Income Tax and VAT (Vjune 2019) PDF

Study Material
For CAP II
Paper 7
Income Tax and VAT

(Updated upto Finance Act, 2076)
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NEPAL

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Third Edition : June, 2019 (Updated)
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PREFACE
This study material on the subject of “Income Tax & VAT” has been exclusively designed and
developed for the students of Chartered Accountancy Professional [CAP]-II Level. It aims to
provide the required knowledge to the students in understanding of the basic concepts of
Nepal Income Tax Regulations as an important part of direct taxes and of Nepal Value Added
Tax regulation as an important part of indirect tax in Nepal. Its objectives focus on recognizing
the principles governing taxation of income, gain from disposal of assets and liabilities and
conditions of disposals and deemed disposals, basic concepts of charging income tax on various
incomes and basic concepts of tax planning.
It broadly incorporates major areas of Income Tax Regulations of Nepal- Basic concepts,
Computation of taxable income, Other relevant matters regarding taxable income, Assessments,
appeals and penalties, Value Added Tax of Nepal- Basic concepts, Definitions, Appointment of
tax officer and his/her jurisdiction, Imposition of VAT, Registration and cancellation, Taxable
value, tax collections and offsets, refund of tax, and Accounts and records. A good deal of
practical problems is included in each chapter which can be useful to the students for their self-
assessment and progress evaluation after thoroughly reading the material.
Students are requested to accustom with the syllabus of the subject and read each topic
thoroughly for understanding on the chapter. We believe this material will be of great help
to the students of CAP-II. However, they are advised not to rely solely on this material. They
should update themselves and refer recommended text-books given in the CA Education
Scheme and Syllabus along with other relevant materials in the subject.
Last but the most , we acknowledge the efforts of CA. Jagadish Agrawal and CA. Bhaba Nath
Dahal, who meticulously assisted to prepare this study material and CA. Himal Dahal, CA.
Shesh Mani Dahal and CA. Prabin Raj Kafle, who assists to update as per the amendments.
Due care has been taken to make every chapter simple, comprehensive and relevant for the
students. In case students need any clarification, creative feedbacks or suggestions for the
further improvement on the material, they may be forwarded to the Education Department.
June 2019
Education Department
The Institute of Chartered Accountants of Nepal
Syllabus
Paper 7 : Income Tax & VAT
(One Paper - Three Hours - 100 Marks)
Level of Knowledge Working

Course objectives
• The objective of this syllabus is to give candidates an understanding of
the basic concepts of Nepalese Income Tax regulations as an important
part of direct taxes and of Nepalese Value Added Tax regulation as an
important part of indirect tax in Nepal.
• Recognize the principles governing taxation of income, gain from
disposal of assets and liabilities and conditions of disposals and
deemed disposals.
• Recognize the basic concepts of charging income tax on various
incomes.
• Recognize the basic concepts of tax planning.
• Apply code of ethics principles in taxation assignments.
PART A : INCOME TAX
COURSE CONTENTS
1. Basic concept
• Income year
• Assets (depreciable assets, investment, stock, business assets etc.)
• Persons (natural and legal person and their types, associated persons.)
• Income (Eg. service fee, royalty, dividend etc.)
• Definitions of basic concept as per Sec. 2
2. Residential concept
• Concept of resident and non-resident
• Worldwide taxation and source of taxation
• Concept of Nepal sourced income and provisions
• Double tax relief mechanism- foreign tax credit and double tax avoidance treaties
• Basic concept of foreign permanent establishment
a. Basis of taxation
• Persons liable to pay tax
• Tax exempt organizations
• Exempt incomes
• Taxable income and assessable income
• Rates of tax and business concessions
• Heads of income
b. Tax accounting
• Nepal accounting standard vs tax accounting
• Cash vs. accrual basis of accounting in taxation
• Basis of accounting for natural person and entities
• Change in accounting methods
• Reverse of amounts including bad debts
• Approved Retirement Funds
• Permanent Account Number (PAN)
3. Computation of taxable income
a. Calculation of income from business:
• Components of income from business
• Incomes which do not form part of income from business
• Deductions allowed from income from business
• Limitations and conditions for a particular deduction
• Schedule 2 of the Act.
b. Calculation of income from employment
• Components of income from employment
• Incomes which are excluded from income from employment
c. Calculation of income from investment
• Components of income from investment
• Incomes which do not form part of income from investment
• Deductions allowed from income from business
• Limitations and conditions for a particular deduction
d. Deductions allowed from taxable income
• Deduction for donation and gifts
• Deductions for contributions to retirement funds
• Deduction for life insurance premium paid
• Deduction for losses from income from business or investment
• Carry forward and carry back of losses for set off
• Deductions not allowed
e. Calculation of net gains from disposal of assets and liabilities
• Net gain and tax calculation from gain from disposal of non business chargeable
assets
• Net gain and tax calculation from disposal of business assets
f. Tax credits
• Medical tax credits
• Foreign Taxcredits
g. Quantification, allocation and characterization of amounts
• Quantification & characterization of payments under annuities, installments and
leases
4. Withholding taxes
• Concept of withholding taxes
• Payments attracting withholding taxes
• Final withholding taxes
• Withholding tax returns
5. Tax returns, tax assessment and appeals
• Estimated tax returns
• Final tax returns
• Revised tax assessment process
• Jeopardy tax assessment
• Tax collection, waiver and refund
• Tax administration - duties and power of DG, Tax officer, tax office
6. Other fundamental concepts of Income Tax Act
• Provisions of Income Tax Act not specifically mentioned but interlinked/relevant to the
concepts covered above.
Income Tax Act 2058 and Income Tax Rules, 2059
Excluded:
1. Sections 41 to 49, relating to Disposal of business with special conditions
2. Sections 59 to 62, relating to Bank & Insurance Business
3. Section 114 and above - relating to tax review and fine/penalties
PART B: VALUE ADDED TAX
1. Basic concepts
a. Definitions of:
i. Terms defined in Section 2 of the Act.
ii. Terms defined in Rule 2 of the Rules
iii. Terms defined in various other Sections and Rules of the Act and Rules.
iv. Meaning and use of various terms used in Act and Rules.
b. Appointment of tax officer and his/her jurisdiction
c. Imposition of VAT
i. Transactions covered by VAT
ii. Goods and services exempted from tax
iii. Place and time of supply
iv. Rate of tax
v. Conditions for zero rate of tax
vi. Assessment and collection of tax
2. Registration and cancellation
a. Registration
i. Conditions for compulsory registration
ii. Threshold for small vendors
iii. Proxy conditions for compulsory registration
iv. Voluntary registration
v. Registration not available
b. Cancellation of registration
Conditions and procedures for cancellation of registration
3. Taxable value, tax collections and offsets, refund of tax

a. Factors determining taxable value
i. General conditions
ii. Extra-ordinary conditions
iii. Taxable value for used goods
iv. Taxable value for dealers in used goods
b. Market value concept and its applicability
c. Tax collection
i. Registered person has to collect tax
ii. Tax collection by custom authorities
iii. Bank guarantees facility available for payment of tax.
iv. Restriction on unregistered person to collect tax.
d. Offset of tax
i. Partial tax offset
ii. Proportionate tax offset
iii. Tax offset not available
iv. Conditions of tax offset
e. Refund of tax:
i. Under regular conditions
ii. Under export conditions
iii. Refund by some specific institutions as per Section 25.
iv. Limitations on refund
4. Accounts and records
a. Invoices
i. Conditions for unregistered person to issue invoices and its contents.
ii. Conditions for issue of different kinds of tax invoices and their contents.
iii. Conditions for issue of tax invoices for dealers in used goods.
b. Accounts and records

i. Taxpayer' duty to keep up-to-date accounts of its transactions
ii. Types of accounts and records to be kept by a taxpayer and their contents.
iii. Certification of the accounts and records
iv. Preservation of the accounts and records.
Value Added Regulations of Nepal (Marks allocation reduced from 40 marks to 30 marks)
Table of Content
PART I : INCOME TAX ACT, 2058
Amendmends made by finance ordinance, 2076 3

CHAPTER- 1: BASIC CONCEPTS 19
UNIT 1: TAXATION SYSTEM IN NEPAL 19
Concept and history of tax 20
Objectives of taxation 21
Types of taxes in Nepal 22
Concept of income and meaning of income tax 23
History of income tax in Nepal 23
Defects of previous tax acts 26
Relations with constitution and components of income tax laws 27
Income tax act, 2058: new era of income tax 29
UNIT 2: PRELIMINARY 31
Extent of income tax act, 2058 32
Definition of word and legal phrase 32
UNIT 3: BASIS OF TAXATION 47

Taxable income – section 5 48
Assessable income – section 6 52
Other taxable income 53
UNIT 4: CALCULATION OF TAX AND RATE OF TAX 57

Calculation of income tax 58
Fixed tax: presumptive tax 64
Tax on repatriation of income 66
UNIT 5: EXEMPTIONS, CONCESSIONS, REDUCTION, DEDUCTION, SET OFF 69

Exemptions - section 10 70
Concession, waives and privileges - section 11 72
Reduction 76
Loss from business and investment-section 20 77
UNIT 6: CHARACTERIZATION, ALLOCATION & QUANTIFICATION 83
Concept and definition 84
Special quantifications: Section 27 84
Special quantifications: Annuities, installment and lease (section 32(5)) 85
Special quantifications: Re-characterizations 87
CHAPTER-II: COMPUTATION OF TAXABLE INCOME 89

UNIT 1: INCOME FROM BUSINESS 89
Component of income from business 90
Disallowable expense (Sec. 21) 133
Special treatments on some expenses 135
Specific types related income from business 136
UNIT 2: INCOME FROM EMPLOYMENT 141

Concept of employment 142
Payments not included in the income from employment 149
Deduction in the income from employment 150
Rebate on tax rate on income from employment 151
UNIT 3: INCOME FROM INVESTMENT 157

Concept of investments 158
Component of income from investments 159
Profit or gain included in income from investments 160
Amounts not included in taxable income from investment: 172
Allowable expenses in computing income from investment: 173
UNIT 4: TAX CREDIT 177

Medical tax credit- section 51 178
Female remuneration tax credit 179
Foreign tax credit - section 71 179
CHAPTER-III: RELEVENT MATTERS IN TAXABLE INCOME 185

Tax accounting and timing 186
Methods of tax accounting - section 22 187
Safeguard of tax accounting documents- section 81 188
Long-term contract 189
Calculation of net gain 190
Gain on disposal of business assets/liability 195
Some deemed transaction for tax purpose 196
CHAPTER-IV: PAYMENT OF TAX AND TAX RETURN 201

Form, place and time for payment of tax 202
Withholding tax 204
Advance payment of tax 217
Income tax returns 218
CHAPTER-V: TAX ASSESSMENT AND APPEALS 221

Assessment of tax 222
PART II: VALUE ADDED TAX ACT, 2052
Amendmends made by finance ordinance, 2076 229

CHAPTER-I : BASIC CONCEPTS 235
Definition of terms 236
Tax officer and jurisdiction 238
Imposition of VAT 238
CHAPTER-II: REGISTRATION AND DEREGISTRATION 251

Registration in VAT 252
Mandatory registration 253
Registration not required 254
Voluntary registration 255
Temporary registration 256
Deregistration 256
CHAPTER-III: TAXABLE VALUE, COLLECTION, OFFSET AND REFUND 259

Taxable value 260
Market value concept 263
Tax collection 264
VAT return 265
Bank guarantee in case of import for export 265
Offset of tax 265
Tax refund 278
Limitations for refund 284
CHAPTER-IV: ACCOUNTS AND RECORDS 285

Invoices 286
Electronic cash register & electronic billing 288
Credit note 288
Invoice by unregistered person 289
Accounts and records 289
Effects of tax on financial accounting 292
CHAPTER-V: SUSPENSION, ADMINISTRATIVE REVIEW AND APPEAL 295

Suspension of transaction 296
Order for reassessment 296
Power equal to court 296
Application for administrative review 296
Area of administrative review department 299
Decision of administrative review 299
Appeals in revenue tribunal 299
CHAPTER-VI: ADVANCE RULING, PUBLIC CIRCULAR AND DEPOSITS 301

Advance ruling 302
Public circulars 302
Deposits 302
PART I
INCOME TAX ACT, 2058
The Institute of Chartered Accountants of Nepal 1

INCOME TAX & VAT
2 The Institute of Chartered Accountants of Nepal

AMENDMENDS MADE BY FINANCE ORDINANCE, 2076
Major Amendment made by Finance Ordinance 2076 as on 29th May 2019 (15th Jestha 2076) is
mentioned here under:
INCOME TAX ACT, 2058 & INCOME TAX (9TH AMENDMENT) RULES, 2076
(Section 26 of Finance Act, 2076)
Section/Rules Old Provision New Provision

Section 11(2) Incomes derived by cooperative Incomes derived by cooperative societies,
societies, registered under registered under Cooperative Act, 2074 from
Cooperative Act, 2074 from business mainly based on agriculture and
business mainly based on forest products such as sericulture and silk
agriculture and forest products production, horticulture and fruit processing,
such as sericulture and silk animal husbandry, diary industries, poultry
production, horticulture farming, fishery, tea gardening and processing,
and fruit processing, animal coffee farming and processing, herbiculture
husbandry, diary industries, and herb processing, vegetable seeds
poultry farming, fishery, tea farming, bee-keeping, honey production,
gardening and processing, rubber farming, floriculture and production
coffee farming and processing, and forestry related business such as lease-
herbiculture and herb hold forestry, agro-forestry, cold storage
processing, vegetable seeds established for the storage of vegetables and
farming, bee-keeping, honey business of agricultural seeds, insecticide,
production, rubber farming, fertilizer and agricultural tools (other than
floriculture and production machine operated)and rural community based
and forestry related business saving & credit cooperatives Cooperative
such as lease-hold forestry, doing Financial Transactions are exempt from
agro-forestry, cold storage tax. Dividends distributed by such societies
established for the storage of are also exempt from tax.
vegetables and business of
agricultural seeds, insecticide,
fertilizer and agricultural tools
(other than machine operated)
and rural community based
saving & credit cooperatives
are exempt from tax. Dividends
distributed by such societies
are also exempt from tax.

INCOME TAX & VAT

Section No Provision Following rebate will be allowed on Income
11(2Kha) Tax for Special Industry fully operated during
any Income Year :
(Ka) 1/3 of Tax on income of Resident Natural
Person if required to pay tax at 30%
(Kha) 20% of Income Tax on income of an Entity
(Ga) Person availing benifit as per Clause (Ka)
and (Kha) is also eligible if any for another tax
rebate as per this section.
Section The rate of tax will be exempted The rate of tax will be exempted by 25%
11(3Nga) by 25% on income earned from on income earned from exporting goods
exporting goods manufactured manufactured by a manufacturing industry.
by a manufacturing industry. Following tax rebate shall be allowed on
Income from export having source in Nepal
during any Income Year:
(Ka) If resident natural person required to
pay tax at 20% on Income then 25% of such
tax amount and if required to pay at 30% on
Income then 50% of such tax amount
(Kha) 20% on applicable Income Tax on
Income of an Entity
(Ga) Additional 25% on tax amount after
availing rebate as per clause (Ka) or (Kha) on
income received from Export of Manufactured
goods by manufacturing based industry
Section The rate of tax will be exempted The rate of tax will be exempted by 40%
11(3Cha) by 40% on income earned from on income earned from construction and
construction and operation of operation of road, bridge, airport, tunnel and
road, bridge, airport, tunnel from operating through investment in tram,
and from operating through trolleybus.
investment in tram, trolleybus. Following tax rebate shall be allowed to any
Entity earning income from following activity:
(Ka) Operated any trolley bus, or tram then 20%
(Kha) Operated any rope way, cable car,
railway, tunnel or sky bridge after construction
then 20% ; or


Section (Ga) Construction and Operation of Airport
11(3Cha) then 40%
(Gha) Construction and operation of Road,
Bridge or Tunnel Way then 52%
(Nga) Investing and operating tram or trolley
bus then 52%
Section No Provision Rebate of 20% shall be allowed on Tax on
11(3Tha) taxable income in any income year of an entity
wholly engaged in the projects conducted by
any entity so as to build public infrastructure,
own, operate and transfer it to the GON
and in power generation, transmission, or
distribution.
Section 11(4) While calculating the income While calculating the income by a person
by a person under subsections operating transactions eligible for separate
(1), (2), Clauses (Ka) and (Kha) benefit under subsections (1), (2), Clauses (Ka)
of (3), (3Ka), (3Kha), (3Ga) and (Kha) of (3), (3Ka), (3Kha), (3Ga) and (3
and (3 Gha), Sub Section (13), Gha), Sub Section (13) , (14) and (15) of Section
(14) and (15) of Section 1 of 1 of Schedule 1 and Sub Section (2), (3), (3Ka)
Schedule 1 and Sub Section (2), and (4) of Section 2 of Schedule -1 this section
(3), (3Ka) and (4) of Section 2 shall calculate the such income assuming the
of Schedule -1 shall calculate income derived by a separate person.
the income assuming the only
income derived by a separate
person.
Section 21(1) No Provision Salary or Wages expenses distributed to
(Gha1) Employees or Workers not having Permanent
Account Number (PAN).
Section 21(1) No provision Expenses in excess of Rs. 1,000 incurred on
(Gha2) invoice not containing Permanent Account
Number (PAN).
Section Entity willing to get merged Entity willing to get merged under Sub
47Ka(6) under Sub Section(1) should Section(1) should submit expression of interest
submit expression of interest to Inland Revenue Department Within 2076
to Inland Revenue Department 2077 Ashad end.
Within 2076 Ashad end.

INCOME TAX & VAT

Section 47 The entities submitting The entities submitting expression of interest
Ka(7) expression of interest under under Sub section(6) to get merged under
Sub section(6) to get merged sub Section (1) should complete the merger
under sub Section (1) should process within 2077 2078 Ashad end.
complete the merger process
within 2077 Ashad end.
Section 63(1) In case where a resident person In case where a resident person files an
files an application with the application with the Department intending
Department intending to get to get approval for establishing a retirement
approval for establishing fund, the Department shall pronounce the
a retirement fund, the approval as prescribed.
Department shall pronounce Provided that, no approval shall be required
the approval as prescribed. for a retirement fund established by Citizen
Provided that, no approval Investment Fund established under Citizen
shall be required for a Investment Trust Act, 2047, Retirement Fund
retirement fund established operated by Social Secutiy Fund established
by Citizen Investment Fund under Contribution Based Social Security
established under Citizen Fund Act 2074, by Employees Provident
Investment Trust Act, 2047 and Fund established under Employees Provident
by Provident Fund established Fund Act, 2019 and retirement fund operated
under Provident Fund Act, by Pension Fund established under Pension
2019. Fund Act, 2075
Section Person doing transaction after obtaining
78(4Ka) Permanent Account Number as per Sub
Section (4) should update registration
No Provision
related information in biometric procedure
as specified by the deparment within the
stipulated time.
Section 79(1) A document to be served on A document to be served on a person under
(Ka) a person under this Act shall this Act shall be considered as sufficiently
be considered as sufficiently served in the following circumstances:-
served in the following (Ka) sent to the tele fax, telex, electronic
circumstances :- mail address or related other electronic
(Ka) sent to the electronic medium of any person;
mail address or transmitted on
a fax of a person;


Section 79(3) No Provision If any documents not served under Sub
Section (1) and (2) then information related
to such order can be telecast or published at
radio, television or any national newspaper in
the name of related person. In this case related
person shall be deemed to have received such
information.
Section 88(1) Provided that, the tax shall be Provided that, the tax shall be withheld at the
(5)(Kha) withheld at the rate of 10% on rate of 10% on payment made by a resident
payment made by a resident person for rent having source in Nepal.
person for rent having source But,
in Nepal.
(Ka) Tax shall be withheld at the rate of 1.5%
But, on payment made to person registered in
(Ka) Tax shall be withheld VAT and running business of giving vehicles
at the rate of 1.5% on payment on rent.
made to person registered in (Kha) Withholding Tax shall not be deducted
VAT and running business of on amount received by Natural person for
giving vehicles on rent. house rent.
(Kha) Withholding Tax shall (Ga) No tax shall be deducted on incentive
not be deducted on amount provided as per Section 25(1Kha) of VAT
received by Natural person for Act,2052 to consumer on purchased goods
house rent. or services by making payment through
No Provision electronic medium as per prevailing laws
Section Notwithstanding Sub Section Notwithstanding Sub Section (4), tax on house
90(4Ka) (4), tax on house rent income rent income of natural person other than in
of natural person other than conducting a business shall be required to
in conducting a business shall pay within end of Ashad of current year and
be required to pay within end person choosing to pay tax on the basis of
of Ashad of current year and turnover as per Section 4(4Ka) shall deposit
person choosing to pay tax on tax withheld by it under Chapter 17 at time of
the basis of turnover as per making payment of tax in installment.
Section 4(4Ka) shall deposit tax
withheld by it under Chapter
17 at time of making payment
of tax in installment.

INCOME TAX & VAT

Section 94(2) Notwithstanding Subsection Notwithstanding Subsection (1), where the
(1), where the amount of amount of total installments calculated under
total installments calculated Subsection (1) is less than Rs 5,000 Rs. 7,500,
under Subsection (1) is less the amount of the installment shall not be
than Rs 5,000, the amount of required to pay.
the installment shall not be
required to pay.
Section Following advance tax will Following advance tax will be recovered on
95Ka(2)(Ka) be recovered on the gain the gain calculated under section 37 in case
calculated under section 37 gain from disposal of interest in resident
in case gain from disposal of entity by a person except by a resident entity
interest in resident entity by registered under prevailing law for carrying
a person except by a resident out transactions of buying and selling of
entity registered under securities.
prevailing law for carrying (Ka) In case of gain from disposal of interest
out transactions of buying and of an entity listed in Securities Exchange
selling of securities. Board of Nepal, by the entity of which deals
(Ka) In case of gain from in securities exchange Market- 7.5% 5% on the
disposal of interest of an entity gain for a resident natural person ,10% on the
listed in Securities Exchange gain from resident entity and 25% on the gain
Board of Nepal, by the entity from others.
of which deals in securities
exchange Market- 7.5% on
the gain for a resident natural
person ,10% on the gain from
resident entity and 25% on the
gain from others.
Section No Provision At the time of computation of gain on disposal
95Ka(2Ka) of interest in an entity as per Sub Section (2)
(Ka), weighted average cost of interest held at
that time of such entity shall be taken.
Section In case of any persons other In case of any persons other than specified
95Ka(6) than specified in Sec. 95Ka in Sec. 95Ka (5), Land Revenue Office shall
(5), Land Revenue Office shall collect advance tax at 10% of gain on disposal
collect advance tax at 10% of of land or building 1.5% on amount derived
gain on disposal of land or from disposal at the time of registration.
building.


Section Where he-buffalo, buffalo, he- Where he-buffalo, buffalo, he-goat, boka,
95Ka(7) goat, boka, sheep, chyangra sheep, chyangra falling in Part 1 of Harmonized
falling in Part 1 of Harmonized Code System; live, fresh or frozen fish falling
Code System; live, fresh or in Part 3 of HS System; fresh flowers falling in
frozen fish falling in Part 3 of Part 6 of HS System; fresh vegetables, potato,
Section HS System; fresh flowers onion, dry vegetables, garlic, baby corn
95Ka(7) falling in Part 6 of HS System; falling in Part 7 of HS System, and fresh fruits
fresh vegetables, potato, onion falling in Part 8 of HS system are imported
falling in Part 7 of HS System, for business purpose, the customs office shall
and fresh fruits falling in Part 8 collect advance tax at the time of release
of HS system are imported for of goods @ 5% and meat falling in Part 2,
business purpose, the customs Milk Products, Egg, Honey falling in Part 4,
office shall collect advance Finger Millet (Kodo), Buckwheat (Fapar),
tax at the time of release of Proso Millet (Junelo), Rice, Small Rice Grains
goods @ 5% on customs value (Kanika) falling in Part 10, Flour, ground
determined such products cereal gains (Aata and Pitho) falling in Part
11, Herbs, Sugarcane falling in Part 12, Plant
related production falling in Part 14 @ 2.5% on
customs value determined such products
Section The advance tax amount The advance tax amount collected or the
95Ka(10) collected or the amount amount deemed to have collected under
deemed to have collected sub-section (7) (8) should be deposited in the
under sub-section (7) should be Department within the time period under
deposited in the Department Sub-section (8) (9) along with the return in
within the time period under statement.
Sub-section (8) along with the
return in statement.
Section In the following conditions, In the following conditions, both the person
95Ka(11)(Kha) both the person collecting collecting advance tax and the person from
advance tax and the person whom it is to be recovered shall jointly and
from whom it is to be recovered separately be liable, for the payment of the
shall jointly and separately be tax, to the Department:
liable, for the payment of the (Ka) If the advance tax not collected by a
tax, to the Department: person required to collect; and
(Ka) If the advance tax not
collected by a person required
to collect; and

INCOME TAX & VAT

Section (Kha) If the tax deemed to (Kha) If the tax deemed to have collected
95Ka(11)(Kha) have collected under sub under sub section (7) (8) not deposited in the
section (7) not deposited in the Department under Sub-section (9) (10),
Department under Sub-section
(9),
Section The person requiring The person requiring depositing advance tax
95Ka(12) depositing advance tax under under Sub-section (10) (11) should deposit the
Sub-section (10) should deposit tax within 25 days from the elapse of the date
the tax within 25 days from the mentioned in Sub -section (8) (9).
elapse of the date mentioned in
Sub -section (8).
Section The advance tax amount can The advance tax amount can be recovered
95Ka(13) be recovered from the person from the person from whom it was required
from whom it was required to be collected in case the amount is deposited
to be collected in case the into the Department under Sub-section (9)
amount is deposited into the (10) by the person required to recover the
Department under Sub-section advance tax.
(9) by the person required to
recover the advance tax.
Section 96(6) No Provision Any person desiring to revise income tax
return filed at department within the due date
may revise as per the procedure prescribed by
department within 30 days from the date of
submission of return.
Section 110Ga No Provision If it is proved that person receiving return

from business is other than those person on
whose name business is registered then real
person receiving return shall be liable to pay
tax of such business.
Section 115(6) Person submitting application Person submitting application as per Sub
as per Sub Section (1) shall Section (1) shall deposit whole amount of
deposit whole amount of undisputed tax and one - third fourth of
undisputed tax and one-third of disputed tax out of assessed tax.
disputed tax out of assessed tax.


Section 115(8) Where the Department fails to Where the Department fails to serve a person
serve a person with notice of the with notice of the decision on an objection
decision on an objection within within 60 days of an objection being filed as
60 days of an objection being filed per Sub Section (1), the person may, by notice
as per Sub Section (1), the person in writing filed with the Department, treat
may, by notice in writing filed the Department as having made a decision
with the Department, treat the to disallow the objection then the applicant
Department as having made a may file an appeal at Revenue Tribunal as per
decision to disallow the objection. Section 116.
Section 115(9) A person shall be required A person shall be required to notify the
to notify the Department Department in writing of the matter of having
in writing of the matter of treated the objection as disallowed under
having treated the objection as subsection (8).
disallowed under subsection The Department shall be treated as having
(8). disallowed the objection and served the
The Department shall be person with notice to that effect on the day that
treated as having disallowed the notification is filed with the Department.
the objection and served the Person shall inform Department in writing
person with notice to that effect attaching a copy of appeal filed as per Sub
on the day that the notification Section (8) within 15 Days of registration of
is filed with the Department. appeal.
Section 117 (1) If a person does not file the If a person does not file the returns, the
(Ka) returns, the following charges following charges are imposed on those
are imposed on those persons: persons:
(Ka) Per return 2,000 on not (Ka) Per return 2,000 5,000 or 0.01 % of
filing return as per Section Assessable Income as per Income Tax Return
95(1) in an income year which ever is higher on not filing return as
per Section 95(1) in an income year
Schedule 1 Subject to Sub Section (2) and Subject to Sub Section (2) and (4), the taxable
Section 1(1) (4), the taxable income of a income of a resident natural person for an
resident natural person for income-year is taxed at the following rates:
an income-year is taxed at the (Ka) taxable income from employment upto
following rates: Rs. 350,000 Rs. 400,000 – 1%;
(Ka) taxable income from
employment upto Rs. 350,000
– 1%;

INCOME TAX & VAT

Schedule 1 (Kha) taxable income in (Ga) taxable income in excess of Rs. 450,000
Section 1(1) excess of Rs. 350000 but not Rs. 500,000 and up to Rs. 700,000- Rs. 13,500
exceeding Rs.45000-Rs.3500 as Rs. 14,000 as per clause (Kha) for income
per clause(Ka) for income upto upto Rs. 450,000 Rs. 500,000 plus 20% taxable
Rs.350000 and 10% of taxable income in excess of Rs. 450,000 Rs. 500,000.
income in excess of Rs. 350000; (Gha) if taxable income in excesss of Rs.650,000
(Ga) taxable income in excess Rs. 700,000 but up to Rs. 2,000,000 - Rs.53,500
of Rs.450000- Rs13,500 as per Rs. 54,000 as per clause(Ga) for income upto
clause (Kha) for income upto Rs.650,000 Rs. 700,000 plus 30% taxable
Rs.450,000 plus 20% taxable income in excess of Rs.650,000 Rs. 700,000.
income in excess of Rs.450000. (Nga) If taxable income in excess of 2 million,
(Gha) if taxable income in additional tax at 20% shall be charged on the
excesss of Rs.650,000-Rs.53,500 tax rate as per clause (Gha)
as per clause(Ga) for income For a taxpayer having registered sole
upto 650,000 plus 30% taxable proprietorship firm and having income from
income in excess of Rs. 650,000. pension and amount contributed by natural
(Nga) If taxable income in person on contribution based pension fund
excess of 2 million , additional
pension fund and income of natural person
tax at 20% shall be charged on contributing at contribution based social
the tax rate as per clause (Gha)
security fund 1% tax under Clause (Ka) is not
For a taxpayer having applied.
registered sole proprietorship
firm and having income
from pension and amount
contributed by natural person
on contribution based pension
fund, 1% tax under Clause (Ka)
is not applied.
Schedule 1 Subject to Sub Section (4), the Subject to Sub Section (4), the taxable income
Section 1(2) taxable income of a couple of a couple making an election under section
making an election under 50 for an income-year shall be taxed at the
section 50 for an income-year following rates:
shall be taxed at the following (Ka) taxable income from employment upto
rates: Rs. 400,000 Rs. 450,000 – 1%;
(Ka) taxable income from
employment upto Rs. 400,000
– 1%;


Schedule 1 (Kha) taxable income in excess (Kha) taxable income in excess of Rs.
Section 1(2) of Rs.400000 but not exceeding 400,000 Rs.450,000 but not exceeding Rs.
Rs.500000-Rs.4000 as per 500,000 Rs.5,50,000 - Rs. 4,000 Rs.4,500 as
clause(Ka) for income upto per clause(Ka) for income upto Rs. 400,000
Rs.400000 and 10% of taxable Rs.450,000 and 10% of taxable income in
income in excess of Rs. 400000; excess of Rs. 400,000 Rs. 4,50,000;
(Ga) taxable income in excess (Ga) taxable income in excess of Rs. 500,000
of Rs.500000-Rs.14000 as per Rs.550,000- but not exceeding Rs. 750,000 Rs.
clause (kha) for income upto 14,000 Rs.14,500 as per clause (kha) for income
Rs.500000 plus 20% taxable upto Rs. 500,000 Rs.550,000 plus 20% taxable
income in excess of Rs.500,000. income in excess of Rs. 500,000 Rs.550,000.
(Gha) if taxable income in (Gha) if taxable income in excess of Rs. 700,000
excess of Rs.700,000-Rs.54,000 Rs.750,000 but not exceeding Rs. 2,000,000 - Rs.
as per clause(Ga) for income 54,000 Rs.54,500 as per clause(Ga) for income
upto 700,000 plus 30% taxable upto Rs. 700,000 Rs.750,000 plus 30% taxable
income in excess of Rs. 700,000. income in excess of Rs. 700,000 Rs.750,000.
(Nga) If taxable income in (Nga) If taxable income in excess of 2 million,
excess of 2 million , additional additional tax at 20% shall be charged on the
tax at 20% shall be charged on tax rate as per clause (Gha)
the tax rate as per clause (Gha) For a taxpayer having registered sole
For a taxpayer having registered proprietorship firm and having income from
sole proprietorship firm and pension and and income of natural person
having income from pension contributing at contribution based pension
and amount contributed by fund 1% tax under Clause (Ka) is not applied.
natural person on contribution
based pension fund, 1% tax
under Clause (Ka) is not applied.
Schedule 1 As per Sub section (4) od Section As per Sub section (4) od Section 1 of Schedule
Section1 (4) 1 of Schedule 1, Subject to Sub 1, Subject to Sub section(3) the following
section(3) the following Natural Natural Person Shall be taxed as fallows:
Person Shall be taxed as fallows: (Ka) the greater of the following amounts shall
(Ka) the greater of the following be taxed at the rates specified in Sub section(1)
amounts shall be taxed at the rates or(2) as though it were the only taxable income
specified in Sub section(1) or(2) as of the Natural Person or couple, as the case
though it were the only taxable requires ;and
income of the Natural Person or
couple, as the case requires ;and

INCOME TAX & VAT

Schedule 1 (1) the total of Natural person (1) the total of Natural person or couples
Section1 (4) or couples taxable income less taxable income less the gains; or
the gains; or (2) Rs.350000 Rs. 400,000, in the case of Natural
(2) Rs.350000, in the case of Person, or Rs.400,000 Rs.4,50,000 in the case of
Natural Person, or Rs.400000 in a couple,
the case of a couple, (Kha) the balance of the taxable income is
(Kha) the balance of the taxable taxed at the rate of 10%.But,
income is taxed at the rate of (1) Tax shall be levied at 2.5% if the ownership
10%.But, is more than 5 years of the NBCA( land and
(1) Tax shall be levied at 2.5% house and land) disposed off.
if the ownership is more than (2) Tax shall be levied at 5% if the ownership
5 years of the NBCA( land and is less than 5years of the NBCA( land and
house and land) disposed off. House and land) dispossed off.
(2) Tax shall be levied at 5% (3) Tax shall be levied at 7. 5% 5% on the gain
if the ownership is less than from disposal of an interest in any entity listed
5years of the NBCA( land and in Securities Exchange Board of Nepal.
House and land) dispossed off.
(3) Tax shall be levied at 7. 5%
on the gain from disposal of an
interest in any entity listed in
Securities Exchange Board of
Nepal.
Schedule 1 The amount of tax referred to The amount of tax referred to in section 4(4)
Section 1(7) in section 4(4) shall be- shall be-
(Ka) for Natural Persons (Ka) for Natural Persons conducting business
conducting business in in the Metropolitan or Sub-Metropolitan
the Metropolitan or Sub- Cities - Rs 5000 Rs. 7,500;
Metropolitan Cities - Rs 5000; (Kha) for Natural Persons conducting business
(Kha) for Natural Persons in Municipalities - Rs 2,500 Rs. 4,000; and
conducting business in (Ga) for Natural Persons conducting business
Municipalities - Rs 2,500; and other than mentioned in Clause (Ka) and
(Ga) for Natural Persons (Kha) – Rs 1,500 Rs. 2,500.
conducting business anywhere
else in Nepal – Rs 1,500.


Schedule 1 Notwithstanding this section, Deleted
Section 1(14) tax shall be calculated at the
rate of 20% on the taxable
income instead of the 30%
tax rate applicable under this
section, if a natural person is
wholly engaged in operating a
special industry referred to in
Section 11 for an income year.
Schedule1 While calculating tax on the Deleted
Section 1 (15) taxable income from export of
a natural person in an income
year, 25% exemption will be
availed for income taxed at
20% and 50% exemption will
be availed for income taxed at
30%
Schedule1 The amount of tax referred to The amount of tax referred to in section 4(4Ka)
Section 1 (17) in section 4(4Ka) shall be- shall be For the purpose of computation of tax
(Ka) for person conducting as per Section 4(4Ka) on the basis of turnover,
business of gas and cigarette transaction up to Rs. 2,000,000 shall be taxed
with upto 3% commission as per Section 4(4) of the Act and transaction
or value addition: 0.25% of in excess of it shall be taxed at the following
transaction; rate -
(Kha) for person conducting (Ka) for person conducting business of gas
business other than mentioned and cigarette with upto 3% commission or
in Clause (Ka): 0.75% of value addition: 0.25% of transaction;
transaction; (Kha) for person conducting business other
(Ga) for person engaged in than mentioned in Clause (Ka): 0.75% of
service sector business: 2% of transaction;
transaction. (Ga) for person engaged in service sector
However, if tax calculated business: 2% of transaction.
under clause (Ka), (Kha) and However, if tax calculated under clause (Ka),
(Ga) is less than Rs. 5,000 then, (Kha) and (Ga) is less than Rs. 5,000 then, Rs.
Rs. 5,000 5,000

INCOME TAX & VAT

Schedule1 Subject to sub Section (2), (3), Subject to sub Section (2), (3), (5) and (7), the
Section2(1) (4), (5) and (7), the taxable taxable income of an entity for an income-year
income of an entity for an is taxed at the rate of 25 percent.
income-year is taxed at the rate
of 25 percent.
Schedule1 Income having a source in Income having a source in Nepal derived as
Section2(3) Nepal derived as follows follows during an income-year by an entity
during an income-year by an shall be taxed at the rate of 20 percent.
entity shall be taxed at the rate(Ka) an entity wholly engaged in operating a
of 20 percent. special industry as referred to in section 11 for
(Ka) an entity wholly engaged the year; or
in operating a special industry (Kha) the entity has-
as referred to in section 11 for
(1) Operated any road, bridge, tunnel, rope-
the year; or
way, or flying bridge constructed by the
(Kha) the entity has- entity; or
(1) Operated any road, bridge, (2) Operated any trolley bus, or tram, or
tunnel, rope-way, or flying
(3) Co-Operatives registered and carrying
bridge constructed by the
out transaction under Cooperative Act, 2048
entity; or
except those carrying out transaction with tax
(2) Operated any trolley bus, exemption.
or tram, or
Co-Operatives registered and carrying out
(3) Co-Operatives registered transaction under Cooperative Act, 2074
and carrying out except those carrying out transaction with tax
transaction under exemption shall be taxed at the rate of 20%.
Cooperative Act, 2048
But,
except those carrying
Following rebate shall be provided to
out transaction with tax
Cooperative as mentioned below doing
exemption.
financial transaction:
(Ka) 75% of applicable tax rate if operated in
Municipality area
(Kha) 50% of applicable tax rate if operated in
Metropilitan or sub metropolitan area
Schedule1 Tax will be levied at 20% on DELETED
Section2(3Ka) the taxable income of an entity
from export of having source in
Nepal.


Schedule1 The taxable income of an entity DELETED
Section2(4) wholly engaged in the projects
conducted by any entity so as
to build public infrastructure,
own, operate and transfer
it to the GON and in power
generation, transmission, or
distribution for an income-year
shall be taxed at the rate of 20
percent.
Rule 29(3) A person shall pay tax in A person shall pay tax in accordance with
accordance with sub-Rule (1) sub-Rule (1) in the following forms:
in the following forms:
(Ka) if the payment is made to the Department
(Ka) if the payment is made where the payment does not exceed the
to the Department where the limits for cash payment prescribed by the
payment does not exceed Department, in cash; or where the payment
the limits for cash payment exceeds the limits, by bank cheques or bank
prescribed by the Department, draft; or
in cash; or where the payment
(Kha) If the payment is made to a bank
exceeds the limits, by bank
empowered to conduct Government
cheques or bank draft; or
transactions, in cash, bank cheques or bank
(Kha) If the payment is made to draft.
a bank empowered to conduct
But for doing government transaction if
Government transactions, in
payment is to be made through authorized
cash, bank cheques or bank
bank in excess of Rs. 10 Lakh then payment
draft.
should be made via cheque, draft or electronic
medium.

INCOME TAX & VAT

CHAPTER 1
BASIC CONCEPTS
Unit 1:
TAXATION SYSTEM IN NEPAL

INCOME TAX & VAT
CONCEPT AND HISTORY OF TAX
Economist Plehn has defined tax as “Taxes are, in general, compulsory contribution of wealth
levied upon persons, natural or corporate, to defray the expenses incurred in conferring a common
benefit upon the residents of the state.”
Government is the single body to levy tax under constitutional frameworks. The government may
be central, regional or local bodies. According to the Constitution of Nepal, no taxes shall be levied
without framing laws and currently various laws are in force to implement various taxes like:
Income Tax Act, VAT Act, Custom Act, Excise Act and etc.
Professor Seligman has defined tax as “A compulsory contribution from a person to the government
to defray the expenses incurred in the common interest of all without reference to special benefit
conferred.”
Most of the Acts relating to tax have defined that tax also includes fines, penalty, interest, etc
charged for infringement of provisions of the Act, Rules and Directives framed under the Act.
Civil Aviation Authority is fully Government owned Undertaking of Nepal. It charges passenger
fee from the passengers embarking from Nepal. The fee is being charged as per the rates as
determined by its bye-laws but not as per any Act of Government of Nepal. Such fee is the revenue
of company, but not a tax.
So the term tax shall be clearly understood as: “The revenue being collected as per the provisions
of various fiscal laws of the government and the amount collected from the different sources
directly goes to the different assigned code of the Nepal Government.
Government collections are called as revenue. Some of the revenue comes from economic
transaction within the country and some from governmental sales, services and fines on breach
of laws. The former types of revenue are called as tax revenue, e.g. Income Tax, Value Added
Tax, Excise Duty, Custom Duty etc. The latter are non-tax revenue as sale of governmental goods,
registration and renewal fees, amount generated by rendering commercial services, fees for
providing license and many more.
Clear distinction shall be made for tax revenue and non-tax revenue. Revenues other than tax
revenues are called non-tax revenues. Those revenues which are collected by providing services
by any government department or offices shall be treated as non-tax revenues. Registrar of
Companies are charging registration fee from companies. In the same way, it charges penalties
on the companies which make infringement of the Company Act and related laws. These fees and
penalties are treated as non-tax revenues. Government may charge royalty for any long-term assets
provided to any person for use. Such royalties are also called non-tax revenues. Casino royalty is

CHAPTER 1 - BASIC CONCEPTS, UNIT 1 : TAXATION SYSTEM IN NEPAL
being charged by GON as royalty for operating a casino but does not provide any government
asset to use. So the casino royalty is also classified as tax revenue.
Taxes are levied on annual basis and on event wise. The rate procedures, collection system,
coverage and other related matters are fixed by Finance Acts enacted annually. Finance Act is
prepared and presented by Finance ministry in consultation with other line ministries and finally
approved by the parliament, once it is approved by the parliament that becomes the law.
OBJECTIVES OF TAXATION
The fundamental objective of charging tax is to raise fund to meet the administrative and
developmental expenses of the government. But the tax framework is designed to collect tax
from haves (those who have more than requirement)to provide direct or indirect benefits to have-
nots(those who does not have capacity to fulfill basic needs). The government has adopted the
taxation system to achieve social as well as economic harmonization in the country and to ensure
equal distribution of wealth and resources among the public.
The other objectives of the charging tax are as follows:
• Raising revenue to meet out the administrative and developmental expenses of the
Government.
• Prevention of concentration of wealth in a few hands as the concentration of wealth in

few hands may create economic, political and social disparities.
• Redistribution of wealth for the common good as the persons earning more in
comparison to the persons earning less have to contribute more amounts to the public
fund so that the government could provide facilities to the downtrodden persons by
providing employments and other jobs for earning.
• Maintenance of welfare state as government has to expend lot of money for education,
health and creation of employment for general public; it is duty of the government to
ensure economic stability within the country.
• To encourage the national need based industries charges high rates of taxes on the
imported goods in comparison to the goods produced in the country and by providing
tax incentives to the businesses earning from foreign currencies.
• Increasing savings and investment provides tax exemptions on savings and also on
income from private investments. This objective is based on the thinking that ‘rather to
pay tax invest the money’.

INCOME TAX & VAT
TYPES OF TAXES IN NEPAL
Taxes are classified into two classes in broad sense as Direct taxes and Indirect taxes.
a. Direct Tax
Dr. Dalton defines direct tax as, “A direct tax is really paid by the person on whom it is legally
imposed”. The ultimate burden of the tax lies with the legal payee. Here legal payee means
the person who is liable to pay the tax but not the person who actually pays the amount on
behalf of others: like manager, agent, representative etc. Income tax, Property tax, Registration
of property tax is some of the examples of direct taxes. In case of direct tax, neither the legal
payee can claim the tax from any other person nor make it as a component of cost of goods.
In the line of direct tax Income Tax is major head of revenue in Nepal.
b. Indirect Tax
Dr. Dalton says that “an indirect tax is imposed on one person but paid partly or wholly by
another”. The payee of the tax shifts the burden on another person. VAT is being paid by
business persons but the ultimate burden of the tax goes to the final consumers. The business
persons can make the tax as component of cost of the goods or services or can charge it as
an additional charge on the price of the goods or services. Custom duty, Excise Duty, Value
Added Tax are the examples of indirect taxes.
Types of Taxes
Direct Taxes Indirect Taxes
Income Tax Customs Duty

Property Tax etc Excise Duty Value Added Tax
Basis Direct Tax Indirect Tax

Levied On persons for On product or services
 Income Earned
 Activities Conducted
Incidence(burden) Borne by the person himself on Borne by the ultimate consumer.
of Tax whom it is levied.
Example: Income Tax, Property Tax etc Sales Tax (VAT), Custom Duty,
Excise Duty etc.

CONCEPT OF INCOME AND MEANING OF INCOME TAX
Income has been defined in the Framework for the preparation and presentation of financial
statements, issued by Nepal Accounting Standard Board, as increases in economic benefits during
the accounting period in the form of inflows or enhancements of assets or decreases of liabilities
that result in increases in equity, other than those relating to contributions from equity participants.
Income Tax Act, 2058 has also recognized that income encompasses both revenue and gains.
Revenue is treated as gross receipt from the disposal of goods and services. Gain is treated as gross
receipt of the property after disposal less the total outflows to acquire it.
Income tax is charged on the taxable income.
Income derived for a certain period is considered for taxation purpose. In Nepal the period for
twelve months commencing from 1st of Shrawan to end of Ashad of next year is treated as one
income year. Income Tax Act, 2058 has stated that taxable income is derived by the summation of
income from four different sources i.e. Income from Business, Income from Employment, Income
from Investment and Windfall Gain. The totals of the income derived from the above mentioned
four sources of a person is said to be an income of the person.
Income from Business or Investment is derived by deducting allowed expenses of the Business or
Investment from the profit or gain of the business. However, income from employment is derived
in a way other than that of Business or Investment.
Income as shown by financial statements (book profit) may differ from the taxable income (tax
profit).
Income tax is payable on the taxable income. Thus, income tax is defined as tax chargeable on
taxable income of a person for the relevant income year based on the rates prescribed in Income
Tax Act.
HISTORY OF INCOME TAX IN NEPAL
It will be better to classify the tax era into four with regard to the progress of Income Tax Act in
Nepal: a. before B.S. 2019, b. after B.S. 2019 to 2031, c. after B.S. 2031 to 2058, and d. after B.S. 2058.
Period before 2019 B.S.: Tax without specific Act of parliament

During this period, the formal Income Tax Act was not exists to charge income tax on income from
any source. But progress of income tax was as follows during the period:

INCOME TAX & VAT
Finance Act, 2016:

• Provision was made to charge income tax on income from employment and business,
dividing the total taxable incomes in 10 slabs and income tax was charged on each slab
at the rates ranging 5% to 25%.
• Some relaxations of income tax were given to small scale, middle and big industries.
Business Income and Employment Act, 2017:

This Act was enforced from Jestha 2, 2017 with following basic features:
• Some basic terms with regard to income, business, employment, etc were defined;
• Procedures of tax assessment and collections were provided;
• Some tax exempted persons are defined;
• Provision for tax deducted at source was introduced;
• Filing of tax returns was made compulsory for some of the taxpayers;
• Provisions of charging penalties and procedures of appeal against an assessment were

established; and
• Rates for charging income tax were left on the Finance Act of the relevant year.
Period after 2019 and up to 2031: taxation law formally introduced

Nepal Income Tax Act, 2019 was enforced from Shrawan 9, 2019. This was the first Income Tax
Act enforced to charge income tax on incomes from various sources. The following were the main
features of the Act:
• Firstly the act was of extra-territorial jurisdiction for all the citizens irrespective of the
place of earnings-global basis for citizen. These provisions were limited to Nepal income
or repatriation into Nepal in 2020.
• Sources of income were classified into: business, employment, profession, house and
land rent, investment, agriculture, insurance business, agency, and other sources.
• Some more terms like- person, couple, family, partnership firms, non-resident persons,
etc were defined.
• Provision was made for appointment of assessment committees in each area.
• Methods of calculation of taxable income under different heads were set.
• Provision was made to enter into an agreement with a foreign country with regard to
income tax for avoiding the double taxation.

• Provision was made to make a revised return in case of any alteration in the previous
return.
• Provisions with regard to set off and carry forward of losses were incorporated, and
• Provided to establish an Income Tax Department.
Period after 2031 and up to 2058: long era for tax laws
During the year 2031, Income Tax Act, 2019 was completely replaced by Income Tax Act, 2031 with
effect from Kartik 5, 2031. The new Act was divided into 66 Sections. The 8 amendments in the
Act along with the notable changes were made in those acts. From the last and eighth amendment
some basis of self assessment were introduced.
Some Basic Features of Income Tax Act, 2031: Repealed History

• Detailed definitions were given for the various terms used in taxation: income, gross profit,
net profit, taxpayer, Single Natural Person, couple, family, partnership firm, company, tax,
income year, tax assessment, Director General of tax, Tax Officers, principal officer of a
company, income from agriculture, income from business; industry; profession and vocation,
income from employment, income from house and land rent, preoperative expenses, loss,
work of a public interest, non-resident person, etc.
• Incomes were classified into five heads:
(a) income from agriculture;
(b) income from business, industry, profession and vocation’s
(c) income from employments
(d) income from house and land rent; and
(e) income from other sources.
• Provision was made in such a way that a resident person had to pay tax on income earned in
Nepal and also on income accrued and received outside Nepal by entering into a transaction
within Nepal. Here ‘received’ means actual receipt or showing an income by passing an entry
in the books. In the same tune, a non-resident person had to pay tax on income earned and
received in Nepal and also on an income, which is earned in Nepal by residing outside Nepal,
and received outside Nepal.
• Expenses incurred for earning tax-exempted incomes were not allowed to deduct from
taxable incomes.
• Provisions regarding self-assessment, filing of a tax return, appointment of a committee

for tax assessment for small tax payers, procedures of tax assessments, filing of revised tax
returns, calculation of taxable income and methods of charging tax on different taxpayers
like: firm, private limited companies, minor, disabled Single Natural Persons, Natural

INCOME TAX & VAT
Persons, couple, family, non-resident persons, deceased Natural Person, entities engaged in
petroleum products, Natural Person and entities engaged in agricultural products, etc were
incorporated in the Act.
• Provisions regarding tax assessment by the authorities under certain circumstances were also
made a fundamental part of the Act. Set off and carry forward of losses, right of a Tax Officer to
order for filling a tax return, assessment of tax, bases of assessment by authorities, certification
of tax return, jeopardy assessment, appeal against an assessment order, provisions regarding
withholding taxes, etc were also the fundamental features of the Act.
• Act had incorporated various provisions regarding tax exempted incomes, disallowed expenses,
restrictions and limitations on certain expenses, deferred revenue expenditures, period for
keeping the books of accounts safely, right of Tax Officer to order for audit of the accounts,
responsibility of an auditor for information provided to tax office after conducting audit, right
of a Tax Officer to search and seize of movable and immovable property, documents, books of
accounts and any other papers or goods related to the business, etc of a taxpayer.
DEFECTS OF PREVIOUS TAX ACTS
Some of the basic defects of the previous Income Tax Acts were as described under:
a. Limited tax nets:

The previous Acts had limited scope with regard to coverage of international income of a
resident person, capital gain tax etc. So many exemptions from taxations were not provided
by the Act rather it was provided by the Finance Acts. Provisions of other Act were contradict
with the provisions of tax Act as exemptions and concessions on income tax also used to
be included on the other acts, hence all the provisions relating to taxation were not routed
through the single and comprehensive Act.
b. Effect of different Acts on Income Tax Act:

Many Acts had provisions regarding exemptions or concessions in the rate of income tax
and the provisions of those Acts were superseding the provisions of prevailing Income Tax
Acts. Nepal Rastra Bank Act, 2012, Provident Fund Act, 2019, Nepal Petroleum Act, 2040,
Industrial Enterprise Act, 2049, Electricity Act, Pokhara University Act, 2053, are some of
the Acts having provisions regarding income tax as well To know/determine tax liability, a
person, for example, also had to know provision of the relevant law applicable to the nature
of business in addition to the provision of existing Income Tax Act.
c. Unclear and insufficient:

Clear definitions of the terms used in the act was lacking on those acts. Sketchy description
of the provisions, lack of economic terms, non-use of accounting standards etc. were also the

defects of the previous Income Tax Acts. The definition of a resident person was not given
clearly. Terms like characterization, transfer pricing, etc were not included in the Acts.
d. Unscientific presentation:
The Acts were divided amongst different sections without subject-wise chapters; nor it was
in any technically accepted flows.
e. Unlimited powers of Tax Officers:

Tax Officers were provided with unlimited powers for assessment and imposing penalties.
Accounts were treated as secondary evidence for tax assessment. Best judgment assessments,
which were based on estimations and assumptions, were common methods of assessment.
f. Unequal treatments:
The tax rates were being determined on the basis of nature of the person, organization,
income, etc but the principle that higher gainer should pay tax by high rates was seldom
implemented. Perquisites and fringe benefits earned by higher economic classes were not
covered by the taxation.
g. Double appeal system:

A taxpayer had option to apply to Director General or to Revenue Tribunal against any
assessment made by a Tax Officer.
RELATIONS WITH CONSTITUTION, AND COMPONENTS OF

INCOME TAX LAWS
COMPONENTS OF INCOME TAX LAW
Income Tax Annual Income Tax Circulars/ Legal Decisions Directive

Act Finance Act Rules Advance of Court
Rulings
Constitution of Nepal:
The Constitution of any country is a supreme law. All the Acts, decisions of the courts, and other
directives from government should be within the purview of the Constitution. According to the
Constitution of Nepal, ‘no tax shall be levied and collected except when permitted by law’. Without
framing and enforcing a law of parliament, no tax can be levied on any person. An Act can be
enforced only after getting approval from the Parliament of Nepal and Sealed by the President.

INCOME TAX & VAT
Income Tax Act, 2058:

With effect from 19.12.2058 the Income Tax Act, 2058 is the prevailing Act for charging income tax.
This Act has a clear provision that for income tax no other Acts can supersede the provisions as
mentioned on this Act. The coverage of the Act is wide enough to cover the calculation of taxable
income, rates of tax, rights of a taxpayer, powers of a Tax Officer, and etc.
Finance Order, Finance Act or Ordinance:

Finance Order issued under Prevailing Tax Collection Act, 2012 Finance Acts or Finance Ordinances
are the Acts which are effective for the period for which these are issued.
Finance Order shall be effective for maximum period of 6 months from the date of its issue as per Sec.
4 of Samayik Kar Asul Ain, 2012. Normally, it shall be issued in the day of Budget Speech rendered in
the parliament by Finance Minister. The matters of the order shall incorporate in Finance Act for the
finance year concern. Finance Act is generally issued for one income year. Any ordinance issued by the
government has its life of six months maximum. In the period when of the business of parliament closed
or dissolved, GON can issue an Ordinance. As the life of a Finance Ordinance is of only six months it can
be replaced only with a new Finance Ordinance. Income Tax Act, 2058 has a provision that Finance Act
or Finance Ordinance can replace any provision of the Income Tax Act for the periodhence, Finance
Act or Finance Ordinance can amend any of the provisions of the Income Tax Act.
Income Tax Regulation, 2059: Regulations and Rules are framed by the Government of Nepal
under authority of the act of parliament. Right to issue rules, directives, orders or similar laws
are called as delegated legislature. These rules are framed to clarify and to set parameters for the
provision those delegated by the act of parliament. Income Tax Regulation, 2059 was issued under
the right of Sec. 138 of the Income Tax Act, 2058.
Tax Directives:
Directives are issued as per the authority given by the Act of parliament and issued by the
operating agency of the Act i.e Inland Revenue Department (IRD), under Sec. 139 issues directives
for income tax.
Income-Tax Rules:
Government of Nepal is empowered to make rules for carrying out the purposes of the Act. For
the proper administration of the Income-tax Act, the government frames rules from time to time.
These rules are collectively called Income-tax Rules, 2059. It is important to keep in mind that
along with the Income-tax Act, 2058, these rules should also be studied.
Circulars And Advance Rulings :

Circulars are issued by the Inland Revenue Department from time to time to deal with certain
specific problems and to clarify doubts regarding the scope and meaning of the provisions. These

circulars are issued for the guidance of the officers and/or assessees. The department is bound
by the circulars. While such circulars are not binding the assessees they can take advantage of
beneficial circulars.
Case Laws:
The study of case laws is an important and unavoidable part of the study of income-tax law. It is
not possible for Parliament to conceive and provide for all possible issues that may arise in the
implementation of any Act. Hence the judiciary will hear the disputes between the assessees and
the department and give decisions on various issues. The Supreme Court is the Apex Court of the
country and the law laid down by the Supreme Court is the law of the land.
INCOME TAX ACT, 2058: NEW ERA OF INCOME TAX
The repealed act having many amendments and several transitional provisions through Financial
Acts have created a thrust for a new and quite revised Act for income tax. Globalization of the
trade, establishment of new kinds of foreign entities in Nepal, emerging complications in business
relationships, establishment of joint venture enterprises in which more than one foreign country
is associated, tax based on books of accounts and self assessments etc are the new features, which
are felt to be incorporated in Income Tax Act.
Lecturer Dr. Peter A. Harris, technical advisor to IMF, prepared the draft of this Act. The International
Monetary Fund had financed the entire project. Harvard Institute for International Development,
which is a branch of Harvard University, had fully cooperated with Nepal in reforming tax laws.
The VAT Act, 2052 is also based on the draft given by the Institute. The Institute’s contribution to
reforming income tax also is notable.
GON had worked hard and taken the help of FNCCI to give the final shape to the Act. It had
conducted several rounds of talks with advocates, chartered accountants, foreign tax consultants,
business houses, and all other concerned personalities.
Difficulty was faced mainly due to translation of the draft in Nepali language. Each and every
word was translated in Nepali language; however, the words are very difficult to understand
even by the tax consultants and chartered accountants. It had created misunderstandings in the
businessmen.
Inland Revenue Department came up with several publications of booklets and established a
special office named by ‘Customers Service Center’ for easy understanding of the Act.
Income Tax Act, 2058 is short name of the Act and its real name, legally called as long name of the
act is ‘Act for amending and consolidating of law regarding Income Tax’. This act has enacted as
extra-territorial jurisdiction basis for resident.

