Nepal Income Tax Reference Guide

Contents

Chapter-1 Preliminary

Figure: Structure of the Income Tax Act, 2058

1. Short title, extent and commencement

(1) This Act may be cited as the "Income Tax Act, 2058 (2002)."

(2) This Act shall come into force throughout Nepal and shall also apply to residents residing wherever outside Nepal.

(3) This Act shall come into force immediately.

2. Definitions

Unless the subject or the context otherwise requires in this Act

(a) "Person withholding advance tax" means a person with a duty to withhold advance tax pursuant to Chapter-17 in making payments for employment, investment return, service charge and contract or agreement, as well.

When making a payment that requires advance tax to be withheld, the amount of tax at the rate prescribed in the Act must be deducted from the payment, and only the remaining balance may be paid. A Withholding Agent is therefore a person who has the obligation to withhold advance tax before making payment. For example, when an entity pays remuneration to its employees and is required to distribute remuneration with tax applied, such entity is a Withholding Agent. When a company pays a service fee to a consultant, such company has the obligation to withhold advance tax on the service fee payment and is therefore a Withholding Agent.

(b) "Officer" means the Director General, Deputy Director General, Chief Tax Administrator, Director, Chief Tax Officer, Tax Officer and other Officers in the Department, as referred to in Section 72.

Section 72 of the Act establishes that the Inland Revenue Department is responsible for implementation and administration of this Act. The Department includes the Inland Revenue Department as well as Inland Revenue Offices, Large Taxpayer Offices, Medium Taxpayer Offices, and Taxpayer Service Offices. Section 72(4)(c) also provides that the Director General may designate certain powers to be exercised by any civil service officer or employee.

(b1) "International Transaction" means any transaction relating to goods, services, finance, or intangible assets conducted by any person with at least one non-resident person. The term also includes any other transaction that affects income, expenditure, assets, or liabilities.

(c) "Payment from which tax is withheld finally" means any dividend, rent, profit, interest and payment from which tax has to be withheld made to the non-resident person, as referred to in Section 92.

The Act treats withheld advance tax amounts in two ways: as creditable withholding tax and as final withholding tax. Creditable withholding tax is the amount of advance tax deducted that a taxpayer may credit against the annual tax payable. Final withholding tax is the amount deducted from the payment at the prescribed rate at the time of payment, which constitutes the final tax payment. A taxpayer subject to creditable withholding is required to file an income return and must include such income received with withholding in the aggregate income in that return, then deduct the withheld tax from the annual tax liability. A taxpayer subject to final withholding is not required to include the amount received with such withholding as income in the income return, nor may such withheld tax be credited against other tax liabilities.

(d) "Retirement fund" means an entity established with the sole objective to accept retirement contribution fund for making retirement payments from the fund to the entity's beneficiary natural persons or their dependents, and invest such funds.

An entity operated solely for the purpose of managing a retirement fund is called a Retirement Fund. Such a retirement fund performs only the following functions:

(1) to accept contributions brought by natural persons to be deposited in their names in the fund;

(2) to make retirement payments to such contributing persons (i.e., beneficiaries), or their dependents, after the beneficiary's retirement or death; and

(3) to invest the accumulated retirement contributions.

For tax purposes, retirement funds have two structural types: Approved Retirement Fund and Unapproved Retirement Fund. Examples of retirement funds include the Employees Provident Fund (Karmachari Sanchayakosh), Citizen Investment Trust (Nagrik Lagani Kosh), Social Security Fund (Samajik Suraksha Kosh), retirement fund operated by the Civil Servants' Retirement Gratuity Fund (Nivritti Bharan Kosh), and entities approved by the Department to operate retirement funds.

(e) "Retirement payment" means any payment made to the following person:-

(1) Payment made to an natural person where such person has got retirement, or

(2) Payment to the dependent of an natural person where such person has died.

Retirement payment refers to payment made after a natural person has in principle reached a state of being unable to perform any employment, profession, or business and has retired. Similarly, where a natural person dies, the amount payable to that person, if paid to that person's dependent, is also called a retirement payment. Examples of retirement payments include payments from a retirement fund for retirement contributions made, gratuity, provident fund, encashment of accumulated leave, medical expenses, long service gratuity, and payment from a welfare fund. Such retirement payments may come from the Government of Nepal, an approved retirement fund, an unapproved retirement fund, an employer, or any other fund. Payments from an approved retirement fund may only be made in the following three circumstances:

(1) when an employee or worker retires from service;

(2) when the beneficiary reaches the age of fifty-eight years; or

(3) when the beneficiary dies or becomes permanently disabled.

Payments received before meeting these conditions, such as Long Service Gratuity, Leave Encashment, or Medical Expenses received during the period of service before actual retirement, do not fall under retirement payments; such payments must be included in income from employment.

(f) "Retirement contribution fund" means any payment made to a retirement fund for provisions of retirement payment or for future provisions thereof.

The retirement contribution amount includes the contribution deposited by the natural person themselves or, in the case of an associated person (i.e., an employer), by the employer on behalf of the natural person.

Example 2.1: Suppose Sujit Singh is employed at Kamal and Co. Pvt. Ltd. at a monthly salary of Rs. 20,000. If the company deposits Rs. 2,000 per month in a retirement fund in his name, and he also contributes Rs. 2,000 from his own side, then the total of Rs. 4,000 contributed by both sides shall be considered the retirement contribution amount for Sujit.

(g) "Incapacitated person" means a person who is not capable of making his or her dealings because of physical or mental illness.

The Act makes special provision so that the legal representatives or guardians of such persons may fulfil tax obligations on their behalf.

(h) "Income" means an income earned by any person from employment, business, investment or windfall gain and the term also includes the total amount of that income calculated in accordance with this Act.

The total amount of such income, calculated in accordance with the Act, is the taxable income on which tax is assessed. Income is classified into four heads: employment, business, investment, and windfall gain.

(h1) "Windfall gain" means a gain obtained by means of lottery, gift, prize, tips, share of earning in a game (Jitauri) or any other gain acquired incidentally.

A lottery, gift, prize, bonus, winnings, or other amount received without certainty of receipt and without the use of the recipient's labor or capital is considered windfall gains. Such amounts are subject to a separate final withholding tax and need not be included in the income return.

(i) "Income year" means a period from the first day of Shrawan of any year to the last day of Ashad of the next year.

The income year runs from the first of Shrawan to the end of Ashad of the following year. However, for a person established or who begins earning income during this period, the income year is from the date of establishment or commencement of income earning to the end of Ashad immediately following. Similarly, where a person's business has been or is deemed to have been closed, that person's income year shall be from the first of Shrawan to the date of closure or deemed closure of the business.

Example 2.2: Suppose Dhruv Company Pvt. Ltd. was liquidated on 2080/07/05. In that case, the final income year of that company shall be from 2080/04/01 to 2080/07/05. If at that date, 50% or more of the ownership of that company changed, then under Section 57 of the Act, in fiscal year 2080/81, the period from 2080/04/01 to 2080/07/05 shall be one income year and the period from 2080/07/06 to 2081/03/31 shall be another income year.

(j) "Gift" means any payment made without any consideration or in the case of any payment with consideration, where the market value of payment exceeds the market value of consideration, payment to the extent of such excess.

Example 2.3: Suppose a person named Vishwabandhu purchased a TV worth Rs. 25,000. The TV seller provided him a DVD player worth Rs. 5,000 at no charge. Such a player received without payment is considered a gift. Where a payment is made with consideration but the payment exceeds the market value of the consideration, the excess is also treated as a gift.

(k) "Debt liability" means the liability equivalent to the debt claim.

Where a person has an obligation to make a payment to another person for an arrangement, and such obligation is to be paid after a specified period or condition, such obligation is considered a debt liability. For example, if a person has taken a loan from a bank, the amount payable under the loan agreement is a debt liability. Such amount includes not only the principal but also the return on that principal, i.e., interest.

(l) "Debt claim" means the right of any person to receive payment from another person, and the term also includes the right of any person to have repaid a loan lent by such person to another person, the right to receive deposits made in a bank and financial institution, to receive sums to which such person is entitled and to receive money from the sale of debentures, bills of exchange, bonds, rights under annuities, financial lease and installments.

A debt claim is the corresponding right held by the lender to receive repayment of a debt liability. Examples of debt claims include deposits held in banks and financial institutions, receivable amounts, debentures, bills of exchange, bonds, rights under annuities, rights to receive amounts from financial leases, and instalment sales.

(m) "Company" means any company incorporated under the prevailing company law, 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 laws in force;

(2) Any unincorporated association, committee, institution, or society, or any group of persons other than a registered or unregistered sole proprietorship and partnership, or a trust;

(3) A partnership firm with twenty or more partners, whether registered or not under the prevailing law, a retirement fund, a cooperative institution, a unit trust, or a joint venture;

(4) Any foreign company;

(5) Any other foreign institution as specified by the Director General.

For income tax purposes, organizations duly registered under prevailing law, such as private limited companies, public companies, corporations, associations, non-governmental organizations (NGOs), and international non-governmental organizations (INGOs), are considered companies. All organized entities except sole proprietorships and partnership firms with fewer than twenty partners are considered companies.

(n) "Tax" means the tax chargeable under this Act, and this term includes the following payments:-

(1) The expenditures referred to in clause (a) of sub-section (8) of Section 104 as incurred by the Department for any claim in respect of, and auction sale of, the property in which the tax is due and outstanding,

(2) The amount payable by the person withholding advance tax or the person subject to tax withholding under Section 90 or the amount payable by the person making payment in installment under Section 94 or the amount payable by the person withholding advance tax under Section 95A. or the amount payable after the tax assessment under Sections 99, 100 and 101,

(3) The amount payable to the Department in respect of tax liability of the third party under sub-section (2) of Section 107, sub-section (3) or (4) of Section 108, sub-section (1) of Section 109, sub-section (1) of Section 110,

(4) The amount referred to in Chapter-22 payable for a fee and interest, and

(5) The amount of fine referred to in Section 129 required to be paid as per the order of the Department.

Under Section 104 of the Act, the Government of Nepal has a claim over the property of a person having tax arrears, and Sub-section (8)(a) provides that costs incurred by the Department in claiming and auctioning such property may be recovered from the person with tax arrears; therefore such costs are also considered tax. Under Section 90, a withholding agent is required to deposit the withheld advance tax amount within 25 days of the end of that month. Under Section 94, a person who has assessable income or will have assessable income from business or investment is required to file tax on an instalment basis. The amount to be paid at self-assessment under Section 99, jeopardy assessment under Section 100, and amended assessment under Section 101 are also considered tax. Amounts payable by managers of entities under Section 107(2), by receivers under Sections 108(3) and (4), by debtors of taxpayer under Section 109(1), and by agents of non-residents under Section 110(1) are also considered tax.

Example 2.4: Suppose Yuga Prasad has been appointed as liquidator of a limited liability company. As of the time of liquidation, there is Rs. 10,00,000 in withheld advance tax and Rs. 30,00,000 in other tax arrears. After selling the assets and deducting liquidation expenses, Rs. 1,00,00,000 remains. There is a secured loan of Rs. 30,00,000 that has priority over the tax, and Rs. 50,00,000 in unsecured liabilities. In that case, the liquidator must first set aside Rs. 10,00,000 in advance withheld tax from the sale proceeds, even before deducting liquidation expenses. Thereafter, after deducting liquidation expenses and the Rs. 30,00,000 secured loan, from the remaining amount, Rs. 30,00,000 in other tax arrears must first be settled, and the remaining Rs. 30,00,000 distributed pro-rata to settle unsecured liabilities.

(o) "Person subject to tax withholding" means any person who receives payment or has the right to receive payment by withholding tax under Chapter-17 in making payment for employment, investment return, service charge or contract or agreement.

A person subject to tax withholding is a person who receives payment after tax has been deducted at source.

(p) "Tax assessment" means the assessment of tax to be made under this Act and this term includes the assessment of a fee and interest under Section 122.

Provided that this term does not mean the previous tax assessment substituted by the amended tax assessment under Section 101.

The Act provides for three types of tax assessment:

(1) Self-assessment under Section 99, i.e., the system where a person with a tax liability assesses their own tax;

(2) Jeopardy Assessment under Section 100 for an income year or a portion thereof before the taxpayer's time to file an income return has expired; and

(3) Amended tax assessment made by the Department under Section 101 to adjust a person's tax liability on a fair and equitable basis.

Since an amended tax assessment replaces the original tax, in the event of an amended assessment, the prior self-assessment (Section 99) or jeopardy assessment (Section 100) shall not be considered a tax assessment(An amended assessment supersedes and replaces the previous assessment, making the amended assessment the only valid tax assessment). Additionally, Section 99(2) provides that for a taxpayer who does not file a self-assessment income return within the prescribed time, a self-assessment shall be deemed to have occurred automatically on the last day for filing the income return. The fees and interest calculated by the Department under Section 122 are also considered a tax assessment, covering fees under Sections 117, 119A, 120, and 121, and interest under Sections 118 and 119.

(p1) "Transaction" means a transaction equal to the total amount included pursuant to Section 7, 8 or 9 for the purpose of calculation of income of employment, business or investment in any income year.

Transaction means the total amount included in computing income under Sections 7, 8, or 9 for an income year. It represents the gross level of activity in employment, business, or investment income computation and is used as the basis for determining whether the presumptive tax provisions of Section 4(4) apply.

(q) "Non-resident person" means any person other than the resident person.

(r) "Non-business taxable 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,

Business assets include shares, land, receivables, advance accounts, cash and bank balances, and other assets other than stock-in-trade or depreciable assets of the business. Depreciable assets means assets used to earn income in any business or investment that lose value through wear and tear, obsolescence, or the passage of time. Stock-in-trade refers to assets held for sale in the ordinary course of a business operated by a person, assets in work-in-progress, and stocks of materials to be incorporated into such assets.

Example 6.4.1: Suppose Hada Furniture Pvt. Ltd. buys and sells furniture. In income year 2080/81, it purchased 10 chairs for Rs. 1,00,000 and sold 6 of them for Rs. 70,000. In that income year, the 10 chairs held for sale constitute the stock-in-trade of that company.

(2) A private building owned by an natural person in the following situation:-

(a) Being under ownership for a continuous period of ten years or more, and

(b) Where that person has resided for a total period of ten years or more continuously or at several times,

Explanation: For the purpose of this clause, "private building" means building, land occupied by the building and additional land of equal area occupied by the building or one Ropani of land whichever is lesser.

(3) Any interest of any beneficiary in retirement fund,

Every person who contributes to a retirement fund is a beneficiary with respect to the investment in that retirement fund. Such a beneficiary's interest in that retirement fund is not treated as a non-business taxable asset. Their investment in any entity other than the retirement fund is treated as a non-business taxable asset.

Example 6.4.2: Suppose Ramprasad contributes Rs. 4,000 every month to a retirement fund. He has also purchased shares worth Rs. 1 lakh in a financial institution. The amount accumulated through contributions to the retirement fund is not treated as a non-business taxable asset. However, his investment in the shares of the financial institution is treated as a non-business taxable asset.

(4) A land, land with building and private building belonging to and disposed of by any natural person for a value less than ten lakh rupees, or

If a natural person disposes of land and a personal building for a value of less than Rs. 10 lakhs, such asset is not treated as a non-business taxable asset. If disposed of for a value exceeding that, such an asset is treated as a non-business taxable asset.

Example 6.4.3: Suppose Suresh purchased a house on date 2069.03.31 for Rs. 20 lakhs and sold that house on date 2081.10.05 for Rs. 80 lakhs. Since the disposal value exceeds Rs. 10 lakhs, that house is treated as his non-business taxable asset, and the amount received from the disposal of that house is treated as non-business taxable asset income. The net gain computed from such income in accordance with Chapter 8 of the Act is treated as non-business taxable asset income and must be included in computing investment income. If he had purchased that house 10 years ago or earlier and had resided in it continuously or intermittently for a total of 10 years or more, that house would not be treated as a non-business taxable asset and the gain from the disposal of such an asset would not be included in his investment income.

(5) Any asset disposed of by way of transfer in any manner other than the purchase and sale within three generations.

