Earlier this month, two journalists from the Kantipur daily came out with an explosive story on the largest ever case of tax fraud in Nepal. In collaboration with the Centre for Investigative Journalism, Krishna Acharya and Krishna Gyawali had investigated how the Tax Settlement Commission had abused the law to give tax exemptions of over Rs 20 billion to hundreds of businesses, including those who are making enormous profits. (Gyawali was awarded the Barbara Adams Investigative Journalism Award 2016 on July 29.) We sat down with the two journalists for a conversation on how they found the story, the details of the scam, and the pressures they faced while working on it.
The Record: Could you describe to us how you started working on this story?
Krishna Acharya: We have been watching the Tax Settlement Commission (TSC) since its inception by the then Finance Minister Ram Sharan Mahat [a prominent Nepali Congress politician, who has held the post six times] in 2015. We had questioned that decision back them, concerned about the misuse of law, since it was formed on the near-defunct Tax Settlement Act 2033 BS. It had become a common practice for businesses to avoid paying taxes and then lobby the government for tax settlement commissions.
Then came the latest annual report by the Office of the Auditor General, which noted irregularities in the TSC. My colleague Krishna Gyawali, who follows corruption-related issues, wrote a story based on that report. Immediately, we began our search for the report that TSC had produced [which was kept a secret].
We were in touch with the Centre for Investigative Journalism (CIJ), whose editor Shiva Gaunle was also looking for the TSC report. Eventually, a source gave the report to CIJ. We found it poorly put together. Still, we thought we could give it a go, even though Krishna [Gyawali] was recovering from a fractured arm after falling from a motorbike. He read the document and I started entering the data on a computer.
We began with the list of 200 biggest companies in the report, which covered 90 percent of the total tax settled.
The Record: Did you receive any threats or were put under any undue pressure while working on the story and after it got published?
Krishna Gyawali: When we asked people associated with the story for quotes, they indicated that they didn’t want the story out.
We asked the political leader behind the TSC about the decision, without really cross-questioning him. You know who he is.
The Record: You mean Ram Sharan Mahat?
Krishna Gyawali: Yes. But his strong reaction and anger towards our questions made us wonder why he was panicking. That made things somewhat uneasy. Some companies that were involved also approached us to convince us otherwise, but they came with incomplete files and data.
We started finding discrepancies in the TSC report during our data entry process. The chartered accountants we talked to had also found similar errors.
The Record: What were these errors?
Krishna Gyawali: Sometimes, the amount settled was larger than what the companies had applied for. In some cases, even companies that had not applied for tax settlement had received it.
Krishna Acharya: It is clear that the TSC was formed to benefit the big enterprises. It was established with a time limit of five months, during which it received only 153 appeals for tax settlement. But the cabinet extended TSC’s tenure by three more month with the intention to exempt taxes of as many companies as possible.
The Record: Which cabinet was this?
Krishna Acharya: The one where Sushil Koirala was the prime minister.
Krishna Gyawali: But Ram Sharan Mahat was the decisive person.
Krishna Acharya: Yes. In fact, according to our sources, he was lobbying for a new TOR allowing the TSC to settle taxes for companies that had fake VAT bills. Chudamani Sharma [Director General of Inland Revenue Department and member of TSC] was lobbying for this, too. But this move was opposed by some officials, and the cabinet specifically asked the TSC to not look into cases of fake VAT bills. Despite that, the TSC went ahead and relieved taxes for around 20 such companies.
The Record: Have they also relieved taxes for companies making profit?
Krishna Acharya: Yes. Take the example of Ncell, which makes profits of billions of rupees, more than that made by the Nepali billionaire Binod Chaudhary. Even that company is getting tax exemption.
The Record: So is a TSC even necessary?
Krishna Gyawali: According to one tax officer, before the Income Tax Act 2058 BS [where taxes are paid on self-declared income] TSC was supposed to settle taxes for companies that had no means to pay. Today, the context is different.
Krishna Acharya: Also, TSC is unnecessary now because there are several ways to appeal for tax exemption. The Industrial Enterprises Acts of 2049 BS and 2073 BS have provisions to declare badly performing industries ‘decrepit’ and forgive their taxes, loan interests and fines. But the Panchayat-era TSC was used to favor the businesses that have nexus with the political class.
If these businesses feel that tax officers have been unfair to them, they have three places to appeal to. First they can appeal to the Inland Revenue Department’s Tax Review Committee. If they are still not satisfied, they can go to the Revenue Tribunal, which is led by an appellate court judge. Finally, they have the Supreme Court. But even cases going through these processes have been handled by the TSC, showing bad faith on its part.
Around 650 organizations (out of the 1069) whose taxes were settled neither paid their taxes nor used the legal recourses available to appeal their case. They’ve totally avoided the tax system. They seem to have been waiting for the TSC to form and take decisions in their favor.
The Record: Can you describe the extent of the scam?
Krishna Gyawali: We’ve already mentioned companies evading income taxes and VAT. But even taxes paid by patients in private hospitals, which is used to fund health care of the rural poor, has been exempted. In some cases, the government has returned the VAT that was already paid by construction companies contracted by the state.
Also, they’ve manipulated dates and figures in the report, and settled taxes using laws, like the VAT Act and Excise Duty Act, which don’t come under the TSC Act.
The Record: Why are all three major parties silent on this massive fraud against the citizens?
Krishna Gyawali: We should also look beyond the particular case CIAA is pursuing. The Finance Committee and Public Accounts Committee in the parliament are empowered to investigate issues of corruption at the level of policies and politics, even when there might be no paper trails.
These bodies can question the decision made in the very formation of TSC by the political leadership, which might be difficult for the CIAA. But neither of these house panels have taken that up. Initially, the Finance Committee recommended the amendment of the TSC Act. Due to public pressure, they’re now asking for the law to be nullified. Instead, they could have brought responsible individuals into their investigations to ensure public accountability. But these committees and the opposition appear quite defunct.
The Record: Where can journalists look for investigating similar cases of corruption?
Krishna Gyawali: Currently, taxes are paid based on the taxpayer’s self assessment, where only around five percent of them and sampled and audited. For the vast majority of cases, the government accepts any amount paid as tax. So there could be many more cases of evasions that the tax department might have turned a blind eye to.
On June 2, 2017, CIAA arrested Director General of Inland Revenue Department Chudamani Sharma for misappropriating revenue while settling taxes in TSC. His case is currently in Supreme Court, after his wife filed a habeas corpus petition in response to Sharma’s arrest. The Court stayed the corruption case that was being prosecuted at the Special Court, and sent the habeas corpus petition to its full bench on July 19. The full bench sat this Thursday and the hearing has been extended for Sunday, July 30. Meanwhile, Sharma remains in custody.
Photo credit: The Record