Income Tax Act, 2058 and Income Tax Regulation, 2059 with reference to commercial banks

1. Residence and taxable income. A bank incorporated in Nepal is a resident entity and is taxed on its worldwide income. A foreign bank working through a Nepal branch is taxed on income sourced in Nepal, and a repatriation tax applies when branch profit is remitted abroad.

2. Tax rate. Banks and financial institutions are taxed at a flat 30% of taxable income, higher than the 25% rate for ordinary industries, as set by the Act and the annual Finance Act.

3. Computation of income. Interest, discount, commission, fees and forex gains are business income; dividends and interest on securities are investment income. Interest paid to depositors, salaries, rent, depreciation (block-wise) and the loan-loss provision permitted by the Act and Regulation are deductible. Interest income is generally accounted on an accrual basis, subject to the rules for non-performing loans.

4. Losses and related-party rules. Business losses can be carried forward and set off against later profits for 7 years. Related-party transactions must be at arm's length prices, and excess interest paid to related non-residents is restricted.

5. Withholding tax (TDS). A bank must deduct tax at source on payments it makes, such as:

   • interest on deposits: 5% for resident natural persons and 15% for resident entities;
   • rent: 10%; dividends paid to residents: 5%; and
   • payments to non-residents: generally 15%, with the rate depending on the type of payment.

   TDS must be deposited with the Inland Revenue Department within 25 days of the end of the month and reported in the prescribed returns.

6. Advance tax and return. Advance tax is paid in three instalments: 40% of the estimated liability by the end of Poush, 70% by the end of Chaitra and 100% by the end of Ashadh. The annual return is filed within three months of the end of the fiscal year (by the end of Ashwin), with audited accounts.

7. Records and penalties. Proper books and records must be kept. Late filing, under-payment or failure to deduct or deposit TDS attracts interest and penalties.

Conclusion: Banks face a 30% tax rate, strict TDS duties, three advance-tax instalments and timely return filing.

Banking Offences and Punishment, and Their Prevention

The Banking Offence and Punishment Act, 2064 (2008) defines offences committed against or through banks and financial institutions (BFIs) and prescribes punishments, to protect depositors' money and public confidence in the banking system.

1. Types of Banking Offences and Punishments (5 marks)

(a) Offences relating to loans and funds

(b) Offences by promoters, directors, managers and employees

• Preparing or causing to be prepared false financial statements, accounts or audit reports.
• Misuse of authority, conflict of interest or taking undue benefit.
• Disclosing confidential information of depositors or the bank.
• Obstructing Nepal Rastra Bank (NRB) inspection or refusing to produce records.

(c) Offences relating to instruments and transactions

• Counterfeiting or altering cheques, drafts, bills and electronic records.
• Issuing a cheque without sufficient funds (cheque dishonour).
• Money laundering and terrorist financing through banking channels (also covered by the Assets (Money) Laundering Prevention Act).
• Operating unlicensed banking or hundi.

(d) General provisions

• Attempt, abetment and conspiracy are punishable like the principal offence.
• Where a corporate body commits an offence, the responsible director, manager or official is personally liable.
• The Act provides for confiscation of property involved and compensation to the victim institution.
• Cases are tried by the court under the Act, with appeal to higher courts. Exact terms of imprisonment and fines differ by offence and amendment, so quote them from the Act itself in the exam.

2. Measures to Minimize Banking Offences (5 marks)

(a) Internal control and governance

• Three lines of defence: business units, risk and compliance, internal audit.
• Segregation of duties, dual authorization of high-value transactions, rotation of staff in sensitive posts and compulsory leave.

(b) KYC, AML and credit discipline

• Strict KYC, customer due diligence and suspicious transaction reporting to the Financial Intelligence Unit.
• Use of the Credit Information Bureau (CIB) to check borrowers and prevent multiple financing.

(c) Technology

• Core banking with real-time monitoring, exception reports and audit trails.
• Multi-factor authentication and cyber-security controls against hacking, phishing and card fraud.

(d) Supervision and regulation

• Risk-based on-site and off-site supervision by NRB, prompt corrective action and fit-and-proper tests for directors and senior managers.

(e) Ethical culture

• Training, a code of conduct, integrity screening at recruitment and a protected whistle-blowing channel, with the board setting the tone at the top.

(f) Deterrence

• Speedy investigation and prosecution, with coordination among NRB, the Commission for the Investigation of Abuse of Authority (CIAA), Nepal Police and the Financial Intelligence Unit.

Conclusion: Banking offences arise mainly from weak controls, greed and regulatory gaps. Strong governance, technology-driven monitoring, effective supervision, an ethical culture and firm enforcement together minimize them and protect depositors' confidence.

The Companies Act, 2063 (2006) is the principal law governing the registration, operation and winding up of companies in Nepal. Its salient features relating to incorporation, governance and dissolution are as follows:

A. Incorporation

1. Types of companies: The Act recognises private companies (1–101 shareholders), public companies (minimum 7 shareholders), one-person companies, and companies limited by shares, limited by guarantee or unlimited companies.
2. Registration: A company acquires legal personality only after registration at the Office of the Company Registrar (OCR). A private company may commence business immediately; a public company must obtain a certificate to commence business after allotment of shares.
3. Memorandum and Articles of Association: The Memorandum contains the name, address, objectives, capital and liability of members; the Articles contain internal management rules. Both must be registered and are binding on the company and its members.
4. Name and capital: The name must not be misleading or identical to an existing company. Authorised capital is stated in the Memorandum, and shares may be issued at par or at a premium (not at a discount).
5. Number of directors: A private company must have at least one director; a public company at least three directors. Every company must have at least one director who is a Nepali citizen resident in Nepal.

B. Governance

1. Board of Directors: The Board manages the company. Directors are appointed by the general meeting.
2. General meeting: The Annual General Meeting must be held within 6 months of the end of the fiscal year. Special general meetings may be called as provided in the Act.
3. Audit and accounts: Every company must maintain proper books of accounts, prepare financial statements and appoint a qualified auditor. Public companies must publish audited financial statements.
4. Disclosure and accountability: Directors have fiduciary duties; related-party transactions and conflicts of interest must be disclosed. The Act provides for the rights of minority shareholders and remedies against oppression.
5. Regulatory supervision: The OCR supervises registration and compliance; the Nepal Rastra Bank and other regulators supervise companies under their respective laws.

C. Dissolution (Winding Up)

1. Modes of winding up: A company may be wound up voluntarily (by special resolution) or compulsorily by order of the court.
2. Grounds for compulsory winding up: Insolvency, failure to commence business within one year of registration, reduction of members below the statutory minimum, or conduct contrary to law or public interest.
3. Liquidation procedure: On winding up, a liquidator is appointed to realise assets, settle liabilities and distribute the surplus among shareholders according to their rights.
4. Dissolution order: After completion of liquidation, the court passes a dissolution order and the company ceases to exist as a legal person; its name is struck off the register.
5. Protection of creditors: Creditors are paid in priority to shareholders, and fraudulent or preferential transactions may be set aside.

Conclusion: The Companies Act, 2063 provides a comprehensive legal framework covering incorporation, corporate governance and dissolution, thereby promoting transparency, accountability and investor confidence in the Nepali corporate sector.