Chapter 8- Withholding Taxes & Collection of Advance Tax through Agents

Errors Rectified:

Page 53: 1st sentence after the definitions: The rate of withholding tax was mistakenly printed as 10%
instead of 5%. So, the 10% shall be replaced by 5%.

Page 53: Point 9- first sentence: The rate of withholding tax was mistakenly printed as 10% instead of
5%. So, the 10% shall be replaced by 5%.

Question 1- Page 63

a. As per Sec. 88 (1), interest having source in Nepal paid by a resident person attracts 15% withholding tax
at the time of payment. Sec. 88 (3) is an exception to Sec. 88 (1) when the rate of WHT is 5% in case of a
natural person if the conditions specified therein is satisfied. Hence, the rate of WHT to TEO by listed
resident entity at the time of payment of interest having source in Nepal is 15%.
As per Sec. 92, interest received by a TEO from a resident banks or financial institutions, listed company
or entities entitled to issue debenture is final withholding when such interest is paid against deposits,
bonds, debentures, government bonds or loan paper. Since the interest is paid by a resident listed
company, the interest is final withholding.
Hence the statement is TRUE.
b. The collection of advance tax by agents in case of sales of land and building is applicable only when such
property is owned by a natural person. In case of entity, it is entitled to calculate gain on disposal of asset
and liability u/s 37-49 as the case may be, and the agent is not required to collect advance tax on such
gain. The applicable tax rate is normal tax rate as specified in Schedule 1 (2) of the Act.
Hence, the statement is FALSE.

Question 2- Page 63

As per Sec. 89 (1), any payment by a resident person related to contract exceeding Rs. 50,000 shall attract
WHT at 1.5%. Sec. 89 (2) requires consideration of payment related to the same contract either made to the
contractor or associated person of contractor in last 10 days as well to determine the threshold of Rs. 50,000.

In this case, since the payment during a month is less than Rs. 50,000 (i.e. Rs. 40,000) assuming subsequent
payments are not made within 11 days of previous payments, there shall be no withholding of tax; and Sec. 89
is not applicable.

When the payments are made as given in question, the applicability of Sec. 89 is as follows:

 Rs. 60,000: Sec. 89 is applicable as the payment exceeds Rs. 50,000

 Rs. 50,000: Sec. 89 is not applicable as the payment does not exceed Rs. 50,000 as it is just Rs. 50,000
assuming there was no payment for the same contract in immediately preceding 10 days.
 Rs. 40,000: Sec. 89 is not applicable as the payment does not exceed Rs. 50,000 assuming there was no
payment for the same contract exceeding Rs. 10,000 in immediately preceding 10 days

Question 3- Page 63

i. As per 67 (6) (h), in case of operation of business related to transmission of information or news through
wire, optical fiber, radio or satellite; the payment is deemed having source in Nepal when the payment is
received for any such information or news transmitted through the equipments installed or established in
Nepal, regardless of the territory of origination of such news or information.
It means, the payment shall have source in Nepal only when such information are transmitted to
equipments installed in Nepal. In case of transmission of information through equipments installed outside
Nepal; the payment is deemed not having source in Nepal.
The two basic conditions for withholding of taxation as per Sec. 88 are as follows, both of which shall be
satisfied for the withholding of taxes:
 The payment shall be made by a resident person, and
 The payment shall have source in Nepal

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 Chapter 8- Withholding Taxes & Collection of Advance Tax through Agents

