Articles published in 1998
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Implications of VAT on Information technology
Software sector in the need of proper VAT structure
By Rajib Subba
Publication date 9 September 1998. Cyber Post, The Kathmandu Post.
The whole economy of Nepal has been affected by the dispute over VAT. There is no doubt
that every citizen should support HMG's efforts to build a new tax culture and regimen to
strengthen the tax base of the country so that the government can start to do all the
things that we as citizens call on the government to do. However the economy is an
intricate structure that has been built up with the efforts of millions of individuals,
entrepreneurs and companies, local and foreign, and over decades of time. This cannot be
tampered with by mere government edict alone that changes from minister to minister or
political party.
Everyone agrees that VAT is a scientific mechanism of tax collection that enforces
transparency but as Nepal lacks the needed manpower, infrastructure, law-enforcement and
revaluation process for actual data, the implementation process may not serve the right
and desired purposes.
Even though VAT is already implemented for quite sometime now the computer and IT business
(I disagree to say industry) hasn’t come out of the chaotic state yet. There is total
confusion with every vendor. Some of the confusions may have subsided now as government
and FNCCI has reached to a 39 point agreement, however many vendors have started to feel
the heat of the practical difficulties after being registered at the VAT office.
According to Binod Kumar Gautam, Legal Office at the VAT Department, there is VAT on
Hardware, Data communication (Internet/Email), IT publication and profit making training
bodies. Software development, software sales and distribution and non-profit making
training bodies are exempted from VAT. Recently government have withdrawn VAT on foreign
printed books to the relief of the academia as well.
The VAT on data communications like email/Internet will definitely raise the current price
structure of the Internet Service Providers and will affect the just more than 5000 users
and new users as well. The other fiasco on the communication side is the 20% tax charged
by Nepal Telecommunications Corporations on the total telephone bill of the customers but
it charges first 10% service tax and add another 10% VAT which raises the tax to more than
20% of the total phone bill.
The major concern of the most computer vendors is the valuation system of the government.
"As everyone knows computer's price decreases pretty fast but the vendor have to
abide by the valuation book and pay not as mentioned in the invoice but as the
government’s valuation," said Sanjib Rajbhandri, CEO of Mercantile Office
Systems. "The country and company (manufacturing) discrimination policy is hampering
the right and suitable technology. This may prevent those technology which are made in US
or Europe or Japan to enter in Nepal."
With a threshold of 4.5 millions small as well as big IT business houses may face
problems. Small vendors aren't able to do business because the clients asks for the VAT
registration which they don't have as they are exempted from registration where as this
threshold is a penalty on the big houses. For example if a big IT vendor sells a harddisk
he has to pay VAT but if a small vendor sells (the same harddisk) then he doesn't have to
pay VAT.
"CAN has been trying to stay abreast of the developments on VAT. But VAT has
disturbed the economy so fundamentally that it has become necessary to point out that
democracy is not just for citizens but also for economic institutions in the country and
their fundamental rights to operate without being tied down impossibly by one conflicting
rule or the other," said Bijaya Krishna Shrestha President of Computer Association of
Nepal. "It is not the government but the private sector that creates the wealth of
the country and sustains the economy with jobs. The government cannot keep adding
administrative burdens on business that make it totally unproductive and uneconomic to
operate."
To some extent government has abide by what it says about the computer software (except
import tax). "The absence of VAT on software sales, distribution and development will
definitely help this sector to grow barring few hiccups," said Allen Tuladhar CEO of
Unlimited Software Networks.
Software development, sales and distribution including services may have been exempted
from VAT but software languages and development tools aren’t. No further infomation
is available. There seems to be total lack of government’s ability to define the term
software. There are many types of softwares like PC operating systems (DOS, Windows),
Network Operating Systems(WindowsNT, UNIX), Front End software(Developer 2000, Visual
Basic), Back End software(Oracle, Sybase), accounting software, Banking
software(Bancs2000) or even game softwares etc. The list is endless.
