Dean's Office Official Model Question Paper

Answer: Tax: A compulsory financial contribution imposed by the government on individuals or legal entities under the authority of law, without a direct and specific quid pro quo (return benefit) to the taxpayer, to fund public expenditures and socio-economic development. Two Canons of Taxation:

1. Canon of Equality / Ability to Pay: Taxes should be levied proportionally based on the taxpayer’s economic ability.
2. Canon of Certainty: Tax liability, time, manner, and amount to be paid must be clear, certain, and not arbitrary.

Answer:

Answer: Under Section 67 of the Income Tax Act, 2058, an individual is treated as a Resident of Nepal in an income year if:

1. Their normal place of abode is in Nepal; OR
2. They are present in Nepal for 183 days or more during the income year (consecutively or in aggregate); OR
3. They are an employee of the Government of Nepal stationed abroad during the income year.

Answer:

1. Amounts derived by bilateral/multilateral tax-exempt organizations or under diplomatic treaties.
2. Amounts received as pension by retired military or police personnel of the Nepal Army or Nepal Police from the Government of Nepal.
3. Agricultural income derived from traditional farming (excluding commercial agro-industries).
4. Amounts derived by the Nepal Rastra Bank (NRB) in conformity with its statutory objectives.

Answer:

• Life Insurance Premium: Maximum allowable deduction is actual premium paid or Rs. 40,000, whichever is lower.
• Health Insurance Premium: Maximum allowable deduction is actual premium paid or Rs. 20,000, whichever is lower.

Calculation:

1. Opening WDV = Rs. 240,000
2. Add: Additions in Mangsir (First 6 months $\implies \frac{3}{3}$ absorption) = Rs. 60,000
3. Less: Disposal proceeds = Rs. 20,000
4. Depreciation Base = $\text{Rs. } 240,000 + 60,000 - 20,000 = \text{Rs. } 280,000$
5. Depreciation Rate for Pool ‘B’ = 25%

$$\text{Allowable Depreciation} = \text{Rs. } 280,000 \times 25\% = \mathbf{\text{Rs. } 70,000}$$

Answer: Under Section 51, a resident individual is entitled to a Medical Tax Credit equal to 15% of approved medical expenses incurred for themselves, subject to a statutory ceiling of Rs. 750. Any unabsorbed medical tax credit may be carried forward indefinitely to subsequent tax years.

Answer:

• Zero-Rated Sales (Schedule 2): Taxed at the rate of 0%. The registered supplier charges 0% VAT on sales and is entitled to claim a full refund/credit for input VAT paid on purchases (e.g., physical exports from Nepal).
• Tax-Exempt Goods (Schedule 1): Completely outside the VAT net. No VAT is charged on sales, but the supplier cannot claim any input tax credit for VAT paid on inputs (e.g., basic agricultural produce, medicines).

Answer: Tax Deducted at Source (TDS): A statutory withholding mechanism whereby the person making designated payments (salary, rent, contract fees, interest) deducts tax at prescribed rates before disbursing funds to the payee. Dual Role:

1. Pay-as-you-earn revenue collection: Provides steady, recurring revenue inflows to the government throughout the fiscal year.
2. Audit trail creation: Minimizes tax evasion by generating cross-verifiable withholding transaction records (e-TDS).

Answer: Under Section 95Ka of the Income Tax Act, 2058, capital gains tax on the disposal of listed shares through NEPSE for a resident individual is:

• 5.0%: If the shares were held for more than 365 days (Long-term gain).
• 7.5%: If the shares were held for 365 days or less (Short-term gain).

Solution: Computation of Allowable Depreciation and Closing WDV

1. Statutory Absorption Rules for Additions:

• Period 1 (Shrawan 1 to Poush end - First 6 months): Full ($\frac{3}{3}$) absorption into depreciation base.
• Period 2 (Magh 1 to Chaitra end - Next 3 months): $\frac{2}{3}$ absorption into depreciation base; remaining $\frac{1}{3}$ added to opening WDV of next year.
• Period 3 (Baisakh 1 to Ashad end - Last 3 months): $\frac{1}{3}$ absorption into depreciation base; remaining $\frac{2}{3}$ added to opening WDV of next year.

2. Pool-wise Computation Table:

$$\text{Total Allowable Depreciation for the year} = \text{Rs. } (70,000 + 107,500 + 146,000 + 360,000) = \mathbf{\text{Rs. } 683,500}$$

Solution: Computation of Assessable Income from Employment and Taxable Income

Taxpayer: Mr. Sharma Status: Resident Individual Income Year: Current Assessment Year

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1. Statement of Assessable Income from Employment

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2. Statement of Taxable Income

(Note: Medical expenses are not deducted from assessable income; instead, a Medical Tax Credit of $15\% \times 8,000 = \text{Rs. } 1,200$ subject to max Rs. 750 is deducted directly from the final tax liability).