Though the company is resident in Nepal; since, it does not satisfy the source criteria, there shall be no
withholding of taxes on service fee paid for such services.
ii. As per Sec. 89; in case of payment exceeding 50,000 in relation to contract or agreement; there shall be
withholding of taxes at 1.5%. While calculating the threshold of Rs. 50,000; the payments made in the
immediately preceding ten days in relation to the same contract to the party or its associated person shall
also be considered.
As per the clarification clause to Sec. 89; Contract or Agreement includes supply of goods.
The basic criterion for withholding of taxes is the payer shall be resident; and source concept is not
applicable in this case.
Similarly as per Sec. 88, for any service having source in Nepal, a resident person shall withholding tax at
15% of the payment. In case of VAT registered service provider, the rate of withholding tax shall be 1.5%.
In the given situation, the company purchases various equipments and services from both domestic and
foreign suppliers. In this situation, the suggestion is provided as follows based on above provisions:
 Purchase of goods from domestic supplier: withholding of tax at 1.5% in case the payment
exceeds Rs. 50,000 in a moving 11 days period in relation to the contract of purchase of goods.
 Purchase of service from domestic supplier: withholding of tax at 1.5% of payment in case the
supplier is VAT registered. In all other case, the rate shall be 15%.
 Purchase of equipments from foreign suppliers: there shall be no withholding of taxes as it is
imported after duly complying custom formality and deemed as export sales for foreign suppliers.
The payment is not having source in Nepal, and as per Sec. 6 a nonresident is not required to pay
tax in income which does not have source in Nepal. Since such income is not taxable, it is
exempted from tax and no withholding of tax is required as per Sec. 89.
 Purchase of service from foreign suppliers: There shall be withholding of taxes at 15% as the
service is provided in Nepal, hence having source in Nepal and paid by resident. It also attracts
reverse VAT at 13% as per Sec. 8 (2).
iii. Maintenance work inside Nepal is service fee having source in Nepal and attracts WHT at 15%, except in
one case when the service provider is VAT registered.
In case of maintenance outside Nepal, the situs of service is outside Nepal; hence no WHT is required.
iv. As explained in answer (ii) above in relation to contract payment, except for vehicle maintenance and
advertisement which are services attracting WHT at 15% (except when the service provider is VAT
registered and attracting TDS at 1.5%), the contract is supply of goods. In case the payment exceeds Rs.
50,000 in moving 11 days period, it attracts withholding tax at 1.5%.

Question 4- Page 63

As per Sec. 88 (2), in case of payment of dividend by resident person; the rate of withholding tax is 5%
irrespective of the residential status of the person. As per Sec. 54, which is charging section for dividend; the
dividend paid by resident company and resident partnership shall be levied tax on final withholding basis. Sec.
92 specifies dividend as final withholding in case it is paid by resident company.

In the given situation, Mr. John is entitled to 40 Million dividend of the bank which is resident in Nepal. Banks
are company for the purpose of taxation. Hence the resident bank withholds tax at 5% while distributing
dividend. In this case, Worldwide Bank withholds tax of Rs. 2 Million and pays the balance of Rs. 38 Million to
Mr. John. The receipt of Rs. 38 million is final withholding.

Hence the tax liability of Mr. John is 2 Million as dividend distributed by the resident bank is the only income of
Mr. John for the Income Year.

The Worldwide bank withholds tax at 5% of Rs. 40 Million.

Question 5- Page 64

As per proviso to Sec. 88 (1), 10% WHT rate shall be applied while making payment against lease of aircraft
which has source in Nepal by a resident person. Similarly, the commission attracts WHT at 15% of payment, in
case the commission is having source in Nepal.

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 Chapter 8- Withholding Taxes & Collection of Advance Tax through Agents

In the given question, as the aircraft is used within the state of Nepal, the payment is having source in Nepal,
thus, Leisure Aviation (P) Ltd. shall withhold tax at 10% of Rs. 30 Lakhs per months while making the payment.

In case of payment of commission to German national, the service is performed outside the state of Nepal,
hence, no TDS shall be deducted.

Question 6- Page 64

As per proviso to Sec. 88 (1), the rate of withholding tax on gain while making payment of retirement payments
by ARF or GON shall be 5%. The formula for calculation of gain is given by Sec. 65.

In the given case, the gain shall be calculated as under:

Total payments by GON 2,000,000

Less: Benefit Accrued till 2058.12.18 (not taxable) 475,000

Taxable Retirement Payments 1,525,000

Less: Higher of following: (762,500)

a. 50% of Taxable Retirement payments 762,500

b. Maximum Amount 500,000

Taxable Gain 762,500

Tax @ 5% 38,125

Question 7- Page 64

Yes, commission having source in Nepal. The rate of withholding tax is 15%.

Question 8- Page 64

As per Sec. 67 (6), royalty is deemed having source in Nepal if it is paid against any asset situated in Nepal.
Since, the intangible asset is used in Nepal, it is situated within the state of Nepal, and any royalty payment
against such asset is deemed having source in Nepal.

As per Sec. 88 (1), the rate of WHT for payment of royalty having source in Nepal by resident person shall be
15%.

As such, M/s Fairly co. Ltd. shall withhold tax at 15% (i.e. Rs. 150,000) while making payment of Rs. 1 Million
to Zukuji Enterprises of Japan and remit the balance to the Japanese company.

Question 9- Page 64

Refer Page 60 & 61 of the book. There is list of 10 payments which are final withholding.

