Compliance of Value Added Tax (VAT) Policy in Nepal: A Heuristic-Institutional-Functional Analysis

Abstract: 
The synthesis of implementation theories illuminates on the policy mandates, individual and institutional capability and constructive engagement of the stakeholders. The compliance of the Value Added Tax (VAT) policy has been analyzed in light of different implementation theories. A structural and functional analysis has been conducted in order to understand the causes behind the poor compliance of VAT policy in terms of returns filing. The two-phase sequential mixed methods have been applied to study as to what extent policy mandates and the institutional capability of the tax administration affect to shape the compliance behavior of the taxpayers. The bivariate analysis of the responses and the nonparametric chi-square test showed the varied results. In the first phase, quantitative research question and hypothesis were tested to find the relationship between policy mandates and filing compliance and between institutional capability and filing compliance of VAT policy with the survey of taxpayers and tax officials; tax intermediaries; officials of the business communities; and with policy makers. In the second phase, qualitative interviews and Focus Group Discussions (FGD) were administered among tax officials and policymakers to inquire into significant quantitative results on filing compliance behavior of the taxpayers. The ontological stance that the policy clarity ensures effective implementation of the public policy is upheld.
Main Article: 

1. Introduction
The Value Added Tax (VAT), a tax on value added portion of price of the taxable goods and services, was introduced in Nepal with the objectives of increasing revenue mobilization by broadening the tax base; to make the tax system neutral and efficient; to establish a fair and transparent tax system in the face of the Eighth Five-Year Development Plan. Given the mammoth budget deficits, the then governments were under severe pressure to bring about structural changes in tax policies to enhance sustainability in domestic sources for revenue mobilization. However, the policymakers, private sector, and people were highly divergent on the VAT policy. "Its emergence as a new tax baby was traumatic to many sections of the society" (Silwal, 2001, p. 154). The low level of policy compliance by the taxpayers has been manifested since its incipient period.
Self-Assessment Tax System (SATS) is the underlying principle for the VAT laws in which the taxpayers assess their tax liabilities for the stipulated time period through submission of the tax returns before the tax officers. The Section 18 of the Value Added Tax Act, 1996 has explicitly provided for the legal framework for filing VAT returns by the VAT registrants. The VAT registrants are required to submit their tax returns within 25 days after the completion of the tax period.The submission of tax returns on time with real and accurate tax liabilities is supposed to be the state of filing compliance of the tax laws and the non-compliance of VAT laws can be ascertained by a gap between the number of tax returns actually submitted and that owed to tax offices as per prevailing laws.
The taxpayers' compliance on these policies has been the core issue for an intense debate and concern in the tax administration. Around 22.3 percent of the VAT registrants are not submitting their tax returns and the non-filing of the tax return pose serious threats to the tax administration in terms of tax evasion and tax defaults. The non-filing the VAT returns evince the non-compliance of the VAT registrants and it may be a good means to dodge the VAT. The poor filing compliance in VAT may indicate the tax cheating behaviour is rife and tax avoidance and evasion cases are increasing. The weak performance in filing compliance of VAT policy may be due to the multitude of problems including ambiguity, inconsistency, and complexity in the VAT policies and ineffective implementation.
Why are the VAT registrants not complying with the policies for returns filing? If we drill down the research question, we can find some gaps in the policy design and implementation stages. To what extent the VAT policy mandate has effect on enhancing voluntary compliance of taxpayers in terms of filing tax returns on time? Whether the institutions are capable to implement VAT laws to deter non-compliance to VAT policy? To what extent the intervening variables affect the voluntary compliance of the taxpayers as well as to the implementation capabilities of the institutions? It is imperative to study the VAT policy structure, policy changes, implementation structure, implementation approaches, policy output and outcomes from the perspective of filing compliance.
2. Literatures Revision
In the public administration domain, the implementation is the "post-legislative stages of decision making" (John,1998, p. 27).It includes "all of the activities designed to carry out the policies enacted by the legislative branch" (Dye, 1975, p. 50).It is usually much easier to implement a policy if it is clearly stated and consistent with other policy objectives. Vaguely worded laws may be subject to varying interpretations by bureaucrats or state officials tasked with implementing a program (Cochran and Malone, 2007, p.57). Sizeable gap exists between policy decision and its operation only because of the fact that the content of policy and its impact on those affected, elaborated or even negated during implementation stage (Reejal, 1995, p. 227).
The classical theorists on public policy implementation have argued that policy clarity, consistency, and tractability affect to the implementation of the public policy. The argued focused on the clear and consistent policy goal (Van Meter and Van Horn 1975; Mazwanian and Sabatier 1983), numerical number of actors (Pressman and Wildavsky 1973); limited extent of change (Van Meter and Van Horn 1975; Mazwanian and Sabatier 1983), and recommended that the implementation responsibility should be charged with an agency sympathetic with the policy’s goals (Van Meter and Van Horn, 1975; Sabatier, 1986).As with the implementation of VAT policy, the tax administration and the taxpayers are coterminous with each other. The proponents of bottom-up model “such as Berman (1978 and 1980); Hjern and Porter (1981); Hjern (1982); Hjern and Hull (1982); Hull and Hjern (1987); and Lipsky (1978) argue that a more realistic understanding of implementation can be gained by looking at a policy from the view of the target population and the service deliverers” (Matland, 1995, p.148).Elmore, (1982 and 1985) attempted to combine top-down and bottom-up approaches. He put forward the ideas of precise policy objectives, elaborating detailed means-ends schemes, and specifying explicit outcome criteria, and the desired behavior of implementers.
