Resource Collection Model of the Government

Resource

Debt Revenue

Internal debt External Debt Tax Revenue Non tax Revenue

Examples Examples Examples

 Govt. Bonds &  Loan from foreign  Fees & Commission
Debentures countries  Gifts & Grants
 Loan from  Loan from World  Fines & Penalties
Central Bank Bank, IMF, ADB etc  Dividend & Royalty

Direct Tax Indirect Tax

Examples Examples
 Income Tax  Value Added Tax
 Property Tax  Excise Duty
 Vehicle Tax  Custom Duty

Expenditure Model of the Government

Expenditure

Capital Expenditure Current/Recurring Expenditure Financing Expenditure

Devt. Expenditure like Payment of Salary of Repayment of various

Construction of Road, Staff, rents etc. internal & External
Hospital, Bridges etc loans
Meaning of Tax
According to Sliegman
“A tax is a compulsory contribution from a person to the government to finance the expenses
incurred in the common interest of all without reference to special benefit conferred.”
Objectives of Taxation
1) To raise revenue for the government:
The main objective of taxation is to provide fund so that government can meet the public
expenditure.

2) Prevention from concentration of wealth in very few hands

As per the principles of taxation, tax should be levied on the basis of equality, meaning
more taxes to be levied from those earning more and less from those earning lesser. If
the richer pays more as taxes then it prevents the concentration of wealth in the few
hands only.

3) Redistribution of wealth for common good

The government collects taxes from the haves and spends on have-nots. Thus, the taxes
collected from the richer and spent for the poor helps in transformation of wealth in the
economic activities.

4) Maintenance of social welfare

Government spends for the public welfare in the form of education, health, road and
infrastructure development from the taxes collected by the government.

5) Increase saving and investment

Through the various schemes of tax concessions and exemptions like CIT deduction, PF
Deduction, investment in insurance tax policy increases the concept of saving.

6) Produce employment opportunities

The government can reduce the problem of employment by promoting various income
generating activities and promoting the domestic industries. If the Industries are
encouraged then it can create more employment opportunities. Further, various
employment schemes are enacted like Prime Ministers Employment scheme.

7) Protection of domestic industries

Being sensitive towards the protection of domestic industries from the unfair prices of
foreign goods, the government levies duties on imports. Moreover, concessions and
facilities are provided for the domestic industries in the other hand which helps to
promote the domestic industries.
History and Concepts
Provision of Income Tax was first introduced in Britain in 1799 as source for paying for war against
the French Forces.
After that it was adopted by Switzerland in 1840 and Austria in 1849. Our neighboring nation
India adopted the same in year 1860.
When we talk about Nepal the concept emerged only in 2016 BS (1959 AD). The Finance Act 2016
introduced to levy tax on Business Profit and Remuneration which became enforceable from
Jestha 2017 only. This Act consisted 22 sections only. Due to limited area of coverage GON was
not able to collect tax as anticipated.
Income Tax Act, 2019 was introduced to cover a wide spectrum of income. This Act consisted 29
sections and income head was categorized into 9 heads as follows
Business Investment Profession
Remuneration Agriculture Agency
Insurance House and Land Rent Others
Provision of Income Tax Department was also formulated with the provision of set off and carry
forward of losses.
The HMG in the year 2031 enacted a new Income Tax Act, 2031 which completely replaced the
Income Tax, Act 2019. It was advanced and covered a wide area than the previous Acts. It was
divided into 66 sections and income was classified into 5 heads viz:
Agriculture Industry, Business, Profession Remuneration
House & Land Rent Other Sources
However, it had shortcomings like narrow tax base, weak mechanism for tax evasion, absence of
administrative Review provision etc.
So to overcome all the shortcomings Income Tax Act, 2058 has been enacted in the year 2058 BS.
It contained 143 sections. Income Tax Act, 2058 has been observed to be the advanced version
of income Tax System. It has not only broadened the coverage of income tax but also created a
reliable base.

