Can a Lottery Beat Tax Evasion? Inside Nepal's New Taxpayer Incentive Program

One of the ten principles of economics as laid down by N. Gregory Mankiw in his book 'Principles of Economics', is that people respond to incentives. Absorbing that principle, Nepal's newly mandated government's Finance Minister, Dr. Swarnim Wagle announced the commencement of Taxpayer Incentive Reward Program in the budget speech of FY 2083/84(26/27) with the aim of expanding formal economy & increasing government revenue. The program officially started from the beginning of the new FY 2083/84, with first lot winners already announced in Shrawan 16. It is not the first time Nepal has tried such a program to increase government revenue. In 2003–04, during Dr. Prakash Chandra Lohani's tenure as Finance Minister, Nepal's revenue authorities tested a one-year VAT lottery scheme. The previous program failed primarily due to change in leadership, lack of digitalization and lots of manual work (Swarnim Wagle mentioned that the lottery used to be drawn through hand picking a bill among a swarm of physical bills in a recent program).

Why is such incentive program even needed in first place?

Historically, Nepal has been operating with a great chunk of informal economy. A research by Dr Adhikari & Dr Raut calculated Nepal's shadow economy to account at around 42.66% of GDP. The paper says that Nepal's informal economy briefly shrinked after 2015 constitution, but surged back post-pandemic due to import restrictions, climbing bank interest rates, and policy changes. A paper by Bharat Neupane shows that tax evasion costs Nepal 400 billion to 500 billion NPR per year, amounting to an estimated 6% to 8% of the country's total GDP. The study flags Value Added Tax (VAT) evasion as a massive problem, showing a 30% compliance gap between what the government should potentially collect versus actual revenues.

These data show a problem in Nepal's economy which is people aren't paying taxes hurting government revenue. This is exactly what the program targets to fix. The latest budget of Nepal aims to collect NPR 1580.31 billion in taxes, in which VAT revenue is supposed to contribute NPR388.83 billion. Recently, FM Wagle also announced to reduce foreign loans and support developmental projects through domestic revenue. All these targets requires increased tax compliance of citizens. There are two primary ways to achieve so: one, increase monitoring, scrutiny and create fear of punishment among taxpayers, another way is to incentivize people to do so voluntarily. The first one requires comparatively more administrative cost and may not recover well in tax revenue, whereas the latter one requires less overhead cost to the government.

Value Added Tax (VAT) is an indirect tax levied on the consumption of goods and services. Nepal follows a single-VAT system fixed at 13%. The concept of VAT is simple instead, of being collected all at once at the final sale, it is collected in stages at each point of production and distribution where value is added. The thing with VAT is that ,when a taxable sale is deliberately kept off the books, the seller can underreport output and potentially evade VAT and other taxes associated with the transaction.

This tax evasion problem arises as both parties of the transaction (consumer and seller) have benefit keeping it undocumented. Seller doesn't want to give bills, pay taxes and consumers don't want to waste time taking their bill. Borrowing texts from a fellow article, let's understand the economics of an undocumented transaction.

'''Tax evasion is an information problem at its core. Governments can only tax what they can observe, and in cash-based economies, two parties can easily transact without either disclosing anything to anyone. The merchant benefits from underreporting. The customer gains nothing from insisting on a receipt. Both parties have the information. Neither has a reason to share it.

Closing that gap through inspections alone is financially impossible. Even a well-resourced tax authority cannot audit every kiosk, every food stall, every small shop. The probability of detection on any individual small transaction is close to zero, which means deterrence-based enforcement, however well-designed, produces weak results at the margins of the formal economy.'''

This is what exactly this program is trying to achieve, instead of making government the watchdog of documentation, it's making consumer the watchdog through incentive, benefiting both government by increased tax revenue and consumer by giving them a chance to be millionaire.

