Taxation in Nepal

Under the Income Tax Act, 2058, "tax" means the income tax imposed under the Act, and it includes advance tax, withholding tax, and any additional charge, interest and penalty payable under the Act.

Two final withholding payments are:

1. Dividend paid by a company or fund to a resident or non-resident person (5%).
2. Interest on bank or financial institution deposits paid to a natural person who is not engaged in business (generally 5-6%), or payments to a non-resident for dividend, interest or royalty without a permanent establishment in Nepal.

Jeopardy assessment is an assessment made by the Inland Revenue Department at any time, before the normal due date, when it believes a person is about to leave Nepal, dispose of, or move their property out of the country or otherwise act so as to avoid paying tax. The Department may assess the tax on the basis of an estimate and require immediate payment.

When an employer gives a residential accommodation facility to an employee, the benefit is included in the employee's assessable income. If the employer pays rent, the amount of rent paid is the benefit; if the employer provides its own or a concessional house, the benefit is the market rental value of the accommodation. Any amount paid by the employee is deducted, and only the remaining benefit is taxable.

Mr. Baral is taken as a resident natural person (single). Income is taxed in two separate parts.

Business income Rs 300,000 falls within the first slab (up to Rs 400,000), taxed at 1% (social security tax):

$300{,}000\times1\%=\text{Rs }3{,}000$

Gain on sale of shares of a non-listed company is taxed at 10% for a natural person:

$300{,}000\times10\%=\text{Rs }30{,}000$

$\text{Total tax payable}=3{,}000+30{,}000=\textbf{Rs 33,000}$

The allowable donation to an approved public benefit body, such as a public school, is the lowest of the actual donation, 5% of adjusted taxable income, and Rs 100,000.

• Actual donation = Rs 200,000
• 5% of adjusted taxable income = 5% x 1,000,000 = Rs 50,000
• Statutory limit = Rs 100,000

$\text{Allowable donation}=\textbf{Rs 50,000}$

Section 10 of the Income Tax Act, 2058 lists amounts that are exempt from tax. Any three of the following:

1. Gifts and inheritance: an amount received as a gift or inheritance, other than a gift connected with employment, business or investment.
2. Scholarship: an amount received by an individual as a scholarship or educational grant.
3. Insurance and compensation: an amount received as compensation for personal injury, death or loss of a body part, other than compensation for loss of income already taxed.
4. Diplomatic income: remuneration and allowances of diplomats and staff of foreign missions, subject to reciprocity.

Working assumptions: Block D (all other assets) has a rate of 15% under Schedule 2. A special industry gets one-third more depreciation, so the rate is $15\% \times \tfrac43 = 20\%$. An asset added in the last three months of the income year (Baisakh to Ashad) gets only $\tfrac23$ of the depreciation.

Depreciation base (excluding the Ashad addition)

• Depreciation on the base: $1,900,000 \times 20\% =$ Rs 380,000.
• Depreciation on the Ashad addition: $300,000 \times 20\% \times \tfrac23 =$ Rs 40,000.

Allowable depreciation = Rs 380,000 + Rs 40,000 = Rs 420,000

Only receipts and payments of the profession are considered. Interest on fixed deposit is investment income, agricultural income is a separate source, and the opening balance is not income.

Personal expenses are not deductible. The donation to a tax-exempt entity is not a business expense. It is allowed only as a deduction from total income, limited to the lesser of Rs 100,000 or 5% of adjusted taxable income.

Tax liability: A trading company pays tax at 25%.

$550,000 \times 25\% = \text{Rs } 137,500$

Natural resource payment is received net of 15% tax at source, so it is grossed up: $255,000 \div 0.85 =$ Rs 300,000. Bad debts recovered are business income, and the office rent, domestic expenses and club donation are not investment deductions. The remote-area benefit is a rebate on tax, not on income.

Adjusted taxable income (before PCC and R&D) $= 700,000 - 200,000 - 50,000 =$ Rs 450,000.

Pollution control cost (PCC): the allowable amount is the lesser of the actual cost and 20% of adjusted taxable income.

• 20% of Rs 450,000 = Rs 90,000
• Actual PCC = Rs 150,000
• Allowable PCC = Rs 90,000

Research and development (R&D): the actual cost of Rs 100,000 is allowed in full. It is incurred for the business and is within the limit.