Income Tax Act 2058

Preamble
Whereas, it is expedient to enhance revenue mobilization through effective process of revenue
collection for the economic development of the country and to amend the interrelated laws
related to Income Tax.
Objectives
There are various provisions made in Income Tax Act and the objectives of Income Tax Act, 2058
are
1. To bring all the income activities under the tax bracket.
2. To confine all the matters of income in a single law.
3. To develop the taxpayer-friendly environment through clear, transparent and simple
procedure.
4. To Levy tax on the principle of justice and equality.
5. To minimize tendency of tax evasion and avoidance.
6. To collect revenue by implementing a competitive and stable tax policy.
7. To integrate the Nepalese tax system with foreign practice.
8. To protect the rights of the taxpayer, define the responsibility of the tax administration.

Features of IT Act, 2058

1. Confinement of all related matters:
All the tax related matters has been incorporated within this Act and thus this Act is the code
for income tax matters.

2. Detailed Definitions:
The various terms used in this Act has been clearly defined in the section 2 of this Act.

3. Broad Tax Base:

The tax base has been widened and tax rates and concessions are harmonized on equity grounds.

4. Deduction of related expenses:

All the expenses related in reference to generation of income are allowed for deduction.

5. Block Base Depreciation:

Assets of any entity has been categorized into 5 blocks and block E for charging intangibles is
also in force.

6. Provision set off and carry forward of losses:

Inter head and Intra head losses can be set off and carried forward if not set off under this Act.

7. Method of Tax Accounting:

Tax payer can opt for cash basis or accrual basis of accounting for the purpose of tax payment.

8. Residential Status:
Residency status has been clearly set out and similarly tax is imposed on the residents and non-
residents that have income source in Nepal.
9. Medical Tax Credit:
For Resident natural person medical tax credit facility has been provided.
If a resident person becomes ill, his treatment cost is qualified for medical tax credit under
section 51 of this Act. According to rule 17 of income tax rule 2059 following medical expenses
are treated as eligible Medical Costs
a. Medical Insurance premium paid during the year
b. Medical Expenses incurred for treatment on the basis of bill.

The following costs are not regarded as approved medical costs

a. Expenses for cosmetic surgery
b. Medical Expenses reimbursed by the insurance company

Medical tax credit liability (MTCL) can thus be calculated as

MTCL= (EMC- Ineligible medical cost)*15%

So the maximum amount of medical tax credit that can be availed during the year is lower of
1. MTCL calculated as above plus the unrelieved tax credit of previous year
2. Rs 750
3. Actual tax liability after all tax credits

Question:
Mrs Ramita working for a photo studio draws a salary of Rs 700000. She becomes ill and incurs
Rs 30000 on medical expenses. She has a medical insurance for which premium of 10000 was
paid. Insurance company compensated Rs 20000. If the tax payable was Rs 1000 find the medical
tax credit.
Ans: MTCL = (30000+10000-20000)*15% =3000
Tax payable = 1000-750= 250 and the remaining 2250 shall be carried forward for next year

Pramod has following approved medical expenses during each year

2074-75 Rs 7000
2075-76 Rs 4000
2076-77 Rs 3000
Calculate the amount of medical tax credit for each year as follows
Year opening Medical Eligible Total Tax Maximum Closing
credit Exp credit Limit Carried
Forward
2074-75 0 7000
2075-76
2076-77
10. Self-assessment of Tax:
In order to ensure the tax friendly environment the Act has followed a full-fledged self-tax
assessment system.

11. Administrative and judicial responsibility:

The Act has separated administrative and judicial responsibilities by distinguishing civil
liabilities and criminal liabilities.

12. Capital Gain Tax:

Tax provision for capital gains has been imposed.

13. International Taxation:

Foreign source of income of a resident has also been brought in tax net. For avoidance of
double taxation DTAA has been made with different countries. Tax provision for the Foreign
Permanent Establishment has also been clearly explained.

14. Provision of fines and penalty:

Stringent fine and penalty provision has been introduced for the tax defaulters and tax
offenders.

15. Provision for appeal system:

The appeal system has been streamlined for taxpayers to file objection with IRD for
administrative review before going to Revenue Tribunal.

