Cost of Trading Goods

Notes:

• Customs duty and freight charges are directly attributable to bringing the merchandise to its present location and condition, so they are added to the cost of purchases.
• Ending inventory is valued at the lower of cost or market value (conservatism principle). Cost = Rs. 50,000, Market = Rs. 70,000; hence Rs. 50,000 is taken.

Cost of trading goods = Rs. 700,000

Under the Income Tax Act, 2058, a natural person whose business turnover is within the presumptive limit pays tax on turnover, not on profit. Binod's stated income of Rs 3 lakh is therefore irrelevant to the computation. His firm is inside Nepal (Pokhara Metropolitan City), so the rates applied are 0.75% on turnover up to Rs 20 lakh and 1% on turnover above Rs 20 lakh.

Tax payable by Binod = Rs 25,000. This is the final tax; no further tax is charged on his income of Rs 3 lakh.

Assumptions

• Income year 2072/73 (promotion on 1 Shrawan 2072 is the first day of the year), so the starting salary of Rs 57,000 per month applies for all 12 months. No increment or efficiency bar (EB) falls within the year.
• Annual basic salary = Rs 57,000 × 12 = Rs 684,000. Satyam is treated as a single (unmarried) resident individual.
• Meeting allowance is net of 15% tax deducted at source (TDS), so it is grossed up and the TDS is a tax credit.
• Interest on fixed deposit is net of 5% final withholding tax, so it is excluded from taxable income.
• The free car is assumed to be for official use only, as no private use is stated, so no benefit is taxed.
• Guard's salary is a personal expense and is not deductible.

Working notes

TDS on meeting allowance = 435,294 − (18,500 × 20 = 370,000) = Rs 65,294.

(a) Net assessable income from employment

(b) Statement of total taxable income

Interest of Rs 95,000 (gross Rs 100,000) is excluded because tax has been finally withheld.

(c) Tax liability

Summary

Statement of Cash Flows of Doctor, Abhinay For the Previous Income Year (As per Direct Method)

Working Notes:

1. Cash Flow from Operating Activities (CFO): This includes all cash inflows and outflows directly related to the primary business operations (providing medical services).
2. Cash Flow from Investing Activities (CFI): This includes the purchase or sale of long-term assets (like the computer) and income generated from investments (dividend, interest).
3. Cash Flow from Financing Activities (CFF): This includes transactions related to long-term funding or owner's equity (though in this case, it primarily includes payments like insurance and donations).
4. Verification: The calculated Net Increase in Cash (Rs 1,115,000) plus the Opening Cash Balance (Rs 250,000) equals the Closing Cash Balance (Rs 1,365,000), which matches the given data.

Direct tax is a tax whose burden cannot be shifted to another person — it is paid directly by the person on whom it is legally imposed, and it is levied on the income or property of that person.

Example: Income tax paid by an individual on their salary.

Tax Deduction at Source (TDS) means the system in which tax on a payment is deducted by the payer (the person making the payment) at the time of making the payment itself, and deposited to the government on behalf of the payee. The payee receives only the net amount after deduction. The deducted amount is treated as advance tax paid by the payee and is adjusted against his/her final tax liability. In Nepal, TDS is imposed on payments such as salary, rent, interest, commission, contract payments, etc., as per the Income Tax Act, 2058.

Income Year vs Assessment Year

In short, income is earned in the income year and taxed in the assessment year.

Canon of Equity

The canon of equity means the principle that taxation should be based on the taxpayer's ability to pay. It holds that people in similar economic circumstances should bear similar tax burdens, and those with greater ability (higher income or wealth) should pay more. It is also called the principle of equity or ability-to-pay, and it is divided into horizontal equity (equal treatment of equals) and vertical equity (unequal treatment of unequals).

Permanent Account Number (PAN)

PAN is a unique nine-digit numeric identification number issued by the Inland Revenue Department (IRD) of Nepal to every taxpayer — individuals, firms, companies and other entities. It is a permanent number that remains the same for the taxpayer's lifetime and is used to bring every taxable person into the tax net.

Its main features and uses are:

• It serves as the taxpayer's identity number for income tax purposes.
• It is required for filing income tax returns, paying taxes, and claiming tax refunds.
• It must be quoted while opening a bank account, registering a business, buying or selling land and vehicles, and carrying out other major financial transactions.
• It helps the government track income, prevent tax evasion and expand the tax base.

Under the Income Tax Act, 2058 and the Income Tax Rules, 2059, accommodation provided by an employer is quantified and added to the employee's remuneration as follows.

• Rent-free accommodation: the value is the lower of (i) the market rent of the accommodation, and (ii) 10% of the employee's remuneration (excluding the accommodation itself).
• Concessional (partly paid) accommodation: the value of the benefit is the amount worked out as above, less the rent the employee actually pays.
• Remuneration here includes salary, wages, allowances, fees, commission, bonus and other cash benefits of the employment.

The quantified value is included in income from employment and taxed under the heading Salaries (income from employment).

Residential status: Resident.

Under the Income Tax Act, 2058, a natural person is a resident of Nepal for an income year if he:

• has a place of abode in Nepal (and stays there), or
• stays in Nepal for 183 days or more in the income year, or
• is a Nepal government employee posted abroad.