1. Conceptual Meaning of Value Added Tax (VAT)

Value Added Tax (VAT) is a modern, comprehensive, multi-stage commodity consumption tax levied on the value added to goods and services at each stage of the production and distribution chain.

$$\text{VAT Payable} = \text{Output VAT (Sales)} - \text{Input VAT Credit (Purchases)}$$

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2. Collection Mechanisms of VAT in Nepal (VAT Act, 2052)

1. Invoice-Based Method (Credit Method): The seller charges VAT (standard rate 13%) on the sales invoice. While submitting the monthly VAT return, the registered dealer deducts the input VAT paid on business purchases and remits the net balance to the Inland Revenue Office (IRO).
2. Reverse Charge Mechanism: When services are imported from an unregistered foreign vendor, the domestic recipient must calculate, self-assess, and pay 13% VAT directly to the tax department.
3. Withholding VAT: Government entities and designated public bodies withhold 50% of the VAT billed by contractors and remit it directly into the state treasury.

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3. Primary Causes of VAT Leakage and Evasion in Nepal

• Under-Invoicing and Non-Issuance of Invoices: Retailers routinely fail to issue formal tax invoices to cash-paying consumers or issue non-fiscal estimate chits.
• Unauthorized Cross-Border Smuggling: Nepal’s porous southern border allows extensive consumer goods to enter without payment of customs duty and VAT, creating price distortions against formal registered businesses.
• Fake / Bogus Tax Invoices: Organized networks circulate fictitious invoices without actual movement of goods to fraudulently claim input tax credit.
• Consumer Apathy: Due to a lack of tax awareness or direct cash incentives, general consumers rarely insist on receiving an official tax bill.
• Enforcement and Inspection Bottlenecks: Human resource constraints in the Inland Revenue Department hinder comprehensive physical market raids and real-time electronic cash register (ECR/API) monitoring.

Solution: Computation of Assessable Income from Business

Taxpayer: Gorkha Trading Concern (Sole Proprietorship) Income Year: Current Assessment Year

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Statement of Assessable Income from Business

(Note: The proprietor can separately claim life insurance premium of Rs. 35,000 against total assessable income while computing individual taxable income).

1. Concept of Income from Investment (Section 7 & 9)

Under Section 9 of the Income Tax Act, 2058, Income from Investment is the profit or gain derived by a person from conducting an investment activity. An investment activity is defined as holding or dealing in one or more assets or participating in an investment process, other than employment or business.

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2. Inclusions in Assessable Income from Investment

1. Dividend: Received from non-resident companies (domestic dividends from resident companies are subject to final withholding tax).
2. Interest: Interest received on loans, debentures, or deposits (except interest earned by individuals from banks, which is final TDS).
3. Rent: Rental income derived from leasing land, buildings, machinery, or tangible assets (except house rent received by individuals in municipal areas, which is subject to municipal local rent tax).
4. Royalties: Royalty received from intellectual property, patents, copyrights, and technical know-how.
5. Net Gains from Disposal of Non-Business Chargeable Assets (NBCA):
   • Gains from disposal of listed/unlisted shares and securities.
   • Gains from disposal of private land and buildings held for less than the statutory exemption threshold.
6. Lottery and Windfall Gains: Unless subjected to final withholding tax under Section 92.

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3. Allowable Deductions from Investment Income

Under Section 13, all ordinary and necessary expenses incurred during the income year wholly and exclusively in production of investment income are deductible:

• Interest Expense: Interest paid on loans borrowed specifically to finance the investment asset.
• Repair and Maintenance: Actual repair costs incurred on investment property (or subject to 7% statutory cap under Section 16 for depreciable assets).
• Management and Brokerage Fees: Direct portfolio management, broker commission, and custodian fees.
• Depreciation: Allowable depreciation under Schedule 2 on depreciable assets leased out under an investment activity.
• Bad Debts: Uncollectible interest or investment claims written off in accordance with Section 25.

1. Rights of a Taxpayer (Section 74)

The Income Tax Act, 2058 recognizes fundamental rights to ensure fair treatment:

1. Right to Respectful Treatment: Right to be treated with courtesy and dignity by tax officials.
2. Right to Privacy & Confidentiality: Information provided to tax authorities must be kept strictly confidential under Section 84, except for legal disclosure.
3. Right to Fair Adjudication: Right to receive clear, reasoned written justifications for any revised tax assessments.
4. Right to Administrative Review and Appeal: Right to file an application for administrative review before the Director General of IRD and subsequently appeal before the Revenue Tribunal.
5. Right to Professional Representation: Right to be represented by an authorized tax auditor, advocate, or legal representative.