INCOME TAX & VAT

CHAPTER 1
BASIC CONCEPTS
Unit 2:
PRELIMINARY

INCOME TAX & VAT
EXTENT OF INCOME TAX ACT, 2058
Section 1(2) of Income Tax Act, 2058 describes that "Income Tax Act, 2058" shall be applicable
throughout Nepal, as well as to all Resident Persons, irrespective of where they may be living
outside Nepal.
DEFINITION OF WORD AND LEGAL PHRASE
Sec. 2 of Income Tax Act, 2058 has described various definitions regarding taxation terminologies.
Some of the definitions are given in the concern chapter or sections and some more are defined in
Income Tax Regulation, 2059 too.
In the definition section some of the words are defined as usual, some are exampled or some defined
for accounting. Most accounting definitions are based on same tune as defined in Accounting
Frame work and Accounting Standards (now NFRS).
1. Income Year – Section 2(Jha)

Clause (Jha) of Sec. 2 defined Income Years as the period beginning on Shrawan 1 of a year
and ending on the last day of Ashadh of the next year.
Explanatory Note:
In case of Business or profession newly set up during the Financial Year, the income year shall
be the period beginning on the date of setting up of the business or profession and ending
with Ashad of the said financial year.
If a source of income comes into existence in the said financial year, then the Income year will
commence from the date on which the source of income newly comes into existence and will
end with Ashad of the financial year.
2. Person (Charging Person) - Sec 2( Ka Cha)

Clause (ka cha) of Sec. 2 defined person as natural person and entity.
The tax is charged to the person- charging person. Charging Person has been classified by three
different basis:
i. By way of Naturalism:
Charging person is classified in Natural person and Entity under this classification. There are
some special provisions regarding taxation procedure and rate might be different for each
class.

CHAPTER 1 - BASIC CONCEPTS, UNIT 2 : PRELIMINARY
Person
Sec. 2(ka cha)
Natural Person Entity

Sec. 2(wa) Sec. 2(bha)
Partnership firm
Single Person (up to 19 partners)
Couple opted. Trust Sec.

Sec. 50 2(na)
Widow or Widower with Company Sec.

dependent/Disabled Sec. 50 2(da)
Proprietorship firm Local

(Registered or not) Authorities
Central
Government
Foreign Government
(Local or central)
Permanent
Establishment
As shown in diagram, the Act classifies taxpayers into two:
a. Natural person
The term “Natural Person” is defined by Sec. 2(wa) as a Natural Person, and, for the purposes
of this Act, the term shall also mean a registered or unregistered proprietary firm under the
ownership of a Natural Person, and couple filing jointly under Section 50 so as to be treated
as a single Natural Person.
Note:
Section 50 of Income Tax Act, defines couple as follow:
a. As per Sub Section (1) of Section 50, a resident natural person and a resident spouse of
the person may, by notice in writing, elect to be treated as a single Natural Person for a
particular income-year.

INCOME TAX & VAT
b. As per Sub Section (2) of Section 50, each spouse of a couple making an election under
subsection (1) with respect to an income-year is jointly and severally liable with the other
spouse for any tax payable by the couple for the year.
c. As per Sub Section (3) of Section 50, notwithstanding Sub Section (1) and (2) the resident
widower or widow taking care of dependents are taken as couple.
Explanatory Note:
 Each of the spouses is treated as a separate natural person for tax assessment, if both of
spouses agree to be filed jointly as single taxing unit for a particular Income Year. In case
the couple elects to be a single taxing unit, the income of both the spouses shall be taxed
in a single hand as that of one Natural Person, but any further tax burden is to be borne
by each of them jointly and severally. In bulleted form:
 The option is beneficial when either of the spouses is a non-earning member.
 The couple is permitted to be treated as a single Natural Person taxpayer irrespective of

whether such an option was taken in any previous income years.
 In case the couple has chosen to be treated as a single taxing person, either of the spouses
will be either jointly or separately responsible for the payment of the tax.
 The option is allowed only to a married couple, if each of the spouses was legal spouse
in last day of income year and is alive on the date of signing Tax Return for the Income
Year. Because the spouse has to sign on the Tax Return as a token of the acceptance of
the election.
 Qualified widow(er) with dependents is accepted as single taxing unit from Finance
Ordinance, 2062 and consecutive Finance Acts have introduced a new Sub-section (3) to
Section 50 that a widow or a widower, having the burden to look after dependents, are
treated as couple for the purpose of income tax. Though the Act or Rule is not clear, a
death certificate from a respective government office shall be produced in proof of being
widow or widower for this purpose. Moreover, the widow or the widower should have
dependants and for whom s/he is responsible to look after. The Section is not clear as to
dependants, but in general terms these include non-earning daughter and/or son and
may be non-earning parents
 The Act has no provision for an undivided family to be regarded as a single taxpayer, but
it accepts married filing jointly and qualified widow(er) as single taxation unit.
b. Entity- Sec. 2(bha)

"Entity" means the following organization or body:
(1) A partnership, trust or company,
(2) Rural Municipality, Municipality or District Coordination Committee,

(3) Government of Nepal, State Government and Local Level,
(4) Any foreign government or provincial or local government under that government or a
public international organization established by any treaty, or
(5) A permanent establishment of the organization or body referred to in clauses (1), (2) and
(3), which is not situated in a country of which it is a resident.
Explanatory Notes:
 Local Authorities:
Rural Municipality, Municipality or District Coordination Committee
 Government of Nepal:
Federal Government of Nepal, State Government or Local level Government.
 A Foreign Government or a Political Sub-Division of the Foreign Government, or a

Public International Organization Established under a Treaty:
Here treaty means treaty between Nepal government and the foreign government or
a political sub-division of the foreign government whereby, these governments or the
public international organizations are allowed to enhance their activities in Nepal by
establishing a unit in Nepal, such as UNDP, JICA, CTEVT, etc. These are treated as entity
in Nepal for income tax purpose.
 A Foreign Permanent Establishment ~Sec. 2(kana):
A Foreign Permanent Establishment (FPE) is a permanent establishment of such a person

who is a resident of some other country. The person may be a company or a partnership
registered in a foreign country, a trust established abroad, a foreign government or
its political sub-division up to local level, etc. When any one of these foreign persons
establishes a permanent establishment in Nepal under the same incorporated status as it
has been in the foreign country, without getting any new incorporated status in Nepal,
the permanent establishment is said to be a foreign permanent establishment.
 Further tests of a Foreign Permanent Establishment are:
 It is entirely owned by a foreign person.
 It is a branch, a division, a subsidiary, place of management, commercial store or a

site office of a foreign person.
 It hasn’t got any incorporated status in Nepal (established and operated under
agreement or regulating license or similar).
 Effective control and management of head office or similar corporate shall be

situated outside Nepal.

INCOME TAX & VAT
 Only the task, if performed by personnel without any office set up shall be permanent
establishment too.
 Permanent Establishment ~Section 2(kada):
‘Permanent Establishment’ (PE) means an establishment where a person wholly or partly

carries on a business. The establishment refers to the head office, factory premises, site
office, branch office, etc. In addition to that, these under noted establishments are also
defined as PE:
a. An establishment where a person wholly or partly carries on a business through an

agent, when the agent is not a general agent of independent status.
b. An establishment where a person has, is using, or is installing main equipment or

machineries (factory premises).
c. One or more establishments within a country where a person furnishes, whether

through employees or otherwise, technical, professional, or consultancy services for
a period or periods aggregating more than 90 days within any 12 months.
d. An establishment where a person is engaged in a construction, assembly, or

installation project for 90 days or more, and a place where a person is conducting
supervisory activities in relation to such a project.
c. Company : Sec. 2(da)

"Company" means any company incorporated under the companies' law in force, and for the
purpose of tax the following institutions shall also be treated as if they were companies:
(1) Any corporate body established under the law in force,
(2) Any unincorporated union, board, association or society or sole proprietorship whether
incorporated or not and any group of persons or trust except a partnership,
(3) Any partnership firm consisting of Twenty or more partners whether registered or not under
the law in force, any retirement fund, cooperative institution, unit trust, joint venture,
(4) Any foreign company;
(5) Any other foreign institution as specified by the Director General.
Explanatory Notes:
 According to Income Tax Act, 2058, company is classified as company and deemed
company. In general terms, a company is an entity, which is incorporated under the
Company Act. It may be a private or a public company. But as per the definition given
by the Income Tax Act, the following entities are also included in the term “company”,
which are called deemed companies. Wherever, the word company is used in Income
Tax Act, it includes company as well as deemed companies.

 Entity registered under Company Act effective at the time being: for example, company
registered under Company Act, 2007; Company Act, 2021; Company Act, 2053; Company
Ordinance, 2062 and Company Act, 2063.
 Institution incorporated by act of parliament: for example, ICAN incorporated under

ICAN Act, 2053; Gorthapatra Sansthan incorporated under Gorkhapatra Sansthan Act,
2019; CIT incorporated under CIT Act, 2047; Nepal Tourism Board incorporated under
NTB Act, 2053 etc.
 Institution established by GON under act of parliament: for example, various Town
Development Committees under Town Development Committee Act, 2047; Development
Committees under Development Committee Act, 2013; Corporations under Corporation
Act, 2021 and Communication Corporation Act, 2028 etc.
 Body Corporate registered under any of act of parliament: for example, cooperatives
under Cooperative Act, 2074; Clubs and NGOs under Society Registration Act, 2034 or
National Directive Act, 2017, Consumer Committee under any Acts etc.
 A Retirement Fund ~Sec. 2(gha): Retirement fund means any entity established solely
for the purposes of accepting and investing retirement fund contributions in order to
provide retirement fund payments to a benificiaries natural person or a dependant of
such an natural person.
 A Unit Trust ~Sec.2 (tra): "Unit trust" means a trust to be divided on the basis fixed with
the number of the units holding the right of the persons entitled to participate in income
or capital, with a provision that the trustee holds property for the benefits of at least
twenty persons.
Explanatory Note:
The definition given in the Act states that it is an organization of at least twenty individuals
who hold the units of the organization. The individuals are called unit holders. The unit has a
face value. The unit holders have a right to sale the units at the prevailing market price. When
the Unit Trust declares the dividend, the unit holders are entitled to receive it in proportion
to their holding of the unit on the date of book closure. There is little difference between a
mutual fund and a Unit Trust.
 A Joint Venture:
The Income Tax Act has not defined the term joint venture. But in general term,
‘Joint Venture’ stands for particular assignment as a project, especially a commercial
one involving a risk of failure. A joint venture may be between two governments, a
government and other institution, two corporate bodies, etc. In common words, a joint
venture is a work of partnership between two entities established for a common objective
for the limited period.

INCOME TAX & VAT
 A Foreign Company:
It is an entity, which has acquired the status of a corporate body in a country other
than Nepal under the Rules of that country. The company is not registered under Nepal
Company Act, so it is not a company but for the purpose of income tax it is treated as
company and tax is assessed accordingly.
 A Foreign Institution (if taken as a company by the Director General of Inland

Revenue Department):
If any institution, which is registered and established in a foreign country, establishes its
office in Nepal or is temporarily involved in certain activities in Nepal, it is called as an
entity for the purpose of income tax. But, if the DG of IRD issues an order recognizing a
particular foreign institution as a company, that entity shall be treated as a company for
income tax purpose.
 Other institutions:
Partnership having 20 or more partners: An unincorporated association, committee,

institution, society, or a group of persons other than a partnership, joint venture- Body
of Individuals (BOI).
d. A Trust ~Sec. 2(na);

A ‘Trust’ is an arrangement whereby an individual or a group of individuals hold property
as a trustee.
Explanatory Note:
Unit arranged by any successor or manager of property of a dead person, liquidators, receiver,
patron for incapacitated person are some example of trust.
e. A Partnership~Sec. 2(Ka pa);

A partnership firm having less than twenty partners is entity taxing as entity.
Explanatory Note:
But in case the firm has twenty or more partners, that firm is recognized as a company under
entity for the purpose of income tax.
ii. By way of Residential status:

Charging person, whether a Natural person or an Entity, is classified based on residential
status as resident person or non-resident person. There are some special provisions regarding
the procedure of imposing the tax and on the basis of residential stauts, rate of income tax
differs for each class

Definition of Resident Person:

As per Section 2(Ka Nga) "Resident person" means the following person in respect of any
income year:
(1) In respect of a natural person,
(Ka) Whose normal abode is in Nepal,
(Kha) Who has resided in Nepal for 183 days or more during a continuous period of
365 days of any income year, or
(Ga) Who is deputed by Government of Nepal to a foreign country in any time of the
income year.
(2) A partnership firm,
(3) In respect of a trust, such trust
(Ka) Which is established in Nepal,
(Kha) The trustee of which is a resident person in an income year,
(Ga) Which is controlled by a resident person or by a group of persons comprising

such a person, directly or through one or more interposed entities,
(4) In respect of a company, such company,
(Ka) Which is incorporated under the law of Nepal,
(Kha) Management of which has been effective in Nepal in any income year.
(5) Rural Municipality, Urban Municipality, or District Coordination Committee,
(6) In respect of an entity of any foreign government or provincial and local government
under that government, such entity,
(Ka) Which is established under the laws of Nepal, or
(Kha) Management of which is effective in Nepal in any income year.
(7) An organization or entity established under any treaty or agreement, and
(8) A foreign permanent establishment of a non-resident person situated in Nepal.
Definition of Non Resident Person:

As per Section 2(Tha), A Person who does not meet the criteria to be a resident is termed as
non-resident.
Concept of resident and non resident and their coverage of income has been clearly defined
on the below diagram.

INCOME TAX & VAT
Resident Person
Sec. 2(ka nga)
Natural person Entity
Person having
Registered in
normal place of
Nepal
abode in Nepal
Effective
183 days rule management in
Nepal
Employed by
GON
a. Residency of Natural Person:

There are three criteria for natural person being a resident. If a natural person became resident
under any of three criteria, the person deemed to be a resident.
Criteria I: Person having normal place of abode in Nepal-

 The act has not defined the procedure or the details regarding place of abode.
 However, as per Income Tax Directive, 2066 Habitual place of abode is in Nepal means
the place where Economic Activity of concerned person is situated.
 Having permanent residency or address does not qualify for place of Economic Activity.
Example to clarify “Habitual Place of Abode:”

• Ram Bahadur is a permanent resident of Kohalpur, Banke. He has been in
Kuwait since Shrawan 25, 2066 for the purpose of employment and will be
returning to Nepal on 2077 Shawan. In this case he has habitual place of
abode in Kuwait for Income Year 2076/77 since his economic activities are
concentrated in Kuwait,
• If in the above case, Mr. Ram Bahadur has been outside Nepal for more than
183 days in any Income Year for the promotion of his business of Nepal; the
habitual place of abode would have been in Nepal since his economic activities
are concentrated in Nepal.

Criteria II: Employed by Government of Nepal:

If any Natural Person is employed by Government of Nepal whether in Nepal or aboard, in
any day of income year, then the person is resident for that income year.
Criteria III: Residency criteria of 183 day rule.

In case a natural person is present physically in Nepal for 183 days or more during a period of
365 consecutive days, his/her status shall be of a resident during an income year in which the
183rd day of his physical presence during a period of consecutive 365 days falls.
Income Tax Manual has modified the concept of moving period of 365 days and now it is
computed for the stays within an income year.
Example to clarify the effect of physical presence in Nepal:

Krimson has a business in USA but he usually visits Kathmandu to manage his business here.
A manager runs the Business at Kathmandu. Krimson first visited Nepal in 2074 and after
that he has frequently visited Nepal and the record of his presence in Nepal is as follows:
S.N. Date (From To) Days
1 Baishakh 01,2075 to Jestha 25,2075 56
2 Ashwin 01, 2075 to Ashwin 15, 2075 15
3 Marga 10, 2075 to Paush 29, 2075 50
4 Falgun 06, 2075 to Ashad 26, 2076 63
5 Bhadra 06, 2076 to Bhadra 26, 2076 20
6 Ashwin 10, 2076 to Magh 29, 2076 79
Is Krimson resident in Nepal for income year 2074-75, 2075-76 and 2076-77 ?
Answer:
Computation of the residential status of Krimson during the income years from 2074-
2075 to 2076-2077:
Income Year Period Number of Days Residential Status
2074-2075 2075.01.01 to 2075.02.25 56 Non Resident
2075-2076 2075.06.01 to 2075.06.15 15 + Non Resident
2075.08.10 to 2075.09.29 50 +
2075.11.06 to 2076.03.26 63
128
2076-2077 2076.05.06 to 2076.05.26 20 + Non Resident
2076.06.10 to 2076.10.29 79
99
From the above example, the day of arrival in Nepal and day of departure from Nepal as
the days of stay in Nepal.

INCOME TAX & VAT
The presence in Nepal means being within the political boundary of Nepal but not necessarily
at a single place in Nepal. One may be present in Kathmandu at one time and in Biratnagar at
another, but for the purpose of determining the residential status all the presences in Nepal
shall be counted.
 Transit travel are not counted as stay in Nepal for computing purpose. Examples are:
Crossing in travel – Mr Amarkhande, Silguri based Indian, works in Birgunj, for 180
days and returned home resigning from his job. Some days later, he got employment
in Uttarakhanda, India and travel through Kakadbhitta- Mahendranagar route. On
Narayagarh, there was an unlimited strike and he compel to stay for 10 days.
The act is silence on the day count procedure. Internationally, ‘traveling through’ period
is not counted for residency (but travel for period is counted). Hence, his stay of 10 days
is not qualified for resident. And he is non-resident even day counts is more than 183
days.
Illustration 1:
Mr. Nao, a Japan national, working in an INGO operating in Nepal. He came on Bhadra 1,
2075 and returned on Aswin 31. Thereafter he came and leaved Nepal on gap of two months
till Poush end of next year. Find his residential status for the Income Year 2075-76 and 2076-
77.
Solution:
Computation of residential status of Mr. Nao for the Income Year 2075-2076 and 2076-2077
Stay period No of days

Income Year 2075 -2076
Bhadra 1, 2075- Aswin 31, 2075 30+31= 61
Poush 1- Magh 30, 2075 30+30= 60
Baisakh 1- Jesth 30, 2076 30+30= 60
Total 181 Days
Income Year 2076-2077
Bhadra, 1- Aswin 30,2076 30+30= 60
Poush 1- Poush 30, 2076 30
Total 90 Days
Assuming 30 days a month, if not provided.
Here he has stayed for two different income years viz. 2075/76 and 2076/77, so we should
compute residential status for both years.

In the given case, he is not resident by virtue of normal place of abode (being in Japan) and
employment by GON, so we should test under the criteria of 183 days rule. Total period of
stay is less than 183 days in both of the income year therefore he is non resident.
Illustration 2:
Mr. Rahaman, Oman national, has resided as follows:
Period Stay days Period Stay days

2076 Baisakh 31 2076 Shrawan 31
2076 Jesth 31 2076 Kartik 30
2076 Ashadh 31 2076 Falgun 30
Find the residential status of Mr Rahaman
Solution:
For 183 days rule, number of days stayed in Nepal to be computed for each an every day of
stay during particular Income Year. For minimizing computing, it is beneficial to count his
stay in each changes of continuous stay (means count at beginning whether is gets 183 days
or count at leave) at tentative total stay of 183 days.
Residential status under 183 days rule to be computed for each income year of stay. In case of
Mr. Rahaman, his stay is for two Income Year- 2075/76 and 2076/77.
For Income Year 2075/76

His stay starts on 2076 Baisakh 1 and ends on 2076 Ashadh 31. So, on 2076/03/31 his stay on
last 365 days (2075/04/01 to 2076/03/31) is 93 (31+31+31) days. It is maximum stay in any
last 365 days for Income Year 2075/76; hence he is non-resident for 2075/76.
For Income Year 2076/77,

His stay around 183 days is falls on Falgun end. At Falgun 30, his stay on last 365 days
(within same income year) is 91 (31+30+30), so he is non-resident for 2076/77 too.
Illustration 3:
Mr. Jharkhande, Indian national, businessman in Mumbai, stayed 200 days in last 365 days
ended 2077 Jesth 1 and then returned back. Find residential status for IY 2076/77
Solution:
His stay in last 365 days on 2077 Jesth 1 is 200 days so, he seems as resident, but in Article 4
of DTAA with Nepal and India, his normal place of adobe is in India and resident for India
not for Nepal. However income generated with the source in Nepal shall be taxed in Nepal.

INCOME TAX & VAT
Pass through approach-

Entities are taxed separately then its beneficiaries, but there are numerous cases where the
tax of entity is incidence based on the status of its beneficiaries. This approach of tax is called
pass-through approach in tax terminology. Briefly, in the following cases, tax incidence is
taken place based on pass-through approach:
• Income from employment and exemptions u/s 10.
• Interest paid by exempt-controlled entity to its exempted controller –Sec. 14(2).
• Personal and domestic expense u/s 21.
• Benefits of non-market transfer Sec. 45.
• Change of ownership, Sec. 57.
• Dividend stripping, Sec. 58.
• Interest and dividend payments, Sec. 67(6).
• Controlled Foreign Entities, Sec. 69
• Conduit Company cases in Sec. 73(5).
• Tax on trust, Sec. 44 and Sch. 1 Sec. 2(5).
Yes, residential status is to be find based on income tax laws of Nepal, but it shall be
affected by DTAA too.
b. Residential status of Entity:

There are two major criteria for entity being a resident. If an entity became resident under any
of these criteria, the person deemed to be a resident.
Criteria I: Registered or Incorporated under any Nepal Law:

Entity which are registered (established or incorporated under any Nepal Law) in Nepal are
termed as resident for tax purpose. In case of registered entity, its management or working
place shall not be considered for residency.
Criteria II: Registered outside Nepal :

In case of entity which are registered outside the Nepal or in case of unregistered body of
individuals, if their management is effective in the territory of Nepal within that income year
is deemed as resident for that specific income year.

iii. By way of Nature of Income:

Charging person to be charged in any form of following incomes:
a) Person having taxable income:

Taxable income is the major concept in tax law and tax is also determined by applying
the rates on taxable income.
b) Person having repatriation of income:

In case of repatriation of income by a foreign permanent establishment the tax is levied.
c) Person having final withholding taxed income:

Among withholding tax, some of the payments are final withholding tax according to
Sec. 92, the detail has been described in Chapter 16.1.
In summarized form charging person would have following combination of rate and
procedures:
Type of Income By Taxable Income Repatriating Final Withholding

Income Taxed Income
Naturalism
Natural person Resident/Non-resident Resident/Non-resident
Entity Resident/Non-resident Resident Resident/Non-resident
f. Non-business chargeable assets

Section 2 (da) state Non business Chargeable assets means any land, building and interest or
security in any entity except the following properties:
(1) Business assets, depreciable assets or stocks-in trade,
(2) A private building owned by a natural person in the following situation -
(a) Being under ownership for a continuous period of 10 years or more, and
(b) Where that person has resided for a total period of 10 years or more continuously or
at several times.
(3) A private building, land or house belonging to and disposed of by any natural person for
a value less than Rs 10,00,000, or
(4) An asset disposed of by way of transfer in any manner other than the purchase and sale
within three generations
(5) Amount on the retirement fund.

INCOME TAX & VAT
Illustration: 5
Mr. Ramesh has purchased a private building amounting to Rs. 2 crores on Kartik 23, 2066
at Kathmandu. He sold such building on Rs. 3 crores on Poush 26, 2076. During such period,
Mr. Ramesh was gone abroad, intermittently for a period of 120 days. Will such building be
considered as "Non-Business Chargeable Assets"?
What will be your answer if such building was sold after two months (i.e. on Falgun 26, 2076)?
Solution
Section 2 (da) (2) of Income Tax Act, 2058 has excluded the following assets from the definition
of "Non-Business Chargeable Assets" in case of Natural Person;
A private building of Natural Person that has been;
• owned continuously for ten years or more; and
• lived in continuously or intermittently for a total period of ten years or more.
In the given case, Mr. Ramesh has owned his private building for a period of ten years in
which case first condition of sectin 2(da) is satisfied. But he lived in for a period of less than ten
years in which case second condition is not satisfied. Hence, such building is to be considered
as "Non-Business Chargeable Asset" as per Income Tax Act, 2058.
But, in case where Mr. Ramesh sold such building after two months (on Falgun, 26, 2076)
second condition of 'lived in continuously or intermittently for a total period of ten years or
more' will also be fulfilled and hence such building shall not be considered as "Non-Business
Chargeable Asset.

CHAPTER 1
BASIC CONCEPTS
Unit 3:
BASIS OF TAXATION

INCOME TAX & VAT
TAXABLE INCOME – SECTION 5
The taxable income of any person in any income year shall be equal to the amount computed by
subtracting the amount, if any, claimed pursuant to Section 12, 12Ka,12Kha or 63 from the grand
total amount of assessable income of each of the following income headings in that income year:
(a) Income from Business,
(b) Income from Employment,
(c) Income from Investment and
(d) Windfall Gain
According to Sec. 5, three deductions from assessable income gives taxable incomes. Those three
deductions are:
i) Contribution to approved retirement fund (Sec. 63),
ii) Donation and gift to exempted entity (Sec. 12), and
iii) Contribution for heritage protection and sport development (Sec. 12Ka).
iv) Contribution for Prime Minister Disaster Relief and Reconstruction Fund (Sec. 12Kha)
Computation formula for taxable income shall be as follows:
Particular Amount
Income from Business u/s 7
Income from Employment u/s8
Income from Investment u/s9
Other Windfall gain –( if such income is not final withhold tax)
Total Assessable Income Rs. ………………
Deduction of:
1. Contribution to Approved Retirement Fund (ARF) Rs. ………………
2. Eligible Donation Rs. ………………
3. Eligible Heritage Protection and Sports Development Rs. ………………
4. Eligible contribution for Prime Minister Relief Fund Rs. ………………
Taxable Income Rs. ………………
Tax liability is computed on taxable income. Taxable income as computed under Sec. 5, is multiplied
by income tax rates given in Schedule 1 of Income Tax Act,2058 which provides rates of tax to be
charged for a particular person for the income year.

CHAPTER 1 - BASIC CONCEPTS, UNIT 3 : BASIS OF TAXATION
a) Income from Business: - Section 7

According to Sec. 2 (ka ja), Business includes a trade, an industry, a profession, a vocation,
and other business transactions. A trading, a production, a commission agency, an audit firm,
a legal advisory work, a repair shop, etc are some of the examples of business activities.
In computing the profits and benefits from the business in any income year, the following
amounts received by that person within that income year shall be included as per Section 7(2):
(a) Service charge,
(b) Amount obtained from the disposal of stock-in trade,
(c) Net profit derived from the business property or business liability of any person
computed pursuant to Chapter-8,
(d) Amount considered to have been derived pursuant to clause (Ka) of Sub-section (2) of
Section 4 of Schedule-2 from the disposal of depreciable property of the business,
(e) Gift received from any person in respect of the business,
(f) Amount received for having accepted any restriction in respect of the operation of the
business,
(g) Notwithstanding that the amount received by any person is of such nature that it is
included in income from investment, the amount received by such a person being
directly related with his business, and
(h) Other amounts liable to be included pursuant to Chapter-6 or 7 or Section 56 or 60.
However, following matters need not be included in computing the profit and benefits from
the business as per Section 7(3)
(a) the amounts deductible under sections 10, 54 and 69 and
(b) payments from which tax is withheld finally
b) Income from Employment: - - Section 8
Sec. 2(gya), state "Employment" means any kind of past, present or future employment
Any income relating to present, past or future employment received during the income year
that are computed based on Sec. 8 are terms as “Income from Employment”.
The fundamental feature of an income from employment is that there is a relation of employer
and employee as the payer and payee. Income received in connection with a service, even
when the service has been terminated, is also classified as income from employment.

INCOME TAX & VAT
The following payments made by an employer to a natural person in any income year shall
be included in computing the remuneration earned by such natural person from employment
in that income year as per Section 8(2):
(a) Amount for wages, salary, leave, amount for overtime work, fee, commission, prize, gift,
bonus, and payment for other facilities,
(b) Payment for any personal allowance including amount for dear allowance, subsistence
allowance, entertainment and transport allowance,
(c) Payment received for settlement of or reimbursement of expenses incurred by him/her

or his/her associated person for personal purpose,
(d) Payment made for having given consent to any terms of employment,
(e) Payment made for termination, loss of employment, or for compulsory retirement,
(f) Retirement payment and retirement contribution including the amount deposited by the
employer for that employee in the retirement fund,
(g) Other payments made in respect of employment, and
However, following matters need not be included in computing the remuneration earned by
any natural person from employment as per Section 8(3):
(a) The amounts deductible under Sections 10 and payment from which tax is withheld
finally,
(b) Food and Tiffin provided by the employer to the employee at the work site in a manner
that it is available to all employees on the same terms,
(c) The settlement or reimbursement of the following expenditure incurred by any employee:
• The expenditure that fulfils the business purpose of the employer, or
• The expenditure exempted or to be exempted in the computation of the income

earned from business or investment of Natural Person.
(d) Payment of such petty amounts of which accounts are impracticable to be maintained or
difficult to be maintained administratively as prescribed.
EXPLANATORY NOTE:
As per Rule 6, Small payment means expenses incurred by the Employer for Tea, Stationary,
Prize, Emergency Medical Treatment or other expenses as notified by the Department not
exceeding Rs. 500 at a time.

c) Income from Investments - Section 9:

Sec. 2(ka kha) state "Investment" means the act of holding one or more properties or investing
in such properties, except with the followings:
• Holding any property used by the owner thereof in personal use or investing money in
such property, or
• Holding any property used by employment or occupation
However, holding any non-business taxable property will be termed as investment
Based on definition of investments, holding of assets or property (including non-business

chargeable assets) except for personal use is investment. Any incomes derived from these
investments are part of income from investments.
The following amounts received by any person in any income year shall be included in
computing the profits and benefits from investment in that income year as per Section 9(2) :
(a) Dividend, interest derived from that investment, payment for natural resources, royalty,
profit from investment insurance, profit from interest in a retirement fund which has not
got approval or retirement payment made from the approved retirement fund,
(b) Net profits derived from the disposal of non-business chargeable property of the
investment of that person,
(c) If, in disposing the depreciable property of the investment made by that person, the
income to be received exceed the remaining value comprising the outgoings made for
the property of the group of depreciable property, the excess amount,
(d) Gift received by that person in respect of investment,
(e) Retirement payment made in respect of that investment and retirement contribution
including the amount deposited in the retirement fund for that person,
(f) Amounts received for having accepted any restriction in respect of investment, and
However, following matters need not be included in computing the profit and benefits from
the investment as per Section 9(3)
• The amounts deductible under Sections 10, 54 and 69 and payment from which tax is
withheld finally, and
• The amounts to be included in computing income by that person from employment or

business.

INCOME TAX & VAT
d) Income from Windfall gain

According to Sec. 2(ja1) windfall gain includes income from lottery, gift, prize, tip, win-rings,
and other similar casual incomes. This is final withholding taxed under Sec. 92, if it is received
from resident person.
As per section 88A, in a payment of windfall gain, income tax shall be levied at the rate of
25%. Provided that, Government of Nepal may provide exemption in the windfall income
by publishing a Notification in the Nepal Gazette on the national or international awards
received for contributing in the sector of literature, art, culture, sports, journalism, science,
technology and public administration.
Notwithstanding anything contain above, no windfall gain tax would be leived on the
national or international awards received for up to Rs 500,000 for contributing in the sector
of literature, art, culture, sports, journalism, science, technology and public administration.
Income Head Formulas

Sec. 10: Tax exempted income.
Income from business Sec. 54: Not taxable dividend.
includes all receipts as per Excluding Sec. 69: Actual dividend from controlled foreign
Sec 7(2) entity.
Sec. 92: Income, subject to final withholding tax.
Income from employment Sec. 10: Tax exempted income
includes all receipts as per Excluding Sec. 92: Income, which is subject to final
Sec 8(2) withholding tax.
Sec 10: Tax exempted income.
Sec. 54: Not taxable dividend.
Income from investment.
Sec. 69: Actual dividend from controlled foreign
includes all receipts as per Excluding
entity.
Sec 9(2)
Sec. 92: Income, which is subject to final
withholding tax.
ASSESSABLE INCOME – SECTION 6
According to Sec. 6 assessable income is sum of income derived from employment, business,
investment and windfall gain. In case of a resident person, assessable income includes all the
income from any country for the given income year ( principle of full tax liability on state of residency)
and in case of non-resident person assessable income includes the income having source in Nepal
only (principle of tax liability on state of source).
Under the provision of Sec. 6, assessable income does not include any concession given under Sec.
11 and income of an Approved Retirement Fund under Sec. 64.

Section 11 allows concessions of tax on certain incomes along with allowing certain concessionary
rate of tax on certain other incomes. Section 6 says that all the exemptions and the concessions
allowed as per Section 11 are excluded to arrive at assessable income. But it is not practicable to
exclude the income from assessable income on which concessionary tax rates are applicable, so it is
suggested that those incomes that are 100% excluded from the income tax shall only be excluded
from assessable income.
For a resident person, the total income is assessable income, irrespective of the country of the
income generation. A resident person should include one’s income in the assessable income, even
when the source of income is located in a foreign country. In case of foreign income, such income
is to be included based on income year used for calculation of income tax in Nepal irrespective of
year for the country of income. Hence, Assessable income would be total income from a source
located in Nepal and total income from a source located outside Nepal.
But for a non-resident person the income from a source located in Nepal is assessable income.
Income of a non-resident from a source located outside Nepal is not taxable in Nepal. Hence,
assessable income would be total income from a source located in Nepal.
OTHER TAXABLE INCOME-
• Adjusted Taxable Income (ATI): According to Sec. 2(kana1), it is taxable income of a person
without deducting interest u/s 14(2), pollution control expense u/s 17(2), research and
development cost u/s 18(2) and without reducing donation u/s 12(2). ATI is used to find
allowable deduction and reduction under said sections.
• Consolidated Taxable Income: In case any Approved Retirement Fund became unapproved
under Sec. 64, then the taxable income is consolidated/modified taxable income for whole the
years of approval assuming single income year.
• Attributable (Taxable) Income: According to Sec. 69, proportionate taxable income of a

controlled foreign entity is to be computed as per Income Tax Act, 2058. The part of taxable
income is called attributable income.
• Turnover is taxable income: in case of business fall under Sec. 70, gross turnover in taxable
income.
Imposition of tax on person

Constitutions allow Government of Nepal to charge income tax based on act of parliaments. Based
on income tax, a person has to pay income tax, if and only if:
• Person has taxable income.
• Person being a foreign permanent establishment repatriating income and
• Person earning final withholding taxed income.

INCOME TAX & VAT
Income Tax Act, 2058 designs to pay (self assessment) income tax for a person having any of above
source or type of income. In case of resident person, the tax is imposed in any income derived
during the income year from all the sources and all the countries. In case of resident person earning
foreign income and the income is final taxed in source country; even then the person need to pay
income tax in Nepal, being any income derived by a resident person all over the world is included
in taxable income.
In case of a non-resident person, one needs to pay income tax having source in Nepal only.
In case any person did not pay income tax, Inland Revenue Department has enough right to re-
assess the income and collect the tax. In case of any fault in self assessment, additional fees and
interest is also charged by IRD as income tax.
Obligation to Pay Tax

In all cases a charging person needs to pay tax according to method and rates as specified by
Income Tax Act, 2058. According to Sec. 142 “Notwithstanding the provisions made under
the current law, no other Acts except this Act, Finance Act or Finance Ordinance is capable to
make changes, amendments and other tax related provisions other than the provisions relating
to imposition, assessment, reduction, increment, exemption, or remission of tax to be made by
amending this Act itself by annual Finance Acts. That is why, Section 143 of this Act repeals most
of the prevailing provisions regarding income tax in various Acts.”
Right of Tax Payers’ (Sec. 74):

Taxpayers does not only have obligation to pay tax, but also have some rights too. According to
Sec. 74, following expressed rights, apart from rule of privacy given under Sec. 84, are available
to a taxpayer:
a. Right to get respectful behavior;
b. Right to receive any information related to tax as per the prevailing Laws;
c. Right to get an opportunity of submitting a proof in one’s own favor in respect of tax
matters;
d. Right to appoint lawyers or auditors for defense; and
e. Right to secrecy in respect of tax matters and to keep it inviolable.
Rule of Privacy (Sec. 84):

Every officer from IRD shall maintain secrecy on the documents and information coming to his
possession or knowledge while performing his duties under this Act. But the Tax Officer can
convey the information to the following persons under the given circumstances:

a. To the extent required in order to perform the officer’s duties under this Act;
b. To a court or tribunal as required by them in proceedings with respect to a matter under

this Act;
c. To the Finance Minister;
d. To any person when the disclosure is necessary for the purpose of any other fiscal law;
e. To any person in the service of Government Of Nepal, who requires the information for
revenue or statistics related works;
f. To the Auditor-General or any person authorized by the Auditor-General when such a

disclosure is necessary for the performance of his official duties; or
g. To the competent authority of the foreign government with which Nepal has entered
into an international agreement, to the extent permitted under the agreement.
Any person, court, tribunal, or authority receiving such documents and information as discussed
above is also required to keep them secret, except to the minimum extent to which the disclosure
is necessary. These documents are not be disclosed in the court cases, except for revenue cases and
doctrine of estoppels in not applicable for other cases too.
Sources of income/Expenses
As we already discussed, resident need to pay tax on global basis and non-resident need to pay tax
on income having source in Nepal. For set off of losses there should be clear distinction of source
country of income. Sec 67 describes the sources of income or expense having source in Nepal as:
• Net gain on disposal is deemed to be source in Nepal, if asset or liability is disposed in

Nepal.
• Balancing Charge on disposal of depreciation pool is deemed to be source in Nepal, if

disposal of depreciable asset takes place in Nepal.
• Cost of goods sold is deemed expensed in Nepal, if disposal of trading stock is in Nepal.
• In other case, source of income or expenses deemed as source in Nepal if source of

payment is deemed having in Nepal as:
o Residency based: Interest, Dividend, Remuneration by Government Of Nepal,

Retirement payments, annuities, and investment insurances.
o Location based: Use or restriction on use of assets located in Nepal as Natural

resources, rent, royalty, insurance risk, service rendered,
o Cross boarder transport initiating from Nepal : Land, water or air transport for
goods, documents, live stock or mankind(except trans-shipment)
o Cross boarder data transmission: From equipment installed in Nepal.

INCOME TAX & VAT

CHAPTER 1
BASIC CONCEPTS
Unit 4:
CALCULATION OF TAX AND
RATE OF TAX

INCOME TAX & VAT
CALCULATION OF INCOME TAX
Income tax is calculated based on following major concepts:
1. Income Tax = Taxable Income * Tax Rate (Taxable income based tax; see Chapter 3.1)
2. Income Tax = Fixed amount of tax (Presumptive tax; see Chapter 3.2)
3. Income Tax = Gross Inflows* Tax Rate (Tax at source and final withholding tax; (see
Chapter 16.1)
4. Income Tax = Gross Pay* Tax Rate (Tax on repatriation; see Chapter 3.3)
In all cases, tax is calculated multiplying tax rate by tax base as per act.
Calculation of tax based on Taxable Income

Income tax is computed applying tax rates given in Schedule 1 of Income Tax Act, 20581. Schedule
1 on Income Tax has two Parts:
Part 1: for the tax rate applicable for natural person

Normally, natural person is taxed on progressive tax rates. Progressive tax rate facility is given to
resident natural persons only (except presumptive tax payers).
• Resident natural person

Tax Rate, according to Sec. 1 of Schedule 1 of Income Tax Act, 2058, for income year 2076/77
is as follows. These rates are subject to changes made by finance act every year:
Slab Rate For Single For Couple U/S 50

1% Tax for 1st Income Slab (on
Remuneration income only) 400,000 450,000
10% Tax for next Income Slab 100,000 100,000
20% Tax for next Income Slab 200,000 200,000
30% Tax for next Income Slab 1,300,000 1,250,000
Balance (i.e. above
36% (30+30*20%) Tax for the Balance 2,000,000) Balance (i.e. above 2,000,000)
If assessment is done under the status of Female Natural Person for employment income,
rebate of 10% of total tax liability is available under Sch 1 (1) (11)
If a person is Incapacitated natural persons, 50% of first slab is exempt Sch 1 (1) (10)
1
Schedule is amending every year by yearly Finance Act/Ordinance, it is strongly suggested to users be
update for tax rates for the particular Income Year.

CHAPTER 1 - BASIC CONCEPTS, UNIT 4 : CALCULATION OF TAX AND RATE OF TAX
Gain from disposal of Non Business Chargeable Assets are taxed at 10% after taking into
consideration 1% Income Slab limit (i.e Rs.400,000 for Natural Person and Rs.450,000 for
couples). However, In case of land and buildings which has been owned for 5 years or more,
if disposed off, the tax rate of 2.5% shall apply. In case of land and buildings which has been
owned for less than 5 years, if disposed off, the tax rate of 5% shall apply. Similarly, Gain from
sale of shares of listed companies, 5% tax rate shall be applied.
For incomes earned from operating special industries as specified under section 11, 1/3 rebate
of Tax on income of Resident Natural Person if required to pay tax at 30%
Person availing benifit as per Clause (Ka) and (Kha) is also eligible if any for another tax
rebate as per this section.
Following tax rebate shall be allowed on Income from export having source in Nepal during
any Income Year:
 If resident natural person required to pay tax at 20% on Income then 25% of such tax
amount and if required to pay at 30% on Income then 50% of such tax amount
 Additional 25% on tax amount after availing rebate on income received from Export of
Manufactured goods by manufacturing based industry
• Non Resident natural person

Non-resident natural person is taxed at the rate given under Sec. 1 of Schedule 1. Tax Rate,
according to Schedule 1 of Income Tax Act, 2058 is flat 25% on the gross income.
Illustration 1:
Mrs. Homagain is administrator of incapacitated husband Mr. Homagain. A firm had
registered in the name of Mr. Homagain before his incapacitation and taxable income of Rs.
850,000.00 from export of merchandise. Mrs. Homagain has not any special income.
Solution:
In case of Mr. and Mrs. Homagain, it would be beneficial for being opting couple. So, assuming
Mrs. Homagain opt for being couple for FY 2076/77:
Particulars Provision Amount

Income from Business 850,000
Less: Handicapped Alowances (50% Schedule 1 Section 1(10) 225,000
of Rs. 4,50,000 )
Taxable Income 625,000
Computation of Tax Liability for the Income Year 2076-2077 as per Schedule 1 Section 1(2)

INCOME TAX & VAT
Particulars Rate Amount

Upto Rs. 450,000 No Tax -
Next Rs. 100,000 10% 10,000
Balance Rs. 75000 (20%-25%x20%)=15% 11,250
TaxLiability 21,250
Illustration 2
Mr. Majgain from Nagarkot has employment income of Rs. 1,00,000 (including Provident
Fund contribution of employer) per month before deducting the contribution to approved
retirement fund which is 40%. He is widower with a child. Find the tax liability of Mr Majgain
for the Financial Year 2076/77
Solution
In case of Mr. Majagain, it is beneficial to be opted as widower with dependent.
Calculation of Taxable Income for the Income Year 2076-2077
Particular Rs.
Income from Employment 12,00,000.00
Income from Business 0
Assessable income 12,00,000.00
Reduce: Contribution to Approved Retirement Fund; Minimum of
a. Maximum limit of Rs. 300,000,
b. one third of assessable income 1,200,000/3=Rs. 400,000 and
c. actual his contribution Rs. 480,000 300,000.00
Taxable income 900,000.00
Calculation of Tax liability for the Income Year 2076-2077 as per Schedule 1 Section 1(2)
Taxable income Tax Rate Tax Amount

Up to 4,50,000 1% 4,500
Next 1,00,000 10% 10,000
Next 2,00,000 20% 40,000
Balance 1,50,000 30% 45,000
Total Tax Payable 99,500

Illustration 3
Mr. Prabin Kumar Aggrawal purchased a piece of land at Rs. 30 lakhs. He sold the land at Rs.
45 lakhs. He paid registration expenses Rs. 2 lakhs for this land. In this case, what would be
the tax implications on the following situations?
i) The land was purchased on Chaitra 2070 and sold it on Magh 2076.
ii) The land was purchased on Magh 2073 and sold it on Magh 2076.
iii) The land was purchased on Chaitra 2064 and sold it on Baishak 2076
iv) If selling and buying of the land were completed through a sole shareholder of a Pvt. Ltd.
The shareholder is Mr. Prabin Kumar Aggrawal and the main objectives of the company
is to buy and sale of land.
Solution:
Land and building disposed for a value less than 10 lakhs by any natural person is not treated
non-business taxable assets as per Section 2(Da). The disposal value more than the limit shall
be taken into account in computing the gain and loss on income from investment. Tax liability
is calculated on the basis of the net gain from the disposal of those assets. Advance tax is
managed for such transactions under section 95 Ka (3) of the Act for natural person. If the
land is sold after holding it for more than 5 years the tax is 2.5 % and if it is sold after holding
it for less than 5 years the tax rate is 5%. The Land Revenue Office withholds the tax on such
net gain.
Calculation of net gain on this land:
Particular Amount Amount

Incoming Rs. 45 Lakhs
Outgoings Rs. 32 Lakhs
Purchase cost Rs. 30 Lakhs
Transfer expenses Rs. 2 Lakhs
Net gain Rs. 13 Lakhs
So, Advance Tax shall be as follows in this case. Any exemption limit available reduces the
tax liability of the natural person. This depends on other taxable income of the tax payer and
a tax return should be submitted for this.
i) The land was purchased on Chaitra 2070 and sold it on Magh 2076. Mr. Prabin Kumar
Aggrawal sold the land after holding 5 years. The Advance Tax is Rs. 32,500.00 (2.5% of
13 Lakhs)

INCOME TAX & VAT
ii) The land was purchased on Magh 2073 and sold it on Magh 2076. He sold the land within
5 years. The Advance Tax is Rs. 65,000.00 (5% of 13 Lakhs)
iii) The land was purchased on Chaitra 2064 and sold it on Baishak 2076. Mr. Prabin Kumar
Aggrawal sold the land after holding more than 10 years as provision of 10 Years is only
applicable for House. Therefore, the Advance Tax is Rs. 32,500.00
iv) If selling and buying of the land were completed through a sole shareholder of a Pvt Ltd,
it will be regarded as disposal of trading assets. Land revenue Office will collect advance
tax at 1.5% on amount derived from disposal U/S 95Ka(6). Therefore, the Advance Tax
is Rs. 67,500.00 (1.5% of 45 Lakhs)
Illustration 4
Calculate amount of tax for Income Year 2076/77 of a natural person from each of the
following information:
Taxable income Net gain for

S.N Particulars
[Rs.] Sec.36
a. Resident Natural Person 200,000.00 20,000.00
b. Resident Natural Person 120,000.00 15,000.00
c. Non-Resident Natural Person 120,000.00 60,000.00*
d. Resident couple 1,200,000.00 60,000.00
e. Resident proprietary firm 95,000.00 60,000.00
f. Mrs. Shahi, resident in Kathmandu as local couple 1,500,000.00 900,000.00
*Investment in Shares
Solution:
Tax on Non business chargeable assets is computed as per Sub-section (3) and (4) of section 1
of schedule 1. According to said provision, tax is computed as follows:
(4) Tax shall be imposed as follows on following persons subject to Sub-Section (3) of this Schedule:
(a) Tax shall be imposed at rate mentioned in Sub-Section (1) or (2) of this Schedule on
whichever is higher of following amounts by treating concerned natural person or
couple as having only such taxable income:
1) The amount left after deducting amount of gain from total taxable income of
natural person or couple, or
(2) Rs 400,000 in case of Natural Person resident person or Rs 450,000 in case of

couple
(b) Tax shall be imposed at rate of 10 percent on balance of that taxable income.

Step 1: Compute Taxable Income [including the net gain from disposal from Non business
chargeable asset.]
Step 2: Subtract the net gain on disposal of Non- business chargeable asset from Taxable
income.[A= Taxable Income – Net Gain from Non business chargeable asset]
Step 3: Rs 400,000 in case of Natural Person or Rs 450,000 in case of couple.
Step 4: Take higher of A and B. [C= max (A, B)].
Step 5: If C=B in Step 4, tax on Non business chargeable asset is 10% (in case of land and
building disposed after 5 years of owned rate of tax is 2.5% and before 5 years of owned rate
if tax is 5%, in case of disposal of listed shares, 5%) of taxable income less zero rated items.
If C=A in Step 4, tax on Non business chargeable asset is 10% net gain included in taxable
income. The normal income is taxed as per rates so applicable. For the purpose to describe the
method example in a tabular form is given here.
a. b. c. d. e. f.
Taxable Income 2,00,000 1,20,000 1,20,000 12,00,000 95,000 1500,000
Net gain included in TI 20,000 15,000 60,000 60,000 60,000 900,000
A= TI other than net gain 1,80,000 1,05,000 60,000 11,40,000 35,000 6,00,000
B= Exemption Limit 4,00,000 4,00,000 0 4,50,000 4,00,000 4,50,000
C=Max(A,B) 4,00,000 4,00,000 0 11,40,000 4,00,000 6,00,000
Taxable NBCA 0 0 0 60,000 0 9,00,000
Tax @ 10% 0 0 0 6,000 0 90,000
Amounts at Normal rate 0 0 0 11,40,000 0 600,000
Tax @ 1% up to 450,000 0 0 0 0 0 0
Tax @ 10% on Rs. 100,000 0 0 0 10,000 0 10,000
Tax @ 20% on Rs.
200,000/50,000 0 0 0 40,000 0 10,000
Tax @ 25% - - 30,000 - - -
Tax @ 30% Rs. 390000 0 - 0 117,000 - -
Total 0 0 30,000 173,000 0 110,000
Part 2 : For the tax rate applicable for entity.

• Resident person
Normally, entity is taxed on corporate tax rates. Tax Rate, according to Sec. 2 of Schedule 1 of
Income Tax Act, 2058, for income year 2076/77 is as follows:

INCOME TAX & VAT
Particular Rate
- Default rate 25%
Subsidized Rates
- Special industry operated whole income year 25%
- Construction and operation of roads, tunnel, rope-way, sky-bridge 25%
- Operation of Trolley Bus or Tram 25%
- Cooperative Society or Unions 10%/5%
- Export income 25%
- Built, Own, Operate and Transferred to GON 25%
- Power-house construction, generation and transmission 25%
Negative Externalities double dividend and High profit
Bank, financial institution, an entity engaged in the general insurance business
or telecommunication and internet service, money transfer, capital market
business, securities business, merchant banking, commodity future market,
30%
stock and commodity broker business, or in the business of Cigaratee, Biddi,
Cigar, Chewing tobacco, Khaini, Gutkha, Panmasala, Liquor, Beer or an entity
engaged in petroleum operations under the 1983 Nepal Petroleum Act
• Non-resident person
Particular Rate
Operating a cable, radio, optical fibre or earth-satellite communication business
from the transmission of news or information through equipment installed in
5%
Nepal, irrespective of whether or not the news or information has originated in
Nepal
Providing telecommunication, air transport or water transport service, which
2%
does not so depart from Nepal with destination in a foreign country
FIXED TAX: PRESUMPTIVE TAX
There are some incomes relating to natural person which are taxed at fixed amount of tax,
irrespective of amount of income earned by tax payers. There are two types of presumptive taxes:
Small Resident Vendors:

Resident natural person having income from business only in Nepal having turnover not more
than Rs. 2 millions and profit not more than Rs. 200,000 may opt for being presumptive tax payer
and need to pay following fixed amount of income tax on annual basis subject to the condition that
the person doesnot claim medical tax credit u/s 51 & advance tax u/s 93. Tax rates applicable for
FY 2076/77 are:

Metropolitan and Sub-Metropolitan areas 7,500

Municipality areas 4,000
For other areas (Rural Municipality) 2,500
Transaction Based Tax

Finance Act, 2072 and amended there after has added new Sub-section (4Ka) under Section 4
making a new provision of transaction based income tax. Which mentions that
Notwithstanding subsection (2), the income tax payable by a resident natural person under section
3 (Ka) on the basis of turnover in any income year, who meets any of the following conditions, is
equal to the amount provided in Section 1(17) of Schedule-1.
(Ka) Taxable income of natural person should be only from business having source in
Nepal.
(Kha) Annual turnover of business shall be above Rs 2 million but not exceeding Rs 5
million.
(Ga) Business shall not be VAT registered.
(Gha) Income shall not be from professional services like service provided from Doctor,
Engineer, Auditor, Lawyer, sports player, actor, consultant
As per Schedule 1 Section 1(17), For the purpose of computation of tax as per Section 4(4Ka) on the
basis of turnover, transaction up to Rs. 2,000,000 shall be taxed as per Section 4(4) of the Act and
transaction in excess of it shall be taxed at the following rate -
• Amount of Tax to be paid:
Percentage of Tax
Particulars
on Turnover
Person conducting transaction of gas, cigarette by adding 0.25%
commission of price upto 3%
Person conducting business other than business mentioned above 0.75%
Person conducting business of service 2%
Public Transport Carriers:

Natural person holding public transport carriers has to pay presumptive tax on annual basis
irrespective of the income earned by them. Amount of presumptive tax shall be the following for
FY 2076/77:

INCOME TAX & VAT
Annual Income Tax Per

Types of Vehicle
Vehicle
(1) Car, Jeep,Van, Micro Bus
(Ka) upto 1300 C.C Rs. 4000
(Kha) From 1301 to 2000 C.C Rs. 4500
(Ga) From 2001 to 2900 C.C Rs. 5000
(Gha) From 2901 to 4000C.C Rs.6000
(Na) above 4001 C.C Rs. 7000
(2) Mini-Bus, Mini Truck ,Water Tanker Rs. 6000
(3) Mini Tiper Rs. 7000
(4) Truck, Bus Rs. 8000
(5) Dozer, Excavator, Loader,Roller, Crane like
Machinery Equipment Rs. 12000
(6) Oil Tanker, Gas Bullet, Tiper Rs. 12000
(7) Tractor Rs. 2000
(8) Power Tiller Rs. 1500
(9) Auto Rikshaw, Three-wheeler, Tempo Rs. 2000
TAX ON REPATRIATION OF INCOME
In case any foreign permanent establishment repatriates its income to its head office or home office
or similar unit, then the repatriated income is to be taxed at 5% as tax on distribution by a resident
company.
Illustration 5:
C Bank is registered in the United States and operating its liaison office in Kathmandu. During the
year it has following summarized transactions:
Income recognized: Rs. 5,000,000,000.00

Expenses recognized: Rs. 4,000,000,000.00 except income tax
The liaison office has policy to repatriate all the remaining profits to its corporate office. As being
prospective Chartered Accountant from Nepal the manager is seeking your help to how much
amount can be repatriated in.

Solution:
Here office is taxed on two bases viz: resident person having taxable income @ 30% of taxable
income and 5% on repatriated amount. So,
Taxable income = Rs. 5,000,000,000.00-4,000,000,000.00 = Rs. 1,000,000,000.00
Tax @ 30% = Rs. 300,000,000.00……………………[a]
Remaining profit = Rs. 700,000,000.00
Tax on repatriated amount = Rs. 700,000,000.00* 5/100 = Rs. 35,000,000.00............[b]
Total of tax payable (a+b) = Rs. 335,000,000.00
Amount that can be repatriated = Rs. 700,000,000-35,000,000.00 = Rs. 665,000,000.00
Tax on repatriated income is reverse charge taxing system income. Here the payer is paid for
income tax and income repatriated itself is not taxed. In all cases of repatriation of income the
PE is taxed in two stages: normal and repatriated.

INCOME TAX & VAT

CHAPTER 1
BASIC CONCEPTS
Unit 5:
EXEMPTIONS, CONCESSIONS,
REDUCTION, DEDUCTION, SET OFF

INCOME TAX & VAT
EXEMPTIONS - SECTION 10
Exemption in taxation means income needs not to be shown for taxation purpose. Sec. 10 of
Income Tax Act, 2058 provides for exempted incomes. Person having exempted income need not
show these income on own tax return nor it is taxed as final withholding tax system. Followings
are exemptions granted by Income Tax Act, 2058.
a) Amount granted to any person entitled to tax exemption facility as provided for in a
bilateral or multilateral treaty concluded between Government of Nepal and any foreign
country or international organization,
b) Amount received by any natural person for doing employment in the governmental
service of a foreign country, Provided that, -
(1) The person has to be a resident or non-resident person only because of doing
employment, and
(2) Such amounts have to be paid from the governmental fund of that country.
c) Amount received by a natural person referred to in clause (b) who is not a citizen of
Nepal or by his/her nearest family member from the governmental fund of a foreign
country,
d) Amount received by a non-Nepalese citizen appointed in the service of Government of

Nepal under the term and condition of tax exemption,
e) Social Security Allowances paid by Government of Nepal, Province Government and

Local Level.
f) Amounts received as gift, inheritance or scholarship except the amounts required to be

included in computing income under section 7,8 and 9
g) Amounts received by an organization entitled to exemption for the following:
(1) Donation, gift,
(2) Other contributions directly related with an organization entitled to exemption as

referred to in Clause (d) of Section 2 without having consideration or without hoping for
such contribution,
h) Amount received for pension by a Nepalese citizen having retired from the military or
police service of a foreign country from the governmental fund of that country.
i) Any type of income of Government of Nepal, Province or Local Level.
j) Amount earned by Nepal Rastra Bank in consonance with its objectives

CHAPTER 1 - BASIC CONCEPTS, UNIT 5 : EXEMPTIONS, CONCESSIONS, REDUCTION...
Related to Person and Sources of Income

Some of the incomes are exempted based on sources of income and person receiving the same.
Conceptually, these are exempted in hand of one person and taxable for other person.
Following incomes of natural person is exempted:
Income Source Conditions Example

Employment income of If charged to Foreign Government Nepal based worker of
resident Fund and person is resident due to foreign government
employment in Nepal
Employment income of If charged to Foreign Government Fund, Non-diplomatic workers
non-resident but working in Nepal or family members of foreign government
Pension of Security If charged to Foreign Government Fund British Military,
Personnel Singapore Police
Employment income of If GON allows tax exemption
foreigners
Social Allowances If paid by GON Widow, incapacitated
allowance
Employment by treaty UN employments of UN Letter of Non-Nepalese UN Staff
Appoint holders
Exempted Entity-section 2(dha)

"Exempted Entity" means the following entity:
1. Following of the Entities registered in the Department as Tax Exempted Entity:

(a) A social, religious, educational or benevolent organization of public nature established
with non-profit motive,
(b) An amateur sports organization so formed with a view to promoting social or sports
related facilities that the organization or its members does not derive profits,
2. A political party registered in the Election Commission,
Provided that, in cases where any person has derived any benefit from the property of that
organization and the monies obtained from that organization except in making payment for
the property or the service provided by any person to that organization or in discharging
functions in consonance with the objective of the organization entitled to exemption, tax
exemption shall not be granted.
IRD has power to grant exemption certificate to an institution based on its non-profit nature
and involvement in amateur sports, religious, charitable or similar nature according to Sec.
2(dha) and rule 4.

