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NRB makes tax clearance certificate mandatory to avail business loans

2018-07-24

Banks and financial institutions have been instructed to ask for tax clearance certificate from the borrower companies while granting loans.

Issuing a circular, Nepal Rastra Bank has directed the class ‘A’, ‘B’ and ‘C’ financial institutions to mandatorily seek tax clearance certificate from corporate borrowers as per the provision of the fiscal policy, which envisioned cross-verification of the financial statement submitted in tax office and banks.

The circular of NRB states that the BFIs should seek the latest tax clearance certificate or e-statement while floating or renewing credit of the borrowing firm. The move is aimed at facilitating the banks in determining the real business efficiency of the borrower, which in turn could help them negotiate the loan amount. This also means that organisational borrowers that have not paid their taxes may not be able to avail loans from now on. “Those who are not sincere towards the state cannot be sincere in debt-servicing,” one banker told THT.

The government has introduced the provision to discourage the trend of producing different balance sheets for different purposes. It is reported that some corporate borrowers develop fabricated balance sheets to obtain more loan. However, the tax amount filed by the concerned firms will show the real business efficiency, according to Nara Bahadur Thapa, executive director of NRB. “If a borrowing firm avails credit on the basis of the fabricated balance sheet, the chances of misappropriation of credit are higher.”

Cross-verification of financial statement in the tax office and the banks is expected to compel the borrowers to present the actual financial statement. This policy was introduced through fiscal budget 2016-17. However, it had not been executed to date due to lack of serious efforts on the part of NRB and the tax administration to implement the policy.

According to officials of the Inland Revenue Department, this provision will minimise the chances of tax evasion. “Implementation of this policy will not only help control revenue leakages but also prevent chances of credit fraud, as the borrower will not be able to get away with presenting false financial reports,” Bishnu Nepal, director general of Inland Revenue Department, told THT.

Stating that the Money Laundering Prevention Act has defined tax evasion as one of the money laundering activities, banks stated that they would sincerely follow the government rule by asking for tax clearance certificate from corporate borrowers.

“In the context of laws defining tax evasion as money laundering, the new provision issued by the central bank will safeguard the banks,” said Ashoke Shumsher Rana, former president of Nepal Bankers’ Association and CEO of Himalayan Bank. “We haven’t had any problems with big corporate houses, but small and medium enterprises that lack proper book-keeping practices could face challenges.”

Source: The Himalayan Times