Ordinarily, property transfers within three generations are made through partition, gift and similar means rather than purchase and sale. However, sometimes property is bought and sold within three generations. Accordingly, the sale amount of property sold within three generations is treated as non-business taxable asset income, while transfer by means other than purchase and sale within three generations is not treated as non-business taxable asset income or investment for tax purposes. However, even where property is sold within three generations, if the value is less than Rs. 10 lakhs, such property is still not treated as a non-business taxable asset.

Example 2.5: Suppose Prem Prasad Acharya purchased a building in Kathmandu on 23rd Kartik 2070 for Rs. 2,00,00,000. He sold that building on 26th Push 2080 for Rs. 3,00,00,000. He was abroad for a cumulative total of 120 days from 23rd Kartik 2070 to 26th Push 2080. Even though he was the owner of that building for more than ten years, because he resided in it for less than ten years cumulatively, the above building is considered a non-business chargeable asset. However, if he had sold the building two months later, the condition of having resided therein for more than ten years would also have been met, and the building would not have been considered a non-business chargeable asset.

Example 2.5.1: In the example above, had it been a building only, the building and in the case of a building with land, land up to one ropani or the area covered by the building (whichever is less), that portion of property would not have been considered a non-business chargeable asset.

Example 2.5.2: Even if the building in the above example had been sold for less than Rs. 10,00,000, it would not have been considered a non-business chargeable asset.

Example 2.5.3: The building in the above example became a non-business chargeable asset when sold. Had that building been transferred free of charge within three generations, it would not have been considered a non-business chargeable asset.

Example 2.6: Suppose a person named Laxmi Rimal purchased land in Kathmandu worth Rs. 20,00,000 on 3rd Falgun 2075. She sold that land on 6th Aswin 2080 for Rs. 45,00,000. Since the sale value of the above land exceeds Rs. 10,00,000, the above land is a non-business chargeable asset.

Example 2.7: Suppose Yubaraj Basnet transferred land worth Rs. 5,00,00,000 registered in his name, purchased one year ago, to his grandson by a gift deed. Even if the market value of that property at the time of transfer was Rs. 6,00,00,000, that property shall not be considered a non-business chargeable asset.

Securities (shares, bonds, debentures) in the ownership of a natural person, except for free-of-charge transfer of rights within three generations, shall be considered non-business chargeable assets when disposed of through purchase and sale or other transfer of rights.

(s) "Organization entitled to enjoy exemption" means the following entity:-

(1) The following entities registered in the Department as organizations entitled to enjoy exemption:-

(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 if 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.

Rule 3(1): Any organization entitled to enjoy tax exemption pursuant to Section 2(s) of the Act shall submit an application, accompanied by the following details, to the Department for the exemption of tax:

(a) in the case of an organization required to be registered pursuant to the prevailing law, a duplicate copy of the registration certificate;

(b) a copy of the statute of the organization;

(c) where the permanent account number has been obtained, a copy of such certificate; and

(d) a duplicate copy of an audit report, if any.

Rule 3(2): Upon conducting necessary examination as to the application for tax exemption submitted pursuant to Sub-rule (1), the Department shall register such organization as an organization entitled to enjoy tax exemption and issue a certificate.

Rule 3(3): Notwithstanding anything contained in Sub-rules (1) and (2), the Department may specify any entity falling within the organization entitled to enjoy tax exemption so as they may not be required to be registered.

Rule 5A(1): Any tax-exempt organization that has obtained a certificate of tax exemption pursuant to Rule 3 shall renew such certificate within one year from the date of expiry of the income year.

Rule 5A(2): In renewing pursuant to Sub-rule (1), the application shall be accompanied by the income return of the preceding income year, the details showing that advance tax has been withheld and deposited, and other supporting evidence, and shall be submitted to the Department in the format prescribed by the Department.

Rule 5A(3): On the basis of the application received pursuant to Sub-rule (2), if upon examination the applicant appears to be entitled to enjoy tax exemption, the certificate shall be renewed.

Rule 5A(4): Where the format of the certificate of tax exemption received for renewal pursuant to this Rule does not match the format specified by the Department, a new certificate shall be issued in place of the previous certificate of tax exemption.

Rule 5A(5): Unless the certificate of tax exemption is renewed pursuant to Sub-rule (1), the organization that has obtained a certificate of tax exemption shall not be entitled to avail of the benefit of tax exemption.

Rule 27(1): Any person entitled to enjoy tax exemption may submit an application to the Department for the tax exemption certificate.

Rule 27(2): Upon receiving an application pursuant to Sub-rule (1), if it appears that the person is entitled to enjoy tax exemption, the Department shall provide the tax exemption certificate to such person.

(t) "Trust" means an arrangement whereby a trustee holds any property.

Provided that this term does not include a partnership, corporate body or organization referred to in sub-clause (3) of clause (m).

A trust is an arrangement whereby a trustee holds and manages property for the benefit of another person (the beneficiary). For income tax purposes, trusts are treated as entities. A trust that is established in Nepal, whose trustee is a resident person in the relevant income year, or a trust controlled directly or through one or more interposed entities by a resident person or a group of associated persons, shall be considered a resident of Nepal.

(u) "Trustee" means an natural person, trust (Guthi) or other body corporate who, natural personly or jointly with other natural person, trust (Guthi) or corporate body, holds a property in trust, and the term also includes the following person:-

(1) The operator or administrator of the assets of a deceased,

(2) A liquidator, recipient or trustee,

(3) Any person who protects, directs, controls or manages the assets of an incapacitated person in personal or official capacity,

(4) Any person who manages the assets under a private enterprise or similar other enterprise, and

(5) Any other person in a position similar to that of the person as referred to in clauses (1), (2), (3) and (4).

A trustee holds property on behalf of a beneficiary and is responsible for managing such property in accordance with the terms of the trust. For tax purposes, the trustee is responsible for fulfilling the tax obligations of the trust. Trustees include the operator or administrator of assets of a deceased person, a liquidator, a receiver or trustee, any person who protects or manages the assets of an incapacitated person, any person managing assets under a private enterprise, and any other person in a similar position.

(v) "Long-term contract" means a contract referred to in Section 26 of which validity period is more than twelve months.

A long-term contract is a contract for production, construction or installation, or a contract on the fulfillment of services related thereto, where the contract is estimated to span more than one income year at the time of conclusion. The special provisions for computing income from long-term contracts are provided in Section 26 of the Act and Rule 12 of the Income Tax Regulations, 2059. The key characteristic is that the contract value exceeds what is ordinary for a single income year, requiring special methods for recognizing income across periods.

(w) "Relative" means an natural person's husband, wife, son, daughter (adopted son, daughter as well), father, mother, grand-father, grand-mother, elder brother, younger brother, sister-in-law, daughter-in-law, elder sister, younger sister, father-in-law, mother-in-law, brother-in-law, elder brother-in-law, wife's sister, uncle, aunt, nephew, niece, grand-son and grand-daughter.

Relatives of a natural person are associated persons of that natural person. This is significant for tax purposes because transactions between associated persons may be subject to arm's-length pricing requirements under Section 33 of the Act, and payments to associated persons may require special treatment.

(x) "Entity" means the following organization or body:-

(1) A partnership, trust or company,

(2) District Coordination Committee,

(3) Government of Nepal, Provincial Government or 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), (3) and (4), which is not situated in a country of which it is a resident.

(y) "Interest in entity" means and includes the contingent right to receive income or capital of any entity.

Interest in an entity means the right, including a contingent right, to receive the income or capital of the entity. For example, interest in entity refers to a partner's share in a partnership firm, a shareholder's share in a limited liability company, an investor's contribution in a retirement fund, a partner's interest in a joint venture, and a person's ownership in a permanent establishment.

(z) "Disposal" means a disposal inclusive of the sale or transfer of any property or liability as mentioned in Section 40.

Disposal includes the sale or transfer of any property or liability, and also any event that is deemed to be a disposal under the Act. The significance of disposal in the Income Tax Act is that it triggers recognition of income or loss on the property or liability disposed of. Deemed disposals include situations such as the death of a natural person, a property becoming subject to a bad debt, a change in use of a business asset to personal use, and a change in residence status from resident to non-resident.

(aa) "Vested ownership" means the following ownership:-

(1) In the case of any entity, ownership created on the basis of the interest which any natural person or any entity in which an natural person has no interest has in that entity directly or indirectly through one or more interposed entities, or

(2) In the case of the assets owned by any entity, ownership of the assets as determined in proportion to the ownership of the persons who have vested ownership in that entity.

Vested ownership refers to full and absolute ownership of an asset or interest, as opposed to contingent or future ownership rights. For an entity, vested ownership is determined by the interest which a person holds in that entity. For assets owned by an entity, vested ownership is determined by the proportionate interest of each holder in the entity's assets.

(ab) "Lease" means the provisional right of any person to enjoy or use any property except movable property belonging to another person, and the term also includes a license, rent agreement, trenches, royalty agreement or right of a lessee/tenant.

For income tax purposes, a distinction is made between operating leases and financial leases. Payments under an operating lease are treated as rental income and expense. Financial leases, where ownership risk and rewards are substantially transferred, are treated differently, with the lessee treating the asset as owned and the payment broken into principal and interest components.

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

An natural person means a human being. For income tax purposes, the tax treatment of a natural person differs from that of an entity. Natural persons have graduated tax rates, personal exemptions, and specific deductions available to them (such as medical tax credits and retirement contribution deductions) that are not available to entities. A natural person may be a resident or a non-resident for income tax purposes.

(ad) "Payment for natural resources" means an amount of any of the following payments:-

(1) Amounts received for having right to extract water, minerals or other living and non-living resources from the earth, or

(2) Amounts calculated on the basis of the quantity or value of living or non-living resources of the natural resources and minerals extracted from the earth, in full or in part.

Natural resource payments are amounts received for the right to extract water, minerals, or other living or non-living resources from natural sources, or amounts calculated on the basis of the quantity or value of such resources extracted or to be extracted. Such payments are treated as investment income under Section 9 of the Act.

(ae) "Market value" means ordinary transaction value of any property or service in the ordinary course of trade between unrelated persons in respect of such property or service.

Market value means the ordinary transaction value of any property or service in an arm's-length transaction between unrelated parties. For tax purposes, where transactions are not conducted at market value (particularly between associated persons), the Department may re-characterize or re-allocate amounts to reflect arm's-length market values under Section 33 of the Act.

(af) "Rent" means a premium/sum received for the house rent as well as for the lease of a tangible property and all payments including premium made under the lease.

Provided that this term does not include any payment made for natural resources or amount received by the natural person as a rent of house except for private/sole firm.

Rent includes both house rent and amounts received for the lease of land. Rent received from the lease of property is investment income under Section 9 of the Act. Natural resource payments are separately defined and treated; they do not constitute rent.

(ag) "Payment" means the following activities:-

(1) If the money or property owned by any one person is transferred to another person and the liability of any other person is transferred to that person,

(2) If the ownership over any property created by any person devolves on another person after the creation of that property or if any person bears the onus of liability of another person,

(3) If any person delivers service to another person,

(4) If any person uses any property owned by another person or such property is available for such use.

Payment is a broad concept under the Act that covers not only cash transfers but also property transfers, creation of ownership rights, delivery of services, and provision of the use of property. This broad definition ensures that non-cash transactions are also captured within the tax system.

(ah) "Distribution of profit" means the distribution of profits of any entity made pursuant to Section 53, including the capitalization of profits.

A distribution of profit by an entity reduces the value of the entity's assets and liabilities and represents a transfer of value to the interest holders. Capitalization of profit (bonus shares) is also treated as a distribution. Payments made to interest holders on arm's-length terms for services or property provided are not distributions.

(ai) "Unit trust" means a trust in which a trustee holds property for the benefit of at least twenty persons, and in which the rights of the persons to participate in income or capital are arranged to be divided on the basis determined by the number of units held.

A unit trust is a trust divided on the basis of a fixed number of units, where each unit represents an equal proportionate share in the trust property. Unit trusts are treated as entities for income tax purposes. Income distributed by a unit trust to unit holders is generally treated as dividend income.

(ai1) "Contribution-based retirement payment" means a payment consisting of an amount included in the income of a natural person and deposited into an approved retirement fund out of that income, together with the amount increased on that sum.

A contribution-based retirement payment comprises: (1) the amount deducted monthly from an employee's or worker's remuneration that is deposited in an approved retirement fund; (2) the employer's additional retirement contribution deposited in an approved retirement fund on behalf of the employee; and (3) the amount by which both of the above have increased (i.e., investment returns on contributions). Such payments are subject to special tax treatment under Chapter 12 of the Act.

(aj) "Employment" means any kind of past, present or future employment.

For tax purposes, a natural person must account for income from employment on a cash basis under Section 22(2) of the Act, meaning employment income is included in income in the year it is actually received in cash.

Example 2.15 (Past employment): Suppose Lalit has been employed at a company since 2070. From 2075, only 50% of salary was being paid due to financial difficulties. In fiscal year 2080/81, the remaining 50% salary arrears were paid to Lalit in Magh 2080. Even though the company may expense the accrued salary in the relevant income year on an accrual basis, Lalit received the payment in cash in Magh 2080 and must include it in income for fiscal year 2080/81 on a cash basis.

Example 2.16 (Future employment): Suppose Suvarna works at a company. Needing money, and on the condition of not receiving salary for the next year, he received one year's salary in advance from the company. Since he received this amount on the condition of future employment, it must be counted in income from employment for the income year in which the amount was received.

(ak) "Royalty" means any payment made under the lease of any intangible property, and the term also includes any payment made for the following purpose:-

(1) To use or have the right to use a copyright, patent, design, model, plan, secret formula or process or trademark,

(2) To render technical know-how,

(3) To provide the right to use any motion picture film, video tape, sound recording or similar other means and to use or render industrial, business or scientific experience,

(4) To render any assistance in a manner to be ancillary to the matters referred to in clauses (1), (2), or (3), or

(5) To have full or partial restrictions on the matters referred to in (1), (2), (3) or (4).

Provided that the term does not mean any payment made for natural resources.

Royalty refers to payments under a lease of intangible property or for the use of intangible property. Examples include payments for the right to use a trade name, payments to a singer, lyricist, or composer for playing their songs on a radio station, or fees paid for the right to use a patent. Natural resource payments are separately defined and do not constitute royalty.

(al) "Investment" means the act of holding one or more properties or investing such properties, except the following:-

(1) Holding any property used by the owner in personal use, or

(2) Employment or occupation.

Provided that the act of holding any non-business taxable assets is considered as investment.

The act of holding property to earn income is called an investment. In earning investment income, the person earning the income generally does not have continuous active engagement. Income such as dividends, interest, natural resource payments, rent, royalties, gains from investment insurance, gains from an interest in an unapproved retirement fund, retirement payments from an approved retirement fund, or net gains from disposal of non-business chargeable assets are investment income. To determine whether something qualifies as an investment, attention must be paid to the nature of holding the assets. Generally, assets held for investment purposes are held for a long period. In investment, income arises from the same asset, whereas in business, income is earned by buying, selling, or otherwise using the asset.

(am) "Investment insurance" means any of the following insurance:-

(1) An insurance against the death of the insured or of the associated person of the insured,

(2) An insurance against personal injuries of the insured or his associated person or against any event leading to incapacity in any particular manner,

Provided that the validity period of the insurance contract shall be at least five years or the contract shall be without any validity period and the contract is so made that it cannot be terminated by the insurer prior to expiration of a period of five years except in exceptional circumstances.

(3) An insurance so made that any money or series of moneys are paid to the insured in the future,

(4) Reinsurance of the insurance referred to in clause (1), (2) or (3), or

(5) Reinsurance of the reinsurance referred to in clause (4).

Examples of investment insurance include Life Insurance, Superannuation, and Endowment Policy. Even if it is insurance related to a life risk, if the period of an accidental insurance contract expires in less than five years, such contract does not fall under investment insurance.

(an) "Dividend" means the distribution to be made by an entity.

Dividend refers to the share of profit distributed by an entity to its interest holders (shareholders). Such term also refers to the capitalization of profit, i.e., bonus shares. Dividends are subject to final withholding tax under Section 88 of the Act.