INCOME TAX & VAT
Within the list of exempted entity, some of the INGOs and governmental institutions are
listed thereto as: Nepal Mediatory Council, SAPLANIOUR, DEPROSC NEPAL, Nepal
Kanoon Byabasai Parisad, Nepal Bar Association, Nepal Red Cross Society, Save the Children
International, CARE Nepal, Action Aid Nepal, Purbanchal University, Leprosy Mission
Nepal, OXfam GB Nepal etc.
There is no such clear rule to get exemption, out of many INGOs, a few abovementioned are
exempted. Similarly, out of many universities, only one is exempted. There are numerous
temples in Nepal, but only few are exempted.
CONCESSION, WAIVES AND PRIVILEGES - SECTION 11
There are certain concession and privileges for person having taxable income. These concessions
are either based on status of person (entity type, business type) or based on transactions (special
industry, agriculture). Similarly, some of them are waived as exemption and some of them are
allowed as tax credit.
a. Concession by way of exemption

Concession and privileges granted by Sec. 11 is, in some cases is allowed by way of exemption,
i.e. income from that concession item is not included in tax returns. In the other words, the
income is, for tax purpose, is deemed as not being income. If a person has these concession
incomes only, it is not required to file its tax return too.
Following concession / privileges are not included in income of person:
o Agricultural Income:
In case a natural person has agricultural income from farming in land within prescribed
limit under Land Related Act, 2021, then the income is exempted by way of concession
under Sec. 11(1). But agricultural income derived from land beyond prescribed limit or
if derived by firm, company, proprietorship firm or from any body corporate is taxed as
normal business income with marginal tax rate of 20%.
o Agro-Forestry Based Cooperative and Cooperatives operated in rural municipality:

Agro-forestry based cooperative and saving and Credit Cooperatives society or unions if
established in rural municipalit.
o Special Economic Zone, hilly:

Industry in special economic zone (even not special too) operated in remote (himali and
prescribed hilly districts) gets exemption up to first 10 years of establishment. After lapse
of 10 years rate of tax shall get concession of 50%.

o Special Economic Zone, other: Industry in special economic zone (even not special
too) operated in remote (prescribed districts) gets exemption up to first 5 years of
establishment. After lapse of 5 years rate of tax shall get concession of 50%.
o Remote Industry: Apart from special economic zone, industry established in remote
area shall get 90% exemption of tax for the first 10 years from operation.
o Information Technology: Information Technology business in IT park shall get

concession of 50%.
o Power Sector Concession: Hydro-power or other power generation, transmission and

distribution shall get exemption for the first 10 years. After lapse of 10 years rate of tax
shall get concession of 50% for the next three years.
o Interest income upto Rs 25,000 from deposit under 'Micro Finance Program', 'Rural
Development Bank', 'Postal Saving Bank & Co- operative (u/s-11(2)) in rural areas is
exempted from tax
b. Concession by way of credits

Concession and privileges granted by Sec. 11 is, in some cases is allowed by way of tax credit,
i.e. income from that concession item is included in tax returns and proportionate or other
credit is allowed on tax. In the other words, the income is, for tax purpose, is deemed as being
normal income but tax is paid by deducting the concession (even these income are not part of
assessable income according to Sec. 6, computation is possible only when tax credit method
is applied or reduction from assessable income).
Following concession / privileges are firstly included in income of person, and then concession
is allowed by way of tax credit (in rate or in amount):
o Following rebate will be allowed on Income Tax for Special Industry fully operated
during any Income Year :
(Ka) 1/3 of Tax on income of Resident Natural Person if required to pay tax at 30%
(Kha) 20% of Income Tax on income of an Entity
(Ga) Person availing benifit as per Clause (Ka) and (Kha) is also eligible if any for another
tax rebate as per this section.
o Special Industry and Information Technology Industry
having 100 or more Nepali employee during whole year- tax credit of 10%, or applicable
rate is 90%.
rate is 80%.

INCOME TAX & VAT
rate is 75%.
having 1000 or more Nepali employees during whole year- tax credit of 30%, or applicable
rate is 70%.
having employed 100 or more Nepali and have 1/3rd from female, incapacitate or dalits
–additional tax credit of 10% is available
o Special Industry operated in Very-undeveloped, undeveloped and underdeveloped gets

tax credits of 90%, 80% and 70% for the first 10 years of operation.
o Industry operated in Special Economic Zone
Industry operated in Special Economic Zone of Himalayan and Hilly district as prescribed
by GON gets tax credits of 100% for the first year and 50% thereafter.
Similar industry in other region gets these facilities up to 5 years as 100% and thereafter
50% tax credits.
Royalty, foreign technology and management fees earned by foreigners from Industry
operated in Special Economic Zone gets tax credits of 50%.
Dividend distributed by the industry established in special economic zone gets 100%
exempt for first 5 years and 50% rebate in subsequent 3 year
o Entity established in Technology park, Bio tech park and IT Park engaged in Software
development or, data processing or, Cyber Café or, Digital Mapping – 50% credits
o On capitalization of accumulated profit through bonus share by Special Industry, Agro-

based industry or industry related with tourism for expansion of capacity of industry, no
tax would be levied.
Illustration 1
Agricultural business –
As per explanation given under Sec. 11, agricultural income is producing crop from public and
private land and deriving rent from a tenant using land for producing crops. As per explanation,
livestock business is not included in agricultural business.
Taxable Agro-Income –
In some cases, agricultural income is taxable. In case of land used by industry and land is cultivated
for agro-industry in land more than prescribed limit and granted by prescribed notice published
in Gazette, agro income in this land is taxable.

Prescribed limit of land -

Mr. Sherpa has 10 bigha of land in Saptari, produced 200 quintals of paddy. The cost of production
excluding land cost is Rs. 250,000. In this case, agricultural income is tax exempted u/s 11(1) being
the land is owned and farmed by natural person within prescribed limit.
Agro income of Company -

K Tea Ltd. has tea farming in 40 ropani in Pachthar produces 2000 kg of tea leaf. The cost of
farming is Rs. 50,000 and sales Rs. 100,000. In this case, it is tea farming is agricultural income but
not tax exempted u/s 11(1). So, tax is charged at 20% (Special industry).
Agro-forestry based Cooperative –

Villagers’ Cooperative is engaged in Bee-farming. It has 38 members in Kavre- Khani Khola
Rural Municipality. Its income statements show Rs. 76,000 net profit. In this case, it is agro based
cooperative and exempted u/s 11(2). If this cooperative distributes dividend to its members, it
would be exempted too.
Illustration 2
Indu Mills produces sugar in Sarlahi, it is 250 Nepali workers. Its taxable income is Rs. 2 crores. In
this case, this is a special industry. Find the tax payables:
What would be tax payable if Indu Mills, is operative in Ramechhap, since last 7 year
Solution:
i. Tax payable of Indu Mills
Taxable Income Rs. 2,00,00,000
Tax @ 20%(25%-25%*20%) Rs. 40,00,000
Less: Large employment credit 10% Rs. 4,00,000
Tax Payables Rs. 36,00,000
ii. If Indu Mills, is operative in Ramechhap, since last 7 year

Taxable Income Rs. 2,00,00,000
Tax @ 20% Rs. 40,00,000
Less: Large employment credit 10% Rs. 4,00,000
OR, Very undeveloped tax credit of 80% Rs. 32,00,000
Rs. 32,00,000
Tax Payables Rs. 8,00,000
In this case, Mills has two alternatives availed, beneficial is very-undeveloped tax credit of
80%. If year for operation is more than 10 years, answer will be same.

INCOME TAX & VAT
Illustration 3
Worthy Jute Industries Limited, a 100% export oriented special industry, is engaged in the
manufacturing of jute products. There are 1501 Nepali citizens working in the company throughout
the year. The accountant of the company computed the taxable income amounting to Rs. 12,550,000
for F/Y 2076/77 and income tax of Rs. 1,757,000. Being a tax auditor, whether you agree with the
tax amount calculated by the accountant of the Company?
Solution
With reference to the section 11 (3)(ka), if any special industry creates employment for 1000 or
more Nepali citizen throughout the year, than only 70% of normal income tax shall be levied.
Further, under the same section, 25% rebate on applicable tax rate is available for the 11 (3 Nga)
manufacturing industries having profit on export sales. In this case, Worthy Jute Industries
Limited is special industries, so, applicable tax rate is 20% & the income tax of the company would
be as follows:
Particulars Option 1 Option 2

Normal Tax Rate for the company( As per Sec. 2(1) of
Schedule 1) % 25% 25%
Less: Rebate as per Section 11(2Kha) (25%*20%) 5% 5%
Balance 20% 20%
Less: Rebate for export 20% of 20% % 4% -
Less: Rebate as per Section 11(3)(Ka) @ 30% - 6%
Applicable Tax Rate % 16% 14%
Taxable income for the year Rs. 12,550,000 12,550,000
Applicable Income Tax Liability Rs. 20,08,000 1,757,000
As the taxpayer has two option under the provisions of Income Tax Act. As calculated above, as
per option 1, the tax liability would be 2,008,000 and as per option 2, the tax liability shall be Rs.
1,757,000.
A rational tax payer shall choose the lower amount. However as the Act has provided option to
tax payer, it can choose to pay 2,008,000 also. Hence, the amount calculated by the accountant is
not correct and desirable.
REDUCTION
Reduction reduces taxable income from assessable income of a person. Reduction can be in form
of saving of income as contribution to approved retirement fund or expense without matching
to earn taxable income as donation or sports development or heritage protection. Reduction is
capped with various parameters as:

In case of contribution to approved retirement fund, reduction is allowed at minimum of:
• Rs. 300,000
• One third of assessable income
• Actual contribution
In case of donation, reduction is allowed at minimum of:
• Rs. 100,000
• 5% of Adjusted Taxable Income
• Actual donation, if any
Contributing to protect heritage and sport developments, reduction is at minimum of:
• Rs. 1000,000
• 10% of Assessable Income
• Actual expense, paid by company upon approval of IRD.
Contribution in the Prime Minister's Relief Fund and in the Reconstruction Fund established
by the Government of Nepal
Reduction shall be allowed in calculating the taxable income for an income year for the amount
Contribution in the Prime Minister's Relief Fund and in the Reconstruction Fund established by
the Government of Nepal.
LOSS FROM BUSINESS AND INVESTMENT-SECTION 20
1. For purposes of computing the income earned by any person from any business or investment
in any income year, such person may deduct the loss as mentioned below:-
(a) Loss suffered by that person from any other business and not deducted in that year, and
(b) Loss suffered by that person from any business and not deducted in the last 7/12 income
years.
2. For purposes of computing the income earned by any person from any investment in any
income year, such person may deduct the loss suffered by that person from any other
investment and not deducted in that year.
3. Any loss suffered by any person in respect of the foreign source and not deducted may be
deducted only in computing the income earned by that person from his foreign source, and
the loss suffered in earning any non-taxable income and not deducted may be deducted only
in computing non-taxable income of that person.

INCOME TAX & VAT
Rule of Quarantine
There are certain rules regarding loss set off quarantine:
• Business loss can be set off with business gain, investments gain or both.
• Investments loss can be set off with investments gain only.
• Foreign source loss can be set off with same country gain only.
Summary option for above rule is as follows:
Business sector gain available Investments sector gain available

Loss maker
Nepal Foreign 1 Foreign 2 Nepal Foreign 1 Foreign 2
Business: Nepal
Business: Foreign 1
Business: Foreign 2
Investments: Nepal
Investments: Foreign 1
Investments: Foreign 3
Tax payer may opt any of available option under rule as above.
Though the source of income falls under the same head the profits or losses from the following
transactions or sources should be determined separately for loss set off purpose:
• Profit from the disposal of non-business chargeable assets;
• Profit from the disposal of business assets;
• Profit or loss from a source that is exempted from tax.
Horizontal set off

Loss can be set off with gain within same year under rule of quarantine given above. This type of
set off is called horizontal set off. Tax exempted business or investments loss can be set off with
similar source too.
Vertical set off: Carry forward

Any unrelieved loss, remained from horizontal set off can be carried forward for next years.
Here carry forward has availed for next seven years (twelve years in case of BOOT, power sector,
petroleum production). This type of loss set off is called vertical set off.
Carry back of Loss- Section 20(4)

If any person suffers a loss in an income year when a long-term contract obtained by any person
by making competition of the business at the international level was completed

or
when a disposal was made in any other manner
or
a loss which was not deducted and the liability whereof is allowed to be carried forward in the
coming year related with a long-term contract, the Department may, by a notice in writing, give
permission to deal with that loss as follows:-
(a) The loss may be carried backward in last income year or years, and
(b) The loss may be treated as not deducted only to the extent of the excess where, the
amounts to be included in the incomings exceed the amounts to be included in the
outgoings.
In case long-term contract awarded based on international competitive bidding procedure, the
foreign contractor has, incurred loss in final year of that long-term contract, then the loss cannot
be carried forwarded. In such, IRD may allow a carry back of loss.
Illustration 4
Singha road Ltd. located at Hetauda is a public infrastructure project. The project will be completed
on Chaitra end 2077 as per estimation, and then it will be handover to Government of Nepal. The
Ltd. has incurred loss continuously from income year 2064/65 to 2075/76 as follows:
Income Year Loss amount Rs.
2068/69 1,000,000
2069/70 500,000
2070/71 600,000
2071/72 200,000
2072/73 150,000
2073/74 100,000
2074/75 75,000
2075/76 10,000
During income year 2076/77, it has incurred the profit of Rs. 1,500,000 Compute the taxable income
for the income year 2076/77 and carry forward losses for the income year 2077/78 for set off with
references to the provisions of Income Tax Act, 2058 relevant to this project.

INCOME TAX & VAT
Solution
Section 20 (1) of Income Tax Act, 2058 has the following provisions for carry forward the losses:
For purposes of computing the income earned by any person from any business or investment in
any income year, such person may deduct the loss as mentioned below:-
(a) Loss suffered by that person from any other business and not deducted in that year, and
(b) Loss suffered by that person from any business which was not deducted in the last seven
income years.
Provided that, in the case of the projects which involve building and operation of public
infrastructures to be transferred to the Government of Nepal, powerhouses construction,
generation and transmission of electricity and petroleum works pursuant to the Nepal Petroleum
Act, 2040 any loss not deducted in the last twelve income years.
As per the provisions, the project has not fulfilled the conditions of BOT. It will be handover after
the completion. So, it can carry forward only 7 years losses.
Calculation of taxable income for the year 2076/77.
Net income during the year 1,500,000

Less: carry forward losses 1,635,000
2069/70 500,000
2070/71 600,000
2071/72 200,000
2072/73 150,000
2073/74 100,000
2074/75 75,000
2075/76 10,000
Taxable loss for the year 2076/77 (135,000)
Carry forward losses for the year 2077/78

The taxable loss for the income year 2076/77 is Rs. 1,35,000. The loss of 2069/70 to 2072/73 is
14,50,000 which is fully setoff in FY 2076/77. The loss of Rs. 50,000 of 2073/74 and the loss of
2074/75 and 2075/76 is carried forward to 2077/78, total of Rs. 135,000.

Illustration 5
Mr. Prabin, a sole shareholder of M/s Ganpati Sugar Mills Pvt. Ltd., was worried about the
performance of the Company as it incurred losses to the tune of Rs. 5 crores during last 4 financial
years ending the F/Y 2075/76. Mr. Suman, an expert acquired 60% stake in the Company on
Ashadh 31, 2076. Miracally, the company has managed to earn Rs. 1.5 crore as profit in F/Y
2076/77. The Company has submitted the Income Tax Return by assessing a taxable loss of Rs. 3.5
crore for F/Y 2076/77 under self assessment by adjusting the carry forward losses of Rs. 5 crore
up to F/Y 2075/76 u/s 20 of Income Tax Act, 2058. The Chief Tax Officer issued an order to pay
income tax on Rs. 1.5 crore along with interest thereon. The management of the Company seeks
your advice on the said order of Inland Revenue Office.
Solution
As per section 57 (1) & (2) of Income Tax Act, 2058, if the ownership of any entity changes by 50%
or more during the last three financial years, the Company is not allowed to carry forward its
accumulated losses of the period prior to such transfer of ownership. In this case, the ownership
of M/s Ganpati Sugar Mills Pvt. Ltd. was change by 60% as the shares of the Company was
sold by old management to the new management, therefore, the Company can not adjust any
accumulated losses for the period until Ashad 31, 2076. Thus, the assessment order issued by
the Inland Revenue Office is correct & the Company has to pay tax on the profit of the Company
earned during the F/Y 2076/77.

INCOME TAX & VAT

CHAPTER 1
BASIC CONCEPTS
Unit 6:
CHARACTERIZATION, ALLOCATION
& QUANTIFICATION

INCOME TAX & VAT
CONCEPT AND DEFINITION
Characterization means identification of a transaction, head or behavior thereto. For example, there
may be varieties of assets within a business like furniture, machine, car, etc. but for tax purpose
there are three classes of assets trading stock, depreciable assets and business assets. It means three types
of assets characterized in taxation. The term Characterize in tax is similar to the term recognition in
Nepal Accounting Standards (NASs).
Quantification means amount involved in a transaction or characterized head. For example a loan
of Rs. 1 crore @10% fetch an interest Rs. 10 lakhs. Here, loan and interest are characterization and
Rs. 1 crore and Rs. 10 lakhs are quantifications. In most cases, quantification is to be done at actual
amount involved in the transaction, but in many cases, valuation to be done.
Allocation means distribution of a quantification to one or more characterizations. Say, that loan
was used to construct a building which was kept on put to use on Magh 1. Then interest has to be
allocated as cost of building of Rs. 5 lakhs and remaining interest expenses of Rs. 5 lakhs has to be
allocated as expenses, hence allocation simply means distribution
SPECIAL QUANTIFICATIONS – SECTION 27
Some of transactions need to be quantified by the application of the standard rate as prescribed by
the law. Sec. 27 has list of such cases:
o Accommodation facility (whether furnished or not, home or flat or room, common or

otherwise etc. are irrelevant)
 2% of salary in case of salaried person (here salary means basic salary plus grade, if
any vide public circular dated 2059.4.28).
 25% of rent paid or imputed rent for own house for other person.
o Vehicle facility
 0.5% of salary in case of salaried person (here salary means basic salary plus grade,
if any vide public circular dated 2059.4.28).
 1% of market value of vehicle per annum.
o Personal helpers provided to any person as chauffeur2, kitchen-man, guard, gardener,

or other domestic helpers
 Amount paid to such helpers less any contribution by facility receiver.
2
Vide public circular dated 2059.4.28; if vehicle facility of 0.5% is added as benefit, the cost paid to
chauffeur is not includible in income.

CHAPTER 1 - BASIC CONCEPTS, UNIT 6 : CHARACTERIZATION, ALLOCATION ...
o Interest free or lower interest debt
 Amount saved in interest based on prevailing market rate.
o Third person receives payment
 If a third person receives payment instead of the recipient of payment, the amount
equal to the value of benefit derivable generally.
o Transfering money or Property:
 Amount equal to the market value of the transferred money or property,
o Compensation Received (Sec. 31)
 Compensation received by a person or someone related to him in connection with his

business, either due to an insurance policy taken or otherwise, to cover any one of the
risks noted hereunder, is to be included in income from business under this sub-head:
 Compensation for Income received, or the compensation for any amount that is to
be included in the taxable business income (e.g. insurance compensation for loss of
stock or loss of assets, or loss on abandon of business sector etc.).
 Compensation for Loss incurred by the person or likely to be incurred, or the

compensation for any amount that is to be deducted for computation of the taxable
income (e.g. insurance compensation for loss of profit etc.).
 Compensation received or receivable against accident or death of natural person

shall not be taxed.
Special Quantifications: Annuities, installment and lease (Section 32(5))

Leasing of a property or goods is, generally, treated as investment, and rent from such property
shall be taxed under head of income from investments. But, renting assets under a finance lease is
treated as disposal of asset for the lesser and purchase of asset for the lessee. Section 32 (5) has defined
a finance lease as an arrangement of a lease having either of the following conditions:
o The ownership of the property will be transferred to the lessee after expiry of lease-term,
or the lessee has an option to purchase the leased asset after expiry of the lease-term for
a fixed or pre-determined price.
o The lease period is for more than 75% of the useful life of the asset leased.
o The estimated market price of the leased asset after the end of the lease-term is less than
20% of its market value at the inception of the lease.
o In case a lease commences before the last 25% of the useful life of the asset, the present
value of the minimum lease payments equals or exceeds 90% of the market value of the
asset at the inception of the lease.

INCOME TAX & VAT
o A leased asset is custom-made for the lessee and after expiry of the lease the asset will
not be of practical use to anyone other than the lessee.
Illustration:1
Principal and Interest in Finance Lease- Ms Chamunda Impex let out an equipment costing Rs.
6 millions (market value of Rs. 7 millions) for a rent of Rs. 900,000 per annum for 15 years (useful
life is warranted as 25 years) to Ms Ugrachandi Construction. It is assumed the market price of
equipment will be Rs. 700,000 at the end of 30 years. Lesser and Lessee agreed the following lease
rent.
Cost 6,000,000.00 Future value 700,000.00

cash price 7,000,000.00 Interest rate 10%
Year Rent paid Interest Principal Balance
0 7,000,000.00
1 900,000 700,000.00 200,000.00 6,800,000.00
2 900,000 680,000.00 220,000.00 6,580,000.00
3 900,000 658,000.00 242,000.00 6,338,000.00
4 900,000 633,800.00 266,200.00 6,071,800.00
5 900,000 607,180.00 292,820.00 5,778,980.00
6 900,000 577,898.00 322,102.00 5,456,878.00
7 900,000 545,687.80 354,312.20 5,102,565.80
8 900,000 510,256.58 389,743.42 4,712,822.38
9 900,000 471,282.24 428,717.76 4,284,104.62
10 900,000 428,410.46 471,589.54 3,812,515.08
11 900,000 381,251.51 518,748.49 3,293,766.59
12 900,000 329,376.66 570,623.34 2,723,143.25
13 900,000 272,314.32 627,685.68 2,095,457.57
14 900,000 209,545.76 690,454.24 1,405,003.33
15 900,000 140,500.33 759,499.67 645,503.66
Total 13,500,000 7,145,504 6,354,496
In this case, useful life of equipment is 25 years and 60% of which is leased to Ugrachandi
Construction, hence testing with useful life, the lease is not finance lease. But market price at end
of lease-term of 15 years is estimated to Rs. 7,00,000 which is less than 20% of current price of Rs.
7 million, and hence the lease arrangement is finance lease.

CHAPTER 1 - BASIC CONCEPTS, UNIT 6 : CHARACTERIZATION, ALLOCATION ...
Special Quantifications: Re-characterizations

There are 4 special cases, on which Inland Revenue Department, upon written notice can re-
characterize the transaction with amended quantifications.
a. Indirect payments (Sec. 29)

In case a person acquires an indirect advantage of a payment made by a payer or his related
person, or the payee authorizes another person to receive the amount, the Department may,
by written notice, treat the person who receives the advantage or authorizes another person
to receive the amount, as he receives the amount. In case IRD has issued a notice to a person
to include an amount in his taxable business income under this Section, he should include the
amount under this sub-head.
In such willful arrangements of tax avoidance, there is a fee of 100% of tax liability under Sec.
120(b) including interest of 10% p.a. too.
b. Transfer Pricing and Other Arrangements between Associates (Sec. 33)

In any arrangements between associated persons, operated by them according to general
market practices (at arm’s length), IRD may, by a notification in writing, distribute, apportion,
or allocate the amounts to be included or deducted in the income between the persons as to
reflect their taxable income or tax liability. In this process, IRD can:
• Re-characterize the source and type of any income, loss, and amount of payment; or
• Allocate costs, including the head office expenses, incurred by one person in conducting
a business that benefits an associate or associates also in conducting their businesses,
based on the comparative turnover of the businesses.
Transfer pricing generally happens between related parties where the resulting loss and profit
from the planned transaction go to the same person. The better test of whether transfer pricing
has happened or not is the arm’s length test. According to the test, the payment for a transaction
is ‘over’ or ‘under’ if it is greater or lesser than the hypothetical price (the arm’s length price),
which the parties would have been paid, had they ties been unrelated to the transaction.
c. Income Splitting (Sec. 34)

In the case of a person attempting to split his income with another person in order to reduce
his tax liability, IRD may, by a notification in writing, adjust the amount to be included or
deducted in calculating the income of each of such persons to prevent any reduction in tax
liability because of the splitting of the income.
The attempt to split the income may include a transfer of the following amounts so as to
reduce the total tax payable by the person or an associate, either directly or indirectly through
one or more interposed entities:

INCOME TAX & VAT
• Amounts to be derived or costs to be incurred: or
• An amount received or enjoyed by the transferee of an asset (i.e. derived from the asset);
or the amount paid or expenses incurred in owning the asset.
In determining the amount of split income IRD shall consider the market value of any
payment made for the transfer.
d. General Anti Avoidance Rule (GAAR, Sec. 35)

In case IRD thinks that a person has made such an arrangement so as to reduce the tax liability,
the IRD may:
• Re-characterize an arrangement or part of an arrangement that is entered into or carried

out as part of a tax avoidance scheme;
• Avoid an arrangement or part of it that does not have any material economic effect: or
• Re-characterize an arrangement or part of it, which does not reflect its materiality.
Here a tax avoidance scheme refers to any arrangement made by a person with the purpose
of avoiding or reducing the tax liability.

CHAPTER 2
COMPUTATION OF TAXABLE
INCOME
Unit 1:
INCOME FROM BUSINESS

INCOME TAX & VAT
1. COMPONENT OF INCOME FROM BUSINESS
Business includes trade, commerce, production, profession, vocation, etc. The activity of a trade
starts from the moment a good is purchased or otherwise acquired with an intention to sell it for
some profit. It is not necessary that the good is sold in due course and profit is acquired there-from.
It’s not only the purchase and sale of goods that constitutes a trade but a sale of services is also
included in the definition. The transportation of goods and human beings, tourism trade, etc are
examples of the trade of services.
Though commerce is something similar to trade, it is used especially when the trade takes place
between two countries.
Basic Characteristics:
A business is said to be a business irrespective of whether:
• The Business Activities have not Commenced yet: (Future Business)

a. A production unit legally constitutes a business when it is incorporated or registered in
the respective government department.
b. A business is deemed to be established when a person has taken effective measures to

establish it. Such measures may include, registration in respective department, taking a
shop on hire, purchase of furniture and office equipment, etc.
c. That is why the Section 2 (ka ja) says that a prospective (future) business is also treated
as a business.
• The Business has Running Its Business Activities: (Present Business)

• The Business has Closed Its Business Activities: (Past Business)
The business has closed its business activities forever but all the effects concerning the
business are not over even than the remaining activities of the business are treated as
business activities.That is why Section 2 (ka ja) says that a past business is also treated as a
business.
Basis of Accounting ~Section 22

Income from business of company shall be computed only on accrual basis of accounting for tax
purpose. However other persons (natural person and entity other than company) may keep its
income from business either cash basis or accrual basis.

CHAPTER 2 - COMPUTATION OF TAXABLE INCOME, UNIT 1 : INCOME FROM BUSINESS
1.1 PROFIT OR GAIN
Section 7 (2) of Income Tax Act, 2058 specifies certain income needs to be included in forming
income from business. Each income that is a part of income from business is specified and has to be
included in income from business. The detailed discussion of each component is given here under.
S.no Particular Amount

1 Service Fees : Sec 7.2 ka
2 Amount Derived from Disposal of Trading Stock: Sec 7.2 kha
Net gain from the disposal of the personal Business Assets or Liabilities :
3 Sec 7.2 Ga
4 Amount treated as derived from the Depreciable Assets: Sec 7.2 Gha
5 Gifts Received by the person in respect to the Business : Sec 7.2 na
Amount Derived by a Person in Consideration of its Accepting a Restriction
6 on the Capacity to Conduct a Business
Amount derived from investments that are effectively connected with
7 business : Sec 7.2 Chsa
Amount to be included by reason of Change in Basis of Accounting System
8 : Section 22 (6)
Excess amount received by reason of Exchange Rate Fluctuation : Sec. 24
9 (4) and Sec. 28
10 Recovery amount of Bad debt deducted earlier paid : Sec. 25
Amount to be included as per Contract of completion Basis in case of long
11 term contract: Sec 26.1
12 Difference of actual interest and Interest as per Market rate : Sec 27.1
13 Amount paid to third party instead of actual payee : Sec 29
14 Amount derived as compensation
Brief description of inclusion of profit or gain has given hereunder:
1. Service fee:
A consideration that is received by a person in lieu of service provided to another person
is called a service fee. Such a fee includes commission, management fess, Techincal and
professional fees, Consultancy charges and any other charges received for providing services.
Service fee is included in profit or gain at gross. Tax accounting is same as income recognitions
in financial statements.

INCOME TAX & VAT
2. Sale of goods: Amount Derived From the Disposal of Trading Stock:

Receipts from sale of assets owned by a person that are sold or intended to be sold in the
ordinary course of the person’s business are included in the income from business. “Ttrading
stock" means assets owned by a person that are sold or intended to be sold in the ordinary
course of a business of the person, work in progress on such assets and inventories of materials
to be incorporated into such assets Example furniture is a trading stock for a dealer in furniture
but it is fixed assets for the consumer who obtain the benefit from such goods. In the same
way, a plotted land is a trading stock for a property dealer. But for a dealer in furniture, the
furniture used by him is not a trading stock that is assets for him. The amount derived by
disposal of business assets and depreciable assets like furniture, computer, vehicles, is not
included in this sub-head of income from business.
For a production unit the amount derived by disposal of its main product, byproducts,
production scrap, unused and damaged packing materials, raw materials, semi-finished
goods, etc are taken in this sub-head of income from business.
Section 40 is very much advanced in saying that the disposal of a trading stock happens
under circumstances like, leasing to another person under finance lease or the goods being
destroyed, lost, expired, or if in any way they are not in existence. The real meaning of
the word “disposal” is transfer of ownership from a person but it does not count that the
ownership is handed over to another person.
3. Net Gains from the Disposal of Business Assets or Liabilities

Where business assets i.e. assets other than depreciable assets such as share, land, advance
and other receivable or liabilities of a business are disposed, the gain, being the difference
between incomings and cost of the asset or liability, is to be included in calculating the
person’s business income.
4. Gain from the Disposal of Depreciable Assets Pool

In case all depreciable assets included in a pool are disposed of, there are chances of a gain
from the disposal. This gain on disposal of pool of depreciable assets is called as balancing
charge. Balancing charge is includible in profit or gain.
Illustration:1
An entity DEF Limited’s balance of depreciable basis of its Class 2 pool of depreciable assets
at the end of the year 2076 was Rs 7,500,000/-. The entity transferred in year 2077 one of its
assets in the pool to its resident subsidiary for Rs 8,000,000 being the market value calculated
in consistence with the Act.
Calculate the depreciation base for the assets for the FY 2076/77

Solution
The amount to be included in calculating the entity’s income from the business for year of
income 2076 in respect of the realisation is the excess of the incomings over the depreciation
basis of the pool, calculated as follows:
Incomings Rs 8,000,000
Less: - Depreciation base 2076 - 7,500,000
- Depreciation for year 2077 1,875,000
Depreciation basis end of 2077 Rs 5,625,000
The excess to be included Rs 2,375,000
5. Gifts Received by a Person in Respect of the Business:

Any gift received by a person in connection with the business should be taken as income from
the business. If the gift received is an object instead of cash, the prevailing market price of the
gift should be treated as income.
6. Amount Derived by a Person in Consideration of its Accepting a Restriction on the

Capacity to Conduct a Business:
A person has a fundamental right to trade in any commodities or services that are not
restricted by any prevailing Act or Rules. In the case of a person accepting an extra amount in
consideration of accepting a restriction imposed by some interested person, the amount will
be treated as income from business.
7. Any Income Derived is of a Nature of Income From Investment if it Directly Relates with
the Business of the Person
Income from investment earned in relation to business of a person, will be income from
business for income tax purpose, not the income from investment. Thus, it needs to be clear
that an entity cannot have income from investment for income tax purpose. For example,
interest accrued on fixed deposit of a company will not be the company’s income from
investment but would be of business source.
8. Amount to be included by reason of Change in Basis of Accounting System ~Section 22 (6):

In case a person adopted a cash basis or accrual basis of accounting system in the previous
year, but for the current income year it seeks the permission of IRD for adopting an accrued
system of accounting, IRD may give the permission with a condition to adjust the income of
the year in such a way that no amount included, deducted, or to be included or deducted in
calculating the person’s income of the income year of the change is omitted or repeated.
If permission is granted for imposing such a condition, the amount specified with the
permission should be included in the income from business under this sub-head.

INCOME TAX & VAT
Illustration 2:
Opening Balance sheet under cash basis of accounting for taxation for Mr. Dahal is reproduced
here. Mr. Dahal seek IRD approval to change the basis in accrual system starting from this
year.
Heads Opening Balance Remarks

Trading Stock 100,0000 There is stock on cash basis
Depreciable Assets 0
Business Assets 100,0000 There is receivable on cash basis
Total Assets 200,000
Liability 100,000 There is payable on cash basis

Equity 100,000
Total 200,000
In case of accrual system of accounting, status of ledgers shall be as follows:
• Trading stock shall be Rs. 125,000; value of depreciable assets shall be Rs. 100,000,
business assets shall be Rs. 20000, loss shall be Rs. 25,000.
• During the period Mr. Dahal drew Rs. 100,000 from its business.
• Here changing in basis of accounting shall have following tax consequences:
Revised Profit or Gain

Heads Opening Balance
Opening (Deduction)
Trading Stock 100,0000 125,000 25,000
Depreciable Assets 0 100,000 100,000
Business Assets 100,0000 20,000 -80,000
Total Assets 2,000,000 245,000
Liability 100,000 100,000 0

Equity 100,000 145000
Total 200,000 245,000 45000
Mr. Dahal need to include Rs. 45,000 as income under profit or gain.
9. Excess amount received by reason of Exchange Rate Fluctuation~Sec. 24 (4) and Sec. 28
In case a person has booked any payment receivable or payable according to accrual system
of accounting, and at the time of the payment the amount differs from the amount booked to
the account, due to exchange fluctuation or any other reason, the difference in amount either

loss or gain on foreign exchange should be adjusted during the income year during which the
payment is made from the income from business under this sub-head.
Illustration 3:
M/S. Rupaketi Stores Purchased equipment on Jesth 15, 2076 for $ 100,000 in 2/10 net 180
DDU terms. The deal has successfully finalized. Exchange rate were found as follows:
Jesth 15 : Rs. 77, Ashad 31 : Rs. 76 Mansir 15 : Rs. 78.
In the first income Year

In this case equipment is to be capitalized at Rs. 7,700,000 with business liability of Rs.
7,700,000. At year-end the transaction shall be characterized as:
Depreciation expense (pool D) Rs. 385,000 (77,00,000/3*15%)
In the second Year

In the next income year, the liability has settled at Rs. 78,00,000 on the base figure of Rs.
77,00,000; here is foreign exchange loss of Rs. 100,000 and deductible u/s 13.
10 . Recovery amount of Bad debt deducted earlier paid ~Sec. 25

Where the person was unable to recover a debt and claim such expense as deduction but
during the current income year, such bad debt has been recovered thenin suchcase, the person
should treat the amount as his taxable income from business under this sub-head.
Where a person has deducted expenditure in calculating the income and the person later
recovers the expenditure, the person shall, at the time of recovery, include the amount
recovered in calculating the person’s income.
Similarly, Where in calculating income on accrual basis a person deducts expenditure that
the person shall be obliged to make and the person later disclaims an obligation to incur the
expenditure the person shall, at the time of disclaimer, include the amount disclaimed in
calculating the income.
Illustration: 4
Ms Book Store has taken a loan of Rs. 200,000 for the agreed period of 3 months. The sum
could not be paid by the Book Store for 3 years and bank written these off. In this case Ms
Book Store should characterize the sum (including interest waiver, if any) as income.
After 2 years of written off of loan from bank, Ms Book Store able to sale best seller books
and able to pay the loan, in this case, bank is recovering the written off loan and should
characterize the income.

INCOME TAX & VAT
In both case, expense is allowed as usual expense for the counterpart party. If such expense
has not allowed or charged in the year of written off, such recovery shall not be part of income.
11. Amount to be includeded as per Contract of completion Basis in case of long term
contract - Section 26
As per section 26(1) of the act, a long term contract is a contract for production, installation,
construction or the services related to them, which run for more than twelve months. To
establish a long term contract under this section, there should be a deferred return as a
condition of the contract and the contract should not be an excluded contract. As per Rule 11
of the Income Tax Rules, Excluded contract is any contract created by reason of an interest in
an entity or by obtaining a membership in a retirement fund or any contract of investment
insurance. Excluded contract is not taken as a long term contract.
Further As per Rule 10 of the Income Tax Rules, a contract shall be called as deferred return
contract if any party to a contract does not declare the information related to the estimated
profit and estimated loss for the period of every six months starting from the commencement
of the contract as required by IRD.
Illustration: 5
ABC Ltd. has entered into a construction contract with PQR Ltd. with a term of 3 years. The
contract price and the total estimated cost are Rs.60 Billion and Rs. 40 Billion respectively in
Year1 of the contract, cost amounting to Rs. 10 Billion was incurred and up to year 2 Rs.25
billion has been expensed. Calculate the income of ABC Ltd. to be included in the concerned
head of income with respect to long term contract in Year 1 and Year 2 by also showing the
calculation of Cumulative Inclusions and Cumulative Deductions.
Solution
Year 1
Percentage of completion of the contract = 10 Billion/40 Billion =25%.
Cumulative inclusion is derived by multiplying total estimative cumulative inclusions up to

the completion by percentage of contract completed.
Rs. 60 Billion * 25% = Rs. 15 Billion.
Cumulative Deductions is derived by multiplying total estimated deductions up to completion

by percentage of contract completed.
Rs. 40 Billion * 25% = Rs. 10 Billion.
Amount to be included as income in Year 1 = Rs. 15 Billion – Rs. 10 Billion = Rs. 5 Billion.

Year 2
Percentage of completion of contract = 25/ 40 = 62.5%.
Cumulative inclusions = Rs.60 Billion * 62.5% = Rs. 37.5 Billion
Cumulative Deductions = Rs. 40 Billion * 62.5% = Rs. 25 Billion
Amount to be included in year 2 as income = Rs. 37.5 – Rs.25-Rs.5 = Rs. 7.5 Billion.
12. Difference of actual interest and Interest as per Market rate
13. Amount paid to third party instead of actual payee
14. Amount derived as compensation
1. 2 INCOME WHICH DO NOT PART OF INCOME FROM BUSINESS
According to Sec. 7(3), following four types of incomes are not part of profit or gain on computing
income from business:
• Any business income covered by Sec. 10 as exemption: in case the person have any
income covered by Sec. 10, such business income is not part of income from business.
Detail description of exemption has given in Chapter 4.2.
• Any income in form of dividend distributed from entity other than company is beyond
the scope of taxation according to Sec. 54. For example, if any distribution has received
from partnership is tax free for the income receiver. These are not part of profit or gain in
income from business.
• Dividend received from controlled foreign entity, under Sec. 69, if taxed under head of
income from business; is not part of profit or gain in income from business.
• Any income which covered by Sec. 92 as final withholding taxed income are not part of
profit or gain in income from business.
1.3 DEDUCTION OF EXPENSES
Subject to the other Sections of the Act, all the expenses incurred by a person, in connection with
the earning from the business, shall be deducted while computing taxable income of that person
in that particular income year. The basic guiding principles for allowing expenses to be deducted
are as under:
a. In order to claim deduction, it is necessary that the expenditure is related to the same
income year. In the case, a person adopts as a cash basis of accountancy, the expenditure
paid and in case of accrued system of accountancy, the expenditure accrued during the
income year is to be deducted.

INCOME TAX & VAT
b. In order to avail the deduction, it is necessary that the person incur the expenditure.
The person, who is debiting the expenditure in his accounts, should be obliged to bear
it because the transactions are related to the business. The other person must have an
enforceable right to recover the amount from him.
c. In order to claim deduction, the expenditure should have been incurred in connection
with the person’s business or in connection with his income-generating source. The
expenditure should be helpful, directly or indirectly, in generating the income from the
business.
a. Interest Expense- Section 14

According to Sec. 2(ka jha), interest means:
(1) Payments, excluding principal, made under a debt obligation,
(2) Gains realized through a discount, premium, swap payment, or similar other modes of
payment under a debt obligation, and,
(3) Amounts as mentioned in Sec. 32 which are to be treated as interest from among
amounts paid by a person acquiring assets under annuity or under instalment sales or in
consideration of use of any asset under a financial lease.
According to Sec. 2(tha), Debt Claim means the right of a person to receive a payment from
another person. The term includes the right of a person to get back the amount that had been
given to another person, deposits made in banks and financial institutions, amounts due to
be realized, loan-bonds, bills of exchange, bonds, and annuities, and the right to get amounts
from financial lease and sales made under installment plans.
All interest incurred during the year by the person under a debt obligation of the person shall
be deducted for the calculation of income of person for a income year from business to the
extent that-
(a) where the debt obligation was incurred in borrowing money, the money is used during
the year or was used to purchase an asset that is used during the year; or
(b) in any other case, the debt obligation was incurred.
Provided that, such debt obligation is required to be incurred in the production of income
from the business or investment.
Interest Allowance under section 14 (1)

According to section 14(1) (1) Any person may, for the purpose of computing his income from
any business or investment in any income year, deduct all interests chargeable in that year
under the following debt liabilities of that person:-

a. If the debt liability has created for having borrowed any amount, and that amount has been used
in that year or used to buy any property used in that year, or
b. That debt liability has been created in any other circumstance.
Provided that, such a debt liability has to be created for the act in which income is earned
from a business or investment.
i. Interest expense on working capital

Interest allowance is allowed to the extent of all interest those raised for working capital loans
and interest accrued on loan purchasing qualifying asset after put to use. So, interest accrued
or paid on loan for purchase, construct or install any asset is not allowed as allowance before
its utilization in business.
Illustration : 6
NEB Bank is lending bank to Ajaya P.L. During the year, 2076/77 latter pays Rs. 50,000 as
interest, Rs. 2,500 deducted on loan as service charge, Rs. 3,500 penal interest is included in
interest. Find amount deductible in business for purpose of Sec. 14.
Solution:
Assuming loan is utilized for earning business income; interest is allowable for income tax
purpose. In the given situation, Rs. 3,500 penal interest is included in interest of Rs. 50,000
and hence allowable. Rs. 2,500 is payable over amount of loan principle received so is interest
for purpose of Sec. 14. Hence Allowable interest expenses equals to Rs 52,500 (50,000 +2,500).
Illustration : 7
Bond Issue Limited issued 1,000 discount bonds of 364 days on 2076.4.1 of face value of Rs.
100,000 each. All bonds were purchased at Rs.95,238. Company cleared all the bonds on year-
end date. How much is the allowable interest?
Solution:
Assuming loan is utilized for earning business income; interest is allowable for income tax
purpose. In this case, Rs. 100,000 has paid for bond costing Rs. 95,238.
So, amount paid over principal is (Rs 1,00,000 – Rs 95,238) = Rs. 4,762 per unit of bond. In total
Rs. 4,762,000 is interest allowed u/s 14.
ii. Interest on loan to purchase qualifying assets (Interest during Construction, IDC)
As already mentioned, interest for the loan taken for the business use is allowed as deduction
for tax purpose. Loan acquired for purchasing of assets is not allowed until the assets so
purchased is put to use. Assets purchased from loan is called as qualifying assets for interest
purpose as per NAS 8. Interest on loan to acquire such qualifying asset is allowed since the

INCOME TAX & VAT
date the assets is put to use. All interest expesnes is allowed as deduction, if the asset is put to
use in the same income year.
Illustration : 8
Kuikyal Limited is a prime client of NEB Bank Limited. During the year, Rs. 10,00,000 is used
as term loan to install plant and machinery and interest of Rs. 1,00,000 has paid. Kuikyal
Limited has accounting policy to charge all the expenses to its profit as benchmark treatment
of NAS 8. Is this deductible on tax?
Solution:
Interest of loan using for installation of plant and machinery up to put to use can be charged
to the profit as benchmark treatment of borrowing cost NAS 8 or can be capitalized on that
qualifying asset. Even in financial statements, it has charged to profit, this interest cannot be
claimed as deduction according to Sec. 14(1) and 21(3), if the asset is not in put to use during
this income year. This interest is to be capitalized in Plant and Machinery.
Illustration : 9
On Bhadra 1, Kubhedi Enterprises received Rs. 10,00,000 loan for purchasing a machine.
Interest rate was 12% p.a. with initial service charge and documentation charge of 2% of
loan. The machine were purchased from Hong Kong and installed on Chaitra 1. Commercial
production was started on Baisakh 1. State allowable interest.
Solution:
Here put to use date is Baisakh 1, which lies in same income year. So all interest expenses
including service charge is allowed for deduction.
Allowed Expesnes
Service Charge: 20,000

Interest : 120,000
Total Allowed Interest Expenses: 140,000
iii. Interest on siphoned-out loan

Lenders always disburse loan with definite purpose. There are strict guidelines from NRB for
banker to disburse loan with definite purpose. Loan get for one purpose but utilized on other
purpose is called siphoned out loan.
Tax behavior on interest on siphoned out loan is as follows:
a. Loan siphoned out for personal purpose, respective interest is disallowed under Sec.
21(1) (Ka).

b. Loan siphoned out for tax exempted or else tax waived business or investments,
respective interest is disallowed under Sec. 21(1)(Ga).
c. Loan siphoned out for business or investments having final withholding tax, respective
interest is disallowed under Sec. 21(1)(Ga).
iv. Interest Portion on Deferred Payments:

If any assets purchased under deferred payment condition, the present market value on a
cash term or on a credit term of a reasonable period shall be treated as cost of the assets
and the remaining amount payable shall be treated as expenses during the year in which
the amount is accrued. The better classification for such expenses shall be interest expenses
as it is payable due to the financial arrangements. The installment purchases, hire-purchase
deliveries, conditional deferred payments, etc are examples of such transactions
v. Interest paid by exempted controller u/s 14(2)

Section 14(2) states that the total interest amount which a resident entity controlled by an
organization entitled to tax exemption can deduct under this Subsection in any income year
shall not exceed the total of the following amounts:
(a) All interest amounts obtained in that year to be included in the computation of the
taxable income of that entity, and
(b) Fifty percent amount of the adjusted taxable income of that entity in that year, which has
been computed excluding any interest derived by that entity or without deducting any
interest paid by that entity.
Allowed interest u/s 14(2) is minimum of:
(A) Interest Income + 50% of Adjusted Taxable Income without interest element i.e.
Interest Income + (Adjusted Taxable Income+ Interest Expenses- Interest Income)*50%
(B) Interest qualified plus unrelieved previous year interest,

Interest for section 14(2) is interest paid or payable to exempted controllers having
substantial holding or controlling of 25% or more except interest to Government of Nepal.
Exempted Controllers are all or any portion of following persons:
a. Exempted entity: Entity having Tax Exemption Certificate, Political Party, Local
Government, Nepal Rastra Bank, Government of Nepal
b. Person having Tax Concession u/s 11: Cooperative without tax, farmers, Industries in
Remote and Special Tax Zone having tax privileges
c. Non-resident Person: Any non-resident for tax, including resident for income tax but
defined as non-resident due to DTAA.

INCOME TAX & VAT
In case of shareholdings of any entity is at 25% or more in above cases, the interest paid to these
shareholders need to examine based on adjusted taxable income. In case of debt claim from
these shareholders is taken and interest is not disallowed u/s 21, but allowed u/s 13 and 14(1),
further test is to be done for Sec. 14(2). If such interest is to be capitalized having loan used to
purchase asset not having in business use. These interests are not covered by Sec. 14(2).
Illustration: 11
Khakuryal Bikash Bank is subsidiary of Nepal Rastra Bank, it has taken a loan form NRB
for its operation. Total interest of Khakuryal Bikash Bank is Rs. 2 Crores including interest
accrued during the year is Rs. 15,00,000.
In this case, Khakuryal Bikash Bank is exempted controlled entity, because its shareholding
is more than 25% by NRB, exempted entity. Interest accrued to NRB is covered by Sec. 14(2).
Illustration:12
Mr. Khadal is permanent inhabitant of Patan established a limited company called Khadal P.
Limited in Patan. Mr. Khadal contributed Rs. 5 crores for share and Rs. 5 crores as loan at 10%.
Interest earnings are Rs. 2 lakh by the company. Profit before tax is Rs. 40 lakh.
Here, interest Rs. 50 lakh accrued to Mr. Khadal. Mr. Khadal is neither of above category.
Illustration: 13
Khadka Nigam is incorporated at 50% of NRB, 30% of different commercial banks and 20%
by Karmachari Sanchaya Kosh. It has taken a loan of Rs. 1 crore at 5% to construct a building,
Rs. 3 crore at 6% to lend to cover indemnity fund from its all shareholders at the proportion of
shareholdings. The building is under construction. It has interest earnings of Rs. 2 lacks. Profit
before interest expenses is found Rs. 10 lakh.
Solution:
Interest expenses for its shareholders are:
Source For Building For operation

NRB, Exempted Entity 50% 250,000 900,000
KSK, Exempted Entity 20% 100,000 540,000
Commercial Banks, 30% 150,000 360,000
Total Interest 500,000 1,800,000
Rs. 500,000 is to be capitalized as Interest During Construction (IDC) because building has not
in put to use during the income year. In IDC, test u/s 14(2) is not required. Out of operating
interest Rs. 18,00,000, Rs. 13,40,000 has paid to exempted shareholder is qualifying amount
for Sec. 14(2).

Adjusted Taxable Income = Profit before interest – interest allowed except interest qualified
for Sec. 14(2)
= 10-3.60 lakh
= 6.40 Lakh
Limit of Sec 14(2) (A) = Interest Income + (Adjusted Taxable Income+ Interest Expenses-
Interest Income)*50%
= 2+(6.40+3.6-2)*50%
= 6 lakh
Interest qualified plus unrelieved previous year interest (B)

= 13.40 lakh
Allowed u/s 14(2) = 6 lakh (minimum of A & B)

Unrelieved interest = Rs. 7.40 lakh (deferred to next year)
Illustration: 14
Mr. Michel is a citizen Norwegian permanent inhabitant of Oslo live Nepal for 3 years
established a limited company called Norway P. Limited in Patan. Mr. Michel contributed
Rs. 5 crores for share and Rs. 5 crores as loan at 10%. Interest earnings are Rs. 2 lakh by the
company. Profit before tax is Rs. 40 lakh.
Solution:
Interest Rs. 50 lakh accrued to Mr. Michel. Mr. Michel is staying since last 10 months in Nepal.
Due to DTAA with Norway, he is resident of Norway and non-resident for Nepal (even his
stay is more than 183 days in last 365 days). Total interest is qualified for Sec. 14(2).
Allowed interest is as follows:
Adjusted Taxable Income = Profit before tax – interest allowed except interest qualified for
Sec. 14(2)
= 40 lakh
= 40 lakh
Limit of Sec 14(2) (A) = Interest Income + (Adjusted Taxable Income without Interest
element) *50%
= 2+(40+0-2)*50%
= 21 lakh

INCOME TAX & VAT
Interest qualified plus unrelieved previous year interest (B)

= 50 lakh
Allowed u/s 14(2) = 21 lakh (minimum of A & B)

Unrelieved interest = Rs. 29 lakh (deferred to next year)
b. Cost of Trading Stock – Section 15

According to Sec. 2(ka yan) : “Trading stock means the assets owned by a person and sold
or intended to be sold in the ordinary course of a routine business conducted by him, work
in progress on such assets, and inventories of materials that are to be incorporated into such
assets.
Provided that, the term shall not include a foreign currency asset.”
This means only stock of items, either in raw form, processing form or finished form in the
ordinary course of business might be trading stock. Items in the stock those are for future use,
like spare parts, stationary or similar are not trading stock.
The formula given by the Section for arriving at the value of cost of sales is given hereunder:
Particular Amount
The opening value of the trading stock Rs. xxxxxx
Add : cost of purchases, cost of production or the cost of acquisition of
Rs. xxxxxx
trading stock during the year.
Less: cost of closing stock Rs. xxxxxx
Cost of sales Rs. xxxxxx
Sec. 15(3) clearly defines Opening Stock for an income-year is the closing value of trading
stock of the business at the end of the previous income-year.
Purchase means all the additions of stock during the year. It includes:
a. Amount paid to Vendors- trade discount and quantity discount to be adjusted, any
foreign exchange transaction to be recorded as per NAS 21 (Sec. 24 & 28)
b. Transportation Cost- It includes all the transportation cost, normally called as carried
inwards. Insurance during transportation shall be another eligible part of cost.
c. Duty- it includes any duty paid or payable till ex-factory gate like custom duty, local
duty etc. For this purpose, value added tax on purchase or on import shall not the part
of cost to the extent of value added tax credit limit. If value added tax is not allowed as
credit, the same shall be cost of goods procured, produced or imported.

d. Production overheads- it includes all the production cost those borne to bring this stock
to such position except finished goods storage and finance cost. If factory has practice
to charge depreciation and factory repair to its production, depreciation and repairs of
depreciable assets is not including for tax purpose. In case of person having cash basis of
accounting, fixed overhead to be taken on cash basis only.
Illustration :16
Nabin Furniture Pvt ltd is a furniture manufacture and dealer in Nepal, It has furniture
costing Rs. 100,000 in stock . During the year end , some of the furniture were damaged and
need repairs costing Rs. 1,500. These expenses are addition for cost and total cost of trading
stock is Rs. 101,500.
If a person keeps accounts on a cash basis, he may choose either the prime cost basis or the
absorbed cost basis as a method of valuation. But the person keeping accounts on an accrued
basis has no choice other than to adopt the absorbed cost basis of valuation.
The formula given for the prime cost basis of valuation by the Section is as follows:
+ Direct material consumption cost;
+ Direct labor cost;
+ Variable factory overheads.
The formula given for the absorbed cost basis of valuation by the Section is as follows:
Direct material consumption cost;
+ Direct labor cost;
+ Variable factory overheads;
+ Fixed factory overheads.
Sec. 15(4) states that the valuation of the closing stock of a business for an income year is done
at a lower of the followings:
i. Cost of the trading stock that remains till the end of the year.
ii. Market price of the trading stock on the end of the year.
Illustration : 17
Kadaria Enterprise has following transaction during the period, from the below information
find deductible cost of sales for tax for Income Year.

