Taxation and Auditing 2023 Board Question Paper

Definition of Tax under Income Tax Act, 2058:

Under Section 2(dh) of the Nepal Income Tax Act, 2058, “Tax” means any tax or duty imposed under the Act. The statutory definition includes:

1. Advance income tax and tax deducted or withheld at source (TDS).
2. Any statutory interest, penalties, and late filing fees imposed under the Act.
3. Any amount payable to the Inland Revenue Department by an employer, payer, or agent in respect of tax liabilities.
4. Any refund claimable or amount recoverable as arrears of tax under court or administrative recovery proceedings.

Two Examples of Final Withholding Payments (Section 92, Income Tax Act, 2058):

1. Dividend Distributed by a Resident Company: Dividends paid by a resident company or mutual fund to a resident natural person or entity (subject to 5% final withholding tax).
2. Interest Paid by Financial Institutions: Interest or returns paid by commercial banks, development banks, and cooperatives to a resident natural person on personal savings and fixed deposits (not involved in business operations), subject to 5% final withholding tax.

Meaning of Jeopardy Assessment of Tax (Section 100):

A Jeopardy Assessment is an expedited, immediate tax assessment conducted by a tax officer prior to the normal tax return filing date or assessment deadline.

Circumstances of Jeopardy Assessment:

The Inland Revenue Department invokes this power when the tax officer reasonably believes that:

• A taxpayer is about to permanently leave Nepal without settling outstanding taxes.
• A person is in the process of liquidating, transferring, or concealing business assets to frustrate or defeat the collection of assessed taxes.

Provision for Quantification of Accommodation Facility (Section 27):

When an employer provides free or subsidized residential accommodation to an employee, the non-monetary perquisite is quantified and added to employment income as follows:

1. Quantification Rule:
   • 2% of the basic salary / remuneration of the employee for the period during which the facility is enjoyed.
2. Concessional Accommodation:
   • If the employee contributes any monthly rent toward the accommodation, the quantified perquisite is reduced by the actual rent paid by the employee.

Computation of Tax Payable by Mr. Baral:

1. Classification of Income:

• Taxable Business Income: Rs 300,000 (sole proprietorship)
• Gain on Sale of Shares (Non-Listed Company): Rs 300,000

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2. Tax Computation:

1. Tax on Business Income (Rs 300,000):

   • For an individual, business income up to the basic exemption limit (Rs 500,000 for single / Rs 600,000 for couple) is taxed at 0% (Note: The 1% Social Security Tax applies strictly to employment income, not business income).
     $$\text{Tax on Business Income} = \text{Rs } 0$$

2. Tax on Capital Gain on Non-Listed Shares (Rs 300,000):

   • Under Section 95Ka, net capital gains from the disposal of shares of an unlisted company by a resident natural person are taxed at a flat rate of 10%:
     $$\text{Capital Gains Tax} = 10\% \times \text{Rs } 300,000 = \mathbf{\text{Rs } 30,000}$$

$$\mathbf{\text{Total Tax Payable}} = 0 + 30,000 = \mathbf{\text{Rs } 30,000}$$

Computation of Allowable Donation (Section 12, Income Tax Act, 2058):

Statutory Rule for General Donation:

For donations made to tax-exempt entities (such as public schools), the allowable deductible amount is the least of the following three limits:

1. 5% of Adjusted Taxable Income (ATI):
   $$5\% \times \text{Rs } 1,000,000 = \text{Rs } 50,000$$
2. Statutory Maximum Ceiling:
   $$\text{Rs } 100,000$$
3. Actual Donation Paid:
   $$\text{Rs } 200,000$$

Conclusion: The allowable deductible amount of donation for the income year is Rs 50,000.

Three Exempt Amounts under Section 10 of the Income Tax Act, 2058:

1. Treaty Exemptions: Amounts derived by any individual or entity entitled to tax privileges or exemptions under bilateral or multilateral treaties ratified by the Government of Nepal.
2. Diplomatic & Foreign Service Allowances: Foreign allowances granted by the Government of Nepal to citizens posted abroad in diplomatic missions.
3. Pensions of Ex-Servicemen: Pensions received by Nepalese citizens who served in foreign military or police forces (such as the British Gurkhas or Indian Army), paid by foreign governments.