(ao) "Resident person" means the following person in respect of any income year:-

(1) In respect of an 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, or

(c) Who is deputed by the 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,-

(a) Which is established in Nepal,

(b) The trustee of which is a resident person in an income year, or

(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, or

(b) Management of which is effective in Nepal in any income year.

(4a) Government of Nepal or Provincial Government,

(5) Rural Municipality, Municipality, or District Coordination Committee,

(6) In respect of an entity of any foreign government or provincial or 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.

Habitual place of abode in Nepal refers to the place where the concerned person's main economic activity takes place; having a permanent address or house in Nepal alone does not make Nepal the habitual place of abode.

Example 2.17: Suppose Om Bahadur Thapa, who has a permanent home in Chitwan, went to Malaysia three years ago for foreign employment. He returns to Nepal once a year to visit his family. In this case, even though his permanent home is in Nepal, since his continuous residence and primary economic activity are not in Nepal, his habitual place of abode shall not be considered to be in Nepal.

Example 2.18: In Example 2.17 above, if Om Bahadur Thapa's business is in Nepal and he traveled to various countries outside Nepal for more than 183 days that year due to business or personal reasons, then since his major economic activities are in Nepal, his habitual place of abode shall be considered to be in Nepal.

Example 2.19: If Om Bahadur Thapa went to Malaysia on 6th Bhadra 2078 for foreign employment and returned to Nepal on 5th Bhadra 2080, after which he permanently resided in Nepal: since he left Nepal on 6th Bhadra 2078, he was present in Nepal for fewer than 183 days in a continuous 365-day period for income years 2078/79 and 2079/80, making him a non-resident for those income years. For income year 2080/81, since he was present in Nepal for 330 days, he is a resident of Nepal for that fiscal year.

Example 2.20: If Om Bahadur Thapa was posted on deputation by the Government of Nepal to the Nepali embassy abroad and has been working there for the past four years, then in such a case he shall be considered a resident of Nepal.

Example 2.21: Suppose a trust is in operation in Kolkata, India. If that trust is controlled by residents of Nepal, such trust shall also be considered a resident of Nepal. A foreign permanent establishment of a non-resident person located in Nepal shall also be considered a resident of Nepal.

(ap) "Person" means an natural person or entity.

The word person refers to both a natural person (such as Ram, John, Rahim) and a legal person (artificial person) such as a company, trust, institution, etc.

(aq) "Manager" means any person involved in making managerial decisions of any entity, and the term also includes a trustee of any trust and a person having ownership in a foreign permanent establishment.

For tax purposes, managers are jointly and severally liable for the tax obligations of the entity under Section 107 of the Act if the entity fails to pay tax by the due date.

(ar) "Occupation" means any kind of industry, business, profession or business transactions of similar other nature, and the term also includes past, present or future occupations of similar type.

Provided that this term does not include employment.

In employment, generally labor is consumed. In business and investment, both labor and capital are consumed. In investment, there is generally no active engagement of the person earning income in holding assets and earning income. In business, however, there is active engagement of the person in income-earning activities. Holding assets without active participation and earning only rent is considered investment, whereas if the person actively manages the property and rental income, it is considered business. Business includes industry (producing and selling goods), trading (buying and selling goods), profession, or similar commercial transactions.

(as) "Interest" means the following payment or profit:-

(1) Payment under debt liability except the principal,

(2) Profit made from concession, concession under debt liability, premium, alteration payment or from similar payment, and

(3) The amounts referred to in Section 32 receivable as an interest out of the payment to be made by a person who acquires any property under annuities or installment sale or of the payment made to any person for the use of any property under a financial lease.

Interest generally refers to the return on capital or investment. When an investment is returned with an amount greater than the capital invested, such excess is called interest. Discounts, premiums, or swap payments under a debt liability are also considered interest.

Example 2.22: Suppose a bank purchased a Treasury Bill issued by Nepal Rastra Bank with a face value of Rs. 1,00,00,000, payable in 90 days, for Rs. 98,50,000. Although the bank invested Rs. 98,50,000, since the bank shall receive Rs. 1,00,00,000 at the time of payment, the excess amount of Rs. 1,50,000 is considered interest.

Example 2.23: Suppose a financial institution provided a loan of Rs. 50,00,000 to a customer with an Annual Fixed Instalment of Rs. 11,48,037. If the interest rate on that loan is 10 percent, the principal repayment and interest income on such received instalments must be calculated as follows:

(at) "Stock-in-trade" means the property owned by any person and to be sold in the course of regular business carried on by such person, the property in work-in-progress and the inventory of materials to be incorporated in the property.

Provided that this term does not include a property held in foreign currency.

Assets held directly or indirectly for sale in a business are called trading stock. Examples may differ depending on the nature of the person's business. Furniture is trading stock for a person who buys and sells furniture, but for other persons it would be a depreciable asset. Assets in progress (work-in-progress) in the course of production are also included in trading stock. Foreign currency and traveler's cheques held by a bank are not trading stock but are foreign currency assets.

(au) "Business asset" means any property used in any occupation.

Provided that this term does not mean stock-in-trade or depreciable assets of the occupation.

Business assets include all assets other than trading stock or depreciable assets of a business, such as shares, land, receivables, advance accounts, cash, and bank balances. All assets owned by a business other than trading stock and depreciable assets are business assets.

(av) "Distribution" means a distribution to be made by any entity as referred to in Section 53.

Generally, transactions conducted on arm's-length terms between an interest holder and an entity, and payments related thereto, are not distributions; all other payments by an entity are considered a distribution. Section 53 of the Act clarifies the distribution of profit and return of capital by an entity. Only when a distribution by an entity reduces the value of the assets and liabilities of that entity shall such distribution be considered a distribution of profit or return of capital.

(av1) "Electronic means" means computer, fax, email, internet, electronic cash machine and fiscal printer, and this term also includes other approved means as specified by the Department.

The Department may designate additional electronic mediums beyond those listed. Electronic mediums are used for filing returns, making payments, and conducting other tax-related transactions. The use of electronic mediums is encouraged by the Department and is mandatory for certain categories of taxpayers.

(aw) "Income sent abroad" means an income required to be sent abroad by a foreign permanent establishment of a non-resident person situated in Nepal as referred to in Section 68, which has been sent abroad through a bank or paid in any other manner.

For business or investment purposes, a non-resident person may have permanent establishments in Nepal. The obligation to file and pay tax on income of a foreign permanent establishment of a non-resident person located in Nepal rests with that establishment itself. Even though such establishments may be independent entities under the prevailing law of Nepal, they cannot independently distribute their profits and must remit their earned profits to the related parent company (non-resident). Such an amount is called income sent abroad. Income sent abroad in any income year equals the dividend amount distributed by the foreign permanent establishment in that year.

Example 2.24: Suppose the branch office of Global Life Insurance Company is a foreign permanent establishment of a non-resident person operating a business in Nepal. If the profit earned by that entity from conducting investment insurance business in Nepal is remitted to the parent company, such amount shall be considered income sent abroad, and only the balance after withholding tax at 5 percent shall be paid.

(ax) "Foreign income tax" means a foreign income tax referred to in sub-section (8) of Section 69 levied by any foreign country, and the term also includes any finally withheld tax levied by any foreign country.

Foreign income tax paid or payable by a resident person on foreign-source income may be credited against the Nepal income tax liability on such foreign income under Section 71 of the Act, subject to the limitations set out in that section.

(ay) "Foreign permanent establishment" means an entity referred to in sub-clause (5) of clause (x).

A foreign permanent establishment means an entity that is not located in its country of residence. For example, the branch office of American Life Insurance Company, USA located in Nepal is a foreign permanent establishment.

(az) "Department" means the Inland Revenue Department.

Under Section 72 of the Act, Large Taxpayer Offices, Medium Taxpayer Offices, Inland Revenue Offices, and Taxpayer Service Offices are all treated as components of the Department. Accordingly, the term Department refers to those offices as well. Actions taken by any subordinate office are deemed to be actions of the Department.

(aaa) "Property held in foreign currency" means any property held in a foreign currency other than Nepalese rupees.

Assets held in any foreign currency other than Nepali rupees are assets in foreign currency. For a bank, foreign currency held in its stock is treated as a foreign currency asset rather than as trading stock. The value of foreign currency assets must be converted to Nepali rupees at the applicable exchange rate for tax purposes.

(aab) "Permanent establishment" means a place where any person carries on a business fully or partly, and the term includes the following place:-

(1) A place where any person carries on a business fully or partly, through any agent except a general agent who acts independently in the ordinary course of carrying on business,

(2) A place where any person's main equipment or main machinery is situated or used or installed,

(3) One or more than one place in any country where any person has delivered technical, professional or consultancy service through an employee or in any other manner for more than ninety days at one or several times in a period of any twelve months, or

(4) A place where any person is involved in a construction, installation or establishment project and has carried out supervisory works of that project for a period of ninety days or more.

Fixed place + Dependent agent + Services (90 days rolling 12 months) + Construction (90 days) = PE

A fixed place (Fixed Place) where a person conducts their business is called a permanent establishment. For tax purposes, a foreign permanent establishment must be treated as an independent entity. For a non-resident person, a place of business falls under a foreign permanent establishment in the following circumstances:

Fixed Place Permanent Establishment: Any structure established in any manner by a non-resident to conduct business in Nepal is a permanent establishment. Such structures include branches, factories, workshops, management offices, oil wells, mines, gas wells, etc. For a non-resident's fixed place of business in Nepal, the duration of stay need not be counted to determine if it is a permanent establishment.

Example 2.25: Suppose American Sport Inc. opened a branch office on New Road to sell and distribute its goods in Nepal. Even if it is only a branch of a non-resident, it constitutes a permanent establishment under the Income Tax Act, 2058.

Agency Permanent Establishment: Where a person fully or partially carries on business through an agent in Nepal, other than an ordinary independent agent, the place of work of such agent is a permanent establishment. Where a local agent has been given authority by a foreign entity to enter into contracts and uses that authority in the normal course of business to enter into contracts in the name of that entity, such agency is considered a dependent agent, and the agent's place of business is a permanent establishment.

Example 2.26: Suppose American Sport Inc. appointed Amco Sports Pvt. Ltd. as its distributor in Nepal. If Amco Sports Pvt. Ltd. imports goods at its own risk and sets prices independently, it is not a Nepali permanent establishment of the American company. However, if Amco Sports Pvt. Ltd. operates as a dependent agent through which the American company sets the selling price and bears the profit and loss, it is considered a permanent establishment.

Service Permanent Establishment: Where a non-resident provides services in Nepal by sending employees or through other representatives, and the cumulative stay of such employees or representatives reaches 90 days in the preceding 12 months (90 days in a rolling 365-day period), the non-resident shall have a service permanent establishment.

Example 2.27: Suppose American Sport Inc. received work to conduct research in Nepal. It sent 2 employees for 35 days from January 1, then 2 employees for 30 days in July and 60 days in December. Since the employees stayed in Nepal for 90 days in the preceding 12 months, American Sport Inc. shall be considered to have a permanent establishment.

Construction and Installation Permanent Establishment: Where a non-resident carries out construction, installation, or assembly work in Nepal, and the presence continuously reaches 90 days or more, such site itself is a permanent establishment.

Example 2.28: Suppose Singapore Construction Company received an order of 100 days to drain mud from the Melamchi project tunnel. It sent 5 employees who completed the work within 95 days. Since Singapore Construction Company was continuously engaged in work in Nepal for more than 90 days, it shall be considered to have a permanent establishment.

(aac) "Property" means a tangible or intangible property of any kind, and the term also includes currency, good-will, technological knowledge, assets, any person's ownership or interest in a foreign branch, a right to make income or acquire income in the future and any part of such property.

Property includes any type of tangible or intangible property, currency, goodwill, technical knowledge, estate, ownership or interest in a foreign branch, the right to earn or receive income in the future, and any part of such property.

(aad) "Associated person" means any one or more than one person or group of persons who act as per the intention of each other, and the term also includes the following persons:-

(1) An natural person and relative of that person or any person or a partner of that person,

(2) A foreign permanent establishment and a person having ownership in that establishment, and

(3) Any entity which by itself or jointly with any other person related with it or with an assisting entity or any other person or entity related with such assisting entity controls fifty percent or more of the income, capital or voting right of any entity or derives benefits therefrom.

Provided that the following person shall not be an associated person:-

(1) An employee,

(2) A person specified by the Department as a non-associated person.

(4) For the purposes of Sections 33, 33A and 33B:

(a) An entity that, either by itself or together with its related persons, associated entities, or other persons/entities related to such associated entities, controls 30 percent or more of the income, capital, or voting rights of another entity, or derives benefit therefrom;

(b) An entity that receives a loan amount equal to 50 percent or more of its total assets from any person providing the loan;

(c) An entity whose income-generating activities are substantially or wholly dependent on the intellectual property rights, technical knowledge, or commercial rights of another person;

(d) An entity that supplies 90 percent or more of the raw materials or consumable goods required by another person.

Where an arrangement exists in which one person conducts transactions on behalf of or in the manner of another person, such a person is called an Associated Person. For income tax purposes, where a payment required to be made to a person is made to that person's associated person, such payment is deemed to have been made to that person.

Example 2.29: Suppose Ram and Binod are partners in Ram-Binod Partnership Firm. In that case, Ram and Binod are associated persons for that partnership. Even as partners, they are also associated persons with each other.

Example 2.30: Suppose Ram and Binod are partners in Ram-Binod Partnership Firm, and apart from that partnership, Ram and Binod each hold 35% shares in Nepal Company Limited. In that case, Ram and Binod are associated persons for Nepal Company Limited.

Example 2.31: Suppose Ram, Ram's wife, Ram's nephew, Binod, and Binod's grandson each hold 15% shares in Nepal Company, and Ram and Binod are partners in one firm. Due to family and partnership relationships, since 75% of Nepal Company's shares are held by associated persons, each person is an associated person.

Example 2.32: Suppose Kathmandu Company holds 60% and Bhaktapur Company holds 40% of the shares in Purva Upatyaka Company. Kathmandu Company and Purva Upatyaka Company are associated persons. If Upatyaka Company's shares are 40% from Purva Upatyaka, 40% from Lalitpur Company, and 20% from Kathmandu Company, then Upatyaka Company, Purva Upatyaka Company, and Kathmandu Company are mutually associated persons.

Example 2.33: Suppose (Ka) Limited has two subsidiary companies: (Kha) Ltd. (52% ownership) and (Ga) Ltd. (60% ownership). (Ga) Ltd. purchased 52% of the shares in (Ta) Ltd. (Kha) Ltd., (Ga) Ltd., and (Ta) Ltd. each purchased 18% of the shares in (Pa) Ltd. In such circumstances, each of the companies is considered an associated person.

(aad1) "Adjusted taxable income" means the taxable income of any person for any income year calculated without reducing any amount under Sections 12, 12A, 12B, 12C and 12D or without any deduction under sub-section (2) of Section 14, Section 17 or 18.

Adjusted taxable income is calculated without reducing any amount under Sections 12, 12A, 12B, 12C (charitable donations) and 12D (corporate social responsibility), without claiming deductions for interest under Section 14(2) (thin capitalisation), pollution control expenses under Section 17, or research and development expenses under Section 18. The concept is used to calculate the maximum deductible limit for each of these expense categories.

(aae) "Partnership" means a firm consisting of less than twenty partners, whether registered under the law in force or not.

Provided that this term does not include a sole proprietorship or joint venture, whether registered or not.

A partnership firm with fewer than twenty partners, whether registered or not, is treated as a partnership for income tax purposes. If a partnership has twenty or more partners, it is treated as a company. A sole proprietorship or joint venture is not a partnership regardless of structure.

(aaf) "General insurance" means an insurance other than investment insurance.

General insurance is all insurance other than investment insurance. Examples include motor vehicle insurance, fire insurance, health insurance, and travel insurance. Premiums paid for general insurance may be deductible as a business expense, and claim amounts received may be includible in income depending on the circumstances. General insurance premiums for health and medical treatment purposes may qualify for the medical tax credit under Section 51 of the Act.

(aag) "General interest rate" means the rate of interest of fifteen percent per annum.