INCOME TAX & VAT
Opening Stock FIFO Rs. 50,000

Purchased during year Rs. 500,000
Sales during year GP ratio 25% Rs. 500,000
Value of Closing Stock (market value)
Case a) Rs. 120,000

Case b) Rs. 150,000
Case c) Rs 200,000
Case d) Nil
Solution:
Particular Amount
Opening Stock Rs. 50,000
Purchase Rs. 500,000
Total stock available (A) Rs. 550,000
Sales Rs. 500,000
Gross Profit (25% margin) Rs. 125,000
Cost of sales (B) Rs. 375,000
Cost of Closing Stock (C) = A-B Rs. 175,000
Closing sock is value at cost or market price whichever is lower basis.
Calculation of Closing Stock
Particular Case a Case b Case c Case d

Cost (D) 175,000 175,000 175,000 175,000
Market Value (E) 120,000 150,000 200,000 0
Value :min(D,E) 120,000 150,000 175,000 0
Calculation of Cost of Good Sold
Particular Case a Case b Case c Case d

Total Stock Available 550,000 550,000 550,000 550,000
Less: Closing Stock 120,000 150,000 175,000 0
Cost of Good Sole 430,000 400,000 375,000 0

If, it is not possible to identify the cost of each item of trading stockthen either the first in
first out method or the weighted average method should be adopted for valuation of the cost
of trading stock A person, who has made a choice to select one method of valuation, has to
adopt the same method for coming income years . The change in the method is possible with
prior permission of IRD.–
Illustration : 18
Find the Cost of Goods Sold during the year for income tax u/s 15 for Kafle Impex. Opening
Stock Rs. 200,000 Purchased Rs. 20,000,000. Sales Rs. 30,000,000. Gross profit margin is 20%
on cost. Use FIFO method.
Solution:
Gross profit margin is 20% on cost means if cost is Rs. 100, sales is Rs. 120. So,
Cost of goods sold = Sales/120*100

= 30,000,000/120*100
= 25,000,000
Opening stock and stock valuation formula is not required here.
Illustration: 19
A, B, C and D are four traders keeps their accounts on cash basis. During the year, all four
purchased merchandise of Rs. 300,000 and sold all at Rs. 500,000. Office cost incurred Rs.
100,000 in accrual system. Payment history for four is as follows:
Party A B C D
Purchase 300,000 300,000 300,000 300,000
Status Fully Paid Fully Paid Not paid till Not paid till
Sales 500,000 500,000 500,000 500,000
Status Fully received Not received till Fully received Not received
till
Office cost 50% Paid Fully Paid Not paid till Fully Paid
In these cases under cash basis concept, Income and Expense would generally be said as
follows:
Party A B C D
Sales 500,000 0 500,000 0
Purchase 300,000 300,000 0 0
Office cost 50,000 100,000 0 100,000
Profit 150,000 (400,000) 500,000 (100,000)

INCOME TAX & VAT
All four have same transaction, same accounting basis but a giant difference in output. Do
you agree?
Of course no, person having cash basis of accounting need to comply most portion of
accounting in accrual system too. Sec. 15 describes accrual system for person having cash
basis.
According to the provision of Sec. 15, status for all four shall be as follows:
Party A B C D
Sales 500,000 500,000 500,000 500,000
Purchase 300,000 300,000 300,000 300,000
Office cost 50,000 100,000 0 100,000
Profit 150,000 100,000 200,000 100,000
It means under cash basis of accounting, only the items of overhead and income except sale
of trading stock is on cash basis.
Illustration : 20
Karakheti Maida Udhoyog valued stock on weighted average method and now intend to
change to FIFO method. The cost of goods sold on the weighted average method of stock
valuation was Rs. 25,000,000 for the income year. The value of stock at year start and on
year end is assessed as follows. Find the eligible cost of goods sold u/s 15 if it processed all
administrative procedures.
Weighted Average FIFO (revalued)

Opening stock Rs. 40,00,000 Rs. 42,00,000
Closing Stock Rs. 22,00,000 Rs. 20,00,000
Solution:
On existing system, Closing stock Rs. 22,00,000
Cost of goods sold Rs. 25,000,000
Cost of total stock Rs. 27,200,000
Opening stock Rs. 4,000,000
Purchase during year Rs. 23,200,000
In FIFO
Opening stock Rs. 4,000,000
Purchased during year Rs. 23,200,000
Stock available Rs. 27,200,000

Closing stock Rs. 2,000,000
Cost of Goods sold u/s 15 Rs. 25,200,000
c. Depreciation Allowances- Section 19

According to Sec. (ka ra) “Depreciable Asset means an asset which is used for generation
of income from any business or investment and whose value declines due to wear and tear,
obsolescence, or the passing of time.
Provided that the term shall not include any trading stock.”
Depreciation is computed on the date latest of date of payment/purchase for the asset or date
of put to use. This latest date is called Pooling Date. In case of machinery, it is purchased in
earlier period than its put to use in business pooling date is later date when it is put to use
If any asset has used in business under sale or purchase on approval basis, date of put to use
will come first and then date of purchase (approval date). In this case, pooling date is date of
approval.
Costs that are incurred for a depreciable asset included in a pools of depreciable assets are
added to the depreciation basis of the relevant depreciable asset pool as follows
Pooling date Portion of Sum Amount

Up to Poush 3/3rd
Magh- Chaitra 2/3rd
Baishak- Ashadh 1/3 rd
Remaining value shall be absorbed in beginning of next year and called unabsorbed purchase
for this year.
In case of pool disposal, whole amount shall be assumed as absorbed irrespective of pooling
date.
Illustration : 21
Kesari Company purchased following assets and used in the business. Find the absorbed
addition during this year.
Assets Name Purchased Amount Put to use date

Bhadra- Rs. 100,000 Kartik 1
Computer Magh- Rs. 30,000 Baisakh 1
Jeth – Rs. 60,000 Ashad 1
Vehicles Srawan- Rs. 100,000 Srawan 1

INCOME TAX & VAT
Solution:
Absorbed Unabsorbed
Pool Pooling date
Addition Addition
Computer (Pool B) Kartik 1 Rs. 100,000 * 3/3 100,000 -
Baisakh 1 Rs. 30,000 * 1/3 10,000 20,000
Ashad 1 Rs. 60,000 *1/3 20,000 40,000
Vehicles Srawan 1 Rs. 100,000 * 3/3 100,000
Total 230,000 60,000
Illustration : 22
XYZ & Co. has provided the following details of its assets during the Income Year 2076-77.
Opening Additions during Disposal during

Block Date of Purchase
Depreciation Basis the Year (in Rs.) the year (In Rs.)
A 3,000,000 Nil - Nil
B 500,000 300,000 Bhadra 01, 2076 50,000
C 1,500,00 500,000 Chaitra 30, 2076 175,000
D 700,000 Nil - Nil
Additional Information:
Before Magh 01, 2076, the company incurred Rs. 300,000 to acquire the patent right for the
period of 5 years and 7 months.
i) Calculate the allowable depreciation allowances for the Income Year 2075/76 in respect
of all the block of assets.
ii) What will be the implication on depreciation allowance if XYZ & Co. is a special industry
as defined under the Income Tax Act, 2058?
Solution
Computation of Depreciation Allowance for the Income Year 2075.76
Blocks
Particulars A B C D
Opening Depreciation Base Rs. 3,000,000 500,000 150,000 700,000
Add: Absorbed Additions Rs.
For Block B: 3/3×Rs 300,000 300,000
For Block C: 2/3×Rs. 500,000 333,333
Less: Disposals Rs (50,000) (175,000)
Depreciation base for the year Rs 3,000,000 750,000 308,333 700,000
Rate of Depreciation 5% 25% 20% 15%
Allowable Depreciation 150,000 187,500 61,667 105,000

i. Computation of Allowable Amortization on patents right, intangible asset, for the Income
Year 2076/77
Allowable Amortization = Rs. 300,000/5.5 = Rs. 54,545
Note:
As per section 3 of Schedule 2 of Income Tax Act, 2058, the useful life of an intangible asset is
rounded to the nearest half year.
Entities referred to in section 19 (2) and paragraph 2(3) and (4) of schedule 1 shall be entitled
to an additional depreciation rate added by 1/3 in the depreciation rates referred to in
subparagraph (1) applicable to pools of depreciable assets in Class A, B, C, and D.
Computation of Allowable Depreciation if XYZ & Co is a special Industry
For Block A: 6.67% of Rs. 3,000,000 = Rs. 200,000
For Block B: 33.33% of Rs. 750,000 = Rs. 250,000
For Block C: 26.67% of Rs. 308,333 Rs. 82,232.42
For Block D: 20% of Rs. 700,000 = Rs. 140,000
For Block E: Rs. 54,545
Additional 1/3 depreciation allowance is not applicable for the pool of asset under Block E.
Block and Pool

Depreciation is to be calculated on pool of asset. Computing formula is given on Block of assets.
There are five blocks in depreciable assets:
Block Assets Covers Rate

A Buildings, structures, and similar works of a permanent nature. 5%
B Computers, data analyzing equipment, furniture, fixtures, and office 25%
equipment
C Automobiles, buses, and mini-buses 20%
D Construction and earth-moving equipment and any depreciable asset 15%
not included elsewhere, including Sub-Section (3) of Section 17, Sub-
Section (3) of Section 18, and Sub-Section (3) of this Schedule.
E Intangible assets other than the depreciable assets mentioned in Class SLM
D.

INCOME TAX & VAT
Illustration : 23
Opening Depreciation Base and purchased during the year for Katuwal Enterprise is as
follows.
Assets Name Opening Value Purchased

Computer 300,000 Bhadra- Rs. 100,000
Magh- Rs. 30,000
Jeth – Rs. 60,000
Building 20,00,000
Vehicles 500,000 Srawan- Rs. 100,000
Magh- Rs. 30,000 Sold
Calculate the depreciation and depreciation base of the Katuwal Enterprises ?
Solution:
Depreciation is computed as follows:
Pool A B C
Opening Depreciation Base 20,00,000 300,000 500,000
Addition
Up to Push (Fully Absorbed) 100,000 100,000
Magh- Chaitra (2/3 rd
Absorbed) 20,000
Baisak- Ashad (1/3rd Absorbed) 20,000
Disposal (30,000)
Depreciation Base 20,00,000 440,000 570,000
Rate 5% 25% 20%
Depreciation 100,000 110,000 114,000
Depreciation base is required to calculate depreciation and repair cost for depreciable assets.
Total depreciation during the Income Year is Rs. 324,000 as given in above table is deduction
for Sec. 19.
Balancing Charge (–ve Depreciation base)

Depreciation base cannot be –ve in value. If disposal proceeds is higher than the depreciation
base, then a negative figure arrived is called balancing charge. Balancing Charge shall be a
includible in profit or gain as defined in Sec. 7(2)(Gha).
In case of disposal of pool, this balancing charge shall be computed taking all the purchase
irrespective of date of pooling. Balancing charge is to be taken before computing depreciation
base for the year.

Illustration: 24
In the example given above let assume, proceeds on vehicle sold on Magh was Rs. 700,000 ,
Calculate the depreciation of Katuwal Enterprises:
Solution :
Pool A B C
Opening Depreciation Base 2000,000 300,000 500,000
Addition
Up to Push (Fully Absorbed) 100,000 100,000
Magh- Chaitra (2/3rd Absorbed) 20,000
Baisak- Ashad (1/3rd Absorbed) 20,000
Disposal (700,000)
Balancing Charge 100,000
Depreciation Base 2000,000 440,000 0
Rate 5% 25% 20%
Depreciation 100,000 110,000 0
Terminal Depreciation
Terminal depreciation means allowance of remaining figure in disposal or otherwise.
Normally, terminal depreciation arises in the following 3 situations:
a. Small Value - If remaining value after normal depreciation (including accelerated too) is
lower than Rs. 2,000, the remaining value.
b. Pool Disposal - If pool is disposed, remaining value, if any.
c. Replacement and Transfer - In case of BOOT, power house construction, generation and
transmission of power, replacement of plant and transfer.
In case of a person leave business, remaining value of depreciable asset shall not deem as
terminal depreciation but assumed as disposal at market value u/s 45. Terminal depreciation
for (b) and (c) case above shall taken before computing depreciation base and for (a) case, it
shall be taken after providing normal depreciation.
Accelerated Depreciation
According to Sec. 3(2) of Schedule 2, depreciation rate shall be increased by 1/3rd in the
following entity for Pool A, B, C and D:
• Cooperative
• Power house construction, generation and transmission of power
• Built, Own, Operate and Transfer (BOOT) Business

INCOME TAX & VAT
The concept of additional depreciation will reduce the tax burden in earlier time and hence
low pay back period of the investments. This depreciation is called accelerated depreciation in
tax world. Accelerated depreciation is allowed for entity only. The acceleration is given in
rate not on amount.
In spite of above regular accelerated depreciation there would be special accelerated depreciation
too, e.g. whole of cost of fiscal printer and cash machine purchased are fully depreciated in
the income year. Again, if a manufacturing industry generates energy for its use, 50% of the
cost of capitalized assets would be allowed as depreciation in the year of incurrence.
In case of equipment, plant and machinery installed in Built, Own, Operate and Transfer
(BOOT), construction of power house, generation and transmission (but not distribution) of
power, there is a special provision of depreciation than other business. In this case, if such
equipment, plant or machinery replaced in any income year, the remaining value of such
replaced equipment, plant or machinery shall be allowed as additional depreciation (terminal
depreciation).
Illustration: 25
Kandel Hydro power Ltd. is engaged in production and transmission of electricity in Nepal.
In 2077 Baisakh it replaced machinery having WDV Rs. 50,000,000 with new machinery
costing Rs. 90,000,000. Opening depreciation base on Pool D (300 items of assets) were Rs.
325,000,000.
Calculate the Depreciation Base
Solution:
Particulars Rs.
Opening Dep. Base 325,000,000
Add: Addition of Machinery ( 90,000,000 * 1/3) 30,000,000
Terminal Depreciation 50,000,000
Depreciation Base 305,000,000
Depreciation Rate 20%

Depreciation:
Normal 61,000,000
Terminal 50,000,000
Total Depreciation 111,000,000

Opening Dep. Base for Next Income Year

Remaining Value ( 305,000,000 - 61,000,000) 244,000,000
Unabsorbed Purchase (90,000,000-30,000,000) 60,000,000
Unabsorbed Repairs etc. 0
Total Opening Base 304,000,000
Illustration : 26
Kandel Hydro power Ltd., in above example transferred its plant and electromechanical
equipments (250 items with written down value of Rs. 300,000,000 were qualified to
transferred) to Government of Nepal, GON on 2076.4.2 and site office possessed to GON. Is
there any adjustment in depreciation for 2075/76 or 2076/77? Is there any difference if the
project transferred to Kalakheti Hydro Power Company Limited?
Here, depreciation for Income Year 2075/76 see above example. For 2076/77, whole the assets
were transferred to GON, it means total remaining value of transferred assets was deemed as
terminal depreciation.
Particulars for 2076/77 Rs.

1. Opening Dep. Base 304,000,000
Absorbed Addition 0
Disposal Proceeds 0
Terminal Depreciation 300,000,000
Balancing Charge 0
Depreciation Base 4,000,000
Depreciation Rate 15%
Depreciation:
Normal 600,000
Terminal 300,000,000
Total Depreciation 300,600,000
Opening Dep. Base for Next Income Year
Total Opening Base 3,400,000
Scenario shall be reversed in case of sale of same assets, if transferred to Kalakheti Hydro
Power Company Ltd, the transferred to be valued at depreciation base of Rs. 30 crores or
market value whichever is higher basis under Sec. 45 even if proceeds was not received at
all.

INCOME TAX & VAT
Depreciation if pool disposed and wake up during year

There is an unwanted question of depreciation base that if a pool disposed during the year
completely and waked up thereafter. The depreciation base is computed at year-end with
formula of Opening + Addition – disposal irrespective of disposal date. Let take an example:
Illustration : 27
Kalikothi Limited has one vehicle having depreciation base of Rs. 200,000 in Srawan 1. The
vehicle was sold at Rs. 500,000 on Aswin 30. The Company purchased another vehicle costing
Rs. 600,000 on Jeth 1. Find the depreciation base and allowed depreciation.
Solution
Particular Rs
Opening Depreciation Base = Rs. 200,000
Add: Addition on Vehicle (Jeth absorbed 1/3 * 600,000)
rd
= Rs. 200,000
Less : Disposal of Vehicle = (Rs. 500,000)
Balancing Charge ~profit or gain for Sec. 7(2)(d) = Rs. 100,000
Opening Depreciation Base for next year

Particular Rs
Remaining Value = Rs. 0
Unabsorbed Purchase = Rs. 400,000
Opening Depreciation Base for next year = Rs. 400,000
In this case all the points were considered as per year-end base, the pool was not existed for
the period Kartik to Baisakh but computation was done on the figure taking for the year at
whole.
Depreciation on Intangible Assets

Accounting for Intangible assets is guided by NAS 18, but for taxation purpose, it has covered
under depreciable assets. Intangible assets are not directly defined in income tax laws, but
there is a probable list of examples in Sec. 2(kaka) as:
(1) Use of or right to use a copyright, patent, design, model, plan, secret formula or process
or trademark.
(2) Supply of technical know-how.
(3) Use of or right to use a motion picture-based film, video tape, sound recording or any
other similar means, and supply of industrial, commercial or scientific experience.

(4) Supply of any assistance in such a manner as to prove helpful in matters mentioned in
Sub-Clause (1), (2), or (3), or
(5) Observation of a full or partial restriction regarding matters mentioned in Sub-Clause

(1), (2), (3), or (4).
Income tax incidence of intangible assets has two folds:
• Royalty based: Intangible asset as lease and royalty payable to owner based on time or
number of units under consideration. Royalty is subject of tax at source (see Chapter 16
in details) and payment in total is deductible under Sec. 13.
• Lump Sum purchase: these types of intangible assets are depreciated in a straight-line
basis according to Schedule 2.
Pool of Intangible Assets: Intangible assets fall in Block E and each purchase is Natural
Person pool. So, Block E may have more than 1 pool like pool E1, E2, E3 and so on. Absorbed
addition of intangible assets is similar as tangible assets, i.e. if purchased within Push fully
absorbed, if purchased during Magh - Chaitra 2/3rd absorbed and after that till Ashad end
1/3rd .
In case of any additional payment is made in case of any pool of intangible assets, these
amount is to be added based on time frame but if similar intangible asset purchases
with Natural Person capacity and independently than already holding, later should
be treated as separate pool of assets.In case of disposal of pool, the behavior issame as
other pool.
Illustration: 28
Surya Pubication Limited has entered into a publication copyright contract on Chaitra 1st with
Nepal Press. Ltd. to publish a book. Royalty is fixed Rs. 900,000 for 3 years 4 months with
maximum copies of 5000 per year. Find the tax impact.
Solution:
It is a case of intangible asset having depreciable assets behavior. Its tax rate is to be computed
based on straight-line formula as:
Depreciation per year = 1/ Period of contract near to half year
Rate of Depreciation = 1/3.5 = 28.57%
Computation of depreciation and depreciation base

INCOME TAX & VAT
Pool E1 Year 1 Year 2 Year 3 Year 4

Purchase Price 900,000 - - -
Opening Dep n.
Base - 728,850 471,720 214,590
Addition Absorbed 600,000 - - -
Terminal Depn. - - - 214,590
Disposal - - - -
Dep Base
n.
600,000 728,850 471,720 -
Rate of Dep n.
0 0 0 0
Depreciation Exp. 171,420 257,130 257,130 0
Opening Dep Base for next year
n.
728,850 471,720 214,590 -
Expiry of terms of an asset is disposal u/s 40(1). Hence in the end of 4th year the pool shall be
seized and hence whole amount of opening Depn. base is terminal depreciation.
Illustration: 29
Kholsakhi Limited has entered into a patent copyright contract on Chaitra 1st with Khaniya
Publishers to publish a book. Royalty is fixed Rs. 900,000 for 2 years 8 months with production
of 10,000 units. Patent seller improved its formula and further Rs. 300,000 has charged for
Kholsakhi Limited at 2nd year end of contract. Find the tax impact.
Solution
Its tax rate is to be computed based on straight-line formula as:
Depreciation per year = 1/ Period of contract near to half year
Rate of Depreciation = 1/2.5 = 40.00%
Computation of depreciation and depreciation base
Pool E2 Year 1 Year 2 Year 3 Year 4

Purchase Price 900,000 1,200,000
Opening Dep n.
Base - 660,000 300,000 200,000
Addition Absorbed 600,000 - 200,000 -
Terminal Depn. - - - 200,000
Disposal - - - -
Dep Base
n.
600,000 660,000 500,000 -
Rate of Dep n.
0 0 0 0
Depreciation Exp. 240,000 360,000 400,000* 0
Unabsorbed Purchase 300,000 - 100,000 -
Opening Dep Base for next year
n.
660,000 300,000 200,000 -
*300,000+100,000

c. Repairs and Improvement Expenses- Section 16

(1) For the purposes of calculating a income for an income-year from any business or
investment, there shall be deducted all costs to the extent incurred during the year in
respect of the repair or improvement of depreciable assets owned and used by the person
during the year in the production of the income from the business or investment.
(2) Notwithstanding subsection (1), the deduction allowed under subsection (1) with respect
to all depreciable assets in a particular pool of depreciable assets of the person shall not
exceed 7% of the depreciation basis of the pool at the end of the income-year and the
deduction shall be allowed with respect to costs in the order in which they are incurred.
(3) Any excess cost of repair and improvement, or a part thereof, for which a deduction is
not allowed as a result of the limitation in Subsection (2) can be added to the depreciation
basis prevailing in the beginning of the subsequent income year, of the pool to which it
relates.
Repair expenses are a capped item on depreciation base. Repair on depreciable asset is allowed
as minimum of:
o Actual repair expenses classified in pool for depreciation
o 7% of depreciation base before deducting the depreciation (hence depreciation and

repairs are compared in same base of depreciation)
Remaining amount, if any in any pool is to be capitalized in the concern pool at the beginning
of next income year
Limitation ~Sec. 16(2):

Expenses on repair and improvement regarding a block of owned and used assets during an
income year in excess of 7% of the depreciable basis of the respective block at the end of the
income year, cannot be deducted during the income year.
The portion of the expenses disallowed during the year are allowed to be capitalized to the tax
base amount of the respective block of the assets but depreciation on that portion is allowed
only a year after the capitalization ~Sec. 16(3).
Illustration : 30
Following is repairs in the assets find the allowable limit u/s 16.
Pool A B C
Depreciation Base 2000,000 440,000 570,000
Repair and Improvement 20,000 35,000 70,000

INCOME TAX & VAT
Solution
Pool A B C
Depreciation Base 2000,000 440,000 570,000
Maximum Limit 7% (X) 140,000 30,800 39,900
Actual Expense (Y) 20,000 35,000 70,000
Allowed Min (X,Y) 20,000 30,800 39,900
Addition to concern pool base 0 4,200 30,100
Some exceptions to above provision are repairs of business assets and repair of own asset but
not used in business or used . Repair expenses of such asset are not allowed as deduction. But
repair of third party assets are qualified for the deduction u/s 13. So, any repair on leased
assets, rented asset etc is allowed u/s 13.
Expense covered by Sec. 16

Expense qualifying for Sec. 16 has three types of expense relating to depreciable assets:
Maintenance cost: Maintenance cost is cost paid to keep depreciable asset in operating condition
without break up or damage.
Repair Cost: Repair cost is cost paid to restore damaged depreciable asset.
Improvement Cost: Improvement is cost to enhance facility without installing additional

equipment, mixed behavior of repair or capital cost, so has a little bit capital in nature.
However, Repairs on Overhauling of Aircraft doesnot cover under this section eventhoughair-
craft is depreciable asset. In case of aircraft overhauling, gross amount of expense is deductible
in the tax accounting. To get this benefit, Aircraft Company should comply following
provisions:
o The person should provide air transport business (aircraft leaser cannot get this benefit
nor aircraft manufacturer can get it).
o The expense should be for overhauled only, repair not covered by this provision and
repair and maintenance other than overhauling is capped at 7% of depreciation base.
o Overhauling should be based on prescribed standard of Civil Aviation Authority.
Illustration: 31
Kharel Airlines is operating aircraft over Nepal sky. Its depreciation pool and repairs is as
follows. Consider Rs. 600,000 is cost for overhauling and CAAN approved for Rs. 550,000
only.

Pool B C D Total
Depn. Base 1500,000 3000,000 21700,000 26,200,000
Repair Cost 100,000 250,000 2000,000 2,350,000
Solution:
Cost for overhauling approved by CAAN is fully allowed, and then:
Pool B C D Total
Depn. Base 1,500,000 3,000,000 21,700,000 26,200,000
7% of Base (A) 105,000 210,000 1,519,000 1,834,000
Repair Cost 100,000 250,000 2,000,000 2,350,000
Less Overhauling 550,000 550,000
Qualified (B) 100,000 250,000 1,450,000 1,800,000
Allowed (C) 100,000 210,000 1450,000 1,760,000
Unabsorbed 0 40,000 0 40,000
Hence Allowed Repair = Rs. 2310,000.
Repairs on Depreciable assets with nil value

Repair on depreciable assets is capped with depreciation base. In case depreciation base is
zero with existence of pool assets, allowed repairs shall be zero and unabsorbed amount is to
be added to opening depreciation base for the next year.
In case of pool is disposed during the year, repairs on assets within that pool cannot be
allowed based on 7% capped nor unabsorbed repair can be carried forwarded to next year.
Income Tax Act, 2058 is not clear on this issue nor has any public circular issued.
General motive of expense to be deductible is, first the expense should not be disallowed u/s
21 and should be passed u/s 13. In case of expense passed u/s 13, section 14 to 19 limits the
quantum for this income year, though all expense is allowed in any case. Due to this motive,
repairs on depreciable assets of pool that disposed at year-end is allowed u/s 13 at whole
irrespective of 7% of depreciation base.
Illustration- 32
Detail of Depreciation Base is given below
Pool A B C
If repairs on computer: Rs. 35,000; building: Rs. 20,000; vehicle: Rs. 70,000 on sold vehicle find
the allowable depreciation.

INCOME TAX & VAT
Solution:
Pool A B C
7% of Depreciation Base 140,000 30,800 0
Actual Repair 20,000 35,000 70,000
Repair u/s 16 (minimum of two) 20,000 30,800 0
Unabsorbed Repairs 0 4,200 70,000
Unabsorbed repairs are to be added in the opening depreciation base for the next year.
In pool C, say physical existence is not at year-end, and then repairs cannot be carried to next
year. In this case, these repairs are to be allowable u/s 13 within this year.
d. Pollution Control Expense – Section 17

Pollution control expenses, as defined in Explanation of Sec. 17 is “the expenses incurred by a
person in connection with a process aimed at controlling pollution or protecting or conserving
the environment in any other way”
In computing the income earned by any person from any business in any income year, such
person may deduct the pollution control expenses to the extent incurred in the operation of
that business in that year.
However, it shall not exceed Fifty percent of the taxable income computed without deducting
pollution control expenses of all businesses operated by that person and without including
Donation Expense as referred in Section 12(2) and Research and development expense as
referred in Section 18(2).
Any excess expense or part thereof which is not deductible in excess of the limit referred
above, may be capitalized and depreciated .
Illustration 33
Nawa Dega Pvt. Ltd. has been established by Nepalese promoters under foreign direct
investment. The eighty percent of the total capital has been hold by non-resident persons.
In addition, The Nawa Dega Pvt. Ltd.has borrowed the amount from the foreign investors.
For the year ended Ashadh end, 2076, the profit and loss account of the company has the
following transactions.

Sales 5,000,000
Interest income 75,000
Total income 5,075,000
Expenses
Cost of sales 2,000,000
Administrative expenses 1,100,000
Interest expenses 1,500,000
Pollution control expense 300,000
Total Expenses 4,900,000

Net profit 175,000
i) Interest expense Rs. 1,400,000 out of total has been charged on the borrowed amount
from foreign investors. Answer whether all the above expenses can be claimed under
Income Tax Act, 2058?
ii) If these expenses cannot be claimed during the year, what would be the implication?
Solution
All the amount of cost of sales under section 15 and adminitrative expenses under section 13
can be claimed for deductions while computing the taxable income. There are limitations on
interest expenses and pollution control expenses.
Calculation of allowable interest expenses
Net Profit: Rs. 1,75,000
Add carry forward interest expenses Rs. 0
Add interest expenses Rs. 15,00,000

Less interest Income (Rs.75,000)
Adjusted taxable income: Rs.16,00,000
Interest Income Rs. 75,000

50 % of Adjusted taxable income Rs. 800,000
Deductible interest expenses Rs. 8,75,000

INCOME TAX & VAT
Interest expenses under section 14 can be claimed only Rs. 9,75,000 out of total Rs. 15,00,000-
Rs. 8,75,000 under 14 (2) and Rs. 1,00,000 under 14(1)
Further, pollution control expenses under section can be deducted fifty percent of adjusted
taxable income.
Calculation of deductible pollution control expenses:
Net Profit: Rs. 1,75,000

Add expenses during the year: Rs. 3,00,000
Adjusted taxable income: Rs.4,75,000
50 %of Adjusted taxable income: Rs. 2,37,500
So, all the expenses of pollution control cannot be allowable for deduction. Pollution control
expenses Rs. 2,37,500 out of Rs. 3,00,000 can be claimed for deductions.
e. Research and Development Expenses – Section 18

Research and Development expenses, as defined in Explanation of Sec. 18 is “the expenses
incurred by a person in order to promote his business and improve business products or and
processes”
In computing the income earned by any person from any business in any income year, such
person may deduct the research and development expenses to the extent incurred in the
operation of that business in that year.
However, it shall not exceed Fifty percent of the taxable income of that person computed
without deducting research and development expenses of all businesses operated by that
person and without including Donation Expense as referred in Section 12(2) and Pollution
Control Expense as referred in Section 17(2)
Any excess expense or part thereof which is not deductible in excess of the limit referred
above may be capitalized and depreciated
Illustration : 34
Nepal Travel and Tour has following income status .
find the allowable interest u/s 14(2), Pollution Control Expense u/s 17 and Research &
Development expense u/s 18
Profit or Gain from Business Rs. 600,000

Deduction of expense Rs. 400,000
Income from Business Rs. 200,000
Income from Investments Rs. 200,000

Further information:
Profit or gain includes Rs. 20,000 as interest income. Deduction of expense includes Rs.
50,000 interest paid to the bank but interest paid to the exempted controller Rs. 250,000 has
not included thereto. There is Pollution Control Expense and Research and Development
Expense Rs. 200,000 each.
Solution
Income from Business Rs. 200,000

Income from Investments Rs. 200,000
Adjusted Taxable Income (ATI) Rs. 400,000
ATI without interest = ATI+ Int. Exp- Int. Inc.

= 400000+50000-20000
= 430,000
Now
i) Allowable limit of Interest u/s 14(2) is minimum of
(A) Qualifying interest expenses Rs. 250,000
(B) Interest income + 50% of ATI without interest elements
= 20000+ 430000*50%
= 235,000
So, interest allowed u/s 14(2) is Rs. 235,000 remaining balance deferred for next year.
ii) Allowable Pollution Control Expense and Research & Development expense is minimum
of
(A) Qualifying expense = Rs. 200,000
(B) 50% if ATI of business only = Rs. 100,000
So allowable Pollution Control Expense is Rs. 100,000
allowable Research & Development expense is Rs. 100,000.
Remaining expense of Rs. 200,000 goes to pool D of depreciation pool.
f. Donation and Contribution -Section 12

The amount of donation given or contribution made to any tax-exempt organizations
recognized by IRD, can be claimed for deduction from the taxable income of the year in which
the payment is made.

INCOME TAX & VAT
The donation or contribution deductible in any income year shall not exceed Rs 100,000 or 5 %
of the adjusted taxable income assessed without making deduction for the donation and gifts
of that person in that year and without including Pollution Control Expense as referred in
Section 17(2) nad Research and Development Expense as referred in Section 18(2), whichever
is lesser.
A ceiling is imposed on such payment of up to 5% of the adjusted Taxable income for the
income year or Rs.100,000, whichever is lower.
But if GON has notified in Nepal Gazette that donation could be given in certain circumstances
for a particular purpose, the amount could be claimed as per the conditions given in the same
notification.
Illustrative Problem
1. Interest expense during the year:
Loan Fund Outstanding Interest Remarks on the loan

Name balance at year-end expense
Loan to old 2,000,000 200,000 Used for construction existing office
building in operation
Term from 3,000,000 350,000 Using for constructing office
bank building under construction
Demand Loan 2,000,000 8% p.a. 1% service charge is levied by bank
Overdraft 20,000,000 8% p.a. 1.5% service charge on renew
Cost of building is to be funded by 30% equity and 70% bank financing basis. During the
year Rs. 100,000,000 has paid to the contractor. Calculate Interest expense.
2. M/s Gandaki Brewery Industries Ltd. furnished the following particulars to you
pertaining to the income year 2076-2067. [2005 Dec]
i. Opening balance (WDV) of depreciable assets as on 2076-4-1.
Particulars Rs.
Building 20,00,000
Car 12,00,000
Computers 1,40,000
Office equipment 2,40,000
Plant and Machinery 16,00,000
Tools 60,000
Repair and improvement cost capitalized (block D) 20,000

ii. The company has purchased a plant & machinery as on 2077-3-15 for Rs. 12,00,000. The
company has also purchased a mini bus as on 2076-6-25 for Rs. 7,00,000.
iii. During the year one old computer having written down value of Rs. 25,000 is sold for
Rs. 15,000. one printer having written down value of Rs. 7,000 became unusable and the
company recovered nothing from it.
iv. Repair & improvement expenses of the Company during the year are:
Particulars Rs.
Building 1,80,000
Office equipment 20,000
Car 1,50,000
Plant & Machinery 1,60,000
v. During the year the Company has incurred Rs. 10,00,000 on research and development.
However, only Rs. 7,50,000 is allowable deduction for research and development cost for
the year 2076-2077.
Required,
(a) Classify the assets as per schedule 2 of Income Tax Act 2058.
(b) Amount of depreciation for the income year 2076-2077 as per schedule of 2 Income
of Income Tax Act 2058.
(c) Amount of depreciable basis for the Income Year 2077-78.
3. M/s Pashupatinath Industries, a partnership firm, submits following profits and loss
account to you for computation of taxable business income for income year 2076-77.
Profit and Loss Account for the year ending 31.3.2077
Amount Amount
Particulars Particulars
(Rs.) (Rs.)
Cost of Raw materials used 1,500,000 Sales 2,600,000
Production Expenses 5,00,000 Misc. Income 50,000
Gross Profit 650,000
2,650,000 2,650,000
To salaries 3,48,000 By Gross Profit 6,50,000
To Rent 24,000 By Sundry creditors w/ back 7,000
To printing and stationery 4,700 By Dividend from Nabil Bank 13,500
To telephone 2,800
To conveyance 19,500
To traveling 16,000

INCOME TAX & VAT
Amount Amount
Particulars Particulars
(Rs.) (Rs.)
To interest 68,000
To Depreciation 20,000
To legal fees 12,000
To auditor’s fees 12,000
To PF contribution 18,000
To Net Profit 125,500
Total Rs. 670,500 670,500
Additional Information:
a. Salaries include Rs. 120,000 paid to working partner X and Rs. 80,000 to working
partner Y.
b. Rent of Rs. 24,000 is paid to the premises belonging to partner Y who has let it out to
the firm.
c. Interest paid includes Rs. 60,000, being interest paid on loan given by partner Y at
the rate of 15% simple interest.
d. Out of PF. Contribution debited to P & L. Account Rs. 7,000 was outstanding unpaid
under the Income Tax Act.
e. The firm normally purchases goods issuing crossed cheques and Banks drafts only
except in the case of one bill for Rs. 75,000 for which payment has been made by
cash.
f. Depreciation debited in the accounts is as per the Income Tax Act.
g. Legal Fees include Rs. 10,000 fees paid in respect of appeal against the income tax
assessment for the earlier year.
4. Mansubha Ltd. is a business house dealing in ready made garments. During the year
2076/77, it had the following transactions. Find its income from exports and the taxable
income and tax liability:
Total sales 2,000 lakhs

Export Sales 1,500 lakhs
Cost of purchase of garments 2,000 lakhs
Export expenses 100 lakhs
Administrative expenses 75 lakhs
Depreciation 9 lakhs
Closing stock of garments 200 lakhs

5. The profit and Loss Account of PQR & Co. a manufacturing company shows a Net Profit
of Rs. 50,00,000 (before tax). Calculate the taxable income of the company for Financial
Year 2076/77, after considering the following facts.
Fixed Assets schedule of the company shows the following balance
Pool WDV as on 76.3.32

A 20,00,000
B 10,00,000
C 12,00,000
D 50,00,000
The company purchased Furniture of Rs. 50,000 on Falgun 15, 2076. It also purchased a
vehicle for Rs. 8,00,000 on Baisakh 1, 2077
i. The Company holds 20% share in ABC & Co. Ltd. It received Rs. 1,00,000 (net of tax)
as dividend during the year.
ii. The Company has spent Rs. 2,80,000 on the repairs of the Machinery during the year
and charged the whole amount to the Profit and Loss Account.
iii. The company has paid a premium of Rs. 2,50,000 for insurance of its Machinery and
charged the whole amount to the Profit and Loss account. The period covered by the
premium is from 2076.1.1 to 2076.12.30 (one year).
iv. The company has charged Rs. 15,00,000 as depreciation during the year in its books.
6. The ABC CO, Pvt. Ltd. has assets of B category (computer group) worth Rs. 3,20,000 as on
32 Asadh, 2076. On Paush 15, the Company purchased a branded computer set costing
Rs. 1,50,000 and the company also paid for repair of old computer Rs. 42,000. During
the year one set computer was disposed at Rs. 60,000. Compute the eligible depreciation
for this group of assets and depreciation for this group of assets and depreciation for
this group of assets and depreciation base for the year 2076-77 according to provision of
Income Tax Act, 2058.
7. The Profit and Loss Account of CBG & Co. for the financial year 2076-77 shows the
following details:
Sales 500,000.00
Cost of Sales 300,000.00
Donation 20,000.00
Pollution Control Cost 300,000.00
Repair and Maintenance 10,000.00
How much amount is deductible as Pollution Control Cost?

INCOME TAX & VAT
8. X Ltd. of Delhi has got 70% shares in Yoyo private Ltd. of Nepal. The Profit and Loss Account
and Balance Sheet of the company for the first year of operation ending on 31.3.2077 was
follows:
Balance Sheet
Share Capital 270 Plant & Machinery 400

Secured Loan for Building 200 Department Building 350
Unsecured Loan 150 Current Assets 183
Current Liabilities 80 Profit & Loss Account 67
700 700
Profit & Loss Account
Cost of Sales 450 Sales 500

Administration Expenses 75 Interest Received 2
Interest on Loan 42 Loss for the year 65
567 567
Interest on Bank Loan is 10% and the interest on unsecured loan is 15%. Compute the taxable
income.
9. M/s Mechi Cigarette Industries Ltd. (producer of cigarettes) furnished the following
particulars to you pertaining to this income year.
Opening balance (WDV) of depreciable assets as on 2076-4-1.
Particulars Rs.
Building 10, 00,000
Car 6, 00,000
Computers 70,000
Office Equipment 1, 20,000
Plant & Machinery 8, 00,000
Tools 30,000
Repair & Improvement cost capitalized (block D) 10,000
• The company has purchased a plant & machinery as on Ashadh 15 for Rs.6, 00,000. The
company has also purchased a mini bus as on Aswin 25 for Rs.3, 50,000.
• During the year one old computer having written down value of Rs. 12,500 is sold for
Rs. 7,500. One printer having written down value of Rs. 3,500 became unusable and the
company recovered nothing from it.

• Repair & improvement expenses of the company during the year are:
Particulars Rs.
Building 90,000
Office Equipment 10,000
Car 75,000
Plant & Machinery 80,000
• During the year the company has incurred Rs. 5, 00,000 on research and development.
However, only Rs. 3, 75,000 is allowable deduction for research and development cost
for the income year.
Required:
i) Classify the assets as per schedule 2 of Income Tax Act, 2058.
ii) Amount of depreciation for the income year as per schedule 2 of Income Tax Act
2058.
iii) Amount of opening depreciable basis for the income year.
10. Hard Steel Udyog, proprietorship firm owned by Mr. Jeevan unmarried and handicapped
has following Trading & P/L A/c for this year on accrual basis.
Particulars Rs. Particulars Rs.

To Opening Stock By Sales 1,500,000
Raw Material - By Closing Stock
Finished Goods - - Raw Material -
Raw Material Purchase 500,000 - Finished Goods 560,000
Production Expenses
To Labour Wages 150,000
To Electricity 200,000
To Production Salary 100,000
To Depreciation (Block D) 200,000
To Plant Repair & Improvement 80,000
To Insurance Premium 10,000
(Machinery)
1,560,000 2,060,000
By Gross Profit C/D 820,000

INCOME TAX & VAT
Particulars Rs. Particulars Rs.

To Selling & Distribution 150,000 By Dividend (Gross) 200,000
To Insurance Premium Expenses 60,000
(Office Equipment)
To Other Expenses 4,000
To Net Profit 806,000
Total 1,020,000 1,020,000
Additional Information
(i) It purchases raw material 50,000 kg @ Rs. 10/kg from local market on Srawan 1.
(ii) Depreciation Base of Block ‘D’ is Rs. 1,000,000.
(iii) Selling & Distribution Expenses includes payment against truck freight Rs. 75,000 in cash
on Kartik 10 to Mr. Rajan, truck driver.
(iv) Insurance Premium Expenses (Office Equipment) is related to 18 months ending Ashadh
last and Insurance Bill is attached with Voucher.
(v) Data for consumption and production were as follows:
Purchase/ Consumption/
Particulars Opening Total Closing
Production Sales
Raw Material (kg) - 50,000 50,000 50,000 -
Finished Goods (kg) - 48,000 48,000 32,000 16,000
2,000 kg (50,000 – 48,000) is normal production loss.
(vi) He has received Salary Rs. 110,000 of F/Y 2075/76 and Rs. 50,000 for F/Y 2076/77 in
cash from part time employment in other companies.
(vii) He received dividend from Moon Rise Bank Ltd., registered as per Company Act, 2063.
(viii) He contributed Rs. 300,000 to Citizen Investment Trust (CIT).
(ix) Closing Stock of Finished Goods has been valued at Closing Market Rate i.e. Rs. 35/Kg.
Required:
i) Calculate Taxable Income
ii) Calculate Tax Liability

DISALLOWABLE EXPENSE (SEC. 21)
Following expense are expressively disallowed in taxation according to Sec. 21:
Expenses of Domestic or Personal Nature ~Sec. 21(1)(Ka)

Expenses of domestic nature or personal nature incurred by the person are not allowed for
deduction. The clarification under Sec. 21 explains the expenses as of domestic and personal
nature are as follows:
• Interest incurred on an amount borrowed to the extent to which it is used for personal
purpose (interest on siphoned out loan). If an entity has taken a loan from a bank and
allowed a certain amount to be used by a partner without any interest, such an amount
is a not allowed for deduction .
• Expenses of personal nature incurred for Natural Person in providing residence, meals,
refreshment, entertainment, or other leisure activities.
• Expenses incurred by Natural Person on conveyance from residence to office and office
to residence if it is not allowed by the policy. But the Section does not cover conveyance
expenses incurred for business purposes.
• Expenses incurred on Natural Person for clothing which is also suitable to wear outside
of work if not provided to all staffs and not included in the policy.
• Expenses incurred on education and training. But the expenses incurred on such training
which doesnot lead to a degree or diploma, that directly relates to the business are
allowed for deduction…
• Any expenses incurred to make a payment to a natural person or the expenses incurred
for a third person, except in and to the extent of the following conditions:
o The payment is included in calculating the income of the Natural Person- such as
house rent, driver facility, gardener, servant, telephone in residence, or etc provided
to an employee. If the expenses are included in the taxable income of the Natural
Person, the expenses are allowed for deduction to the person.
o The Natural Person makes a return payment of an equal market value to the person
as a consideration for the payment.
o Small amount incurred in this respect for which keeping a Natural Person account
is impracticable, for tea, stationary, awards, emergency medical facility or any other
expenses up to Rs.500 at a time.

INCOME TAX & VAT
Income Taxes Expense ~Sec. 21(1)(Kha)

Income taxes including interest, fines, penalty, etc paid under the Income Tax Act is treated as
charge to capital and are not allowed for deduction.
Similarly, Penalties or fines of similar nature payable to any Government or its local bodies for
breach of any Act or Rules or Regulations framed under the Acts are allowed as deduction.
Penalty on breach of law ~Sec. 21(1)(Kha)

Penalties or fines of similar nature payable to any Government or its local bodies for breach of
any Act or Rules or Regulations framed under the Acts are not allowed as deduction. But, all
additional charges may not constitute to be disallowed expenses. For example, additional charges
for late payment of electricity charges are deductible but a penalty levied for unauthorized use of
electricity (i.e by stealing) is not allowed for deduction.
Expenses Incurred for Tax Exempted or Final Withholding Taxed Income ~Sec.
21(1)(Ga)
Expenses to the extent to which a person is deriving from income exempt under Section 10 or
expenses incurred for getting final withholding payments are not allowed for deduction.
Payment in Cash for More Than Rs.50,000~Sec. 21(1)(Gha)

Any payment of expenses by a person having an annual turnover of more than Rs.20 lacs in an
income year, in cash for more than Rs.50 thousand at a time is not allowed for deduction, so the
person shall make all the payments above Rs 50,000 through banking channel.
Cash payment means a payment not made through any bank or financial institution in the shape
of a letter of credit, account payee cheque, draft, money order, telegraphic transfer, money transfer
and any other kind of transfer between banks and finance institutions.
But under these circumstances, the expenditure for more than Rs.50,000 at a time in cash, if paid,
is allowed:
• Payment made to GON, Constitutional bodies, corporate having ownership of GON,

Banks, and Financial institutions.
• Payment to a farmer or a producer for primarily agro products even in the case where
the farmer himself primarily processes the product.
• Payment of a retirement contribution or a retirement payment.
• Payment made in such areas where banking services are not available. An area not
having banking services means the area where there are no banking facilities within the
surrounding of ten kilometers.

• Payment made on the day when banking services are closed.

• Payment made under circumstances, where it is most necessary to be made in cash.
• Payment is made in the bank account of the payee.
No having PAN ~Sec. 21(1)(Gha1)

Salary or Wages expenses distributed to Employees or Workers not having Permanent Account
Number (PAN) shall not be allowed as deduction.
Invoice not containing PAN ~Sec. 21(1)(Gha2)

Expenses in excess of Rs. 1,000 incurred on invoice not containing Permanent Account Number
(PAN) shall not be allowed as deduction.
Distribution of an income ~Sec. 21(1)(Nga)

Distribution of income is not allowed for deduction i.e. Dividend paid out of the profit.
Disallowed other than allowed ~Sec. 21(1)(f)

Any other amount that is expressly not denied by the above paragraphs but denied by other
provisions included in Chapters 5, 6, 7, 10, 11, 12 or 13 of the Act are also not allowed for deduction.
Expenditure of Capital Nature ~Sec. 21(3)

Expenditures of capital nature are not allowed to be deducted. These expenditures are treated as
those of capital nature:
• Expenses incurred in respect of natural resource prospecting, exploration, and development.
• Expenses incurred in acquisition of assets having a useful life for more than twelve months.
• Expenses incurred on the disposal of a liability.
But those expenses of capital nature, such as pollution control cost, research and development
cost, etc up to an extent allowed by Section 14,15,16,17,18,19,20 and 71, are allowed for deduction
during the year of expenditure.
SPECIAL TREATMENTS ON SOME EXPENSE
Some of the expense are limited or explained by IRD with some disagreement than in accounting as:
Bonus Expense
Vide public circular dated 2072.11.28 bonus expense is allowed to the limit of followings:
Allowable bonus expense= (Net Profit before bonus and tax/110)*10.
If net profit before bonus and tax is Rs. 100,000; as exampled in the circular, bonus expense is
deductible to Rs. 9091.

INCOME TAX & VAT
Accommodation Provision
Vide public circular dated 2065.4.29 accommodation provision as compulsorily required by Labor
Act, 2048 is not allowable for tax expense.
Pre-operating Expense
Vide public circular dated 2064.11.3, preliminary expense and pre-operating expense is allowed
(of course subject to Sec. 21 and Sec. 13 except payment within this year) in the first year of
commercial production.
Carriage and insurance cost

Vide circular dated 2061.4.4 transport cost and transit insurance cost in the connection to the
import of goods, the cost paid and declared in custom frontier is allowed to be capitalized to the
cost of that particular goods.
SPECIFIC TYPES RELATED INCOME FROM BUSINESS
There are certain business whose taxation treatments is unique than other entity or business
sectors.
Long-Term Contract
Income recognition and deduction quantification in case of a long-term contract is quantified
separately for separate contracts.
A long-term contract is a contract for production, installation, construction, or the services related
to the production, installation or construction, which runs for more than twelve months and the
consideration is payable interim payment or running bills system. Whole the consideration shall
be paid at final bill with adjustments of earlier interim payments/ running bills.
To establish a long-term contract under this Section, there should, on one hand, be a deferred
return as a condition of the contract, and on the other, the contract should not be an excluded
contract.
The term “Deferred Return” is defined, as the return that is received later in separate parts after
an item has been sold. But according to Rule 10 of Income Tax Regulation, 2059, a contract is
not called a deferred return contract, if any party to a contract declares the information related
to the estimated profit and estimated loss for the period of every six months starting from the
commencement of the contract, as required by IRD3.
3
Conceptually, the returns are of two type- defined return and deferred return. In defined return contract,
anyone can reliably estimate the quantum of return during any future period; e.g. 8% 10 years bond
earns Rs. 8 in 4th year. Here, the return is defined. Other returns, on which return for particular period
cannot be estimated (for tax every six months) are deferred return contracts.

The Section further says that an excluded contract is not taken as a long-term contract. Excluded
contracts are those contracts which are expressively excluded from cumulative procedure of
income recognition. Rule 11 of the Income Tax Regulation, 2059 has enlisted the exclusion list of
excluded contracts as:
- Any contract that is executed solely because the parties to the contract have an inherent
interest in the entity (securities contract).
- Any contract that is executed solely because one of the parties to the contract has had the
membership of a retirement fund (retirement fund beneficiary).
- Any contract for investment insurance (Life insurance contracts).
Hence all the contracts relating to production, installation or construction having period more
than 12 months being deferred return but not excluded contracts are long-term contracts.
According to the Section, the gain from a long-term contract during a particular income year
should be calculated on the basis of cumulative procedure based on percentage of completion of
the contract. For this method following parameters need to be analyzed:
Contract price say Rs. 12 million
Contractor’s Estimated cost for completion say Rs. 10 million
Cumulative expense (direct cost) on year 1 say Rs. 1 million
In this case percentage of completion is computed as:
Percentage of completion=Cumulative expense/ Contractor’s Estimated cost
Percentage of Completion- Inclusion and deduction in the above case for the income year 1 and 2
shall be computed as follows:
Year 1 2
% of completion 10% (=1/10) 30% (3/10)
Cumulative Revenue 1.2 m (10% of Rs. 12m) 3.6 million (30% of Rs. 10m)
Cumulative Deduction 1.0 3.0
Cumulative Profit 0.2 million 0.6 million
Previous profit 0 0.2 million
This year gain 0.2 million 0.4 million

INCOME TAX & VAT
Retirement Fund-
Retirement funds are classified into two types: approved and unapproved retirement funds; both
are, normally Natural Person entity for tax.
a) Approved Retirement Fund

According to Section 63(1), Employees Provident Fund established under Employees
Provident Fund Act, 2019 and retirement fund established by Citizen Investment Trust
established under Citizen Investment Trust Act, 2047, Retirement Fund operated by Social
Secutiy Fund established under Contribution Based Social Security Fund Act 2074, Retirement
fund operated by Pension Fund established under Pension Fund Act, 2075 are duly-approved
retirement funds. But if a person wants to establish an approved retirement fund, it has to
obtain a written and prior permission from IRD.
These are the conditions applicable for granting the approved status:
i. The funds or deposits received by an approved retirement fund should be invested in

accepted investments. According to the Rule, the accepted investments are :
- Investment in Government bonds;
- Investment in banks or investment in finance companies having license from NRB

to conduct financial transactions;
- Investment for consortium financing; and
- Investment in beneficiaries other than its own shareholders.
ii. Paid up capital should be not less than Rs 1 crore
iii. Beneficiary or employee should be at least 1,000
iv. The management of the fund should be separate from the employer, if the fund accepts
the retirement contribution from the employer on behalf of the employees. But this
provision is not applicable, if the contribution is made directly by the employees.
v. The contribution amount should be deposited in the fund, within one month in case
the expenses are booked during the month of Ashad, or within fifteen days in case the
expenses are booked during the months of other than Ashad.
vi. The retirement payments to the beneficiaries could be made only under these
circumstances:
a. On retirement of the employee;
b. On achievement of an age of fifty eight years of the beneficiary; or
c. On death or on being permanently disabled of the beneficiaries.

v. The fund should get its accounts audited from an auditor who has an audit license from
the Institute of Chartered Accountants of Nepal.
Tax Accounting in Approved Retirement Fund –Section 64

In the calculation of income of a retirement fund, all the income and expense as other
institution are includible or deductible but these amounts are not considered:
• Contributions received from members are not included in the income of the fund.
• The retirement payments to the members are not included in the expenses of the fund.
Tax Accounting if approval from IRD is withdrawn

In case an approval of an approved retirement fund is withdrawn by IRD, it has to pay income
tax @ 25% on the amount calculated as follows:
Income year = date of approval to date of seizure of approval (might be more than a calendar
year)
b. Unapproved Retirement Funds

The retirement funds, other than approved retirement funds, are called unapproved
retirement funds.
According to Rule 20 (3), IRD has power to withdraw the approval, if the fund does not
function according to the conditions set for it. On withdrawal of the approval the fund is
converted into un-approved retirement fund.
Unapproved retirement fund need to file its income tax return based on whole of the income
and expense except contribution received or contribution refunded to members. At the
point of interest crediting to deposit accounts of members, if any; the interest expense of
Unapproved Retirement Fund is allowed whereas interest income of beneficiary is tax at the
time of payment vide Sec. 88 and 92.
Amendment to section 65 by Finance Act, 2064 has further clarified that the fund in which
there is no any contribution of the employee (non contributory fund), the payment from the
fund shall not be treated as received from an unapproved retirement fund. For example:
gratuity or compulsory retirement compensation etc shall not be taken as received from
unapproved retirement fund.

INCOME TAX & VAT

CHAPTER 2
INCOME
Unit 2:
INCOME FROM EMPLOYMENT

INCOME TAX & VAT
CONCEPT OF EMPLOYMENT
Definition of Employment
Employment is defined by the Act under Section 2(aj) as “employment that includes a past, present
or prospective employment.”
In general terms, the act of performing a certain job for the person, who appoints one for the job,
in consideration of a regular payment is called an employment. The income from an employment
can be generated only when a relation of employer and employee or master and servant has been
established between a payer and a payee. Whatever the employee derives from the employment in
the shape of a regular salary, allowance, overtime payment, bonus, etc. is included in the income
from employment.
Generally, an employment is known as a long-term employment but, in legal terms, an employment

last for a short period and may also be a part time one. An Natural Person may have more than
one employment on a day.
The employer may be any person like a Natural Person (a proprietorship firm), an entity, GON,
a local body of the GON, an institution, an organization, a foreigner, etc. but the employee is
always a Natural Person (a natural person). A husband and a wife working in the same entity are
treated as creation of two employments, one for husband and another for wife. The employment
is awarded on the basis of his/her ability, education, experience, honesty, behavior, etc. and so a
proxy is nowhere allowed to work on behalf of the employee.
A written appointment letter does not always qualify Natural Person to be an employee but an
oral appointment or even the behavior of the employer and employee is sufficient to treat the
Natural Person as an employee.
Accounting of Income of Employment

According to Sec. 22, income from employment is to be accounted in cash basis of accounting.
Here cash basis includes cash received or cash deemed to be received within income year. If any
payments are paid directly to third party or to associated person on behalf of employee, then the
payment is deemed to be received in cash. There are some fringe benefits those deemed to be
received in cash under given valuation method.
Calculation of Income from Employment

The remuneration derived by any natural person from employment in any income year shall be computed as
the income earned by that person in that year.
The following payments made by an employer to a natural person in any income year shall be included in
computing the remuneration earned by such natural person from employment in that income year:

CHAPTER 2 - COMPUTATION OF TAXABLE INCOME, UNIT 2 : INCOME FROM EMPLOYMENT
1. Amount for wages, salary, leave, amount for overtime work, fee, commission, prize, gift, bonus,
and payment for other facilities,
2. Payment for any personal allowance including amount for dear allowance, subsistence allowance,
entertainment and transport allowance,
3. Payment received for settlement of or reimbursement of expenses incurred by him/her or his/her
associated person for personal purpose,
4. Payment made for having given consent to any terms of employment,
5. Payment made for termination, loss of employment, or for compulsory retirement,
6. Retirement payment and retirement contribution including the amount deposited by the employer
for that employee in the retirement fund,
7. Other payments made in respect of employment,
Whatever the employee receives from the present, past or prospective employers in consideration
of the work s/he performed or for the work to be performed by him, is said the income of the
employee from the employment.
Section 8 of the Act specifies all the payments described below as amounts to be included in income
from employment. In this case, a payment means:
• A payment made by the employer;
• A payment made by an associate of the employer; or
• A payment made by a third party under an arrangement with the employer or an
associate of the employer.
Similarly, income from employment includes any payments in cash or deemed cash during income
year for any employment that was in past or being in present or even employment believed to be
in future too
Salary and Wages:

The amount being paid regularly for regular work performed on the basis of daily, weekly, or
monthly attendance, are called salary, wages, remuneration, emoluments, allowances, etc. Such
payments are the major component of income from employment.
If salary or wage has based on basic pay and periodic grade system, the term “salary and wage”
means total of basic and grade.
Allowances for Specific works:

Allowances being given for some specific circumstances, posts, or posting are included in income
from employment. For e.g. dearness allowance, remote area allowance, technical post allowance,
dangerous work allowance, hardship allowance etc.

INCOME TAX & VAT
Other Allowances:
Other allowances like entertainment allowance, standard of living allowance, etc are included in
the taxable salary. An allowance given for conveyance to and from the office is a taxable allowance.
Reimbursement or settlement of Personal Expenses:

Reimbursement of the expenditure incurred by the employee for personal cost like goods
purchased, even during the tour period is treated as income from employment of the employee.
However, reimbursement of expenses incurred by an employee for the business activity of the
employer is not included in income from employment. When an employee is in a business tour, his
total expenses including lodging, boarding, local conveyance, tickets for means of transport, fuel
for the means of transport, etc (outstation cost) are to be borne by employer and are not included
in income from the employment.
Sometimes, an employer allows a daily allowance in lieu of actual expense to borne the outstation
cost on the basis of the days of tour such amount of the daily allowance is not income for the
employee and hence not included in income from employment.
In case any advance is allowed for staff for paying any cost settlement of these cost is the cost
incurred for the business purpose which is not includible in income of employee; .Only the
settlement of any personal cost is includible in income from employment of employee.
Fees, Commission, etc.:

Amount being received regularly for a regular performance of duty on the basis of the quantity
or volume of work performed - such as fees, commission, etc. are includible in income from
employment of employee.
Overtime Payments:
Amount being received occasionally for the time spent on the job for more than the stipulated time
are includible in income from employment such as overtime payments.
Leave Encashment:
Amount being received occasionally for not availing of the allowed leave benefit. According to
Rule 20(6) of Income Tax Rules, 2059, an amount payable for leave accumulated up to Chaitra 18,
2058 is not included in taxable income.
Illustration : 1
On Shrawan 15, 2076, Mr. Jagat Lama received Rs.250,000 as leave encashment from his employer.
As per the record of the employment, as on Chaitra 18, 2058, the leave encashment payable to Mr.
Lama was Rs.150,000. Calculate the amount of leave encashment to Mr Jagat Lama

Solution:
In this case, the amount of leave encashment accrued after Chaitra 19, 2058, (Rs 250,000-Rs 150,000
= Rs. 100,000) shall only be included in the taxable income of Mr. Lama.
Awards, Prizes, Gifts, etc:

Amount or the market value of any awards, prizes, gifts etc received from an employer is to be
included in income from employment.
But the gifts, awards, prizes, etc. received from any person other than the employer are taxed as
wind fall gain which would be 25% on the amount or the market value of the benefits. The burden
of deduction of tax and deposit to Revenue is on the payer.
Bonus or Incentives:
Bonus or incentives provided by an employer are includible in income from employment.
Perquisites:
The value of any other facility provided by an employer to an employee under the terms of
employment are termed as perquisites. Such facilities include residence facility, vehicle facility,
facility of driver for vehicles, facility of house maids, gardeners, telephone facility for his/
her residence, etc. All facilities other than residence and vehicle are included in income from
employment of the employee on the basis of the actual expenses incurred by the employer less
any contribution paid by employee on this regard.
For accommodation and vehicle facility provided to any employee, Rule 13 of the Income Tax
Regulation, 2059 has quantified these facilities at 2% and 0.5% of basic salary and grade.
There are some points need to be considering in these two types of facilities:
• In both case, valuation need to be done based on ‘facility provided basis’; irrespective of
use or not.
• Salary in this regard is basic pay plus grade on the period of such facility.
• If employer charge any sum regarding use of these facilities, the charge or contribution
paid by employee is irrelevant for this purpose.
• Additional facility as furnished or unfurnished etc. are not considerable for valuation.
Illustration : 2
Pradeep is an employee of Ratna Hardware Enterprises and during the income year, received as
follows:

INCOME TAX & VAT
Basic pay Rs.10,000 per month Rs.120,000

Dearness allowance Rs. 24,000
Provident fund 10% of the basic pay
Bonus for last year Rs. 10,000
Dashain expenses for one month Rs. 12,000
Total cash salary Rs.180,400
Ratna Hardware Enterprises has allotted a house for his residence for which it is paying Rs.6,000
per month as rent and has also offered a car for his personal use during off hours. The firm is
paying Rs.3,000 to the driver for the car provided to him.
Calculate the income from employment of Mr Pradeep ?
Solution
Computation of income from employment:
Basic salary Rs. 120,000
PF contribution of employer Rs. 14,400
Bonus Rs. 10,000
Dashain expenses Rs. 12,000
Accommodation (2% of Rs.120,000) Rs. 2,400
Vehicle facility (0.5% of Rs.120,000) Rs 600
Driver’s salary Re. 04
Income from employment Rs. 183,400
Amount Received in Compensation or Termination of Employment:

Any amount received in compensation of accepting any limitation with regard to the terms of
employment is also included in computing taxable income from employment.
Any amount received for redundancy or a loss or termination of the employment is considered as
part of taxable income.
3
Vide public circular dated 2059.4.28, if vehicle facility of 0.5% is added as benefit, the cost paid to
chauffeur is not includible in income.

