Recently, a number of incidents have revealed the troubling levels of corruption and collusion that are currently plaguing Nepal, resulting in  poor state of governance.

Revenue misappropriation worth Rs21 billion by the Tax Settlement Commission (TSC) and the rising controversy surrounding TeliaSonera’s evasion of income tax as major stake holders in Ncell have made the shortcomings of the current system glaringly obvious.

Mukul Humagain and Supriya Gurung spoke to Rameshwor Khanal, former Finance Secretary, to shine light on the causes behind this worrying trend, and to discuss the level of collusion between bureaucrats, politicians and the private sector. 

Given the revelation of the capital gains tax controversy with TeliaSonera, and the fact that the Tax Settlement Commission is under investigation for exemption of taxes worth Rs21 billion, has Nepal entered into a new level of policy corruption, or are these incidents more widely reported now? 

We are essentially living in an open society where keeping secrets is nearly impossible.

Activities that either appear to be corrupt or are actually corrupt cannot be hidden from the public anymore.

So now, the public has insight into the level and nature of corruption occurring, thus fuelling the perception that we are living in corrupt times.

But aside from public perception, the fact of the matter is that corruption has indeed increased.

Though the government machinery was always weak, the political system further deteriorated following the second Constituent Assembly elections in 2013.

In Nepal, the bureaucracy and political parties are seen as one and the same; there is hardly any separation between the two.

Those within the bureaucracy who are loyal to political leaders are hand-picked to fill top positions for the politicians’ personal gains.

So the rule of bureaucracy as a system to maintain checks and balances has substantially eroded.

Bureaucrats have become subservient to politicians, essentially devoting their time and energy to serving the interests of politicians instead of the public at large. 

Is the private sector also to be blamed for these high-stakes games of collusion?

In the past, the requests made by middle-men and power brokers from the private sector were invariably met by politicians.

They have been allowed to think that they can achieve anything by asking politicians to do things in their favour. 

For example, the Nepali tax system has enforced a self-assessment system of taxation, yet commissions such as the TSC are repeatedly created.

That the TSC is involved in a case of tax exemption worth Rs21 billion shows the convoluted aim behind its creation.

Without the support of politicians and private sector middle men lend, such a commission would not have been formed in the first place. 

Under a self-assessment based tax system, if tax payers are selected for audit and have taxes imposed on them that are higher than what they personally assessed, they have space for recourse.

There are three judicial options available to tax payers: They can go to the Director General for further review, and if they are not satisfied by this judgment, they can appeal to the Revenue Tribunal.

If even this does not provide amenable results, the tax payer can then go to the Supreme Court for the final say.

If any issues were found with this judicial system of review, then efforts should have been made to strengthen and improve it.

But instead of doing so, the TSC was established despite not being entirely necessary. 

Nepal’s Auditor General raised strong objections against settlements determined by the TSC in the year 2007.

Almost all the settlements were seen to have irregularities that the government was required to address. In 2008, a general consensus was reached that no commissions such as the TSC would be formed in the future. 

But in 2015, another TSC was established. Those with grievances within the business community who had been pressing politicians to change the system were successful.

The argument for establishing a TSC was that there were many settlement cases pending, where the government was not able to collect the pegged amount, and the tax payers were also suffering, burdened by the obligation of paying tax.  

While this justification for the creation of the TSC may have been valid, the current functioning of the TSC—if the media is correct—appears to be completely remiss.

In terms of tax collection, business men are simply agents of the government who collect taxes from customers on behalf of the state.

If they collected taxes and misused the funds for whatever reasons, it is not for the TSC to exempt them from paying up.

If the TSC does so, then they are going beyond their mandate, jurisdiction and authority; they have violated the spirit of the law under which they were created. 

TSC’s in the past were hardly ever involved in such controversy. Why has this situation arisen now?

Past commissions looked into the settlement of taxes that were difficult to collect because of problematic circumstances.

For example, if a company that should have been taxed is liquidated, or the person who was taxable cannot be reached for a number of reasons such as death or disappearance, then writing off those taxes was deemed appropriate. 

Additionally, the past TSC did not waive the real tax amount. Instead, they waived the penalty or the interest, which is sometimes higher than the principle amount of tax itself.

This was considered to be a reasonable compromise. These write offs by the former TSC were worth much less than the Rs21 billion allegedly waived by the current TSC.

The current TSC has been given too much power. Their decisions and the procedures they follow to reach them cannot be questioned.

They have been turned into an almost quasi-judicial body with extreme power. 

Are bureaucrats and the politicians at fault for the controversy surrounding TeliaSonera as well?

In regards to the Ncell and TeliaSonera controversy, it is not the tax administration who should be considered weak; often times substantial political pressure disables them from moving forward.

As per the law, TeliaSonera is subject to pay 10 percent of the capital gains amount. Any foreign entity with a permanent establishment in Nepal is responsible to pay taxes as a seller, and Ncell was the permanent establishment of TeliaSonera. 

So if TeliaSonera does not deposit the tax, the funds they have left in Ncell’s bank account can be legally seized for tax settlement.

This is precisely what the large tax payer’s office has done. But even as we speak, the power brokers are pushing politicians to release TeliaSonera’s funds.

They are advocating that neither Ncell nor TeliaSonera have tax obligations.

Are you implying that Nepal is in a phase where power brokers are calling the shots?

Yes. The proposal to require NRB to release TeliaSonera’s funds has already gone to the Cabinet, pushed through by invisible yet powerful middle-men who believe they can get things done by using politicians. 

Politicians are to be blamed for this as well. Laws are made by parliamentarians, not public servants.

The essence of the law and provisions that govern our taxes were made by parliamentarians; they know what the law is. And the law says that any income earned in Nepal or any income earned from the assets in Nepal are subject to tax. 

In the case of TeliaSonera, the income is in Nepal, the asset is in Nepal, and even the entity is in Nepal. So TeliaSonera is subject to income tax in Nepal.

But the amount payable is huge and when the amount is huge, if you could provide relief to the tax payer, you can make a lot of money on the side.

Nepal has turned into a rogue state, where people with vested interests mend the law for their own gain.

The education law, the health bill, or even the Banks and Financial Institutions Act—there are a lot of bills where people have sought profit and fit their own interests into the bill. 

Are Nepali private sector tax payers fuelling corruption?

In the past there was a general perception that people could get rich by evading taxes and by misusing the government system. But now, the Nepali private sector seeks to be tax compliant.

They want their businesses to develop and expand instead of spending time on hassles related to tax payments and dealing with the political nexus.

In this regard, professionalism in the business community comparatively has increased.

Of course, there are traditional thinkers who feel that the old ways are better and they want protection from politicians even while they are involved in illegal activities and are cheating taxes. 

But the government has to make sure that the judicial system is efficient and effective in delivering timely justice so that the private sector will have cause to have faith in the system.