Canons/ Principles of Taxation

Canons of taxation simply means the characteristics or qualities which a good tax system should
possess. Adam Smith first devised the principles or canons of taxation in 1776 in his book entitled
“Wealth of Nation”. He devised the four canons of taxation namely:
(i) Canon of equality or equity
Canon of equality states that the burden of taxation must be distributed equally or equitably
among the taxpayers. Rich people are capable of paying more taxes than poor people. Thus,
justice demands that a person having greater ability to pay must pay large taxes. If everyone is
asked to pay taxes according to his ability, then sacrifices of all taxpayers become equal. This is
the essence of canon of equality. To establish equality in sacrifice, taxes are to be imposed in
accordance with the principle of ability to pay.
(ii) Canon of certainty
The tax which an individual has to pay should be certain and not arbitrary. Thus, canon of
certainty embraces a lot of things. It must be certain to the taxpayer as well as to the tax-levying
authority. Not only taxpayers should know when, where and how much taxes are to be paid. In
other words, the certainty of liability must be known beforehand. Similarly, there must also be
certainty of revenue that the government intends to collect over the given time period.
(iii) Canon of economy
This canon implies that the cost of collecting a tax should be as minimum as possible. Any tax
that involves high administrative cost and unusual delay in assessment and high collection of
taxes should be avoided.
(iv) Canon of convenience.
Taxes should be levied and collected in such a manner that it provides the greatest convenience
not only to the taxpayer but also to the government. Thus, it should be painless and trouble-free
as far as practicable.
Modern economists added few more canons some of which are
v) Canon of Productivity
According to Charles F. Bastable, taxes must be productive or cost-effective. This implies that the
revenue yield from any tax must be a sizable one. Further, this canon states that only those taxes
should be imposed that do not hamper productive effort of the community. A tax is said to be a
productive one only when it acts as an incentive to production.
vi) Canon of Elasticity/Flexibility
Modern economists attach great importance to the canon of elasticity. This canon implies that a
tax should be flexible or elastic in yield. It should be levied in such a way that the rate of taxes
can be changed according to needs of the situation. Whenever the government needs money, it
must be able to extract as much income as possible without generating any harmful
consequences through raising tax rates.
vii) Canon of Simplicity
Every tax must be simple and intelligible to the people so that the taxpayer is able to calculate it
without taking the help of tax consultants. A complex as well as a complicated tax is bound to
yield undesirable side-effects. It may encourage taxpayers to evade taxes if the tax system is
found to be complicated. A complicated tax system is expensive in the sense that even the most
honest educated taxpayers will have to seek advice of the tax consultants.
viii) Canon of Diversity
Taxation must be dynamic. This means that a country’s tax structure ought to be dynamic or
diverse in nature rather than having a single or two taxes. Diversification in a tax structure will
demand involvement of the majority of the sectors of the population. If a single tax system is
introduced, only a particular sector will be asked to pay to the nation leaving a large number of
population untouched. A dynamic or a diversified tax structure will result in the allocation of
burden of taxes among the vast population having a wider coverage area.

Classification of Tax
Based on the volume, nature, tax base taxes can be broadly classified into two categories
a) Direct Tax and
b) Indirect tax

DIRECT TAX
Tax is said to be direct when the liability and incidence of payment lies on the same person.
According to Dalton “ a direct Tax is really paid by the person on whom it is legally imposed”.

Merits of Direct Tax

 Equitable:
A direct tax is an equitable tax. Through it the rich can be made to pay more than the poor. In
case of necessity, the poor people can be granted exemption from payment of such taxes.

 Certain:
A direct tax satisfies the canon of certainty. For instance, a person liable to pay income tax
knows how much, when and where he should be required to pay; for that purpose he can take
appropriate steps beforehand.

 Elastic:
A direct tax justify the principle of elasticity. It can be varied according to the needs of the
government and changes with the change in income level of the people. When the income of
the people goes up, the rate of income tax can also be increased. If the income of the people
falls, the rate of income tax can also be lowered.

 Economic:
Direct taxes constitute an important source of government revenue. Their collection charges
are also low. Therefore, direct taxes are productive.

 People’s Consciousness:
A direct tax increases the civic sense of the people. When the people are fully aware of the
payment of taxes, they are also conscious of the way the government spends the money. They
resent unproductive or wasteful expenditure. As a result, the government becomes careful in
its expenditure.

Demerits of Direct Tax

 Lack of Popularity:
 Such taxes are not very popular, because the people have to bear the burden of such taxes
directly. That is why, when the rate of a direct tax is raised, most people express their
resentment against the government. For instance, when the rate of personal income tax or
corporate profit tax is raised, criticism from those affected becomes very strong.