International Practice of Similar Programs

Nepal isn't the first country to introduce such programs, actually its way too old and common program. Behavioral economics provides a theoretical basis for using incentives alongside conventional deterrence-based approaches to improve tax compliance. Over the past few decades, this concept has evolved from a niche cash-society solution into a global compliance tool used by dozens of nations. Few examples of such programs are mentioned below:

Taiwan: Taiwan launched the Uniform Invoice Lottery (Tongyi Fapiao) in 1951 to target massive tax evasion in a heavily cash-dominated economy. Every transaction invoice contains a unique serial number that is entered into bi-monthly cash drawings. Decades later, the system evolved into digital cloud e-invoices linked to consumer bank apps.

Portugal: Known as Fatura da Sorte, Portugal introduced its tax lottery to combat a massive underground shadow economy. Instead of relying on manual ticket entry, every invoice that a consumer explicitly attaches their Tax Identification Number (NIF) to is automatically transmitted by the business to the tax authority and registered into weekly luxury car or voucher raffle.

Slovakia and Poland: Launched in the 2010s to combat Value Added Tax (VAT) fraud in retail and hospitality sectors. Consumers manually registered their physical paper receipts onto a dedicated government web portal to win high-value cash prizes or consumer electronics.

China: Implemented localized Lottery Receipt Experiments (LRE) across dynamic commercial sectors in major municipalities like Beijing and Tianjin. Receipts featured scratch-off boxes that provided instant-win cash feedback directly at the cash register.

Implication of these programs can be seen on both positive and negative side. First positive impact is immediate revenue surge, when Taiwan first integrated lottery numbers onto invoices, its corporate and sales tax revenue jumped by 75% in the very first year. Similarly, a comprehensive econometric study published on ResearchGate tracking China's LRE data proved that scratch-off receipt programs significantly raised aggregate business tax revenues across 37 test districts. Behavioral studies from the University of Nottingham (CREDIT) confirm that lotteries weaponize consumer "loss aversion". Consumers who usually ignore receipts suddenly view throwing away a bill as throwing away a winning ticket, creating powerful social pressure on business owners to stay inside the legal tax network. But these positive side comes with few negative impacts too like, according to compliance reports from Vatcalc Transaction Logs, systems without minimum-spend thresholds are routinely gamed. In Taiwan, fraudsters exploited the draw by splitting single grocery runs into hundreds of individual 1-NTD purchases (such as buying plastic bags one by one) to accumulate thousands of lottery numbers, forcing the Ministry of Finance to establish minimum spending caps. Also, there are studies that conclude that once the novelty of a receipt lottery wears off, consumer registration rates drop unless the government continuously scales up the cash prize pool.

Nepal's Adopted Lottery Model

Nepal named the program as 'Taxpayer Incentive Prize Program' and is managed by Inland Revenue Department (IRD). The details and procedures of this program is laid down in the directive ' करदाता प्रोत्साहन उपहार कार्यक्रम सञ्चालन कार्यविधि, २०८३ '. As per the directive, In order to develop a culture of issuing invoices when buying and selling goods and services, promote tax compliance, encourage the recording of actual business transactions, and encourage consumers to mandatorily obtain invoices when purchasing goods and services, the Taxpayer Incentive Reward Program shall be operated under the approved annual budget and program.

Any consumer buying goods and service of value over NPR 100 at a single instance, purchased in the territory of Nepal for the purpose of personal use are eligible to be part of this program. As per section 4 subsection 5 of the directive, the following transaction aren't eligible to be part of this program:

1) Commodity purchased for business use,

2) Bill originated from Government or public offices,

3) Bill of payment of Internet services, telephone services, electricity, transportation & cargo, and flight ticket payments.,

4) Bill taken from people who don't have PAN.

These exclusions have been meticulously planned, as such transactions are already recorded by business in normal sense, and government doesn't have benefit by including them in the program. These transactions provide less additional compliance value because they are generally already recorded or traceable through existing systems.

The process of participating in this program is pretty simple, any payment done through electronic means such as mobile banking, internet banking, wallets, connectIPS are automatically included in the program. Such apps have already integrated this lottery system through IRD API, and we can see it working. Though, if you win the prize having a valid bill is compulsory to claim such prize. If you have done cash transaction, then you have to register such transaction in IRD prize website.

The winner is chosen on the first and sixteenth of each month of Nepali calendar. The winner is chosen through IRD web portal by cryptographically secure uniform random sampling without replacement algorithm. This removes the factor of partiality and increases the consumer trust on the system. The winner is notified through their mobile number and e-mail for convenience. Also, the winner list is published on IRD website.

