Taxation in Nepal

Chapter 1 Taxation

Taxation is the biggest source of public revenue of modern government. Tax is a kind of money of which it is a legal duty of every citizen of a country to pay honestly. It may be levied on income, property and even at the time of purchasing commodity. In short, tax is the major source of government income. It is a compulsory payment to the government by tax-payer without any expectation of some specified return.
The revenue of government comes basically from two sources i.e. non-tax sector and tax-sector. Non-tax revenue includes different sources like grants, gift, administrative income and business income like registration fee, fines and penalties. The basic objective of non-tax revenue is not called revenue, but to provide services to the people. In Nepal around 20% revenue comes from this source. Another source of government revenue is taxation. Custom duty, excise duty, vat, personal income taxes are some example of sources of tax revenue. In Nepal around 80% revenue comes from this source. The government pass for getting tax revenue is to collect tax as per act. The tax cannot be imposed without the act of parliament in Nepal too.

What is tax?

The word ‘Tax’ is derived from the Latin word ‘taxare’ which means to estimate. In simple words, it is compulsory payment by the people. If a person denies the tax payment, he/she may be penalized or punished in the court of law. So ‘Taxation’ is the compulsory contribution from a person to the government to meet expenses incurred in the common interest. So tax is the compulsory levy and those who are taxed have to pay it without any direct benefit. Due to this compulsory nature some economist says, “Nothing is certain except death and tax.” some economist says, “Death and tax are both certain but death is not annual, tax is annual.” Some economist says, “Death means stopping to pay tax.”
Tax is necessary contribution by the tax payer to social objectives like securing high level of employment, social security, promoting economic stability of nation, etc.

Features

Tax is an important tool in the development of economy. It affects the overall structure of the whole economy. The main elements of good tax system are highlighted below:

1. Tax is the compulsory payment not a voluntary payment or donation.
2. Tax is the payment to the government as per the prevailing law.
3. Aim of tax collection is for public welfare.
4. Taxes are paid by the person.
5. Taxes are paid out of income.
6. No effect on trade and industry. (honeybee concept)
7. Tax is required to be paid at regular intervals.
8. Failing to pay taxes is subject to punishment by law.

Objective

The primary objective of a tax system is to generate revenues to pay for the expenditures of government at all levels. Besides raising revenues, tax has become an instrument of social and economic policy for the government. The main objectives of taxation are:

1. Raising public revenue Normally, the objective for the imposition of tax is to collect the revenue for the government. The government providing social service promoting economic development and meeting war expenditure all of this expansion in the scope of economic activities have created up greater fund to be spent by the government. The greater the need of funds the greater is resource of taxation. Thus, the aim of taxation is to raise public revenue to meet the increasing public expenditure.
2. Reduction of inequalities in income and wealthAnother aim of taxation is to reduce the inequality income. One of the great problems of underdeveloped country is that there is the vast gap between the income of person in the highest income group and of those in the lowest income group. One of the objectives of taxation is to redistribute income and wealth in such a way as to ensure more just and equitable distribution. This is possible by taxing; rich people are imposed high tax and less tax to the poorer. This is the objective of progressive tax like income tax, wealth tax, etc.
3. Restriction on unnecessary consumptionAnother objective of taxation is to restrict the unnecessary consumption particularly harmful commodities such as wine, cigarette, tobacco, etc. when heavy tax is imposed on such commodities, the consumption of such commodities are automatically reduced.
4. Increase in national income
Another objective of taxation is to Increase in national income. Tax is the main source of government income and used for productive purpose and thereby overall production is increased. These increase in production leads to increase in national income of country along with increase in per capita income.
5. Business stability and maintaining full employmentAnother objective of taxation is to bring above business stability and maintain full employment condition. Low rate of taxation during business depression provides more income to the people and help in raising demand as well as to revive business activities.
   On the other hand, high rate of tax and additional tax may be useful to check inflation pressure on price. Thus, tax policy may be used as a regularity mechanism to achieve price stability, check business booms and depression and also maintain full employment in the economy.

   Canon of taxation

   There are different views regarding of a good tax system. The canons of taxation were first developed by Prof. Adam smith. Adam smith’s view in this respect is generally accepted as the features of good tax system. Smith’s four canons as outlined in his book entitled ‘An enquiry into the nature and causes of wealth of nation’ are as follows.
   
