Taxation in Nepal 2079 Board Question Paper

Indirect Tax

An indirect tax is a tax where the primary statutory tax liability (impact) and the ultimate economic tax burden (incidence) fall on different persons. The taxpayer collects the tax from buyers and remits it to the government, shifting the tax burden along the supply chain.

• Examples in Nepal: Value Added Tax (VAT at 13%), Customs Duty, Excise Duty.

Assessable Income vs. Taxable Income

Cash Basis of Accounting

Under Section 22 of the Income Tax Act, 2058, the cash basis of accounting recognizes revenues only when cash or financial consideration is actually received, and recognizes expenses only when physical payment is made, ignoring receivables and accrued payables. Natural persons are permitted to maintain tax accounts on a cash basis.

Capital Expenditure vs. Revenue Expenditure

• Capital Expenditure: Outlays incurred to acquire permanent fixed assets or enhance their operational capacity with enduring economic benefits (>1 year). It is not deductible in the year incurred; it is capitalized and depreciated over time (Schedule 2).
• Revenue Expenditure: Recurrent day-to-day operational expenses incurred in generating current income (rent, salaries, utility bills). It is fully deductible in the current income year.

Canon of Certainty

The Canon of Certainty (formulated by Adam Smith) states that the tax which each individual is bound to pay ought to be certain, clear, and not arbitrary. The time of payment, the manner of payment, and the exact amount to be paid must be transparent and clearly known beforehand to both the taxpayer and the tax administration.

Quantification of Vehicle Facility (Section 27)

Under Section 27(1)(a) of the Income Tax Act, 2058:

• When an employer provides a motor vehicle (car, jeep) for an employee’s personal or combined official/personal use, the taxable perquisite added to the employee’s income from employment is 0.5% of the employee’s basic salary.
• Fuel expenses, driver’s remuneration, and repair costs paid by the employer are not added separately; they are subsumed under the 0.5% valuation.

Determination of Residential Status for Thomas (FY 2078/79)

Days Stayed in Nepal:

• Poush 2078: 30 days
• Magh 2078: 29 days
• Falgun 2078: 30 days
• Chaitra 2078: 30 days
• Baishakh 2079: 31 days
• Jestha 2079: 31 days
• Ashad 2079: 31 days
• Total Duration of Stay: $30 + 29 + 30 + 30 + 31 + 31 + 31 = \mathbf{212\text{ days}}$

Statutory Provision: Under Section 2(ak) of the Income Tax Act, 2058, an individual who stays in Nepal for 183 days or more during an income year (or consecutive 365-day period) is a resident.

Conclusion: Since Thomas stayed for 212 days ($ge 183$ days), he is a Resident Individual for the income year 2078/79.

Tax Liability of Mr. Nepal (Pensioner, Family/Couple Status)

Parameters:

• Total Pension Income = Rs. 650,000
• Basic Exemption Limit (Couple) = Rs. 500,000
• Additional 25% Exemption for Pension Income = $25\% \times 500,000 = \text{Rs. 125,000}$
• Total Exemption Limit: $500,000 + 125,000 = \mathbf{Rs.\; 625,000}$

Taxable Income:

$$\text{Taxable Income} = 650,000 - 625,000 = \mathbf{Rs.\; 25,000}$$

Tax Calculation:

• 1% Social Security Tax (SST) does NOT apply to pension income.
• Tax on Rs. 25,000 @ 10% = Rs. 2,500

Total tax liability of Mr. Nepal is Rs. 2,500.

Calculation of Cost of Trading Goods

Under Section 15 of the Income Tax Act, 2058:

$$\text{Cost of Trading Goods} = \text{Opening Stock} + \text{Purchases/Imports} + \text{Direct Customs Duty} - \text{Closing Stock}$$

(Note: Administrative expenses of Rs. 25,000 are period expenses, not part of inventory cost).

Calculation:

$$\text{Cost of Trading Goods} = 10,000 + (500,000 + 40,000) - 20,000 = 550,000 - 20,000 = \mathbf{Rs.\; 530,000}$$

The cost of trading goods is Rs. 530,000.

Computation of Presumptive Tax Liability for Smrity

Statutory Provision: Under Section 4(4) and Schedule 1 Section 1(7) of the Income Tax Act, 2058:

• A resident natural person doing business with annual turnover up to Rs. 3 million and income up to Rs. 300,000 may opt for presumptive taxation.
• Statutory fixed tax rates based on business location:
  • Metropolitan / Sub-Metropolitan City: Rs. 7,500
  • Municipality (Nagarpalika): Rs. 4,000
  • Rural Municipality (Gaupalika): Rs. 2,500

Conclusion: Since Walling is a Municipality, Smrity’s presumptive tax liability for the year is fixed at Rs. 4,000.