The community have no doubt on Finance Minister’s hope to export of software through
the Internet. But in the lack of proper definition of softwares, this will be a distant
dream. First of all the softwares should be categorized in two parts: one locally made
other imported. To develop any type of software one needs atleast a PC, operating system,
a computer language or developing tools or packages. In the current situation Nepal is
unable to make all the needed ingedients. All these are to be imported from else where.
Then how could govenment justifies that development of software is VAT free, leave alone
sales and distribution? Moreover except for PC all the necessary software tools can be
downloaded from the Internet bypassing the import duty. The import duty on foreign made
software is legitimate how ever government is unable to check the down loaded software
sold through locally burnt CDs.
The officials at the customs should be able to differentiate types of softwares whether
brought in CDs or Floppies or any other media. They should know which are tools and which
aren’t. A provision should be made that no VAT is charged, that too only once, on the
software developing houses for those softwares which they bring for development. Further
they shouldn’t get confused with IT publications which provide free CDs and Floppies
with freewares and sharewares.
Some of the softwares like operating systems or RDBMS can never be made in Nepal for quite
a long time. The VAT on these types of software will be unproductive. Any other types of
software (like imported accounting software) which can be developed (here) shouldn’t
be exempted from VAT which will help the local developers.
Of course there are always two sides of a coin. The benefit of VAT for IT sector is
tremendous. As this will bring more use of PC as well as more degree of computerization.
There will be scope for software developers to develop VAT softwares, which actually been
started by Professional Computer Systems (VAT Easy) one of the leading software houses.
With the implementation of VAT, the first example of this sort was the Finance Ministry
itself which revamped its computer section with more than 30 networked computers.
Nepal already has a massive unemployment problem. Instead of further hurdles to the
economy, the government needs to work on liberating the economy so that the fundamental
flexibility of the private sector is kept alive to create opportunities for job creation
within Nepal. Lets us not forget that Nepal was one of the first countries in South Asia
to pass the privatization act in the parliament for the ultimate betterment of the country
as well as its people.
Why NTC should not raise the telephone tariff now?
NTC, as progressive, public-spirited and consumer-responsive entity, is committed to
provide nation-wide reliable telecommunications services to serve as an impetus to the
social, political and economic development of the country. NTC's mission from the annual
report.
NTC mulling rise in telephone tariff was the head lines few weeks back. Chet Prasad
Bhattarai, General Manager, of Nepal Telecommunication Corporation(NTC) disclosed that NTC
is considering a raise in the minimum tariff of the telephones, owing to the poor rate of
returns of its investment per phone line in the urban sector. Talking at a workshop
"Internet in Nepal 100000@2000 AD " organized by Computer Association of Nepal,
he elaborated the expected raise as rebalancing of the tariff. According to him the return
from the urban sector is thinning out as people are holding more phones than they need as
compared to the revenue from the rural sector. The rate of return from the rural sector is
3500 rupees per month than 1500 rupees from the urban sector. The expected raise is about
cent percent i.e. 150 rupees. NTC may not raise the charge per minute but may reduce the 3
minutes slab to lesser minutes.
Is the expected raise a worth to the consumers? Lets check out the other aspects of NTC.
Its true that the urban population especially Kathmaduites are holding more phones than
they really need causing less return of the revenue. But who gives them phones? Of course
NTC itself that too against it's own law of holding more than one phone by a person.
Mismanagement at NTC allows people to hold more phones than needed where as some sectors
like business sector which gives a lot of jobs and need the phones are deprived or are
forced to buy through OYT. Even organizations which are working for the development in the
different sectors have to buy through OYT. "When we approached NTC asking for lines
as NIUG is hosting a Intranet for public that too for free, we were forced to buy through
OYT. For us phone lines are a must", said Gaurab Raj Upadhayay of Nepal Internet
Users Group, a NGO working for IT culture as well as development of networking
environment.