The ordinary (general) interest rate of fifteen percent per annum is the benchmark rate used throughout the Act for calculating interest on late payments of tax under Section 119, interest paid on tax refunds under Section 113(6), and for computing the interest component of financial lease and instalment payments under Section 32.

(aah) "Approved retirement fund" means a retirement fund having obtained approval from the Department pursuant to sub-section (1) of Section 63.

Retirement funds that have obtained approval from the Department to operate a retirement fund, the Employees Provident Fund, the Citizen Investment Trust, the Social Security Fund, and retirement funds operated by the Civil Servants' Retirement Gratuity Fund are called Approved Retirement Funds. Entities operating retirement funds without obtaining approval from the Department are called unapproved or disapproved retirement funds.

(aah1) "Safe Harbour Rule" means the conditions specified in Section 33A under which the transfer price shall be accepted as the arm’s length market value.

(aai) "Service charge" means any charge paid to any person, according to the market value, for the service rendered by such a person, and the term also includes any meeting allowance, management fee or technical service charge.

Service fee is a charge paid at market value to any person for services provided by that person. Examples include a fee paid to a consultant for services provided (Consultancy Fee), or remuneration paid to an auditor for providing audit services. However, the salary paid to an internal auditor who is an employee is included under remuneration (employment income), not service fee. Service fees are subject to advance tax withholding under Chapter 17 of the Act.

(aaj) "Shareholder" means a beneficiary of any company.

A shareholder is a person who has an interest in a company. In the context of income tax, shareholders receive dividends from companies. Dividends distributed to shareholders are subject to final withholding tax under Section 88 of the Act. A shareholder's interest in a company is a non-business chargeable asset or a business asset depending on the circumstances.

(aak) "Depreciable property" means a property, which is used in any business or investment for earning income, and declines in value because of wear and tear, being old or passage of time.

Provided that the term does not mean stock-in-trade.

The depreciation deduction is calculated on a pooling basis under Section 19 and Schedule 2 of the Act.

(aal) "Beneficiary" means a person who has an interest referred to in clause (y) in any entity.

Interest holder (beneficiary) refers to a partner in a partnership firm, a shareholder in a limited liability company, an investor (natural person making retirement contributions) in a retirement fund, a partner in a joint venture, and a person who holds ownership in a permanent establishment. The interest held by a beneficiary in a retirement fund is specifically excluded from the definition of non-business chargeable assets under Section 2(r)(3).

(aam) "Prescribed" or "as prescribed" means prescribed or as prescribed in the Rules framed under this Act.

Where the Act uses the words 'prescribed' or 'as prescribed,' the Government of Nepal must prescribe them by making regulations. Accordingly, the Government of Nepal has issued the Income Tax Regulations, 2059 and prescribed therein matters that need to be prescribed. Such matters prescribed in the regulations are treated as part of the Act. The Department may also issue directives (such as the Income Tax Directive, 2066) prescribing operational details within the authority granted by the Act and Regulations.

Chapter-2 Tax Bases

3. Tax to be levied

Tax shall be levied on each of the following persons in each income year and be collected pursuant to this Act:-

(a) A person who has taxable income in any income year,

The income on which tax is computed using the tax rate is called the tax base. The income remaining after claiming expense deductions on income received in accordance with Section 7 (business income) and Section 9 (investment income) of the Act, reduced by any income exempt under Section 11 or retirement fund income under Section 64 or both, together with the amount under Section 8 (employment income), is called assessable income. The taxable income is then the amount computed by deducting from the assessable income any amount claimed under Sections 12, 12A, 12B, 12C, or Section 63, or under all such sections. This amount is called the tax base, and the tax is computed by applying the rates specified in Schedule 1 of the Act.

(b) A non-resident person's foreign permanent establishment situated in Nepal, which sends income of any income year abroad pursuant to sub-sections (3) and (4) of Section 68, and

Income remitted abroad by a foreign permanent establishment located in Nepal is also deemed to be the tax base for income tax purposes, and income tax on such taxable income must be computed by applying the tax rate specified in Schedule 1, Section 2(6).

(c) A person who receives payment liable to final tax withholding in any income year.

Payments subject to final withholding tax are also deemed to be the tax base, and the tax payable on such income must be computed by applying the tax rates specified in Sections 87, 88, 88A and 89 of the Act. In addition, Section 95A provides for the collection of advance tax.

The payment subject to withholding tax at source is the payment from which tax is withheld. When a payer makes a payment that is subject to withholding tax, the payer must withhold tax at the specified rate on behalf of the payment recipient at the time of making the payment.

The tax base is further illustrated in the diagram below:

4. Computation and rate of tax

(1) The amount of tax required to be paid by any person referred to in Section 3 for any income year shall be equal to the total amount of tax required to be paid by such person in the capacity of any one person or more than one person mentioned in clauses (a), (b) and (c) of that Section.

In accordance with Section 3 of the Act, the tax liability of a person consists of: the tax required to be filed by a person with taxable income in any income year; the tax required to be filed on income remitted abroad by a foreign permanent establishment located in Nepal; and the tax required to be filed on a payment subject to final withholding tax. Where a person has one or more of these capacities, the total of all such tax amounts constitutes the tax that person is required to file.

Example 5.5.1: Suppose the branch office of Global Life Insurance Company is a permanent establishment of a non-resident person located in Nepal, conducting business in Nepal with authorisation from the relevant authority. That entity is required to file tax in three separate capacities: tax on the taxable income from the insurance business conducted in Nepal; tax withheld on dividends received from shares purchased in another company; and, where that entity remits profits to its parent company, tax on income remitted abroad in accordance with Schedule 1, Section 2(6). The total tax required to be filed in these separate capacities constitutes the total tax of that entity.

(2) In computing the tax required to be paid by any person referred to in clause (a) of Section 3, it shall be computed by applying the related rates mentioned in Schedule-1 to the taxable income of that person for that income year. In so computing the tax, it shall be computed by deducting the amount that is adjustable in tax, and claimed by that person pursuant to Section 51 or 71 or both.

A natural person may deduct from the tax required to be filed any medical tax credit (Medical Tax Credit) claimable under Section 51 of the Act, or any foreign tax credit (Foreign Tax Credit) claimable under Section 71 of the Act, or both amounts, from the tax liability. The following example illustrates this situation.

Example 5.5.2: Suppose Sankalpa Thapa, a resident person, had foreign-source employment income of Rs. 7,00,000 in income year 2080/81, and paid income tax of Rs. 55,000 in the country where that income was sourced. If he is a single person, his tax liability for that income year is computed as follows:

(3) Notwithstanding anything contained in sub-section (2), the tax payable by a resident natural person referred to in clause (a) of Section 3, who has fulfilled all of the following requirements, shall be equal to the total amount of tax deducted pursuant to Section 87 from the payments made by the employer to such resident natural person in that income year:-

(a) Only the income of any employment having source in Nepal is included in the income of that income year,

(b) All employers have been resident persons in that income year and there is only one employer at one time, and

(c) The employer has made a claim for the adjustment of tax for medical expenses paid by the employer and for the retirement contribution paid by the employer itself, and has not made a claim to deduct expenses for donation pursuant to Section 12.

Only Nepal salary income + resident employers + one employer at a time + claimed only employer paid medical and retirement payments + no donation deduction = TDS is the final tax & No filing of Tax Return Required

In accordance with Section 4(3) of the Act, where a person has only one employer at any one time and has claimed only the medical tax credit for medical expenses paid by the employer and retirement contributions paid by the employer itself, and has not claimed donation expenses, and where the tax on employment income payable and paid by that person has been withheld under Section 87, that person is not required to file an income return. Where a taxpayer's employer changes during the income year, such a taxpayer, in order to avail themselves of this benefit, must present the tax deduction certificate showing the payment received from the previous employer and the tax withheld on such payment to the new employer. The new employer must also adjust the payment made by the previous employer and the tax withheld on such payment, compute the tax on the payment made by the new employer, and withhold tax on such payment in accordance with Section 87. Where a person has more than one employer at the same time, that person is required to file an income return.

Example 5.5.3: Suppose Harish Mathema, an employee, was working at Nepal Bank Ltd. (NBL) in income year 2080/81. He had no other income apart from employment at NBL. He received a salary and allowances of Rs. 5,00,000 from NBL in that income year. NBL deposited Rs. 80,000 into his NBL retirement fund and deducted Rs. 20,000 from his salary and deposited it into the Citizens Investment Fund on his behalf. He claimed a deduction for the retirement contribution amount deposited but did not claim any donation expense or medical tax credit. In this case, he is not required to file an income return. In this situation, the tax withheld by NBL from the salary payment in accordance with Section 87 of the Act is his tax liability.

(4) Notwithstanding anything contained in sub-section (2), the tax payable in any income year by a resident natural person referred to in clause (a) of Section 3, who has fulfilled all of the following requirements, shall be equal to the amount mentioned in sub-section (7) of Section 1 of Schedule-1:-

(a) That person has only income earned from business having source in Nepal in that income year,

(a1) Has not claimed for tax adjustment for medical expenses under Section 51 and for advance tax deduction under Section 93,

(b) The taxable income earned from the business does not exceed three lakh rupees and the turnover of the business does not exceed thirty lakh rupees,

Only Nepal-source business income + No Sec. 51/93 claims + Income ≤ Rs. 3 lakh + Turnover ≤ Rs. 30 lakh = Presumptive Tax as per Schedule 1(7).

Example 5.5.4: Suppose Mintu Jonathan has a sole proprietorship business called Zenith Industries located in Bareshwar, Kathmandu. That business had sales of Rs. 14 lakhs in income year 2076/77. The business earned income of Rs. 1,42,000 in that year, which included interest income of Rs. 8,500 received from a bank after Rs. 1,500 had been withheld at 15 percent on Rs. 10,000. During that year, he also incurred Rs. 6,000 on medical treatment. If Mintu Jonathan opts for the provision under Section 4 of the Act, his tax liability in accordance with Schedule 1, Section 1(7) is Rs. 7,500. However, the advance tax of Rs. 1,500 withheld from the deposit interest income of that business cannot be credited against his tax liability, and even though he incurred medical expenses, the tax credit claimable under Section 51 of the Act cannot be credited against his tax liability.

(4a) Notwithstanding anything contained in sub-section (2), the tax to be paid on the basis of turnover in any income year by a resident natural person referred to in clause (a) of Section 3, who has met the following conditions, shall be equal to the amount calculated according to the rate prescribed in sub-section (17) of Section 1 of Schedule-1:-

(a) That person has only income earned from business having source in Nepal in that income year,

(b) The taxable income earned from the business is up to ten lakh rupees and the turnover of the business is more than thirty lakh rupees and up to one crore rupees,

(c) ......,

(d) Income is not from consultancy and expertise services provided by doctors, engineers, auditors, legal professionals, sportspersons, artists, consultants and the like natural persons.

Only Business Income + Income ≤ Rs. 10 Lakh + Turnover Rs. 30 Lakh-1 Crore + Not Professional Income = Turnover-Based Tax under Schedule 1(17).

(4b) Notwithstanding anything contained in sub-sections (4) and (4a), the person must have opted for such provision to apply in that income year.

(5) In computing the tax required to be paid by any foreign permanent establishment referred to in clause (b) of Section 3, it shall be computed by applying the rates mentioned in sub-section (6) of Section 2 of Schedule-1 to the income sent abroad by such establishment in that income year.

Tax is levied on income remitted abroad by a foreign permanent establishment located in Nepal at the rate of 5 percent as specified in Schedule 1, Section 2(6).

Example 5.5.5: Suppose the branch office of Global Life Insurance Company is a permanent establishment of a non-resident person conducting business in Nepal with authorisation from the relevant authority. That entity earned income of Rs. 3 crores 50 lakhs from the investment insurance business in Nepal in income year 2080/81. It remitted Rs. 2 crores to its parent company in that year. Accordingly, tax of Rs. 10 lakhs, computed at 5 percent on the income remitted abroad in accordance with Schedule 1, Section 2(6), must be filed.

(6) The amount of tax required to be paid by the person referred to in clause (c) of Section 3 shall be equal to the total amount computed by applying the rates mentioned in Sections 87, 88, 88A. and 89 to the amount of each payment liable to final tax withholding received by that person in that income year.

Payments subject to final withholding tax as mentioned in Section 92 of the Act do not need to be included in income.

In computing the tax liability of a person, the provisions and rates specified in Schedule 1, Sections 1 and 2 of the Act must be applied to the taxable income. The details are set out in the tables below.

5. Taxable income and classification of income headings

Figure: Classification of Income under Three Headings (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 Sections 12, 12A, 12B, 12C, 12D, 63 or all these Sections from the grand total amount of assessable income of each of the following income headings in that income year:-

(a) Business,

(b) Employment,

(c) Investment, and

(d) Windfall gain.

The provisions for computing taxable income are set out in the table below:

A natural person may have income from employment, business and investment heads, while a person other than a natural person (an entity) may only have income from business and investment heads. Where a person has income from more than one income head, the total assessable income of all such income heads for that income year constitutes the assessable income of that taxpayer for that income year. In computing the taxable income for that income year, donations given to tax-exempt institutions, gifts and retirement contributions may be deducted from assessable income of any source.

6. Assessable income

Subject to this Act, the following incomes earned by any person for any employment, business, investment or windfall gain in any income year shall be considered assessable income:-

(a) Income earned by a resident person from his employment, business, investment or windfall gain in that income year irrespective of the place of source of his income, and

(b) Income earned in that income year by a non-resident person from employment, business, investment or windfall gain having income source in Nepal.

Provided that the assessable income shall not include any income exempted from tax pursuant to Section 11 or 64 or both.

See table in Section 5 for better understanding.

Assessable income is the amount remaining after including amounts required to be included in each income head and deducting all permissible expenses, and then reducing that figure by income exempt from tax under Section 11(1) and (2) for agricultural and cooperative business income, and income of approved retirement funds exempt under Section 64(2). Income tax is levied on the worldwide income (Global Income) of a resident person regardless of the source of income, while tax is levied in Nepal on a non-resident person only on income with a Nepal source.

3 Computation of Income

7. Computation of income from business

Figure: Computation of Income from Business (Section 7)

(1) The profits and gains made by any person in any year from any business shall be the income of that business of that person in that income year.

The total of profits and gains remaining after deducting expenses from income earned from conducting any such business, together with gains from the disposal of other assets, constitutes the business income.

Business includes industry (manufacturing and selling goods), trading (buying and selling tangible or intangible goods), profession, or similar commercial transactions. There is sometimes confusion between business (particularly professional service) and employment. The following points help distinguish business from employment:

(i) Mode of work: An independent contractor must complete a specified task - direction on the mode of working is generally not given. However, workers or employees are given clear instructions on the mode and nature of work.

(ii) Use of materials and tools: An independent contractor uses or purchases their own materials and tools to complete assigned work. The employer provides materials and tools to workers or employees.

(iii) Work timing: An independent contractor is given a deadline for completing work and sets their own schedule within that time. Workers or employees are generally told when and at what time to work and usually work full-time.

(iv) Person performing the work: An independent contractor can complete assigned work with or without assistance. Employees generally complete assigned work themselves or through their assistant.

(v) Exclusivity: An independent contractor can work with more than one client at a time, whereas employees generally work with a single employer.

(vi) Training: An independent contractor arranges their own training and bears all costs. The employer arranges and bears training costs for employees.

(vii) Payment arrangement: An independent contractor is paid based on quality or time of work. This may not apply to employees.

(viii) Continuity of relationship: An independent contractor's relationship with the employer lasts until the specified work is completed. An employee's relationship is continuous.

(ix) Calculation of remuneration: An independent contractor bears profit/loss risk and receives a fixed amount for any work. Employees are paid fixed remuneration for specified hours without room for profit or loss.

Independent contractor (business income) = own mode of work, own tools, own schedule, multiple clients, self-arranged training, bears profit/loss risk, relationship ends when task done;

Employee (employment income) = directed work, employer's tools, fixed timing, single employer, continuous relationship

The following accounting method applies to business income:

Example 18.4.1: Suppose ABC Company is a manufacturing company. In FY 2080/81, Rs. 2 crore was received from operations and Rs. 20 lakh gain was made from selling business assets. The total of Rs. 2 crore 20 lakh is business income for tax purposes in that FY.