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2. Duties of a Taxpayer

1. Duty to Obtain PAN: Register and obtain a Permanent Account Number before commencing operations.
2. Duty of True Disclosure: Maintain proper books of accounts and submit true, accurate annual income returns (Self-Assessment Return under Sec. 96).
3. Timely Tax Payment: Pay advance tax installments (Poush, Chaitra, Ashad) and final tax liabilities on or before statutory due dates.
4. Withholding Duty: Deduct tax at source (TDS) on eligible payments and deposit the deducted sum within 25 days of the following month.
5. Cooperation during Audit: Furnish requested books, vouchers, and documentation during tax audits.

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3. Powers of a Tax Officer (Sections 81, 82, 100)

• Power to Summon and Examine: Issue formal notices requiring taxpayers or witnesses to attend in person and give testimony under oath.
• Power of Full and Free Access: Enter any business premises, inspect financial records, examine digital data, and seize relevant accounts and documents without prior notice.
• Power to Conduct Jeopardy Assessment: Issue an immediate tax assessment before the end of the income year if there is reason to believe the taxpayer is liquidating assets or fleeing the country.
• Power to Freeze Assets: Direct banks to freeze bank accounts and land revenue offices to block property transfers of defaulting taxpayers.

Solution: Comprehensive Employment Income Assessment

Taxpayer: Mr. Bimal Status: Resident Individual (Opted for Married Status Assessment) Income Year: Current Assessment Year

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Part (a): Statement of Assessable Income from Employment

(Note: Meeting allowance of Rs. 20,000 is final withholding tax under Section 92; hence excluded from assessable income).

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Part (b): Statement of Total Taxable Income

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Part (c): Computation of Net Tax Liability (Couple / Married Slabs)

Note: For individuals contributing to SSF, the 1% Social Security Tax is exempt, but since this is an illustrative examination standard computation, standard statutory calculation is demonstrated.

Solution: Assessment of Manufacturing Enterprise

Taxpayer: Himalayan Industrial Products Ltd. (Resident Manufacturing Entity) Income Year: Current Assessment Year

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1. Statement of Assessable Income from Business

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2. Statement of Total Taxable Income

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3. Computation of Corporate Tax Liability

• Business Taxable Income = $\text{Rs. } 1,760,000 - 80,000 = \text{Rs. } 1,680,000$ Manufacturing Concessional Tax Rate = $20\%$$\text{Tax on Business Income} = \text{Rs. } 1,680,000 \times 20\% = \text{Rs. } 336,000$$
• Investment Taxable Income = Rs. 135,000 Standard Entity Tax Rate = $25\%$$\text{Tax on Investment Income} = \text{Rs. } 135,000 \times 25\% = \text{Rs. } 33,750$$

$$\mathbf{\text{Total Corporate Tax Liability}} = \text{Rs. } 336,000 + 33,750 = \mathbf{\text{Rs. } 369,750}$$

1. Context of Tax Administration in Nepal

The Inland Revenue Department (IRD) is responsible for administering internal taxes (Income Tax, VAT, and Excise Duty). While internal tax revenue has expanded substantially over the past two decades, Nepal’s tax system remains constrained by structural vulnerabilities, a high dependency on customs revenues, and a vast unorganized informal sector.

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2. Major Institutional Challenges Facing Nepalese Tax Administration

                  Key Bottlenecks in Nepalese Taxation
                                    |
    +-------------------+-----------+-----------+-------------------+
    |                   |                       |                   |
Informal Economy    Under-Invoicing &       Weak Technical       Administrative
 & Cash Dominance   Customs Valuation         Capacity &         Discretion &
                                               Litigation         Corruption

1. Massive Informal Economy & Cash Transactions: A significant proportion of agricultural, wholesale, and retail transactions operates in physical cash, completely bypassing banking channels and tax reporting.
2. Under-Invoicing at Customs Checkpoints: Importers habitually declare artificially depressed invoice values at border customs points to minimize import tariffs, compelling them to sell downstream goods in the domestic market without formal VAT bills to prevent inventory discrepancies.
3. Proliferation of Fake VAT Bills: Organized cartels exploit loopholes in paper invoicing to generate fictitious input VAT claims, depriving the state of legitimate revenues.
4. Sluggish Revenue Tribunal & Backlog of Tax Disputes: Arbitrary tax assessments by tax officers lead to prolonged litigation in the Revenue Tribunal and Supreme Court, locking hundreds of billions of rupees in disputed revenue arrears.
5. Narrow Tax Base: A disproportionate share of direct tax is contributed by a tiny cluster of corporate taxpayers (banks, telecom, cigarette/liquor manufacturers) and salaried employees via TDS, while wealthy real estate speculators and agricultural magnates remain outside the net.

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3. Strategic and Technological Reforms for the IRD

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4. Conclusion

Broadening Nepal’s tax base requires transforming the IRD from an enforcement-heavy, coercive bureaucracy into a taxpayer-centric, digitally automated service organization. By lowering compliance costs, eliminating cash leakages through digital rails, and treating compliant business owners as national wealth-builders, Nepal can achieve fiscal self-reliance and sustainably finance its development priorities.