Fischer, et., al.,(1992) argued about the key determinants of tax compliance as follows: (a) tax system structure; (b) attitude and perception of the taxpayers; (c) non-compliance opportunity; and (d) demographic factors.Das-Gupta and Mookherjee, (1998, p.28) argued for (a) an information system for the identification of tax liabilities; (b) an assessment system to determine if taxes paid are less than (or more than) tax liability; and (c) a system for follow-up. Alink and Kommer (2011, p 113) describe three principles: (1) seek to maintain and improve compliance by taxpayers as voluntary as possible; (2) ensure greater efficiency and effectiveness in tax administration keeping cost as low as possible; and (3) ensure fair and proper treatment of taxpayers. Alan A Tait (1991, p 141) has illustrated some conditions for effective implementation of Self-Assessment System (SAS) basically as designing of simple tax laws; provision for service to taxpayers; formulating simple registration, filing, payments and refund procedures; effective and swift enforcement for tax dues tax returns and tax collection; conduction of tax audit; provision of stringent penalties; and accessibility to independent appeal and review of decision.
Enforcing universal tax compliance is impossible “until there is a tax administrator under every bed” (Torgler and Schaltegger, 2005, p. 2). The motivation to pay taxes depends on rational constitutions about the perceived behavior of citizens and of government officials (Trudinger, Eva-Maria and Hildebrandt, Achins, 2012, p.192).Non-compliance of the policies and laws are heavily dependenton the valid interpretation of norms, values, and laws and sufficient resources to implement. Tallberg (2002, p. 611) says that non-compliance stems from an incentive structure in which the benefits of shirking exceed the costs of detection and Chayes and Antonia, (1993, p. 178) say that compliance is the normal bevavioural reflex of the administrative system.Evasion depends mainly on the probability of detection and the severity of the penalty (Jantscher et. al., 1991, p.67).The non-filing of the tax returns by the VAT registrants may prove to be weak compliance on the part of taxpayers and weak enforcement of tax administration. Levin and Ferman (1986, p 311-325) have identified three major types of implementation obstacles viz. resistance of actors; imperfect convergence of interest; disorganized interest.
3. Conceptual Framework
The implementation of the VAT policy in terms of returns collection and taxpayers' compliance thereon has been studied and analyzed by borrowing some theories and models of top-downers and bottom-uppers. The conceptual framework has been designed with the consideration of policy clarity and consistency as employed by Van Meter and Van Horn (1975); tractability of the problem as applied by Mazwanian & Sabatier (1989); autonomy of implementing agents, willingness and capacity of the implementers as taken into account by Berman, (1978).; Hjern, (1982); Lipsky, M. (1978); McLanghlin, M.W. (1987); policy mandate, technical assistance, funding, and agency commitment as embraced by May (1996). Moreover, the factors like goals, strategies, activities, plans and programs of the implementing agencies, central level policy makers' influence on implementers, interaction between local implementers and environment are also important variables to be studied and analyzed for the study of the implementation of VAT policy.
Source: developed by the author
The causal relationship between policy mandates, institutional capabilities and filing compliance of the taxpayers under the VAT policy has been studied taking into consideration other intervening variables. The operational definition ofthe policy mandate is defined as the legal authority provided by the sovereign people to the government to implement public policy. The institutional capability of the tax administration is known as the ability of the tax administration to enforce the laws. The institutional capability includes adequacy, competency, and commitment of the tax officials; sufficient financial resource; comprehensive and robust information about the personal and business transactions of the taxpayers; and Information Communication and Technological (ICT) infrastructures.
4. Research Methodology
Epistemologically, the compliance of VAT policy is analyzed by applying both rationalist (survey, logical interpretation and justification with secondary data) and empiricist (interview and FGD) approaches. The deductive approach is employed to test the extant theories on policy implementation. The factor like the policy mandates embraced by the top-downer and the factor like institutional capabilities taken account into by the bottom-uppers are included in the proposed study with new version and construct compatible to the VAT policy compliance in Nepal. The filing compliance issues have been formidable problems in the tax administration. The mixing and adapting of both approaches could help tease out in detail some of the implementation level problems.
"The sequential explanatory strategy is a popular strategy for mixed method design that often appeals to researcher with strong quantitative leanings" (Creswell, 2009, p 211). In the first phase, quantitative data were collected and analyzed. Based on the results derived from quantitative approaches, semi-structured interview and FGD with tax officials and policy makers at Inland Revenue Department (IRD) were organized in order to collect qualitative data. The qualitative data were collected and analyzed in the second phase in order to draw conclusion from the quantitative analysis.
Inland Revenue Office (IRO) Lalitpur and Taxpayer Service Office (TSO) New Baneshworare purposively selected for the study. The IRO Lalitpur is the high performer and TSO New Baneshwor is the least performer in implementing VAT filing policy in FY 2011/12 The reasons for selecting these offices are to analyze the underlying causes for being the high performer and low performer in implementing the policy. To be compatible with mixed methods research, the primary data were collected from 186 respondents and analyzed by employing systematic sampling technique. The population is grouped into tax officials, taxpayers, tax intermediaries, and policy makers in order to make the sample more homogeneous.