Employer’s Contribution to the Retirement Fund and Retirement Payments:

Any contribution to the retirement fund of an employee by an employer is included in computing
income from employment.
Any Other Payment by the Employer:
Any other payment made in connection with the employment is also included in computing
income from employment.
Interest Less than Market Rate ~Sec. 27(1)(d):

In cases the rate of interest on loans or advances paid by an employee to the employer during
an income year is lower than the prevailing market rate of interest, the amount, to the extent it is
lower, shall be included in the income from employment.
Income from Retirement Fund

Retirement payment relating to employment has two separate taxation methods with some
exemptions:
i) At the time of payments from Approved Retirement fund

a. Retirement payment accumulated till 2058.12.18.: Regulation 20(6)
Retirement payment, in form of gratuity, accumulated leave, provident fund or similar
retirement scheme accumulated till 2058.12.18 is tax exempted in the hand of employee.
In case of medical cost not utilized on that date; payment of retirement medical cost up
to Rs. 180,000 is tax exempted.
b. Retirement payment accumulated after 2058.12.18 : -Section 65(1)

Where payment from Approved Retirement Fund is made in lump sum, the payment to be set by
subtracting Fifty percent of the paid amount or five hundred Thousand Rupees, whichever
is higher, from the amount so paid shall be deemed as the profit made by the person from the
disposal of his non-business taxable property.
At the time of payment out of retirement fund in lumpsum, 50% of actual amount
received or Rs 5,00,000 whichever is higher is deducted from actual amount paid from
Approved Retirement Fund and remaining balance is taxed at 5% as final withholding
tax.
Illustration : 3
On Shrawan 15, 2076, Mr. Lama received Rs.300,000 as gratuity from GON. As per the record
of the employer, as on Chaitra 18, 2058, the gratuity payable to Mr. Lama, supposing that he
is retiring on the date, was Rs.250,000. Calculate the amount of gratuity taxable for Mr Lama

INCOME TAX & VAT
Soluton
In this case, the amount of gratuity accrued after Chaitra 19, 2058, (Rs. 50,000) shall only be
taxable income of Mr. Lama.
In case above payment were disbursed by GON to its employee or paid to any employee from
ARF, the tax shall, being payment is less than Rs. 500,000; be nil.
Illustration : 4
Mr. Wantawa takes retirement, on Jesth 15, 2076, under a scheme from Finance Ministry and
receives Rs.1,000,000 as a compensation for the earlier retirement, and Rs.600,000 as an amount
of gratuity. As per the service record with the Ministry, the amount of gratuity accrued, as on
Chaitra 18, 2058, was Rs. 500,000. Calculate his taxable amount
Solution
In such a case, the tax liability for the retirement payment received shall be as under:
Compensation received Rs.1,000,000

Gratuity received Rs. 600,000
Total amount Rs.1,600,000
Less: Amount of gratuity accrued as on 18.12.2058: Rs. 500,000
Balance Rs.1,100,000
Less: 50% of Rs.1100000 or Rs.500,000 which ever is
Higher Rs. 550,000
Remaining amount Rs. 550,000
Tax amount 5% on Rs.550,000 Rs. 27,500
This tax is a final withholding tax.
ii) At the time of payments from Unpproved Retirement Fund: -Section 65(2)
For purposes of computing the profit made by any natural person from the interest in any
retirement fund that has not obtained approval, the following provisions shall apply:-
• Where a resident person has made payment, tax shall be imposed on the gain amount (Received
amount less contribution amount) to the beneficiary in that amount as withholding of tax finally,
and
• Where a non-resident person has made payment, that amount has to be included in computing the
income of the beneficiary.

In case of payment from resident unapproved retirement fund, such amount is taxed at 5%
as final withholding tax. In case of payment from non-resident unapproved retirement fund,
such amount included in calculation of income of receiver
Payments not Included in the Income from employment

There are some payments, those seem as being relating to employment but these payments are not
included in computing income from employment:
a. The amounts deductible under Sections 10 and payment from which tax is withheld finally,
Any amount received by an employee for which exemption is given under Section 10 of
the Act. Such as any remuneration received by resident natural person being paid through
public fund of any foreign government , security personnel getting pension from public
fund of foreign government, ,any non-Nepalese resident person (or family members) gets
remuneration from foreign public fund, are exempted from taxability.
Any amount received which is subject to final withholding of tax.
b. Food and Tiffin provided by the employer to the employee at the work site in a manner
that it is available to all employees on the same terms,
Work-time meals or refreshments provided by the employer in equal terms for all the
employees at working place or uniform applicable to working place only.
c. The settlement or reimbursement of the following expenditure incurred by any employee:

1. The expenditure fulfils the business purpose of the employer, or
2. The expenditure exempted or to be exempted in the computation of the income earned

from investment.
Any reimbursement of expenses incurred by the employeeThat serves the purpose of the
business of the employer; orThat would otherwise be deductible in calculating the Natural
Person’s income from the business or investment.such as Reimbursement of outstation cost-,
travelling or daily allowance
Similarly, any amount paid as expense is exemptedwhere income corresponding tosuch

expense is also exempted in hand of natural person For example; agricultural income of a
natural person is exempted in tax, wage paid to workers from farm owner is exempt in hand
of workers, even wage is part of income from employment
d. Payment of such petty amounts of which accounts are impracticable to be maintained or

difficult to be maintained administratively as prescribed.
Any payment of petty amount, which are too small and thus unreasonable or administratively
impracticable to make accounting for them. The amount prescribed by the Rule is Rs.500 at a

INCOME TAX & VAT
time. The expenses prescribed by the Rule include tea expenses, stationery expenses, prizes,
gifts, emergency medical facility, or other such payments as specified by IRD.
Deduction in the Income from employment

a. Remote Area Allowance
Natural person working at remote areas gets additional deduction from taxable income as
follow:
Ka-50,000,
Kha-40,000,
Ga-30,000,
Gha-20,000,
Nga-10,000
b. Natural person with pension income

Natural person with pension income included in the taxable income obtains additional
deduction from taxable amount equal to 25% of amount prescribed under first tax band
c. Incapacitated natural person

Incapacitated natural person obtains additional deduction from taxable amount equal to 50%
of amount prescribed under first tax band
d. Life Insurance Premium

A natural person who has procured life insurance and paid premium amount thereon shall
be entitled to a reduction of actual annual insurance premium or Rs 25,000 whichever is less
from taxable income
e. Medical Insurance
A natural person insured in resident insurer for health insurance shall be entitled to a
reduction of actual premium paid or Rs 20,000 whichever is less
f. Contribution to Retirement Fund

A natural person at the time of contribution obtains minimum of following amount as
deduction to compute taxable income for the income year of contribution:
• Rs. 300,000
• One third of assessable income
• Actual contribution

Rebate on tax rate on Income from employment

a. Resident Natural Person women
In case of resident Natural Person women having only remuneration income, rebate of 10%
on the tax liability calculated as other natural person. i.e. not applicable for women with
couple status.
b. Retirement payment resulting from Merger

In case of decision of the organization to provide group retirement to its employees (in the
event of merger or acquisition) except to the payment made as per the employment term or
the payment made by retirement fund, a rebate of 50% on withholding tax.
Illustrations
Illustation 5.
Nabin Nirman Pvt. Ltd., Kathmandu declared a Voluntary Retirement Scheme (VRS) for its staffs
during FY 2076/77. Provident funds are deposited in CIT, an approved retirement fund. Mr
Subash Nepal decided to take VRS with effect from 1st Baishakh 2077. The following details are
available for income of Mr Subash Nepal for the year.
i) Basic Salary till Chaitra 2076 Rs. 50,000 per month.
ii) Monthly Allowance Rs. 30,000 per month.
Provident Fund contributed by employer 10% of basic salary. An equal amount was
contributed by employee.
iii) Life Insurance premium paid by Mr Subash Nepal for himself Rs. 20,000
iv) Remote area allowance for working in.
Category C district for two months Rs. 5,000 per month.
v) Provident Fund paid by CIT on 15th Baishakh 2077 Rs. 12,00,000.
Retirement payment paid by Nabin Nirman Pvt. Ltd. as per VRS was Rs. 20, 00,000, paid to
Mr Subash Nepal directly by the company.
Required:
a. Calculate taxable income and tax liability of Mr Subash Nepal for F/Y 2076/77 as per
Income from Employment. Assume Natural Person.
b. Identify any payments subject to final withholding Tax (Final TDS) and applicable TDS
rate and Tax amount.

INCOME TAX & VAT
Solution
Calculation of taxable income and tax liability of Mr Subash Nepal for FY 2076/77
Details Amount Notes

Salary 450,000.00
Monthly Allowance 270,000.00
Provident Fund by Employer 45,000.00
Remote Area Allowance 10,000.00
Total Assessable Income 775,000.00
Less: Contribution to Approved Retirement Fund (90,000.00) 1
1/3rd of Assessable Income 258,333.33
Contribution (45000 +45000) 90,000.00
Maximum 300,000.00
Taxable Income 685,000.00
Less: Life Insurance Premium (20,000.00) 2
Less: Remote Area Benefit (5,000.00) 3
Net Taxable Income 660,000.00
Calculation of tax liability for FY 2076/77
Tax Slab Tax Liability

1st Rs. 400000 @1% 4000
Next Rs. 100,000 @10% 10000
Next Rs. 160,000 @20% 32000
Total Tax Liability 46,000
• Note 1- Contribution to approved retirement fund is deductible upto 1/3rd of assessable

income or actual contribution or Rs. 3 lakh whichever is lower. Here, the amount
deductible is Rs. 90,000.
• Note 2- Life Insurance premium paid is deductible actual premium paid not exceeding
Rs. 25,000.
• Note 3- Remote area benefit available for Category C district is Rs. 30,000, proportionate
for period of stay. Here, two months.
The retirement payments made to Mr Subash Nepal are subject to TDS as per Sec. 88 of the
Act.
a. Provident Fund paid by CIT

Total Payment (Note 1) Rs. 12,00,000

Less 50% of the payment or Rs. 5,00,000 whichever is higher (Rs. 6,00,000)
Net Payment subject to tax Rs. 6,00,000
TDS @ 5% Rs. 30,000
The payment is final TDS as per Sec. 92.
Note 1: The payment for provident fund is assumed to have related only with the period
after the Income Tax Act, 2058.
b. Provident fund Paid by Employer

Retirement Payment paid by employer is subject to 15% tax as per Sec. 88. The tax amount
for Mr Subash Nepal is Rs. 3,00,000. The payment is final as per Sec. 92 of the Act.
Illustration 6
Mr. Ramesh has been retired from Government of Nepal on 15th Jestha, 2077. He has received
the following retirement payments in Ashadh, 2077. He has not any other sources of income
except salary. Remuneration tax already has been deducted and deposited. Assume, no
retirement payment was accrued at the commencement of this act in connection with this
employment.
Particulars Amount (Rs.)

Payment from GON against accumulated leave and medical allowances Rs. 6,00,000
Payment from Employee Provident Fund against contribution Rs. 7,00,000
Payment from Citizen Investment Trust against contribution Rs. 5,00,000
Solution
Fifty percent of the paid amount Or Rs. 5 Lakhs, whichever is higher, shall be deducted on the
lump sum retirement payment from any Approved Retirement Fund or Nepal government in
computing tax liability of any natural person as per section 65(1).
Further, section 88 (1) (1) states that in the case of the retirement payment made by the
Government of Nepal or by the approved retirement fund, at the Rate of Five percent shall be
deducted from the benefits calculated pursuant to section 65(1). Such retirement payment is
final withholding as per section 92 (1) (Chha).
Retirement payment to Mr. Ramesh from retirement fund and Nepal government and 50
percent thereof are as follows:

INCOME TAX & VAT
Particulars Amount
Payment from GoN against accumulated leave and medical allowances Rs. 6,00,000.00
Payment from Employee Provident Fund against contribution Rs. 7,00,000.00
Payment from Citizen Investment Trust against contribution Rs. 5,00,000.00
Total amount (WN 1) Rs. 18,00,000.00
50% of Total Payment (a) Rs. 9,00,000.00
Fixed amount u/s 65 (b) Rs. 5,00,000.00
Deduction allowed for the higher amount (a) or (b) above Rs. 9,00,000.00
Taxable Amount RS. 9,00,000.00
The EPF will withhold Rs.10,000.00 @ 5% on Rs. 2,00,000.00 (Rs.7,00,000.00-Rs.5,00,000.00) and

similarly, the CIT will not withhold any amount being only Rs.5,00,000.00. But, the GON will
withhold Rs. 35,000.00 (i.e Rs. 45,000.00 @ 5% on 9,00,0000.00 minus the amount Rs. 10,000.00
already withheld by the EPF). It will be a final withholding u/s 92.
Illustration 7
Mr. Sailesh, a disabled person, is working in Dailekh branch of Nabil Bank Ltd. In Fiscal Year
2076/77, following are the transactions;
i) Salary and allowances Rs. 50,000 per month; Dashain allowance Rs. 20,000; Bonus Rs.
40,000.
ii) Bank has managed to contribute to Provident Fund (approved) Rs. 24,000 from employer
as well as employee side.
iii) In addition to the remuneration received from Bank, Mr. Sailesh has also received Rs.
150,000 from Nepal Government in the form of Pension.
iv) He has covered the insurance and paid the insurance premium of Rs. 20,000 during
Fiscal Year 2076/77.
v) He has declared the couple under section 50, in Fiscal Year 2076/77.
Compute Assessable Income, Taxable Income, Tax liability of Mr. Sailesh for the Fiscal Year
2076/77.stating relevant provisions of Income Tax Act, 2058. 10
Solution
a) Computation of assessable Income, Taxable Income and Tax Liability of Mr. Sailesh
for the fiscal year 2076/77.

Particulars Amount (Rs) Working

Salary (50,000*12) 600,000
Dashain Allowance 20,000
Bonus 40,000
Contribution to Provident Fund (PF) 24,000
Pension 150,000
Assessable income from employment 834,000
Deductible Amount
Deductible amount against contribution to PF -48,000
Actual Contribution - Employer's and Employee's
48,000
Contribution
1/3 rd of Assessable income 278,000
Maximum Limit 300,000 Note1
Adjusted Taxable Income 786,000
Deduction for Remote Allowance under category Ga -30,000 Note2
Deduction under pension -112,500 Note3
Deduction for Disability -225,000 Note4
Taxable Income 418,500
Deduction against Insurance -20,000
Premium paid 20,000
Maximum Limit 25,000 Note5
Taxable Income (For Tax Calculation) 398,500
Computation of Tax Liability
For Pension NPR 37,500 @ 0% 0

Up to NPR 361,000 (For Couple) 3,610
Total Tax Liability 3,610 Note6
Working Notes
Note 1
As per rule 21 of Income Tax Rules, 2059 Natural Person, who has made a contribution to an
approved retirement fund during a Fiscal Year, is entitled to get exemption of the amount
deposited to the fund subject to a maximum limit of 1/3rd of the Assessable Income of him/
her during the year or Rs. 300,000 whichever is lower.

INCOME TAX & VAT
Note 2
As per section 1(5) of Annexure 1 of Income Tax Act, 2058, in case the income is generated
from an activity at a remote area of Nepal an additional exemption limit has been prescribed
for a resident natural person. The amount prescribed under category “Ga” (Dailekh district
falls under category “Ga”) is Rs. 30,000.
Note 3
As per section 1(9) of Annexure 1 of Income Tax Act, 2058, any natural person who has also
an income from pension, the tax exemption limit as prescribed under subsection (1) (Ka) or
(2)(Ka), whichever is applicable, shall increase by 25% of the basic limit i.eRs.112,500 (Rs.
450,000*25%). But as per rule 39 of Income Tax Rules, 2059, the additional exemption given to
the pension holders should not exceed the actual amount of pension s/he is receiving.
Note 4
As per section 1(10) of Annexure 1 of Income Tax Act, 2058, any natural person who is
disabled Natural Person or couple, the tax exemption limit as prescribed under subsection
(1) (Ka) or (2)(Ka), whichever is applicable, shall increase by 50% of the basic limitRs.2,25,000
(Rs. 4,50,000*50%).
Note 5
As per section 1(12) of Annexure 1 of Income Tax Act, 2058, in case a resident natural person
has taken life insurance on his life, Rs 25,000 or the actual premium paid during the year,
whichever is lower, is available for deduction from the taxable income of the Natural Person.
Note 6
For a Natural Person, who has opted for couple under section 50, the tax applicable shall be
as prescribed under section 1(2) of annexure 1 of Income Tax Act, 2058 and the minimum
exemption shall be Rs. 450,000.

CHAPTER 2
INCOME
Unit 3:
INCOME FROM INVESTMENT

INCOME TAX & VAT
CONCEPT OF INVESTMENTS
Investments as defined in Sec. 2(ka kha)

means an act of holding or investing one or more assets, but excludes the following :-
(1) the act of holding assets for personal use by the person owning the asset, or
(2) employment or business.
Provided that, the act of holding non-business chargeable asset is treated as an investment.
By this definition investments include the assets other than for personal use and for business.
Hence, one can classify total of assets as:
1. Assets on personal affairs (except non-business chargeable assets, if any)
2. Assets in business (trading stock, depreciable assets and business assets)
3. Investments assets
Investments assets are described in a few places of the act. Most cases, investments assets are
described as non business chargeable assets.
Personal affairs are not tax attractive. But in some rare conditions, assets under personal affairs are
tax attractive as non-business chargeable assets. Land, building and securities are defined as non
business chargeable assets in Sec. 2(da) except:
1. Relating to business as trading stock, depreciable assets and business assets;
2. Relating to natural person in case of personal house owned at least 10 years and resided
at least 10 years
3. Membership in retirement fund
4. Land and building disposed below than Rs. 1 million in case of natural person and
5. Transfer of above assets within 3 generation.
Land or building owned by a natural person may become non business chargeable asset in the
point of disposal, if above conditions not fulfilled in full.
Conceptually, Income from investments includes the income attached from those investment
assets or from disposal of investment assets themselves:

CHAPTER 2 - COMPUTATION OF TAXABLE INCOME, UNIT 3 : INCOME FROM INVESTMENT
COMPONENT OF INCOME FROM INVESTMENTS
Income from investments is to be accounted, according to Sec. 22, on cash basis of tax accounting
for natural person. Company should account in accrual basis. Entity other than company may
keep its tax accounting in either cash or in accrual basis of accounting. According to Sec. 9(2) “The
profits and gains made by a person from his investment in an income year shall be calculated by
including the following amounts received in that year:
(Ka) Dividend and interest received from that investment, payments received in consideration
of natural resource, rent, royalty, gains made from investment insurance, and gains
made from the benefit of retirement fund for which no approval has been obtained
under Sub-Section (1) of Section 63, or retirement payments received from the approved
retirement fund.
(Kha) The net gain made from the disposal of the non-business chargeable assets of the
investment of the person calculated under Chapter 8.
(Ga) In case the incomes (incomings) exceed the remaining value, including the expenses
incurred (outgoings) for the assets belonging to the group of depreciable assets under
Clause (Ka) of Sub-Section (2) of Section 4 of Schedule 2, at the time of disposal of the
depreciable assets of the investments made by the person, the excess amount.
(Gha) Gifts received by the person in relation to the investment.
(Nga) Retirement payments made in relation to the investment, and the retirement contributions
along with amounts deposited in the retirement fund for that person.
(Cha) Amounts received in consideration of consent given to any prohibition in relation to the
investment, and
(Chha) Other amounts to be included according to Chapter 6 or 7, or Section 56.
Investments income for person having investments business is taxed under income
from business source, and most cases for natural person getting income from Nepal
source, income from investments is taxed under final withholding tax method. Hence,
practically, there are very few cases taxed as income from investments.

INCOME TAX & VAT
PROFIT OR GAIN INCLUDED IN INCOME FROM INVESTMENTS
Incomes includible in profit or gain under income from investments are as follows:
a. Dividend: (Section 53)

(i) Distribution of profit
Dividend is a payment made by an entity to its beneficiaries in consideration of the
capital employed by them.
Section 2 (kala) has defined a beneficiary as the person having an interest in an entity.
Section 2(ma) has defined an interest in an entity as a right, including a contingent right, to
participate in the income and capital of the entity.
Partners for a partnership, shareholders for a company, members for a cooperative

society, etc are examples of beneficiaries.
According to Section 53
(1) The following matters have to be included in the distribution to be made by an entity:-
(a) Payment made by the entity to any of its beneficiaries in any capacity, or
(b) Capitalization of profits.
The Section covers each and every payment made by an entity to its beneficiaries but the
Sub-section (2) of Section 53 has excluded some of the payments to the beneficiaries from
the distribution of profit:
According to Section 53
(2) Notwithstanding anything contained in Sub-section (1), any payment referred to
in clause (a) of that Sub-section shall be deemed to have been distributed only in the
following circumstances:-
(a) Where the payment exceed the amount paid by a beneficiary to the entity in
exchange for a consideration likely to be obtained from the entity, and
(b) Where the following amounts are not included in the payment:-
(1) The amounts included in computing the income of the beneficiary,
(2) The payments from which tax has been deducted finally except for reason of distribution.
(3) Only if the distribution of any entity reduces the value of property or liability of that
entity, such distribution shall be deemed to be a distribution of profits or return of
capital.

(4) In any of the following circumstances, a distribution of any entity shall be deemed to be
a distribution of profits, subject to Section 55:-
(a) Where the distribution is of a type referred to in Sub-section (3) and the
amount as per the market value of the property exceeds the total amount
of capital contribution consisting of the market value of the liability of the
entity at the time of distribution and of capitalized profits, as well,
(b) Where profits are capitalized
(5) The distribution referred to in Sub-section (3) shall be deemed to be a return of

capital to the extent of non-distribution of profits.
(6) The distribution of any entity shall be deemed to be a dividend of that entity to
the extent of non-return of capital.
• In case a beneficiary receives some benefit for goods or services provided

to the entity, the payment is not treated as distribution of profit. But in
case the entity makes a payment in consideration of goods or services and
such payment exceed the amount paid by the beneficiary, then, the excess
amount may be qualified as a distribution of the profit;
• In case a payment by the entity to its beneficiary is included in the latter’s

taxable income, the payment is not treated as a distribution of profit such
as payment of salary for an executive post, interest for a loan provided, rent
for the property let out, paid to partners or shareholders .These payment
are not treated as a distribution of profit if the partners or the shareholders
have included the salary, interest or the rent in their taxable income.
• If a payment to the beneficiary is subject to the final withholding tax,

except distribution itself; it is not treated as dividend.
• The payment should reduce the value of assets or liability and following
condition to be fulfilled to that extent:
Market value Market value Book value Remarks

Total assets ≥ Total liability Paid up capital
Less: Payments Distribution
Total assets ≥ Total liability Paid up capital To the extent of
≥, distribution
thereafter capital
refund

INCOME TAX & VAT
Illustration :1
In the following case of Ansari company Ltd. on the date of payment to its shareholder:
Particulars Tax Base Market value
Trading Stock 100,000 105,000
Depreciable Assets 100,000 90,000
Business Assets 100,000 85,000
Non Business Chargeable Assets 100,000 110,000
Total Assets 400,000 390,000
Liability 100,000 100,000
Retained Earnings 100,000
Paid up capital 200,000
Total of Equity and Liability 400,000
At the end of financial year,, Rs. 100,000 has been paid to its shareholder. Then, assuming the
payments is not for purchase of any goods or services or for employment;
Calculate the amount of capital refund
Solution:

Total assets Rs. 390,000 Total liability Paid up capital
Rs. 100,000 Rs. 200,000
Less: Payments Rs. Distribution Rs. 90,000
100,000
Total assets ≥ Total liability Paid up capital Capital refund Rs. 10,000
Illustration: 2
In the following case of Jain company Ltd. on the date of payment to its shareholder:

Total Assets 400,000 415,000
Liability 100,000 100,000

At the end of financial year, asset valued Rs. 110,000 has transferred to its shareholder. Then,
assuming the payments is not for purchase of any goods or services or for employment;
Calculate the amount of distribution to share holder
Solution

Total assets ≥ Total liability Paid up capital
Rs. 415,000 Rs. 100,000 Rs. 200,000
Less: Rs. 110,000 Distribution Rs. 110,000
Rs. 305,000 Rs. 100,000 Rs. 200,000
Illustration: 3
In the following case of Ibrahim company Ltd. , Company capitalized whole retained earnings:

Total Assets 400,000 415,000
Liability 100,000 100,000
Here, total of capitalization (of retained earnings or other accounts) is distribution, so Rs.
100,000 is distribution.
ii. Dividend Distribution Tax (Section 54):

According to section 54
(1) On the dividend distributed by a resident body, it shall be as follows:-
(a) Tax shall be imposed on a shareholder of any company as per the mode of final tax
deduction, and
(b) No tax shall be imposed on other entities.
(2) The dividend distributed by any non-resident person to any resident beneficiary shall be
included in the income of the beneficiary and tax imposed accordingly.

INCOME TAX & VAT
(3) Notwithstanding anything contained in Sub-section (1), in cases where in distributing

a dividend by a resident company to another resident company, except for a dividend
distributed by a resident company to an organization enjoying tax exemption, the resident
company receiving the dividend, controls twenty-five per cent or more voting right of
the resident company distributing the dividend, directly or indirectly through itself or
one or more associated entities, no tax shall be charged on the dividend distributed to
such a resident entity.
(4) Notwithstanding anything contained in Sub-section (3), that Sub-section shall not be
applicable in the following circumstances:-
(a) Dividend distributed to any company because of ownership of redeemable shares

of the company distributing dividend.
(b) Dividend referred to in Section 58.
(5) The incomes referred to in Chapter-8 receivable for the interest of a beneficiary of an
entity have to include the amount for capital return made by any entity for that interest.
Provided that, the dividend distributed by the entity need not to be included.
Tax is levied on dividend paid by a company and partnership to its shareholders and its
partner but the dividend paid by other is exempt from tax.
Dividend paid by a resident company/partnership firm is subject to 5% final withholding

tax. In the above example dividend tax shall be 5% of Rs. 90,000, Rs. 110,000 and Rs. 100,000.
In case a non-resident company pays dividend to a resident person, the amount of the
dividend is to be included in income from investment of the payee.
According to Section 54(3) a company that receives an amount of dividend after deduction
of the tax, is not obliged to deduct tax on dividend paid by it to its shareholders out of the
amount of dividend received.
b. Interest
Interest is a consideration received for investment of cash with the expectation of return
from such investment such as a bank deposit, a deposit in a finance company, a loan, an
investment in bonds, saving bonds, development bonds, in a debenture of a company etc.
In case of annuity, finance lease, installment sale, hire purchase or similar deferred payment
scheme the installment should be segregated into interest and principal. .The rate of interest,
interest payable period, and maturity of the loan or deposit are generally fixed at the time of
investment. Interest received during the year on such investment is included in the income
from investment of the person. But a interest shall not be included in taxable income in case it
is declared as tax-free (normally on saving bonds) or final withholding taxed interest received
during the year:

c. Payment for Natural Resources

Section 2(sha) says that a payment made in consideration of the following activities is said to
be a payment for natural resources:
• The right to take water, minerals, or other living or non-living resource from the land; or
• For taking out, in whole or part, of natural resources or living or non-living minerals as
calculated on the basis of quantity or value of these materials taken from the land.
• So the royalty payable for a right to takeout the materials or any amount paid for taking
out materials from the land is included in the income from investment.
d. Rent
Payment made in consideration of getting a right to use some tangible assets including a
house property and payment in case of operating leased assets are defined as rent. In simple
words, a consideration paid for hiring a house property, land, plant and equipment, vehicle,
etc. is said to be a rent.
However, rent does not include natural resource payment and amount received as house rent
by a natural person except sole proprietorship firm.
e. Royalty
Section 2(kaka) has defined royalty as a payment received in consideration of leasing of an
intangible asset and also includes the following payments:
• Payment received for the use of, or a right to use a copyright, patent, design, model, plan,
secret formula or process, or trademark;
• Payment for the supply of some know-how;
• Payment for the use of, or a right to use a cinematography film, video tape, sound
recording, or any other such medium;
• Payment for the supply of information regarding industrial, commercial, or scientific

experience;
• Payment for the supply of assistance ancillary to the supply of the above mentioned
matters; or
• Payment for the total or a partial forbearance with respect to the matters discussed above.
• Royalty so received during the year is included in income from investment of the person.

INCOME TAX & VAT
f. Gain from Investment Insurance:

According to the clarification clause of Section 62 a gain from investment insurance is
calculated by subtracting a sum of the premiums paid, from the amount received from the
insurance policy.
The amount of gain is calculated as under:
Particulars Amount
Amount received from on maturity or on death of a natural person XXX
including bonus etc.
Less: Accumulated total of premiums paid for the policy XXX
Gain from investment insurance XXX
If a natural person receives a policy amount from a non-resident person during a year, the
amount of gain is included in income from investment during the year. But in case, the
amount of policy is received from a resident entity, the gain is subject to final withholding
tax at the rate of 5%. In such circumstances, the amount of gain is not to be included in the
income from investment.
g. Gain from the Amount Received from Un-approved Retirement Fund:

In case the retirement payment received from an unapproved retirement fund, the
accumulated contribution of up to the retirement or death deposited by the beneficiary to the
fund is deducted from the amount received and the balance amount is taken as gain. As per
Section 88(2)(Ga) read together with Section 92(1)(Gha) tax is levied on the gain @ 5% as final
withholding tax. The amount of gain is not to be included in income from investment.
In case the retirement payment is received from an unapproved retirement fund that is a
non-resident for Nepal during the year, the gain is included in income from investment of the
Natural Person as:
Particulars Amount
Amount received from on maturity or on death of a natural person including XXX
bonus etc.
Less: Accumulated total of contribution paid XXX
Gain from unapproved retirement fund XXX
h. Amount Received from an Approved Retirement Fund:

An amount being installment or similar received from an approved retirement fund is
included in the taxable income of the beneficiary. The treatment is explained separately in
previous chapter.

i. Net Gain from the Disposal of Non-Business Chargeable Assets:

In case, a person disposes off its non-business chargeable assets during a year and there by
derives a gain as calculated under Chapter 8 of the Act, the gain is included in income from
investment of the person for the year.
According to Section 36(2) net gain from the disposal of non-business chargeable assets of a
person for an income year are calculated as follows:
Particulars Formula
Total of gains on gain making items of disposal of non- ∑ gain u/s 37 this year
business chargeable assets during the year
Less: Total of losses on loss making disposal of non- ∑ Loss u/s 37 this year
business chargeable assets during the year
Less: Any unrelieved net loss out of any losses of business ∑ Net Loss from business
assets or investment of the person for the year other investments this year
Less: Any unrelieved net loss for a previous years out of the ∑ Net Loss from business
losses of the investment, any business, or other investment other investments Previous
of the person years
Less: Any unrelieved net loss for a previous years out of the ∑ Loss from business other
losses of the investment, any business, or other investment investments Previous years
of the person, unrelieved due to lapse of set off period of 7 unrelieved due to time
years or 12 years, as the case may be
Net gain from disposal of non-business assets XXX
j. Net Gain from the Disposal of Depreciable Asset:

In case, a person disposes off depreciable asset, used for investment purposes; and gained
a balancing charge, under Schedule 2 of the Act, the gain is included in the income from
investment of the person for the year. The method of calculation of balancing charge from
the disposal of depreciable assets is given in Balancing Charge in page 65 under income from
business chapter.
k. Gift Received by the Person in Respect of the Investment:

If a gift is received in cash, or otherwise, the market value of the gift is included in the income
from investment.
l. Contribution to the Retirement Fund Relation to Investment:

Any contribution to the retirement fund of Natural Person during a year by any person
related to the investments is included in the income from investment of the Natural Person
during the year.

INCOME TAX & VAT
On the other hand, any retirement payments received by the Natural Person from any
retirement fund is included in income from investment, if the contribution to the retirement
fund was made from the income from investment.
m. Any Amount Received in Compensation of Accepting any Limitation:

Any amount received during a year, in compensation of accepting any limitation with regard
to the terms of investment, is included in income from investment of the Natural Person
during the year.
n. Income from controlled foreign entity:

According to explanation under Sec. 69; ‘controlled foreign entity’ means a non-resident entity
in which, in any income year, a resident person has a direct interest or an indirect interest
through one or more interposed non-resident entities; in case such a person is associated to
that entity, or in case the person to be regarded as associated and any other not more than
four resident persons are associated to that entity, such an entity shall also be regarded as a
controlled foreign entity’. This definition can be explained under example as:
Illustration: 4
Company A, non-resident hold 51% shares in Company B, another non-resident. Company Z,
resident hold 51% of shares in Company A. State relation.
Hint: Here, Z and A as well as A and B are associates having direct shareholdings for the
purpose of Sec. 2 (kana). So, Z and B are associates under same Section. In this case, both
companies are controlled foreign entity for Z, having direct control of 51% in A and indirect
control of 51% from A in B. Income of B at 26% and income of A (except dividend income
from B- Sec. 69(2)) is to be included in profit or gain of Z.
Illustration: 5
Nepal Ltd. holds 70% of shares of Myanmar Ltd. registered in Myanmar. Later has 90%
holdings in Japan Ltd., which has 80% holdings in Bhotan Ltd. Bhotan Ltd. has 90% holdings
in Cambodian Ltd; latter has 80% holdings in Bangla Ltd. All the companies were registered
in the country named as companies. In Bangle Ltd. four other resident Nepalese associated
with Nepal Ltd. hold 20% shares. Then, for Nepal Ltd.
Myanmar Japan Bhotan Cambodia

Bangla Ltd.
Ltd. Ltd. Ltd. Ltd.
Holdings to latter company 70.0% 90.0% 80.0% 90.0% 80.0%
Holdings by other 4 residents 20%
Underlying Holdings of
Nepal Ltd. 70.0% 63.0% 50.4% 45.4% 36.3%
Status for Nepal Ltd CFE CFE CFE CFE CFE

In the above case, Myanmar Ltd. is controlled foreign entity with direct investments for
Nepal Ltd. Japan Ltd., Bhotan Ltd., Combodia Ltd. and Bangla Ltd. are controlled foreign
entity controlled through interposed entities.
Illustration : 6
Nepal Ltd. holds 70% of shares of Myanmar Ltd. registered in Myanmar. Later has 90%
holdings in Japan Ltd. Both subsidiaries earned taxable income of Rs. 10,000,000 excluding
dividend income. Corporate tax paid is 25% of net income in respective countries. Both
company distributed Rs. 5,000,000 dividend during the year.
Myanmar Ltd. (directly controlled-Subsidiary) and Japan Ltd. are controlled foreign entity
for Nepal Ltd; control is through interposed entity of Myanmar Ltd. (Fellow subsidiary in
corporate law). Here,
Proportionate to Nepal Ltd

Attributable Qualifying foreign tax
CFE (Inclusion in Profit or
Income credit
gain).
Myanmar Ltd. 10,000,000 7,000,000 2,500,000*70%=1,750,000
Japan Ltd. 10,000,000 6,300,000 2,500,000*63%=1,575,000
Dividend, actually received is not taxable vide Sec. 69(2), but included in incomings for
investments in shares in Myanmar Ltd.
Illustration : 7
Nepal Ltd. invested Rs.30 million to acquire shares on Myanmar Ltd. in IP-98. In the second
year Myanmar Ltd. issued right shares at 1:1 basis, as per Myanmar’s foreign investment
policy Nepal Ltd. could not acquire further shares. In the second year Myanmar Ltd. earned
attributable income of Rs. 8 million before paying Myanmar tax equivalent to Rs. 2 million.
In this case, Myanmar Ltd. (as well as Japan Ltd.) is not a CFE. Tax base of investment is
Rs.38,300,000 and any dividend from Myanmar is taxed on receipt basis.
Computation of Investments Amount Rs.

Outgoings at inception 30,000,000
Amount included in taxable income
Myanmar Ltd. (1st year income) 7,000,000
Japan Ltd. (1st year income) 6,300,000
Total Outgoings (Sec. 38) 43,300,000
Incomings
Actual dividend 3,500,000
Net Outgoings/ Tax Base (Sec. 38(2)) 39,800,000

INCOME TAX & VAT
Illustration : 8
Due to uncertainties in Myanmar, Nepal Ltd. disposed all shares at Rs.40,000,000 during the
2nd year. Then,
Incomings (Sec. 39) Rs.

Amount received at inception 0
Amount received during holding period 3500,000
Amount received at disposal 40,000,000
43,500,000
Outgoings (Sec. 38)
Amount Paid at inception 30,000,000
Amount paid during holding period 0
Amount paid at disposal 0
Amount included in income due to reason of receipt 13,300,000
43,300,000
Gain (loss) (Sec. 37) 200,000
Since there is single gain for Sec. 36, net gain includible in taxable income from investments
is Rs. 200,000.
Particulars Formula
Total of gains on gain making items of disposal of non-business chargeable 200,000
assets during the year
Less: Total of losses on loss making disposal of non-business assets during 0
the year
Less: Any unrelieved net loss out of any losses of business assets or investment 0
of the person for the year
Less: Any unrelieved net loss for a previous years out of the losses of the 0
investment, any business, or other investment of the person
Less: Any unrelieved net loss for a previous years out of the losses of the 0
investment, any business, or other investment of the person, unrelieved due
to lapse of set off period of 7 years or 12 years, as the case may be
Net gain from disposal of non-business assets 200,000
Other Amounts to be Included under the Following Sections:

a. Change in Basis of Accounting ~Section 22 (6):
In case a person adopted a cash basis or accrual basis of accounting system in the previous
year, but for the current income year it seeks the permission of IRD for changing the basis of
accounting IRD may give the permission with a condition to adjust the income of the year in

such a way that no amount included, deducted, or to be included or deducted in calculating

the person’s income of the income year of the change is omitted or repeated.
If permission is granted for imposing such a condition, the amount specified with the
permission should be included in the income from investments under this sub-head.
b. Gain from Exchange Fluctuation ~Sec. 24 (4) and Sec. 28

In case a person has booked any payment receivable or payable according to accrual system
of accounting, and at the time of the payment or receipt of the payment, if the amount differs
from the amount booked to the account, due to exchange fluctuation, the difference in amount
should be adjusted during income year in which the payment/receipt occurred as gain from
exchange fluctuation under this sub heading.
c. Recovery of Bad Debts, liability need not to be paid ~Sec. 25

As per section 25
(1) In maintaining accounts of the amounts received and expenses borne in the
computation of the income earned by any person from any employment, business or
investment, the person has to make proper adjustments at the time of reimbursement,
recovery, relinquishment of claim, writing off, or remission in any of the following
circumstances:-
(a) Where the person subsequently gets the amount reimbursed, or recovers the
expense, as the case may be,
(b) Where the accounts of the amount received have been maintained on the accrual
basis and the person subsequently relinquishes his right to receive that amount or
where that amount is a debt claim of that person and he writes off the debt as a bad
debt, or
(c) Where the accounts of the expense incurred have been maintained on the accrual
basis and the person subsequently relinquishes his liability to incur such expense or
where that expense is a debt claim, the person whom the debt is to be repaid remits
the debt.
(2) Any person may relinquish the right to receive any amount or to write off the debt
liability of that person as a bad debt only in the following circumstances:-
(a) In the case of a debt claim of any financial institution or bank, the debt claim is
converted into a bad debt as per the specified criteria, and
(b) If, after having followed all proper measures to receive payment in circumstances other than
those referred to in clause (a), that person is reasonably satisfied that the right or debt claim
cannot be realized or recovered.

INCOME TAX & VAT
As stated by section 25, if a person has adopted every step to recover a debt but, unable
to make the recovery in that case the receivable amount in the books has to be charged
as an expense. But during the current income year the debtor has paid the amount which
has already been written off, or somehow, able to recover the amount. In this case the
person should treat the amount as his taxable income from investments under this sub-
head on the income year in which amount is actually received.
In case a person shows an amount as expenses as per the accrual system of accounting
during any previous income year and later on, the person, who has a right to receive the
amount, disclaims the entitlement to receive the amount or in case of a debt, the person
writes off the debts as bad, the person who is liable to pay the amount or debt should
include the amount in his income from investments under this sub-head.
d. Distribution other than Profit ~Sec. 56(3):

In case an entity distributes dividend out of any amount other than profit, the amount of
dividend will be treated as income from business under this sub-head.
Distributed out of any provision created for any probable expenses in earlier years or
Distributed out of any capital reserve shall be some examples.
e. Indirect Advantage from Related Person (Sec. 29):

In case a person acquires an indirect advantage of a payment made by a payer or his related
person, or the payee authorizes another person to receive the amount, the Department may,
by a written notice, treat the person who receives the advantage or authorizes other person
to receive the amount, as he receives the amount. In case IRD has issued a notice to a person
to include an amount in his taxable investment income under this Section, he should include
the amount under this sub-head.
f. Compensation Received (Sec. 31):

Compensation received by a person or his related person in connection with his investment,
either due to an insurance policy taken or otherwise, to cover any one of the risks noted
hereunder is to be included in income from investment under this sub-head:
- Income received or receivable, or the compensation for any amount that is to be included
in the taxable investment income.
- Loss incurred by the person or likely to be incurred, or the compensation for any amount
that is to be deducted from the taxable income.
Amounts not Included in Taxable Income from Investment:

Following incomes, being similar as income from investments are not includible in profit or gain
on income from investments:

Exempted: Amounts received, which are exempted from tax as discussed in Chapter 3.3, are
not included in income from investment.
Dividend: Dividend distributed from entity other than company for tax purpose is not
includible in profit or gain under Sec. 54.
Controlled Foreign Entity: Dividend received from controlled foreign entity, under Sec. 69,
if taxed under head of income from investments; is not part of profit or gain in income.
Final Taxed: Amounts received, which are subject to final withholding of tax, are also not
included in income from investment.
Allowable Expenses in Computing Income from Investment:

The allowable expenses are described while discussing on the income from business.
Subject to Sec. 22 basis of accounting and Sec. 21 disallowable expense, principle to allow the
expense as deductible for computing income from investment is same as the principle of deductible
expense for computing income from business.
Illustration 9
The investment income and expenses related to Mr. Narayan for the financial year 2076-77 are as
follows:
Particulars Amount (Rs.)

A. Income:
House rent income 180,000
Bank interest income net of TDS- Nepal Bank Ltd. 190,000
Natural resources payments net of TDS 170,000
Interest income net of TDS from ABC Ltd. 2,125,000
Compensation received from loss of last year investment 25,000
Income from investment insurance net of TDS- Rastriya Beeme Sanstha 95,000
Gift related to investment income 50,000
Dividend income net of TDS from Sanima Bank Ltd. 47,500
B. Expenses:
Expenses related to collection of house rent 4,000
Expenses related to natural resources 8,500
Allowable depreciation allowance as per the Act 5,500
Life insurance premium paid to Rastriya Beema Sanstha 20,000
Donation paid to tax exempt organization 40,000

INCOME TAX & VAT
Calculate
i) Total Taxable income from investment.
ii) Net Tax liability for the financial year 2076-77, assuming Mr. Narayan is a unmarried and
had no other income.
Solution
Computation of assessable investment Income of Mr. Narayan for the F. Y. 2076-77
Particulars Amt. in Rs.

A. Investment Income:
House Rent Income -
Bank Interest Income net of TDS- Nepal Bank Ltd -
Natural resources payments net of TDS Rs. 170,000 (15% TDS) 200,000
Interest Income net of TDS Rs. 2,125,000 from ABC Ltd.(15%TDS) 2,500,000
Compensation received from loss of last year investment 25,000
Income from investment insurance net of TDS- Rastriya B. Sanstha -
Gift related to investment income 50,000
Dividend income net of TDS from Sanima Bank Ltd -
A. Total Investment Income 2,775,000
B. Investment Expenses:
Expenses related to natural resources 8,500
Allowable depreciation allowance as per the Act 5,500
B. Total Investment Expenses 14,000
C. Net Assessable Investment Income (A-B) 2,761,000

Particulars Amt. in Rs.
Net Assessable Investment Income 2,761,000

Less:
1. Donation to tax exempt organization (least of following):
i. 5 % of Adj. taxable income Rs. 2,761,000 = Rs. 138,050 (40,000)
ii. Actual donation = Rs. 40,000
iii. Maximum limit of Rs. 100,000
2. Life Insurance premium (least of following):
-Actual life insurance premium paid = Rs. 20,000 (20,000)
- or Maximum limit of Rs. 25,000 per annum
Total Taxable Income 2,701,000
Computation of Tax
Up to 400,000 (1% Social Security Tax- Not applicable) -
From 400,000 to 500,000(max of Rs. 100,000) @10% 10,000
From 500,000 to 700,000(max of Rs. 200,000) @20% 40,000
From 700,000 to 2,000,000(max of Rs. 1,300,000) @ 30% 390,000
Remaining Amount 701000 @ 36 % (In excess of Rs. 2,000,000) 252,360
Total Tax Liability 692,360
Less: Withholding tax ( Rs. 30,000 + Rs. 375,000) -405,000
Net Tax Liability of Mr. Narayan for 2075-76 287,360
Hence:
a) Total taxable income from investment of Mr. Narayan for F.Y. 2076-77 is Rs. 2,701,000.
b) Net tax liability of Mr. Narayan (after claiming withholding Tax of Rs. 405,000) is Rs. 287,360.

INCOME TAX & VAT

CHAPTER 2
INCOME
Unit 4:
TAX CREDIT

INCOME TAX & VAT
Tax credit is amount that is deductible from amount of tax liability computed from taxable income.
There are, now, three types of tax credits:
a. Medical Tax Credit- Section 51

If a resident natural person became ill, his treatment cost is qualify for medical tax credit
under Sec. 51
(1) Any resident natural person may make a claim for adjustment of tax for medical
treatment in any income year for the approved medical expenditure incurred by him/
herself or through any other person for him/herself.
(2) The tax adjustment amount for medical treatment of a natural person in any income year
shall be computed also by adding any amount, if any, referred to in Sub-section (4) to
the amount to be set by Fifteen per cent of the approved medical treatment expenditure
referred to in Sub-section (1).
(3) Notwithstanding anything contained in Sub-section (2), the amount of tax adjustment
for medical treatment claimed by a natural person in any income year shall not exceed
the prescribed limit.
(4) In the case of any natural person in any income year, the excess amounts as mentioned
in clauses (a) and (b), up to the following limit, may be carried forward and be included
in the amount referred to in Sub-section (2) in the forthcoming years:-
(a) Where the amount referred to in Sub-section (2) exceeds the limit referred to in Sub-
section (3), the amount of such excess, and
(b) The amount to the extent that the person referred to in clause (a) of Section 3 is
not allowed to use tax adjustment for medical treatment because of being less the
amount of tax payable by that person in that year.
Eligible Medical Cost is cost of treatments including fee paid to doctor, lab cost, dispensary
cost and other associated costs. Cosmetic medical cost is not includible as approved medical
treatement. If a person has medical insurance, premium paid for it is deemed as EMC.
Maximum limit of medical tax credit is Rs. 750 for a year. If a person has MTCL is more than
Rs. 750 or have tax payable is less than Rs. 750, any unrelieved Medical Tax Credit is carried
forward to coming years (till death).
Conceptually, allowed MTC is lower of:
a) 15%( MTCL including prior year unrelieved carried forward,)
b) Rs. 750
c) Actual tax after all tax credits availed to the person.

CHAPTER 2 - COMPUTATION OF TAXABLE INCOME, UNIT 4 : TAX CREDIT
b. Female Remuneration Tax Credit

If a resident natural person being female has remuneration income only, she is allowed a
Female Remuneration Tax credit of 10% on tax liability. If she has other income or clubbing
income (as couple or widow with dependent) this tax credit is not availed to her.
Illustration 1:
Mrs. Talika is working with a local bank branch, draws salary of Rs. 70,000. She get ill and
eligible medical cost is Rs. 30,000. She had a medical insurance contract, premium paid Rs.
10,000. Insurance company compensates Rs. 20,000 for treatment. Find tax for Talika.
Solution
Here, Taxable Income Rs. 60,000

Tax : 1% Re. 600
10% Re. 0
Tax Payable Rs. 600
Less: Female Remuneration Tax Credit (10% 0f Rs 600) Rs. 60
Medical Tax Credit Rs. 540
Tax Liability Re. 0
Medical Tax Credit:

= (EMC+ Medical insurance Premium- Insurance Compensation)*15%
= (30,000-20,000)*15%
= Rs. 1500.
Or Rs. 750
Or Tax Liability before medical tax credit = 540
Her actual tax after Female Remuneration Tax Credit is Rs. 540, so this can be availed as tax
credit. Remaining Rs. 960 (1500-540) is deferred to next year.
Foreign Tax Credit – section 71

If a person has foreign income, it would be taxed in that foreign country too. Resident person need
to pay tax on global income basis. Sec. 71 allows the person to set off this foreign tax on Nepal tax.
Any amount paid on foreign country having taxable income included by the resident is qualified
for foreign tax credit. The income included in taxable income of the person may be of same country
to get foreign tax credit facility.

INCOME TAX & VAT
a. Tax credit Method.

According to Sec. 71 (1) a tax credit may be available to a resident person whose income has a
source in a foreign country is included in taxable income of the person in Nepal to the extent
of the amount of income tax paid in that country on that income.
In case a person has a source of income in more than one foreign countries, the amount of
assessable foreign income situated in each country should be calculated separately.
The maximum amount of tax credit allowed for the year shall not exceed the average rate of
Nepal income tax for the person for the year applied to the person’s assessable income from
each foreign country.
The average rate of tax applicable in Nepal for the person during the year is calculated on the
basis of the following formula:
Average Tax Rate = Total tax calculated before tax credit for foreign income tax paid*100
Taxable income of the person including assessable foreign income.
The remaining amount of tax credit not absorbed during the year can be carried forward for
set off from the income during subsequent years from the same country.
Illustration : 2
Prabhat has a source of income in Nepal and also in more than one foreign country. During
the income year, employment income and tax paid in each foreign country is given below:
Name of the country Income Rs. Tax paid Rs.

USA 200,000 60,000
Australia 150,000 30,000
UAE 100,000 5,000
Nepal 250,000 -
Calculate the tax payable for the income year 2076/77
Solution:
He is a resident single natural person as taxpayers during the year.
Here, for income year 2076/77:
Total assessable income from all the sources:
Net income from Nepal Rs.250,000
Net income from the USA Rs.200,000

Net income from Australia Rs.150,000

Net income from the UAE Rs.100,000
Total taxable income Rs.700,000
Tax calculation
First Rs. 400,000 4,000

Next Rs. 100,000 10,000
Remaining Rs. 200,000 40,000
Total Tax 54,000
Average Tax Rate 7.71%
Tax credit for the year shall be available for:
Country Income Rs. Tax paid Rs. Tax calculated Tax credit Unabsorbed tax
at average rate available for credit to be carried
Rs. the year Rs. forward Rs.
USA 200,000 60,000 15,420 15,420 44,580
Australia 150,000 30,000 11,565 11,565 18,435
UAE 100,000 5,000 7,710 5,000 0
Total 450,000 95,000 34,695 31,985 63,015
The tax payable during the year comes to Rs.54,000 – Rs.31,985 = Rs.22,015.00.
b. Expense Method:
In case a person elects to relinquish the tax credit facility of the tax paid in a foreign country
during any income year, it can claim the tax paid in the foreign country as expenses for the
income having a source in that country. In the above example, person may elect to relinquish
the tax credit facility of the income tax paid in foreign countries, in that case the net income
from the foreign sources of Rs.355,000 (Rs.450,000 – Rs.95,000) shall be included in the taxable
income. In that case person is neither able to claim the tax credit during the year, nor able to
carry forward for subsequent years.
Illustration : 3
Mr. Amar is working with local school and earned following incomes during the year:
Salary on pay scale of Rs. 15000-10(1000-25000. Salary excludes festival allowance which is
two months salary at gross. Medical allowance of one month salary is received at year-end. He
got one grade as prize and reached the maximum scale of salary. School reimbursed Rs. 15000
for medical treatment, but Mr. Amar is not willing to take medical credit benefit, because the
bills were seemed not genuine.

INCOME TAX & VAT
School has policy that provident fund contribution of 20% is to be deposited into Karmachari
Sanchaya Kosh at equal proportion by both. School allowed a loan of Rs. 100,000 at 3% during
the year. Mr. Amar paid Rs. 2,000 as interest during the year. On 25th of Ashadh Mr. Amar
married with Mrs. Amar; she had a job, but resigned after marriage. Before married she got
Rs. 200,000 from that job.
Mr. Amar had bank deposit which were spent on marriage, but bank give Rs. 20,000 interest
thereto on net. Nepal Bank Ltd. Share, fortunately gave some dividend but still not collected.
Mrs. Amar got some interest from bank on her personal account, but she forgot how much
that was.
Amar has an industry producing verginia tobacco products has following income status.
Income Statements
For the year ended 31st Ashadh
Expense Rs. Income Rs.

Opening stock 300,000 Sales revenue 1200,000
Wages 400,000 Export revenue 800,000
Purchase 500,000 Closing Stock 200,000
Depreciation –factory 100,000
2,200,000 2,200,000
Export expense 10,000 Gross Profit 900,000

Interest @ 10% 100,000 Interest income 10,000
Prior year expense 100,000 Other income 100,000
Depreciation –office 100,000 Prior Year income 100,000
Staff cost 100,000 Dividend income 10,000
Office cost 100,000
Profit before tax 610,000
1,120,000 1,120,000
Tax base of depreciable assets is 110% of carrying amount for the purpose of NAS Income Tax.
Wages Rs. 50,000 is for repair works, not relating to production.
He got Rs. 20,000 for setting question in the school and Rs. 25,000 for the same from the District
Education Office.

Being first month of marriage, both of Mr. and Mrs. Amar are appreciative and wants to filed
jointly, can they do this? If or if not so, how much tax to be paid by them. Please calculate based on
the tax rates applicable for FY 2076/77
Illustration : 4
In the Illustration 2, say Parbat has contribution to an approved retirement fund of Rs. 100,000 and
eligible medical cost of Rs. 30,000. Find the Foreign tax credit and tax to be paid
Illustration : 5
Mr. Bimal Shrestha has a source of income in Nepal as well as foreign countries. His net income
and tax paid in each foreign country during the income year is given below:
Name of the Country Net Income (Rs.) Tax Paid (Rs.)

UAE 2,00,000 10,000
USA 4,00,000 1,20,000
Australia 3,00,000 60,000
Nepal 5,00,000 -
Mr. Bimal Shrestha is a resident natural person and opted couple status for income tax purpose.
He decided to elect to get benefit of foreign tax credit. Calculate his tax liability for the income
year. [2006-Dec]
Illustration : 6
Mr. A receives Royalty Rs. 25,00,000/- from Nepal on which 15% taxes deducted at sources. Mr. A
occasionally visits Nepal and during the 2076-77 he stays in Nepal for 100 days. He is a resident of
USA and he has to pay tax in USA. Can he claim the tax he has to pay in USA to be set off against
the tax deductible in Nepal and claim refund as that is the only income that he receives in Nepal?
He has to pay a tax at 35% in the USA on the Royalty income earned. [2004-Dec]

INCOME TAX & VAT

CHAPTER 3
RELEVENT MATTERS IN
TAXABLE INCOME

INCOME TAX & VAT
1. TAX ACCOUNTING AND TIMING
Income Year: Taxing period

The year in which income is earned is known as income year. Different countries have adopted
different periods for income year as per their customs and convenience. According to Sec. 2(jha)
income year starts from 1st of Shrawan and ends on the last day of Ashad next year, hence income
year for income tax purpose starts from Shrawan and ends on Ashad of next year.
However, income Year may not be a full year of 12 months in all cases. Following are the examples:
a. Newly Set up of Business, Profession, Industry, employment, birth etc:

In the case of newly set up business, the “Income Year” starts from the date of setting up of
the source of income and ends on the last day of following Ashad. It means an income year
may be for the period less than 12 months. The period may even be of a single day.
Setting up of an income source starts from the date of certification of incorporation or

registration from respective Government office or from the day of the actual starting of
business activities, depending on the earlier date.
Illustration : 1
a. If Kunal P.Ltd. has incorporated in 2076 Magh 15, then its first income year is 2076.10.15
to 2077.3.31.
b. Ms Durga, unemployed scholar, got a job on Ashadh 24, 2077 with GON, her income
year is 2076.77 (Ashadh 24 to Ashadh 31).
b. Liquidation or death
In the case of liquidation of business or death of natural person, the “Income Year” starts from
the 1st day of Shrawan and ends on the last day of liquidation or death.
c. A Certain Portion of a Year as Income Year in running business: Jeopardy Assessment

Section 100 of Income Tax Act, 2058 has specified certain circumstances under which the
Inland Revenue Office (IRO) may order a tax payer to submit a Tax Return for the period from
Shrawan 1 of the respective year and up to the date specified by the office but before the last
day of the closing of the income year if:
• The taxpayer becomes bankrupt, is wound up or goes in to liquidation.
• The taxpayer is about to leave Nepal immediately.
• The taxpayer is about to cease his business activities in Nepal for some other reasons, or
• The IRO considers any other circumstance as appropriate for the order.

