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Taxation

Income from employment


Income from business
Set off and losses carry forward
Residential Status
House and land tax in Nepal
Value Added Tax (VAT)
Chapter 1 Taxation
Taxation is the biggest source of public revenue of
modern government. Tax is a kind of money of which it is
a legal duty of every citizen of a country to pay honestly.
It may be levied on income, property and even at the
time of purchasing commodity. In short, tax is the major
source of government income. It is a compulsory
payment to the government by tax-payer without any
expectation of some specified return.
The revenue of government comes basically from two
sources i.e. non-tax sector and tax-sector. Non-tax
revenue includes different sources like grants, gift,
administrative income and business income like
registration fee, fines and penalties. The basic objective
of non-tax revenue is not called revenue, but to provide
services to the people. In Nepal around 20% revenue
comes from this source. Another source of government
revenue is taxation. Custom duty, excise duty, vat,
personal income taxes are some example of sources of

tax revenue. In Nepal around 80% revenue comes from


this source.
The government pass for getting tax revenue is to collect
tax as per act. The tax cannot be imposed without the act
of parliament in Nepal too.
What is tax?
The word Tax is derived from the Latin word taxare
which means to estimate. In simple words, it is
compulsory payment by the people. If a person denies
the tax payment, he/she may be penalized or punished in
the court of law. So Taxation is the compulsory
contribution from a person to the government to meet
expenses incurred in the common interest. So tax is the
compulsory levy and those who are taxed have to pay it
without any direct benefit. Due to this compulsory nature
some economist says, Nothing is certain except death
and tax. some economist says, Death and tax are both
certain but death is not annual, tax is annual. Some
economist says, Death means stopping to pay tax.
Tax is necessary contribution by the tax payer to social
objectives like securing high level of employment, social
security, promoting economic stability of nation, etc.
Features
Tax is an important tool in the development of economy.
It affects the overall structure of the whole economy. The
main elements of good tax system are highlighted below:
1)Tax is the compulsory payment not a voluntary
payment or donation.

2)Tax is the payment to the government as per the


prevailing law.
3)Aim of tax collection is for public welfare.
4)Taxes are paid by the person.
5)Taxes are paid out of income.
6)No effect on trade and industry. (honeybee concept)
7)Tax is required to be paid at regular intervals.
8)Failing to pay taxes is subject to punishment
by law.
Objective
The primary objective of a tax system is to generate
revenues to pay for the expenditures of government at all
levels. Besides raising revenues, tax has become an
instrument of social and economic policy for the
government. The main objectives of taxation are:
1. Raising public revenue
Normally, the objective for the imposition of tax is to
collect the revenue for the government. The government
providing social service promoting economic
development and meeting war expenditure all of this
expansion in the scope of economic activities have
created up greater fund to be spent by the government.
The greater the need of funds the greater is resource of
taxation. Thus, the aim of taxation is to raise public
revenue to meet the increasing public expenditure.
2. Reduction of inequalities in income and wealth
Another aim of taxation is to reduce the inequality
income. One of the great problems of underdeveloped

country is that there is the vast gap between the income


of person in the highest income group and of those in the
lowest income group. One of the objectives of taxation is
to redistribute income and wealth in such a way as to
ensure more just and equitable distribution. This is
possible by taxing; rich people are imposed high tax and
less tax to the poorer. This is the objective of progressive
tax like income tax, wealth tax, etc.
3. Restriction on unnecessary consumption
Another objective of taxation is to restrict the
unnecessary consumption particularly harmful
commodities such as wine, cigarette, tobacco, etc. when
heavy tax is imposed on such commodities, the
consumption of such commodities are automatically
reduced.
4. Increase in national income
Another objective of taxation is to Increase in national
income. Tax is the main source of government income
and used for productive purpose and thereby overall
production is increased. These increase in production
leads to increase in national income of country along with
increase in per capita income.
5. Business stability and maintaining full employment
Another objective of taxation is to bring above business
stability and maintain full employment condition. Low
rate of taxation during business depression provides more