Computation of Allowable Depreciation for Block D (Special Industry):

1. Absorption Rules for Additions:

• Marga (Shrawan–Poush): $100\% \text{ of Rs } 600,000 = \text{Rs } 600,000$
• Chaitra (Magh–Chaitra): $\frac{2}{3} \times \text{Rs } 900,000 = \text{Rs } 600,000$
• Ashadh (Baisakh–Ashadh): $\frac{1}{3} \times \text{Rs } 300,000 = \text{Rs } 100,000$
• Total Absorbed Additions: $600,000 + 600,000 + 100,000 = \mathbf{\text{Rs } 1,300,000}$

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2. Depreciation Base:

$$\text{Opening WDV Base} = \text{Rs } 1,000,000$$

$$\text{Add: Absorbed Additions} = \text{Rs } 1,300,000$$

$$\text{Less: Disposal Proceeds} = \text{Rs } 600,000$$

$$\mathbf{\text{Depreciation Base for the Year}} = 1,000,000 + 1,300,000 - 600,000 = \mathbf{\text{Rs } 1,700,000}$$

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3. Allowable Depreciation:

• Standard Block D rate = 15%.
• Special Industry under Section 19(2) receives an additional 1/3 allowance:
  $$\text{Effective Rate} = 15\% + \left(15\% \times \frac{1}{3}\right) = 15\% + 5\% = \mathbf{20\%}$$
  $$\mathbf{\text{Allowable Depreciation}} = \text{Rs } 1,700,000 \times 20\% = \mathbf{\text{Rs } 340,000}$$

(At standard 15% rate without special industry concession: $1,700,000 \times 15\% = \text{Rs } 255,000$).

Computation of Assessable Income from Profession for the Lawyer:

Statement of Assessable Income:

Computation of Taxable Income and Tax Liability of XYZ Trading Company:

1. Statement of Taxable Income:

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2. Tax Liability:

Corporate Tax Rate for a general commercial trading company = 25%

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

Computation of Net Assessable Income from Investment for Mr. Baral:

1. Analysis of Inflows:

1. Natural Resources Payment (Net Rs 255,000):
   • Natural resource payment is subject to 15% non-final withholding tax (TDS).
     $$\text{Gross Amount} = \frac{\text{Rs } 255,000}{1 - 0.15} = \frac{255,000}{0.85} = \mathbf{\text{Rs } 300,000}$$
2. Interest from Investment: Rs 100,000 (chargeable under Section 9).
3. Bad Debts Recovered (Rs 50,000 with 30% not allowed):
   • Only bad debts previously allowed as deduction are taxable upon recovery:
     $$\text{Taxable Recovery} = 70\% \times \text{Rs } 50,000 = \mathbf{\text{Rs } 35,000}$$
4. Casual Gain (Rs 20,000):
   • Subject to 25% final withholding tax; excluded from assessable income.

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2. Statement of Net Assessable Income from Investment:

Computation of Allowable Pollution Control Cost (PCC) and Research & Development (R&D) Expenses:

1. Determination of Adjusted Taxable Income (ATI) before PCC & R&D:

$$\text{Gross Assessable Income from Business} = \text{Rs } 700,000$$

$$\text{Less: General Deductions before PCC \& R\&D} = \text{Rs } 200,000$$

$$\text{Less: Previous Year Unrecovered Business Loss} = \text{Rs } 50,000$$

$$\mathbf{\text{Adjusted Taxable Income (ATI) Base}} = 700,000 - 200,000 - 50,000 = \mathbf{\text{Rs } 450,000}$$

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2. Allowable Pollution Control Cost (PCC) under Section 17:

Statutory limit is the lower of:

1. Actual PCC incurred = Rs 150,000
2. 50% of ATI Base: $50\% \times \text{Rs } 450,000 = \mathbf{\text{Rs } 225,000}$$\mathbf{\text{Allowable PCC}} = \mathbf{\text{Rs } 150,000}$$ (Unabsorbed PCC to be capitalized to Block D = Nil).

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3. Allowable Research and Development (R&D) Cost under Section 18:

Remaining ATI for R&D calculation:

$$\text{Remaining ATI} = \text{Rs } 450,000 - \text{Rs } 150,000\text{ (allowable PCC)} = \mathbf{\text{Rs } 300,000}$$

Statutory limit is the lower of:

1. Actual R&D incurred = Rs 100,000
2. 50% of Remaining ATI: $50\% \times \text{Rs } 300,000 = \mathbf{\text{Rs } 150,000}$$\mathbf{\text{Allowable R\&D Cost}} = \mathbf{\text{Rs } 100,000}$$ (Unabsorbed R&D cost to be capitalized to Block D = Nil).

Depreciation Provisions under Section 19 and Schedule 2 of the Income Tax Act, 2058:

1. Classification of Depreciable Assets into Blocks:

• Block A (Building, structures, waterworks): $5\%$ declining balance.
• Block B (Office equipment, furniture, computers): $25\%$ declining balance.
• Block C (Automobiles, buses, transport equipment): $20\%$ declining balance.
• Block D (Plant, heavy machinery, manufacturing equipment): $15\%$ declining balance.
• Block E (Intangible assets: patents, trademarks, software): Straight-line basis over useful economic life.