CHAPTER 3 - RELEVENT MATTERS IN TAXABLE INCOME
In case a taxpayer receives a notice from the IRO, it has to submit a Tax Return for the period
as specified in the notice as income year.
If the taxpayer has continued the business for the whole Income Year, the taxpayer has to
file a new Tax Return as per Section 96 of the Act, ignoring the Tax assessment under Section
100. If the taxpayer has paid any amount under the obligation of Section 100, it can claim the
amount as advance tax paid for the Income Year.
d. Income Year covering more than one year

According to Sec. 64(3), in case any Approved Retirement Fund (ARF) became unapproved,
then its income year shall be date of approval to date of seizure of approval.
2. METHODS OF TAX ACCOUNTING - SECTION 22
Income Tax Act has prescribed two methods of tax accounting.Statutory cash basis for tax: Income
from Employment and income from investments in case of natural person has to be accounted in
cash basis of accounting.
Statutory accrual basis for tax: Company; should keep its tax accounts on accrual basis of
accounting. Banking business, as licensed from Nepal Rastra Bank can keep its accounts based on
directives.
Optional basis for tax: Income from business of a natural person and income of entity other than
a company (partnership and trust) may opt either basis for taxation.
a. Cash Basis of Tax Accounting- Section 23

Any person shall, in maintaining accounts on cash basis of his income earned from
employment, business or investment for tax purposes, subject to this Act, do as follows
(a) To treat as income only that which is received at the time when payment is received by
him or made available to him and include it in his income.
(a) To deduct for expense only after he pays out.
In this basis, according to Sec. 23, income includes in profit or gain as and when the actual
cash is received against the income. Loan received in cash or repayment of loan in cash is not
income and part of profit or gain.
Person accounting in cash basis for taxation, need to accounts for deemed cash received in
various cases. Contribution to retirement fund, payment directly to hospitals or school or any
other 3rd person or associated person are some examples. In cases of perquisite, market value
or token value are deemed as cash receipt for tax purpose.

INCOME TAX & VAT
b. Accrual Basis of Tax Accounting- Section 24

In this basis, according to Sec. 24, income includes in profit or gain as and when the right to
receive on those income as same in accounting.
In the case of deduction of expense, with due consideration of Sec. 21 and Sec. 13; liability
for the purpose of NAS 12 is allowed and provisions as in accounting and covered by NAS
12 are not allowed as deduction. Deduction under Sec. 24(2), are allowed in accrual basis, if
and only if,
• Obligation to definite party – Party
• Amount can be fixed- Measurable
• Payment against expense- Matching
These three points consist to liability for the purpose of NAS 12. Provisions under conservatism
and prudence concept are not allowed in tax. Provisions are allowed when cash payments
from provision or acquires all three points given above.
3. SAFEGUARD OF TAX ACCOUNTING DOCUMENTS- SECTION 81
According to Section 81, every person, liable to pay tax as per this Act, has to keep records and
documents as specified by IRD. Moreover, the Section compels a person to keep the following
records and documents:
a. All records and documents that are necessary to explain the information provided or
to be provided in tax returns and in other documents to be filed with IRD or Inland
Revenue Office (IRO).
b. All documents and records that are sufficient to determine the actual tax liability of the
person, and
c. All documents and records that are sufficient to prove the validity of the expenses shown
in the books.
It is, therefore, necessary to keep the supporting vouchers and documents, books, subsidiary
books, registers, etc with regard to every transaction or event happening during the year.
Sec. 81(3) has allowed a person to keep accounts and record either in English or in Nepali language.
In case a person keeps accounts and records in any other language, it has to get them translated
into Nepali from an authorized person on its own cost.
Above mentioned documents to be retained for 5 years from the date of closure of income year
concern. For example, documents relating to tax accounting for income year 2076.77 to be retained
up to 2082 Ashadh-end.

In case, tax documents could not kept safe and availed on need, the person is imposed a fee under
Sec. 117(2) amounting 0.1% of assessable income without deducting any amount or Rs. 1000
whichever is higher.
4. LONG-TERM CONTRACT
A long-term contract is a contract for production, installation, construction, or the services related
to the production, installation or construction, which runs for more than twelve months and the
consideration is payable as interim payment or running bills system. Whole the consideration
shall be paid at final bill with adjustments of earlier interim payments/ running bills.
To establish a long-term contract under this Section, there should, on one hand, be a deferred return
as a condition of the contract, and on the other, the contract should not be an excluded contract.
The term “ Deferred Return” is defined, as the return that is received later in separate parts after
an item has been sold. But according to Rule 10 of Income Tax Regulation, 2059, a contract is
not called a deferred return contract, if any party to a contract declares the information related
to the estimated profit and estimated loss for the period of every six months starting from the
commencement of the contract, as required by IRD5.
The Section further says that an excluded contract is not taken as a long-term contract. Excluded
contracts are those contracts which are expressively excluded from cumulative procedure of
income recognition. Rule 11 of the Income Tax Regulation, 2059 has enlisted the exclusion list of
excluded contracts as:
- Any contract that is executed solely because the parties to the contract have an inherent
interest in the entity (securities contract).
- Any contract that is executed solely because one of the parties to the contract has had the
membership of a retirement fund (retirement fund beneficiary).
- Any contract for investment insurance (Life insurance contracts).
Hence all the contracts relating to production, installation or construction having period more
than 12 months being deferred return but not excluded contracts are long-term contracts.
According to the Section, the gain from a long-term contract during a particular income year
should be calculated on the basis of cumulative procedure based on percentage of completion of
the contract.
5
Conceptually, the returns are of two type- defined rerun and deferred return. In defined return contract,
anyone can reliably estimate the quantum of return during any future period; e.g. 8% 10 years bond
earns Rs. 8 in 4th year. Here, the return is defined. Other returns, on which return for particular period
cannot be estimated (for tax every six months) are deferred return contracts.

INCOME TAX & VAT
The percentage of completion is computed as:
Percentage of completion=Cumulative expense/ Contractor’s Estimated cost
Illustration : 2
Contract price say Rs. 12 millions
Contractor’s Estimated cost for completion say Rs. 10 millions
Inclusion and deduction in the above case for the income year 1 and 2 shall be computed as follows:
Year 1 2
% of completion 10% (=1/10) 30% (3/10)
Cumulative Revenue 1.2 m (10% of Rs. 12m) 3.6 millions (30% of Rs. 10m)
Cumulative Deduction 1.0 3.0
Cumulative Profit 0.2 million 0.6 millions
Previous profit 0 0.2 million
This year gain 0.2 million 0.4 million
5. CALCULATION OF NET GAIN
a. Business Asset & Business Liability

There are three types of assets in tax base balance sheet of a business with priority of trading
stock, depreciable assets and business assets. All liabilities applied in the business are
business liability, irrespective of current or non-current.
If there is any asset that fulfills the definition of asset and not fall into trading stock or
depreciable asset, then the asset is business asset such asDebtors, receivables, advances, loans,
bill of exchange, prepaid expense, non-depreciable asset etc. Stock items that are not trading
stock like spare parts, stationary stock or depreciable assets before put to use like capital work
in progress (CWIP), unused furniture etc. are also business assets.
Investments are not business assets rather they are non-business chargeable assets.
Tax incidence on business assets and business liabilities are calculated on net gain basis. We
need to be clear in following five steps to find the net gain.
Disposal: There should be disposal. No disposal, no gain or loss.
Incomings: If there is disposal find total receipt on the asset/liability.

Outgoings: If there is disposal find total payments on the asset/liability.
Gain (loss): Residue of incomings and outgoings is gain
Net Gain: If total of gain exceeds loss and unrelieved loss, it’s net gain.
i. Disposal of Assets and Liabilities

Disposal as prescribed in Sec. 40 is applicable for all assets and liability whether those are
trading stock, depreciable asset, business asset, non-business chargeable asset or liability.
There are two different types of disposal: direct disposal and deemed disposal.
• Direct Disposal, Sec. 40(1) and Sec. 40(2):

If title associated with an asset is seized from a person, it is direct disposal. Seizure of title
(ownership) may be done by way of sale or leased, merger or de-merger, transfer, cancel
or surrender, expiry, theft or stolen or lost, fired or flood, or by similar nature.
On the other hand, if obligation associated with a assets is seized from a person, and
then the liability is disposed. It includes mutatis mutandis to disposal of assets as merger,
cancel, surrender, maturity or payment.
Sec. 40 to Sec. 49 are common for trading stock, depreciable assets, business assets,
liabilities and non-business chargeable assets too.
• Deemed Disposal Sec. 40(3):

There are various cases in the Income Tax Act, 2058 which deals withdisposal for the
purpose of tax but not a real disposal. In such case, asset might be owned by same person,
but deemed as disposal for tax purpose (examples Sec. 41 to 45). Alternatively, assets
might be disposed in the real practice but for the tax purpose, it may not be deemed as
disposal (examples Sec. 46 to 47). Followings are deemed disposal for the tax purpose:
Change of Status:
• Change of Good loan to Bad loan: Sec. 40(3)(Ga): If it has become a bad debt as per the
standards as prescribed in respect of a debt claim of a bank or financial institution, and
If, in any other circumstance, that person has reasonably believed the debt claim as non-
recoverable.
• Change of Form of Asset: Sec. 40(3)(Gha) : If any assets in either form of Non business
chargeable asset, trading stock, depreciable asset or business assets change to another
form, then the asset deemed to be disposed. For example, if any entity goes to liquidation,
all the assets transferred to held for sale (trading stock), then all the assets deemed to be
disposed off.

INCOME TAX & VAT
• Change of Ownership Sec. 40(3)(Nga) : In case of shareholdings of an entity has changed

by more than 50% as compared with the ownership prior 3 years, then all the assets
owned by and liability owed by the entity is deemed to be disposed.
• Change of Residency Sec. 40(3)(Cha) : In case any person changed to non-resident

from resident, all the assets (except land and building situated in Nepal) deemed to be
disposed.
• Other Cases:
• Death Sec. 40(3)(Ka) : In case of death of a natural person, all the assets owned and
liabilities owed by the person deemed to be disposed at the point just before death.
• Incomings > Outgoings Sec. 40(3)(Kha) : In case incomings in a assets if higher than
outgoings, then the asset deemed to be disposed.
b. Incomings on Business Assets / Liabilities

Incomings means historical receipts including sale proceeds
If an asset has been disposed in any form of direct or deemed, sale or otherwise, amount
received on that income needs to be computed. Incomings mean all the receipts on the asset
from the point of its acquisition to date of disposal. So,
Amount received at the time of inception Rs. ……

Amount received during the holding period Rs. ……
Amount received at the time of disposal Rs. ……
Total Incomings Rs. …. …
In case of liability, incomings come, normally, at beginning. In the case of assets, normally,
incomings come at disposal.
In case of most of the assets, there will not be any inflow at the inception (purchase) or during
the holding period. But, there are various assets which brings inflow at inception or during
holding period.
Illustration : 3
If any asset has been acquired with the government grant or similar assistance, then person
acquiring asset get an amount at the time of inception. Same or similar case may be deemed
as the grant if received after fulfilling some future conditions. In this case, the amount has
received during holding period.
Solar pane cost Rs. 20,000, government assist 70% of cost immediately after installation. Rural
Municipality assists 10% after one year of operation. The solar operated for 3 years.

In this case, amount received at inception is Rs. 14,000 and amount received during holding
period is Rs. 2,000.
Illustration: 4
If some part of assets has been sold or some other arrangements were made, it would get
benefits of ‘amount received during holding period’. Owner of zigzag land may get ‘amount
received during holding period’ if he allows his land to make straight or to close compound
wall gate far away.
In case of advances or loan asset, it might be paid partially, then the sum may be taken as
amount received during holding period.
Illustration: 5
Mr. Loankarta has incurred a loan of Rs. 2,000,000 on Srawan 1st of 2076. His loan limit was
increased to Rs. 3,000,000 and take further loan on 30th Chaitra 2076. For the yearend:
Amount received at the time of inception Rs. 2,000,000

Amount received during the holding period Rs. 1,000,000
Incomings Rs. 3,000,000
Assets owned or Liabilities obliged before 2058.12.19
In case of any liability obliged by a person before 2058.12.19, it is deemed that incoming at the
point of inception is market value of obligation on 2058.12.19.
Similarly, in case of an asset is owned by a person before 2058.12.19, it is deemed the outgoings
at the point of inception is market value of asset on 2058.12.19.
In both case, all payment or receipt before 2058.12.19 is replaced by market value on that date
according to Sec. 40(5). This valuation is applicable to the assets or liability which were firstly
fall into tax bracket only. Assets or liability within tax bracket on the date of enactment of
Income Tax Act, 2058 need to be valued at tax base on that date.
Net incomings (Tax Base)
If any liability has been settled partially, the net amount outstanding after settlement or partial
settlement of liability is Net incomings. In case of any remission on liability is allowed, and
then this amount is netted to incomings.

INCOME TAX & VAT
Illustration : 6
In above illustrationNet incoming at 2077 Ashad end is :
Amount received at the time of inception Rs. 2,000,000

Amount received during the holding period Rs. 1,000,000
Incomings on 2077 Rs. 3,000,000
Less: Amount paid at inception Rs. 0
Amount paid during holding period Rs. 0
Outgoings on 2076 Rs. 0
Net Incomings (Incomings- Outgoings) Rs. 3,000,000
c. Outgoings on Business Assets/ Liabilities

Outgoings means historical payments including loan settlement
If a liability has been disposed in any form i.e direct ordeemed, settled or otherwise, outgoings
on that liability were needed to be compute on that liability. Outgoings mean all the payments
on the asset or liability under question from its acquisition to date of disposal. So,
Amount paid at the time of inception Rs. ……

Amount paid during the holding period Rs. ……
Amount paid at the time of disposal Rs. ……
Total Outgoings Rs. …. …
In case of asset, outgoings come, normally, at beginning. In the case of liability, outgoings come
normally at disposal.
In most of the assets, there will beoutgoing at inception (purchase) or during holding period.
But, there are various cases where outgoing would beafter at inception or during holding
period.
Illustration: 6
Solar pane cost Rs. 20,000, government assist 70% of cost immediately after installation. Rural
Municipality assists 10% after one year of operation. The solar operated for 3 years.
In this case, Outgoing is Rs. 20,000.
Illustration : 7
Land costing Rs. 2,000,000 purchased on 2070, compound wall was constructed Rs. 200,000.
The compound wall had damaged due to flood and repair cost Rs. 100,000 on 2077. The
neighbor land owner paid Rs. 50,000 for a small piece to make boundary straight.

In case, outgoings is Rs. 2,300,000 (2000000+200000+100000) and incomings is Rs. 50,000.
Net outgoings (Tax Base)

Net outgoings is the actual investment of asset at any particular point of time. For computing
deferred tax it is tax base of business assets.
Net outgoings is computed deducting Incomings, if any, from outgoings of an asset.
Illustration: 8
In above illustration
Net Outgoings is Rs.
Outgoings Rs. 2,300,000

Incomings Rs. 50,000
Net Outgoings Rs. 2,250,000
6. GAIN ON DISPOSAL OF BUSINESS ASSETS/LIABILITY
In case of disposal of business assets, liability and non business chargeable assets, gain or loss
on disposal need to be computed in each asset and liability. According to Sec. 37;
Gain (loss) = Incomings - Outgoings
According to Section 36(1) net gain from the disposal of non-business chargeable assets of the
investment of a person for an income year are calculated as follows:
Particulars Formula
Total of gains on gain making items of disposal of BA/BL ∑ gain u/s 37 this year
during the year
BA/BL during the year ∑ Loss u/s 37 this year
Less: Any unrelieved net loss out of any losses of BA/BL of the ∑ Net Loss from business
person for the year this year
Less: Any unrelieved net loss for a previous years out of the ∑ Net Loss from business
losses BA/BL of the person Previous years
Less: Any unrelieved net loss for a previous years out of the ∑ Loss from business
losses of any business of the person, unrelieved due to lapse of Previous years unrelieved
set off period of 7 years or 12 years, as the case may be due to time
Net gain from disposal of non-business assets XXX

INCOME TAX & VAT
7. SOME DEEMED TRANSACTION FOR TAX PURPOSE
a. Disposal with Retention

If a person faced a transaction as prescribed in Sec. 40(3)(Ga) to (Cha), amount received at
disposal is deemed as market value on the date of transaction. For second disposal, same
market value is deemed as inception value. Hence, in case of Change of Good loan to Bad
loan u/s 40(3)(Ga) , Change of Form of Asset u/s 40(3)(Gha), Change of Ownership u/s 40(3)
(Nga) and Change of Residency u/s 40(3)(Cha) :
o Amount received at disposal = Market Value

o Amount paid for second disposal = market value
i. Change of good loan to bad loan

If loan and advances issued by the bank and financial institution has been classified as bad
loan as per Nepal Rastra Bank Directives, the loan is deemed as disposed.
In other cases, if person owned a loan or receivables could not be collected with all reasonable
action, it could write to bad expense.
If any receivable became bad, it is valued at nil as prudence valuation.
Illustration :9
NOREAD Bank Limited holds Rs. 4 billions loan and advances. Out of this loan Rs. 3 crores
classified as bad loan. In such case:
It is disposal of good loan u/s 40(3)(Ga).
Incomings = Re.0
Outgoings = Rs. 3 crores
Gain (Loss) = Incomings – Outgoings = (3 crores)
Amount paid for bad loan = Re. 0.
This loss can be set off with gain u/s 37 and any net gain is profit or gain.
ii. Change of form of asset

In case any asset, being either trading stock, depreciable asset, business asset or non-business
chargeable assets has changed to another asset, then the first-mentioned asset deemed to be
disposed off at market value. This provision is not for inter-group transferred as raw material
changes in WIP or finished product; Debtor (Business Asset) changed to Bill of Exchange
(Business Asset) or similar.

Illustration : 10
Car Sales Limited sales car in Kathmandu. On the consignment dated Shrawan 30, company
purchased 30 Japanese car for Rs. 2.5 crores. Market value of car is Rs. 3 crores. One of the
cars, as per managerial decision 25 cars were sold for Rs. 2.5 crores. Find tax incidence.
Here, 25 cars were sold in market for sales revenue of Rs. 2.5 crores. One car has been used by
company at market value of Rs. 10 lakhs. So, sales revenue is Rs. 2.60 crores.
Value of depreciation pool C is Rs. 10 lakhs (fully absorbed).
Illustration : 11
Gharti Investment Company invested Rs. 100,000 for 7% convertible debenture. Debentures
are converted to 1000 share of Rs. 100 each. Market value of share after conversion is estimated
Rs. 150.
In such case, 7% convertible debenture has disposed to shares.
1. It is disposal of 7% convertible debenture u/s 40(3)(d).
2. Incomings = Re.150,000
3. Outgoings = Rs. 100,000
4. Gain (Loss) = Incomings – Outgoings = 50,000
5. Amount paid for share = Re. 150,000.
This gain can be set off with gain u/s 37 and any net gain is profit or gain.
Illustration: 12
In above illustration, debenture were redeemed one year before of due date with 4.5%
additional shares at par value. Market value of share expected to be Rs.150 per share.
In this case,
Incomings on disposal of debenture (1000*1.045*150) Rs. 156,750
Outgoings Rs. 100,000
Gain Rs. 56,750
Illustration : 13
In above illustration, debenture were redeemed one year before of due date with premium
of 4.5% of par value. Full value was settled by way of issued of shares at 2.25% of premium.
Market value of share expected to be Rs.150 per share.

INCOME TAX & VAT
In this case, no. of shares received is 1,022 (100,000*1.045/102.25)
Amount received at disposal is Rs.153,300 (1,022*150) .
Hence, Incomings Rs. 153.300
Outgoings Rs. 100,000
Gain Rs. 53,300
Tax base of share investments Rs. 53,300
Illustration : 14
Hitang Industry engaged in producing shoe owned 2 buildings having depreciation base
of Rs. 20 lakhs and Rs. 30 lakhs. The second building was transferred to asset held for sale.
Market value on the date of such classification was Rs. 35 lakhs. Company uses fair value for
asset held for sale. Find the depreciation for income year.
Here, building falls on pool A of depreciation pool. Asset classified as held for sale cannot be
depreciated as per NAS 20 (IFRS 5).
Particulars Amount Pool A

Opening Depreciation Base Rs. 50,00,000
Addition Re. 0
Disposal u/s 40(3)(d) Rs. 35,00,000
Depreciation Base Rs. 15,00,000
Rate of Depreciation 6.67%
Depreciation expense Rs. 100,050
Tax Base for asset held for sale is Rs. 35,00,000.00. Tax Base of depreciable asset is Rs. 13,99,950.
iii. Change of Ownership

If 50% of shareholders in last 3 years have been changed, then the entity is deemed to be
dissolved. In such case, first-mentioned entity disposes all the assets and liability to second
entity at market value.
Illustration : 15
Shareholdings of company has assumed to be changed by 70% rather than dividend. Then the
tax impact, apart from other transactions; in this change shall be as follows:


Total Assets 400,000 390,000
Liability 100,000 100,000
In case of trading stock- it deemed to be disposed at Rs. 105,000 and cost of goods sold Rs.
100,000.
In case of depreciable assets (assuming single pool)- Rs. 90,000 is amount received in disposal,
terminal depreciation of Rs. 10,000 is allowed as deduction.
In case of business assets, net loss of Rs. 15,000 can be set off with net gain on disposal of non
business chargeable assets Rs. 10,000 can be set off and unrelieved loss Rs. 5,000 cannot be set
off in any future years.
Illustration: 16
Shareholdings of company has assumed to be changed by 51% rather than dividend. Then the
tax impact, apart from other transactions; in this change shall be as follows:
Particulars Tax Base Market value Gain Loss Includible in:

Trading Stock 100,000 115,000 115,000 Sales
Depreciable Assets 100,000 90,000 10,000 Terminal depreciation
Business Assets 100,000 85,000 15,000 set off with gain
Non Business 100,000 125,000 10,000 Net gain
Chargeable
Total Assets 400,000 415,000
Liability 100,000 100,000 No impact

INCOME TAX & VAT
Illustration : 17
On Falgun 1, shareholders of A Ltd sold their share of 60% to new company. The tax balance
sheet as on that day was as follows:
Trading Stock 100,000 Paid up capital 100,000

Depreciable Assets 100,000 Tax paid reserve 100,000
100,000 Liability 100,000
Total 300,000 300,000
Market value of depreciable assets were 120% and trading stock 115%. At the year-end the
company sold all the stocks at Rs. 120,000. Dividend at 100% for the last year and 20% interim
for the year were distributed mean-time. Find the tax consequences.

CHAPTER 4
PAYMENT OF TAX AND
TAX RETURN

INCOME TAX & VAT
FORM, PLACE AND TIME FOR PAYMENT OF TAX
Income tax is paid to Inland Revenue Department by three ways: withholding tax on accrual/
payment, advance tax by way of installment and payment of remaining tax with income tax return.
In case of failure to pay tax liability to tax authority, they may collect in various ways like seizing
and selling the assets owned by defaulted taxpayer.
1. Forms for payment of tax

There are varieties of modes/ways/forms for payment of tax to tax authorities which are
explained as below:
i. Withholding Tax (TDS): In case of payments subject to Sec. 87 to 89B, payer need to
deduct tax at source and need to deposit in tax authorities revenue account within 25th
of succeeding month. Person making withholding tax need to file monthly Withholding
Tax Return in the concern IRO. On failure to file monthly return, additional fee @ 2.5% of
withhold tax will be levied.
ii. Installment Form: Every person (other than presumptive taxpayer) having annual tax
payment of Rs. 5,000 or more need to file an estimated tax return within Push-end of each
income year. Person need to pay
 40% of estimated tax within Push-end,
 up to 70% of estimated tax up to Chaitra-end and
 up to 100% of estimated tax up to Ashadh-end of income year.
The estimated tax should not be less than 90% of actual tax to be paid for the income year.
Format of Estimated Tax Return is prescribed and in form of e-return too.
iii. Tax Return Form:
Self assessment return has to be filed by each tax payer within three months from the
elapse of income year i.e end of Ashwin (may be extended till poush with an application
to the concerned IRO) with the balance amount of the tax liability not paid in installment
has to be paid Further sometimes tax authority may ask to deposit tax liability by jeopardy
assessment and amended assessment within the Income year (i.e before completion of
FY).
Return Filing not Required (Sec. 97)

i. Unless requested by the Department by notice in writing served on the person or by public
notification, no return of income for an income year shall be required under Section 96 from
following persons:-

CHAPTER 4 - PAYMENT OF TAX AND TAX RETURN
(Ka) a person who has no tax payable for the year under Section 3(Ka);
(Kha) a person referred to in Section 3 (Ga) for the year;
(Ga) a resident natural person to whom Section 4 (3) applies for the year; or
(Gha) If the owner of vehicle who is liable to pay tax under Section 1 (13) of Schedule 1 is
Natural Person except sole proprietorship frim, such Natural Person.
(Nga) An Natural Person who has gain only from disposal of non business chargeable assets
and who do not want to file income tax return.
(2) Notwithstanding Sub-section (1), a natural person with income over Rs. 40 lakh in an
income year shall file return under Section 96 of the Act.
(3) In addition to the income included by the person filing return under Sub-section (2), the
incomes under Clause (Gha) of Section 5, Sub-section (3) of Section 7, Clause (Ka) of Sub-
section (3) of Section 8, Clause (Ka) of Sub-section (3) of Section 9, and the income under
business exemptions and concessions under Section 11 shall also be included.
Provided that, it is not compulsory to include meeting allowance and interest income.
(4) The income under Clause (Ga) of Section 3 and tax exempted income under Section 11
shall be reduced from the income derived under Sub-section (3).
Provided that the meeting allowance and the interest income need not be reduced, if they
are not included.
(5) The format for return statement to be furnished under Sub-section (2) shall be as
prescribed by the Inland Revenue Department.
2. Mode of payment of tax:

Income tax can be paid in cash (if allowed by IRO) or by way of bank deposit in prescribed
bank account or by electronic medium. In none case, payment in form of kind is not possible.
3. Place for payment of tax

There are Inland Revenue Offices, Taxpayer Service Offices, one Large Tax Payers’ Office and
one Medium Level Tax Payers’ Office to pay income tax. Inland Revenue Office has territorial
jurisdiction but Large Tax Payers’ Office and Medium Level Tax Payers’ office have turnover
jurisdiction. In the district, where Inland Revenue Office is not situated, District Treasury
and Comptroller’s Office has been assigned with the authority to collect tax liability of that
district.

INCOME TAX & VAT
4. Time for payment of tax

Tax payer need to pay tax within the period fixed in the act. In case, tax payer does not pay
tax in the prescribed time, then the remaining payment is subject of interest of 15% p.a. for
the month and part of month method. Nonpayment of tax might be taken as criminal offence
having penalty of Rs. 5000 to Rs. 30,000 or imprisonment from one month to three months or
the both as per Sec. 123.
Following are the time-frame for paying income tax:
Form of tax Time to pay Corresponding Sec.

Tax at source on 25 day of closure of month
th
Sec. 90: on failure interest need
payments (TDS) of payments and deduction of to pay at 15% p.a. basis.
withholding tax
Installment tax Push-end up to 40% Sec. 94: on failure interest u/s
Chaitra-end up to 70% 118 need to pay
Ashadh-end up to 100%
Annual tax Upto Ashoj-end of `next year Sec. 99: on failure interest u/s
119 need to pay
Tax on reassessment As prescribed in the assessment Sec. 102/122
WITHHOLDING TAX
Withholding tax is payment of tax at the point of occuring taxable transaction and TDS amount
is calculated on gross amount without deducting any expenditures. This type of tax is based on
“PAYE” concept (Pay As You Earn). This reduces payment burden to the payer, easy to collect
with minimum cost for collection and regular revenue generation source for the government.
According to Income Tax Act, 2058, only resident payer paying any payments covered by Sec. 87
to 89B having source in Nepal need to withhold income tax at the point of payment. Hence, to
deduct withholding tax:
o Payer must be resident.
o Source of income should be in Nepal.
o Payments should be covered by either Sec. 87 to 89B.
If all three criterions meet on any payment, payer MUST deduct withholding tax. Withholding
tax are of two categories one is advance and the next is final withholding, amount received after
final withholding need not to be included in taxable income at the year end while filing income
tax return.

1. Final Withholding Payments

According to Sec. 92, some of withholding taxed payments are final taxed in the case of
recipient. Person getting final withholding taxed income need not to be included in the
taxable income. Following payments are final withholding taxed payments:
Income or Rate for

Conditions applicable
payment 2075/76
Interest having In case a resident bank, finance company, cooperative, a 5%
source in Nepal listed company, or any entity that has issued debentures,
are paying interest for deposits, debentures, bonds etc to a
natural person not in the course of conducting a business.
Interest having In case a resident bank, finance company, cooperative, a 15%
source in Nepal listed company, or any entity that has issued debentures, are
paying interest for deposits, debentures, bonds etc to a tax-
exempted person under Section 2(s)
Rent having Rent for land and/or building with or without including the 10%
source in Nepal attachments or equipment installed in that land or building
payable to person other than a natural person(Taxed by Local
level government) not in the course of conducting a business.
Meeting or part- Meeting fee up to Rs. 20,000 per meeting, setting up question 15%
time teaching paper, examination of answer sheets, occasional teaching
allowance fee.
Retirement Retirement payments made by GON or an approved 5%
payments retirement fund, on the amount calculated as per Section 65
(1)(Kha)
Retirement Retirement payments made by an unapproved retirement 5%
payments fund, on the amount of the gain to the employee.
Dividend In case of a resident company and a resident partnership 5%
firm
Gain on Amount received from a life insurance company for 5%
investment insurance on the life of the Natural Person, on the amount of
insurance gain to the Natural Person.
Windfall gain Amount received from any type of windfall gain except 25%
exempted by GON.
All payments to a If Withholding tax is applied in the payments making to
non-resident a non-resident, the payments shall be final at applicable
withholding tax rates.
Rent of Withholding of taxes on payment of rent of transportation 2.5
Transportation paid to natural person except sile oroprietorship firm.
Distribution from Consideration amount distributed by Mutual Fund to 5
Mutual Fund Natural Person

INCOME TAX & VAT
2. Withholding by Employer
Every resident employer are responsible to deduct tax on the payment of remuneration and
deposit into the concerned IRO. Remuneration tax has to be computed based on the rate given
in Schedule 1.
Withholding tax on employment payment is based on estimated income of an employee. The

estimation need to done at the beginning of first payment of remuneration. Any changes on
estimation need to adjust at the time of changes.
Employees may have other sources of income those to be taxed in the hand of him/her. For
the purpose of withholding tax, employer should consider payment under own system paid
directly to employee or any person upon his direction or for associates of employee.
Sec 87. Tax Deductions by Employer

• Resident employer
• While paying any taxable amount in the relationship of employer and employee.
• Source in Nepal is to be included in calculation of income
• Received by any employee or worker from employment
• Must deduct tax at rates mentioned in schedule 1 on estimated income.
• Donation cannot be reduced on computing withholding tax. Likewise.medical tax credit

and retirement contribution can be taken only for the amount related with the employer.
If the employee wants to enjoy the facility of reduction of the medical tax credit and the
retirement contribution except related to the employer and of the a donation, he/she has
to file annual tax return to the concerned IRO.
If all the cases above are fulfilled, then:
Step 1: Compute yearly tax based on estimated income at the time of first payment i.e first
month of salary payment.
Step 2: Divide the tax computed in step 1 by the no of remaining months of the income year
and deduct on monthly basis from the salary.
Illustration :1
Income from employment is Rs. 220,360 including provident fund contribution of Rs. 14,400.
Assuming the contribution was single side and was approved. Find the monthly withholding
tax.

Solution:
Income from employment/Assessable income Rs. 220,360
Reduce: Contribution to ARF Rs. 14,400
Taxable income Rs. 205,960
As per the Finance Act 2076/77 annual income up to Rs 4,00,000 is exempt i.e only 1% tax will
be levied in case of single opted hence in the above case taxable income is Rs 205,960 and 1%
tax will be Rs 2,059.60. So monthly withholding will be Rs 171.62 (2,059.60/12)
Illustration :2
During Falgun in above example, employer has raised salary in lumpsum of Rs. 200,000 for
the remaining months for each of employee working on that date. Calculate the monthly
withholding tax on revised salary
Solution
Then withholding tax shall be deducted as follows:
Revised Taxable income Rs. 405,960

Tax to be paid @ 1% 4,00,000 4,000
Tax to be paid @ 10% 5,960 596
Tax to be paid 4,05,960 4,596

Less: already deducted Rs. 171.62*7 1,201.34
Remaining deduction 3,394.66
Monthly Tax (Falgun to Ashadh) Rs. 3,394.66/5 Rs. 678.93
Illustration :3
Mrs. Alibadan is working in a private company since IY 2063.04.01. Find the tax to be
deducted per month for 2076-77 under pay scale of Rs. 15,000- 1000(15)- 30,000. Sanchaya
kosh contribution is 10% by both.
Computation of income from employment and tax at source
Basic salary (Rs. 15000*12) 180,000

Grade 13,000*12 156,000
Employer’s contribution to Fund (180,000+156000)*10% 336,00
Income from employment/assessable income 369,600
Less : Deduction

INCOME TAX & VAT
Contribution to Retirement Fund - Minimum (Rs.

67,200
300,000 or 123,200 or Rs. 67,200)
Taxable income 302,400
Tax to be paid 1% of Rs 302,400 3024

Annaul Tax liability 3024
Monthly withholding tax 3024 /12 252
Note: Female rebate has not been given as couple
has been opted and Rs 4,50,000 has been used as
exemption limit as availed by Finance Act, 2076/77.
Illustration :4
In case any person appointed in the term of tax-free pay, employer need to pay the tax
required. For example, Mr. Rakhel Desai has appointed in MD at the term of tax free salary.
During this year, he has drawn Rs. 22,77,000 as salary. How much should be the tax per
month? Please assume that F/Y is 2076-77 and apply the tax rates accordingly. Rs. 100,000 per
month has increased since Chaitra above example, then compute withholding tax.
3. Withholding from investment return and service fees-Section 88

Resident payer has to deduct following withholding tax in cases of service fees and in
investment returns, according to Sec. 88:
a. Service Fees:
Service fee are subject of withholding tax as follows:
Service provider’s status Billing Status Withholding rate

VAT Registered Person VAT Tax invoice 1.5% on taxable amount
VAT unregistered resident / Non no Tax invoice 15% of Billing amount
resident
Foreign employment agent Paid by resident 5% of payment
company
Commission other then above 15% of gross pay
Commission of commodity future 10% of commission
Royalty 15% of gross pay
Meeting allowance 15% of gross pay
Part-time teaching fees 15% of commission
Sales Bonus Not billed 15% of bonus paid

Illustration : 6
CA Firm issued a tax invoice having audit fee plus applicable value added tax of Rs. 339,000.
Here, taxable amount for the purpose of Value Added Tax Act, 2052 is Rs. 300,000 and Value
Added Tax is Rs. 39,000. Withholding tax is to be deducted on Rs. 300,000 at 1.5% i.e. Rs. 4,500.
In case of service fee is paying without VAT and receiver is resident person - rate of
withholding tax is 15% of bill amount. In case the service provided is non-resident the rate of
withholding tax is 15% according to Sec. 89(3).
Illustration : 7
CA Firm issued an invoice having audit fee of Rs. 90,000. Here, the bill has issued by VAT
unregistered person; and hence withholding rate applicable is 15% on gross. So, withholding
tax is to be deducted on Rs. 90,000 at 15% i.e. Rs. 13,500.
Illustration
CPA Firm having registered office in New York, issued an invoice having fee of Rs. 1,000,000.
Here, the bill has issued by non-resident and hence withholding rate applicable is 15% on
gross. So, withholding tax is to be deducted on Rs. 1,000,000 at 15% i.e. Rs. 150,000.
b. Interest:
Interest is subject to withholding tax as follows:
Payer Payee Purpose of base Withholding rate

Bank, Financial Institution, Natural Person Personal deposit 5%
Bond Issuer and listed Co.
Any person Bank and Financial No Withholding
Institution tax
Exempted NGO 15%
Any cases Other then above 15%
c. Gain on disposal of non-business chargeable assets

Sec. 89Ka and Sec. 89Kha are relating to the withholding tax on disposal of non-business
chargeable assets. Both cases, gain is computed according to Sec. 37
In case of disposal of shares and securities listed in Securities Exchange Board of Nepal at
the rate of 5 % on gain amount in case of natural person, at the rate of ten percent in case of
resident entity, and at the rate of twenty five percent on gain amount in other case, by the
entity that deals in securities exchange market.

INCOME TAX & VAT
In respect of gain received from the disposal of interest of an entity not listed in Securities
Exvhange Board of Nepal, at the rate of ten percent on gain amount in case of natural resident
person, at the rate of fifteen percent on gain amount in case of resident entity, and at the rate
of twenty five percent on gain amount in other cases, by the entity whose interest have been
disposed off.
In case of disposal of land or building having disposal value over Rs. 1 million, withholding
tax (exactly paying tax by person disposing it- not a withholding tax itself) is to be paid to
Land Office at following rates:
o If ownership is less than 5 years 5%
o If ownership is more than 5 years 2.5%
No tax shall be levied on the disposal of land and land and building having disposal value
less than 1 million rupees.
d. Other items subject to withholding tax:

The table below shows the details of withholding tax deductible incomes, conditions
applicable, rate of withholding tax:
Rate for
Income Conditions applicable
2076/77
Payment for natural In all the cases. 15%
resources
Inter regional Inter regional interchange fee payable to a bank issuing No TDS
interchange fee credit card.
Lease rent on Lease rent for aircraft 10%
aircraft
Retirement Retirement payments made by GON or an approved 5%
payments retirement fund, on the amount calculated as per Section
65 (1)(Kha)
Retirement Retirement payments made by an unapproved retirement 5%
payments fund, on the amount of the gain.
Dividend from In all the cases. 5%
company
Amount received Amount received from a life insurance company for 5%
from a life insurance insurance on the life of the Natural Person, on the amount
company. of gain to the Natural Person.
Windfall gain Amount received from any type of windfall gain except 25%
exempted by GON.

e. Gain from Dealing in Commodity Futures Market

Entity operating commodity future market business shall recover advance tax from a person
trading on commodity future market at the rate of ten percent on the profit and gain made by
the person from such trading.
f. TDS on Rent
Provided that, the tax shall be withheld at the rate of 10% on payment made by a resident
person for rent having source in Nepal.
But,
(Ka) Tax shall be withheld at the rate of 1.5% on payment made to person registered in VAT
and running business of giving vehicles on rent.
(Kha) Withholding Tax shall not be deducted on amount received by Natural person for
house rent.
(Ga) No tax shall be deducted on incentive provided as per Section 25(1Kha) of VAT
Act,2052 to consumer on purchased goods or services by making payment through
electronic medium as per prevailing laws
4. Withholding from Contract Payment

According to Sec. 89; resident person at the time of making a payment for any contract given
for more than Rs.50,000 has to withhold tax at source at the rate of 1.5% of the amount of
payment.
The payment of more than Rs.50,000 is calculated by including all the payments made within
ten days for the same contract to the same person or his related/associated person.
The provision is applicable where the payment for the contract is higher than Rs.50,000
irrespective of the volume of total contract price of a single contract. Suppose a contract price
is Rs.200,000 but the part payments are made in five monthly installments of Rs. Rs.40,000
each. In this case the provision to withhold tax is applicable on payment of the contract price.
In case of contract awarded to non-resident, the rate of withholding tax shall be as follows
(Sec. 89(3):
o In case of aircraft repair and other contract- 5%
o Payment of premium to non resident insurance company or on commission given against

reinsurance premium received from non resident insurance company – 1.5%
o Other cases, as notified by IRD.

INCOME TAX & VAT
For the purpose of Sec. 89, clarification has been given as Contract or agreement defined:
Contract or agreement for:
i. Supply of goods or manpower;
ii. Construction, installation or establishment of tangible assets or structures;
iii. Any act prescribed by IRD as contract or agreement;
iv. In case the contract or agreement regarding construction, installation or establishment of

tangible assets or structures, includes the supply of related services also, the payment for
such services are also treated as payment for the contract or agreement.
Illustration : 8
Out of contract price Rs. 12 millions, contractor submits Rs. 2.26 millions running bills
including value added tax on the last day of income year.
Here, payment is Rs. 2 millions and contract is subject of 1.5% i.e. Rs. 30,000 on taxable amount
of running bills is to be withhold.
Illustration : 9
The Profit and Loss Appropriation A/c of Sirkata Limited is abstracted hereunder. Find the
tax consequences of dividend payable by company as Tax Collection at Source (TCS). Kasyap
Sodari is a member of company holding 20% of paid up capital, how much is amount he
actually receives.
Profit and Loss Appropriation A/c

Profit for year 500,000.00
Accumulated profit b/d 1,500,000.00
Distributable Profit 2,000,000.00
Proposed Dividend 1,052,631.58
Balance transfer to Balance Sheet 947,368.42
Solution
For purpose of company
Amount of dividend Rs. 1,052,631.58
Tax at source for Dividend@ 5% Rs. 52,631.58
Net amount payable Rs. 1,000,000.00

For the purpose of Kasyap Sodari
Amount of dividend Rs. 210,526.32
Tax at source for Dividend@ 5% final withholding Rs. 10,526.32
Net amount receivable Rs. 200,000.00
Illustration : 10
The Profit and Loss Appropriation A/c of Sirfata Limited is abstracted hereunder. Find tax
consequences of dividend payable by company as Tax deduction at Source. Kasyap Sodari
is a member of company holding 20% of paid up capital, how much is amount he actually
receives.
Profit and Loss Appropriation A/c Rs.

Profit for year 500,000.00
Accumulated profit b/d 1,500,000.00
Distributable Profit 2,000,000.00
Capitalization of Profit by making paid up value make up to Rs. 90.00 1,500,000.00
Balance transfer to Balance Sheet 500,000.00
Solution
Dividend capitalization is deemed as cash dividend. Capitalized profit is to be taxed as per
Section 88(1) at rate of 5%. In the given case, Rs. 1,500,000.00 is distributed (actually capitalized)
and tax at source is to be paid by each of shareholders. These should be arranged by company
as per Section 90(3). The company cannot pay advance tax in name of shareholders because if
it pays for tax it will be deemed as distribution and the same is attraction of TDS of 5%.
Illustration : 11
RBS is an insurance company in life insurance business. It paid Rs. 230,000.00 to Mr. Rishibant
Odarkani in account of 20 years life insurance being maturity. The annual premium was Rs.
5,000.00 payable in 1st January of each year. Find Tax Deducted at Source payable by RBS.
Solution
Payment of Investment insurance Rs. 230,000.00
Premium paid (Rs. 5,000.00* 20) Rs. 100,000.00
Gain from Investment Insurance Rs. 130,000.00
Tax to be deducted at source @ 5% Rs. 6,500.00
(Payable as final withholding tax as per Section 92(Ga) and Explanation given under Section 62)

INCOME TAX & VAT
Illustration : 12
RBS is an insurance company in life insurance business. It paid Rs. 230,000.00 to Mr. Rishibant
Odarkani in account of 20 years life insurance being death at 6th year. The annual premium
was Rs. 5,000.00 payable in 1st January of each year. Find Tax Deducted at Source payable
by RBS.
Solution
Payment of Investment insurance Rs. 230,000.00
Premium paid (Rs. 5,000.00* 6) Rs. 30,000.00
Gain from Investment Insurance Rs. 200,000.00
No tax Tax to be deducted at source as per section 31 of the Act.
Illustration: 13
Dabibi Kadanr is a member of a retirement fund not approved by IRD. In retirement from
service of employer, he got Rs. 1,200,000.00. During working period he contributed Rs.
500,000.00 in different months of employment. Advise tax treatments in hands of Mr. Kadanr
and in hands of retirement fund.
Solution
Payment of Unapproved Retirement Fund Rs. 1,200,000.00
Contribution Made towards Fund Rs. 500,000.00
Gain from Unapproved Retirement Fund payments Rs. 700,000.00
Tax to be deducted at source @ 5% Rs. 35,000.00
(Payable as final withholding tax as per Sec. 92(Gha) and Explanation given under Sec. 65)
Illustration : 14
Panorama p. Ltd., a manpower supply company. It supplies security guards to Sagarmatha
Ltd. for Rs. 5,000,000.00. What shall be tax consequences in the contour of withholding tax?
Solution
Vide Advance Ruling dated 2060.8.12 to Hotel De La Annapurna, being man power service is
a contract, 1.5% withholding tax is applicable.
Illustration : 15
The following issues arise in connection with the deduction of tax at source under Chapter 17
of the Income Tax Act, 2058. Discuss the liability for tax deduction in these cases:

a) M/s XYZ Ltd. has entered into a contract and outsources the security of the business
premises to Gorkha Security Service Pvt. Ltd. for providing the security services. The
Service Provider has submitted the following invoice for the month of Asadh, 2077.
TAX INVOICE
Gorkha Security Service Pvt. Ltd.
New Baneshwar, Kathmandu, Nepal
PAN No : 500276456 Date of Transaction :
Invoice No. : 777 Date of Invoice issue : 2077/03/31
Buyer's Name : XYZ Ltd.
Address : Balaju Industrial Area
Buyer's PAN No. : 504678469
S. No. Particulars Qty Rate Amount

(1) Guard Duties 4 Guard × 31 days 124 Man days 150 per Man days 18,600.00
(2) Service Charge – 10% 1,860.00
Total 20,460.00
% …. Discount 0.00
Taxable Value 20,460.00
13% VAT 2,659.80
Total 23,119.80
E. & O.E Signature
At the time of payment of the invoice no. 777, the accountant of XYZ Ltd. get confused
whether to deduct the withholding tax on the above invoice and approached to you for your
advice. According to the accountant, double taxation on the same service cannot be done and
withholding tax is not required to be deducted since the VAT already has been collected on
above services. Advise the accountant on the above issue.
b) M/s Kamal Trading Pvt. Ltd. is the Super Distributor of one of the Leading Indian
Company and has deposited Rs. 16,00,000 NR as Security deposit. In the Security deposit
the firm has received Interest of Rs. 1,44,000 and withholding tax certificate of Rs. 16,000
for the F/Y 2076/77.
c) The Tax Officer wishes to tax the interest income earned on security deposit and do not
give the credit of tax deducted in India on the ground that the tax has not been deposited
in Nepal. However, the argument of the CFO of the company is that Tax deducted on
Interest is Final withholding of tax as per Income Tax Act, 2058 and double taxation on

INCOME TAX & VAT
the same income cannot be done. Discuss the legal validity of the conflicting arguments
of Tax Officer and the CFO in light of the provisions of the Income Tax Act, 2058.
c) An employee of the Public Sector Undertaking owned and managed by His Majesty
Government receives arrears of salary for the earlier 3 years. He enquires whether he is
liable for deduction of tax on the entire amount during the current year.
5. Withholding tax: Administrative Procedures

According to Section 90 (3) a withholding agent is obliged by the Act to deduct withholding
tax at source. But if does not do so, in that case it will be supposed that the withholding has
been done according to the provision at the same time when it should have been deducted.
Sec. 103 provides that the withholding amount shall be collected for GON in any case, it shall
not be part of liquidation and have over priority in case of bankruptcy.
Withholding agent should file a monthly withholding return showing amount withheld and
paid during the month.
Withholding tax should be deposited to concerned IRO:

The total amount of withholding tax deducted or deemed to be deducted during a month
according to Nepali calendar should be deposited in to the concerned IRO or a bank specified
by IRD within 25 days of expiry of the month of withholding tax deduction.
The withholding agent (who is obliged to deduct tax) has the sole obligation to deposit the
amount to the tax office within the specified period.
In case of a deemed tax deducted at source, both the withholdee and the withholding agent
are jointly or severally responsible for deposit of the amount to the Revenue. The responsibility
of both the parties ends on payment of the amount to the tax office. In case the withholding
agent deposits the amount of tax deemed deduction to the Revenue, he gets a right to recover
the amount from the withholdee, but interest of fee cannot be recovered.
Certification for Tax Deducted at Source:

A withholding agent has to give a certificate of tax deducted at source to the withholdee
within 25 days of expiry of the month in which the tax is deducted. In case the withholdee is
an employee of the person such a certificate should be provided within thirty days from the
end of the income year or within thirty days of the termination of the service of the employee
in case the employee has terminated the job during the year.
The certificate should be certified in a manner, if any, prescribed by IRD and must include the
information regarding the payment of income and the amount of withholding tax deducted.

ADVANCE PAYMENT OF TAX
Concept of Advance tax

Similar to withholding tax, annual tax is required to pay upon Pay As You Earn (PAYE) basis.
Person having annual tax of Rs. 7,500 or higher from income from business or income from
investments need to pay installment tax according to Sec. 94 and 95.
Estimated income tax return

Within Push-end of income year, person need to file an estimated tax return showing estimated
income and expense, so estimated tax payable within the income year. Based on estimated tax
return, tax payer need to pay installment tax as follows:
Up to Push-end during income year 40% of estimated tax
Up to Chaitra-end during income year 70% of estimated tax
Up to Ashadh-end during income year 100% of estimated tax.
Inclusion: Advance tax in form of installment tax shall include the following payments:
i. Previous installment paid,
ii. Withholding tax deducted on receiving of payments.
iii. Withholding tax not deducted on receiving payment but deposited u/s 90(3).
iv. Medical tax credit, if applicable.
Arbitrary estimation: Advance tax, according to Sec. 94, shall be within abovementioned limit of
estimated tax; but in case of arbitrary estimation or estimation not filed, there are two measures
to control this:
i. Reassessment of estimated tax return u/s 95(7),
ii. Charging of interest under Sec. 118.
Interest in case installment tax is insufficient

In case a person need to file its estimated tax return and installment of income tax. Payment of
inadequate tax (below than estimation error of 10% of real tax) is subject of interest at 15% p.a. for
month and part of month basis, under the provision of Sec. 118. Let take example. Relaxation of
10% goes till Ashoj of next year.
Advance tax to be paid at time of import

As per Section 95Ka(7), Where he-buffalo, buffalo, he-goat, boka, sheep, chyangra falling in Part 1
of Harmonized Code System; live, fresh or frozen fish falling in Part 3 of HS System; fresh flowers

INCOME TAX & VAT
falling in Part 6 of HS System; fresh vegetables, potato, onion, dry vegetables, garlic, baby corn
falling in Part 7 of HS System, and fresh fruits falling in Part 8 of HS system are imported for
business purpose, the customs office shall collect advance tax at the time of release of goods @
5% and meat falling in Part 2, Milk Products, Egg, Honey falling in Part 4, Finger Millet (Kodo),
Buckwheat (Fapar), Proso Millet (Junelo), Rice, Small Rice Grains (Kanika) falling in Part 10, Flour,
ground cereal gains (Aata and Pitho) falling in Part 11, Herbs, Sugarcane falling in Part 12, Plant
related production falling in Part 14 @ 2.5% on customs value determined such products
Advance tax on sale of listed securities by Natural Person

As per Section 95Ka (2) (Ka), In case of gain from disposal of interest of an entity listed in Securities
Exchange Board of Nepal, by the entity of which deals in securities exchange Market- 7.5% 5% on
the gain for a resident natural person, 10% on the gain from resident entity and 25% on the gain
from others.
At the time of computation of gain on disposal of interest in an entity as per Sub Section (2) (Ka),
weighted average cost of interest held at that time of such entity shall be taken.
Advance tax to be collected by Land revenue office

In case of any persons other than specified in Sec. 95Ka (5), Land Revenue Office shall collect
advance tax at 1.5% on amount derived from disposal at the time of registration.
Installment on Transaction Based Tax

Person paying tax on the basis of transaction shall deposit in two instalments as follows:
Date to be Deposited Amount to be Deposited

By the end of Poush Tax under the prescribed rate based upon the transaction upto
Poush 20.
By the end of Ashadh Tax amount derived after reducing the deposited tax within Poush
end, out of the tax amount calculated on the basis of the prescribed
rate by estimating the transaction upto Ashadh-end with the basis
of the actual transaction upto Ashadh 20.
INCOME TAX RETURNS
Within three months from closure of income year or within the period specified under Sec. 100 in case
of jeopardy assessments tax payers need to file income tax return showing income and deductions
including tax computation. In such case of filing, tax is deemed to be assessed under Sec. 99(1).
On the due date, if tax payer could not file the tax return, it is deemed the assessment has done at
the quantum of tax those already deposited into taxation authority -advances tax is deemed as tax
payable and not further tax deemed to be paid.

Format on Returns
For assessing income tax, tax payer need to file income tax return. Income tax return is combination
of various tax formats. Summary of such formats are as follows:
Name of form Description Comment

Applicable to natural person having Nepal source only
Dr.01–03–03–64 Business only having turnover Rs. 20 Lacs and No annexure
profit up to Rs. 2 lacs
Dr.02–03–03–64 Business and Employment turnover up to Rs. Professional up to Rs. 15
50 lacs lacs
Dr.04–03–03–64 Having non-business chargeable assets income PAN not required
only
Person other than above
Dr.03–03–03–64 Every person can opt Variety of annexure
Dr.05–01–02–62 Tax assessment u/s 70 Cross boarder transport
Annexure
Dr.10–03–03–64 Tax Computation of Natural person Annexure 1
Dr.11–03–03–64 Tax Computation of Entity Annexure 2
Dr.15–03–03–64 Computation of income from Business Annexure 5
Dr.16–03–03–64 Computation of income from Employment Annexure 6
Dr.17–03–03–64 Computation of income from Investments Annexure 7
Dr.18–03–03–64 Computation of income from Non-business Annexure 8
Chargeable assets
Dr.19–01–02–62 Repatriated Income Annexure 9
Credit Forms
Cr.01–03–03–64 Advance Tax Annexure 10
Cr.02–03–03–64 Medical Tax Credit Annexure 11
Cr.03–03–03–64 Prior year tax credit
Cr.06–02–03–64 Foreign Tax Credit Annexure 12
Period of Tax Return

As already mentioned and prescribed under Sec. 96, income tax return should be filed (called
assessment u/s 99) within 3 months from date of closure of income year. These periods, under Sec.
98; can be extended up to 3 more months upon written request and due approval from concerned
IRO before closing of the time to filing or extended time to filing return.

INCOME TAX & VAT
Revised Return
As per Section 96(6) Any person desiring to revise income tax return filed at department within
the due date may revise as per the procedure prescribed by department within 30 days from the
date of submission of return.
Deemed Assessment: According to Sec. 99(2), on the due date, if tax payer could not file the tax
return, it is deemed the assessment has done at the quantum of tax those already deposited into
taxation authority -advance tax is deemed as tax payable and not further tax deemed to be paid.
Delayed Assessment: In case income tax return has filed after due date, then it is delayed
assessment (belated tax return) can be filed. In case of belated tax return, fee under Sec. 117(1)(Kha)
is applied. In such situation, 0.1% p.a. of assessable income without deducting any amount or Rs.
100 per month whichever is higher; is imposed as fees.
As per Section 117(1)(Ka) If a person does not file the returns, the following charges are imposed
on those persons Per return 5,000 or 0.01 % of Assessable Income as per Income Tax Return which
ever is higher on not filing return as per Section 95(1) in an income year.

CHAPTER 5
TAX ASSESSMENT AND APPEALS

INCOME TAX & VAT
1. ASSESSMENT OF TAX
There are three types of assessments in income tax:
Self Assessment :Direct Assessment Sec. 99(1)

:Deemed Assessment Sec. 99(2)
Re-assessment :Amended Assessment Sec. 102
Jeopardy Assessment :Periodic Assessment Sec. 100
a. Self-Assessment Section 99
Under Section 96, a taxpayer has an obligation to submit tax returns on time. According to
Section 99, in case a person submits a tax return including the information regarding the total
tax payable during the year and the tax due for payment on the date of submitting the return,
it is believed that the income tax assessment is complete. In legal terms the filing of an annual
return is a self-assessment made by the taxpayer and is treated as assessed by the IRO unless
the conditions under Sections 100 or 101 prevail.
Even in the case of a person who does not submit the annual tax return, the income tax for the
year is deemed as assessed on the following bases:
a. The total tax liability of the taxpayer during the year is equal to the amount of withholding
tax deducted by withholding agents on payments to it and the amount of advance tax
paid by it; and
b. The deemed tax assessment shows that there is no more tax payable for the year by the
taxpayer.
b. Jeopardy Assessment Sec. 100 and Sec. 73

Jeopardy assessment by the IRO is possible only under any one of these conditions:
a. The person becomes bankrupt, is wound-up, or goes into liquidation;
b. The person is about to leave Nepal indefinitely; or
c. The IRD otherwise considers it appropriate.
Under any one of the above conditions the IRO may serve a notice to the taxpayer to submit a
tax return for the specified period of the year within specified days. In the case of a taxpayer
who submits the return as per the notification or does not submit it, in either case, the income
tax assessment is supposed to be made as per the provisions of Sec. 99(2). But Sec. 100 (2) has
given an authority to the respective IRO to make a jeopardy assessment in the above case on
the basis of the best judgment adopted by the IRO.

CHAPTER 5 - TAX ASSESSMENT AND APPEALS
The period taken by the IRO for such a jeopardy assessment may be a part of the year or the
whole year. In such a case, the notice is meant for an assessment of the whole year, and the
taxpayer has to file the return within the time specified in the notice but in no way can wait
for the period as specified in Section 96.
The respective IRO can make a jeopardy assessment only if it has a reasonable belief that the
figures produced or deemed to be produced by the taxpayer do not exhibit the real position
of the tax liability of the taxpayer for the period.
According to Sec. 100 (2), the following information are considered for the jeopardy
assessment:
a. Assessable income of the taxpayer from business, employment or investment, i.e. from
all the sources;
b. Taxable income of the taxpayer during the year and the total amount of tax due to the
taxpayer; and
c. In the case of a taxpayer, which is a foreign permanent establishment, the income

remitted to a foreign country during the period and tax payable on such a remittance.
Before issuing an order for the jeopardy assessment, the IRO has to serve a notice to the
taxpayer stating the reason of disagreement over the figures given in the return filed or the
figures available to the IRO. A period of seven days should be given to the taxpayer to explain
and produce evidence against the IRO’s contention.
In case a jeopardy assessment is made for a whole year, the taxpayer is not required to submit
a tax return under Sec. 96 (1). But if it is for a part of the year, the taxpayer has to file a return
under Sec. 96 (1) and the treatment of tax paid as per the jeopardy assessment shall be as an
advance payment of tax and could be adjusted against the tax payable as calculated as per the
self-assessment for the year.
When the IRO has made a jeopardy assessment, it has to issue an order to the taxpayer stating
the following information:
a. The total tax payable by the taxpayer for the period of assessment and the tax due to him;
b. The method of calculation of the tax liability;
c. The reason of the jeopardy assessment by the IRO;
d. The period within which the tax due is payable; and
e. Where, when and how to appeal against the order if the taxpayer is not satisfied with the
jeopardy assessment.