income to the people and help in raising demand as well


as to revive business activities.
On the other hand, high rate of tax and additional tax
may be useful to check inflation pressure on price. Thus,
tax policy may be used as a regularity mechanism to
achieve price stability, check business booms and
depression and also maintain full employment in the
economy.
Besides above mentioned points there are following;
6. To boost up the economy
Canon of taxation
There are different views regarding of a good tax system.
The canons of taxation were first developed by Prof.
Adam smith. Adam smiths view in this respect is
generally accepted as the features of good tax system.
Smiths four canons as outlined in his book entitled An
enquiry into the nature and causes of wealth of nation
are as follows.
1)Canon of equality or benefit
According to this Canon, a good tax system is that which
is based on the principle of equality. In broader sense,
equality may be considered to be same as justice. In this
principle, it is maintained that the tax must be levied
according to the paying capacity of the individual. In
other words, the principle of benefit states that the
burden of taxation should be fair and just. Thus,
rich people must be subjected to higher taxation in

comparison to the poor. Higher the income higher


the tax, lower the income lower the tax.
Adam smith has defined this principle as the subject of
every state ought to contribute towards the support of
the government, as nearly as possible, in proportion to
their respective abilities, that is, in proportion to the
revenue which they respectively enjoy under the
protection of state.
He states that every individual should contribute
according to his ability so that equalities of sacrifice are
achieved.
2)Canon of certainty
Canon of certainty is important Canon of taxation;
Certainty in the word of smith is related to the time,
method, manner and quantity of paying tax. It means the
tax payer should determine the following manners
carefully.
a. The time of the payment
b. Amount to be paid
c. Method of payment
d. Place of payment
e. The authority to whom the tax is to be paid
3)Canon of convenient
Convenient is another quality that should be in good tax
system. Most of the tax payers are ordinary people who
neither have sufficient tax-related knowledge nor the

capacity to hire tax experts. The tax system should be of


such type that can be followed by ordinary people in the
society.
The time of payment should be convenient like land
revenue should best be collected at the harvest time. The
income tax from the salary should best be collected when
they get their salary from their employer.
4)Canon of economy
This Canon of economy implies that minimum possible
money should be spent in the collection of tax. The
maximum part of collected amount should be deposited
in the government treasury. Thus, all extra unnecessary
expenditure in this collection should be avoided.
In addition to above four Canons of taxation given by
Adam smith, there are other Canons which have been
added by modern economist Bastable are given below:
5)Canon of productivity
This canon says that the fund raised through taxes should
be utilized by the government in productive sector of the
economy so that the taxpayer can see the utilization of
their hand-earned money paid as taxes.
According to this principle, it is better to impose a few
productive taxes than to go in for a large number of
unproductive taxes.
6)Canon of elasticity/flexibility

This canon signifies that the taxes should be levied in


such a way the amount to be collected can be increased
or decreased with the least inconvenience from the time
to time.
Other modern economists have added some other canons
of taxation. They are:
7)Canon of simplicity
8)Canon of uniformity
9)Canon of Neutrality
10)
Canon of co-ordination
11)
Canon of diversity
Types/Classification of tax
A tax can be classified into different division on different
basis. Our government classifies tax in following heads
i.e. taxes from international trade, taxes from internally
produced and consumed goods, land revenue and taxes
from income, profit and property.
Basically, the taxes can be classified in following different
ways:
On the basis of form/shifting of burden
Direct tax
A direct tax is one which cannot be shifted to others. A
direct tax is actually paid by the person on whom it is
legally imposed like income tax, vehicle tax, and property
tax. It is directly collected by the government from the

person who bears the tax burden. It is the tax on income


and property.
Merits:
a) It satisfies the principle of ability to pay.
b)It is economical because it is imposed on limited
person in the society.
c) It is elastic.
d)It has quality of progressive.
Demerits:
a) It creates feeling of high burden of tax.
b)It is inconvenient.
c) There is high evasion.
d)It burden goes to only small section of the people.
e) It is expensive for the government to collect tax
individually.
f) Its scope is very narrow.