Question 10- Page 64

a. WHT shall be 1.5% of 300,000 (i.e. amount excluding VAT). The payment is not final withholding.
b. WHT shall be 5% of 550,000 (i.e. 50% of 1500,000 less 400000)- calculate using the formula given in
page 52 of the book. It is final withholding.
c. WHT shall be 5% of 200,000 (i.e. Total payments less benefit accrued till 2058.12.18 less contribution from
the beneficiary)- use the formula given in Page 53 of the book. It is final withholding.
d. As per Sec. 88 (4), a natural person cannot withhold tax on any payments except when the payments are
made in course of business. So, the question of withholding tax on personal borrowing of Binod does not
arise.
e. There shall be no withholding of taxes u/s 88 (4) of the Act. However, as Mr. Ramesh is employee of the
college, provisions of Sec. 87 are applicable on payments made from the college, and not of Sec. 88.
Hence, the amounts shall be included while calculating income from employment of Mr. Ramesh.

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 Chapter 8- Withholding Taxes & Collection of Advance Tax through Agents

Question 11- Page 64

a. The WHT shall be 1.5% of service fee excluding VAT, i.e. 1.5% of 200,000 per month.
b. The rate of WHT shall be 10%, and the payment is final withholding.
c. For the payment against publication of articles in Kantipur, there shall be no withholding of taxes u/s 88 (4),
however the amount is service fee and is taxable u/s 7 (2) (a). For the payment of part time lecture fee, the
rate of WHT shall be 15% which is final withholding.
d. The rate of WHT is 5%, which is final withholding.
e. The withholding tax shall be 5% of total distribution, i.e. 5% of Rs. 150,000 as the term distribution includes
both distribution of profit and capitalization of profit.

Question 12- Page 64

As per Sec. 95A, the Land Revenue Office shall collect advance tax on gain on disposal of Land or Building,
which is NBCA at 5% if the continuous ownership is less than 5 years and 2.5% if the continuous ownership is
5 years or more.

As per Sec. 2 (da), any private building satisfying any of the following three conditions is not NBCA:

a. In case the private building is owned by the person continuously for 10 years or more and the owner
resides in the private building for 10 years or more either continuously or intermittently.
Private building means, in case of building occupying area up to 1 ropani of land- the building and the area
occupied by the building & in all other case, the building and 1 ropani of land out of total area occupied by
the building.
b. In case the private building is disposed off for less than Rs. 3 Million, or
c. In case the private building is disposed by way of transfer within three generations, except by way of sales
or purchase.

Since, the private building in question does not satisfy any of the above three criteria, assuming the building
occupies whole of 1 ropani land and falls under the definition of private building, Land Revenue Office shall
collect advance tax on gain on disposal of such building.

As per Sec. 1 of Schedule 1 of the Act, the maximum tax rate for such gain is restricted to rate specified b y
Sec. 95A of the Act, i.e. 5% of gain if the continuous ownership is less than 5 years and 2.5% of gain if the
continuous ownership is 5 years or more.

The gain on disposal is:

Incomings at the time of disposal on 31.12.20X-11 15,000,000

Less: Outgoings for the building (cost plus subsequent cost) (6,000,000)

Gain 9,000,000

Tax @ 2.5% (as ownership exceeds 5 years since 20.11.20X6) 225,000

In case the building were purchased on 20.11.20X1, the gain shall not be taxable as it does not fall under the
definition of NBCA, assuming Mr. Ramesh resided in building for 10 years or more during the ownership
period. Since, the asset does not fall under either of business asset, trading stock, depreciable asset or NBCA;
the gain is beyond the charging scope of Income Tax Act, 2058.

Question 13- Page 64

Gain on Disposal

A. Net Incomings (3500 * 500 – 8750) 1,741,250

B. Net Outgoings (700 * 500 + 2800) 352,800

Gain (A – B) 1,388,450

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 Chapter 8- Withholding Taxes & Collection of Advance Tax through Agents

Advance Tax to be collected (10% of Gain) 138,845

Since it is the shares of listed company and the owner is nonresident, as per Sec. 95A advance tax shall be
collected by NEPSE at 10% of gain.

The payment is not final withholding, hence, Mr. X is required to submit income tax return and pay tax @ 25%
less the advance tax collected by NEPSE.

Question 14- Page 65

Quote the provisions of Sec. 88A (2) from page 55 of the book.

As the amount received by him is in relation to the contribution towards art, i.e. from song competition, the
prize of which is up to Rs. 5 Lakhs, the amount is not taxable.