 Tax Evasion and Avoidance:

It is liable to be evaded. By submitting false returns, many people try to evade income tax.
Unless the civic sense of the people is well-developed and there is spread of education among
them, the administration of direct taxes is very difficult.

 People’s Indifference:
It does not develop the civic sense of those who do not pay such taxes. In the case of income
tax, people with income is below a certain level are not liable to pay tax. In a low-income
country like Nepal, the majority of the people are not required to pay income tax. When a man
directly bears the burden of a tax, he tries to know how the government spends that money.
Those who are not directly affected by the burden of taxation remain indifferent as to the way
the public expenditure is incurred.

 Negative Impact on Investment & Production:

They reduce the desire to work and save. The rate of direct taxes are usually high. Many
business ventures are not undertaken on the ground that a large part of the income earned will
have to be given to the government in the form of taxes. Thus, direct taxes reduce incentives
to work hard and save.

INDIRECT TAX
An indirect tax is one in which the burden can be shifted to others. The impact and incidence of
indirect taxes are on different persons. An indirect tax is levied on and collected from a person
who manages to pass it on to some other person or persons on whom the real burden of tax falls.
For e.g. VAT, excise duty, custom duties, etc. are indirect taxes.
Merits of Indirect Taxes
1. Convenient
Indirect taxes are imposed on production, sale and movements of goods and services. These are
imposed on manufacturers, sellers and traders, but their burden may be shifted to consumers of
goods and services who are the final taxpayers. Such taxes, in the form of higher prices, are paid
only on purchase of a commodity or the enjoyment of a service. So taxpayers do not feel the
burden of these taxes. They are also convenient because generally they are paid in small amounts
and at intervals and are not in one lump sum. They are convenient from the point of view of the
government also, since the tax amount is collected generally as a lump sum from manufacturers
or traders.

2. Difficult to evade
Indirect taxes have in built safeguards against tax evasion. The indirect taxes are paid by
customers and the sellers have to collect it and remit it to the Government. In the case of many
products, the selling price is inclusive of indirect taxes. Therefore, the customer has no option to
evade the indirect taxes.

3. Wide Coverage
Unlike direct taxes, the indirect taxes have a wide coverage. Majority of the products or services
are subject to indirect taxes. The consumers or users of such products and services have to pay
them.

4. Elastic
Some of the indirect taxes are elastic in nature. When government feels it necessary to increase
its revenues, it increases these taxes. In times of prosperity indirect taxes produce huge revenues
to the government.

5. Social Welfare
The indirect taxes promote social welfare. The amount collected by way of taxes is utilized by the
government for social welfare activities, including education, health and family welfare.
Secondly, very high taxes are imposed on the consumption of harmful products such as alcoholic
products, tobacco products, and such other products. So it is not only to check their consumption
but also enables the state to collect substantial revenue in this manner.

Demerits of Indirect Tax

1. Uneconomical
Indirect tax fails to satisfy the principle of economy. The government has to set up elaborate
mechanism to administer indirect taxes and high scale of amount should be spent. Therefore,
cost of tax collection per unit of revenue raised is generally higher in the case of most of the
indirect taxes.

2. Inequitable
Generally, the indirect taxes are regressive in nature. The rich and the poor have to pay the same
rate of indirect taxes on certain commodities of mass consumption. This may further increase
income disparities among the rich and the poor.

3. Public Unconsciousness
Indirect taxes do not create any social consciousness as the taxpayers do not feel the burden of
the taxes they pay. Consequently taxpayers becomes indifferent towards their responsibilities
and fail to watch on the irregularities of the government.

4. Uncertain
Indirect taxes are often uncertain. Taxes on commodities with elastic demand are particularly
uncertain, since quantity demanded will greatly affect as prices go up due to the imposition of
tax. In fact a higher rate of tax on a particular commodity may not bring in more revenue.

5. Inflationary
The indirect taxes are inflationary in nature. The tax charged on goods and services increase their
prices. Therefore, to reduce inflationary pressure, the government may reduce the tax rates,
especially, on essential items.