Indirect tax
An indirect tax is that tax where the person pays tax to
the businessman, not to the government. In other words,
an indirect tax is imposed on one person but paid partly
or fully by another like excise duty, VAT, etc. indirect tax
can be shifted.
Merits:
1. It is convenient
2. It is difficult to evade
3. It has wide base

4. Mass participation
5. It is universal in nature, it is collected from all the
citizen
Demerits:
1. It is not based on ability to pay
2. It creates inequality in the society, rich and poor are
same.
3. This tax is uncertain with the fluctuation in demand
the tax amount can also fluctuate.
Major taxes in Nepal
Nepal government collects revenue from different
sources. Right now, the types of these taxes are around
24. However, from the revenue point of view only five
types of tax have importance.
1. Custom duty
Taxes imposed by a country on all import and export
goods, when the goods cross the boundaries of the
country are called custom duty. It is also called boarder
tax. The customs imposed on imported goods are called
import duty whereas, imposed on imported goods are
called export duty. In Nepal, from custom duty cover in
previous year around 19% of the total revenue.
2. Value added tax (VAT)
VAT system was introduced in 1919 in France and used in
1954. Right now more than 160 countries in the world
and latest country, south Sudan of the world use this tax

system. In Nepal, this tax was introduced in 1997


replacing sales tax, entertainment tax, hotel tax and
contract tax. Right now, the rate of VAT on Nepal is 0 and
13%. The contribution from this tax is around 29% of the
total revenue.
3. Excise duty
Tax levied on the manufacture, sell or consumption of
goods or services injurious to health or luxurious goods is
called excise duty. It is narrow-based indirect tax for this
tax provides around 12% of the total revenue in previous
year.
4. Local tax
Local tax is the tax imposed by local governments
however in Nepal the concept of local tax is a new one. It
was started after 2054.
5. Income tax

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Chapter 1
Chapter 2
Chapter 3
Chapter 4
Chapter 5
Chapter 6
Chapter 7 Income from employment

Employment is a contract of service (mental and


physical) between two parties- employer and employee in
which the first party makes a regular payment of salary,
wages and other benefits to the second.

Income Tax Act 2058 has not given a specific definition of


employment but it has used the term broadly to include
past, present or prospective employment.
Characteristics of Employment
a. Economic activity
b. Qualification
c. No risk
d. Certainty return
e. Conduct
Employment income
Employment income is also known as remuneration or
salary, is the reward from employment and can be salary,
fee, wage, overtime pay, allowance, commission, bonus,
tip, gratuity or perquisite in the form of car, house,
servants, driver, etc.
All types of payments and benefits (monetary and nonmonetary) are to be included under employment income;
the best way to think of it is in terms of compensation an
employee receives that the government will tax.
Taxation in Employment
1. Step: one Tax assessment step/Assessable income
from employment

2. Step: two Calculation of taxable income


Common reduction

i.

Retirement benefit/Providend fund reduction to


an approved fund (Sec. 63)

1
3 of Assessable income

Or
Maximum Rs 300000
Or
Actual paid by employees to the recognized P.F office
whichever is less
Recognized P.F. offices are:
a. Providend fund building, Thamel
b.Citizen Investment Trust, (CIT),
Baneshwor
ii.

Donation (Sec.12)

Donation given to:


a)

Prime minister relief fund:

Full amount can be deducted from assessable


income
b)

World heritage/Sports club

10% of adjusted taxable income


Or Maximum Rs. 10, 00,000
Or actual whichever is less
c) Tax-exempt entity

5% of adjusted taxable income


Or maximum Rs 1, 00,000
Or actual whichever is less
Note: Donation given to the non-tax exempt entity
cannot be deducted from the Step: two. The
income given in net value should not be recorded.
iii.

Life insurance
a. Old concept:

Insured 7

Or
Maximum Rs 20,000
Or Actual whichever is less
b.New concept:
Maximum Rs 20000 or Actual, whichever is less

3. Step: three Determination of tax liabilities


a)Medical tax credit Sec.51
Maximum Rs 750
Or 15% of claimed amount whichever is less
b)Remote area allowance:
Remote area A Rs 50,000

Remote area B Rs 40,000


Remote area C Rs 30,000
Remote area D Rs 20,000
IRD has suggested that those transactions which are
Below Rs 500 are not recorded.
At the time of calculating grade if appointed date is
equals to fiscal year we calculate grade as:
Grade=number of year worked1