Total allowable PCC and R&D = Rs 90,000 + Rs 100,000 = Rs 190,000

Section 19 of the Income Tax Act, 2058 provides for depreciation on depreciable assets used in business or investment. The main provisions are as follows.

1. Pooling in blocks. Depreciable assets are grouped into blocks and depreciation is computed on the pooled depreciation base of each block. It is not computed asset by asset.

2. Depreciation base.

• Base = opening written-down value + cost of additions (including improvements) - disposal proceeds.
• Depreciation is deducted from the base each year to give the closing value, which carries forward.

3. Special rules.

• An asset acquired in the last three months of the income year gets only two-thirds of the depreciation for that year.
• A special industry gets depreciation at one-third more than the normal rate.
• Depreciation on an asset used partly for business is allowed only for the business proportion.
• If the closing value of a block falls below Rs 10,000 after depreciation, it is fully written off. If disposal proceeds exceed the base, the excess is business income.

4. Conditions. The asset must be owned by the taxpayer and used in generating income. Land and trading stock are not depreciable. Depreciation is a deduction in computing business income and cannot create more than the available base.

VAT rate is 13%. Profit margin of 15% is on cost price at each stage.

(a) Invoice price of importer

Price of the retailer to the customer, excluding VAT:

$\frac{67,800}{1.13} = \text{Rs } 60,000$

Retailer's cost price (the importer's selling price):

$\frac{60,000}{1.15} = \text{Rs } 52,173.91$

Invoice price of importer is Rs 52,173.91 excluding VAT. Including VAT it is $52,173.91 \times 1.13 =$ Rs 58,956.52.

Importer's cost (value at import) is $52,173.91 \div 1.15 =$ Rs 45,368.62.

(b) VAT paid at each stage

Total VAT = 5,898.52 + 884.09 + 1,017.39 = Rs 7,800, which equals the VAT borne by the customer (Rs 67,800 - Rs 60,000).

Dividend from a resident company is excluded from business income. Donations to a tax-exempt body are not a business expense. Omitted interest and PCC are deducted. Business losses are carried forward and set off against future business income.

Loss set-off and taxable income

The taxable income is nil in all five years. A loss of Rs 195,000 remains to be carried forward at the end of year 5, subject to the statutory carry-forward period.

Assumptions: the taxpayer is a resident, unmarried individual. The income year ended on 31 Ashad, so the full year is covered.

Working: salary. Gross pay = net received + PF contribution + tax $= 197,000 + 24,000 + 39,000 =$ Rs 260,000. This covers 13 months' pay (12 months plus the Dashain bonus), so monthly salary is $260,000 \div 13 =$ Rs 20,000 and annual salary is Rs 240,000.

(a) Assessable income from employment

(b) Taxable income

The retirement contribution is within the limit of one-third of assessable income.

(c) Tax liability

• Tax at 1% (first slab for a single person, up to Rs 400,000): $325,280 \times 1\% =$ Rs 3,252.80
• Less: Medical tax credit, lesser of 15% of Rs 50,000 = Rs 7,500 or Rs 750 = Rs 750

Tax liability = Rs 2,502.80

Tax of Rs 39,000 was already deducted at source, so he is entitled to a refund of Rs 36,497.20.

Check of the account. The items on the Dr. side of the Profit and Loss account add to Rs 2,575,000 excluding net profit. Against the credit total of Rs 2,605,000, the net profit works out to Rs 1,855,000, not the printed Rs 1,825,000. The computation below uses Rs 1,855,000.

Assumptions: the individual is single and the slab rates for a single person apply. Depreciation of Rs 90,000 is taken as the allowable depreciation. The other business expenses are allowed. Interest on investment and the gain on a non-business chargeable asset (NBCA) are investment income and are taken out of business income.

1. Business income

The amount received for accepting a restriction on business (Rs 70,000), sundry income and business interest remain in business income.

Pollution control cost of Rs 120,000 is allowed in full, being less than 20% of adjusted taxable income.

2. Total income

The donation is within the limit of the lesser of Rs 100,000 and 5% of adjusted taxable income.

3. Tax liability

Tax liability = Rs 415,500