Solution: Mr. Basnet’s Employment Income, Taxable Income, and Tax Liability

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Step 1: Determination of Monthly Basic Salary for the Previous Income Year (2078/79)

• Date of Appointment: 1st Shrawan 2073
• Scale: Rs. 50,000 - 1,500 - 53,000 - EB - 2,000 - 63,000
• Annual Increments:
  • 2073/74: Rs. 50,000
  • 2074/75: Rs. 51,500 (1st inc)
  • 2075/76: Rs. 53,000 (2nd inc)
  • 2076/77: Rs. 55,000 (3rd inc)
  • 2077/78: Rs. 57,000 (4th inc)
  • 2078/79: Rs. 59,000 p.m. (5th inc)
• Annual Basic Salary = $59,000 \times 12 = \mathbf{Rs.\; 708,000}$

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Part (a): Statement of Assessable Income from Employment

(Notes: TADA is an exempt reimbursement under Sec. 21. Interest on Fixed Deposit of Rs. 30,000 is final withholding under Sec. 92 and excluded).

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Part (b): Statement of Total Taxable Income

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Part (c): Tax Liability (Assuming Individual / Unmarried Status)

Solution: Assessable Income from Profession of the Lawyer

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Part 1: Assessable Income from Profession (Section 7)

Inclusions (Gross Professional Receipts):

1. Legal Fees: Rs. 695,000
2. Gifts and Presents from Clients: Rs. 350,000
3. Consultation Fees (Grossed up: $85,000 / 0.85$): Rs. 100,000 (TDS Rs. 15,000)
4. Other Professional Incomes: Rs. 75,000
5. Sale of Old Newspapers and Professional Journals: Rs. 5,000

• Total Gross Inclusions: Rs. 1,225,000 (Note: Agriculture income is exempt; Interest on local loan goes to Investment income; Casual income is final withholding).

Allowable Professional Deductions:

1. Office Expenses: $80,000 - 10,000 \text{ (domestic helper)} = \text{Rs. } 70,000$
2. Telephone & Communication Expenses: Rs. 30,000
3. Salary to Office Assistants: Rs. 180,000
4. Office Rent: Rs. 150,000
5. Water & Electricity (50% professional): $30,000 / 2 = \text{Rs. } 15,000$
6. Hospitality & Entertainment: Rs. 20,000
7. Printing & Stationery: Rs. 30,000
8. Depreciation on Computer (Block B, 25% on full addition in Ashwin): $150,000 \times 25\% = \text{Rs. } 37,500$

• Total Allowable Deductions: Rs. 532,500

$$\text{Assessable Income from Profession} = 1,225,000 - 532,500 = \mathbf{Rs.\; 692,500}$$

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Part 2: Statement of Total Taxable Income

Solution: VAT Calculations and Exempt Goods

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Part (a): VAT Calculation Across Intermediaries

Given Data:

1. Importer Cost (Excl. VAT) = Rs. 4,000
2. Retailer Purchase Price from Importer (Excl. VAT) = Rs. 5,000
3. Final Consumer (Sharma) Purchase Price (Incl. 13% VAT) = Rs. 7,910

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Step 1: Selling Price and Value Added by Retailer

$$\text{Retailer Selling Price Excl. VAT} = \frac{\text{Price Incl. VAT}}{1 + 0.13} = \frac{7,910}{1.13} = \mathbf{Rs.\; 7,000}$$

$$\text{Value Added by Retailer} = \text{Selling Price} - \text{Cost} = 7,000 - 5,000 = \mathbf{Rs.\; 2,000}$$

Step 2: Selling Price and Value Added by Importer

$$\text{Importer Selling Price} = \text{Rs. } 5,000$$

$$\text{Value Added by Importer} = 5,000 - 4,000 = \mathbf{Rs.\; 1,000}$$

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Step 3: VAT Schedule to Government

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Part (b): Five Goods/Services Exempt from VAT (Schedule 1 of VAT Act, 2052)

1. Basic Agricultural Products: Fresh vegetables, fruits, rice, wheat, and unpasteurized milk.
2. Basic Health Services: Doctors’ consultation, hospital admission, pathology testing, and life-saving medicines.
3. Educational Services: School and university tuition fees, research publications, and educational books.
4. Public Transport & Air Travel Services: Domestic public buses and mass transit passenger services.
5. Financial & Insurance Services: Banking transactions, loan disbursements, and life insurance policies.