(2) In computing the profits and benefits earned by any person from the business in any income year, it shall be computed so as to include the following amounts received by that person within that year:-

(a) Service charge,

(b) Amount obtained from the disposal of stock-in-trade,

If any person holds foreign currency, such property is a business asset, not stock-in-trade. Foreign currency must be converted to Nepali currency per Section 28 and included in cash and bank balances. Exchange gains or losses from conversion are not included in income or deducted as expense for income tax purposes. Only exchange gains or losses at the rate at the time of receiving or using foreign currency property must be included. For banks and financial institutions, Nepal Rastra Bank's standards apply.

(c) Net profit derived from the disposal of business assets or business liability of any person, computed pursuant to Chapter-8,

While the service charges mentioned in clause (a) and the amounts received from the disposal of stock-in-trade mentioned in clause (b) require the full amount received (Gross Receipt) to be included in income, clause (c) does not require the full amount of the payment to be included. Instead, net gain or profit must be computed in accordance with Chapter 8 of the Act, and only the net gain amount is required to be included in income.

(d) Amount considered to have been derived pursuant to clause (a) of sub-section (2) of Section 4 of Schedule-2 from the disposal of depreciable property of the business,

Where the depreciation base (the amount before deducting depreciation expense) of all assets in any pool of depreciable assets is less than the amount received from the disposal of any asset in that pool, the excess amount is treated as a gain under this section and must be included in computing income. This is clarified by the examples below.

Example 6.2.1: Suppose ABC Company has the following assets in pool 'B' for income year 2080/81 before depreciation deduction: Pool 'B' contains furniture and computers with an opening depreciation base of Rs. 9,00,000. If the furniture is sold for Rs. 10,00,000, the amount to be included in profit and gain is computed as follows and amounts to Rs. 1,00,000. Depreciation base of all assets in pool 'B' (a): Rs. 9,00,000. Amount received from disposal of furniture in pool 'B' (b): Rs. 10,00,000. Gain (b-a): Rs. 1,00,000.

Example 6.2.2: Suppose in Example 6.2.1 above, the furniture was sold for only Rs. 8,00,000. In that case, the depreciation base of pool 'B' assets would be Rs. 1,00,000, and depreciation expense would be claimed accordingly. Depreciation base of all assets in pool 'B': Rs. 9,00,000. Amount received from disposal of furniture in pool 'B': Rs. 8,00,000. Depreciation base remaining: Rs. 1,00,000.

Even if a gain arose from the disposal of furniture in the taxpayer's financial accounting (Financial Accounting), for income tax purposes gain must be computed on a pooled basis. A gain on an individual asset basis should not be included in income. Gain or loss for income tax purposes must be computed and included in income or as an expense in the income return only when all assets in a pool are disposed of.

Example 6.2.4: Suppose in Example 6.2.1 the computer broke down and became unusable, or was stolen. In such a case, disposal is deemed to have occurred under Section 40 of the Act and is computed as follows: Depreciation base: Rs. 9,00,000. Amount received from disposal: Rs. 0. Remaining depreciation base: Rs. 9,00,000. In the above example, since not all assets of pool 'B' have been disposed of and the pool is not dissolved, depreciation expense must be claimed in the following income year based on the same remaining depreciation base.

Example 18.4.2: ABC Company's Pool 'B' depreciation base before depreciation in FY 2080/81 is Rs. 9,00,000. If furniture in that pool is sold for Rs. 10,00,000: Depreciation base of Pool 'B' (B): Rs. 9,00,000; Amount received from disposal (A): Rs. 10,00,000; Gain (A - B): Rs. 1,00,000. This gain of Rs. 1,00,000 must be included in business income as per Section 7(2)(d).

Example 18.4.3: If all assets in Pool 'B' (furniture Rs. 10,00,000 and computers Rs. 5,00,000, total Rs. 15,00,000) are sold and the pool is dissolved, the gain from dissolution is: Rs. 15,00,000 (disposal proceeds) minus Rs. 9,00,000 (depreciation base) = Rs. 6,00,000. This Rs. 6,00,000 gain must be included in business income.

Example 18.4.4: If the computer in Example 18.4.2 became irreparable or was stolen, disposal is deemed under Section 40. Depreciation base Rs. 9,00,000; disposal proceeds 0; remaining base Rs. 9,00,000. Since furniture remains in Pool 'B', pool dissolution has not occurred, so depreciation continues on the remaining base of Rs. 9,00,000.

(e) Gift received from any person in respect of the business,

If any gifts are received from any person in the course of business, such gifts must also be included in business income. "Gift" means a payment without consideration, or where there is consideration, the portion of the payment exceeding the market value of the consideration.

Example 6.2.5: Suppose Diwakar is a dealer for a TV company. In income year 2080/81, since he was able to achieve the target set by the TV company, that company provided him with a music system worth Rs. 50,000 as a gift. Such additional benefit received in connection with the business is treated as a gift received in connection with business, and such a gift must be included in business income.

(f) Amount received for having accepted any restriction in connection with the operation of the business,

Example 6.2.6: Suppose Nepal Rasbari Factory and Gusbari Co. Pvt. Ltd. have a contract under which Gusbari pays Nepal Rasbari Rs. 1 lakh per month in exchange for Rasbari agreeing not to sell its products in the Kamalpadi area. In this situation, Nepal Rasbari must include the Rs. 1 lakh received for accepting such restriction in its income.

(g) Amount received by a person, even though it is of the nature of income from investment, that is directly connected to and received in the course of that person's business, and

For example, interest income received by banks and financial institutions from loan investments must be included under this clause for the purpose of computing income under this section. Although income from loan investment is ordinarily income earned from investment, since the principal business activity of banks is loan investment, interest income must be included and reported under this clause.

(h) Other amounts required to be included pursuant to Chapter-6 or 7 or Section 56 or 60.

As provided in Chapter 6 of the Act, if a person changes their accounting method for tax purposes without obtaining approval from the Department, or if the accounting method changes due to other provisions in that chapter, an adjustment must be made in the income year of the change to ensure that no amount is omitted or duplicated in the amounts included, deducted, or to be included or deducted in computing that person's income. This is clarified in the following example:

Example 6.2.7: Suppose Deven Mahara is a legal professional. He has been accounting for income from his profession on a cash basis. He submitted an application to the Department to change his accounting method from Cash Basis to Accrual Basis from income year 2080/81. Since the accounts were consistent with prevailing accounting principles, the Department approved the change effective from income year 2080/81.

At the time of the accounting change, his accounts were as follows:

(1) Services rendered up to income year 2079/80 but not yet received in cash, therefore not included in income for that year: Rs. 80,000.

(2) Advance received up to 2079/80 for services to be rendered in 2080/81, included in income for 2079/80 on cash basis even though services not yet rendered: Rs. 30,000.

(3) House rent prepaid from Magh 2079 to end of Poush 2080, paid in 2079/80 and claimed as expense for that year on cash basis: Rs. 48,000.

In this situation, the following income and expense adjustments must be made in income year 2080/81:

(1) Rs. 80,000 receivable for services already rendered up to income year 2079/80 must be included in income for income year 2080/81 on the Accrual Basis.

(2) The advance of Rs. 30,000 received before services were rendered up to 2079/80 was already computed as income in 2079/80; even though services are rendered in 2080/81, it should not be included again in that year's income to avoid duplication.

(3) Out of the prepaid house rent of Rs. 48,000, Rs. 24,000 relating to 6 months falls in income year 2080/81, but since it was already claimed as a deduction in income year 2079/80 on the cash basis, it cannot be claimed again in income year 2080/81.

After making such adjustments to income and expense items in income year 2080/81 to avoid duplication, accounting must be done on the Accrual Basis in subsequent income years.

As mentioned in Chapter 7 of the Act, where a transaction is settled not in cash but by transfer of an asset, the amount equal to the market value of such transferred asset must be included in income. The value of the transferred asset is not the value stated in the agreement between the parties or the book value, but the market value determined at the time of transfer, which is treated as the official transaction value for the purposes of the Act and must be included in income.

Example 6.2.8: Suppose Digam Bantawa provided services to an organization called Scott Nepal Pvt. Ltd. Instead of paying cash, the organization gave Digam a television. The market value of that television is Rs. 50,000. In this situation, Bantawa is treated as having received a payment equivalent to Rs. 50,000 even without receiving a cash payment.

Included in business income u/s 7(2): (a) service charge (incl. meeting, management & technical fees) + (b) disposal of stock-in-trade + (c) net gain on disposal of business assets or liabilities (per Ch 8) + (d) gain on disposal of depreciable assets + (e) business gifts + (f) amount for accepting a business restriction + (g) investment-type income directly related to the business + (h) amounts under Ch 6 or 7 or Sec 56 or 60

(3) Notwithstanding anything contained in sub-section (2), the amounts deductible under Sections 10, 54 and 69 and payments from which tax is withheld finally shall not be included in computing the profits and benefits derived from the operation of business.

In accordance with Section 10 of the Act, the following amounts shall not be included in income:

(a) The exempt amount received by any person eligible for a tax exemption as provided in a bilateral or multilateral treaty or agreement between the Nepal Government and any foreign country or international organization.

Any amount received by a person eligible for a tax exemption under a bilateral treaty between the Nepal Government and any foreign country or international organization, while subject to that treaty, constitutes an exempt amount.

(g) Donations, gifts, or other contributions directly related to the activities of an exempt organization received by that organization with or without the expectation of a return are treated as exempt amounts.

Example 18.5.1: See Example 9.2.6

(j) Amounts earned by Nepal Rastra Bank in accordance with its objectives.

Example 18.5.3: See Example 9.2.9

(l) Amounts earned by a Collective Investment Fund (Mutual Fund) approved by the Securities Board of Nepal in accordance with its objectives are also treated as exempt amounts and shall not be included in income.

(m) Amounts earned by an educational institution established and operating on the basis of a memorandum of understanding with the Nepal Government with the objective of not earning or distributing profit, in accordance with its objectives, are also treated as exempt amounts and shall not be included in income.

Example 18.5.2: An international NGO selected a tax-exempt NGO to run computer education training for street children. Since the international NGO expected training in return, even though the receiving body is tax-exempt, the amount received is a service charge, not a donation, and is not tax-exempt.

Final withholding payments need not be included in income.

Dividends distributed by a company or partnership:

Dividends distributed by companies and partnerships are taxed through final withholding per Section 54.

Amounts distributed by Controlled Foreign Entities:

Dividend amounts distributed by controlled foreign entities per Section 69(2) need not be included in income.

Excluded from business income u/s 7(3): amounts deductible u/s 10 (exempt), 54 & 69 + payments under final WHT.

8. Computation of income earned from employment

Figure: Components of Employment Income (Section 8)

(1) The remuneration derived by any natural person from employment in any income year shall be computed as the income earned from employment by that person in that year.

In computing employment income, the amounts received directly or indirectly by an employee from an employer in cash, goods, services or benefits in the course of employment must be included.

Employment and Consultant: There is sometimes verbal confusion between employment and a consultant. Generally, a Contract of Service signifies employment while a Contract for Service indicates a consultant. "Employment" means the condition under which a person working for a particular natural person or body in a managerial, supervisory, administrative, technical, or any other similar capacity, where written or unwritten employee service conditions and benefits or similar conditions of that body apply, and such a body pays a salary, wage, or other similar payment. Such an natural person or body can be resident or non-resident.

A payment that establishes the relationship between the worker and the employer is to be included in employment.

Example 17.2.1: Suppose Ramila is employed at a certain body with a monthly remuneration of Rs. 50,000. Similarly, a person named Hanif has been appointed to study market conditions for the same body and submit a report within six months for a remuneration of Rs. 3,00,000. The body makes payment to Hanif at a rate of Rs. 50,000 per month. In this situation, the payment to Ramila falls under employment (Contract of Service), while the payment to Hanif falls under a service charge (Contract for Service). Hanif must include the total amount received (before tax) in his business income and claim the tax deducted as advance tax.

Remuneration received by the employee for past, present, and future employment must be included in employment income and tax calculated on a cash receipt basis..

Example 17.2.2: Suppose Katrina was appointed as a store keeper at Samari Institution in 2069 with a monthly salary of Rs. 20,000. Since the institution's financial condition was not good, it could not pay salaries from Baisakh 2074 onwards. Katrina resigned in Baisakh 2076 and started working at Bikash Bank Limited. When the institution's financial condition improved, Katrina received Rs. 4,80,000 in a lump sum from Samari Institution on Shrawan 10, 2080. In this case, the lump sum remuneration received must be included in income under FY 2080/81, i.e., the financial year of receipt, on a cash receipt basis as per Section 22 of the Act. Here, Samari Institution is the past employer and the remuneration received is income from past employment.

Example 17.2.5: Suppose an industry sent an employee at a cost of Rs. 5,00,000 to undergo training to gain expertise in operating machinery used in its production operations. Since the purpose of such training expense is for the industry's business, such expense should not be included in the concerned employee's income. However, if such expense is not related to the employer's business, such training fees must be included in the concerned employee's income as per Section 22 of the Act.

Employment income = return for services under a Contract of Service (employer-employee bond); a Consultant works under a Contract for Service = business income.

Covers past (already left), present (currently working) and future (signed for a fixed future start) employment; taxed on cash-receipt basis u/s 22

(2) The following payments made by an employer to an natural person in any income year shall be included in computing the remuneration earned by such natural person from employment in that income year:-

(a) Amount for wages, salary, leave, amount for overtime work, fee, commission, prize, gift, bonus, and payment for other facilities,

Wages and Salary: There is not much practical difference between wages and salary. Both terms refer to the return received for providing services. For income tax purposes, since salary and wages are calculated under the same income head in determining employment income, it is not necessary to distinguish between them.

Leave Amounts: Workers and employees may receive various types of leave according to the employee regulations or their contract with the institution, such as annual leave, sick leave, special leave, contingency leave, etc. The amount payable to the employee for accumulated leave not used during employment or at the time of termination of employment is called the leave amount. As per Rule 20, Sub-rule (6), Clause (a), the principal, interest, and other amounts accumulated in an employee's Provident Fund or Citizens Investment Trust in income years prior to the commencement of the Act, and the gratuity and accumulated leave amounts earned up to that date, shall be tax exempt.

Fees: Fees received by an employee from an employer in the context of employment (such as job joining fees or similar payments) must be included in employment income.

Commission and Bonus: Amounts paid based on predetermined management criteria related to sales targets, profit targets, legal obligations, or other similar reasons are called commission and bonus amounts. A medical representative appointed as an employee by a pharmaceutical manufacturing company, in addition to salary, receives commission based on sales ratio or performance bonus, and bonuses given to employees under the Bonus Act are examples of this.

Prize and Gift: A payment received from an employer for outstanding work by an employee is called a prize or gift. If such prizes or gifts are received in kind rather than cash, they should be valued at prevailing market price and included in income as per Section 8. If such a prize or gift is received from an open competition in which employees and other persons can also participate, such prize and gift need not be included in employment income.

Example 17.3.1: Suppose a commercial bank gave Rs. 10,000 cash as a prize to its outstanding employee on its annual celebration. The employee must include such prize in employment income as per Section 8 of the Act.

Example 17.3.2: Suppose a commercial bank, in coordination with the National Sports Council, organized a national-level running competition on its annual celebration, with provisions for the general public including the bank's employees to participate. If one of the bank's employees became outstanding in that running competition and received a prize of Rs. 20,000, since the awarded person received the prize as an outstanding runner and not as an employee of the bank, the employee need not include such prize in employment income as per Section 8 of the Act. Such amount will be windfall gain income for that employee.

(b) Payment for any personal allowance including amount for cost of living allowance, subsistence allowance, rent, entertainment or transport allowance,

(c) Payment received for settlement of or reimbursement of expenses incurred by him or his associated person for personal purpose,

Associated Person: In the context of an employee, associated person means the relatives of that person. "Relative" is defined in section 2.

Personal Purpose: If an employee of a body or their associated person has incurred expenses for their personal work and received such amount from the body as reimbursement, then since such payment was for personal purposes, it must be included in their employment income.