INCOME TAX & VAT
In case of competent authority of contracting state having treaty regarding ‘Avoidance

of Fiscal Evasion’ seek any tax arrears on that country to be collected from the person in
Nepal, then taxation authority can collect the tax to the extent of valid and bona fide request
of competent authority. The assessment based on these request are assessment classified as
jeopardy assessment of tax collecting for another country.
a. Amended Assessment Sec. 101

The IRO can make an amended assessment of any return filed by any taxpayer solely on the
ground that the IRO thinks it proper to do so. The amended assessment shall be based on the
IRO’s best judgment and should be done in a manner that is consistent with the intention of
the Act.
In case IRD thinks it proper to do so the amended assessment can be amended again according
to the IRO’s best judgment for as many times as it thinks appropriate. IRD has the power to
make an amended assessment within four years of:
a. In the case of an assessment under Section 99, the due date for filing the return; or
b. In the case of a jeopardy assessment, the date on which the notice of assessment is served
to the taxpayer under Section 102.
For the income year 2073-74 the return filing date is end of Ashwin, 2074 and in case time
is extended the latest date may be the end of Paush, 2074. In that case the four-year period
ends on the end of Ashwin, 2078. The provision of this Section is that within the four years
the amended assessment should be completed. It means a pending assessment on the date of
expiry of the four years also becomes ineffective.
The above limitation of four years is effective for the conditions except that the tax assessment
is affected by fraudulent work. If it is proved that the tax assessment was affected by some
fraudulent work, at any time, even if the four-year period has expired, the file can be reopened
for amended assessment.
If the Revenue Tribunal or any other authorized Court has reduced the assessed tax liability,
the IRO has no authority to make an amended assessment to the extent the tax liability is
reduced by the Court. But, if the Court orders for a reinvestigation of the matter, the IRO can
make an amended assessment.
Procedure for reassessment:

Sampling of tax payer: IRD take samples based on its own information for assessing the
income tax returns. Most cases, assessment are substantiated by audit of information (called
full audit within IRD). To seek documents and information require to judge the return under
full audit, IRD issued a letter under Sec. 83 to submit their requirement of information.

CHAPTER 5 - TAX ASSESSMENT AND APPEALS
Servicing of notices etc.: in all cases, if IRD need to serve any documents to any person, the
method has to be followed as per provision of Sec. 79. A document to be served by IRD to a
person under this Act shall be considered as sufficiently served in the following circumstances:
a. It is sent to the tele fax, telex, electronic mail address or related other electronic medium
of any person;;
b. In case of Natural Person handing over the document to him, and in case of an entity
the document being handed over to the manager of the entity; or
c. It is sent by registered post at the last known address of his resident, office, business or
some other place.
A document issued, served, or handed over, according to this Act, by IRD to a person, shall
be treated as issued in order, if the document is duly signed by the officer whose name and
designation is mentioned on the document either encrypted or encoded by means of computer
technology or duly stamped.
If any documents not served under Sub Section (1) and (2) of Section 79 then information
related to such order can be telecast or published at radio, television or any national newspaper
in the name of related person. In this case related person shall be deemed to have received
such information.
Notice u/s 101(6): Before issuing an order for the amended assessment, the IRO has to serve
a notice to the taxpayer stating the reason of disagreement over the figures given in the
return filed or the figures available to the IRO. A period of fifteen days should be given to
the taxpayer to explain and produce evidence against the IRO’s contention. Taxpayer need to
clarify the cases, or need to submits the evidences it had within this period of 15 days.
Reassessment Notice u/s 102: In case the IRO is not satisfied with the evidence and explanation
given by the taxpayer, it can issue an order stating the information below:
a. The total tax payable by the taxpayer for the year of assessment and the tax due to him;
b. The method of calculation of the tax liability;
c. The reason for making the amended assessment by the IRO;
d. The period within which the tax due is payable; and
e. Where, when and how to appeal against the order if the taxpayer is not satisfied with the
amended assessment.
Defective Documents (Sec. 80): In all cases of documents issued by taxation authority, one
point need to consider as any document issued by IRD shall not be treated as defective when
it observes the following procedures.

INCOME TAX & VAT
a. The documents are issued in conformity, materially, with this Act; and
b. The documents are duly addressed to the person, to whom it is to be served, according
to the common understanding.
The IRD can rectify a defect, detected in a document issued, in case the defect does not involve
a dispute as to the interpretation of the Act or facts involving a particular person.
Illustration
On Mangsir 16, Inland Revenue Office ordered C Ltd. to file Income Tax Returns for the
period within income year ended on that day. Company, of course, file the return and paid
tax assessed so far. The operation of the company was continuously running. At the year-end
the status were found as follows:
Period till Manshir 16 After Manshir 16

Sales 10,000,000 10,000,000
Cost of goods sold 6,000,000 6,000,000
Operating cost 1,000,000 1,000,000
Depreciation 0 1,000,000
State how the tax return to be prepared and mode of tax payments.

PART II
VALUE ADDED TAX

ACT, 2052

INCOME TAX & VAT

Major Amendment made by Finance Ordinance 2076 as on 29th May 2019 (15th Jestha 2076) is
mentioned here under:
VAT ACT, 2052 & VAT (21ST AMENDMENT) RULES,2076
(Section 24 of Finance Act, 2076)
Section/Rule Old Provision Amended Provision
Section 10(2) Any person engaged in transaction Any person engaged in transaction of
of taxable goods and services shall taxable goods and services shall apply in
apply in the prescribed format the prescribed format within 30 days to
within 30 days to a tax officer a tax officer from date of such taxability
from date of such taxability or or commencement of transaction:-
commencement of transaction:- (Ka) Transaction by bricks production,
(Ka) Transaction by bricks liquor distributor, wine shop, software,
production, liquor distributor, wine Liquor, Wine, Health Club, Disco
shop, software, trekking, rafting, theque, Massage therapy, Motor Parts,
ultra light flight, paragliding, Electronic Software, Custom Agent,
tourist vehicle, crusher, sand Toy Business, Junk or Scrap Business,
mines, business operations related trekking, rafting, ultra light flight,
to slate and stone industry, paragliding, tourist vehicle, crusher,
(kha) Where any person operates sand mines, business operations related
a business of hardware, sanitary, to slate and stone industry,
furniture, fixture, furnishing, (kha) Where any person operates a
automobiles, motor parts, business of hardware, sanitary, furniture,
electronics, marbles, education fixture, furnishing, automobiles, motor
consultancy, disco theque, health parts, electronics, marbles, education
club, massage therapy, beauty consultancy, disco theque, health club,
parlour, catering services, party massage therapy, beauty parlour,
palace business, parking service, dry Educational and Legal Consultancy
cleaners operated with machinery, services, Accounting and Auditing
retaurant with bar, ice-cream related services catering services, party
industry, colour lab, boutique, palace business, parking service, dry
tailoring business with materials cleaners operated with machinery,
of suiting shirting, supplying retaurant with bar, ice-cream industry,
uniform to educational institutions colour lab, boutique, tailoring business
or health institutions or other with materials of suiting shirting,
entities within metropolitan, sub- supplying uniform to educational
metropolitan,municipality or areas institutions or health institutions or
as designated by the department. other entities within metropolitan, sub-
metropolitan,municipality or areas as
designated by the department.

INCOME TAX & VAT

Section 10Ga(1) No provision Person registered as per this Act, should
update registration related information
and documents in biometric registration
procedure as specified by the deparment
within the stipulated time.
Section 14(6) A provision will be made to recover A provision will be made to recover the
the tax at consumer’s level on the tax at consumer’s level on the published
published price by issuing invoice price by issuing invoice in prescribed
in prescribed format while selling format while selling those goods by the
those goods by the person under person under Sub Section (7) (5) to non
Sub Section (7) to non registrants. registrants.
Provided that the person not Provided that the person not specified
specified under Sub Section (7) under Sub Section (7) (5) may voluntary
may voluntary issue the invoice in issue the invoice in the prescribed
the prescribed format under this format under this Sub Section.
Sub Section.
Section 19(7Ka) No provision Notwithstanding Sub Section (7), tax

in excess of Rs. 1,000,000 shall only be
paid through cheque, draft or electronic
medium.
Section 24(3) A registered person may file a claim A registered person may file a claim
to a tax officer for a lump sum to a tax officer for a lump sum refund,
refund, as prescribed, of the amount as prescribed, of the amount of the
of the remaining excess after remaining excess after offsetting for a
offsetting for a continuous period of continuous period of six four months
six months under this section. under this section.
Section 25(1) No provision As per Sub Section (1) of Section 25,
(Ka1) the following amounts collected as tax
shall be refunded immediately, if the
application for refund is submitted within
3 years from the date of the transaction
on which the claim for refund is based:
(Ka1) Tax paid by mission availing
diplomatic facility on purchase of
taxable goods or services within Nepal
on the recommendation of Nepal
Government, Foreign Ministry.

PART II - VALUE ADDED TAX ACT-2052, AMENDMENDS MADE BY FINANCE ORDINANCE, 2076

Section 25(1Ka) Notwithstanding Sub Section (1), Notwithstanding Sub Section (1), no
no refund of the tax paid will be refund of the tax paid will be made on
made on purchase of taxable goods purchase of taxable goods or service for
or service for less than Rs.5000 at a less than Rs.5000 Rs.10,000 at a time by
time by a diplomat or diplomatic a diplomat or diplomatic mission.
mission.
Section 25(1Kha) No provision Any consumer at the time of
purchasing goods or services makes
payment through electronic medium
as per prevailing laws then 10% of tax
payment shall be refunded as cash
incentive at bank account of consumer
as per the procedure specified by
department.
Section 29(1) On infringement of Sub Section On infringement of Sub Section (5) or

(Kha) (5), (6) or (7) of Section 10, Rs.1,000 (6) or (7) of Section 10, Rs.1,000 for each
for each time of offence, time of offence,
Section 29(1) No provision On infringement of Sub Section (7) of
(Kha2) Section 10, Rs.10,000 for each time of
offence
Section 29(1)(Ga) On Infringement of Sub Sections On Infringement of Sub Sections (1)

(1) and (4) of Section 14, Rs.5,000 and (4) of Section 14, Rs.5,000 for each
for each time and the chargeable time and the chargeable tax,
tax, On infringement of Section 14(1), not
issuing invoice Rs. 10,000 each time
and not receiving invoice Rs. 1,000 each
time.
Section 29(1) No provision On infringement of Section 14(4), Rs.
(Ga1) 10,000 each time
Section 29(1Ga) Fifty per cent of the bill amount Fifty per cent of the bill amount penalty
shall be levied to selling persons or imprisionment up to 6 month or both
issuing bills without transferring shall be levied to selling persons issuing
goods. bills without transferring goods.

INCOME TAX & VAT

Section 31Ka(6) The taxpayer applying under Sub The taxpayer applying under Sub
Section (1) should pay undisuted Section (1) should pay undisuted tax
tax amount and deposit cash in amount and deposit cash in 1/3 1/4
1/3 of the disputed tax amount of the disputed tax amount out of the
out of the assessed tax amount. assessed tax amount.
Schedule 1 Tax Wheat or meslin flour (1103.11.00) Deleted

exempted goods
and services:
Group 1 Basic
Agricultural
Products 11.03
Schedule 1 Tax Soyabadi Maseora Deleted
exempted goods
and services:
Group 1 Basic
Agricultural
Products
Schedule 1 Air transport, service from Air transport, service from mechanical
Tax exempted mechanical bridge, public bridge, public passenger transport
goods and passenger transport (except cable (except cable car), transport services
services: Group car), transport services (except (except transport related to supply) and
9 Passenger transport related to supply) and cargo service for the purpose of export.
Carrying cargo service for the purpose of
Transport And export.
Freight Services
Schedule 1 Tax Three Wheeler vehicles (Auto Deleted
exempted goods Rickshaws Bat_ tery opreated only
and services: Like SAFA Tampoo (8703.80.10)
GROUP 11 :
OTHER GOODS
AND SERVICES
87.03
Rule 6Ka(2) No Provision Government body, public institution
or registered person should acquire
contract or consultancy service for
more than Rs. 5,00,000 in a year only
from reigistered person.

PART II - VALUE ADDED TAX ACT-2052, AMENDMENDS MADE BY FINANCE ORDINANCE, 2076

Rule 6Ga No Provision Government body or organization
wholly or partly owned by Nepal
Government at the time of making
payment against tender agreement or
contract for supply of goods or service
or goods and services to respective
contractor or supplier, should deposit
50% of tax payable amount, in the name
of contractor or supplier at respective
revenue code and pay only balance
amount of tax to them. Revenue such
deposited shall be informed to related
contractor or supplier and amount
deposited can be setoff with tax payable
by related contractor or supplier.
Rule 7Kha No Provision Registered person shall update its

information within 2077 Ashad end as
per Section 10Ga of the Act on Biometric
Procedure.
Rule 41(1) For the purpose of Section 17 of For the purpose of Section 17 of the Act,
the Act, tax may not be deducted tax may not be deducted in respect of
in respect of the following goods the following goods or services:
or services: (Ka) Beverages,
(Ka) Beverages, (Kha) Alcohol or alcohol mixed
(Kha) Alcohol or alcohol mixed beverages such as liquor and beers;
beverages such as liquor and (Ga) Light Petroleum Product (Petrol)
beers; fuel for vehicles (Petrol, Diesel and L.P.
(Ga) Light petroleum (Petrol) fuel Gas),
for vehicles, (Gha) Entertainment expenses.
(Gha) Entertainment expenses.

INCOME TAX & VAT

Rule 45(1) When refunding the amount of tax When refunding the amount of tax for
for the purpose of Sub-sec.(3) and the purpose of Sub-sec.(3) and (4) of
(4) of Section 24 or Section 25 of Section 24 or Section 25 of the Act, the
the Act, the TO shall immediately TO shall immediately investigate the
investigate the evidence submitted evidence submitted by the Taxpayer
by the Taxpayer for the refund of for the refund of tax and refund the
tax and refund the tax within 30- tax within 30 60 days with respect to
days of the date of registration of Section 24(3) – and within 30 days with
the claim. respect to Section 24(4) and Section 25
of the date of registration of the claim.
Rule 45(2Ka) No Provision For the purpose of refund, tax paid

on goods or services purchased from
listed firm or company (refund shop)
by Diplomatic mission or diplomats
as per Section 25(1)(Ka) and (Ka1) can
be refunded within 30 days as per the
procedure prescribed by department.
Rule 58Ka The tax payer may take the service Deleted
of the tax facilitator for required
information and help in relation
to tax.

CHAPTER 1
BASIC CONCEPTS

INCOME TAX & VAT
1. DEFINITION OF TERMS
Terms defined in Value Added Tax Act, 2052 and Value Added Tax Regulation, 2053 are described
in the concern Chapters, however some of the common terms are described in this Chapter.
Consideration, according to Sec. 2 (ja) is anything to be received for money, goods, services or
value. Consideration shall be assumed on paid or payable as basis of payment (likely to be accrual
basis) or received may be past, present and future in lump sum or in installments. A consideration
may be in cash or cash equivalents, goods, services, etc.
Director General, as per Sec. 2(dha), is the director general of the Department under the Ministry
of Finance authorized by Nepal Government to be responsible for tax administration. At Present,
the Department of Inland Revenue is called the department for VAT purpose also.
Electronic device, as per Sec. 2 (ta1) is apparatus of transmission including computer, fax, E-mail,
internet, electronic cash machine and fiscal printer as prescribed and approved by IRD used for
the purpose of transferring information, official correspondence and etc.
Goods, according to Sec. 2 (nga) may be both movable and immovable assets.
Group companies and entities are; according to Sec. 2 (cha1), are following entities as:
a. An Natural Person related in a group entity or representative of a group entity operating

a business.
b. In case of supply of goods by a group entity to its related entity or to any other group
entity.
c. Supply of goods or services to its group of entities or any other member of the group.
d. In case the permanent address of businesses of two or more entities is the same.
e. In case one Natural Person or group of Natural Persons directly or indirectly has control
over the management of the group entity.
Person, as per Sec. 2(tha) is any person such as a natural person, groups of natural persons,
constitutional body, corporate body, etc which are engaged in taxable transactions with or without
profit motive. Thus, the definition includes any Natural Person, firms, associations, institutions,
partnership firms, cooperative societies, joint ventures, religious endowments, funds, government
bodies, religious organizations, charitable trusts, etc.
Market Value, as per Sec. 2 (ta) is the price as determined pursuant to the section 13 of the Act.
Registered Person, as per Sec. 2(da), is one who has taken registration under section 10 of the Act.
Thus, the persons engaged in taxable or non-taxable transactions without getting registration for
VAT purpose are called unregistered persons for VAT purpose.

PART II - VALUE ADDED TAX ACT-2052, CHAPER 1 : BASIC CONECEPTS
Services, according to Sec. 2 (cha), are anything other than goods.
Tax, according to Sec. 2 (ka) is value added tax. But according to section 27, the fines, interest and
penalties charged as per this Act shall also be treated as tax.
Taxable Transaction, according to Sec. 2 (ga) is transaction which is subject to VAT and not a
transaction of VAT exempted goods or services.
Taxable Value, according to Sec. 2 (gha) is value of sale or purchase on which VAT is imposed for
the buyer.
Tax Officer, as per Sec. 2(na) is any Tax Officer or chief Tax Officer appointed for the purpose
of this Act by Nepal Government or any other officer designated by Nepal Government and
empowered to use the power of a Tax Officer in accordance with the provisions of this Act.
Transaction, according to Sec. 2(kha) is, supplying any goods or services.
Supply, for this purpose, according to Sec. 2 (chha) is supply as the act of selling, exchanging and
delivering any goods or services, or the act of granting permission thereof or of a contract thereof
by taking or not taking consideration.
Tax periods, according to Sec. 18 is, period prescribed by Act or Rules for calculation of net VAT
payable or receivable. Except following cases, a registered person has to adopt a month as per
Nepali calendar as tax period. As per Rule 26, certain specific taxpayers could adopt two months
as tax period or four months as a tax period:
• Bimonthly Tax period: In case hotel and tourism entrepreneurs desire, the Department
may fix tax period of two months to submit tax return. The tax period shall be, Shrawan
and Bhadra, Ashwin and Kartik, Marg and Paush, Magh and Falgun, Chaitra and
Baisakh and Jestha and Ashad.
• Trimester Tax period: In case brick industry, press, press and electronic publication and
transmission house desire, the Department may fix tax period of four months. The tax
period shall be Shrawan to Kartik, Marg to Falgun, and Chaitra to Ashad.
• Different tax period: In case a registered person that has maintained its accounts using
software cannot generate the required report in Nepalese Calendar system; it may file an
application to Tax Officer to adopt different tax period date with same period according
to Rule 26. If the Tax Office thinks it appropriate, the person may be granted a different
tax period.
• First Tax period: First tax period of a registered person shall be period of day of
registration to end of concern tax period.

INCOME TAX & VAT
• None-tax period: In case any registered person applied for deregistration, it need to file
its VAT return within 3 months from apply for deregistration; if tax officer could not
decide to deregistration, then such person (even it is registered person) need not file its
tax return. Badly, if tax officer, decides to not to deregister, then VAT return from tax
period when the decision is made, need to be filed.
2. TAX OFFICER AND JURISDICTION
The provisions of VAT law are vested with Tax Officer. According to Sec. 2(na), Tax Officer
includes:
• Tax Officer as appoints by GON (TO);
• Chief Tax Officer (CTO);
• Chief Tax Administrator (CTA);
• Directors of IRD;
• Deputy Director General; and
• Any other officer designated by Nepal Government and empowered to use the power
of a Tax Officer in accordance with the provisions of this Act. Under this rule, GON
designated District Treasury Officer as Tax Officer in the districts not having any Inland
Revenue Offices.
Sec. 3 empowers GON, for the purpose of the Act, appoints Tax Officers in the required number
and if deemed necessary, may designate any officer of Nepal Government to act as a Tax Officer.
Jurisdiction of a Tax Officer shall be fixed by GON according to Sec. 4. DG of IRD may specify a
Tax Officer to inspect transactions of taxpayers beyond his/her jurisdiction.
3. IMPOSITION OF VAT
a. Concept of VAT
Value Added Tax (VAT) is a major source of indirect taxes. It is an improved version of sales
tax. It is a tax imposed on value addition on goods and services made by business entities at
the successive stages of production and distribution. VAT is charged on person making value
addition. For any charging person dealing in the goods or services, value addition by the
person is computed as a system as:

For a system of production INPUT PROCESS OUTPUT

Value Addition System INPUT VALUE ADDITION OUTPUT
Economic system PURCHASE VALUE ADDITION SALES
Example
for a manufacturer 10,000 1,000 11,000
For a trader 10,000 1,000 11,000
For a service provider 10,000 1,000 11,000
Value addition in case of VAT is slightly different than usual use on economics. In economics,
value addition means additional cost incurred plus profit on the process, but in VAT
accounting, value addition means all the cost on which VAT has paid on purchase (or not
allowed for set off) plus profit.
VAT is collected in the transaction value on sale of taxable transaction by registered person.
In all examples above, VAT collection is required at sale value (output) of Rs. 11,000. VAT
collected on the sale is called output tax. For the VAT rate of 13%, output tax (means VAT to
be collected) is Rs. 1,430.
VAT is charging on the person dealing VAT attractive goods or services. The person collects
output tax (Rs. 1,420 in our example), but amount charging to the person may not be all of
output tax. The person can set off his allowed input tax credits from the collection of output
tax. Hence, charging person is charged VAT in the difference of output tax and allowed
quantum of input tax credits.
Charging of VAT = Output Tax- Allowed input tax credit
In all the examples above, suppose the person’s purchase of goods or services is Rs. 10,000 is
subject of VAT paid purchase and VAT paid is allowed in full, and then VAT is imposed as
follows:
Charging of VAT = 1,420- 1,300

= 120
b. Charging and Reverse Charging

• VAT is charging to a registered person; that means VAT shall be collected only by
registered person (except for some exceptions). Every registered person need to file VAT
return within 25 days from the end of tax period. Any amount due on VAT shall be paid by
that person.
• In some specified cases, unregistered person shall also collect and pay the tax as a
registered person (it is dealt in Chapter 6.2). Except for those exceptions, a person shall

INCOME TAX & VAT
get registered and after the registration, s/he is empowered to collect tax. Sec. 20(1)
empowers Tax Officer to assess tax in the person having transaction in Nepal.
• General principle of VAT requires a registered person to collect VAT on sales and deposit
the VAT, so collected, in tax office after setting it off against the VAT paid on purchases.
There are some exceptions to this general principle, whereby a person, whether registered
or not, shall collect VAT by himself/herself and deposit it into Revenue Office in the case
of purchase; the concept is Reverse Charging of VAT as the VAT is being charged by the
buyer instead of seller. Person is not required to issue any self-invoice in case of reverse
charging unlike many countries that requires so.
• Person receiving Service from foreigners- As per Sec. 8(2), any person, whether
registered or not, in Nepal receiving service from person outside Nepal shall pay VAT
for that service. In this case, person delivering the service cannot issue VAT Invoice, so the
person receiving the service shall declare and pay applicable VAT to Revenue Authority at the
time of receiving service or at the time of making payment for service whichever is earlier. If the
person is registered person, it can set off such payment as other purchases.
• Persons developing Commercial Complexes- According to Sec. 8(3), any person

(registered or not) in Nepal engaged in constructing commercial buildings, apartments,
shopping malls or similar constructions for commercial propose, the cost of which is
more than Rs. 50 lakhs* shall collect VAT on the construction cost from themselves and
deposit it to Revenue Authority in case the construction work is not carried out through
a registered person.
*As per Circular (Paripatra) dated 2070/07/03 all cost subject to capitalization excluding
finance cost shall be included to calculate Rs. 50 lakhs. However, all taxable goods and
taxable services used during construction shall be included to calculate tax payable. Cost
incurred before construction such as drawing cost, cost related to approval of drawing,
finance cost, supervision charge paid to third party etc. shall not be considered for
calculation of tax payable.
c. Transaction covered by VAT

Value Added Tax Act, 2052 is law having territorial jurisdiction. Any law having territorial
jurisdiction can be enacted within geographical boundaries of the nation only. According to
Sec. 5 all the transaction within Nepal are covered by VAT. Explaining this section, VAT is
imposed on the transactions as:
• Goods or services imported into Nepal (transaction place is deemed in custom frontiers of
Nepal for goods and person receiving services for service)
• Goods or services transacted within Nepal (transaction place is as per Rule 15 and 16)
• Goods or services export from Nepal (transaction place is deemed in custom frontiers of
Nepal)

Transaction outside Nepal: If any person, whether registered in Nepal, having permanent
inhabitant of Nepal or citizen of Nepal or otherwise similar; dealing goods or services beyond
above 3 geographical territorial cases is not liable to charge any VAT on its transaction. But,
any person having transaction outside Nepal, later take goods into Nepal (example EXW
purchase) place of transaction is deemed custom frontier.
d. Goods and services exempted from VAT

Even VAT law is imposed in all cases of transactions covered by above 3 cases, but some of
the items are exempted from VAT too. Schedule 1 of act has listed items which are exempted
from VAT. In the VAT exempted goods or services, output tax need not be collected, nor
person dealing such items can get any input tax credits. Person dealing VAT exempted goods
or services only, need not get registered, but minor portion of the act still followed by such
person.
Following group of items are VAT exempted according to Schedule 1 of the act, the details is
being amending yearly:
Group No. Group Name

Group 1 Basic Agricultural Products
Group 2 Goods of basic needs
Group 3 Livestock and Livestock products
Group 4 Agro-inputs
Group 5 Medical treatment and similar health services
Group 6 Education
Group 7 Books, Newspapers and Printings
Group 8 Cultural, Artistic and Sculpturing services
Group 9 Transportation: passengers or goods
Group 10 Professional or professional services
Group 11 Other goods and services
Group 12 Land and Building
Group 13 Betting, Casino, Lottery
Transfer of Business:
According to Sec. 5A, in case of transfer of business under either of the following two
conditions value added tax will not be applicable on the transfer of ownership of a business:
a. When a registered person sells its business to any other registered person; or
b. A business is transferred to any inheritor on the death of an owner.

INCOME TAX & VAT
In case a registered person transfers the whole of its business to any other registered person,
the transferor is not required to charge tax on the transfer. This is the facility given to the
transferor as against the general concept of the VAT. But the total VAT liability of the
transferor shall be shifted to the transferee. For VAT purpose, the transferee steps into the
shoes of the transferor. In this case, the VAT credit shall also be shifted to the transferee, even
transferee is separate person identifying with own permanent account number. To get this
benefit, transfer of business to be substantiated by Form 4 “Business Transfer Form” under
Rule 11.
e. Place and time of supply

VAT is, as explained earlier, imposed in the transactions in territorial basis, hence place
of transaction is important. Similarly, VAT requires paying within prescribed time-frame
whether the consideration received or not, and hence timing of supply is important.
Following are the place of supply for any goods under Rule 15 or services under Rule 16 for
any transaction:
i. Sale of Movable Goods: In the case of movable goods transferred by sale, the place
where such goods were sold or transferred,
ii. Immovable Goods: In the case of any immovable goods whose location can't be
transferred even if their ownership is changed, the place where such goods are located,
iii. Imported Goods: In the case of imported goods, the customs point in Nepal through
which such goods are imported,
iv. Self-consumption: In case any producer or vendor supplies the goods to itself, the place
where the producer or vendor of such goods resides.
v. Service: The place of supply of a service shall be the place where the benefit of that
service is received.
Supply of goods or services is covered by VAT, based on above principle, if the location is in
Nepal.
Time of supply
In case of supply of goods, earliest of following shall be time for supply under Sec. 6(2):
a. Date of invoice
b. Date of possession on goods/ date of removal of goods.
c. Date of consideration.

In case of supply of services, earliest of following shall be time for supply under Sec. 6(2):
a. Date of invoice
b. Date of rendering service.
c. Date of consideration.
Sec. 6(4) empowers DG, in the case of a transaction for which more than one provisions as
prescribed above are applicable at once, the supply time shall be as prescribed by DG.
There are few exception given in Sec. 6(3), regarding timing of supply as explained earlier are
as follows:
a. In the case of services which are continuously provided, namely, telecommunication

services or similar other public services, when the invoice is issued.
b. Where there is a contractual provision for paying partially the value of goods or services
on an installment basis, the supply time shall be the earliest day on which the payment
is made or the day on which the payment is to be made according to the contract.
c. In the case of goods or services for which an offset is not allowed under this Act, the time
when such goods or service are used.
f. Rate of Tax
According to Sec. 7, there shall be single rate for VAT, which is 13% chargeable in the
transaction value.
VAT exempted goods or services as per Schedule 1, by the name exhibits, is not subject of
VAT.
In case of transaction covered by Schedule 2, the rate of tax is 0%.
In summarized form, there are three types of VAT incidence on the transaction:
• Single Rate - 13%
• No VAT- Items of Schedule 1
• Zero Rated- Transactions of Schedule 2
g. Conditions for Zero Rate of Tax

Zero rated tax means tax charged at zero rates, whereas no VAT means not charging VAT, or
getting input tax credits. Schedule 2 provided a list of transaction on which VAT is charged
at 0%. In the following cases, there is 0% VAT:

INCOME TAX & VAT
1. Export of goods: In case it is proved that the supply is made as follows:
a. Goods exported outside Nepal;
b. Goods stores on a flight to an eventual destination outside Nepal; or
c. Goods stored on an international flight having destination outside Nepal for retail
sales, supplies or consumption.
2. Services provided to any person belonging to outside Nepal:
a. A supply of services by a person resident in Nepal to a person residing outside

Nepal and having no business establishment, agent or legal representative acting
on behalf in Nepal.
b. A supply of goods or service by a registered person resident in Nepal to a person

residing outside Nepal.
3. Diplomatic Supply: Import of goods or services by accredited diplomat Natural

Person or office or any Natural Person working in duty exempted diplomat office on
recommendation of Ministry for Foreign Affairs, Nepal Government.
4. Prior Exempt Project: Any purchases of goods from a registered dealer in Nepal by any
person to whom exemption of sales tax was provided as per the agreement with a project
till the agreement is in force, on a recommendation of the related project, the person shall
avail the zero VAT facility.
5. Economic Zone Supply: Sales of raw materials and finished goods to any industry
established at notified special economic zone.
6. Power Sector Supply: Sales of battery required for plants and equipments for use in
production of solar energy duly approved by Alternative Energy Promotion Centre by a
domestic producer directly to the solar power producing unit.
7. Power Sector Supply: Sales of plants and equipments required for hydro power project
produced by a domestic producer and directly supplied to the project upon approval of
Alternative Energy Promotion Centre or Department of Electricity.
8. Value added tax paid on raw materials used for manufacturing sculptures, paintings,
bastukala and similar other handicrafts that are exported through Export Trading House
of Nepal will be refunded on completion of prescribed procedure of the Department.
9. The VAT paid on import or local purchase of scooter by a handicapped person shall be
refunded as prescribed by the Inland Revenue Department on recommendation from
the Ministry of Women, Children and Social Welfare or from the Chief District Officer of
the concerned district in case the scooter is registered in his/her name in the Transport
Management Office. The VAT thus refunded shall be recovered if (the scooter) is sold to
person other than a handicapped.

h. Assessment and Collection of Tax

VAT is assessed under mainly three procedure of assessments:
a. Self Assessment (Sec. 18),

Within 25th day of closure of tax period, registered person need to file VAT return to the
concerned Tax Office.
b. Jeopardy Assessment (Sec. 22)

If there is a reason to believe that the collection of tax is in jeopardy because any person
is about to leave Nepal or to transfer his property to anybody or to remove or conceal
assets, a Tax Officer, with the approval of DG, may immediately assess and collect the
tax due, or about to become due.
c. Assessment by Tax Officer (Sec. 20).

Grounds and Conditions for assessment by Tax Officer (Sec. 20 (1): Under the following
grounds and conditions Tax Officer can make tax assessment:
a. If a return is not submitted within the time limit;
b. If an incomplete or erroneous return is filed;
c. If a fraudulent return is filed;
d. If the Tax Officer has a reason to believe that the amount of tax is understated or
otherwise incorrect;
e. If the Tax Officer has a reason to believe that the taxpayer has caused under-invoicing;
f. If under-invoicing within group companies;
g. In case person required to get registered operated business without registration;
h. In case of sales without issuing invoices; and
i. In case unregistered person collects the tax.
j. In case tax not deposited under Section 8(2) or (3).
k. For existing of situation mentioned in Section 17(4) (Goods ceases to be ued in

taxable transaction)
Bases of the assessment (Sec. S 20 (2): The Tax Officer may make such tax assessment on one
or more of the following bases:
a. Proof of transactions;
b. A tax audit report on transactions submitted by the concerned Tax Officer; and
c. Tax paid on a similar transaction by another person.

INCOME TAX & VAT
Burden of proof (Sec. 20 (3): The burden of proof lies on the Tax Officer for the reasons of the
assessment.
Time limit for assessment (Sec. 20(4): The assessment of tax, if needed, shall have to be made
within four years from the date of a tax return being filed. If the stipulated time expires the
return so filed shall be considered to be true and valid.
Assessment in case of fraudulent activities of taxpayer (Sec. 20 (4ka): In case the taxpayer
has prepared accounts, invoice, or any other documents fraudulently; or if he has fraudulently
been involved in tax evasion, IRD can order an assessment at any time, irrespective of the
above time limit.
Opportunity to explain (Sec. 20(5): While assessing the tax by Tax Officer, the Tax Officer
shall provide a period of fifteen days to the concerned person to submit his clarification.
When a Tax Officer makes assessment, he issues a preliminary assessment order in the form
of Rule 29(1), which provides a time of 15 days of the receipt of the notice to submit his
clarification in this regard along with additional documents in proof of the clarification.
In case the Tax Officer is even not satisfied with the clarifications, he issues final assessment
order in the form of Rule 29(3).
Collection of Tax
Registered person need to pay tax on the due date of filing the VAT return. In case of assessment
by Tax Officer, according to Rule 30, the assessed amount need to be paid along with tax
including any fee, additional duty, interest, fine etc. within 7 days of such assessments. In
case, the person did not pay the tax on time, Tax Officer, according to Sec. 21, can collect the
due amount from any or all of following methods:
a. By offsetting the amount, if any, to be refunded to the taxpayer,
b. By seizing movable or immovable property of the taxpayer;
c. By selling through sealed tender or public auction all or part of the assets at one time or
in a series of times;
d. By causing to deduct amounts from the taxpayer’s bank account or other financial
institutions.
e. By causing to deduct amounts due to the tax payer by Nepal Government, or a corporate
body owned by Nepal Government or local bodies.
f. By deducting with the pre-approval of the taxpayer, the amounts a third party owes to
the taxpayer; or
g. By withholding import, export or transaction of the taxpayer.
h. By restricting to go outside Nepal.

Procedure for public auction (Rule 53): A Tax Officer may realize the tax by auctioning,
wholly or partially the property of the taxpayer, by fulfilling the following procedures:
• Identification of property to be auctioned and publicly publish notice indicating the

reason for auction sale, as well as venue and date of auction sale at least 15 days before
the date of auction sale.
• Conducting the auction, with a witness of one representative of the Rural Municipality
or Metro/ sub-metro/ Municipality of the place where the goods in the auction sale are
located or a representative of the nearest government office and if possible the taxpayer
or his representative.
• All the expenses incurred on the auction sale shall first of all be borne out of the amount
realized from the auction sale; tax, charges, penalties and interest payable by the taxpayer
shall then be realized from the balance; and the surplus, if any, shall be refunded to the
taxpayer.
• But, where the taxpayer, prior to the conduct of the auction sale of his property, comes
forward to pay the entire amount including all the expenses relating to the auction sale,
tax, charges, penalties and interest to be paid by him, the same shall be collected and the
auction sale shall be stopped.
• In case the Tax Officer receives information before clearance of the dues by the taxpayer
that the tax payer has deposited sufficient amount in his account in a bank or a financial
institution, and where such amount is realized the remaining actions of the auction sale
shall be stopped.
• In case realization is likely to be made partially, it shall be made in the order expenses
relating to auction sale, interest, charges, penalties and tax.
Conduct an Auction Immediately: According to Rule 54

In case the property stopped is likely to decay, rot or wear out because of prolonged period
of stoppage resulting from the filing of a petition or appeal in any court in respect of the
stoppage of the property, the Tax Officer shall conduct the auction sale of such goods or
articles immediately and credit the proceeds thereof; and in case the amount stopped is later
decided to be refundable to the taxpayer according to a court decision, only the amount
obtained from the auction sale shall be refunded to him. The taxpayer shall not be entitled to
claim for the return of the goods or articles.
Illustration 1
Ashakheti Impex importing an equipment costing Rs. 30,000,000 from Germany. The
transportation cost is shared by both importer and seller as CIF basis. For the part of
Ashakheti Impex it is Rs. 2,000,000 and Rs. 1,000,000 paid for transit insurance. Custom rate
for such equipment is 15%. State Ashakheti Impex’s VAT treatment.

INCOME TAX & VAT
Solution
The item is subject to VAT payable, any item imported is deemed as transacted in custom
frontier of Nepal as per Rule 15. VAT is charged on the purchase cost including all the cost
incurred up to custom point. In the given case, cost incurred is Rs. 33,000,000 plus 15% custom.
So, VAT required to pay is Rs. 4,933,500. For this payment person need not required to get
registered in VAT.
Cost till custom 33,000,000

Custom Duty 4,950,000
Total Cost 37,950,000
VAT @ 13% 4,933,500
Illustration 2
Kavarkhet Impex importa VAT exempted equipment costing Rs. 300,000,000 from Germany.
The transportation cost is shared by both importer and seller as CIF basis. For the part of
Kavarkhet Impex it is Rs. 2,000,000 and Rs. 1,000,000 paid for transit insurance. Custom rate
for such equipment is 1% under code 84 of harmonized system. State Ashakheti Impex’s VAT
treatment.
Solution
The item is exempt from VAT according to Schedule 1. So, no VAT is charged on the import.
Illustration 3
Rupakheti Impex and Kalakheti Impex entered into a contract of sale of some furniture. For
this former produced some articles of furniture and latter make them marketing as dealer.
During the month, 25 units of furniture were taken by Kalakheti Impex against cost payment
of Rs. 200,000 in last month. For the next month production Rs. 300,000 were paid. Rupakheti
Impex issued Rs. 240,000 invoice covering 10 units of furniture issued this months and 30
units issued last months. How much is output tax?
Solution
VAT is deemed collected at the earliest of date of invoice, date of possession on goods or
consideration paid. In the given case, Rs. 300,000 consideration has received earliest as
production and sale of coming month, so VAT to be collected on this sum.
Illustration 4
Sunakheti Ltd., Bhimkheti Ltd., Jamarkheti Ltd. and Karkheti Ltd. are four company owned by
Mr. Uperkheti. The head office for all companies is same place, but there are four accountants

one for each. Mr. Uperkheti is worried about monthly VAT return for each company. Being
the key person, he wants to file a single return. Is it possible?
Does the answer is different in case, Karkheti Ltd. is filing trimester basis?
Solution
In VAT, group company or group entity is for inter-company transaction at market
value and not for consolidated VAT return. There is no any concept of consolidated VAT
accounting or consolidated VAT return in VAT. Even, surplus money of one unit of group
company cannot be set off with another company. As all the companies are incorporated
separately and they have their own identity hence Mr. Uperkheti has to file VAT return of
each company individually irrespective of the monthly, bimonthly and trimester basis of
return filing.
Illustration 5
Phekurel Ltd. has a branch in Dhaka, Bangladesh, Financial Statements is prepared and
monitored monthly under NAS. During the month, sales from head office is Rs. 20 millions
and sales from branch is Rs. 10 millions equivalent. How much VAT need to pay, if input tax
credit is Rs. 2 millions.
Solution
In VAT, only the transaction in Nepal is subject to VAT. Any sale or purchase beyond territory
of Nepal, is not taxable as per the VAT laws, even the person is registered person. Here, sales
from Nepal are Rs. 20 millions and output tax is Rs. 2.6 millions whereas there is input VAT
of amounting Rs 2 millions . So VAT payable is Rs. 0.6 million.
Illustration 6
Bhekurel Ltd. is a branch of Dhaka Ltd. registered in Bangladesh. During the month, sales
from branch are Rs. 10 millions. How much VAT needs to pay, if input tax credit is nil.
Solution
In VAT, all the transaction in Nepal is subject to VAT irrespective of registration of main
corporate body. Branch in Nepal is a person for VAT purpose; even the corporate person is
not a registered person. Here, sales from Nepal are Rs. 10 millions which is beyond the limit
of VAT registration requirement, hence the person needs to be registered in VAT and file
return on monthly basis. In this illustration as input VAT is Nil VAT on output payable is Rs.
1.3 millions (i. e 13% of Rs 10 million).

INCOME TAX & VAT
Illustration 7
How do you determine when a transaction is deemed to have occurred and when is the VAT
reportable?
a. Is the delivery of goods the key factor?
b. Is date of service performance critical?
c. For continuous services is invoice date critical?
d. Is payment date critical?
Illustration 8
Are transactions in Goods between a Branch in Nepal and a Branch/ Head Office of the same
Legal Entity in another country, within the scope of VAT, or are they ignored?
Illustration 9
What shall be the impact in case one branch in Biratnagar send some goods to Nepalganj
Branch?

CHAPTER 2
REGISTRATION AND
DEREGISTRATION

INCOME TAX & VAT
1. REGISTRATION IN VAT
VAT is charged to the registered person except few cases. Person registered with VAT is called
‘registered person’. Registered person get same permanent account number (PAN) for all taxation
purpose, which is also applicable for VAT procedure.
Certificate of Registration-
According to Sec. 10(4), Tax Officer shall register each person who has duly submitted an
application for registration and shall issue an unique registration number, in the prescribed form
and time, together with a certificate of registration. Permanent Account Number is such unique
code assigned to each tax payers.
According to Rule 5, the Tax Officer shall, after making investigation on the application, register
the person and grants a certificate of registration in a prescribed format to the person within 30
days of such application.
According to Rule 14, in case the certificate of registration of a person torn, lost, or otherwise
destroyed, the person shall submit an application to the respective Tax Office for duplicate
certificate with a fee of Rs. 100. Tax Office upon receipt of the application shall give a duplicate
copy of the certificate of registration within 15 days of the receipt of the application.
Changes in description of registration-

According to Sec. 10(7); in case of any changes in particulars as mentioned in the application
for registration, the registered person has to inform to the concerned Tax Office regarding the
changes within 15 days of such happening. As per Rule 9, in case any person desires to change
the transaction place, the fact shall be informed to the Tax Office before 15 days of doing so. As
per Rule 10, any registered person shall prior to 15 days of the change of the nature or object of its
transactions notify the concerned Tax Office thereof.
Upon receipt of the notice as above, the concerned Tax Office shall change the nature or object of
the transaction of the registered person and inform such registered person thereof. On receipt of
the information, in case the new transaction place falls under the jurisdiction of another Tax Office,
the Tax Office shall have to inform the new Tax Office about the transaction place of the taxpayer.
Display registration certificate-

According to Sec. 10(5); registered person shall display the registration certificate in an eye-
catching place at his principal place of transactions. In case the person has more than one place
of transaction, he shall display at each place of transaction a copy of the registration certificate
attested by the Tax Officer.

PART II - VALUE ADDED TAX ACT-2052, CHAPER 2 : REGISTRATION AND DEREGISTRATION
Use of registration number-

According to Sec. 10 (6); registered person shall have to use its registration number for all
transactions related to VAT, excise duty and custom duty and other transactions as prescribed.
Prescribed places of use of such numbers as per Rule 13, includes:
i. Documents relating to income tax;
ii. Documents relating to loan application for commercial or industrial purpose from any
bank or finance company for an amount of Rs. 1 lakh or more;
iii. Documents relating to import and export.
2. MANDATORY REGISTRATION
The Permanent Account Number issued by IRD for Income Tax purpose has been used for the
purpose of VAT as well since 2058. The taxpayer shall apply for VAT registration once it gets
registered for Tax purpose. There have been certain cases, where the person has not registered for
income tax but for VAT only. The cases of registration for VAT even in the case of transactions of
exempted goods and services were numerous at the time of implementation of VAT Act in Nepal.
There are Four types of Registration in VAT, viz. Compulsory VAT Registration, Voluntary VAT
Registration, Temporary VAT Registration and Forced Registration.
Compulsory VAT Registration

The conditions for compulsory VAT registration are as follows:
• Commencing of Business dealing in existing VAT attractive Goods or Services: The

person willing to involve in taxable transaction shall register for VAT purpose, except
in the cases when it is relieved from registration requirement due to the transaction below the
threshold prescribed in the law as presented in Chapter 3.2 (2).
• Transaction of Goods or services exempted under VAT, now converted to VAT attractive
items: In case the goods or services that were exempted under Schedule 1 becomes
tax attractive due to the amendment in tax law, the person shall file an application for
registration within 30 days of such incidence, if the person believes that the turnover of the
transaction exceeds the threshold prescribed under the Act.
• The person was not registered due to the application of threshold, but the turnover
exceeds the threshold prescribed under the Act: A person is exempted from registration
in case the turnover is below some threshold prescribed under the Act (discussed in
Chapter 3.2 (2)). In case there occurs such circumstance that the turnover of any 12 months
exceeds the prescribed threshold, the person shall make an application for compulsory
registration within 30 days of such happening.

INCOME TAX & VAT
• Compulsory Registration in case of certain businesses in certain area: The person dealing
in following business in metropolitan city, sub-metropolitan city, municipality and other
area prescribed by IRD shall register for VAT purpose regardless of the turnover of the
business.
Operating following businesses anywhere in Nepal

Transaction by bricks production, Liquor, Wine, Health Club, Disco theque, Massage therapy,
Motor Parts, Electronic Software, Custom Agent, Toy Business, Junk or Scrap Business, trekking,
rafting, ultra light flight, paragliding, tourist vehicle, crusher, sand mines, business operations
related to slate and stone industry
Operating following businesses in metropolitan city, sub-metropolitan city, municipality area

or other area prescribed by IRD
Where any person operates a business of hardware, sanitary, furniture, fixture, furnishing,
automobiles, motor parts, electronics, marbles, Educational and Legal Consultancy services,
Accounting and Auditing related services catering services, party palace business, parking
service, dry cleaners operated with machinery, retaurant with bar, ice-cream industry, colour lab,
boutique, tailoring business with materials of suiting shirting, supplying uniform to educational
institutions or health institutions or other entities
Other Conditions for Compulsory Registration

The following are the other conditions for compulsory registration:
• In case the tax officer finds that the stock is greater than the amount prescribed by IRD as
per the nature of goods at the time of investigation,
• In case any person receives commercial loan from any banks for more than one million
rupees in a year.
Commentary on Other Conditions

The person, the turnover of which is less than the threshold prescribed by IRD, shall also get
registered if any of the above two conditions are satisfied.
3. REGISTRATION NOT REQUIRED
a. Exempted item dealer:

According to Sec. 10(3), for a person, who carries out the transactions of goods or services
mentioned in schedule 1 of the Act, shall not be required to register in VAT. It means any
person dealing exclusively in goods or services which are included in schedule 1 are not
required to apply for the VAT registration.

b. Small Vendors:
According to Sec. 9, notwithstanding anything contained in other provisions of the Act, an
exemption may be provided to a small vendor, having transaction below the prescribed
threshold, from the requirement of registration.
Rule 6 prescribed the taxable threshold is fixed for transaction of Rs. 2 millions during a
period of previous 12 months. For this purpose, transaction means either purchase or sale
which crossed Rs. 2 millions during last 12 months.
Provided that except the presumptive tax-payer filing returns under Section 4(4) of the Income Tax
Act, 2058 and dealing in VAT-able transaction, a small entrepreneur may register the transaction
by completing the process of Section 10 upon desiring to be registered.
Exemption from requirement of Registration

• The followings are the conditions under which a person is not required to get registered
for VAT purpose:
• Person dealing only in Exempted Items {Sec. 10(3)}: Person dealing exclusively in goods
or services that are included in schedule 1 as exempt goods or service shall not get
registered.
• Small Vendors (Sec. 9): The person with the following turnover (Threshold of turnover
prescribed in Rule 6) in any period of 12 months (set of moving 12 months) are relieved
from the registration requirement:
• For persons dealing in Taxable Goods: The turnover of last 12 months shall not exceed Rs. 5
Million.
• For persons dealing in Taxable Service: The turnover of last 12 months shall not exceed
Rs. 2 Million.
• For persons dealing in both Taxable Goods & Taxable Services: The turnover of last 12
months shall not exceed Rs. 2 Million
Turnover means the higher of Sales or Purchases. In case the sales or purchases are not
specifically identifiable, the DG may prescribe the combined value as turnover.
4. VOLUNTARY REGISTRATION
Any person engaged in taxable transaction and there are no conditions applicable on it for
compulsory registration as per section 10 or Rule 6 and 7, may apply for registration, voluntarily.
It has to file an application for registration after completing the process of section 10.
After registration, either compulsory or voluntarily, the right and duties, responsibility for
maintaining books of accounts etc. are same for all.

INCOME TAX & VAT
5. TEMPORARY REGISTRATION
Temporary Registration for Unregistered Person

Any unregistered person desiring to engage in any short-term taxable transactions of goods or
services at fair, show, demonstration, display, exhibition etc., shall make an application for a
temporary VAT registration.
Person responsible for Temporary Registration

The exhibitor or organizer, if it is not registered; and the unregistered participant of such fair shall
register temporarily.
Demand of Deposit
The tax officer shall demand 2% of total estimated income as deposit from such person filing an
application for temporary registration.
Stock Transfer Facility for Existing Registered Person

Existing registered person can transfer goods for transaction to the place of exhibition or fair.
Cancellation of Temporary Registration

Within 7 days from completion of the fair, show, demonstration, display, exhibition etc.,
temporarily registered person has to submit VAT return of the transactions made thereon and
shall cancel the registration.
6. DEREGISTRATION
Any registered person who desires not to continue his taxable business due to any reason may
apply for DEREGISTRATION from VAT. Section 11 has specified certain conditions under which
the VAT registered person may apply for deregistration
Deregistration of VAT registration is effective only if the concerned Tax Office provides notice
to the person about the cancellation of the VAT registration status. Submission of application for
deregistration is not sufficient to say that the VAT registration is cancelled.
Conditions for deregistration: According to Sec. 11(1), Tax Officer may deregister the VAT
registration under any one of the following conditions:
a. In the case of an incorporated body, if the incorporated body is closed down, sold or
transferred or if it otherwise ceases to exist;
b. In the case of an individual ownership, if the owner dies;
c. In the case of a partnership firm, if it is dissolved or any of the partners expires;

d. If a registered person ceases to be engaged in taxable transactions;
e. In case the registered person submits zero tax returns continuously for 1 year or it has
not submitted tax return till the date (may be sue motto forced deregistration).
f. If a person is registered in error (may be sue motto forced deregistration).
g. In case of temporary registration under Sec. 10A, after 7 days of closure of exhibition or
fair or event for which temporary registration made so far.
Procedure for and effect of deregistration- In case any person desires to cancel its registration, it
has to file an application in Form No. 11 of the Rules. When the Tax Office receives the application
for deregistration, makes necessary inquiries and may cancel the registration on satisfaction.
In case the registered person has certain stock of inventories or capital goods at the time of
application for deregistration, it has to pay the tax on the stock of taxable goods as these are
disposed off at that time at their market rate. According to circular dated 2055.9.5, in case market
value could not be ascertained at the time of deregistration (and in case of self-use too), cost price
shall be assumed as market price.
VAT Return after application-The registered person need to file VAT return after applying for
deregistration within earliest of date of cancellation granted or 3 months from date of application.
In case, Tax Officer has not decided within 3 months, further VAT return is not required according
to Sec. 11(1B).
Effect of Deregistration- The responsibility of the registered person to comply with the provisions
of the act does not cease only because of deregistration however provisions applicable to only
registered person will not be binding if the deregistration takes place.

INCOME TAX & VAT

CHAPTER 3
TAXABLE VALUE, COLLECTION,
OFFSET AND REFUND

INCOME TAX & VAT
In this Chapter we shall discuss the quantification of tax as per the law. Registered person
collect VAT on taxable value of the transaction done during the tax period. It can offset paid
VAT from those collected amount and in case of surplus it can be refunded to the person.
There is variety of conditions regarding determination of value, collection of tax, offset or
refund.
1. TAXABLE VALUE
Taxable value means the value of transaction on which VAT shall be charged. According to
Sec. 12, it is amount received from the buyer and includes cost of goods, transportation cost,
transit insurance, applicable duties (except VAT) and profit of the sellers, if any. Taxable value is
determined in case to case basis as:
a. Taxable Value in General

Cash consideration: As per section 12 of the Act the taxable value is the value charged by
the supplier for the goods or services where the consideration is payable in cash. It includes
value of the invoice including profit margin, freight and distribution expenses incurred by
supplier, excise duty or other taxes except VAT less any discounts, commission or any other
trade discounts. Vide circular dated 2056.2.28, in case of cash consideration includes any fee
or penalty, that should be included in taxable value too.
Import: According to Sec. 12(5) and Rule 48; in case of import of goods, respective custom
office collects VAT based on taxable value. Sec. 12(6), provides the revaluation of purchase
price at market price in case of significant under-invoicing found or reasons to be believed.
Taxable value for the purpose of import shall be computed as follows:
1. Value paid to Vendor or value as determined for Custom Duty (TV based or otherwise)
2. Custom duty and custom service charge
3. Excise or countervailing duty
4. Other duties (Ownership charge, Agriculture duty, Local Development Tax, if any)
5. Demurrage or other penalties
6. Insurance and transportation etc.
b. Taxable Value in Special Condition

Barter system: According to Sec. 12(4), in case of a barter system, the market value of goods
given shall be treated as the taxable value of goods bartered. Here is a question which of

PART II - VALUE ADDED TAX ACT-2052, CHAPER 3 : TAXABLE VALUE, COLLECTION...
the rate to be taken- item out or item in; the act has not clarified the matter. The valuation is
similar quantification as in NAS 18 Revenue6 in financial accounting.
Under-invoicing: According to Sec. 12(6), in case, value of any goods or services is found to
be much lower than the prevailing market value, the taxable value of the goods or services
shall be equal to market value.
Partial Consideration: According to Sec. 12(7), in case, value of any goods or services is
settled by partial consideration the taxable value shall be market value rather than value
equals to partial consideration.
Taxable value for wood: According to Sec. 12A; wood of national forest is being sold, tax
shall be levied on the amount on which royalty is being calculated or the amount of auction,
whichever is higher. The amount considered for such calculation shall be on the basis of the
earlier of these happenings: auction of wood of the national forest, issue of delivery order or
issue of an order to cut the wood.
Wood of a private area, private forest and community forest if sold for business, though
royalty is not chargeable on such sales, for tax purpose it is determined on the basis given for
the wood of national forest.
Taxable value for notified goods- According to Sec. 14(6), IRD may issue notice publicly or to
any specified person to publish the retail price of specified goods for specific period. In case
of such notice is issued, the respective person should not sell or transfer such goods without
publishing the retail price of the specified goods.
Sub-section (7) further provides that in case such notice is issued for any specified goods,
the respective person while selling such goods to any unregistered person shall have to
issue the invoice at the consumer price and VAT shall be charged on the consumer price.
The discounts or commissions payable on the invoice shall be given after charging VAT
that means no discount and commission is allowed to be given in the rate published.
Such persons while selling such goods to unregistered person has to issue the invoice as
prescribed in annexure 5kha of VAT Rules. It is also provided that in case the person desires
to issue such invoice voluntarily while selling such goods to registered person also, he may
do so.
6
The revenue is measured at the fair value of the goods or services received, adjusted by the amount of any cash or cash
equivalents transferred. When the fair value of the goods or services received cannot be measured reliably, the revenue
is measured at the fair value of the goods or services given up, adjusted by the amount of any cash or cash equivalents
transferred.- NAS 18 Revenue para 12.

INCOME TAX & VAT
c. Taxable Value in case of used goods

According to Rule 33, taxable value for dealers in secondhand or used materials is the
difference of sales amount and VAT included cost of sales.
Taxable value for used goods = Selling value of the goods- purchase price including VAT
A registered person, who is dealing in used or secondhand goods and intending to get benefits
of Rule 33, has to maintain purchase register and sales register containing the following
particulars:
Particulars in a Purchase Register:

i. Date of Purchase,
ii. Particulars giving full information of the goods,
iii. Buying price excluding tax,
iv. Rate of tax,
v. Amount of tax,
vi. Total amount paid.
Sales Register:
i. Date of sale,
ii. Selling price, excluding tax,
iii. Difference between the purchase price (including VAT) and the selling price (excluding
VAT),
iv. Rate of tax,
v. Amount of tax,
vi. Total amount received.
In case the purchase price of every item of used goods exceeds Rs. 10,000, separate records of
buying or selling shall be maintained.
In case a registered person is found not to have satisfactorily maintained the records as
prescribe above, Tax Officer may impose VAT on the total selling price of the goods sold by
such taxpayer, and the Tax Officer may issue a written order requiring him to pay such tax
along with the next tax return.