The primary data were generated through questionnaires and interview methods. Given the mixed methods research, the researcher collected quantitative data on aforementioned qualitative issues through questionnaires designed in the "Likert Scale" format. The respondents were asked how confident they were on the questions on a five point 'Likert scale' from completely disagree (1), partly disagree (2), partly agree (3), completely agree (4), and Don't Know (5).
The questionnaires were divided into five parts. The part A consisted of demo-graphic information of the respondents. The part B dealt with filing compliance as a dependent variable. The part C comprised of two independent variables, namely policy mandate and institutional capability. The part D composed of intervening variables for the implementation of the VAT policy. The last part E included some exogenous variables
The questionnaires were administered during 11.00 a.m. and 16.00 P.M. at the selected offices to every even number taxpayers who were lined up at those offices. The questionnaire survey captured around 92.8 percent of the total tax officers of IRO Lalitpur and of almost 100 percent of the TSO New Baneshwor and 66.67 percent of the total number of middle level policy makers at IRD. The questionnaires were mailed to 75 Chartered Accountants (CAs) and business community officials
The interview samples were purposive taking into consideration to selecting knowledgeable respondents within the tax administration so that they could provide a wider range of information, insights and ideas about the filing compliance. The findings obtained from quantitative methods were further discussed with two groups of CTOs and TOs of both offices.
Of the total sample of 186 respondents, 153 respondents were processed in this analysis. 33 cases were excluded from the analysis due to missing values. The internal consistency among the 16 variables representing the filing compliance and related factors is checked. Since Cronbach's alpha if items deleted are more than 0.80, the problematic items with correlation lower than 0.33, viz., budget (0.847), authority and discretion (0.838), and exogenous variables (0.855) are rejected. Hence, the predictor variables are reduced from 7 to 6 and intervening variable from 5 to 4. The policy mandate variable includes policy clarity, policy consistency, and policy simplicity; the institutional capability variable includes human resource, information, and infrastructure; and intervening variable includes organization culture, coordination, risk management, and monitoring and evaluation system of the tax administration.
The Kolmogorov- Smirnov test and Sapiro-Wilk test, visual inspection of their histograms, normal Q-Q plots and box plots showed that the dependent and independent variables were not normally distributed. Since the p value of Sapiro-Wilk test is found to be less than 0.05, the null hypothesis that the data are normally distributed is rejected. Moreover, the Skewness and Kurtosis and their z-values (value derived from dividing skewness and Kurtosis value by their standard errors) were found above and below +/- 1.96. Based on the normality test, nonparametric tests like chi-square test, and Kruskal-Wallis Test were applied to test the relationship between predictor and test variables. Results compare responses from respondents. Independent test was carried out at 95 percent confidence.
5. Results
5.1 Policy Mandates affect filing compliance
The VAT policies have mandated taxpayers to assess their tax liabilities for a stipulated period through preparing tax returns and to file tax returns to the tax offices on time. In order for the taxpayers to calculate their tax liability and to prepare tax returns, the legal provisions, return format, and time for return submission should be simple and economical. Policy mandate variable included three sub-variables like policy clarity, consistency, and simplicity for the research purpose. These variables are complementary to each other in affecting on the compliance behavior of the taxpayers. The respondents' nominations for the policy clarity, policy consistency, and policy simplicity were merged into a major policy mandate variable and sought to find out the relationship between policy mandate and filing compliance of the taxpayers.
Table 5.4 Relation between Policy Mandate and Filing Complinace
Filing Compliance Total
Disagree Agree
Policy Mandate Disagree Count 23 19 42
Percent 48.9 29.2 37.5
Agree Count 24 46 70
Percent 51.1 70.8 62.5
Total Count 47 65 112
Percent 100.0 100.0 100.0
Source: Field Study, 2014
The cross-tabulated statistics show that 71.0 percent respondents agree with the fact that policy mandates affect the filing compliance and the Pearson Chi-Square value is statistically significant, (p < 0.05), hence the policy mandates do affect filing compliance behavior of the taxpayers. The following three theoretical sub hypotheses supplement the critical issues of policy mandates that affect the compliance behavior of the taxpayers:
• H1: Policy clarity enhances filing compliance in VAT system.
• H2: Policy consistency promotes filing compliance in VAT system.
• H3: Simple policy encourages filing compliance in VAT system.
5.1.1 Policy clarity boosts filing compliance.
Mills and Hyler (2001, pp. 453-477) hold the view that ambiguous language in policy may provide chances to external and internal constituents to implement the changes. However, the clarity in policy goals; implementation procedures, operational strategies, and programs; and target people ensures effective imple-mentation of the policy. The clarity in the definition of taxable and non-taxable person; compulsory and voluntary registration in and deregistration from VAT regimes; time and procedures for submission of tax returns; penalties chargeable to the late-filers and non-filers; audit and tax assessments for non-filers; collection of returns from non-filers; and in appeal procedures in the VAT laws are crucial factors to change the compliance behavior of the taxpayers.