Solution: Investment Income and Additional Depreciation Allowance

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Part (a): Assessable Income from Investment of Shisir

Gross Inclusions (Section 9):

1. Mining Rent / Natural Resource (Gross: $510,000 / 0.85$): Rs. 600,000 (TDS Rs. 90,000)
2. Gifts Received in Respect of Investment: Rs. 100,000
3. Foreign Dividend: Rs. 50,000 (Domestic dividend from resident firm is final withholding)
4. Rent Received from Property (Non-house/asset lease gross: $180,000 / 0.90$): Rs. 200,000
5. Interest from Local Money Lending: Rs. 60,000

• Total Gross Investment Inclusions: Rs. 1,010,000 (Notes: House rent of natural person goes to local municipality tax; Bank saving interest is final withholding; Birthday gift is exempt; Lottery is final withholding).

Allowable Investment Deductions:

1. Collection charges on natural resources: Rs. 10,000
2. Agent Commission on natural resources ($1.5 \text{ months} = 600,000 \times 1.5/12$): Rs. 75,000
3. Other allowable investment expenses: Rs. 45,000

• Total Deductions: Rs. 130,000

$$\text{Assessable Income from Investment} = 1,010,000 - 130,000 = \mathbf{Rs.\; 880,000}$$

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Total Taxable Income Statement

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Part (b): Businesses Entitled to Additional Depreciation (One-Third / 33.3% Extra)

Under Schedule 2 Section 3 of the Income Tax Act, 2058, an additional one-third (1/3rd) depreciation rate is granted to:

1. Special industries (manufacturing industries) categorized under Industrial Enterprises Act.
2. Entities operating construction and generation of hydro-electric power projects.
3. Entities operating infrastructure projects (tram, trolleybus, ropeway, roads, bridges).
4. Entities operating cooperatives registered under Cooperatives Act.

Incomes Excluded (Exempt) Under Section 10 of Income Tax Act, 2058

Section 10 of the Income Tax Act, 2058 specifies amounts that are legally exempt from tax and excluded from employment income:

1. Amounts Received by Foreign Diplomats: Emoluments received by foreign diplomatic missions, consular corps, and accredited foreign representatives.
2. Foreign Technical Assistance Experts: Salaries and allowances paid to foreign technical experts under bilateral/multilateral government treaties.
3. Foreign Government Allowances for Nepalese Citizens Abroad: Foreign allowances paid to Nepalese diplomatic representatives posted in embassies abroad.
4. Pensions of Armed Forces: Disability pensions or pensions paid to retired armed forces/police personnel of Nepal or foreign governments (e.g., British Gurkhas).
5. Compensation for Injury and Death: Lump-sum insurance compensation or death gratuities paid to heirs upon accidental injury or demise.
6. Bequest, Inheritance, and Genuine Gifts: Assets received through ancestral inheritance or family gifts.
7. Exemptions for Remote Area Allowances: Prescribed regional allowances up to statutory limits based on hardship zones.

Internal Check and Differences from Internal Control

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1. Meaning of Internal Check

An internal check is an operational system of arranging book-keeping and clerical work whereby the duties of individual staff members are allocated such that no single employee has exclusive control over any single business transaction from start to finish.

• The work of one employee is automatically, continuously, and independently verified by another employee during routine workflow (e.g., separating cash receipt from ledger entry).

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2. Differences Between Internal Check and Internal Control

Solution: Depreciation Schedule and Business Loss Carry-Forward

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Part (a): Depreciation Schedule for XYZ Company (Schedule 2)

Asset Classification:

• Block ‘C’ (Automobiles): Maruti cars ($300,000 \times 2 = \text{Rs. } 600,000$) purchased on 1st Ashwin (1st period: 100% absorption). Depreciation rate = 20%.
• Block ‘D’ (Plant & Machinery): Plant purchased on 10th Jestha (3rd period: 1/3rd absorption). Depreciation rate = 15%. Sold plant part = Rs. 100,000.

Computation of Depreciation Basis:

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Repair and Improvement Cost Allocation (Section 16):

• Statutory Limit = 7% of Depreciation Basis:
  • Block C Limit: $7\% \times 1,100,000 = \text{Rs. } 77,000$. Actual: Rs. 60,000 $\rightarrow$ Full Rs. 60,000 deductible (no capitalization).
  • Block D Limit: $7\% \times 600,000 = \text{Rs. } 42,000$. Actual: Rs. 100,000 $\rightarrow$ Rs. 42,000 deductible, remaining Rs. 58,000 capitalized.

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Closing WDV at the End of the Year:

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

Under Section 20 of the Income Tax Act, 2058, an unabsorbed business loss may be carried forward and set off against business income of the following 7 income years.