Relation of Income Tax with other Acts and Laws

1. Income Tax and the Constitution
The Constitution is the supreme law of the nation and all the Acts and Laws enacted in the
country are guided by the constitution. According to the constitution of Nepal tax should not be
levied and realized without laws. Hence we can say that Income Tax Act 2058 if fully guided by
the constitution. If any provisions of Tax Act will be found Inconsistent with the spirit of
constitution, that portion to the extent of inconsistency will be invalid.

2. Income Tax Act & Finance Act

Finance Minister announces budget each year within Jestha 15 and to give effect of the proposals
of budget Finance Bill is passed from the parliament. As soon as the Bill is passed the Finance Act
will be enacted. The Income Tax Act and Finance Act are closely interrelated with each other. In
order to fulfil the objectives of Income Tax, Finance Act empowers government to implement the
tactical tax policies each year. The Finance Act is the complementary law of Income Tax Act.
Income Tax is permanent in nature and is a procedural law stating the norms for submission of
tax, assessment of Tax and collection of Tax. But to contrary Finance Act is temporary because
the provision remains effective for only one year.

3. Income Tax Act and Provisional Tax Realization Act

The Finance Act will be enacted only when the Finance Bill presented by the Finance Minister is
passed by the parliament. In some cases passing the finance bill by the parliament takes a long
time. In that case the department and authorities collects taxes pursuant to power granted by
Provisional Tax Realization Act. The right to levy and collect tax with respect to Provisional Tax
Realization Act will be effective until the Finance Act comes to force. Hence Income Tax Act and
Provisional Tax Realization Act are also interrelated with each other.

4. Income Tax Act and Income Tax Rules

In order to meet the objectives of Income Tax Act GON formulates the Income Tax rules pursuant
to power granted by the Act. Section 138 of the Income Tax Act empowers for making necessary
Tax Rules. These rules attempt to clarify the provisions of Income Tax Act. So, these rules are
considered as the subsidiary tax law of Income Tax Act

5. Income Tax Act and Legal Precedent established by the Court.

Sometimes when the dispute between the tax payer and the tax authority arises then the
interpretations made by the court shall be and final which becomes Najeer for similar other cases
in future. In this way the legal Precedent established by the court helps to implement the
provisions of Income Tax Act and hence there is a mutual relationship between court decision
and Income Tax Act.

Important Terminologies
1. "Income" means the income earned by any person from Employment, Business, Investment
and Windfall gain and the total amount of that income calculated under this Act.

2. "Income year" means a period from the first day of Shrawan of any year to the last day of
Ashadh of the next year.

3. "Employment" means any kind of past, present or future employment. Any amount received
from an employer in the form of salary, wages, allowances, commission, reimbursement of
personal expenses, perquisites, leave encashment, advance salary, pension etc. are treated as
taxable employment income.

4. "Person" means a natural person or entity.

5. "Natural person" means an individual, and, for the purposes of this Act this term includes a
sole proprietorship owned by an individual, whether registered or not and a spouse so
selected under Section 50 as to be considered as the single individual.

6. "Entity" means the following organization or body:

(1) A partnership, trust or company,
(2) Village Development Committee, Municipality or District Development Committee,
(3) Government of Nepal,
(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 which is not situated in a country
in which an entity is resident.

7. "Resident person" means the following person in respect of any income year:
(1) In respect of a natural person,
(a) Whose normal abode is in Nepal,
 (b) Who has resided in Nepal for 183 days or more during a continuous period of 365 days of
any income year, or
(c) Who is deputed by Government of Nepal to a foreign country in any time of the income
year

Questions on 183 days rule

Krishna Dahal has a business in America and he often visits Kathmandu to manage his business.
His duration of visit is as follows. Consider 30 days in a month whenever provided otherwise.
Calculate the residential status of Krishna Dahal for the respective financial years.
1, Chaitra 2074 to 26, Baisakh 2075 56
1, Asar 2075 to 15 Asar 2075 15

For Fiscal Year 2074-75 71 days

Since the period of stay in Nepal is only 71 days, so he will be non-resident for the fiscal year
2074-75

1 Bhadra 2075 to 20 Ashoj 2075 50

1 Poush 2075 to 3, Falgun 2075 63
1 Baisakh 2076 to 26 Jestha 2076 56
15 Asar 2076 to 28 Asar 2076 14
183

For Fiscal Year 2075-76

Since the period of stay in Nepal is only 183 days, so he will be resident for the fiscal year 2075-
76

(2) A partnership firm, registered in Nepal

(3) In respect of a trust, such trust

(a) Which is established in Nepal,
(b) The trustee of which is a resident person in an income year,
(c) 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,

(a) Which is incorporated under the law of Nepal,
(b) Management of which has been effective in Nepal in any income year.