   1. Canon of equality or benefitAccording to this Canon, a good tax system is that which is based on the principle of equality. In broader sense, equality may be considered to be same as justice. In this principle, it is maintained that the tax must be levied according to the paying capacity of the individual. In other words, the principle of benefit states that the burden of taxation should be fair and just. Thus, rich people must be subjected to higher taxation in comparison to the poor. Higher the income higher the tax, lower the income lower the tax.
      Adam smith has defined this principle as “the subject of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities, that is, in proportion to the revenue which they respectively enjoy under the protection of state.” He states that every individual should contribute according to his ability so that equalities of sacrifice are achieved.
      
   2. Canon of certaintyCanon of certainty is important Canon of taxation; Certainty in the word of smith is related to the time, method, manner and quantity of paying tax. It means the tax payer should determine the following manners carefully.a.The time of the payment b. Amount to be paid c.Methods of payment d.Place of payment e.The authority to whom the tax is to be paid
   3. Canon of convenientConvenient is another quality that should be in good tax system. Most of the tax payers are ordinary people who neither have sufficient tax-related knowledge nor the capacity to hire tax experts. The tax system should be of such type that can be followed by ordinary people in the society.
      The time of payment should be convenient like land revenue should best be collected at the harvest time. The income tax from the salary should best be collected when they get their salary from their employer.
      
   4. Canon of economyThis Canon of economy implies that minimum possible money should be spent in the collection of tax. The maximum part of collected amount should be deposited in the government treasury. Thus, all extra unnecessary expenditure in this collection should be avoided.
      In addition to above four Canons of taxation given by Adam smith, there are other Canons which have been added by modern economist Bastable are given below:
      
   5. Canon of productivityThis canon says that the fund raised through taxes should be utilized by the government in productive sector of the economy so that the taxpayer can see the utilization of their hand-earned money paid as taxes.
      According to this principle, it is better to impose a few productive taxes than to go in for a large number of unproductive taxes.
   6. Canon of elasticity/flexibilityThis canon signifies that the taxes should be levied in such a way the amount to be collected can be increased or decreased with the least inconvenience from the time to time.
      Other modern economists have added some other canons of taxation. They are:
   7. Canon of simplicity
   8. Canon of uniformity
   9. Canon of Neutrality
   10. Canon of co-ordination
   11. Canon of diversity

   Types/Classification of tax

   A tax can be classified into different division on different basis. Our government classifies tax in following heads i.e. taxes from international trade, taxes from internally produced and consumed goods, land revenue and taxes from income, profit and property.Basically, the taxes can be classified in following different ways:
   

   Direct tax

   A direct tax is one which cannot be shifted to others. A direct tax is actually paid by the person on whom it is legally imposed like income tax, vehicle tax, and property tax. It is directly collected by the government from the person who bears the tax burden. It is the tax on income and property.
   Merits:
   1. It satisfies the principle of ability to pay.
   2. It is economical because it is imposed on limited person in the society.
   3. It is elastic.
   4. It has quality of progressive.

   Demerits:

   1. It creates feeling of high burden of tax.
   2. It is inconvenient.
   3. There is high evasion.
   4. It burden goes to only small section of the people.
   5. It is expensive for the government to collect tax individually.
   6. Its scope is very narrow.

   Indirect tax

   An indirect tax is that tax where the person pays tax to the businessman, not to the government. In other words, an indirect tax is imposed on one person but paid partly or fully by another like excise duty, VAT, etc. indirect tax can be shifted.
   

   Merits:

   1. It is convenient
   2. It is difficult to evade
   3. It has wide base
   4. Mass participation
   5. It is universal in nature, it is collected from all the citizen
   6. It is not based on ability to pay
   7. It creates inequality in the society, rich and poor are same.
   8. This tax is uncertain with the fluctuation in demand the tax amount can also fluctuate.

   Major taxes in Nepal

   Nepal government collects revenue from different sources. Right now, the types of these taxes are around 24. However, from the revenue point of view only five types of tax have importance.
   

   Custom duty

   Taxes imposed by a country on all import and export goods, when the goods cross the boundaries of the country are called custom duty. It is also called boarder tax. The customs imposed on imported goods are called import duty whereas, imposed on imported goods are called export duty. In Nepal, from custom duty cover in previous year around 19% of the total revenue.

   Value added tax (VAT)

   VAT system was introduced in 1919 in France and used in 1954. Right now more than 160 countries in the world and latest country, south Sudan of the world use this tax system. In Nepal, this tax was introduced in 1997 replacing sales tax, entertainment tax, hotel tax and contract tax. Right now, the rate of VAT on Nepal is 0 and 13%. The contribution from this tax is around 29% of the total revenue.