Tracking Unabsorbed Losses:

• Total unabsorbed losses entering Year 5:
  • 1st Year: Rs. 600,000 (Expires after Year 8)
  • 2nd Year: Rs. 75,000 (Expires after Year 9)
  • 3rd Year: Rs. 50,000 (Expires after Year 10)
  • 4th Year: Rs. 25,000 (Expires after Year 11)

Year-by-Year Set-Off Table:

(Note: The remaining Rs. 175,000 of 1st Year loss expires at the end of Year 8 because the 7-year carry-forward window has ended).

Year 9 Computation:

• Profit before R&D and Donation = Rs. 600,000
• Less: Allowable R&D Expenses (Section 18):
  • Actual: Rs. 132,500; Ceiling: 50% of Adjusted Taxable Income ($50\% \times 600,000 = 300,000$).
  • Full Rs. 132,500 is deductible.
  • Adjusted Profit after R&D = $600,000 - 132,500 = \text{Rs. } 467,500$.
• Less: Set-off of 2nd, 3rd, and 4th Year Losses:
  • 2nd Year Loss = Rs. 75,000
  • 3rd Year Loss = Rs. 50,000
  • 4th Year Loss = Rs. 25,000
  • Total Losses Set-off = Rs. 150,000
  • Income after Loss Set-off = $467,500 - 150,000 = \text{Rs. } 317,500$.
• Less: Donation (Section 12):
  • Actual: Rs. 50,000; Limit: 5% of Rs. 317,500 (Rs. 15,875) or Max Rs. 100,000.
  • Allowable Donation = Rs. 15,875.
• Taxable Income for 9th Year: $317,500 - 15,875 = \mathbf{Rs.\; 301,625}$.

Solution: Sole Proprietor Business Income, Taxable Income, and Tax Liability

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Part (a): Statement of Assessable Income from Business (Section 7)

Method: Net Profit Adjustment Approach

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Part (b): Statement of Total Taxable Income

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Part (c): Computation of Tax Liability (Individual Status)

Analytical Discussion: Jeopardy Assessment and Tax Clearance Certificates

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Part (a): Circumstances for Jeopardy Assessment (Section 100)

Under Section 100 of the Income Tax Act, 2058, the Inland Revenue Department (IRD) is legally empowered to initiate an immediate Jeopardy Assessment before the expiry of the standard due date for filing an income tax return, under the following urgent circumstances:

1. Imminent Permanent Departure from Nepal:
   • When the tax officer has reasonable grounds to believe that an individual taxpayer is about to permanently depart from Nepal without paying assessed or anticipated tax liabilities.
2. Flight or Hiding of Corporate Entities:
   • When an incorporated company, entity, or branch is about to terminate its business operations in Nepal, dissolve its corporate form, or flee the jurisdiction.
3. Fraudulent Asset Transfer to Defeat Tax Collection:
   • When a taxpayer is actively engaged in liquidating, concealing, or transferring assets to relatives, related persons, or offshore accounts with the clear fraudulent intent of obstructing tax recovery.
4. Impending Bankruptcy or Insolvency:
   • When an entity or person is about to enter bankruptcy, receivership, or compulsory liquidation, requiring the IRD to establish sovereign tax claims immediately.
5. Procedure and Safeguards:
   • The tax officer issues an immediate assessment notice specifying the assessed tax and demanding payment within a compressed statutory deadline (often 7 days), subject to prompt administrative review.

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Part (b): Tax Clearance Certificate (TCC) and Required Documentation

1. Meaning of Tax Clearance Certificate

A Tax Clearance Certificate (TCC) is a formal legal document issued by the competent Inland Revenue Office (IRO) / Large Taxpayers Office (LTO) certifying that a specific taxpayer (individual, firm, or company) has fully declared their incomes, paid all assessed direct taxes, VAT, and excise duties, and has no outstanding tax liabilities or arrears up to the specified fiscal year.

• Mandatory Uses: Essential for participating in public procurement tenders, renewing business/company licenses, obtaining bank financing, and repatriating profits abroad.

2. Documents Required for Obtaining a Tax Clearance Certificate:

1. Formal Application Letter: Prescribed application form signed by the authorized proprietor, partner, or CEO.
2. Copy of Permanent Account Number (PAN/VAT Certificate): Registration proof.
3. Audited Financial Statements: Duly signed Balance Sheet, Profit & Loss Account, and Cash Flow Statement for the relevant income year.
4. Income Tax Return (D-01/D-02/D-03 Form): Copy of self-assessment tax return filed online via the IRD portal with confirmation acknowledgment.
5. Bank Deposit Vouchers / Electronic Tax Payment Receipts: Proof of payment of advance tax, self-assessed tax, and TDS reconciliations.
6. VAT Returns and Reconciliation Statements: Proof of monthly/bi-monthly VAT return submissions and clearance.
7. Withholding Tax (TDS) Filing Proof: Certification that all employee and vendor TDS has been deposited into the government treasury.