(5) Village Development Committee, Municipality, or District Development Committee,

(6) In respect of an entity of any foreign government or provincial and local government under
that government, such entity,
(a) Which is established under the laws of Nepal, or
(b) 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

“Non-Resident Person” means a person which is not a resident person of Nepal

TAX ACCOUNTING AND TIMING

In order to maintain uniformity and consistency Section 22 of Income Tax Act, 2058 has made
certain provisions that books of accounts has to be kept in accordance with the widely used
accounting principles. But, in some cases Income Tax Act has clearly stated the methods of
accounting to be followed.
Conditions Accounting method to employ
Where the method of accounting has been The Method Defined in The Act
clearly stated out in the Act
Where Tax Accounting not clearly stated Accounting as per the Generally Accepted
Accounting Principles

Summary Table for adopting accounting method

Nature of Person Income Heads Basis of Tax Accounting
Natural Person Employment and Investment Cash Basis ( compulsory)
Natural Person Proprietorship Business Cash or Accrual Basis
Company Business and Investment Accrual (compulsory)
Other Entity Business and Investment Cash or Accrual Basis

Change in basis of Accounting

According to section 22(5), a person may apply in writing for a change in person’s basis of
accounting for tax purpose. The Department if satisfied that the change is necessary to clearly
reflect the person’s income may approve the application for change in writing.

Section 22(6) of the Act states if basis of accounting for tax purpose is changed, adjustments
should be made for the year in which change has been made.

Accounting on Cash Basis

As per section 22 a person whose accounts for tax purpose has been recorded on cash basis for
the income derived from employment, business or investment must treat
- Income only when payment is received or made available to the person
- Expense only when the actual payment is made

Accounting on Accrual Basis

As per section 23 a person whose accounts for tax purpose has been recorded on accrual basis
income and expenses should be recorded as and when the person becomes entitled to such
payment or obligation for liability to pay is established.

Problems on Cash Accounting

a) Ram Kumar & Sons (proprietorship business) was keeping books of accounts as per cash basis
and made the following transaction during 76/77
- Out of the total sales of Rs 10,00,000 the firm could realize only Rs 9,00,000 .
- Collected Rs 30,000 from its debtors for previous year
- Out of Rs 1,20,000 payable as annual interest the firm could only pay Rs 70,000 in 76-77 and
the remaining balance was paid on 77-78.
- Cost of Trading Stock of Rs 5,50,000 was fully paid during the year.
- Out of the total salary Payable Rs 2,00,000 only Rs 1,70,000 was paid during the concerned year.
The remaining 30,000 was only paid on 5th Shrawan 2077.
- In respect of House Rent the firm paid the following amounts
Rs 90,000 was paid as advance rent of FY 2076/77 on 2075/76. Similarly, during the fiscal year
the firm paid Rs 99,000 as advance rent of 2077/78. Calculate the income of the firm
Revenue Cash Basis Accrual
Sales 900000 1000000
Cash Received from previous Year 30000 930000 0
Expenses
Interest 70000 120000
Cost of Stock 550000 550000
Salary 170000 200000
Rent 99000 889000 90000