Application: The income year 2078/79 runs from 1 Shrawan 2078 to the end of Ashadh 2079. Thomas arrived on 1 Baishakh 2078, before this income year began, and stayed until the end of Kartik 2079, after it ended. He was therefore in Nepal for the whole income year, about 365 days, which is well above the 183-day test.

His foreign citizenship makes no difference, because residence is decided by the period of stay and not by nationality. Thomas is therefore a resident person for 2078/79 and is taxable in Nepal on his worldwide income.

Tax liability of Mr. Nepal

Mr. Nepal is a retired government employee, so his income is pension income. The one-month Dashain allowance included in the Rs 6,52,000 is treated as exempt, so the pension is spread over 13 months and only 12 months are taxable.

$\text{Monthly pension} = \frac{652{,}000}{13} = \text{Rs } 50{,}153.85$

$\text{Taxable pension} = 50{,}153.85 \times 12 = \text{Rs } 6{,}01{,}846$

Tax (individual rates, FY 2081/82):

Tax liability of Mr. Nepal = about Rs 15,185.

Cost of Trading Goods = Rs. 6,15,000

Working:

Note: Administrative expenses are not included in the cost of trading goods as they are period expenses. Closing stock is valued at the lower of cost or market value; hence Rs. 15,000 is taken.

Given:

• Total turnover = Rs 19,00,000 (Rs 19 lacs)
• Total operating expenses = Rs 17,00,000
• Rajan has elected presumptive taxpayer status.

Applicable rule: Under Section 4(4) of the Income Tax Act, 2058, a resident natural person whose annual turnover does not exceed Rs 20,00,000 may elect presumptive tax at 1% of turnover. Operating expenses are not deductible under this scheme.

Computation:

Answer: Rajan’s tax liability is Rs 19,000.

Explanation: Since his turnover (Rs 19 lacs) is within the Rs 20 lacs limit for presumptive taxation, he is eligible. The tax is calculated on turnover, not on profit. His operating expenses of Rs 17 lacs are irrelevant for this purpose.

Computation of Taxable Income and Tax Liability of Suman

Income year 2080/81 (he was promoted on 1 Shrawan 2080, so he draws the starting salary of Rs 50,000 for the whole year). Individual tax slabs of FY 2080/81 are used. Assumptions: "salary" means basic salary; the car, being provided with a driver for general use, is valued at the employer's actual cost.

1. Income from Employment

2. Income from Investment

Interest on saving deposit (gross): 28,500 × 100/95 = Rs 30,000

3. Total Assessable Income

13,13,000 + 30,000 = Rs 13,43,000

4. Deductions and Taxable Income

5. Tax Liability

Total assessable income Rs 13,43,000; taxable income Rs 12,53,050; tax liability about Rs 1,60,915.

Solution:

Given:

• Total turnover = Rs 2,000,000
• Total operating expenses = Rs 1,800,000
• Location: Walling Municipality
• Smrity opted for presumptive tax

Applicable Law: As per Section 4(4) of the Income Tax Act, 2058 and Schedule 1, Part 1, a natural person having turnover up to Rs 5,000,000 can opt for presumptive taxation. The tax rates are:

• Turnover up to Rs 2,000,000 → 0.5% of turnover
• Turnover from Rs 2,000,001 to Rs 5,000,000 → 1% of turnover

Under presumptive taxation, the actual operating expenses are not deductible. The tax is computed on the gross turnover.

Calculation: Since Smrity’s turnover is exactly Rs 2,000,000 (which falls under “up to Rs 2,000,000”), the applicable rate is 0.5%.

[ \text{Tax Liability} = \text{Turnover} \times \text{Rate} ] [ = 2,000,000 \times 0.5% ] [ = 2,000,000 \times \frac{0.5}{100} ] [ = \text{Rs } 10,000 ]

Explanation:

• The operating expenses of Rs 1,800,000 are ignored because presumptive taxpayers are not allowed to deduct expenses.
• If Smrity had not opted for presumptive tax, her net income would be Rs 2,000,000 – Rs 1,800,000 = Rs 200,000, and tax under normal slabs would be Rs 2,000 (1% of Rs 200,000). However, since she opted for presumptive tax, the liability is Rs 10,000.

Conclusion: Smrity’s tax liability under presumptive taxation is Rs 10,000.

Bannet: Employment Income, Taxable Income and Tax

Income year 2073/74 (he was promoted on 1 Shrawan 2073, so the starting salary of Rs 50,000 applies for the whole year). Assumptions: "salary" means basic salary; the car, provided with a driver, is valued at the employer's actual cost; individual (single) tax slabs of FY 2073/74 are used.

a. Net (Assessable) Income from Employment

The retirement contributions (Rs 90,000) are within the limit of the lower of Rs 3,00,000 and one-third of assessable income.

b. Statement of Total Taxable Income

c. Tax Liability

Answers: (a) Rs 13,93,000; (b) Rs 13,68,000; (c) Rs 3,19,050.

Statement of Cash Receipts and Payments of the Lawyer (Previous Income Year)

Personal items are separated from professional ones: Rs 10,000 paid to the domestic helper (included in office expenses) and half of the water/electricity bill (Rs 15,000) are personal. The life and health insurance premiums and the donation are also personal outgoings of the lawyer.

The closing balance of Rs 8,90,000 agrees with the balance c/d in the given statement.