   Excise duty

   Tax levied on the manufacture, sell or consumption of goods or services injurious to health or luxurious goods is called excise duty. It is narrow-based indirect tax for this tax provides around 12% of the total revenue in previous year.

   Local tax

   Local tax is the tax imposed by local governments however in Nepal the concept of local tax is a new one. It was started after 2054.

   Income tax

   Income from employment

   Employment is a contract of service (mental and physical) between two parties- employer and employee in which the first party makes a regular payment of salary, wages and other benefits to the second. Income Tax Act 2058 has not given a specific definition of employment but it has used the term broadly to include past, present or prospective employment.
   

   Characteristics of Employment

   a.     Economic activity

   b.    Qualification

   c.      No risk

   d.    Certainty return

   e.     Conduct

   Employment income

   Employment income is also known as remuneration or salary, is the reward from employment and can be salary, fee, wage, overtime pay, allowance, commission, bonus, tip, gratuity or perquisite in the form of car, house, servants, driver, etc.
   All types of payments and benefits (monetary and non-monetary) are to be included under employment income; the best way to think of it is in terms of compensation an employee receives that the government will tax.

   Taxation in Employment

   1.    Step: one Tax assessment step/Assessable income from employment
   
   
   2.    Step: two Calculation of taxable income
   Common reduction
       i.        Retirement benefit/Providend fund reduction to an approved fund (Sec. 63)
   Or
   Maximum Rs 300000
   Or
   Actual paid by employees to the recognized P.F office whichever is less
   Recognized P.F. offices are:
   a.    Providend fund building, Thamel
   b.    Citizen Investment Trust, (CIT), Baneshwor
     ii.        Donation (Sec.12)
   Donation given to:
   a)   Prime minister relief fund:
   Full amount can be deducted from assessable income
   b)   World heritage/Sports club
   10% of adjusted taxable income
   Or Maximum Rs. 10, 00,000
   Or actual whichever is less
   c)    Tax-exempt entity
   5% of adjusted taxable income
   Or maximum Rs 1, 00,000
   Or actual whichever is less
   Note: Donation given to the non-tax exempt entity cannot be deducted from the Step: two. The income given in net value should not be recorded.
   iii.        Life insurance
   a.    Old concept:
   
   
   
   
   Or
   Maximum Rs 20,000
   Or Actual whichever is less
   b.    New concept:
   Maximum Rs 20000 or Actual, whichever is less
   
   
   3.    Step: three Determination of tax liabilities
   a) Medical tax credit Sec.51
   Maximum Rs 750
   Or 15% of claimed amount whichever is less
   b) Remote area allowance:
   Remote area A Rs 50,000
   Remote area B Rs 40,000
   Remote area C Rs 30,000
   Remote area D Rs 20,000
   IRD has suggested that those transactions which are Below Rs 500 are not recorded.
   At the time of calculating grade if appointed date is equals to fiscal year we calculate grade as:
   At the time of calculating grade if appointed date is not equals to fiscal year we calculate grade making equals to fiscal year.
   Tax rate
   Individual:

   Up to Rs. 350,000	1%
   Next Rs. 100,000	15%
   Next Rs. 2,200,000	25%
   Balance	35%

   
   
   Couple:

   Up to Rs. 400,000	1%
   Next Rs. 100,000	15%
   Next Rs. 2150,0000	25%
   Balance	35%

   
   
   
   
   
   
   
   
   
   

   Gross

   
   

   Tax free

   Saving from TADA

   Income from copy checking

   Income from business

   Business means use of capital and labour to earn income/profit. It is the mix-up of capital and labour. It includes trade, manufacturing industry and service industry. It is equivalent to the industry, business or profession. Income tax act 2058, “business as the business transaction related to industry, trade, profession or any other similar types of activities.”
   Definition as pointed out as follows
   Business is a commercial activity undertaken with a profit motive that includes an industry or trade or a profession.
   Business treats an isolated transaction with a business character as a business
   Business includes a past, present or prospective business
   Business excludes employment
   Business includes either registered or unregistered

   Admissible income under business heads

   a)   Service revenue

   b)  Disposal of trading goods

   c)    Gain on disposal of business assets goods

   d)  Gain on disposal of depreciable assets

   e)   Bad debt recovered

   f)     Exchange gain

   Admissible expenses under business heads

   a)   Cost of trading stock/goods
   Opening stock +purchase of trading assets + other assets-closing stock
   In calculation of stock price market price or cost price whichever is less
   b)  Business/profession related expenses
   Personal expenses not recorded
   c)    Allowable depreciation
   