Net Income 41000 40000

Accounting in respect of Banking Business
According to Section 24(3) banking business has to keep records as per Nepal Rastra Bank Act
2058, and other governing laws in respect of banking. The Inland Revenue Department accepts
the accounting procedure followed by the banking business as per the instruction of NRB.
Accounting in respect of currency valuation
When calculating the person’s income form business or investment on accrual basis if payment
received or made occurs due to variation in exchange rate, such difference should be adjusted.
Problem:
NTC purchased some spare parts amounting to Rs $20,000 from South Korea on Credit terms on
2076/1/17 (F/Y 75-76). The company charged expenses as an obligation to the spot rate of NRS
75 per $. The payment was done on 2076/8/25 (F/Y 76-77). The $ at the time of payment was
a) equivalent to NRs 72 per 1$
b) equivalent to NRs 76 per 1$
2076/1/17
Purchase A/c Dr 20000*75 =1500000 75-76
To Korean Company 15000000

a) 2076/8/25
Korean Company 20000*72 =1440000
To Bank 1440000
Difference 60000 Exchange gain income of Fiscal Year 2076-77
b) Korean Company 1520000
To Bank 1520000
Hence you can claim 20000 as additional expense due to exchange loss in fiscal year 2076-77

Reverse of Amounts including bad debts

As per Section 25 of Income Tax Act, while computing 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:-
1) In case a person gets the amount reimbursed or recovers the expenses
E.g Ganesh Store purchased stock in trade of Rs 200000 from Nepal Traders in 2075/3/16. During
2075/4/10 Ganesh Store complained that some of the articles purchased from Nepal Traders was
outdated and expired amounting to Rs 20000. Nepal Traders refunded Rs 20000 to Ganesh Store
74-75
Ganesh Store Nepal Traders
Purchase 200000 Bank 200000
To Bank 200000 To sales 200000
75-76
Bank 20000 Expenses 20000
To Income 20000 To Bank 20000

2) 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,
Conditions to claim debt as bad debt
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 of NRB.
b) In other case if a person after taking all the appropriate steps believes that the entitlement or
debt claim will not be recoverd.
e.g
ABC Company sold goods worth Rs 500000 to XYZ Company on 2075-09-27 on 30 days credit
period. But XYZ could not pay the amount to ABC Company. ABC Company took all the
appropriate steps for the recovery of amount and on 2076-07-14 claimed the amount as bad
debt. So, ABC Company can claim that amount as expense for the FY 2076-77 on 2076-07-14.
3) 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.
E.g
Ram Kumar Traders a proprietorship firm has taken loan of Rs 100000 @ 12% interest p.a from
Kumari Bank repayable within 2076 Ashad. But due to the good credit history with the bank the
bank waived interest of Rs 5000 and the firm paid Rs 7000 only as interest.
Here the firm was benefited by Rs 5000 due to the waiver provided by bank. So, the firm should
record the waiver of Rs 5000 as its income for the year 2075-76.

Averaging inclusions and deductions under a Long Term Contract

As per Section 26(1) "long-term contract" means a contract with the following circumstance":-
(a) A contract with a validity period of more than twelve months, and
(b) A contract is either a contract for manufacture, installation or construction or in relation to
those activities or a contract with deferred return which is not an excluded contract

Contract with deferred return

According to Rule 10 of Income Tax Rule 2059, deferred revenue contract means any contract
where the party to contract does not show the details prescribed by Department regarding
estimated gain or loss during every 6 months
Excluded Contract
According to Rule 11 of Income Tax Rule 2059, an excluded contract refers to the following
1) any contract created by reason of an interest in an entity or by obtaining a membership in a
retirement fund
2) any contract of investment insurance (life insurance)
For the purpose of calculating a person’s income for an income year from an employment,
business or investment estimated cumulative inclusions and deductions under a long term
contract of the person shall be treated as derived or incurred according to the percentage of
contract completed during the year.
𝐶𝑢𝑚𝑢𝑙𝑎𝑡𝑖𝑣𝑒 𝑑𝑒𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑢𝑝𝑡𝑜 𝑡ℎ𝑒 𝑖𝑛𝑐𝑜𝑚𝑒 𝑦𝑒𝑎𝑟
% of contract completed = ∗ 100
𝑇𝑜𝑡𝑎𝑙 𝑒𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑡ℎ𝑒 𝑐𝑜𝑛𝑡𝑟𝑎𝑐𝑡

Question?
ABC Construction Co. entered into agreement with NCell for the construction of Tower during
2074-75. According to the contract the contract price for construction is NRs 30 million and the
construction work should be completed in 3 years. The contractor estimated that the
construction will be completed for Rs 25 million. During the first year the company incurred a
cost of Rs 80 Lakhs, 80 lakhs during the second year and remaining amount was incurred in the
third year. Calculate the contract income/loss for the respective years.