Question 15- Page 65

House rental payment to Garibdash attracts WHT at 10% as per proviso to Sec. 88 (1) of the Act.

In case of payment of vehicle rental for hiring of vehicle owned by an individual paying tax u/s 1 (13) of
Schedule 1 of the Act, Income Tax Manual has specifically relieved the withholding of taxes. Since IRD is
bound to act as per its public circular, there shall be no withholding of tax while making payment of vehicle
rental to Mr. Daman Thapa. (Refer Page 282 of pdf version of Income Tax Manual 2068, example no. 16.2.26)

Question 16- Page 65

Amount of dividend net of TDS= 10% of paid up capital= 10% of 15,000,000= Rs. 1,500,000

As per Sec. 88 (2), the rate of withholding tax is 5% on dividend, i.e. the recipient is entitled to receive 95% of
the total payments.

Assuming “x” be total payment, then

95% of “x”= 1500,000

i.e. “x”= 1500,000 /.95= 1,578,947.37

Therefore, amount of cash dividend is Rs. 78,947.37

Question 17- Page 65

a. Gain on Disposal of Shares

Net Incomings (500*7000-17500) 3482500
Net Outgoings (500*1,000+4,000) 504000
Gain on Disposal of Shares 2978500
b. As per Sec. 95A, NEPSE shall collect advance tax on gain on disposal of listed shares. The rate of
advance tax shall be 5% on gain for resident natural person and 10% on gain for others. Assuming Mr. Anil
to be resident natural person, the rate shall be 5% on gain (calculate the amount of tax yourselves)
c. In case the shares were held and sold by an entity, the rate of advance tax to be collected by NEPSE shall
be 10% of gain instead of 5% as in the case of Mr. Anil, whom we assume is a resident natural person.

Question 18- Page 65

a. The amount to be received by M/s PC P. Ltd. is service fee having source in Nepal. As M/s M Ltd. is a
resident person, it shall withhold tax at 15% of the payment as there is no VAT invoice, neither the service
is exempted from VAT, i.e. 15% WHT shall be levied on service fee of Rs. 40,000.
As Rs. 20,000 is a reimbursable expense, there shall be no WHT on such payment as per Income Tax
Manual, however, as it is also part of service performed by the service provider, principally tax shall be
withheld on such amount as well.

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 Chapter 8- Withholding Taxes & Collection of Advance Tax through Agents

b. Distribution of iPhone is distribution of profit and is taxable u/s 54 of the Act, which means the company
shall collect WHT @5% of Market Value of iPhone (i.e. 5% of 38,000) from each shareholder.
c. As Mr. Mahesh is making payment to engineer in personal capacity and not for his business, though it is a
payment of service fee; Mahesh shall not withhold tax on such payment as per Sec. 88 (4) of the Act.
d. As per Sec. 88 (4), WHT is not required while making payment of interest to resident Banks or Financial
Institutions. As per general practice, service fee on loan is also part of interest, thus, MNO Co. P. Ltd. shall
not withhold tax while making payment of service fee and interest to Hamro Bank Ltd., a resident bank.
e. The amount received by Mr. Ram to deliver lecture is a part time lecture fee, which is service fee and
attracts TDS @ 15%. In relation to payment received for setting up question paper and checking answer
sheets, Sec. 88 (4) relieved such payment from Withholding of Taxes, thus, WHT is not required.

Question 19- Page 65

a. As per Sec. 88 (4), WHT is not required while making payment of interest to resident Banks or Financial
Institutions. Thus, Z & Co. shall not withhold tax while making payment of service fee and interest to Nabil
Bank Ltd., a resident bank.
b. As Mr. Gokul is making payment to construction company in personal capacity and not for his business,
though it is a payment of service fee; Gokul shall not withhold tax on such payment as per Sec. 88 (4) of
the Act. The practice of Gokul is correct.
c. The insurance company shall withhold tax at 5% of gain. Calculate yourself the gain amount and TDS
amount.
d. As per Sec. 88A, there shall be withholding of 25% tax on windfall gain. As per Sec. 2, winning a lottery
falls under the definition of windfall gain. Thus, Mr. Smart is wrong as he is bound to pay tax in the form of
final withholding payments.
e. As the payment on 17th Shrawan exceeds Rs. 50,000 (since 7th Shrawan to 17th Shrawan- there is total
payment of Rs. 55,000 and as per Sec. 89-2, it must be considered while calculating the threshold of Rs.
50000), X & Co shall withhold tax on each of payments from 8th Shrawan as per Sec. 89.

Question 20- Page 65

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