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2. Time-Based Absorption Rules for Additions:

• Additions during First Half (Shrawan to Poush): $3/3$ ($100\%$) of cost is added to base.
• Additions during Second Period (Magh to Chaitra): $2/3$ ($66.67\%$) is added; $1/3$ capitalized next year.
• Additions during Third Period (Baisakh to Ashadh): $1/3$ ($33.33\%$) is added; $2/3$ capitalized next year.

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3. Formula for Depreciation Base:

$$\text{Depreciation Base} = \text{Opening WDV} + \text{Absorbed Additions} - \text{Disposal Proceeds}$$

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4. Special Provisions & Additional Concessions:

• Special Industries (Manufacturing, Mining): Entitled to an additional 1/3 (33.33%) of the normal depreciation rate.
• Full Absorption of Disposals: If disposal proceeds exceed the depreciation base, the surplus is treated as taxable business gain, and the pool base becomes zero. If all assets in a pool are disposed of, the unabsorbed base is written off as allowable terminal depreciation.

Computation of Invoice Price of Importer and VAT Paid at Each Stage:

1. Backward Calculation from Retailer Selling Price:

• Retailer Price to Customer (inclusive of 13% VAT) = Rs 67,800
  $$\text{Retailer Selling Price (Exclusive of VAT)} = \frac{\text{Rs } 67,800}{1 + 0.13} = \frac{67,800}{1.13} = \mathbf{\text{Rs } 60,000}$$
  $$\text{Total VAT Paid by Customer} = 67,800 - 60,000 = \mathbf{\text{Rs } 7,800}$$

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2. Cost Price to Retailer (Importer Selling Price):

The retailer charges a 15% profit margin on cost:

$$\text{Retailer Selling Price} = \text{Cost} \times (1 + 0.15)$$

$$\text{Rs } 60,000 = \text{Cost to Retailer} \times 1.15 \implies \text{Cost to Retailer} = \frac{60,000}{1.15} = \mathbf{\text{Rs } 52,173.91}$$

Thus, the Invoice Price of Importer (Exclusive of VAT) = Rs 52,173.91.

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3. Import Cost to Importer:

Importer charges 15% profit margin on cost:

$$\text{Cost to Importer} = \frac{\text{Rs } 52,173.91}{1.15} = \mathbf{\text{Rs } 45,368.62}$$

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4. Statement of VAT Paid at Each Stage of Sales:

Computation of Taxable Income with Set-off and Carry-Forward of Business Losses:

1. Annual Adjustments to Accounting Profits/Losses:

• Year 1: Net Loss Rs (200,000). Donation of Rs 50,000 was deducted in accounts. Under tax law, donation is not an operational business deduction and cannot create or increase a business loss.
  $$\text{Adjusted Year 1 Loss} = -200,000 + 50,000 = \mathbf{-Rs\ 150,000}$$
• Year 2: Net Loss Rs (400,000). Interest expense of Rs 20,000 was omitted.
  $$\text{Adjusted Year 2 Loss} = -400,000 - 20,000 = \mathbf{-Rs\ 420,000}$$
• Year 3: Profit Rs 400,000. PCC of Rs 25,000 was omitted.
  $$\text{Adjusted Year 3 Profit before loss relief} = 400,000 - 25,000 = \mathbf{Rs\ 375,000}$$
• Year 4: Net Loss Rs (50,000). Dividend from resident company of Rs 50,000 was included. Dividends are final withholding receipts and must be removed from business profit:
  $$\text{Adjusted Year 4 Loss} = -50,000 - 50,000 = \mathbf{-Rs\ 100,000}$$
• Year 5: Profit Rs 100,000.

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2. Loss Carry-Forward and Set-Off Table (Section 20):

Losses from general business can be carried forward up to 7 consecutive income years.

Conclusion: Taxable income for all five years is Nil (Rs 0), with Rs 95,000 of Year 2 loss and Rs 100,000 of Year 4 loss carried forward to Year 6.