Example 17.3.3: Suppose a person named Bharat is an employee at a company. He went on a holiday trip with his family for vacation. As per the company's rules, the company pays transportation expenses for such a trip. In this situation, since the transportation expenses paid by the company for the holiday trip are personal expenses of Bharat, they must be included in Bharat's employment income.

Example 17.3.4: Suppose a person named Hari Prasad is employed at a company. His son studies at a school called Kid Bold and he pays Rs. 10,000 per month in school fees. He takes such fee amount as monthly reimbursement from the company where he works. Since such reimbursement is not for the employer's business purpose but for the employee's personal purpose, the payment received as such reimbursement must be included in his employment income.

(d) Payments made for having given consent to any terms of employment,

Example 17.3.5: Suppose a bank agreed to pay the Chief Executive Officer 5 percent of the bank's earned profit as an incentive as a condition of appointment. The amount received as such payment must be included in employment income.

(e) Payments made for termination, loss of employment or for compulsory retirement,

Termination of Employment: An employee may be retired from employment through loss of employment, retirement, compulsory retirement, or any other method. Regardless of the modality through which the employee is retired from employment, the retirement payment received from the employer must be paid after deducting tax at 15% on the payment as per Section 88(1) of the Act. Since such payment is a final withholding payment as per Section 92(1)(f) of the Act, it need not be included in employment income as per Section 8(3) of the Act.

Loss of Employment: Loss of employment is one of the processes of retirement. For example, liquidation, privatization with a condition of not retaining current employees, a situation where an employee/worker at an institution becomes incapacitated and unable to work, employees facing retrenchment, etc. In such situations, the compensation amount received from the relevant institution due to such loss of employment must be included in employment income as per Section 8(2)(e) of the Act. However, since tax must be deducted at 15% on payment as per Section 88(1) of the Act and it is a final withholding as per Section 92(1)(f), such amounts need not be included in employment income during calculation as per Section 8(3).

Example 17.3.6: Suppose in the process of privatizing Krishi Samari Institution, the employees were to be retired but a decision was made to provide, in addition to the usual benefits for loss of employment, additional salary as compensation at the rate of 2 months per year of service. In this context, a person named Dipak received the following payments: Previous salary and benefits: Rs. 80,000; Leave amount earned before the Act came into force: Rs. 50,000; Gratuity earned after the Act came into force: Rs. 2,50,000; Additional salary received as compensation: Rs. 4,00,000.

Of the above payments, the leave amount of Rs. 50,000, the gratuity of Rs. 2,50,000, and the additional salary of Rs. 4,00,000 are subject to 15% tax deduction on payment as per Section 88(1), and since they are final withholding amounts as per Section 92(1)(f), they need not be included in income. However, the previous salary and benefits of Rs. 80,000 must be included in employment income.

Compulsory Retirement: The process by which an institution retires a specified group of workers/employees from employment, or retires them upon reaching a specified period/age as per Staff Regulation, is called compulsory retirement. In giving compulsory retirement other than retirement upon reaching the period/age specified in Staff Regulation, special benefits may also be provided. Such payment received as special benefit is a retirement payment, and therefore, tax must be deducted at 15% on payment at source as per Section 88(1), and since it is a final withholding as per Section 92(1)(f), it need not be included in employment income during calculation as per Section 8(3).

Termination, loss of employment & compulsory-retirement payments (incl. gratuity, leave, VRS special benefits) = 15% TDS at source u/s 88(1), final withholding u/s 92(1)(f), so NOT included in employment income u/s 8(3); only normal salary & benefits are included

Example 17.3.7: Suppose a commercial bank, in the process of reducing employees, allowed employees who had completed 20 years of service to apply for voluntary retirement, and for employees retiring under this VRS scheme, provided special benefits of 2 months' salary for each year of service. Under this scheme, an employee named Rasik Kalam retired effective from Ashadh end of 2065. As per the bank's rules, those with more than 15 years of service received gratuity at 2 months' salary rate, and those with more than 20 years received 2.5 months' salary rate, paid by the bank. As per the employee regulations before Chaitra 18, 2058, he also received three months' medical treatment expenses at the time of retirement. His payments in FY 2064/65 including retirement amounts were as follows:

As per Rule 20, Sub-rule (6), Clause (a), leave, gratuity, and medical treatment expenses earned until Chaitra 18, 2058 are tax exempt. The employer must deduct tax at 15% on payment for VRS/CRS benefit, gratuity, and leave amounts, and since the amounts paid after such tax deduction are deemed final withholding payments as per Section 92(1)(f), they need not be included in employment income during calculation as per Section 8(3).

(f) Retirement payment and retirement contribution including the amount deposited by the employer for that employee in the retirement fund,

"Retirement payment" means a payment made to the following persons:

(1) a payment made to a natural person upon their retirement, or

(2) a payment made to a natural person's dependent upon that natural person's death.

The conditions under which payment can be made from an approved retirement fund are as per Rule 20(2)(d): payment from a retirement fund can only be made to the beneficiary of the retirement fund in the following situations:

(1) when the employee or worker is retired from service,

(2) when the beneficiary reaches the age of 58 years, or

(3) when the beneficiary dies or becomes permanently disabled.

As per Rule 20(6): Notwithstanding anything written above,

(a) the principal, interest, and other amounts accumulated in an employee's or worker's Provident Fund or Citizens Investment Trust in income years prior to the commencement of the Act, and the gratuity and accumulated leave amounts earned up to that date, shall be tax exempt; and

(b) medical treatment expenses up to Rs. 1,80,000 payable to employees or workers who were in service when the Act commenced, upon retirement as per their service conditions regulations, shall not be included in the income of such employees or workers.

Example 17.3.8: Hafiz Singh works at a government company with a monthly remuneration of Rs. 20,000. In addition to monthly remuneration, Rs. 2,000 per month is deposited in a retirement fund in his name, which is called the retirement contribution, and such amount must be included in his employment income.

(g) Other payments made in respect of employment, and

Eg: holiday trips and shopping, must also be included in employment income.

(h) Other amounts required to be included pursuant to Chapter-6 or 7.

Any person must quantify and characterise various facilities provided by the employer and include them in their own income.

Method and Timing of Tax Accounting for Employment Income: Tax accounting for employment income must be done on a cash basis for natural persons. As per Section 22(2) of the Act, a natural person must account for income from employment on a cash basis for tax purposes. An amount shall be deemed received and included in the calculation of income only when they receive payment or when such payment becomes available to them.

Example 17.3.9 Suppose Kamal is an employee at Samari Institution. This person received Rs. 2,40,000 (at the rate of Rs. 20,000 per month for Shrawan 2078 to Ashadh 2079) only in Shrawan 2080. In this situation, since accounting is done on a cash basis, the amount must be included in income for tax purposes in the month of receipt, Shrawan 2080. Therefore, under this method, regardless of which financial year the income was earned, it must be included in the income of the financial year in which it was received.

Indirect Payment: As per Section 29 of the Act, if any person indirectly benefits from a payment made by the payer or their associated person, or designates another person to receive the payment, the Department may, by issuing written notice, deem such benefiting person or the person making such designation as the person receiving such payment.

Example 17.3.17 Suppose Hari Prasad is a retired government employee. He has arranged for his wife, who lives separately from him, to receive his pension. Even though he has designated another person to receive payment, the Department may issue written notice and deem the person benefiting, i.e., his wife, or the person making such designation, i.e., him, as the person receiving such payment.

Included in employment income u/s 8(2): (a) wages, salary, leave pay, overtime, fees, commission, prizes, gifts, bonus & similar + (b) personal allowances (cost-of-living, rent, entertainment, transport) + (c) employer reimbursement of the employee's personal expenses + (d) payment for agreeing to employment conditions + (e) payment for termination or loss of employment + (f) retirement payment & retirement contribution (incl. employer's fund deposit) + (g) other employment-related payments + (h) amounts under Ch 6 or 7

(3) Notwithstanding anything contained in sub-section (2), the following matters need not be included in computing the remuneration earned by any natural person from employment:-

(a) The amounts deductible under Section 10 and payments from which tax is withheld finally,

(1) Amounts exempt under Section 10 of the Act with regard to employment:

(2) Payments subject to final withholding tax:

Section 92 of the Act provides for payments subject to final advance tax withholding. Income received after final withholding tax has been deducted shall not be included in computing employment income. Those payments include: benefit received by a resident person from investment insurance; benefit received by a resident person from an interest in an unapproved retirement fund; all types of retirement payments (other than regularly paid pension); meeting allowances up to Rs. 20,000 per meeting; windfall gain payments; returns distributed by Collective Investment Funds (Mutual Funds) to natural persons; and rent or freight payments for the vehicle or transport means of a natural person (other than a sole proprietorship).

Example 17.4.1: Suppose Mr. Harish is a foreign national working at a foreign embassy in Nepal. He has been working there continuously for the past 5 years and receives salary and allowances paid from that foreign government's official treasury. In this situation, the source of his income is not deemed to be Nepal. Since his residency in Nepal is solely because of that employment and he is a resident of Nepal, his received salary and allowances are not subject to remuneration tax. However, if he has business, investment in Nepal, or employment income paid from sources other than that foreign government's official treasury, tax will apply.

Example 17.4.2: Suppose in Example 17.4.1, Mr. Harish's father Mr. Jack is a foreign national and has been living in Nepal with his son for a long time after retiring from government service there. If he receives a monthly pension of GBP 2,000 from that foreign government, the said pension amount received by him need not be included in income calculation as per Section 10, Clause (c) of the Act.

Example 17.4.3: Suppose Ratnakar De Silva is a non-Nepali citizen. If the Government of Nepal appoints him as a specialist to assist the peace process with a monthly payment of USD 20,000 on a no-tax condition, then the payment amount received by him need not be included in income.

Example 17.4.4: Suppose Ram Bahadur is a Captain employed in the Indian Army. After completing 20 years of service, he currently lives in Dhikura Thok Gaun Palika of Kanchanpur District. He receives monthly Indian pension of INR 20,000 from the Indian Pension Camp in Pokhara. He is also working as Security Chief at Bikash Bank Limited with a monthly remuneration of Rs. 15,000. In this situation, the monthly INR 20,000 received from the Indian government's state treasury as pension need not be included in employment income. The monthly Rs. 15,000 received from Bikash Bank Limited must be included in income as per Section 8 of the Act.

Example 17.4.5: Suppose Ram Prasad is an employee working at the officer level at Bikash Bank Limited. He purchased ordinary shares worth Rs. 1,00,000 in Nabil Bank. The bank declared a dividend of Rs. 5,000 on such shares and after deducting advance tax of 5%, i.e., Rs. 250, it paid the remaining Rs. 4,750 to him. Since the dividend after final withholding tax is received as Rs. 4,750, Ram Prasad need not include such amount in his employment income.

Example 17.4.6: Suppose Vishwa Compass Pvt. Ltd. rented 8 anna of land from a person named Rahim Mia at Rs. 10,000 per month to operate its business. Rahim Mia is also employed at a non-governmental office with a monthly remuneration of Rs. 30,000. The Pvt. Ltd. deducted advance tax at 10% on the contracted amount of Rs. 10,000 and paid the remaining Rs. 9,000 to the landlord Rahim Mia. Since the land rent income received by the landlord Rahim Mia is after final tax deduction, he need not include it in income.

Example 17.4.7: Suppose an employee working at Bikash Bank Limited has life insurance at an insurance company. While accumulating premium at Rs. 1,000 per month for such insurance, Rs. 2,00,000 had been paid in premiums by the end of Ashadh 2080. Since this insurance matured, the insurance company paid Rs. 3,00,000 and deducted 5% tax on the profit of Rs. 1,00,000 (3,00,000 - 2,00,000) and paid the benefit. In this situation, the payment received by the employee need not be included in income.

Example 17.4.8: Suppose Haris is an employee at Bikash Bank. He deposited a total of Rs. 10,00,000 in a savings account. If he received Rs. 1,00,000 interest on that account in FY 2080/81, the bank deposited Rs. 1,00,000 in his account and simultaneously debited advance tax at 6%, i.e., Rs. 6,000, from his account. Haris need not include such received interest in employment income. However, interest received from a bank account related to his business must be included in income. In addition, interest received from other persons not mentioned in Section 88(3) must be included in income, and if tax has been deducted at the time of payment, such deducted tax amount can be set off against the tax liability as advance tax.

Example 17.4.9: Suppose Hari Prasad Kafle was appointed as an Assistant at Ne.Ba.Li. (Nepal Bank Limited) on Baisakh 1, 2044. He retired from service on Jestha 1, 2065. At the time of retirement, he received the following amounts:

(1) Provident Fund - principal until Chaitra 18, 2058: Rs. 4,00,000

(2) Provident Fund - principal from Chaitra 19, 2058 to end of Baisakh 2065: Rs. 8,00,000

(3) Provident Fund - interest until Chaitra 18, 2058: Rs. 1,50,000

(4) Provident Fund - interest from Chaitra 19, 2058 to end of Baisakh 2065: Rs. 1,50,000

Total Provident Fund to be received: Rs. 15,00,000

As per Rule 20, Sub-rule (6)(a) of the Income Tax Regulations, 2059, the tax-exempt amount must be calculated as follows:

Provident Fund principal before Act came into force: Rs. 4,00,000

Provident Fund interest before Act came into force: Rs. 1,50,000

Total Provident Fund amount exempt: Rs. 5,50,000

Retirement payment calculation after Act came into force:

Provident Fund (retirement fund) amount after Act: Rs. 8,00,000

Interest on Provident Fund (retirement fund) after Act: Rs. 1,50,000

Total Provident Fund amount: Rs. 9,50,000

The Provident Fund amount after the Act is called a retirement fund. If such retirement fund is an approved retirement fund, the payment from that fund must be calculated as follows for tax purposes:

Total amount received from approved retirement fund after Act came into force: Rs. 9,50,000

As per Section 65, Subsection (1), Clause (b) when calculating profit, 50% of the payment amount or Rs. 5,00,000 whichever is higher must be deducted:

(1) 50% of payment amount: Rs. 4,75,000

(2) Specified amount: Rs. 5,00,000

Since a total of Rs. 9,50,000 was received from the approved retirement fund after the Act came into force, and Rs. 5,00,000 is exempt from profit as per Section 65, Subsection (1), Clause (b), tax must be deducted at 5% on the remaining Rs. 4,50,000 as per Section 88, Subsection (1) before paying the balance.

If the retirement fund after the Act came into force is an unapproved retirement fund, 5% advance tax must be deducted on the difference between the received amount and the contributed amount as per Section 88(2)(c).

Suppose:

(1) Provident Fund - from Chaitra 19, 2058 to end of Baisakh 2060 - principal: Rs. 4,50,000

(2) Interest on Provident Fund for same period: Rs. 50,000

Total payment amount: Rs. 5,00,000

Of the principal amount, Hari Kafle's own contribution is Rs. 4,50,000, so tax must be deducted as follows:

(1) Payment to be made: Rs. 5,00,000

(2) Own contribution to the fund: Rs. 4,50,000

Profit for tax purposes: Rs. 50,000

As per Section 88(2)(c), advance tax at 5% amounting to Rs. 2,500 must be deducted on payment and the remaining paid.

Example 17.4.10: Suppose Nilima Shrestha is a professor working at a campus. She received Rs. 1,000 as meeting allowance for attending one of the campus's meetings. She also received Rs. 1,500 for teaching a special class in English at another campus and additionally received Rs. 10,000 for preparing question papers and Rs. 20,000 for marking answer sheets. Tax must be deducted at 15% on the meeting allowance of Rs. 1,000, and on Rs. 1,500 for occasional teaching, Rs. 10,000 for question paper preparation, and Rs. 20,000 for answer sheet marking, and the payments received after such tax deduction need not be included in employment income calculation.

However, if Nilima also regularly teaches at another institution three times per week and receives monthly remuneration, such remuneration must be included in income as per Section 8 of the Act.

(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,

Meals and refreshments provided by the employer to employees at the workplace, uniformly available to all employees on equal terms, need not be included in employment income.