At the time of calculating grade if appointed date is not


equals to fiscal year we calculate grade making equals to
fiscal year.
Tax rate
Individual:
Up to Rs. 200,000
Next Rs. 100,000
Next Rs. 2,200,000
Balance

1%
15%
25%
35%

Couple:
Up to Rs. 250,000
Next Rs. 100,000
Next Rs. 2150,0000
Balance

1%
15%
25%
35%

Particular

Rate

1. House
rent/Accommodation
facility
2. Vehicle facility
3. Disable person rebate

2% of basic annual salary

4. Pension rebate
5. Women rebate
6. Casual gain
for e.g. lottery

7. Capital gain
8. Income from copy
checking
9. Income from making
questions, invigilator
10. Providend fund
reduction

11. Medical tax credit Sec.


51
12.
13.
14.
15.

0.5% of basic annual salary


Additional 50% of basic limit
of tax free
Additional 25% of basic limit
of tax free
10% of total tax liabilities
free
25% of the casual gain
The amount is given always
after deducting tax. Its
value is net
5% of the capital gain
free
15%
10% from basic salary plus
equal amount by employer
in case of government
office only
Maximum Rs 750
Or 15% of claimed amount
whichever is less

16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
41.
42.
43.
44.
45.
46.
47.
48.

Gross

Net
Casual gain
Meeting allowance
Dividend received

Tax free
Saving from TADA
Income from copy checking

Chapter 8 Income from business

Business means use of capital and labour to earn


income/profit. It is the mix-up of capital and labour. It
includes trade, manufacturing industry and service
industry. It is equivalent to the industry, business or
profession. Income tax act 2058, business as the
business transaction related to industry, trade, profession
or any other similar types of activities.
Definition as pointed out as follows

Business is a commercial activity undertaken with a profit


motive that includes an industry or trade or a profession.
Business treats an isolated transaction with a business
character as a business
Business includes a past, present or prospective business
Business excludes employment
Business includes either registered or unregistered
Admissible income under business heads
a) Service revenue
b)Disposal of trading goods
c) Gain on disposal of business assets goods
d)Gain on disposal of depreciable assets
e) Bad debt recovered
f) Exchange gain
Admissible expenses under business heads
a) Cost of trading stock/goods
Opening stock +purchase of trading assets + other
assets-closing stock
In calculation of stock price market price or cost price
whichever is less
b)Business/profession related expenses
Personal expenses not recorded
c) Allowable depreciation

Treatment of depreciation for tax purpose


Deducting Depreciation from fixed assets is reducing the
taxable income and tax liability of the business.
Deducting depreciation cash does not go out from the
business but it is mentioned as business expenses.
For tangible assets Diminishing balance method
Type
Detail
Rate
Block Long term use like building
5%
A
Block Computer, office furniture
25%
B
Block Automobile
20%
C
Block Earth moving equipment and machinery
15%
D
While calculating depreciation in case the tangible asset
is bought in different months during the fiscal year

For intangible assets Straight line method


Type
Block
E
Rate=

Detail
Intangible assets like goodwill, trademark,

Rate

amount of assets
No. of year

Note: while calculating the Number of year the tax


office does not consider the months. If the months
is below 6 it will round it to zero and if the months

is 6 and above it will round it to 0.5 year In case of


intangible assets only.

Particular

Block
- A

Block
- B

Block
-C

Block
-D

Balance b/d Or opening


WDV
Add: Purchase
Less: Disposal
Depreciation base =
(Balance b/d Or opening
WDV+ Purchase disposal)
Depreciation rate
Allowable depreciation =
depreciation base
depreciation rate
Allowable repair and
improvement
Purchase date of assets for calculation of depreciation are
done using absorbed

Purchase date
1st Shrawan to
30th Poush
1st Magh to 30th
Chaitra
1st Baishakh to
30th Ashadh

Absorbed
3/3 of total
purchase amount
2/3 of total
purchase amount
1/3 of total
purchase amount

Unabsorbed
3/3 of total
purchase amount
1/3 of total
purchase amount
2/3 of total
purchase amount

Allowable Pollution control cost (Sec.17)