The prize amount is NPR One Lakh Thirty-Three Thousand Three Hundred and Thirty-Four for daily winners and NPR Ten Lakh for fortnightly winner. Fifteen daily winners and one fortnightly winner will be announced on each draw. The winning amount is subject to windfall gain tax as per Income Tax Act, 2058 section 55(a), which is 25% of amount. After tax, the amount in hand is NPR One Lakh for daily winners and NPR Seven Lakh and Fifty Thousand for fortnightly winner. Doing basic math, the program therefore has an annual gross prize pool of approximately NPR 7.2 crore. After the 25% withholding tax, approximately NPR 5.4 crore would be paid out to winners. This amount is peanuts for government for program that is forecasting massive revenue gains.

To claim the reward, the winner shall give a letter to their nearest IRD with an identification document, original bill, bank account details and PAN attached. The department is mandated to release the fund within 10 days of receipt of such letter. The amount is released in the bank account of the winner. If any forged document is found on the attached letter, then IRD will take necessary legal actions. In case, if winner doesn't claim his/her prize then such amount will be deposited in Prime Minister's Disaster Relief Fund.

Way Forward For Nepal

MoF and IRD have huge expectation from this program as such programs have been successful in other nation. The success of this program is highly dependent on consumer participation and the government's commitment to its implementation. There are multiple possible challenges hampering the success of the program, but if government tackle those problems then it can also bring good prospect for the economy of nation.

A very first challenge for government is to market this program, government needs to ensure that people are aware of this opportunity to be millionaire, only then the consumer will actually start to demand bill from sellers. Currently sellers in Nepal are reluctant to give out bills for transaction, as many of them are unregistered, have benefit in underreporting income or even don't have the infrastructure of giving out bills. The government should solve this issue either by deterrence or through incentive. I propose that government should also incentivize sellers, as currently sellers have no benefit in giving out bills, what I would like to change in this program is we should also give a certain amount to sellers like give the exact same prize pool as consumer to seller through which the consumer got the winning bill. Like if bill number 478 won, then give prize to both parties of the bill: The seller which gave bill, and the consumer which received the bill. This way, consumers don't even have to demand bill from sellers, as even sellers will get benefit from giving out bill. However, extending the prize to sellers could introduce a new moral-hazard problem. Sellers might fabricate transactions, split purchases or collude with consumers to generate additional winning entries. Any seller-side reward would therefore need to be conditional on transactions being digitally verifiable and consistent with the seller's tax records.

The government must also address declining incentive effects over time, as eventually consumer may not value the prize pool enough to demand bill from sellers, defeating whole purpose of the program. So, the government needs to continuously make the prize pool attractive enough for consumers to be part of this program. The first lot of lottery draw saw 2.56 Crore eligible transaction worth value of 76 Arba. The winning chance in the first lot was 0.0000062%. If each transaction had an equal probability of winning, the first draw implied an approximate winning probability of 1 in 1.6 million. Such low probability may discourage consumer. So, the probability of winning should be balanced by increasing prize pool.

Gaining consumer trust is another issue, as people may think that the lottery draw is rigged to favor people near of government. To counter this, I propose that the government should open-source the code of IRD website especially the algorithm of selecting winning bill which is used to draw bill of winners. This will help people verify the method of lucky draw to be impartial. The cost effectiveness of this program is a thing which needs empirical evidence, as this program is only viable if it generates revenue greater than the cost of reward. Given Nepal's large informal economy and VAT compliance gap, the program has the potential to be highly cost-effective, but this remains an empirical question.

Conclusion

The government's 'हरेक दिन लखपति कार्यक्रम' is an ambitious plan to increase domestic revenue. Inspired from international practices, making consumer watchdog to reduce government's administrative cost is a masterstroke move by FM Wagle. Leveraging the knowledge of behavioral economics, the proposed lottery system is a revival of old practice with a touch of digitalization & marketing. Though the implementation has some hurdles to pass, a good execution of Swarnim's idea could help reduce Nepal's long-standing tax evasion problem.