Dean's Office Official Model Question Paper

Resident Person (Income Tax Act 2058)

An individual is a resident in Nepal for an income year if:

1. Their habitual place of abode is in Nepal, or
2. They reside in Nepal for 183 days or more during the relevant fiscal year (consecutively or in aggregate), or
3. They are an employee of the Government of Nepal posted abroad during that year. Entities (companies, partnerships, trusts) incorporated or having their effective management in Nepal are statutory residents.

Assessable Income vs. Taxable Income

• Assessable Income: The total gross income derived by a person from each of the three statutory heads: Employment, Business, and Investment, after allowable statutory exclusions.
• Taxable Income: Assessable income minus allowable general reductions (allowable retirement fund contributions under Section 63, life insurance premium relief, health insurance deductions, and remote area allowances).

Depreciation Pools and Rates (Schedule 2)

1. Pool A (Buildings, structures, permanent fixtures): 5%
2. Pool B (Office equipment, computers, furniture, fixtures): 25%
3. Pool C (Automobiles, buses, transport vehicles): 20%
4. Pool D (Construction equipment, plant, manufacturing machinery): 15%
5. Pool E (Intangible assets): Amortized on a straight-line basis over their useful life.

Value Added Tax (VAT) in Nepal

VAT is a broad-based, multi-stage consumption tax levied on the value added to taxable goods and services at each stage of production and distribution, collected using the tax credit invoice method.

Standard VAT Rate: 13%.

Tax Deducted at Source (TDS)

TDS is a statutory mechanism requiring the payer (withholding agent) to deduct income tax at specified rates at the time of making payments (rent, interest, dividends, service fees, contract payments) and remit it directly to the Inland Revenue Department (IRD). It accelerates state cash collections and prevents tax evasion.

Computation of Income from Employment and Tax Liability

Assessee: Mr. Bikram (Resident Individual) | Fiscal Year: 2079/80

a. Assessable Income from Employment

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b. Statement of Taxable Income

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c. Calculation of Tax Liability (Individual Resident Tax Slabs for 2079/80)

Specific Statutory Deductions under Income Tax Act 2058

1. Interest Expense (Section 14 & 14a)

• Interest incurred on borrowed capital utilized directly for generating business/investment income is fully deductible.
• Thin Capitalization Rule (Section 14a): For loans borrowed from controlling exempt entities or foreign shareholders, deductible interest is capped at: Total Taxable Interest Income + 50% of Adjusted Taxable Income. Any excess unabsorbed interest may be carried forward indefinitely.

2. Repair and Improvement Expenses (Section 16)

• Repairs to depreciable assets are deductible up to a statutory ceiling of 7% of the depreciation base of that respective pool at the beginning of the year.
• Any excess unabsorbed repair cost cannot be expensed immediately; it must be capitalized by adding it to the depreciation base of the respective pool at the beginning of the next income year.

3. Pollution Control and R&D Costs (Sections 17 and 18)

• Pollution Control Costs (Section 17) and R&D Expenses (Section 18) incurred in business operations are deductible up to a maximum limit of 50% of Adjusted Taxable Income from all businesses conducted by the person.
• Excess unabsorbed expenses must be capitalized and added to Pool D depreciable assets.

Carry Forward and Set-Off of Business Losses (Section 20)

The Income Tax Act provides structured rules for absorbing business operating losses:

1. Intra-Head and Inter-Head Set-Off in the Same Year

• A business loss from one business venture can be set off against taxable income from another business venture of the same person in that year.
• Business losses cannot be set off against income from employment.

2. Carry Forward of Losses

• General Rule: Unrelieved business losses can be carried forward and set off against business income for up to 7 consecutive income years.
• Extended 12-Year Carry Forward: Entities operating in prioritized infrastructure sectors—specifically hydropower generation, transmission, petroleum extraction, and cement production projects—are granted an extended loss carry-forward window of 12 consecutive income years.

3. Restriction on Change in Ownership (Section 57)

• If the underlying ownership of an entity changes by more than 50% within a three-year period, accumulated historical losses incurred prior to the ownership change cannot be carried forward to offset future profits, preventing the trafficking of corporate tax-loss shells.

Value Added Tax (VAT) Architecture in Nepal

Nepal’s VAT operates under the Value Added Tax Act 2052 using the credit-invoice method.

1. Tax Calculation Mechanism

$$\text{Net VAT Payable to IRD} = \text{Output VAT Collected on Sales} - \text{Input VAT Paid on Purchases}$$

• If Output VAT > Input VAT: Difference is remitted to the Inland Revenue Office within 25 days of the following month.
• If Input VAT > Output VAT: Excess input credit is carried forward to offset future months’ liabilities or claimed as a cash refund (for export businesses).

2. Zero-Rated vs. Exempt Supplies

Corporate Income Tax Assessment: Himalayan FMCG Products Ltd.

Assessee: Himalayan FMCG Products Ltd. | Income Year: 2079/80

a. Allowable Depreciation and Repair Expense (Pool D: 15%)

1. Depreciation Base of Pool D: Rs 6,000,000
2. Statutory Depreciation:
   $$\text{Depreciation} = 15\% \times 6{,}000{,}000 = \mathbf{\text{Rs } 900{,}000}$$
3. Allowable Repair Expense (Section 16 Limit):
   $$\text{Ceiling} = 7\% \text{ of Opening Depreciation Base} = 7\% \times 6{,}000{,}000 = \mathbf{\text{Rs } 420{,}000}$$
   • Actual Repair Incurred = Rs 650,000
   • Allowable Repair Deduction = Rs 420,000
   • Unabsorbed Repair Cost to be capitalized to Pool D next year: $650{,}000 - 420{,}000 = \text{Rs } 230{,}000$.

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b. Business Income Before Pollution Control Deduction

Allowable Pollution Control Expense (Section 17 Limit):

• Statutory Limit: $50\% \text{ of ATI} = 50\% \times 9{,}330{,}000 = \text{Rs } 4{,}665{,}000$
• Actual Incurred = Rs 1,200,000
• Allowable Deduction: Entire actual amount = Rs 1,200,000 (since Rs 1,200,000 < Rs 4,665,000).

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c. Net Assessable Income from Business

$$\text{Assessable Business Income} = \text{Rs } 9{,}330{,}000 - 1{,}200{,}000 = \mathbf{\text{Rs } 8{,}130{,}000}$$

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d. Taxable Income and Corporate Tax Liability

(Note: If granted the 20% preferential manufacturing rate under Section 11, tax payable would be $20\% \times 6{,}630{,}000 = \text{Rs } 1{,}326{,}000$).