50% of adjusted taxable income
Or actual whichever is less
Allowable Research and development cost (Sec.18)
50% of adjusted taxable income
Or actual whichever is less
Repair and improvement cost (Sec.16)
7% of depreciation base
Or actual whichever is less
Bad debts (sec.25.2)
Bad debts can be deducted as expenses
Losses from business (sec 20)
Losses of the business from previous 7 years in general
business organization

Losses of the business from previous 12 years in Nepal Oil


Corporation
Allowable reductions
a. Donation to exempt organization (Sec. 12 and Sec.
12 ka)
b. Retirement contributions (Sec. 63)
c. Other reductions (schedule 1)
d. Medical Tax credit (Sec. 51)
e. Foreign Tax credit (Sec. 71)
Chapter 9 Capital Gain tax

25%
Chapter 10
Chapter 11 Set off and losses carry forward
Chapter 12 Residential Status

Income tax act (ITA) 2058, has given definition


A.
In respect of an individual
I. Whose normal place abode is in Nepal
II. Who is present in Nepal at anytime during the
income year or who is present in Nepal for more than
182 days in any period of 365 consecutive days
III. An employees or an officer of government of Nepal
posted abroad at anytime during the income year

B.

A partnership firm

Tax rates
A non-resident person is not entitled to any exemptions.
Unlikely a resident person, non-resident person is taxed
at a flat rate of 25%. Similarly, any withholding taxes
levied on employment income (Sec.87), investment
returns and service fees (Sec.88), contract payments
(sec.89) in respect of non-resident person are treated as
final taxes.

Chapter 13
Chapter 14
Chapter 15
Chapter 16
Chapter 17
Chapter 18
Chapter 19
Chapter 20 House and land tax in Nepal

House
Particular

Squa

Depreciation

Green brick with mud mortar


Klink brick with mud mortar
Klink brick with cement mortar
RCC frame structure

re
feet
cost
450
525
575
635

rate
Rate Depreciat
ion year
3%
25
2%
30
1%
75
0.75 100
%

Land
Particular
First 10,00,000
Next 10,00,000
Next 30,00,000
Next 50,00,000
Next 1,00,00,000
Remaining

Rate
Nil
Rs 300
0.05%
0.25%
0.50%
1.50%

Chapter 21 Value Added Tax (VAT)

VAT

VAT is a sales taxs advance form. It is imposed on


different stage. It is a tax imposed by government on
added value of goods and services. In some countries

including Australia, Canada, this tax is known as Goods


and Service Tax (GST). VAT is the major source of
indirect tax. It is imposed on producer, wholesaler,
retailer and consumer too. It is levied on industry as well
as commerce. It is multi-stage tax; imposed only on value
added amount in each stage, in contrast to sales tax. It is
consumption tax because it is borne ultimately by the
final consumer.
The value is added in the form of profit, rent, wages and
salaries, etc. sales tax is imposed on total retail price of
the item sold while VAT is imposed on the value added at
each stage of the production and consumption. Over 130
countries (among 216 countries) worldwide have
introduced VAT. Nepal introduced VAT in November 1997;
however the concept of this tax in Nepal was introduced
in early 1990 by Ram Sharan Mahat.
The following are the features of full phase VAT system
1. It is an indirect tax.
2. It is based on value added.
3. It is broad based tax; it covers the value added to each
commodity by a firm during all stages of production
and distribution.
4. It is based on self assessment system and provides
facility of tax refund and tax credit.
5. It avoids cascading effect (tax on tax), which can have
snowballing effect on prices.
6. VAT is levied on taxable transaction with a single rate
13% in every point of value added.
7. Vat rate 0% and 13%

8. If sale is below 20 lakhs and profit is below 2 lakhs


registration in VAT is not necessary.
9. Value added is sales value minus all expenditure on
goods and services purchased from other firms.
Why VAT is superior to Sales tax system?
Sales tax is imposed on the total retail price of the item
sold, while the VAT is imposed on the value added at each
stage of production and distribution.
For example:
a. An importer imported goods for Rs 1000.
b. Importer passed to wholesaler including 10% profit
on cost.
c. Wholesaler also passed to retailer including 10%
profit on cost.
d. Retailer passed to consumer including 10% profit on
cost.
Required:
Cost price of consumer of imported goods
Solution:
Statement of Value added tax
New concept
Channel