Table 5.1 Relation between Policy Clarity and Filing Compliance
Filing Compliance Total
Disagree Agree
Policy Clarity Disagree Count 22 17 39
Percent 46.8 26.2 34.8
Agree Count 25 48 73
Percent 53.2 73.8 65.2
Total Count 47 65 112
Percent 100.0 100.0 100.0
Source: Field Study, 2014
The bivariate analysis shows that 74 percent of the respondents agreed that policy clarity affects the filing compliance. The Pearson Chi-Square value is statistically significant, (p < 0.05). Hence, there is sufficient evidence to infer that more clarity in policy, the higher would be the filing compliance in VAT system. The clarity in the process for submission of tax returns and in provisions relating to the penalties chargeable to the late-filers and non-filers may affect the compliance behavior of the taxpayers. The theoretical hypotheses that the policy clarity enhances filing compliance in VAT system are upheld.
5.1.2 Policy consistency enhances filing compliance.
The consistency in policy affects effective implementation of the policy. The policy consistency in definition of taxable and exempted transactions; compulsory and voluntary registration in VAT; deregistration from VAT regimes; penalties chargeable to the late-filers and non-filers; amnesties and waiver of penalties; collection of returns from non-filers; and appeal procedures in the laws.VAT policy is in motion that reflects that laws are frequently being changed through annual Finance Acts. The frequent changes in laws may create instability in the VAT system.
Table 5.2 Relation between Policy Consistency and Filing Compliance
Filing Compliance Total
Disagree Agree
Policy Consistency Disagree Count 38 17 55
Percent 71.7 26.2 46.6
Agree Count 15 48 63
Percent 28.3 73.8 53.4
Total Count 53 65 118
Percent 100.0 100.0 100.0
Source: Field Study, 2014
Around 74 percent of the respondents agree with the fact that policy consistency affects the filing compliance and the Pearson Chi-Square value is statistically significant, (p < 0.05). Hence, there is a significant relation between policy consistency and filing compliance. The inconsistency in definition of taxable and exempted transactions; compulsory and voluntary registration in VAT; deregistration from VAT regimes; penalties chargeable to the late-filers and non-filers; amnesties and waiver of penalties; in the collection of returns from non-filers have affected the behavior of the taxpayers. The theoretical hypotheses that the policy consistency promotes filing compliance are upheld.
5.1.3 Mere simplicity in VAT policy does not ensure filing compliance.
The simplicity in policy affects effective implementation of the policy. The simple and unambiguous procedure for returns filing; simple and concise formats, comfortable timing; swift enforcement for the collection of un-filed returns from non-filers may enhance the filing compliance.
Table 5.3 Relation between Policy Simplicity and Filing Compliance
Filing Compliance Total
Disagree Agree
Policy Simplicity Disagree Count 33 30 63
Percent 62.3 46.2 53.4
Agree Count 20 35 55
Percent 37.7 53.8 46.6
Total Count 53 65 118
Percent 100.0 100.0 100.0
Source: Field Study, 2014
Around 54 percent of the respondents agreed that simplicity in the policy affects the compliance behavior of the taxpayer. However, 46.0 percent of the respondents were of the view that taxpayers comply with tax policy not because of simple policy framework, rather they are self-motivated to observe the rules and they know that they are required to file on time. Around 38.0 percent of the respondents said that simple policy does not ensure full compliance of the policy. The Pearson Chi-Square value is statistically insignificant, (p > 0.05). Hence, a simple and easy process of returns filing would not ensure filing compliance in VAT system.
In the second phase of the research, the quantitative results were substantiated with the CTOs and TOs through interviews and FGD methods. From the inter-views and FGD, with CTOs and TOs what came out is that the tax administra-tion has devised and implemented simplified returns format, e-based swift process for returns filing, monthly, bi-monthly, and trimester tax period that might have facilitated compliant taxpayers to file their tax returns. On the fillip side, the taxpayers who are deliberately not complying with tax laws would not file tax returns on time even if tax administration has implemented a simple process. Accordingly, there are highly compliant taxpayers who file their tax returns even if there is complicated filing process. In an interview, the CTO of TSO New Baneshwor stated that some taxpayers are compliant, but they may fail to file tax returns on time due to their ignorance or they overlook about filing obligation. The TOs articulated that the cumbersome deregistration process in VAT laws has been a major cause for holding redundant taxpayers into the VAT system that has resulted in poor compliance record and a large number of non-filers in the system. The theoretical hypotheses that simple policy encourages filing compliance are rejected.
5.2 Institutional Capability
Almond and Pawell Jr. (1996, pp. 190-212) have explained different kinds of capabilities of political system, namely, extractive, regulative, distributive, symbolic, responsive, and domestic and international capabilities. Tax administration, among other government organizations, is the core institution to implement extractive, regulative, distributive, responsive, distributive, domestic, and international policies. Motivating taxpayers to comply with laws voluntarily and enforcing tax laws to deter non-compliance by the taxpayers is the cardinal factor of institutional capability of the tax administration.
Table 5.8 Relation between Institutional Capability and Filing Compliance
Filing Compliance Total
Disagree Agree
Institutional Capability Disagree Count 32 30 62
Percent 60.4 46.2 52.5
Agree Count 21 35 56
Percent 39.6 53.8 47.5
Total Count 53 65 118
Percent 100.0 100.0 100.0
Source: Field Study, 2014
The analysis of cross-tabulated statistics implies that 54 percent of the respond-ents agree with the fact that institutional capability of the tax administration affects the filing compliance. However 46.0 percent of the respondents said that taxpayers comply with the law even if tax administration is inefficient and incapable. The Pearson Chi-Square value is statistically insignificant, (p > 0.05). It implies that the institutional capability of the tax administration do not affect the filing compliance behavior of the taxpayers in VAT system.