2. MARKET VALUE CONCEPT
VAT is charged on the cash or equivalent of consideration in almost cases. In some cases, the
valuation is to be considered for VAT accounting. Requirement for valuation of transaction is
market value and which is accounted by registered person itself and in some cases Tax Officer
uses the market value.
Market value~ arm length:

As per Sec. 13, market value of goods or services supplied shall be the consideration which the
supply of these goods and services would generally be agreed on if the transaction were made
under similar circumstances at that date in the same location taking into consideration the
characteristics, quality, quantity materials, and any other relevant factors, being a supply freely
offered and made between persons who are unrelated.
Cases of market valuation by registered person: In the following cases, transactions to be

accounted in market value by the registered person itself:
o Barter system transaction (Sec. 12(4): see Chapter 27.2 above)
o Partial Consideration (Sec. 12(7): see Chapter 27.2 above)
o Remaining stock and capital items at deregistration (Sec. 11(3): see Chapter 26)
o Remaining stock and capital items at shifting to VAT Exempted business or self
consumption of trading stock (Sec. 17(4) and Rule 15)
Cases of market valuation by Tax Officer: In the following cases, transactions to be reassessed at
market value by the Tax Officer:
o Above cases of market valuation if not done by tax payer itself. (Sec. 20 and Rule 29)
o Under-invoicing (Sec. 12(6): see Chapter 27.2 above, Sec. 20 and Rule 29)
o Remaining stock if could not shown at physical verification by Tax Officer (Rule 40)
Cost Price for market value: In the cases of self consumption and at the time of deregistration,
market price shall be determined at cost price vide circular dated 2055.9.5.
Method of determination: Tax Officer has right to fix the market price based on similar goods
transacted as per Rule 22. According to same rule, if Tax Officer could not ascertain market
price, then Director General shall prescribe the method to take similar goods of different
suppliers.

INCOME TAX & VAT
3. TAX COLLECTION
Normal principle of VAT is that, tax to be collected by a registered person recognized by taxation
authority. There are some cases where person other than registered person need to collect such
tax.
a. Registered Person has to collect

VAT is to be collected by registered person according to Sec. 8(1). In the case of supply of
goods or services, registered person need to collect VAT at the transaction value by way of
tax invoice.
In case any person in Nepal, receives any service for foreign country, then the person getting
benefits from those service need to pay VAT on service so received according to Sec. 8(2). Such
system of paying VAT is called reverse charging system. According to Sec. 8(3), in case, any
person engaging in construction of apartments, shopping complex, or commercial buildings
having value more than Rs. 5 millions, the person need to pay VAT on the cost paid to any
unregistered contractor as reverse charging.
b. Persons collecting tax other than registered person

Unregistered person cannot collect VAT as per above para. In case any unregistered person
collected VAT on its sales, then VAT shall be assessed by the Tax Officer as per Sec. 20.
There are certain cases, where the collecting person shall not be VAT registered person too.
o Custom Offices: In case of import, the respective custom office collects VAT on the
taxable value calculated as per the Act. For this, the direct expenses incurred up to the
custom office and duty those collected by custom office are considered for calculation of
the value of the goods.
o Government and International Agency: In case of any sale or service by Government

of Nepal, Province Government, Local Government, Nepal based International
Organizations or Missions need to collect VAT, even if they are not registered person.
o Wood Sellers: In case any person selling wood from forest (governmental, community
or private forest), the person need to collect VAT, irrespective of its registration in VAT.
c. VAT on Consultancy Service

As per Rule 6Ka(2), Government body, public institution or registered person should acquire
contract or consultancy service for more than Rs. 5,00,000 in a year only from reigistered
person.

4. VAT RETURN
Registered person has to submit tax returns in the format prescribed in Schedule 10 of Regulation,
within the time specified for a particular tax period as per Sec. 18. Time specified for this purpose is
25th day from end of each tax period.
Place of submitting VAT return is Tax Office in the districts where Inland Revenue Office located
or to District Treasury Comptroller’s Office otherwise or by electronic medium.
5. BANK GUARANTEE IN CASE OF IMPORT FOR EXPORT
Sec. 8A provides some facility to the importer whose imported material is re-export with value
addition and duty free bonded warehouses. In such case, importer may use bank guarantee facility
for the portion of VAT payable in import at custom.
i. Conditions for re-exporter:

In the following conditions bank guarantee facility is availed:
o Manufacturing industry exporting more than 40% of its sales during last 12 months or
duty free shops under bonded warehouse.
o This facility is availed to importing raw materials only.
o Exporter need to value add at least 10%.
ii. Conditions for bonded warehouse:

In the following conditions bank guarantee facility is availed:
o Bonded warehouse for duty free shops.
o Sale of duty free alcoholic goods and cigarettes should be limited to diplomatic person or
entity getting duty facility by Ministry of Foreign Affairs.
The bank guarantee in both cases shall be released by the custom office as prescribed by IRD.
6. OFFSET OF TAX
Registered person requires collecting VAT on its every sale except items covered by Schedule 1.
These collection need to pay to the governmental revenue accounts. Paying to revenue accounts,
registered person can offset VAT paid by it on purchases which is also termed as input tax credit.
There is a thumb rule principle (with some exception) that VAT paid on purchase having VAT
attractive output can be set off. VAT set off is allowed by way of input tax credit. Let’s take an
example:

INCOME TAX & VAT
Illustration 1:
A Ltd. engaged in alcoholic products; is a registered person in VAT has following purchases
where applicable VAT were paid on purchase:
1. Equipment purchased at Rs. 500,000 and installed in the factory, which was insured
against the fire with premium of Rs. 20,000.
2. The entire building materials were purchased from a firm in which the managing
director of this company is a partner. The fair market value of the materials purchased is
Rs.20,00,000.
3. Interest on loan includes Rs.15,000 being interest on loan taken for investment in shares
of various companies.
4. Office administration expenses include Rs.113,000 paid for stationary and telephone
including VAT.
Output (sales- actually happened or intended to happen) is VAT attractive. VAT paid
purchases are:
Name of Item Cost paid Rs. VAT paid Rs.

Equipment 500,000 65,000
Insurance Premium 20,000 2,600
Building material 2,000,000 260,000
Stationary and telephone expense 100,000 13,000
Total 2,620,000 340,600
Interest if exempted items under Schedule 1, so no VAT requires paying. In this case, output
of A Ltd. is alcoholic product (VAT attractive output), all VAT paid on purchase is allowed
to input tax. There is not a question that whether actual sales done this month or not or the
installation might be ongoing too. Assuming A Ltd. following sales VAT input tax (offset
allowed) shall be as follows:
VAT collected VAT payable

Sales Rs. if Input tax Credit
(output tax) (Carry forward)
500,000 65,000 340,600 (275,600)
20,00,000 260,000 340,600 (80,600)
30,00,000 390,000 340,600 49,400
a. Input tax- Full credit

VAT paid on purchase is allowed as full set off if output of registered person is VAT attractive
only. In the above example output of alcohol is VAT attractive and VAT paid is fully allowed
as credit.

VAT credit can be claimed within 12 months of purchase and not necessary to claim at the
first month. There is no concept of put to use in VAT.
b. Input tax- No credit or Partial Credit

There are some cases where VAT paid on purchase is not allowed- no credit, even if output of
registered person is VAT attractive.
Following cases are no-credit items:

o In case output (Intended or actual sales) is VAT exempted for the purpose of Schedule 1,
VAT paid on purchase is not allowed for credit as per Sec. 5(3).
o VAT paid on Entertainment is not allowed for credit as per Rule 41.
o VAT paid for consumption of drinkable items as per Rule 41(soft drink, juice or similar).
o VAT paid for consumption of liquor items as per Rule 41(beer, wine, whiskey, or similar).
o VAT paid for consumption of Petrol, Diesel and LP Gas as per Rule 41.
Last three cases are allowed at full credit in case of dealer, only consumption is no-credit.
In case any VAT registered person not dealing in automobiles business, if purchase
automobiles (at least three wheelers vehicle running in road with passenger) for own use,
only 40% of VAT paid is allowed as credit. This type of credit is called partial credit.
c. Input tax- Proportionate Credit

VAT paid on purchase is allowed as full set off if registered person collects VAT on its output
sales either as 13% or zero percent (other than exempt). Similarly, VAT paid on purchase is
not allowed as credit if the output is VAT exempted. There shall be the cases, where registered
person deals both VAT attractive and VAT exempt items at a time; in such situation VAT
credit is allowed on proportionate basis in case of VAT input relating to common costs:
Raw materials for VAT attractive output Full Credit Rule 40(3)
Raw materials for VAT exempted output No credit Rule 40(3)
Common Cost (raw materials or overheads) Proportionate of sales 7
Rule 40(4)
d. Input tax- Loss of asset

In case any fire, steal, accident or damages, terror, rotting, expiry of period of consumption or
similar events make loss of assets or dispose at lower rate, then input tax credit (for new items) or
credits already allowed as input tax is allowed at following stage as per Sec. 16B and Rule 39A:
7
Proportionate Credit has not defined. In practice, Tax Officer and Tax Payers use yearly sales proportion, though there
is not year concept in VAT accounting.

INCOME TAX & VAT
o Registered person has to apply to Inland Revenue Office within 30 days of loss, damage,
expiry or whatever in writing.
o Inland Revenue Department shall form an investigation committee to find the fact.
Committee shall investigate and finalize the quantum of tax credits to be allowed.
e. Input tax- Documentation

Input tax credit is availed upon the following documentations:
o Input tax credit on local purchase:

 Tax Invoice of purchase (no abbreviated tax invoice). In case of purchase from
governmental agency or international agency or wood-sellers (see Chapter 29.2 for
Persons collecting tax other than registered person), VAT paid is eligible without tax
invoice as per Sec. 17(5).
 PAN, name of the buyer need to be mentioned in Tax Invoice.
 Purchased item should use or intend to use in the business.
o Input tax credit on import:

 Import related documents (pragyapan patra, VAT paid slip, etc.).
 In case of goods were released on dharauti, evidence to deposit into revenue.
 Purchased item should use or intend to use in the business.
o Input tax credit on reverse charging:

 Imported service invoice
 Purchased service should use or intend to use in the business.
f. Input tax- Stock at the time of registration

VAT input tax credit is availed for purchase by registered person only. But, as per Rule 43
(1), a person, at the time of registration, if any stock items are in stock which was purchased
through valid VAT creditable documents shall apply to a Tax Officer in form No. 16. Any
VAT credit ascertained in Form 16 is deemed as purchase in regular basis.
g. Tax payment
The excess of tax collected during a tax period (output tax) over tax paid on purchases (input
tax) during the same tax period shall be paid to revenue within 25 days of the end of the tax
period. Such payments should be made at respective tax office in cash or may be deposited at
a bank account specified by IRD. In case of delay, there is an interest of 15% per annum plus
additional duty of 10% per annum for unpaid amount.

There are some persons who collect VAT without registering in VAT (GON, Local Government,
International Organizations & Missions, wood sellers). The act is unclear on the date and
method of payment of VAT so collected. Without clarity, we should say, they need to deposit
tax amount as other registered person do, within 25th day of closure of month in which VAT
amount was collected.
h. Tax Payment by GON or GON owned entity

Government body or organization wholly or partly owned by Nepal Government at the time of
making payment against tender agreement or contract for supply of goods or service or goods
and services to respective contractor or supplier, should deposit 50% of tax payable amount,
in the name of contractor or supplier at respective revenue code and pay only balance amount
of tax to them. Revenue such deposited shall be informed to related contractor or supplier
and amount deposited can be setoff with tax payable by related contractor or supplier.
Illustration 2:
Dhablakoti Ltd. is producing bottled beer. During the month, it purchased Rs. 300,000
construction materials, Rs. 600,000 bottle crown, Rs. 1 million malt and Rs. 100,000 stationary.
Construction materials was for office building. Out of bottle crown and stationary, 80% is
found in stock. During the month it sold Rs. 3 million from old stock. How much input tax
credit availed?
Solution
output is VAT attractive, non of the purchase are qualified for partial or no VAT, hence all the
purchase are qualifying for input-tax credit.
Taxable Value Input tax Output tax
Sales 3,000,000 390,000

Purchase
Construction Materials 300,000 39,000
Bottle Crown 600,000 78,000
Malt 1,000,000 130,000
Stationary 100,000 13,000
Total 260,000 390,000

INCOME TAX & VAT
Illustration 3:
Sallakoti Ltd. is producing can beer. During the month, it purchased Rs. 300,000 construction
bricks, Rs. 600,000 marble, Rs. 1 million iron rod and Rs. 100,000 stationary. Construction
materials were for factory building. After completing factory buildings, its production shall
be started. How much input tax credit availed?
Solution:
Output is VAT attractive, non of the purchase are qualified for partial or no VAT, hence all the
purchase are qualifying for input-tax credit (assuming VAT registered).
Taxable Value Input tax

Construction bricks 300,000 39,000
Marble 600,000 78,000
Iron rod 1,000,000 130,000
Stationary 100,000 13,000
Total 260,000
Illustration 4:
List the input tax credit vehicles those are eligible for credit. Is there any chance where input
tax credit is availed without Tax Invoice?
Solution
Tax invoice is major and default supporting required claiming input tax credit. Apart from
tax invoice; there are some cases where input tax is allowed even without tax invoice with the
basis of following documents:
a. Bills from Electronic Cash Register.
b. VAT paid voucher against wood from forest.
c. VAT paid voucher against reverse charging
d. VAT paid voucher against import
e. VAT collected by GON, Local Government or INGOs u/s 15(3).
Illustration 5:
Dharmakoti has net income of Rs. 500,000.00 from export of merchandise. Office overhead
cost excluding VAT was Rs. 200,000 and gross profit was 20% on sales. 50% of costs of goods
sold attracting VAT. Find VAT consequences.

Solution:
Gross profit =( Rs 500,000 + Rs 200,000) = Rs. 700,000
Sales = Rs 700,000 /0.2 = Rs. 35,00,000
cost of goods sold =(3500,000- 700,000) = Rs. 28,00,00.
Vat attracted cost of good sold = 50% ( Rs 2800,000) = Rs 1400,000
So, VAT paid purchase is Rs.1600,000 (1400,000+200,000) and hence VAT paid is Rs. 208,000.
Assuming export was VAT attractive items, input tax credit availed is Rs. 208,000 and can
claim for refund under Sec. 24.
Illustration 6:
Bastakoti Ltd. has following transaction during the month, find VAT credit allowable for the
coming month:
Opening Credit 10,000

Purchase net of VAT 1000,000
Salary for the month 100,000
Purchase of a car with VAT 1130,000
Purchase of Office Supplies 100,000+VAT
Sale- Local 1000,000
Sale- Export 1000,000
Out of sales one half is vat attractive.
Solution:
Out put is mixed- VAT exempted and VAT attractive both. Sales ratio is 50% and input cannot
be directly related with output. In such situation, input tax credit is allowed in the proportion
of sales, i.e. 50%.
Input tax credit

Taxable value VAT paid
(50% of eligible)
Purchase net of VAT 1000,000 130,000 65,000
Salary for the month 0 0 0
Purchase of a car with VAT (40%) 1,000,000 130,000 26,000
Purchase of Office Supplies 100,000 13,000 6,500
273,000 107,500

INCOME TAX & VAT
Input tax credit

Taxable value VAT paid
(50% of eligible)
Sale- Local 500,000 65,000
Sale- Export 500,000 0
65,000
VAT payable (refundable) (42,500)
Since export is more than 40%, credit of Rs. 42,500 can be claimed as refund.
Illustration 7:
Jalakoti P. Ltd. sales vegetables. During the month following sale and purchase (VAT to be
adjusted) made. Find VAT impact.
Purchase Sales
Fish Fillet 20,000 10,000
Potato 20,000 10,000
Green Tea 20,000 10,000
Black Tea 20,000 10,000
Purchase of Office Supplies 20,000 10,000
Solution
output is mixed- VAT exempted and VAT attractive both.
Purchase Sales Remarks

Fish Fillet 20,000 10,000 VAT attractive
Black Tea 20,000 10,000 VAT attractive
40,000 20,000 VAT attractive
Potato 20,000 30,000 VAT Exempted

Green Tea 20,000 30,000 VAT Exempted
40,000 60,000
Purchase of Office Supplies 20,000 Mixed
Purchase of Fish Fillet and black tea is VAT attractive, so purchase (Rs. 40,000 VAT Rs. 5,200)
is allowed for input tax credit. Out of Office supplies, 25% is eligible for input tax credit, i.e.
Rs. 650 (Rs. 20000*25%*13%).

Illustration 8:
Gairikoti P. Ltd. a VAT registered firm received some service from India. The bill was Rs.
100,000. Company paid Rs. 13,000 as reverse charge. During the month company has sales of
Rs. 1 million. Find VAT impact.
Hint: Here VAT paid is Rs. 13,000 and collection is Rs. 130,000. VAT paid without bill is
allowed as credit in the case of reverse charging, hence Rs 13,000 can be set off against Rs
1,30,000.
Illustration 9:
Bhinakoti Co-operative working in Nala Kavre has imported Rs. 100,000 costing material from
India on Chaitra. Custom Office confused on import code and custom rates. Preliminarily, it
set 30% custom and accordingly, the goods were cleared. The confusion were sent to Custom
Department, which latter on Jeth it fixed the rate of custom at 5%. On clearing goods, Bhinakoti
Kept Rs. 30,000 as Custom and 16,900 as VAT in dharauti. All the goods were sold during
Chaitra. What shall be the VAT accounting?
Hint: Here VAT paid is Rs. 16,900 is not on the account of VAT fixed, it was dharauti. According
to Sec. 12(8), input tax credit is allowed as and when the collector settled it as consideration.
Dharauti cannot be claimed as input tax in chaitra or in Baisakh. Input tax credit of Rs. 13,650
is allowed in Jeth only.
Illustration 10:
Burlakoti Ltd. is a trading company sales Tibet imported garlic. During the month it sold
Rs. 200,000 garlic to its dealer Durakoti in Dhulikhel at Rs. 100 per kilogram. In the mean
time, dealer and director of the company became close relatives due to marriage between two
families. Next month, consideration were reduced to Rs. 50 per kilogram.
Hint: Partial consideration to be valued at market rate (Sec. 12(7). Hence for the purpose of
VAT product has to be assessed at Rs 100 rather than Rs 50.
Illustration 11:
Durakoti P. Ltd has following fixed assets and trading stock. The company is going to
liquidate. Find VAT impact on liquidation:

INCOME TAX & VAT
Carrying Market Value

Remarks
Amount Rs. Rs.
Property Plant and 20,000 unknown Accumulated depreciation
Equipments Rs. 100,000
Receivables 40,000 10,000 Rs. 5,000 VAT credit
Liability -20,000 -20000
60,000 0
Hint: All assets deemed to be sold at market value ~Sec. 11(3).
Illustration 12:
Durakoti P. Ltd, in IP-171 has shifted to exempted business, find VAT impact on liquidation.
Hint: All assets deemed to be sold at market value ~Sec. 17(4).
Illustration 13:
Barakoti Ltd. is a trading company sales Tibet imported electric goods. Normal selling price is
Rs. 1,000 per unit. One of the units is sold at Rs. 600 being a friend. Find VAT.
Hint: Partial consideration to be valued at market rate (Sec. 12(7), hence VAT is assessed at Rs
1,000 not Rs 600.
Illustration 14:
Sidhakoti Impex purchased the goods sold by Barakoti Ltd. at Rs. 600 per unit. Normal selling
price is Rs. 1,000. Tax invoice was issued at Rs. 600 and it is informed that Barakoti Ltd. paid
VAT at market value of Rs. 1,000. How much VAT is allowed as credit?
Hint: Partial consideration to be valued at market rate (Sec. 12(7) in case of seller, but buyer
can claim input tax credit based on tax invoice i.e. paid value only. VAT amount on Rs 600
can be claimed.
Illustration 15:
Kalikoti Ghee Ltd. exports 100 quintal vanaspati ghee to Tibet under barter of 10,000 set of
sandles. Market price of sandle is valued at Rs. 100 for the purpose of custom. What shall be
the VAT impact?
Hint: Here, sale value of sales is Rs. 1,000,000 (market value of incoming goods as per NAS
07). VAT charging on sales is zero because of export. In case the barter is within Nepal, these
value were taken as taxable value of sales.

Illustration 16:
Kalikoti Ghee Ltd. exports 100 quintal vanaspati ghee to Tibet under barter of 1,000 lambs.
Market price of a lamb is valued at Rs. 2,000. What shall be the VAT impact?
Hint: Here, lambs are vat exempted; but VAT on export is zero rated.
Illustration 17:
Mehakoti Ltd. is dealing with used goods. During the month following transactions were
done. Find VAT impact.
Purchase Sales
Remarks
(including VAT) (before VAT)
Chairs 22,000 Last month purchase Rs. 12,000
Tables 20,000 22,000
Rack 40,000 30,000
Black Table 10,000 8,000
Red Table 10,000 Still in Stock
80,000 82,000
Hint: Here, VAT is chargeable in the sales value excluding VAT and purchase value with VAT
and in case, there is loss tax invoice need not be issued.
Taxable Value=Sales-Purchase price including VAT on individual basis.
In the above example, Rack and black table are sold at lower then VAT included cost, in both
case tax invoice need not to be issued nor VAT can be offset as per Rule 19. There shall be no
VAT credit or refund in case of used goods dealer8. In the profit making cases:
Purchase Sales Taxable Value VAT

(including VAT) (before VAT) (Sales- Purchase) (Payable)
Chairs 12,000 22,000 10,000 1,300
Tables 20,000 22,000 2,000 260
32,000 44,000 12,000 1,560
Illustration 18:
Sapkota Impex filed VAT return for Mangshir with VAT payable Rs. 110,000. Payable amount
could not be paid till Falgun. In Magh Rs. 10,000 is credit. Find fine and interest impact.
8
There are numerous difficulties and ambiguities for used goods dealers, practically, and hence such dealers present
themselves as normal trader.

INCOME TAX & VAT
Hint: Here 15% p.a interest under Sec. 26 and 10% p.a. additional duty under Sec. 19(2) is
levied.
Illustration 19:
- Jaukota Impex sold some trees grown in the factory side and collected VAT as per Sec. 12A.
VAT collected was Rs. 100,000 in Mangshir. Payable amount could not be paid till Falgun.
Find fine and interest impact.
Hint: Here 15% p.a interest under Sec. 26 and 10% p.a. additional duty under Sec. 19(2) is
levied, even the person is un-registered and liable for VAT.
Illustration 20:
Hastikota Impex paid self assessed tax on 2063 Magh. Around 4 years of filing of return, Tax
Officer assessed Rs. 20,000. Find fine and interest impact.
Hint: Here, there was payable in the month concerned, any additional tax on the month of
payment is subject of 15% p.a interest under Sec. 26 and 10% p.a. additional duty under Sec.
19(2). Debit or credit position thereafter shall not be considered.
Illustration 21:
Baskota Enterprise filed VAT return on due date. After 20 months from date of filing return,
one bill found not totaled having Rs. 20,000 sales. What shall be VAT impact?
Hint: This sales Rs. 20,000 is to be declared in 20th month and interest need to pay for the
period.
Do Your-Self/Practical Questions for exercise

IP-1 Partial Credit- Mixed Ltd. dealing with sale of diary products. Following are purchase
during the month, find the amount of value added tax to be paid by Mixed Ltd:

Purchase of capital items net of VAT 1000,000
Wage paid to capital equipment operation 100,000
Salary for the month 100,000
Purchase of a car with VAT 1130,000
Purchase of Office Supplies 100,000+VAT
Sale-fresh milk and curd 1000,000
Sale- Ghee and Paneer 1000,000
Sale- Pasturised Milk in Plastic packet 1000,000

During the month, plastic granules imported on 3 months earlier at Rs. 100,000 has fired and
damaged. VAT credit was taken at 30% on last month. Milk Purchase ledger for the month
was destroyed on the same fire.
IP-2 Proportionate Credit, Common- Calculate VAT credit available in the following
cases:
Purchase under VAT Rs. 300,000

Wage paid Rs. 100,000
Telephone cost Rs. 20,000
Other overhead attracting VAT Rs. 50,000
Sales books Rs. 400,000 copy Rs. 100,000
IP-3 Loss of assets, first point credit- Galic was lost by fire in the month of purchase in
IP-167. What shall be the VAT impact?
IP-4 Loss of assets, credit already taken- After laying in stock for 4 month after purchase
in IP-167, stock of black tea found loss due to expiry. What shall be the VAT impact?
IP-5 Credit on purchase before registration- Siwakoti JV is small contractor purchased

cement bags amounting Rs. 1130,000 including VAT on Chaitra. After these
purchases, JV gets it registered with VAT and make a construction bill of Rs. 500,000
within Chaitra. What shall be the VAT impact?
IP-6 VAT on bad debt- If the business writes off a Bad Debt, can VAT previously
reported on a Tax Invoice/ VAT return and paid to the authorities be recovered?
IP-7 Taxable value- When an engineer employed by an entity in another country is

seconded to an entity in Nepal, and the charge is actual cost of Rs. 100,000 plus a 5%
fee of Rs. 5,000, what is the value for VAT? Is it Rs. 5,000, 100,000 or 105,000?
IP-8 Taxable value- Healthy Bottlers Pvt. Ltd. is a manufacturer of glass bottle packaged
beverages. The Company supplies packaged bottles of beverage, billing the selling
price of the beverage. In addition to that, it gets certain amount from the dealers as
deposit for the glass bottles supplied to them. When the dealer returns the empty
bottles, the amount of deposit is refunded. A tax officer, during his inspection of
the company, found that bottles worth Rs. 2, 00,000 were not in physical stock. He
made tax assessment under section 20 of the VAT Act and treated the shortage of
bottles as sold by the company. The company had proved that the bottles were in
stock with various dealers in due course of return. However, the tax officer did
not accept the contention and charged tax and penalty on the deemed sales of the
bottles. Critically examine the contention of the tax officer. [2009 June]

INCOME TAX & VAT
IP-9 Catch up effect- Mr. Deshmukh, an importer imported certain goods at Rs 50,000.
No VAT was paid on its import. The goods passed to the final consumer through a
retailer. Both middlemen incurred Rs 1,000 each for administration expenses. Both
middlemen charged 15% profit margin on selling price. Find Cost price to the final
consumer and VAT payable to the government at each stage. [2009 June]
8. TAX REFUND
As discussed above registered person need to pay VAT at the amount which is over the input tax
credit available to it.
VAT Payable = Output tax - Input tax credit
There shall be the cases, when the input tax might be higher than output tax in any month. As
we already discussed, these over credit is carried forwarded to next tax period. According to Sec.
24(1), this carried forward credit can be set off with output tax of next tax period. By this way,
there shall be continuous credits for a person.
VAT Credit (carried forward) = Opening Credit + Input tax - Output tax
There are the cases, where such over credit is, possibly, cannot be set off with output tax in the
future periods too. In such situation registered person can claim a refund of VAT. Similarly, in
some cases, person paying VAT is not exactly require to pay for it and need to get refund of VAT.
a. Refund for registered person

There are two cases, where refund to registered person is allowed in regular condition:
i. Continuous Four Month Credit-

In case any person registered with VAT has continuous credit of VAT for four months;
the credit is eligible for VAT refund as per Sec. 24(3). After lapse of continuous four
month person can claim the refund; but claim should be made within 3 years of month
of such credit as per Sec. 25A.
Continuous four months may starts from any month, because VAT has not concept of
year-end or cut-off date.
ii. Significant Exporter-

In case any registered person has export during the month 40% or more of total sales in
that month, the credit is eligible for VAT refund as per Sec. 24(4).
Effect of Claim of Refund- When a person applied for the refund of the tax under either
method, cannot claim for set-off against the tax payable even the refund were not done.
In case, IRO refuses the refund claim, it issues a credit note for crediting in VAT return.

iii. Purchase through electronic medium

As per Section 25(1Kha), Any consumer at the time of purchasing goods or services
makes payment through electronic medium as per prevailing laws then 10% of tax
payment shall be refunded as cash incentive at bank account of consumer as per the
procedure specified by department.
Illustration 22
Chamling Co-operative Ltd. working in Bhojpur has sales of Rs. 500,000. During Chaitra
month it purchased furniture Rs. 100,000; trading stock Rs. 400,000 (30% laid in stock under
FIFO); telephone bills Rs. 10,000; stationary purchased and used in last month Rs. 10,000 were
not claimed in VAT. All the items of sale were under Tax Invoice.
Solution
Here, all the items are VAT attractive and output is VAT attractive. Cooperative can offset all
the VAT paid on purchases since there are no anu VAT exempt items.
Particulars Taxable Amount Output Tax Input Tax Net Tax

Sales 500,000 65,000
Purchases 520,000 67,600
VAT Payable
VAT Credit carried forward 2,600
Illustration 23
Bantawa Ltd. working in Bhojpur with taxable transaction has following sales and purchases
amount excluding VAT. Can refund claim in Falgun return?
1. Month 2 .Sales 3 .Purchase

Bhadra 500,000 600,000
Aswin 520,000 500,000
Kartik 600,000 500,000
Mansir 450,000 500,000
Push 320,000 500,000
Magh 400,000 500,000
Falgun 350,000 500,000
Hint: Here, all the items are VAT attractive and output is VAT attractive. Company can offset
all the VAT paid on purchase.

INCOME TAX & VAT
4. Month 5. Sales 6. Purchase 7. Output Tax 8. Input Tax 9. Credit

Opening Credit
Bhadra 500,000 600,000 65,000 78,000 -13000
Aswin 520,000 500,000 67,600 65,000 -10400
Kartik 600,000 500,000 78,000 65,000 2600
Mansir 450,000 500,000 58,500 65,000 -6500
Push 320,000 500,000 41,600 65,000 -29900
Magh 400,000 500,000 52,000 65,000 -42900
Falgun 350,000 500,000 45,500 65,000 -62400
Here, Rs. 2,600 needs to pay in Kartik. Rs. 6500 credit reached for continuous four months and
hence can be claimed for refund.
Illustration 24
Rai Ltd. working in Bhojpur has following sales and purchases without VAT. Can refund
claim in Falgun return?
Month Sales Purchase

Bhadra 500,000 600,000
Aswin 520,000 500,000
Kartik 520,000 500,000
Mansir 450,000 500,000
Push 320,000 500,000
Magh 400,000 500,000
Falgun 350,000 500,000
all the VAT paid on purchase.
Month Sales Purchase Output Tax Input Tax Credit

Opening Credit
Bhadra 500,000 600,000 65,000 78,000 -13,000
Aswin 520,000 500,000 67,600 65,000 -10,400
Kartik 520,000 500,000 67,600 65,000 -7,800
Mansir 450,000 500,000 58,500 65,000 -14,300
Push 320,000 500,000 41,600 65,000 -37,700
Magh 400,000 500,000 52,000 65,000 -50,700
Falgun 350,000 500,000 45,500 65,000 -70,200

For Falgun tax return, last continuous four month is Mangshir. There is continuous
credit of Rs. 14,300 for last four months. Company can claim a refund of Rs. 14,300 in
Falgun.
Illustration 25
Rujhali Ltd. working in Terhathum has following expected sales and purchases without VAT.
How much refund can it could expect?
Month Sales Purchase Export Capital Expense

Bhadra 500,000 600,000 45% 45%
Aswin 520,000 500,000 45% 45%
Kartik 600,000 500,000 45% 45%
Mansir 450,000 500,000 45% 45%
Push 320,000 500,000 45% 45%
Magh 400,000 500,000 45% 45%
Falgun 350,000 500,000 45% 45%
all the VAT paid on purchase since no transaction are VAT exempt. VAT Credit or refund is
not based on whether the purchase is for capital input or raw materials or overheads, so all
the purchase is qualifying for credit or refund, as the case may be.
zero rated Local Output Input

Month Sales Purchase Export Credit
sales Sales tax Tax
Bhadra 500,000 600,000 45% 225000 275,000 35,750 78,000 -42,250
Aswin 520,000 500,000 45% 234000 286,000 37,180 65,000 -27,820
Kartik 600,000 500,000 45% 270000 330,000 42,900 65,000 -22,100
Mansir 450,000 500,000 45% 202500 247,500 32,175 65,000 -32,825
Push 320,000 500,000 45% 144000 176,000 22,880 65,000 -42,120
Magh 400,000 500,000 45% 180000 220,000 28,600 65,000 -36,400
Falgun 350,000 500,000 45% 157500 192,500 25,025 65,000 -39,975
Since all the sales have significant export of 40% in all months, credit amount can be claimed
every month.

INCOME TAX & VAT
Illustration 26
Naulakha Ltd. working in Terhathum has following sales and purchases without VAT.
Company’s policy of VAT refund is claim as and when eligible. How much refund it claimed
in each month?
Month Sales Purchase Export

Bhadra 500,000 600,000 45%
Aswin 520,000 500,000 25%
Kartik 600,000 500,000 45%
Mansir 450,000 500,000 35%
Push 320,000 500,000 45%
Magh 400,000 500,000 25%
Falgun 350,000 500,000 35%
all the VAT paid on purchase since no items are VAT exempt. So all the purchase is qualifying
for credit or refund, as the case may be.
zero rated Local Output Input

Month Sales Purchase Export Credit Refund
sales Sales tax Tax
Bhadra 500,000 600,000 45% 225000 275,000 35,750 78,000 -42,250 42,250
Aswin 520,000 500,000 25% 130000 390,000 50,700 65,000 -14,300
Kartik 600,000 500,000 45% 270000 330,000 42,900 65,000 -36,400 36,400
Mansir 450,000 500,000 35% 157500 292,500 38,025 65,000 -26,975
Push 320,000 500,000 45% 144000 176,000 22,880 65,000 -69,095 69,095
Magh 400,000 500,000 25% 100000 300,000 39,000 65,000 -26,000
Falgun 350,000 500,000 35% 122500 227,500 29,575 65,000 -61,425
Illustration 27
Thuling Ltd. working in Chatara has got some service from Kulung Inc. registered and
working in the United States. Cost paid for service was Rs. 1 million. Company paid Rs.
130,000 in IRO as reverse charging payment. Apart from these services, company has not
any purchase during the month. Sales amounting the month was Rs. 2 millions including 1.3
millions export. Find VAT implication.

all the VAT paid on purchase since there is no VAT exempt transaction. So all the purchase is
qualifying for credit or refund, as the case may be.
Sales 2,000,000
Local Sales 700,000
Export Sales 1,300,000
Output tax 91,000
Input Tax 130,000
Credit 39,000
Refund 39,000
Illustration 28
Mr. Shyam, a businessman, submits his VAT return for the month of Falgun according to
which total sales for the month was Rs. 10, 00,000 and purchase was Rs. 6, 00,000. Out of
the total sales, Rs. 6, 50,000 was export to Tibet (Non L/C). He had no previous debit/credit
balance in his VAT return. He claims the refund of the excess tax paid on purchase on 25th of
Chaitra. State the time and amount of claim he is entitled to. Also mention the documents (if
any) he requires to claim the refund. [2009 June]
b. Refund for persons other then registered

According to Sec. 25, VAT paid by following person or paid for following event may be
refunded, upon request for refund within 3 years from the date of transaction on which the
claim for refund is based:
a. Diplomats- Diplomat, privileged on a reciprocal basis from Ministry of Foreign Affairs;

person engaged in Regional or International Organization or missions having diplomatic
privileges. This refund shall not be allowed for diplomats for purchase of goods or
services at a time for less than Rs. 5,000 as per Sec. 25 (1a).
b. International institution- VAT paid by the institutions on which Ministry of Finance,

has granted the privileges of tax exemption;
c. Projects under bilateral or multilateral agreement- Tax exemption project by Ministry

of Finance under bilateral and multilateral agreement; and
d. Collection by mistake- Any tax collected by mistake.
e. Tax refund to a foreign tourist-Foreign tourist visiting in Nepal, if purchased and take
goods away from Nepal via air transport shall refund VAT paid on those assets, if the
cost paid is higher than Rs. 25,000. A service charge of 3% of refund is charge on refund.

INCOME TAX & VAT
9. LIMITATIONS FOR REFUND
Refund has some limitations those to be positively achieved by a person getting refund. Here are
some limitations:
Small purchase by diplomats or diplomatic mission- Diplomats or diplomatic mission

purchasing any item less than Rs. 10,000 at a time cannot claim for refund.
Small purchase by tourist- Tourist purchasing and taking any item of Rs. 25,000 or less
cannot claim for refund.
Duty Meal- VAT paid on meal for staff cannot be claimed as credit or refund for any registered
person vide circular dated 2056.12.3.
Relevant Person- In case of any refund is granted to any person or institution, only obliged
person can claim for refund as per Sec. 25(2) and circular dated 2056.12.3.
Used goods Dealer- VAT paid by used goods dealers cannot be claimed for refund.

CHAPTER 4
ACCOUNTS AND RECORDS

INCOME TAX & VAT
In this Chapter we shall discuss the accounts and records required for VAT as documentation
requirements.
1. INVOICES
Person selling goods or services need to issue invoice along with the goods or services. The invoice
shall be issued by either registered person or other with few exceptions.
Registered person need to issue tax invoices in prescribed formats, whereas unregistered person
may form own format with minimum prescribed requirements. Only format is prescribed but not
a specified color paper required for invoices (most country need prescribed color paper too).
Invoice should starts from serial no 1 each year vide circular dated 2055.3.32 and cannot be hand
written serial number vide circular dated 2055.7.10. Different branch or departments within same
roof can use their own serial at a time vide circular dated 2054.7.29.
Recharge invoices between divisions within a legal entity is not required invoices; but
transportation of goods from one unit to another having different location within Nepal need to
fulfill the conditions laid in Internal Transport of Commercial Goods Regulating Directives, 2065.
Cross boarder transportation to own unit, of course, is an export for VAT.
Invoices under VAT are required to issue directly out of its commercial invoicing systems. This
means tax invoices can be use for accounting of transaction, financial statements, income tax and
other revenue recognizing accounts.
a. Tax Invoice
Registered person need to issue Tax Invoice as prescribed in Schedule 5 of VAT Regulation,
2053 as per Sec. 14. The format of Tax Invoice is reproduced here:

PART II - VALUE ADDED TAX ACT-2052, CHAPER 4 : ACCOUNTS AND RECORDS
Particulars to be filled indicating the kind of goods/services, size thereto, model or brand, if
any. Tax invoices shall be in triplicate, the first copy goes to the buyer, and the second copy
is to be kept in a file and shall be produced to Tax Officer as required and third copy has to
be retained in accounts along with the voucher. Invoice should be printed with ‘tax invoice’
on the face of it.
In case of general insurance business there is separate type of tax invoice under Schedule 5A
of Regulation.
Input tax credit or refund, if any can be allowed upon purchases through tax invoices only.
b. Consumer Level Tax Invoice

Inland Revenue Department can direct any person to publish the retail price of specified
goods for specific period as per Sec. 14(6). In case of such notice is issued, the respective
person should not sell or transfer such goods without publishing the retail price of the
specified goods. In this case, according to Sec. 14(7), person while selling such goods to any
unregistered person (even to distributor or whole seller or retailers) shall have to issue the
invoice at the consumer price and VAT shall be charged on the consumer price. Distributor
or whole seller’s or retailers’ commission or discounts to be deducted after charging VAT.
Such sales to be billed under format given in Schedule 5B of VAT Regulation, 2053. The sketch
function of this invoice shall be as:
Rate per unit Total

SN Particulars
(Consumer Price Rs.) Rs.
Total Rs.
VAT @ …%
Discount
Net Amount
It is also provided that in case the person desires to issue such invoice voluntarily while
selling such goods to registered person also, it may do so.
As per Section 29(1Ga), Fifty per cent of the bill amount penalty or imprisionment up to 6
month or both shall be levied to selling persons issuing bills without transferring goods.

INCOME TAX & VAT
c. Abbreviated Tax Invoice

In case a retailer request Tax Officer to issue Abbreviated Tax Invoice and if Tax Offi cer
allowed, the retailer can issue such abbreviated tax invoice according to Rule 18 in the form
prescribed in Schedule 6. In case, registered retailer authorized for issuing an Abbreviated
Tax Invoice, it shall not be issued for amount more than Rs. 10,000 including VAT and
other duties. In Abbreviated Tax Invoice, name of each goods or rate or VAT amount need
not be shown and be issued as ‘miscellaneous goods’ or similar.
There is a barrier to buyer buying goods or services through Abbreviated Tax Invoice is that,
input tax credit cannot be claimed by use of Abbreviated Tax Invoice. In case buyer requires
tax invoice, retailer supplier has to issue the tax invoice as required by the buyer.
VAT collected on the sales through abbreviated tax invoice shall be computed as follows:
Sales amount = Sales including VAT*100

(100+ Rate of VAT)
VAT Collected = Sales including VAT*Rate of VAT

(100+ Rate of VAT)
2. ELECTRONIC CASH REGISTER & ELECTRONIC BILLING
According to Rule 18A, Inland Revenue Department may direct any person to issue invoices
using Electronic Cash Register Machine or electronic billing procedure. In both cases, individually
permission for use of prescribed machine is required.
Under this provision, IRD prescribed some business for which ECR is compulsory.
3. CREDIT NOTE
According to Rule 20, any change in matters of issued invoice due to any reason, the person has
to issue debit note or credit note for such changes in value of the goods. Person issuing invoice,
conceptually issued a credit note. Even credit note is a crucial matter in tax accounting as many
countries has policy of pre-printed credit notes issued by government. Rule 20 has not prescribed
format for debit and credit note, but person need to keep a register of such notes.
Debit or credit note include following information:
a. Serial Number of the debit or credit note,
b. Date of issue,
c. Name, address and PAN of the supplier,

d. Recipient's name, address, and PAN if a registered person,
e. Serial number and date of the tax invoice concerned,
f. Particulars of the goods or services and reason of issuing to credit or debit,
g. Amount credited or debited,
h. Tax amount credited or debited.
g. Credit or Debit Note to be maintained in the issued note.
4. INVOICE BY UNREGISTERED PERSON
According to Sec. 14(1), registered person has to issue an invoice, while selling goods and serices.
These invoices should tag as TAX INVOICE.
IP-1 Sign in invoice- Is there a requirement to sign the Tax Invoice before it is issued?
IP-2 Forex invoice- For an invoice raised in a currency other than the local VAT reporting
currency,
a. What exchange rate must be used to convert the invoice values into the local VAT
reporting currency?
b. Is the exchange rate that must be used a daily or monthly rate?
c. Are there any alternatives available in terms of what rate to be used?
d. Must the foreign exchange conversion be shown on the Tax Invoice?
IP-3 Taxable Value- If a contract valued at Rs. 1,000,000 is completed and the customer refuses
to pay the full value because of commercial reasons or dispute and then contractor agrees
to reduce the contract price, must contractor continue to invoice the full Rs. 1,000,000 and
then also a credit note for the agreed reduction, or is it sufficient to document the price
change in a contract amendment and only to invoice up to the value of the amended
contract value?
5. ACCOUNTS AND RECORDS
a. Up-to Date Records of Transaction

According to Sec. 16 and Rule 23, registered person need to keep its VAT and accounts up to
date. In case of person have computerized accounting for VAT, the same need to be up to date
too. Purchase Book and Sales Book shall be kept in form as attested by Tax Officer.

INCOME TAX & VAT
According to Sec. 16(3Ka), any unregistered person having VAT attractive business requires
to keep Purchase Book and Sales Book attesting itself.
Dealers dealing with used goods need to keep its records for each assets it purchased and
sales.
In case registered person fails to keep its records up to date, there is a fine as:
• In case attested books not maintained- Rs. 10,000 for registered person and Rs. 1,000 for
unregistered person~(Sec. 29(1)(chha) and ~(Sec. 29(1)(chha1).
• Documents to be retained for the period of six years as per rule 23(7)- on failure there is
a fine of Rs. 10,000 for a registered person~(Sec. 29(1)(ja).
• VAT account record if not update - Rs. 10,000 for a registered person~(Sec. 29(1)(nga).
• VAT account record if not kept - Rs. 10,000 for a registered person~(Sec. 29(1)(chha).
• On infringement of Section 14(1), not issuing invoice Rs. 10,000 each time and not
receiving invoice Rs. 1,000 each time Section 29(1)(Ga).
• On infringement of Section 14(4), Rs. 10,000 each time Section 29(1)(Ga)
• On infringement of Sub Section (7) of Section 10, Rs.10,000 for each time of offence Section
29(1)(Kha2)
b. Types of Records
There are only three types of VAT account books. VAT shall be ascertained based on normal
accounting documents. According to Rule 23 and Sec. 16, a taxpayer has to maintain the
following records:
a. VAT Account – This is VAT ledger prescribed in Schedule 7 of Regulation. It is summary

of purchase or import and sale or export including input VAT and Output VAT.
Practically, this record seems not in common use.
b. Purchase book – According to Form prescribed in Schedule 8 of Regulation, registered

person and unregistered person having VAT attractive business turnover Rs. 1 million or
more need to record all transaction of purchase and import in this book. Practically, this
record seems mandatory use. In Purchase book, purchases on which input tax credits (even
overheads and consumables) to be recorded as purchase. Goods or services without VAT
or with VAT but input tax credit is not allowed are to be recorded as exempted purchase.
c. Sales book- According to Form prescribed in Schedule 9 of Regulation, registered person

and unregistered person having VAT attractive business turnover Rs. 1 million or more
need to record all transaction of sale and export in this book. Practically, this record seems
mandatory use.

d. Other Records
Apart from above mentioned statutory VAT books, other documents (or computerized
records if allowed by Tax Officer) to be kept by a person are as follows as per Rule 23:
o Records regarding transactions, cash, etc
o Copies of Tax Invoices and Abbreviated Tax Invoices
o Tax Invoices received on purchases
o Documents regarding import and export
o Records and copies of Debit or Credit Notes
o Register of free or sample goods as per Rule 24.
e. Free or Sample goods

A registered person need to maintain separate records for free goods or samples it received or
distributed by it according to Rule 24. The Rule is silence in regards of records for free goods
or sample received or distributed by an unregistered person.
f. Records of a used goods dealer

According to Rule 33, used goods dealers need to keep separate records for each dealing of
used goods. Particulars required in such records are described in Chapter 27.3
In case a registered person dealing used goods is found not to have satisfactorily maintained
the records as prescribe, Tax Officer may impose VAT on the total selling price of the goods
sold by such taxpayer, and the tax officer may issue a written order requiring him to pay such
tax along with the next tax return.
Records in digital formats

A registered person may, with the approval of the Department, maintain the records required
to be maintained using computers or another similar mechanical system or the method as
prescribed by the Department.
Inspection Records
Tax Officer may inspect the records maintained by a registered person at any time during
working hours. Sec. 16 (1Ka) authorizes Tax Officer to have an access, as and when needed,
to the computer database of the taxpayer too. Data base and records shall be in normal access
of Tax Officer and need to preserve for six years.
During the inspection, all the records shall make available the details and documents relating
to the records demanded by Tax Officer. If Tax Officer seeks the copies thereto, person need
to make printed at his own expense.

INCOME TAX & VAT
In case of inspection, registered person need to provide necessary staff in order to assist as
required by Tax Officer.
c. Certification of Records
There are required certification of VAT books and some records. Purchase book and Sales
book need to be certified by Tax Officer. These certifications are to be done at:
o tax-payer submits an application to the office for the certification;
o during the period of tax audit, or
o at the time of inspection.
Computerized records are to be maintained upon approval from Tax Officer. Electronic Cash
Register and Computerized Billing is to be certified as per requirements of Directives.
d. Preservation of Records
As already mentioned, records and documents relating to VAT and their supporting to be
preserved for six years.
6. EFFECTS OF TAX ON FINANCIAL ACCOUNTING
Income Tax and Value Added Tax have own technical accounting system. We discussed income tax
accounting on Chapter 13 in brief and VAT accounting in Chapter 33.There are certain accounting
impacts of income tax and VAT in financial accounts which has been briefly explained as below.
Income Tax impact on Financial Accounting

Income tax itself has three types of impacts in financial accounting:
o Current tax expense as per NAS 12 Income Tax: Income tax payable for the income
year concern need to recognize as expense in the books of accounts based on income
tax rate and taxable income are computed as per the Income Tax Act. Tax expenses
accounted and presented in financial statement is as per the income tax law rather
than accounting income hence tax liability differs if we compute as per the accounting
records. Foreign taxed income is recognized in net of foreign tax in accounting, or in
case of controlled foreign entity no income is recognized in financial statements but
need to pay tax.
o Deferred tax expense as per NAS 12 Income Tax: Deferred income tax is tax adjustments
need to be done on accounting assets or liability. This is purely accounting concept, but
figures of deferred tax are based on tax law.

o Accounting of withholding tax: Withholding tax has direct relation with financial
accountings. In case of payment is final withholding taxed, income on financial accounting
to be recognized at net but need not to include as income for taxation purpose, hence
total income as per the accounting and taxation differs.
Value Added Tax impact on Financial Accounting

Value added tax itself has three types of impacts in financial accounting, except for used goods
dealers:
o Input tax, if allowed, purchases to be accounted is net of VAT: VAT paid as receivables.
In case paid VAT is allowed to set off with VAT collected or may carry forward as credit or
may refund, such VAT shall be recognized as ‘receivables’ in financial accounts.
o Input tax, if not allowed, purchase to be accounted at gross value paid including VAT:
VAT paid as expense.
In case paid VAT is not allowed to set off with VAT collected, such VAT shall be recognized as
‘expense’ or to capitalize in the concern asset in financial accounts.
Illustrative Problem
IP-4 Income Tax Expense, Current tax- Rana Impex computed its tax to be paid for income year
is Rs. 300,000 as per Income Tax Act, 2058. The accounting entry shall be as:
Income Tax Expense (current tax) Dr. 300,000

To Income Tax Payable 300,000
IP-5 Income Tax Expense, Deferred tax- Rupakheti Ltd. computed its deferred tax liability for
the year is Rs. 200,000. Last year deferred tax liability was Rs. 250,000. These calculations
were done on temporary difference of all assets and liabilities in balance sheet and tax base
as per tax laws. The accounting entry shall be as:
Deferred Tax Liability Dr. 50,000

To Income Tax Expense 50,000
IP-6 Financial Accounting of withholding tax, gross- Knawar P Ltd. has issued service charge
tax invoice of Rs. 100,000 and received in time. Then accounting shall be as follows:
At the time of issuing tax invoice:
Named party Dr. 113,000

To Service Charge Income 100,000
To Value Added Tax 13,000

INCOME TAX & VAT
At the time of receiving payments
Bank Dr. 111,500

Advance Tax Dr. 1,500
To Named Party 113,000
IP-7 Financial Accounting of withholding tax, gross- Lamsal P Ltd. has received dividend
income of Rs. 100,000 and paying company withhold Rs. 5,000 as final withholding tax.
Then accounting shall be as follows:
Bank Dr. 95,000

To Dividend Income 95,000
IP-8 Financial Accounting of VAT- Dahal P Ltd. has purchased iron rod costing Rs. 100,000
and other construction materials Rs. 300,000 for wall construction; coca cola Rs. 10,000 for
worker. Wage paid Rs. 100,000. Output of company is VAT attractive. Then accounting
shall be as follows:
Compound Wall Construction Dr. 511,300

Value Added Tax Dr. 52,000
To Bank 563,300
(~VAT paid on coca cola was added in cost, other VAT were recognized as receivables)
IP-9 Financial Accounting of VAT- Dahal P Ltd. in above example, if being food-store (VAT
exempted) the accounting shall be changed as:
Compound Wall Construction Dr. 563,300

To Bank 563,300
(~VAT paid on all items need to added in cost)

CHAPTER 5
SUSPENSION, ADMINISTRATIVE
REVIEW AND APPEAL

INCOME TAX & VAT
1. SUSPENSION OF TRANSACTION
As per Section 30, If a registered person commits twice or more of any of the offences mentioned
in Section 29, the Director General may order a tax officer to suspend such person's place of
transactions up to seven days so that transactions are not carried out.
2. ORDER FOR REASSESSMENT
a. As per Sub Section (1) of Section 30Ka, The Director General may direct the concerned tax
officer or order any other tax officer prior to completion of the tax assessment to reassess the
tax by raising a note disclosing explicit reason on the information derived by him that an
irregularity has been made or is going to be made in relation to tax assessment.
b. As per Sub Section (2) of Section 30Ka, The Director General may order to amend the tax
assessment order within 4 years of the date of first time tax assessment if the tax liability is
seen reduced on tax assessment by the negligence or ill intention of the tax officer.
3. POWER EQUAL TO COURT
As per Section 31, for the purpose of this Act, a tax officer may issue a summons, record the
statements for persons, receive evidence and cause to submit documents in the same manner as a
court is empowered.
4. APPLICATION FOR ADMINISTRATIVE REVIEW
a. As per Sub Section (1) of Section 31Ka, A person discontent with the decision of tax assessment
made by a tax officer, may apply to the department against the decision within 30 days of
getting information of the decision.
b. As per Sub Section (2) of Section 31Ka, The Department may extend to the extent of 30 days
from the date of expiry of date if it thinks fit, if the taxpayer on expiring the date to apply
under Sub Section (1) applies for extension of the date within 7 days of the date expired along
with reason behind expiry of date.
c. As per Sub Section (6) of Section 31Ka, The taxpayer applying under Sub Section (1) should
pay undisuted tax amount and deposit cash in 1/4 of the disputed tax amount out of the
assessed tax amount.
d. As per Sub Section (7) of Section 31Ka, Deposit under Sub Section (1) can be made only
the residual amount of deducting any excess amount deposited prior to submitting the
application.

PART II - VALUE ADDED TAX ACT-2052, CHAPER 5 : SUSPENSION, ADMINISTRATIVE REVIEW...
e. As per Sub Section (8) of Section 31Ka, Amount deposited as per this Section shall not be
refunded until the final closure of the dispute.
5. AREA OF ADMINISTRATIVE REVIEW DEPARTMENT
As per Sub Section (3) of Section 31Ka, The Director General may direct the concerned tax officer
or order any other tax officer to reassess the tax by invalidating the tax assessment made, through
raising a note disclosing explicit reason if the contention of the application proved to be true on
investigating the documents of evidence along with the application submitted by the tax payer
under Sub Section (1).
6. DECISION OF ADMINISTRATIVE REVIEW
a. As per Sub Section (4) of Section 31Ka, the Department should decide within 60 days of
application filed under Sub Section (1).
b. As per Sub Section (5) of Section 31Ka, The concerned person may appeal to Revenue Tribunal
under Section 32 in case the Department does not decide within the date of Sub Section (4).
7. APPEALS IN REVENUE TRIBUNAL
a. As per Sub Section (1) of Section 32, an appeal may be filed at the Revenue Tribunal pursuant
to Revenue Tribunal Act, 2031 by the discontent person on the suspension order issued by
the Director General under Section 30 or on the decision made by the Department under Sub
Section (4) of Section 31Ka.
b. As per Sub Section (2) of Section 32, The person appealing under Sub Section (1) should
register in the Department one copy of the information of the appeal within 15 days of the
appeal lodged.

INCOME TAX & VAT

CHAPTER 6
ADVANCE RULING, PUBLIC
CIRCULAR AND DEPOSITS

INCOME TAX & VAT
1. ADVANCE RULING
a. As per Sub Section (1) of Section 32Ka, The Department may issue the contention of the
Department informing the person in writing through advance ruling if the person applies to
the Department in writing to dismiss any confusion on the implementation of this Act.
b. As per Sub Section (2) of Section 32Ka, Notwithstanding anything in Sub Section (1), if the
matter of any confusion on the implementation of this Act is under consideration of a court
or the court has already decided, the Department cannot issue any advance ruling under Sub
Section (1) on the matter.
2. PUBLIC CIRCULARS
a. As per Sub Section (1) of Section 32Kha, the department can issue written public circulars
along with interpretation in regard to the provision of this Act to provide guidance to the
officers of the department including the persons to be affected by this Act and to make
simplified the tax administration by bringing uniformity in implementation of this Act.
b. As per Sub Section (2) of Section 32Kha, The department shall make available the circulars
issued under Sub Section (1) in the web site of department or publish in national level circulars
for the information of general public.
c. As per Sub Section (3) of Section 32Kha, the department shall be compelled to act as per the
circular issued under Sub Section (1) until it is revoked.
3. DEPOSITS
a. As per Section 33, While filing an appeal under this Act, 50 % of the disputed amount of the
disputed tax and fine shall have to be deposited or a bank guarantee for the same should be
produced after paying the undisputed amount of the assessed tax.
b. As per Rule 34, Prior to filing an appeal by a taxpayer against a tax assessment order made
pursuant to Rule 29, he must submit his tax return of that period to the concerned tax officer.


INCOME TAX & VAT

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Income Tax and VAT

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NEPAL

© The Institute of Chartered Accountants of Nepal

This study material has been prepared by the Institute

All rights reserved. No part of this publication may be

Price : Rs. 300/-

First : March, 2011

Second Edition : December, 2015

Third Edition : June, 2019 (Updated)

Designed & Printed at:

Level of Knowledge Working

PART A : INCOME TAX

PART B: VALUE ADDED TAX

3. Taxable value, tax collections and offsets, refund of tax

b. Accounts and records

Amendmends made by finance ordinance, 2076 3

UNIT 3: BASIS OF TAXATION 47

UNIT 4: CALCULATION OF TAX AND RATE OF TAX 57

UNIT 5: EXEMPTIONS, CONCESSIONS, REDUCTION, DEDUCTION, SET OFF 69

CHAPTER-II: COMPUTATION OF TAXABLE INCOME 89

UNIT 2: INCOME FROM EMPLOYMENT 141

UNIT 3: INCOME FROM INVESTMENT 157

UNIT 4: TAX CREDIT 177

CHAPTER-III: RELEVENT MATTERS IN TAXABLE INCOME 185

CHAPTER-IV: PAYMENT OF TAX AND TAX RETURN 201

CHAPTER-V: TAX ASSESSMENT AND APPEALS 221

PART II: VALUE ADDED TAX ACT, 2052

Amendmends made by finance ordinance, 2076 229

CHAPTER-II: REGISTRATION AND DEREGISTRATION 251

CHAPTER-III: TAXABLE VALUE, COLLECTION, OFFSET AND REFUND 259

CHAPTER-IV: ACCOUNTS AND RECORDS 285

CHAPTER-V: SUSPENSION, ADMINISTRATIVE REVIEW AND APPEAL 295

CHAPTER-VI: ADVANCE RULING, PUBLIC CIRCULAR AND DEPOSITS 301

INCOME TAX ACT, 2058

The Institute of Chartered Accountants of Nepal 1

2 The Institute of Chartered Accountants of Nepal

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The Institute of Chartered Accountants of Nepal 3

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4 The Institute of Chartered Accountants of Nepal

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The Institute of Chartered Accountants of Nepal 5

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6 The Institute of Chartered Accountants of Nepal

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The Institute of Chartered Accountants of Nepal 7

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8 The Institute of Chartered Accountants of Nepal

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The Institute of Chartered Accountants of Nepal 9

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Section 110Ga No Provision If it is proved that person receiving return

10 The Institute of Chartered Accountants of Nepal

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The Institute of Chartered Accountants of Nepal 11

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12 The Institute of Chartered Accountants of Nepal

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The Institute of Chartered Accountants of Nepal 13

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14 The Institute of Chartered Accountants of Nepal

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