Cos
t
pric
e

Valu
e
adde
d

Imported 100
goods
0
Importer 100 100

Selling
price
exclusi
ve VAT

VAT
rate
@
13%

Selling
price
inclusi
ve VAT

1000

130

1130

VAT
payable
to
governme
nt
130

1100

143

1243

13

to
0
wholesal
er
Wholesal 110 110 1210
157.3 1367.3 14.3
er to
0
retailer
Retailer
121 121 1331
173.0 1504.0 15.73
to
0
3
3
consume
r
Hence,
The cost price of consumer of the imported goods is
Rs 1504.03.
The VAT payable to government is Rs 173.03
(130+13+14.3+15.73)

Sales tax
Old concept
Channel Cost profi
price t

Selling
price
exclus
ive
VAT

Importer 1000 100


to
wholesal
er

1100

VA
T
rat
e
@
13
%
14
3

Selling
price
inclusi
ve VAT

VAT
payable
to
govern
ment

1243

143

Wholesa 1243 124. 1367. 1367.3 ler to


3
3
retailer
Retailer 1367 136. 1504. 1504.0 to
.3
73
03
3
consum
er
Hence, cost price to consumer of imported goods =
Rs 1504.03
VAT payable to government = Rs 143
The government will be beneficial in VAT system so,
sales tax is replaced by the VAT.

Questions
Mr. Hari, a retailer purchase a table fan paying Rs 3300
inclusive VAT from wholesaler. He incurred carriage and
selling expenses of Rs 150 and Rs 80 respectively and
sold to customer the profit in each stage is 15% on selling
price. It is assumed that VAT rate is 10%
Required:
a. VAT collected in each level
b. Value Added by each businessman

Miss Sunita purchased a television from a retailer at the


total payment of Rs 22000. The retailer itself purchased
from a dealer at Rs 17500 exclusive VAT. The dealer has

purchased from manufacturer at Rs 16500 inclusive VAT.


The manufacturer has assembled purchasing different
part from different shop for Rs 11000 out of which he paid
VAT Rs 1265.50
Required:
a. VAT collected in each level
b. Value Added by each businessman
Channel

Cost Valu
price e
adde
d

Sellin
g
price
exclu
sive
VAT
manufac 9734
9734.
turer
.50
50
manufac 9734 4857 1460
turer to
.50
.50
2
dealer
dealer to 1460 2898 1750
retailer
2
0
Retailer 1750 1969 1946
to
0
9
consume
r

VAT
rate
@
13%

Sellin
g
price
inclus
ive
VAT
1265 1100
.50
0
1898 1650
0

VAT
payable
to
govern
ment

2275 1977
5
2531 2200
0

377

1265.5
0
632.50

256

A customer purchased a mobile from a retailer paying


total price Rs 12995 the retailer purchased same from the
importer and incurred expenses of Rs 1000 and 15%

profit on cost price. Importer incurred additional expenses


Rs 1150 and 15% profit on selling price. He had paid VAT.
Required:
a. Imported price
b. Value added by importer and retailer

Property tax in Nepal


Property refers to things that are owned by somebody. In
broader sense, any kind of assets owned by person is
known as property. So, it includes land and building,
vehicles, gold, furniture, etc. however the property
specially including building or building and the
surrounding land only. Thus the taxable property can be
classified into following four categories prevailing in
Nepal.
1. House and land
2. Land
3. Integrative property (land within municipal area
including physical structure such as compound,
building, go down, shades and garage)
4. Vehicles
Tax exempted property
Under ownership of Nepal government

Of consiler mission or other mission


Of government, hospital, education institute, government
cooperation for non profit
Place of public utility like drinking water reserve
Under ownership of trust
Rights and duties of property holder
Rights
Right to appeal
Right to get information
Right to apply for review
Duties
Duty to pay tax
Duty to comply law
Rights and duties of tax authorities
Rights
Right to impose tax
Right to remission
Power to impose fine and penalties
Duties
To access rate of revaluation

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