In the FGD and interviews, the CTOs and TOs responded that VAT system predicates upon SATS and the taxpayers bear responsibility for filing their tax returns on time. The tax administration is supposed to assess the risks of non-compliance. Given the number of taxpayers, commitment of the officials toward enhancing filing compliance, and information system within the tax administration, the institutional capability of the tax administration has not been enhanced at the level that can influence taxpayers' behavior for filing their tax returns on time. The following three theoretical sub hypotheses discuss the institutional capability of the tax administration that affect the compliance of the taxpayers:
• H1: Human resources of the tax administration facilitate filing compli-ance of the taxpayers.
• H2: The information system of the tax administration boosts filing compliance of the taxpayers.
• H3: The infrastructure of the tax administration facilitates filing compliance behavior of the taxpayers.
5.2.1 Human resources of the tax administration have little leverage in influencing filing compliance.
The human resources of the tax administration are the crucial factors for enhancing institutional capability of the organization. Adequate, computer literate, professional, and committed staffs are the key for organizational efficiency and productivity. The linkages between IRD's Performance Based Incentive System (PBIS), performances; and performance appraisal system of the tax administration are analyzed to assess the outcome of the tax officials.
The cross-tabulated statistics depict that 57 percent of the respondents agree with the assumption that human resource of the organization affects to the filing compliance. However, 43.0 percent of the respondents said that tax officials have hardly influenced the filing compliance. The Pearson Chi-Square value is statistically insignificant, (p > 0.05), It infers that the human resources of the tax administration would not significantly affect filing compliance behavior of the taxpayers.
Table 5.5 Relation between Human Resource and Filing Compliance
Filing Compliance Total
Disagree Agree
Human Resource Disagree Count 31 28 59
Percent 58.5 43.1 50.0
Agree Count 22 37 59
Percent 41.5 56.9 50.0
Total Count 53 65 118
Percent 100.0 100.0 100.0
Source: Field Study, 2014
In the FGD and interviews, CTOs and TOs substantiated that the tax officials' competency and commitment have little role to influence the behavior of the taxpayers, they can render quality service to the taxpayers to encourage them to file on time. The tax officials can assess the tax liability against the non-compliant taxpayers with penalties that could pressurize taxpayers to file tax returns as soon as possible. However, they are less interested to assess tax against non-filers only because of difficulty in delivery of assessment order and the impossibility of the collection of such tax liability. The delinquent taxpayers do not comply with tax laws. Hence, the theoretical hypotheses that human resources of the tax administration facilitate filing compliance of the taxpayers are rejected.
5.2.2 Information system within tax administration are not adequate to enhance filing compliance.
The information of the taxpayers' personal and business activities is a resource and power for the tax administration for implementing VAT laws. For this group variable, the questions relating to the collection of details, comprehensive and appropriate information of the taxpayers; third party information collection system of the tax administration; regular updates of the changes in stored information; and integration of computer software with other agencies to collect information were asked in the survey.
Table 5. 6 Relation between Information and Filing Compliance
Filing Compliance Total
Disagree Agree
Information Disagree Count 27 24 51
Percent 50.9 36.9 43.2
Agree Count 26 41 67
Percent 49.1 63.1 56.8
Total Count 53 65 118
Percent 100.0 100.0 100.0
Source: Field Study, 2014
The analysis of cross-tabulated statistics postulate that 63.1 percent of the re-spondents agree with the hypothesis that details and comprehensive information of taxpayers' personal and business data affect the filing compliance. However 47.0 percent of the respondents said that IRD data base has little influence to bring about the intended change on compliance behavior of the taxpayers.The Pearson Chi-Square value is statistically insignificant, (p > 0.05). Hence,the management information system within tax administration is not vibrant and statistically insignificant to affect in enhancing filing compliance in VAT system.From the interviews and FGD, it was unveiled that the comprehensive and robust information about taxpayers' personal and business transactions within the tax administration can play a significant role to chase the non-filers and to assess tax liability against the non-filers. However, the information about the taxpayers within the IRD are less qualitative and sometimes even found to be inaccurate. The tax officials and taxpayers are less inclined to update taxpayers' information. The poor information within tax administration has been ineffective in developing institutional capability of the tax administration. Hence, the theoretical hypotheses that the information system of the tax administration boosts filing compliance of the taxpayers are rejected.
5.2.3 ICT infrastructures of tax administration affect the filing compliance
The ICT infrastructure of organization is a crucial factor for organizational efficiency and effectiveness. IRD's ICT for data mining, storing, processing, and service delivery has been analyzed. The revenue accounting system" "e-based internal monitoring system, ICT capacity; management information system; and the digital networking with other agencies are also analyzed.
Table 5.7 Relation between Infrastructure and Filing Compliance
Filing Compliance Total
Disagree Agree
Infrastructure Disagree Count 30 22 52
Percent 56.6 33.8 44.1
Agree Count 23 43 66
Percent 43.4 66.2 55.9
Total Count 53 65 118
Percent 100.0 100.0 100.0
Source: Field Study, 2014
The analysis of cross-tabulated statistics implies that 66 percent of the respond-ents agree with the fact that ICT infrastructure affects the filing compliance. The Pearson Chi-Square value is statistically significant, (p < 0.05), hence it infers that the ICT infrastructure of the tax offices would significantly affect filing compliance behavior of the taxpayers. IRD's data mining, processing andsharing system have positively impacted on the decision-making. The theoretical hypotheses thatthe infrastructure of the tax administration facilitates filing compliance behaviour of the taxpayers are upheld.