   

   Treatment of depreciation for tax purpose

   Deducting Depreciation from fixed assets is reducing the taxable income and tax liability of the business. Deducting depreciation cash does not go out from the business but it is mentioned as business expenses.
   For tangible assets Diminishing balance method

   Type	Detail	Rate
   Block A	Long term use like building	5%
   Block B	Computer, office furniture	25%
   Block C	Automobile	20%
   Block D	Earth moving equipment and machinery	15%

   While calculating depreciation in case the tangible asset is bought in different months during the fiscal year
   
   
   For intangible assets Straight line method

   Type	Detail	Rate
   Block E	Intangible assets like goodwill, trademark,

   Note: while calculating the Number of year the tax office does not consider the months. If the months is below 6 it will round it to zero and if the months is 6 and above it will round it to 0.5 year In case of intangible assets only.
   
   
   
   
   
   
   
   
   
   
   
   

   Particular	Block - A	Block- B	Block -C	Block -D
   Balance b/d Or opening WDV
   Add: Purchase
   Less: Disposal
   Depreciation base = (Balance b/d Or opening WDV+ Purchase - disposal)
   Depreciation rate
   Allowable depreciation = depreciation base × depreciation rate
   Allowable repair and improvement

   
   
   Purchase date of assets for calculation of depreciation are done using absorbed

   Purchase date	Absorbed	Unabsorbed
   1st Shrawan to 30th Poush	3/3 of total purchase amount	3/3 of total purchase amount
   1st Magh to 30th  Chaitra	2/3 of total purchase amount	1/3 of total purchase amount
   1st Baishakh to 30th  Ashadh	1/3 of total purchase amount	2/3 of total purchase amount

   
   
   Allowable Pollution control cost (Sec.17)
   50% of adjusted taxable income
   Or actual whichever is less
   Allowable Research and development cost (Sec.18)
   50% of adjusted taxable income
   Or actual whichever is less
   Repair and improvement cost (Sec.16)
   7% of depreciation base
   Or actual whichever is less
   Bad debts (sec.25.2)
   Bad debts can be deducted as expenses
   Losses from business (sec 20)
   Losses of the business from previous 7 years in general business organization
   Losses of the business from previous 12 years in Nepal Oil Corporation

   Allowable reductions

   a.     Donation to exempt organization (Sec. 12 and Sec. 12 ka)

   b.    Retirement contributions (Sec. 63)

   c.      Other reductions (schedule 1)

   d.    Medical Tax credit (Sec. 51)

   e.     Foreign Tax credit (Sec. 71)

   Set off and losses carry forward

   Residential Status

   Income tax act (ITA) 2058, has given definition

   A.   In respect of an individual

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

   B.    A partnership firm

   Tax rates

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

   Particular	Square feet cost	Depreciation rate
   		Rate	Depreciation year
   Green brick with mud mortar	450	3%	25
   Klink brick with mud mortar	525	2%	30
   Klink brick with cement mortar	575	1%	75
   RCC frame structure	635	0.75%	100

   
   
   Land

   Particular	Rate
   First 10,00,000	Nil
   Next 10,00,000	Rs 300
   Next 30,00,000	0.05%
   Next 50,00,000	0.25%
   Next 1,00,00,000	0.50%
   Remaining	1.50%

   
   

    Value Added Tax (VAT)

