A great majority of house owners in Putalisadak, Dillibazar and Baneshwar are renting out their two-bedroom flats to tenants at as low as Rs 500, show the records of IRO, Kathmandu Sector Number 1 and 2. For a room in Lazimpat, Tripureshwar and Kupandol, the rental charge stands as low as Rs 1,500 a month.
The range of undervaluation varies, but such practice and subsequent tax evasion is practiced by well over two-thirds of all the taxpayers who rent houses. And top it with the fact that a large number of landlords still do not bother to comply with their due tax liabilities, and there´s much more money that´s being skimmed away.
"We know the practice is making mockery of the tax administration, but given that the contract agreement between the landlord and the tenant is the only basis for us to assess tax, we become helpless when those are manipulated," said a senior official at IRO.
Records also suggest that the manipulating of the contract amount is nominal in case of commercial complexes. But it is high in commercial spaces (shutters) that are rented out along the major roads.
Going by the existing law, landlords--owners of both residential and commercial buildings--need to pay a 10 percent house rental tax to the government. The government in the past used to collect about Rs 100 million in revenue from rental tax.
The scenario did improve to some extent this year when the government adopted a carrot-and-stick policy. The offer of fine exemptions for those complying with the tax law within the first half of the fiscal year and the issuing of strong warnings that strict action would be taken against those who did not comply helped the government mobilize about Rs 400 million under the scheme.
That brought some 20,000 landlords within the tax net and eventually raised collections from house-land rental taxes to over Rs 701 million in the first nine months of Fiscal Year 2008/09. But officials say the amount is still meager. They say collections could go up to as much as Rs 3 billion if everyone were to pay their taxes and if they did not lie about their rental figures.
Keeping the present higher rate of defaults in mind, IROs have stepped up market inspections and sudden visits to landlords this week. "Our special concentration this time around is house rental tax, apart from value added tax (VAT)," said Sishir Kumar Dhungana, chief tax administrator of IRO Kathmandu sector 1.
IROs are taking special stock of potential rental tax evaders within the ring road and have instructed officials to conduct sudden investigations of whether they have paid their taxes, in a bid to reel them into the tax net.
The tax offices are also thinking about paying similar visits to areas outside the ring road like Kapan, Jorpati, Gongabu, Samakhushi and Narephant in Koteshwore, among others.
Officials expect such visits to help them nab tax defaulters. However, they said that the practice of registering false rental amounts and underpaying taxes would still remain a big headache unless the government made a policy decision to introduce reference rental charges for different areas.
"It (the government) can introduce a differential tax structure, fixing rental tax at 5 percent for residential and 15 percent for commercial clients. But a reference charge is a must if we are to check this anomaly," said the IRO official.
milan@myrepublica.com
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