Example 17.4.11: Suppose a call center named Call America Pvt. Ltd. provides food equally to all employees present at the office daily, costing an average of Rs. 200 per person per day. The snacks received equally by employees at the workplace need not be included in employment income. However, if food and snacks are provided to employees in cash rather than in kind, it must be included in the concerned employee's employment income.

(c) The settlement or reimbursement of the following expenditure incurred by any employee:-

Reimbursements or settlements received by an employee from an employer for expenses incurred in fulfilling the employer's business purpose need not be included in the employee's employment income.

Example 17.4.12: Suppose Gopi is working as an employee at Nepal Bank Limited's Head Office, Kathmandu. While on official duty, he was sent on assignment to Nepal Bank Limited Pokhara for four days and received: Daily travel allowance for 4 days at Rs. 1,000 per day: Rs. 4,000; Airfare Rs. 3,000 x 2: Rs. 6,000; Other expenses as per bills: Rs. 1,000; Total: Rs. 11,000. Gopi went to Pokhara in the course of official work and submitted bills for reimbursement, which were approved by the authorized person. Such Rs. 11,000 received from the employer is for the employer's business purpose and need not be included in his remuneration income.

(1) The expenditure fulfils the business purpose of the employer, or

(2) The expenditure exempted or to be exempted in the computation of income from the natural person's business or investment.

(d) Payment of such petty amounts of which accounts are impracticable or administratively difficult to maintain as prescribed.

(e) The amount equivalent to sweat equity shares received as remuneration for employment in the information technology industry.

Rule 6: In making payment of petty amounts mentioned in Clause (d) of Sub-section (3) of Section 8 of the Act, the payer may make payment of a maximum of Five Hundred Rupees at a time for tea expenses, stationery, gift, prize, casual medical treatment and for similar kind of payment as specified by the Department.

Explanation: For the purposes of this Section, "payment" means the following payment:-

(a) Made by the employer,

(b) Made by the associated person of the employer, and

(c) Made by any third person as referred to in the agreement made with the employer or his associated person.

Excluded from employment income u/s 8(3): (a) Section 10 exempt amounts + payments under final WHT + (b) food/tiffin provided at the workplace equally to all employees + (c) reimbursement or settlement of employer-business-purpose expenses + (d) prescribed petty payments up to Rs. 500 per occasion (Rule 6: tea, stationery, gift, prize, casual medical)

9. Computation of income earned from investment

(1) The profits and benefits derived by any person from investment in any income year shall be the income earned by that person from that investment in that year.

Investment means the act of holding (Holding) assets and earning income. Keeping assets for personal use by the owner, or owning assets used in employment or business, is excluded - while ownership of other assets and keeping non-business taxable assets are called investment.

Generally, the person earning income from investment activities does not need to be actively and continuously involved.

(2) The following amounts received by any person in any income year shall be included in computing the profits and benefits derived by that person from investment in that income year:-

(a) Dividend, interest derived from that investment, payment for natural resources, rent, royalty, profit from investment insurance, profit from interest in a retirement fund which has not got approval pursuant to sub-section (1) of Section 63, or retirement payment made from an approved retirement fund,

Similarly, royalties received for granting permission for petroleum exploration or for use of technical support or a trademark must also be included in investment income. However, dividend amounts received, interest and rent received by a natural person other than through business, profit from investment insurance, and retirement payments from a retirement fund, where tax has been withheld in advance under Section 88 and is treated as final withholding tax under Section 92, need not be included in investment income. However, where such income is paid by a non-resident (except dividends where the non-resident entity is a controlled foreign entity under Section 69), such income must be included in profit and gain.

Example 6.4.4: Suppose Harris & Co. made a loan investment of Rs. 1,00,000 in ABC Company Ltd. at 10 percent interest. That company paid interest of Rs. 10,000 at 10 percent, withheld advance tax of Rs. 1,500 at 15 percent under Section 88(1), and paid the balance of Rs. 8,500. In this situation, Harris & Co. must include the full amount of Rs. 10,000 in its investment income. Similarly, if Mr. Harris, as a personal investment, invested Rs. 1,00,000 in ABC Company Ltd. (which is not authorised to issue debentures) at 10 percent interest, and the company paid interest of Rs. 10,000, withheld advance tax of Rs. 1,500 at 15 percent under Section 88(1), and paid the balance of Rs. 8,500, then Harris must include the full amount of Rs. 10,000 in his investment income and file an income return. However, if he deposited the amount in a bank or in an entity authorised to issue debentures and received interest, such interest received after tax deduction is treated as a final withholding tax payment, and Harris need not include such interest income in his investment income.

(b) Net profits derived from the disposal of non-business taxable assets of the investment of that person, computed pursuant to Chapter-8,

Non-business taxable assets are assets not directly used in business or investment. When non-business taxable assets comprising land, buildings and interests in any entity are disposed of, the net gain received at the time of disposal must be included in income. In computing such net gain, the net gain is the amount remaining after deducting expenses from income and further deducting any undeducted losses.

Example 21.4.2: Suppose Haris had purchased 100 units (kirra) of shares of ABC Company Ltd., listed on Nepal Stock Exchange, for Rs.20,000/- on date 2080.08.20. He sold those shares for Rs.25,000/- on date 2081.08.15. The net gain of Rs.5,000/- from disposal of shares not related to a natural person's business - i.e., non-business chargeable assets - must be included in his investment income.

(c) If, in disposing the depreciable property of the investment made by that person, the incomings to be received exceed the remaining value comprising the outgoings made for the property of the group of depreciable property pursuant to clause (a) of sub-section (2) of Section 4 of Schedule-2, the excess amount,

(d) Gift received by that person in respect of investment,

Example 6.4.5: Suppose Haris invested Rs. 2 crores in shares of Sampanna Bank Ltd. In some income year, the bank provided shareholders with a share investment exceeding Rs. 1 crore with a one-tola gold coin as a gift for Dashain. Since the gold coin was received as a gift in connection with an investment, such a gift must be valued at market value and included in investment income.

(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 connection with investment, and

(g) Other amounts required to be included pursuant to Chapter-6 or 7 or Section 56.

Included in investment income u/s 9(2): (a) dividend, interest, natural-resource payment, rent, royalty, investment-insurance profit, unapproved retirement-fund profit / approved-fund retirement payment + (b) net gain on disposal of non-business taxable assets (Ch 8) + (c) gain on disposal of depreciable investment property + (d) gift relating to investment + (e) retirement payment & contribution relating to investment + (f) amount for accepting an investment restriction + (g) amounts under Ch 6 or 7 or Sec 56

(3) Notwithstanding anything contained in sub-section (2), the following matters shall not be included in computing profits and benefits derived by any person from investment:-

(a) The amounts deductible under Sections 10, 54 and 69 and payments from which tax is withheld finally, and

(b) The amounts to be included in computing income earned by that person from employment or business.

To avoid double counting, amounts included in computing income earned from employment or business shall not be included in investment income. Amounts included in computing business income under Section 7 and amounts included in computing employment income under Section 8 shall not be included in computing investment income.

Investment income is thus a residual income that is computed or defined only after computing income from employment and business.

Investment income is residual = computed only after employment & business income (9(3)(b)). Excluded u/s 9(3): Sec 10 / 54 / 69 amounts + final-WHT payments. A natural person's dividend, interest, rent, investment-insurance & retirement income with final TDS u/s 88/92 is not included; but the same income from a non-resident is included.

Chapter-4 Exemptible Amounts and Other Exemptions

Figure: Exemptible Amounts and Exemptions (Sections 10-12D)

10. Exemptible amounts

The following amounts shall be exempted from tax

(a) Amount exempted from tax granted to any person entitled to tax exemption facility as provided for in a bilateral or multilateral treaty or agreement concluded between the Government of Nepal and any foreign country or international organization,

For example, persons who receive diplomatic privileges under the Vienna Convention, that is, foreign diplomatic officers, consuls and others, are exempt from income tax on employment income received for their own government's official service. Even though the workplace of such persons is in Nepal, Section 10(a) of the Act provides for a tax exemption on income received from such employment.

Nepal has granted a tax exemption on the employment income of foreign diplomatic officers working in foreign embassies and missions in Nepal, received from their own country, by virtue of being a signatory to the Vienna Convention 1961 (ratified by Nepal on 28 September 1968).

(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.

Where an natural person is employed in the governmental service of a foreign country in Nepal, has become a resident or non-resident person only because of that employment, and receives payment from the governmental fund of that country, such income is exempt from tax in Nepal. This provision is further clarified in the following examples:

Example 9.2.1: Suppose a person named Ruin Peyere works at the Ministry of Foreign Affairs of a foreign country. That foreign government has assigned him to Nepal to assist in Conflict Management. Ruin Peyere has been working in Nepal on this task for the past one year. He receives a monthly remuneration of Euro 10,000 from that foreign government. Since Ruin Peyere is doing official governmental service of that foreign country, became a resident of Nepal only because of the employment, and receives his remuneration from the official governmental fund of that foreign country, the amount he receives is deemed an exempt amount.

Example 9.2.2: Suppose Dinesh Chatakuli, a resident of Nepal, is an employee working on a Conflict Management Programme operated by a foreign government in Nepal. He receives a monthly remuneration of Euro 5,000 from that foreign government. He receives such remuneration from the official governmental fund of that foreign government. Even though he receives the payment from the official governmental fund of a foreign country, since he is a resident of Nepal, such income is not deemed an exempt amount and he must include such income in his employment income.

If a person was already residing in Nepal before engaging in such governmental service and only afterwards works in the governmental service of a foreign country, such a person does not receive an exemption in computing income under this provision of the Act.

(c) Amount received by an natural person referred to in clause (b) who is not a citizen of Nepal or by his nearest family member from the governmental fund of a foreign country,

Payments received from the governmental fund of a foreign country, such as pension, far station allowance, family allowance and other amounts, by the nearest family member of a person who became a resident only because of employment and who receives remuneration from the governmental fund of a foreign country, even where such payment is received in Nepal, are exempt from tax in Nepal. This provision is clarified in the following example:

Example 9.2.3: Suppose Maria Smith is a foreign woman. Her husband works at the embassy of the same foreign country in Nepal. In accordance with the rules of that foreign government for allowances to family members of embassy employees, Maria Smith has been receiving 3,000 pounds per month as a Far Station Allowance from the official governmental fund of that foreign country. In this situation, the amount of such allowance she receives is deemed an exempt amount.

(d) Amount received by a non-Nepalese citizen appointed in the service of the Government of Nepal under the condition of tax exemption,

The Government of Nepal may appoint any non-Nepalese citizen on the condition that no tax has to be paid, and where such appointment is made, the income amount received by that person from the Government of Nepal is deemed an exempt amount. This provision is clarified in the following example:

Example 9.2.4: Suppose the Government of Nepal formed a high-level task force for the proper utilisation of Nepal's water resources, and appointed a foreign national, Teve Fernando, to that task force on the condition of not having to pay tax, with a monthly remuneration of Euro 10,000. In this situation, even though the source of his income is in Nepal, the amount he receives is deemed an exempt amount.

(e) All kinds of allowances provided by the Government of Nepal, Provincial Government or Local Level as social security,

All kinds of allowances provided by the Government of Nepal, Provincial Government or Local Level to widows, the elderly, the disabled and disadvantaged persons as social security for their livelihood are not subject to tax.

(f) Amounts received as gift, inheritance, scholarship or stipend except the amounts required to be included in computing income pursuant to Section 7, 8 or 9,

Gifts related to employment, business or investment must be included in the respective income head. Similarly, amounts received as gift, inheritance, alimony or scholarship, other than those subject to windfall gain tax, such as a dowry received at the time of marriage, or a scholarship available to a poor or meritorious student, are also deemed exempt amounts. This provision is further clarified in the following example:

Example 9.2.5: Suppose Gopi Bantawa is studying MBBS at a medical college under a scholarship from the Government of Nepal. The cost would be Rs. 15 lakhs. In addition, he receives Rs. 10,000 per month in cash under the same scholarship. The expenses for his studies and the amounts received need not be included in his income; such amounts are deemed exempt amounts.

(g) Amounts received by an organization entitled to exemption for the following:-

(1) Donation, gift,

(2) Other contributions directly related with the work of an organization entitled to exemption as referred to in clause (s) of Section 2 without having consideration or without hoping for consideration, or

(3) ......,

Two types of situations for tax exemption exist under the Act:

For any organization to register as an organization entitled to exemption, obtain a tax exemption certificate, and continue to enjoy the tax exemption benefit, the following process and conditions must be fulfilled:

Tax exemption is lost/suspended if:

1. Organization ceases to be a public charitable non-profit organization.

2. Income return and audited financial statements are not filed on time.

3. Any person derives personal benefit from organizational assets or income.

4. Activities are conducted outside the objectives stated in the charter.

5. Tax exemption certificate is not renewed.

Exempt organisation: only its donations, grants & gifts (Sec 10(g)) are tax-exempt, not its interest, rent, investment or commercial income. Two types: (1) automatic exemption (e.g. political party registered with the Election Commission); (2) exemption only after registration/approval (public non-profit social, religious, educational, charitable & amateur sports bodies). Any personal benefit to a specific person = loses exempt status

Example 9.2.6: Suppose Nepal Dalit Bikas Mancha is an entity registered with the Department as an organization entitled to exemption. The Mancha received donations of Rs. 5,00,000 from various donors. It also received a grant of Rs. 10 lakhs from the Government of Nepal to be spent on Dalit upliftment activities. Both amounts are deemed exempt amounts for that entity.

Example 9.2.7: Suppose Nepal Dalit Bikas Mancha mentioned in Example 9.2.6 has been placing its received funds in savings deposits at a financial institution. The entity received interest income of Rs. 1 lakh from such deposits. Since such interest income is not income in accordance with the objectives of the entity, this amount is not exempt from tax. The person making the interest payment to that entity must withhold tax at 15 percent on such interest payment in accordance with Section 88(1) of the Act, and the interest received by that entity after such tax withholding is treated as a payment from which tax is withheld finally under Section 92(1)(e)(2) of the Act.

(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,

Nepalese citizens are serving in the military or police of India, the United Kingdom and other countries. Where such persons, after retiring from their service, return to and reside in Nepal, and where they or their families receive pension amounts, no tax is levied in Nepal. However, where a Nepalese citizen has provided service other than military or police service of a foreign country and receives a retirement pension amount in Nepal for themselves or their family, such amount must be included in income for tax purposes. This provision is clarified in the following example:

Example 9.2.8: Suppose Ram Bahadur Thapa is a retired captain from the British Gurkha military service and currently resides in Pokhara. He receives a monthly retirement pension of 1,200 pounds from the British government. Such retirement pension amount he receives is an exempt amount.

(i) Any type of income of the Government of Nepal, Provincial Government or Local Level,

In this context, the income of a commercial entity (such as Rastriya Banijya Bank) that is wholly owned by the Government of Nepal is not deemed exempt income on the basis of this clause. Generally, amounts deposited in the Consolidated Fund of the Government of Nepal and amounts deposited in funds operated by government entities under prevailing law are treated as income of the Government of Nepal. Similarly, amounts deposited in the Consolidated Fund of provincial governments or local levels are treated as income of the respective Provincial Government or Local Level.

(i1) Income received from the transfer, free of charge, of land or a private building owned by a natural person to the Government of Nepal, a Provincial Government, or a Local Level.

(i2) Interest income earned from lending in Nepal by a financial institution established with full ownership of a foreign government and operating on a non-profit basis.

(i3) Amount earned by a Drinking Water and Sanitation Consumer Organization registered under the Water Resources Act, 2049, in accordance with its objectives.

(j) Amounts earned by Nepal Rastra Bank in pursuance of its objective,

Amounts earned by Nepal Rastra Bank from financial activities conducted in accordance with the objectives of the Nepal Rastra Bank Act, 2058 relating to maintaining financial stability are exempt from tax.

Example 9.2.9: Suppose Nepal Rastra Bank allocated Rs. 20 crores to a Banking Development Fund. The amount in that fund is deposited in various banks and financial institutions, and Nepal Rastra Bank earned interest income of Rs. 1 crore from those deposits. Since such income is income of a fund whose earnings are spent in accordance with the objectives of Nepal Rastra Bank, such income is deemed exempt income.