5.3 Intervening Variables
The work culture within the tax administration, coordination mechanism within and between tax offices, risk management system and monitoring and evaluation system of the IRD has both positive and negative effects on the compliance management.
The organizational culture is "a system of shared meaning held by members that distinguishes the organization from other organization" (Robbins, 2000, p 509); is "a set of values, beliefs, behaviors, customs, and attitudes that helps the members of the organization understand what it stand for, how it does things, and what it considers important" (Griffin, (2005), p. 87). Jamil (1994, p. 279) has mentioned that culture is seen as a fixed entity embedded in society, therefore, cannot be consciously manipulated and managed. The organizational culture in Nepalese tax administration is predominantly shaped and conditioned by the domestic socio-political values, beliefs, customs, and traditions.
Table 5.9 Relation between Organization Culture and Filing Compliance
Filing Compliance Total
Disagree Agree
Organization Culture Disagree Count 37 18 55
Percent 69.8 27.7 46.6
Agree Count 16 47 63
Percent 30.2 72.3 53.4
Total Count 53 65 118
Percent 100.0 100.0 100.0
Source: Field Study, 2014
Around 72.0 percent of the respondents agree with the fact that work culture of the tax administration affects the behavior of the taxpayers, and the Pearson Chi-Square value is statistically significant, (p < 0.05), hence the organization culture of the tax administration significantly affects the filing compliance behavior of the taxpayers in the VAT system.
The best tax reforms involve "participation by the private sector in both policy and operational issues" (Holland, 1991, pp. 19). However, the government and other stakeholders are found divergent due to "conflicting requirements from vertical and horizontal linkages" (Brinkerhoff, 1991, quoted in Brinkerhoff and Crosby, 2002, p 120).The coordination within different functional wings of the organization and between organizations creates synergic outcomes in the organization.
Table 5.10 Relation between Coordination and Filing Compliance
Filing Compliance Total
Disagree Agree
Coordination Disagree Count 31 27 58
Percent 58.5 41.5 49.2
Agree Count 22 38 60
Percent 41.5 58.5 50.8
Total Count 53 65 118
Percent 100.0 100.0 100.0
Source: Field Study, 2014
The analysis of cross-tabulated statistics implies that 58.0 percent of the respondents agree with the fact that intra and inter office coordination affects the filing compliance and the Pearson Chi-Square value is statistically insignificant, (p > 0.05). In the FGD and interviews, the CTOs and TOs said that intra and inter office coordination are not directly associated with filing compliance behavior of the taxpayers. The effective vertical and horizontal coordination mechanism ensures enforcement against the non-filers which has hardly been undertaken by the tax administration. The government has been lenient towards the non-filers and tax defaulters by providing amnesty and waiver of interests, fines and penalties owed. It implies that mere intra and inter office coordination would not help enhance filing compliance in the VAT system.
Self-Assessment Tax System (SATS) entails a comprehensive and robust risk management system in tax administration in order to encourage taxpayers to comply with tax laws voluntarily and to deter non-compliance.
Table 5.11 Relation between Risk Management and Filing Compliance
Filing Compliance Total
Disagree Agree
Risk Management Disagree Count 16 32 48
Percent 30.2 49.2 40.7
Agree Count 37 33 70
Percent 69.8 50.8 59.3
Total Count 53 65 118
Percent 100.0 100.0 100.0
Source: Field Study, 2014
The analysis of cross-tabulated statistics implies that 51.0 percent of the respondents agree with the fact that risk management system affects the filing compliance and the Pearson Chi-Square value is statistically significant, (p < 0.05), hence the risk management system affects the filing compliance behavior of the taxpayers.
Monitoring is a concurrent evaluation process and tool for facilitating implementation of policies, plans, and programs and for assisting evaluation of the policies, plans, and programs.
Table 5.12 Relation between Monitoring and Evaluation and Filing Compli-ance
Filing Compliance Total
Disagree Agree
Monitoring and Evaluation Disagree Count 28 20 48
Percent 52.8 30.8 40.7
Agree Count 25 45 70
Percent 47.2 69.2 59.3
Total Count 53 65 118
Percent 100.0 100.0 100.0
Source: Field Study, 2014
The analysis of cross-tabulated statistics implies that 69.0 percent of the respondents agree with the fact that monitoring and evaluation system of the IRD affects the filing compliance. IRD's county-wide ICT networking and e-based internal reporting and monitoring system is linked with PBIS and other reward management. The responses are analyzed in the following table. and the Pearson Chi-Square value is statistically significant, (p < 0.05), hence the monitoring and evaluation system of the IRD affects the filing compliance behavior of the taxpayers.