NTC's networks are made up of products from different developed countries and are best in
the world but look at the fault rate of NTC, it's one of the highest in the world. The
present fault rate between 13 to 20 based on subscribers complaint is far high than the
international standard of 0.5 to 1 fault per set per annum. The mean time failure MTBF
shall be increased for uniform service quality. Further the mean time to repair MTRR the
faults shall be made as small as possible.
Further the waiting time to get a phone line must be reduced from the current average of
eight years. "I was in the waiting list for more than ten years where as I was paying
a heavy sum every month as I was taken a phone on rent", said Umesh Regmi. First NTC
should reduce the waiting years then the expected raise may be justified.
Nepal was first country to introduce digital system and first to achieve 100%
digitalization in South Asia. But the tele-density, 0.9 per 100 population, is one of the
lowest in the world. Every top brass level of NTC talks about the rural Telecom
development but unfortunately there are only 13 rural exchanges as well as only 1200 VDC
have phones.
While NTC being a govt.'s body, its obvious that NTC's priority will always be the rural
mass. But what about the middle classes of the urban areas who make the most of the
populations. The proposal will not affect the elite and the bulk users but ordinary
customers will be kept at the arms length.
NTC is few of the government's venture which is very successful and vibrant. The job at
NTC has been very lucrative as staffs are given bonus every year. The bonus paid in
1994-95 was NRs 5,07,50,474.00 and NRs 4,85,63,049.00 in 1993-94. This year NTC staffs
have been provided six months bonus and one and half months allowances. That's pretty fair
but at what cost? At this cost, are the services provided by NTC have the worth? Are most
of the subscribers are happy with NTC? When the staffs are paid handsomely then why the
management at NTC is not to boast about? Few argue that if the staffs are provided bonus
they will work hard. It may be true but will it be possible for the organizations like NTC
where attitude of no work and all play is rampant.
When there is a total monopoly of NTC at the Telecom sector the need of the raise is
debatable. With the different services NTC going to introduce soon, the management should
be improved. The lack of seriousness at most of the levels at NTC will make it crumble
like a giant once the private sector are allowed to ply on the wires. Further will the
political bosses allow NTC to raise the charge when the election is at the corner?
Internet in Nepal: Target 100000 @ Y2K
Thanks to the Internet, the vehicle of information revolution, people across the globe
are at just arms length. The revolutionary development in the recent years in information
technology has shown its impact in Nepal, too. The access-to-information threshold today
is lower than ever before -even in Nepal.
Nepal joined the internet bandwagon just three years ago, initially limited to the email
usage. The cost was too high -1 KB of email used to cost 20 rupees. The Internet Service
Provider used to get connection to the upstream provider only via UUCP twice a day. Then
about 150 email addresses existed in Nepal. In just three years, the number of internet
users has been magnified by 33 times. Currently, in 1998, there are approximately 5000
Internet users. Unlike India, Internet in Nepal was introduced by the private sector.
The Internet Service Providers (ISPs) are now forging ahead with a target to add-up the
number of Internet users by at least 20 folds by the year 2000. The growth rate may be
very ambitious, but given the right approach, the Internet can and should be brought to a
wider audience: 100,000. To explore this posibility Computer Association of Nepal (CAN)
organized a seminar "Internet in Nepal : 100000 @ Y2K". The theme paper was
presented by Sanjib Raj Bhandari, former President of CAN and CEO of Mecantile Office
Systems.
Though the target to increase internet users is set unilaterally by ISPs, it will not only
benefit the internet users to get global exposure, but will also augment the national
economy, significantly. Hence, as the benefits of the growth of information superhighway
is not limited to any particular sector, a paradigm shift in the mindset of the country
itself is very necessary to bear the fruit. There is a serious need to develop
infrastructure, increase efficiency in legislation formulation and implementation, and
change of attitude to achieve the target. The opening of mind of regulators/government,
telecommunications, ISPs and business people are quite essential. Reduction of all round
cost and development in application/content is also very important.
The immense benefits of internet to the wider section of the population can not be
recounted in a small article like this. To assess the direct and indirect benefits, it may
require a huge research work. However, an additional benefit of internet is, it cuts the
information technology investment for many institutions like banks, newspapers, election
commission, customs, immigration etc.