   VAT is a sales tax’s advance form. It is imposed on different stage. It is a tax imposed by government on added value of goods and services. In some countries including Australia, Canada, this tax is known as “Goods and Service Tax (GST).” VAT is the major source of indirect tax. It is imposed on producer, wholesaler, retailer and consumer too. It is levied on industry as well as commerce. It is multi-stage tax; imposed only on value added amount in each stage, in contrast to sales tax.  It is consumption tax because it is borne ultimately by the final consumer.
   The value is added in the form of profit, rent, wages and salaries, etc. sales tax is imposed on total retail price of the item sold while VAT is imposed on the value added at each stage of the production and consumption. Over 130 countries (among 216 countries) worldwide have introduced VAT. Nepal introduced VAT in November 1997; however the concept of this tax in Nepal was introduced in early 1990 by Ram Sharan Mahat.
   The following are the features of full phase VAT system
   1.    It is an indirect tax.
   2.    It is based on value added.
   3.    It is broad based tax; it covers the value added to each commodity by a firm during all stages of production and distribution.
   4.    It is based on self assessment system and provides facility of tax refund and tax credit.
   5.    It avoids cascading effect (tax on tax), which can have snowballing effect on prices.
   6.    VAT is levied on taxable transaction with a single rate 13% in every point of value added.
   7.    Vat rate 0% and 13%
   8.    If sale is below 20 lakhs and profit is below 2 lakhs registration in VAT is not necessary.
   9.    Value added is sales value minus all expenditure on goods and services purchased from other firms.
   Why VAT is superior to Sales tax system?
   Sales tax is imposed on the total retail price of the item sold, while the VAT is imposed on the value added at each stage of production and distribution.
   For example:
   a.     An importer imported goods for Rs 1000.
   b.    Importer passed to wholesaler including 10% profit on cost.
   c.     Wholesaler also passed to retailer including 10% profit on cost.
   d.    Retailer passed to consumer including 10% profit on cost.
   Required:
   Cost price of consumer of imported goods
   Solution:
   Statement of Value added tax
   New concept

   Channel	Cost price	Value added	Selling price exclusive VAT	VAT rate @ 13%	Selling price inclusive VAT	VAT payable to government
   Imported goods	1000	-	1000	130	1130	130
   Importer to wholesaler	1000	100	1100	143	1243	13
   Wholesaler to retailer	1100	110	1210	157.3	1367.3	14.3
   Retailer to consumer	1210	121	1331	173.03	1504.03	15.73

   Hence,
   The cost price of consumer of the imported goods is Rs 1504.03.
   The VAT payable to government is Rs 173.03 (130+13+14.3+15.73)
   
   
   
   
   
   
   Sales tax
   Old concept

   Channel	Cost price	profit	Selling price exclusive VAT	VAT rate @ 13%	Selling price inclusive VAT	VAT payable to government
   Importer to wholesaler	1000	100	1100	143	1243	143
   Wholesaler to retailer	1243	124.3	1367.3	-	1367.3	-
   Retailer to consumer	1367.3	136.73	1504.03	-	1504.03	-

    Hence, cost price to consumer of imported goods = Rs 1504.03
   VAT payable to government = Rs 143
   The government will be beneficial in VAT system so, sales tax is replaced by the VAT.
   
   
   Questions
   Mr. Hari, a retailer purchase a table fan paying Rs 3300 inclusive VAT from wholesaler. He incurred carriage and selling expenses of Rs 150 and Rs 80 respectively and sold to customer the profit in each stage is 15% on selling price. It is assumed that VAT rate is 10%
   Required:
   a.     VAT collected in each level
   b.    Value Added by each businessman
   
   
   
   
   Miss Sunita purchased a television from a retailer at the total payment of Rs 22000. The retailer itself purchased from a dealer at Rs 17500 exclusive VAT. The dealer has purchased from manufacturer at Rs 16500 inclusive VAT. The manufacturer has assembled purchasing different part from different shop for Rs 11000 out of which he paid VAT Rs 1265.50
   Required:
   a.     VAT collected in each level
   b.    Value Added by each businessman

   Channel	Cost price	Value added	Selling price exclusive VAT	VAT rate @ 13%	Selling price inclusive VAT	VAT payable to government
   manufacturer	9734.50	-	9734.50	1265.50	11000	1265.50
   manufacturer to dealer	9734.50	4857.50	14602	1898	16500	632.50
   dealer to retailer	14602	2898	17500	2275	19775	377
   Retailer to consumer	17500	1969	19469	2531	22000	256

   
   
   A customer purchased a mobile from a retailer paying total price Rs 12995 the retailer purchased same from the importer and incurred expenses of Rs 1000 and 15% profit on cost price. Importer incurred additional expenses Rs 1150 and 15% profit on selling price. He had paid VAT.
   Required:
   a.     Imported price
   b.    Value added by importer and retailer
   
   
   
   
   
   
   
   

   Property tax in Nepal

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

   Tax exempted property

   Under ownership of Nepal government
   Of consiler mission or other mission
   Of government, hospital, education institute, government cooperation for non profit
   Place of public utility like drinking water reserve
   Under ownership of trust

   Rights and duties of property holder

   Rights
   
   1. Right to appeal
   2. Right to get information
   3. Right to apply for review
   Duties
   
   • Duty to pay tax
   • Duty to comply law

   Rights and duties of tax authorities

   Rights
   
   1. Right to impose tax
   2. Right to remission
   3. Power to impose fine and penalties