6. Discussion
The bivariate analysis of the responses and the nonparametric Chi-Square test showed mixed results. The results postulated that higher the clarity and con-sistency in policy, the better is the implementation from the implementer and higher compliance from the taxpayers. It has validated the extant theory of Van Meter and Van Horn (1975); Mazwanian and Sabatier (1983); Edwards, G.C. III, & Sharkansky I, (1978). However, the results showed that mere simplicity of policy does not ensure better compliance of the policy. The interviews with CTOs, TOs, and with middle and lower level policy makers at the IRD, and focus group discussion with tax officers shed light on the facts that the policy clarity, specificity, and certainty are the crucial factors to implement public policy like filing compliance. The participants, indisputably, were of the view that policy consistency and simplicity are also important factors to implement VAT policy for enhancing filing compliance behaviour of the taxpayers. They also admitted that large number of non-filers has been a threat to the tax administration. "Tax uncertainties give rise to regulatory and compliance risk and dealing with those risks pose a significant challenge for corporation" (Lavermicocca, Catriona, (2011, p 96). The government has been implementing rebate and fine waiver policy targeting the hitherto non-filers to encourage them to file their tax returns. However, such a policy has not been effective in reducing non-filers and enhancing filing compliance.
Edwards, G.C. III, &Sharkansky I, (1978) focused on the ability of the imple-menters to carry out the policies in order to ensure compliance. The study results do not support this assumptions. The adequacy, competency, and commitment of the tax officials have meagre impact on the filing behavior of the taxpayers. Matland (1995) focused on the skills of individuals in the local implementation structure and on the local conditions to adapt the policies in sync with local condition. However, the research findings showed that the role pf the VAT policy implementers has scant effect on the compliance behavior of the taxpayers.
The findings of the research showed mixed conclusions. The infrastructure of the tax offices, IRD's risk management system and internal monitoring and evaluation system have positive impact on the filing compliance behavior. The findings are similar to the findings of Fischer, et. al., (1992);Das-Gupta and Mookherjee, (1998); Tallberg (2002); and (Poppelwell et.al., 2012). Fischer, et. al., (1992) argued that tax compliance is contingent upon different factors like, tax rate, penalty, and probability of detection, complexity of tax system, attitude and perception of the taxpayers, non-compliance opportunity,and demographic factors like age, gender and education.Das-Gupta and Mookherjee, (1998) argued for the tax compliance and foused on the information system for the identification of tax liabilities; an assessment system to determine tax liabilities, and on a system for follow-up penalty, prosecution, and collection. Tallberg (2002) advocates a coercive stategy of monitoring and sanctions is needed to remedy the problem of non-compliance. (Poppelwell et.al., 2012) held the same view that the success of deterrence strategies can be linked to fear of detection or severity of punishment, deterrence is more effective when strong positive social norms exist.
7. Major Findings
The study has revealed variant results. Some control variables from the extant theories on policy implementation have been borrowed to test the conjecture on the policy implementation. The ontological stance that the policy clarity ensures effective implementation of the public policy is upheld. The results imply that the relationship between policy clarity and filing compliance is significant. Accordingly, the relationship between policy mandates and filing compliance are found significantly correlated with each other. The infrastructure of the IRD in terms of automation, e-governance, and e-services, and e-based monitoring and evaluation system are found to be effective in influencing the filing behavior of the taxpayers. The service oriented organization culture is found important for enhancing voluntary compliance of the taxpayers.
However, the relations between simple policy and filing compliance are found insignificant. The reasons for insignificant relations between policy simplicity and filing compliance were analyzed during the FGD with the policy makers and implementers. They were of the view that the VAT laws are simpler than others laws. The compliance behavior of the taxpayers is affected by poor assessment of the risk and inadequate capability of the IRD and its functional organizations to manage non-compliance. The relations between the role of tax officials and filing compliance are found to be insignificant. From the research findings, it is figured out that the staffs of the IRD have less to do with enhancing voluntary compliance of the taxpayers. The taxpayers themselves can decide when to file tax returns. Moreover, the information captured in the VAT system are less effective to enhance the capability of the tax officials to communicate and control the behaviour of the taxpayers. Moreover, the intra office coordination in the IRD and IROs was poor to deal with non-compliant taxpayers and to enhance the service quality so that taxpayers can be motivated to be compliant in terms of returns filing. The inter office coordination within and beyond the IRD organization is also insignificant in influencing the behavior of the taxpayers.
8. Policy Implication
The positive relationship between policy mandates and filing compliance could be useful policy feedback for the IRD to devise clear, consistent, simple policies to enhance voluntary compliance of the taxpayers. The study might push IRD to devise specific and unambiguous policies and procedures for easy registration in and deregistration from the VAT system on the one hand, and for effective enforcement of the tax laws on the other. Furthermore, IRD could enhance competency and commitments of the staffs; improve service delivery; improve service-oriented work behavior; develop information, communication, and technological infrastructures; manage potential risks in VAT system; and augment robust system of monitoring and evaluation of the performance of the employees. The policymakers could gain better understanding of the key variables that are significantly associated with filing compliance. The frontline officials could develop effective operational strategies, plans, and programs to maximize their performances.
References
Alink, Matthijs and Kommer, Victor Van, (2011), Handbook on Tax Administration, International Bureau of Fiscal Documentation (IBFD), Amsterdam, The Netherland.
Almond, Gabriel A. and Pawell Jr. G. Bingham (1966), Comparative Politics; A Development Approach, Little, Brown and Company (inc.), Boston, Massachusetts, USA, PP. 190-212
Berman, P. (1978). "The Study of Macro and Micro implementation", Public Policy, 26(2), 157- 184.