The other major use of Internet is the Intranet as well as Virtual Private Network (VPN)
for businesses, government, library, NGOs. With the popularity of the on-line shopping
electronic commerce within Nepal is not far any more. Distant learning, tele-medicine,
video conference etc. are other useful applications. Moreover, the end users will get the
ultimate advantage with reduced prices and different services. Even ISPs have to be happy
with more businesses with more value added services. Government should be happy as this
development produces at least 800 new jobs at ISPs. There will be new investment of more
than Rs. 10 Crores. The real beneficiary will be NTC and government/NTA. If each user uses
the Internet for an average of 15 hours per month, it will result in a total of 90,000,000
minutes of local calls per month i.e. 1,080,000,000 per annum. There will be increase in
royalty as well as VAT/Tax much to the relief of NTA/government. Basically it's a win win
situation for all.
As discussed above, in order to reap the benefit of internet few major issues should be
dealt with highest importance, viz. development of infrastructure, reduction of
telecommunications cost, and development of the contents.
Development of infrastructure: The national network should consists of at least 25 POPs.
The large cities should be connected by more than 1 MB link and rural areas by
radio/satellite link. The approach to implement technology should be mixed. The
international network should be multiple E1/T3 links.
For this target Internet Service Providers (ISPs) have to upgrade their current situation.
There should be major upgrade of resources like manpower, equipment, capital, etc. As ISPs
need 8000 phone lines and end-users need more than 50000 phone lines, NTC has the scope
for more than 1 billion minutes per annum. More public access points like cyber cafes,
libraries, schools, hotels etc. will help to get the target. For this Nepal Telecom
Authority (NTA) and Nepal Telecommunication Corporation (NTC) can play a vital role. But
as going by the lines of NTC, it's quite clear that the priority sector is the rural mass
rather than the urban.
NTC's plan to spread it's wires across the country, like the optical fibre link through
the east west highway, will surely help to boom the Internet sector. One may not disagree
that the role of NTC is very vital to achieve the target but to hear the chief of NTC
talking about the prospective raise of the phone charge (in his own word rebalancing the
tariff) was certainly beyond the scope of the seminar.
The lack of IT policy till now is another major hurdle to achieve this target. The chief
of NTA agrees that Internet is a must but should be used also for the development of the
country. NTA wants to see NTC as a competitor (to the private sector) in telecom rather
than a monopoly. It seems that NTA have many plans to unfold for the development of IT in
Nepal but going by the trend till now it will take longer time than needed and get turned
to a Pandora's box.
Reduction of cost: Even the present capital involvement is quite high with average annual
cost of Rs. 1.2 crores for 64 KB through NTC. The proposed multiple E1 (2MB) links to
reputable upstream providers will cost around Rs. 2.5 crores per link and cost for 1 MB
national network to major cities will be Rs. 5.5 lakhs per circuit per annum. The cost has
to lowered as high cost will prevent it to grow.
ISPs should get phone lines on standard prices not on OYT rates. VSAT would be the best
bet for them to get a connection for international network as well as rural access along
with radio network. Currently ISPs are paying VAT as well as royalty to the government,
exemption of any one of them will reduce the cost.
The target is not only to increase the Internet subscribers, but also to reduce the cost
of the Internet use to Rs. 0.75 per minute, which would mean just Rs 450 per month for 10
hours of use. Further the cost of terminal equipment should be lowered from Rs.
50000-120000 to Rs. 15000-120000 and use of networked computers should be increased.
Content is the king: With out the contents for the Internet users it will be like all
dressed up but no where to go. The basic application for the Internet users in Nepal is
email and the Web. If the volume of the content in local languages is increased many fold
then the use of Internet to the mass will be obvious.
Finally: Is it possible? Of course it is. As most of the problems and short comings are
self inflicted so we all have to work for it. Computers should work for people not the
other way around. In the spring of 2001, we should be able to look back at the Internet
facility in Nepal in 1998 and be able to say, "That's ancient history!"