Computation of Assessable Income, Taxable Income, and Tax Liability of Mr. Aayyan:

1. Working Notes on Remuneration:

• Net salary received = Rs 197,000
• Add deductions: Own PF deduction (Rs 24,000) + TDS (Rs 39,000) = Rs 260,000
• Since this total includes Dashain bonus equal to 1 month salary, the Rs 260,000 covers 13 months:
  $$\text{Monthly Basic Salary} = \frac{\text{Rs } 260,000}{13} = \mathbf{\text{Rs } 20,000\text{ per month}}$$
  $$\text{Annual Basic Salary (12 months)} = 20,000 \times 12 = \mathbf{\text{Rs } 240,000}$$
  $$\text{Dashain Bonus} = \mathbf{\text{Rs } 20,000}$$
• Employer’s PF contribution = $10\% \times 240,000 = \mathbf{\text{Rs } 24,000}$
• Dearness Allowance = $1,200 \times 12 = \mathbf{\text{Rs } 14,400}$
• Annual Bonus = Rs 80,000
• Life Insurance Premium (LIP) paid by office = Rs 22,000 (fully taxable perquisite)
• Saving from TADA = Exempt (actual reimbursement).

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Part (a): Assessable Income from Employment

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Part (b): Statement of Total Taxable Income

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Part (c): Tax Liability (Individual Status)

Since taxable income (Rs 264,780) is below the first slab limit of Rs 500,000:

• Social Security Tax (1% on first Rs 500,000):
  $$\text{Gross Tax} = 1\% \times 264,780 = \text{Rs } 2,647.80$$
• Less: Medical Tax Credit (Section 51):
  • Allowable medical credit = 15% of approved medical expense (Rs 50,000) = Rs 7,500, subject to maximum statutory ceiling of Rs 750.
    $$\text{Medical Tax Credit} = \mathbf{\text{Rs } 750.00}$$
    $$\mathbf{\text{Net Tax Liability}} = 2,647.80 - 750.00 = \mathbf{\text{Rs } 1,897.80}$$
    (TDS already paid was Rs 39,000, resulting in an eligible tax refund).

Comprehensive Business Tax Assessment for Miss Dhakal (Sole Trader):

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1. Working Notes & Adjustments:

1. Stock Valuation Adjustment:
   • Opening and closing stocks were undervalued by 10% (i.e., booked at 90% of true cost).
   • True Opening Stock $= \frac{100,000}{0.90} = \text{Rs } 111,111.11$ (Understated by Rs 11,111.11 -> Increases COGS / reduces profit).
   • True Closing Stock $= \frac{200,000}{0.90} = \text{Rs } 222,222.22$ (Understated by Rs 22,222.22 -> Increases profit).
   • Net Stock Adjustment $= +22,222.22 - 11,111.11 = \mathbf{+Rs\ 11,111.11}$.
2. Plant & Machinery Capitalization:
   • Purchases included Rs 200,000 for Plant & Machinery (Block D asset) purchased in Marga.
   • Must be deducted from purchases (credited back to profit) and capitalized into Block D pool.
3. Depreciation on Block D (Plant & Machinery):
   • Opening WDV = Rs 300,000
   • Additions in Marga (absorbed at 100%) = Rs 200,000
   • Depreciation Base $= 300,000 + 200,000 = \text{Rs } 500,000$
   • Allowable Depreciation ($15\%$ on Rs 500,000) $= \mathbf{\text{Rs } 75,000}$.
   • Accounting depreciation charged (Rs 90,000) must be added back.
4. Legal Expenses:
   • Rs 20,000 spent on income tax appeal is an inadmissible personal/administrative expense and must be added back.
5. Non-Business / Final Withholding Incomes:
   • Interest on Investment: Rs 50,000 (Investment Income).
   • Gain on sale of Non-Business Chargeable Asset (NBCA): Rs 200,000 (Investment Capital Gain).
6. Inadmissible Provisions:
   • Provision for tax: Rs 30,000 (added back).
   • Donation: Rs 50,000 (added back; deducted at taxable income stage).

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Part (a): Statement of Assessable Income from Business

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Part (b): Statement of Total Taxable Income

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Part (c): Tax Liability (Individual Slabs for Resident Sole Proprietor):

• Tax on Capital Gain from NBCA (Rs 200,000 @ 2.5% / 5%):
  • Standard rate for NBCA land/building held > 5 years is 2.5%, or unlisted capital gains = $5\% \times 200,000 = \mathbf{\text{Rs } 10,000}$.
• General Taxable Income: $2,001,111 - 200,000 = \mathbf{\text{Rs } 1,801,111}$
  1. First Rs 500,000 @ 0% (Sole proprietor business) = Rs 0
  2. Next Rs 200,000 @ 10% = Rs 20,000
  3. Next Rs 300,000 @ 20% = Rs 60,000
  4. Next Rs 801,111 @ 30% = Rs 240,333.30
     $$\text{Tax on General Business Income} = 20,000 + 60,000 + 240,333.30 = \mathbf{\text{Rs } 320,333.30}$$

$$\mathbf{\text{Total Tax Liability}} = 320,333.30 + 10,000 = \mathbf{\text{Rs } 330,333.30}$$