Brinkerhoff, Derick W. and Crosby, Benjamin L., (2002), Managing Policy Reform: Concepts and Tools for Decision-Makers in Developing and Transitioning Countries, Kumarian Press, Inc.
Chayes, Abram and Antonia, Handler Chayes, (1993), On Compliance, Interna-tional Organization, 47(2), pp. 175-205.
Cochran, Charles L., and Malone, Eloire F. (2007),Public Policy: Perspectives and Choices (Third edition) Viva Books Private Limited, New Delhi.
Creswell, John W.,(2009), Research Design: Qualitative, Quantitative, and Mixed Methods Approaches, SAGE Publication India Pvt. Ltd, New Delhi.
Cuban L (1988).The Managerial Imperative and the practice of leadership in school, Albany: State University of New York Press
Das-Gupta, Arindam and Mookherjee, Dilip (1998), Incentives and Institutional Reform in Tax Enforcement: An Analysis of Developing Country Experience, Oxford University Press, New Delhi.
Dye, Thomas R.,(1975),Understanding Public Policy, Englewood Cliff, New Jersey, Prentice Hall.
Edwards, G.C. III, &Sharkansky I, 1978,The policy Predicament: Making and Implementing Public Policy, W. H. Freeman,San Fransisco, CA.
Fischer CM, Wartick M., Mark M. (1992), Detection Probability and Taxpayer Compliance: A Review of the Literature, J. Acc.Lit. 11, pp 1-46
Government of Nepal, Inland Revenue Department, (2012), Annual Report 2011/12, Kathmandu, Nepal.
Government of Nepal, Ministry of Finance, (2012), Economic Survey, Fiscal Year 2011/12, Kathmandu, Nepal.
--------------------, Value Added Tax Act, 2052, Kathmandu, Nepal.
---------------------, Value Added Tax Regulation, 2053, Kathmandu, Nepal.
Griffin, Ricky W., (2005), Management, 6th Edition, Biztantra, An Imprint of Dreamtech Press, New Delhi.
Hill, Michael and Hupe, Peter (2002), Implementing Public Policy: Governance in Theory and in Practice, Sage Publication, London
Hjern, B (1982). "Implementation Research: The link gone missing",Journal of Public Policy, 2. 301-308)
Holland, Graham, (1991), "Planning for VAT", in: Alan A. Tait (eds) Value-Added Tax: Administration and Policy Issues, International Monetary Fund, Occasional Paper 88.
Jamil, Ishtiaq, (1994), "Administrative Culture: A Mode of Understanding Public Administration Across Cultures", Research in Urban Policy, Vol. 5, JAI Press Inc.
Lavermicocca, Catriona, (2011) "Tax Risk Management Practices and Their Impact on Tax Compliance behavior- The Views of Tax Executives from large Australian Companies", eJournal of Tax Research , vol.9, No.1, pp 89-115
Lipsky, M. (1978),"Standing the Study of public policy implementation on its head". In W.D Burhham& M.W Weinberg (Eds), American Politics and Public Policy (pp 391-401), Cambridge MA : MIT press.
John, P. (1998), Analysing Public Policy, Printer,London.
Matland, Richard E. (1995), "Synthesizing the Implementation Literature: The Ambiguity-Conflict Model of Policy Implementation", Journal of Public Administration Research and Theory: J-PART, Vol. 5, No.2, pp. 145-174
May Peter J., (1996), "Mandate Design and Implementation: Enhancing Imple-mentation Efforts and Shaping Regulatory Style", Journal of Public Administration Research and Theory( J-PART), Vol. 6, Page 337- 364
Mazmanian, D.A. & Sabatier P.A. (1983), Implementation and Public Policy, Glen-view, Ill. Scott, Foresman.
McLanghlin, M.W (1990), "The Rand Change Agent Study Revisited: Macro Perspectives and Micro realities", Educational Researcher, 19(9), 11-16
McLanghlin, M.W. (1987), "Learning from Experience: Lessons from policy implementation", Educational Evaluation and Policy Analysis, 9(2), 133-152)
Pressman, J.L., and Wildavsky, A. (1973), Implementation, University of California Press.
Poppelwell, Elisabeth, Kelly, Gail, and Wang, Xin, (2012), "Intervening to to reduce risk: identifying sanction thresholds among SME tax debtors", eJournal of Tax Research, 2012, Atax, The University of New South Walles, vol. 10, no. 2, pp 403 - 435
Reejal, Puskar R. (1995), Fundamental of Public Policy Analysis, PairaviPrakashan, Kathmandu.
Robbins, Stephen P., (2000), Organizational Behavior, 9th Edition, Prentice-Hall of India, New Delhi.
Silwal, Narayan Prasad, (2001), "Value Added Tax: Its Past, Present and Future", In: Rup Khadka (eds), Value Added Tax: Four Years of Implementation, Inland Revenue Department and Value Added Tax Project, Kathmandu, pp 153- 62.
Tait, Alan A. (1991), "VAT Policy Issues: Structure, Regressivity, Inflation, and Exports", in: Alan A. Tait (eds) Value-Added Tax: Administrative and Policy Issues, International Monetary Fund, Occasional Paper 88, October 1991.
Tallberg, Jonas (2002), "Paths to Compliance: Enforcement, Management and the European Union", International Organization, 56(3), pp. 609-43
http://www.mof.gov.np/contentArticle-Content-cWk=