(k) ......,

(l) Amounts earned by a mutual fund having obtained approval from Nepal Securities Board in pursuance of its objective,

(l1) Amount earned by a university established and operating in Nepal in accordance with its objectives.

(m) Amounts earned by an educational institution operating on the basis of a memorandum of understanding with the Government of Nepal with the objective of not making profit or not distributing profit, in pursuance of its objective.

In addition to the above provisions, amounts received from the disposal of assets or liabilities other than those designated as chargeable assets or liabilities under the Act are also not subject to tax. The sale of personal assets unrelated to business by an natural person, such as furniture, jewellery and so on, other than the disposal of non-business chargeable assets (house, land, interests in entities) of an natural person, is exempt from tax.

11. Professional exemptions and facilities

(1) No tax shall be levied on an income earned by carrying on an agricultural business by any person registered as a firm, company, partnership or corporate body and on agricultural income other than that earned from an agricultural business in land as referred to in clauses (d) and (e) of Section 12 of the Act Relating to Land, 2021 (1964).

Provided that fifty percent tax shall be exempted in the income earned from agricultural business, vegetable dehydration business or cold storage business by any firm, company, partnership or corporate body so registered.

The above provision of the Act includes agricultural income derived from organized and commercially operated agricultural business in the income of the person. However, income derived by an natural person from land within the ceiling prescribed by the Land Act, 2021 is not subject to tax. However, agricultural income derived from land mentioned in clauses (d) and (e) of Section 12 of the Land Act, 2021 through agricultural business must be included in income for purposes of income tax computation. Clauses (d) and (e) of Section 12 of the Land Act, 2021 contain the following provisions:

(d) Land up to the limit fixed by a notified order of the Government of Nepal for industrial work under the conditions prescribed in such order, so long as such work continues.

(e) Land up to the limit fixed by a notified order of the Government of Nepal for agricultural industry work under the conditions prescribed in such order, so long as such work continues under those conditions.

The Land Act, 2021 provides for a ceiling on land ownership, and also provides that the Government of Nepal may raise the ceiling limit for conducting industrial or agricultural business on such land.

Example 10.2.1: Suppose Dhak Bahadur Bamjan has been cultivating tea on land owned by his family or joint family (within the ceiling of the Land Act, 2021). In doing so, he earned income of Rs. 10,00,000 in income year 2070/71. Such income falls within tax-exempt income. However, if any person has obtained approval from the Government of Nepal and cultivated land exceeding the ceiling in the manner prescribed under Section 12(d) or (e) of the Land Act, 2021, the income derived from such cultivation shall not be exempt from tax. Similarly, in any circumstances, if any agricultural income is earned through any business firm or entity, tax shall be levied on such income.

(2) No tax shall be levied on the income of a cooperative organization and union operated and registered under the Cooperatives Act, 2074 (2018) that carries on agricultural or forest-based industrial business such as sericulture and silk production, fruit farming, production and fruit processing, animal husbandry, dairy industry, poultry farming, fishery, tea gardening and processing, coffee farming and processing, herbiculture and herb processing, vegetable seed production, bee keeping, honey production, rubber farming, leasehold forestry, agro-forestry and other professional forest-related businesses, cold storage established for the storage of vegetables, agro-seeds, animal feed, pesticides, fertilizers and agricultural tools (except those operated with mechanical power), and cooperative organization or union operated in the area of a Rural Municipality. No tax shall also be levied on the dividends distributed by such organization or union.

This sub-section of the Act, is not available to cooperative organizations operating in metropolitan municipalities, sub-metropolitan municipalities, and municipalities. This is further clarified by the following example.

Example 10.2.2: Suppose Kanyam Community Tea Garden Ltd. is a cooperative organization registered under the Cooperative Act, 2074. In that organization, 40 farmers from the Kanyam area collectively engaged in tea cultivation, processing, and sale of processed tea. The organization earned income of one crore rupees in income year 2070/71. In this case, the income earned by such organization shall be exempt from tax. In addition, if the organization distributes dividends to its shareholders, advance tax withholding is not required on such dividends.

(2a) No tax shall be levied on interest income of up to twenty-five thousand rupees per annum earned from deposits in a micro-financial institution, rural development bank, postal saving bank and cooperative referred to in sub-section (2) operating in the area of a Rural Municipality.

Provided that where the amount of interest exceeds NPR 25,000, tax shall be levied on the amount of interest exceeding NPR 25,000.

(2b) Exemption from the tax leviable on income earned by a special industry, hotel, resort and information technology industry in full operation throughout the year in any income year shall be as follows:-

(a) By one-third of the tax if tax is levied at the rate of thirty percent on the income of a resident natural person,

(b) By twenty percent on tax leviable on the income of an entity,

(c) ......

Example 11.5.1 Suppose Sushri Shashikala Rai operates an industry producing juice from fruits in Achham district. In FY 2081/82, the business turnover of the industry is Rs. 2,25,00,000 and deductible amounts are Rs. 2,10,00,000. In that year, she opted as a single individual for taxable income computation purposes. Her taxable income and tax for the year shall be as follows:

(3) Tax shall be levied as follows on the income earned by any person from a special industry, hotel, resort and information technology industry in any income year:-

(a) If the person gives direct employment to one hundred or more Nepali citizens throughout the year, ninety percent of the tax leviable on the income of that year; if the person gives direct employment to three hundred or more Nepali citizens throughout the year, eighty percent of the tax leviable on the income of that year; if the person gives direct employment to five hundred or more Nepali citizens throughout the year, seventy-five percent of the tax leviable on the income of that year; if the person gives direct employment to one thousand or more Nepali citizens throughout the year, seventy percent of the tax leviable on the income of that year,

Provided that additional ten percent exemption shall be provided in the amount of tax payable if the person gives direct employment to more than one hundred Nepali citizens throughout the year including at least thirty-three percent from among women, Dalits or persons with disability,

(b) If a special industry has been operated in least developed, undeveloped and underdeveloped areas, respectively ten, twenty and thirty percent of the tax leviable on the income of the years for up to ten years from the date of commencement of the commercial production or transaction by that industry,

Provided that the special industry established in Karnali Province and hilly districts of Sudurpashchim Province providing direct employment to more than one hundred Nepali citizens shall be exempt from income tax for a period of fifteen years from the date of commencement of its transaction,

(c) If a special industry and tourism industry (except casino) established with capital investment of more than one arab rupees providing direct employment to more than five hundred throughout the year shall be provided with full income tax exemption for five years from the date of commencement of its transaction and fifty percent of the tax leviable for three years afterwards,

Provided that if an industry in operation at present increases its installed capacity at least by twenty-five percent making its capital two arab rupees and provides direct employment to more than three hundred throughout the year, full income tax exemption shall be provided in the income earned from such capacity enhancement for five years and fifty percent of the tax leviable shall be exempted for three years afterwards.

Example 10.2.3: Suppose Nepal Cement Industry Pvt. Ltd. has established a cement industry with shareholder capital investment of one arab fifty crore rupees and total investment of four arab rupees. The industry has an installed capacity of 1,500 tons per day and commenced production from 2071/6/1, with 510 workers and employees working throughout the year. In this case, from 2071/6/1 to 2076/5/31, the taxable income of the industry shall be fully exempt from tax, and from 2076/6/1 to 2079/5/31, a fifty percent exemption on taxable income shall apply.

(3a) Exemption from the income tax leviable on income of an industry established in a special economic zone and tax on dividends distributed by such industry shall be as follows:-

(a) The industry established in a special economic zone in a mountainous district and hilly district as specified by the Government of Nepal shall be provided with hundred percent income tax exemption for ten years from the date of commencement of its transaction and fifty percent for the income years afterwards,

(b) The industry established in a special economic zone in an area other than the area referred to in clause (a) shall be provided with hundred percent income tax exemption for five years from the date of commencement of its transaction and fifty percent for the income years afterwards,

(c) On dividends distributed by an industry established in a special economic zone, hundred percent tax exemption for five years from the date of commencement of its transaction and fifty percent for three years afterwards,

(d) Fifty percent of the income tax leviable on income earned by foreign investors from foreign technology or management service charge and royalty in an industry established in a special economic zone.

Under Section 88(1) of the Act, 15 percent advance tax withholding is required on royalties and service fees such as technology and management fees, and under Section 92(1)(f) such tax withheld on payments to non-resident persons constitutes a payment from which tax is withheld finally. For foreign investors in industries established in special economic zones, such fees shall be subject to tax at only 7.5 percent.

(3b) A person carrying on the business of exploration and excavation of minerals, petroleum substances, natural gas and fuel who commenced commercial operation by Chaitra of 2080 (mid-April 2024) shall be provided with full income tax exemption for the first seven years from the date of commencement of the transaction and fifty percent income tax exemption for three years afterwards.

(3c) Seventy-five percent exemption shall be provided from the income tax leviable on income of the industry related to software development, data processing, cyber cafe, digital mapping established within the operation of the zoological, geological, biotech related park, technology park and information technology park as specified by the Government of Nepal by a notification in the Nepal Gazette.

(3d) The person having commercial transaction of electricity shall be provided with tax exemption as follows:-

(a) A licensed person commencing commercial production, transmission or distribution of hydropower, electricity produced from solar, wind and biological substance by Chaitra of 2084 (mid-April 2028) shall be provided with full income tax exemption for the first ten years and fifty percent exemption for five years afterwards.

Provided that in the case of hydropower projects above forty megawatts capacity with reservoir and semi-reservoir for which financial closure) is completed by Chaitra of 2085 (mid-April 2029), and lower riparian hydropower projects operated in tandem operation (Tandem Operation) with such projects, full income tax exemption shall be provided for the first fifteen years and fifty percent exemption for six years afterwards.

(b) Notwithstanding anything contained in clause (a), the provision prevailing at the time of issuance of the licence shall apply for any licensed person that has already commenced commercial production at the time of commencement of this sub-section.

(3e) Tax exemption on income earned from export in any income year from a source in Nepal shall be as follows:-

(a) If tax is chargeable at the rate of twenty percent on the income of a resident natural person, twenty-five percent of that tax; and if tax is chargeable at the rate of thirty percent, fifty percent of that tax,

(b) Twenty percent of tax leviable on the income of an entity,

(c) Fifty percent of the tax leviable on income earned up to the extent of income received in foreign currency by such person for exporting information technology-based services including business process outsourcing, software programming, cloud computing and the like and earning foreign currency therefrom, up to fiscal year 2084/85.

Example 11.5.2 Suppose the business income mentioned in Example 11.5.1 above is derived from exports. The taxable income and tax for the year shall be as follows:

Export income concession (Sec 11(3e)): resident natural person taxed at 20% → 25% off (effective 15%), at 30% → 50% off (effective 15%); entity → 20% off; IT-based services (BPO, software, cloud) earning foreign currency → 50% off up to FY 2084/85

(3f) In the case of income earned by any entity from any of the following activities, there shall be exemption from the tax leviable on income for up to ten years from the date of commencement of the commercial transaction as follows:-

(a) Forty percent, in the case of operation of a tram or trolley bus,

(b) Forty percent, in the case of construction and operation of a ropeway, cable car or sky bridge,

(c) Fifty percent, in the case of construction and operation of a road, bridge, underground route, tunnel, railway or airport.

(3g) The production-based, tourism service, hydropower generation, distribution and transmission entities listed in the securities market and entities mentioned in sub-section (3c) of Section 11 shall have fifteen percent exemption from the tax leviable.

(3h) The industry established in the least developed area and undeveloped area producing brandy, cider and wine based on fruits shall have respectively forty and twenty-five percent exemption from income tax for ten years from the date of commencement of the transaction.

(3i) Any person receiving royalty income from the export of intellectual property shall have twenty-five percent exemption at the rate of income tax leviable on such income.

(3j) Any person receiving income from the sale through transfer of intellectual property shall have fifty percent exemption at the rate of income tax leviable on such income.

(3k) The industry related to tourism or the airlines company operating international flight shall be provided with tax exemption as follows:

(a) An industry established with capital investment of more than one arab rupees shall have full exemption for five years from the date of commencement of the transaction and fifty percent exemption at the rate of leviable income tax for three years afterwards.

(b) An industry established with capital investment of more than three arab rupees shall have full exemption for ten years from the date of commencement of the transaction and fifty percent exemption at the rate of leviable income tax for five years afterwards.

(c) An industry established with capital investment of more than five arab rupees shall have full exemption for fifteen years from the date of commencement of the transaction.

(3l) If a special industry, information technology industry or an industry related to the tourism sector capitalizes its accumulated profit into shares for the purpose of increasing the capacity of the same industry, there shall be hundred percent exemption from the dividend tax leviable in the form of dividend distribution from such capitalization.

(3m) If any company having paid-up capital of fifty crore rupees or more operating as a private company converts into a public company and commences transaction, it shall have ten percent exemption from the leviable tax for three years from the date of its conversion into a public company.

Provided that a company required to be incorporated as a public company under Section 12 of the Company Act, 2063 (2006) shall not be entitled to the facility referred to in this sub-section.

(3n) A domestic tea producing and processing industry, dairy industry carrying on the business of milk products or textile production industry shall have fifty percent exemption at the rate of income tax leviable on income earned from the sale of its products.

(3o) A health institution operated by a community organization shall have twenty percent exemption from the tax leviable on its taxable income.

(3p) A micro-enterprise shall have full exemption from the leviable income tax for seven years from the date of commencement of its business or transaction. If such a micro-enterprise is operated by a woman entrepreneur, it shall have full exemption from the leviable income tax for an additional three years.

(3q) If any entity in any income year constructs and operates a public infrastructure to be transferred to the Government of Nepal or constructs, generates and transmits electricity, such entity shall have twenty percent tax exemption from the tax leviable on its taxable income.

(3r) A special industry established and operated in an industrial area or industrial village shall have fifty percent tax exemption for three years from the date of commencement of production and twenty-five percent tax exemption for five years afterwards.

(3s) Twenty percent tax exemption shall be provided in the income earned from the sale of raw material or associated raw material produced domestically to a special industry.

(3t) A start-up business as specified by the Department that uses innovative knowledge, ideas, skills, technology, practices and methods and has annual turnover of up to ten crore rupees shall be provided with hundred percent tax exemption for five years from the date of commencement of its transaction.

(3u) If any special industry operating in the Kathmandu valley relocates and operates outside the Kathmandu valley, hundred percent tax exemption shall be provided for three years from the date of such relocation and operation and fifty percent tax exemption for two years afterwards.

(3v) The industry using only previously used goods having direct impact on the environment as raw material to produce new goods shall be provided with fifty percent tax exemption for the first three years from the date of commencement of its transaction and twenty-five percent for two years afterwards.

(3w) The industry producing health vaccine, oxygen gas and sanitary pad shall be provided with hundred percent tax exemption for five years from the date of commencement of its production and fifty percent for two years afterwards.

(3x) The industry established by Ashad of 2082 (mid-July 2025) with the objective of producing and assembling electric vehicles shall have forty percent tax exemption for five years from the date of commencement of its transaction.

(3y) The industry established by Ashad of 2082 (mid-July 2025) with the objective of producing agricultural tools shall have hundred percent tax exemption for five years from the date of commencement of its transaction.

(3z) The industry producing green hydrogen shall have full income tax exemption for five years from the date of commencement of its transaction.

(3aa) The industry producing and assembling electric vehicle charging machines operated by electric energy shall have income tax exemption for five years from the date of commencement of its transaction.

(3ab) A person constructing, establishing and operating an industrial area or industrial village shall have full income tax exemption for the first ten years from the date of commencement of the transaction and fifty percent income tax exemption for five years thereafter.

(4) If any person carries on transactions qualifying for different tax exemption facilities pursuant to this Section, income shall be computed to obtain such facility as if that income were derived by separate persons.

A person availing the exemption concession under Section 11 of the Act must compute income as if only that income exists. In other words, other income of such person, if any, shall not be entitled to such concession. This is further clarified by the following example:

Example 10.2.5: Suppose Swastik Garment Industry Pvt. Ltd. has a factory in Kathmandu. Another unit of the same company is also operating in Dhading (underdeveloped area). The business status of the two units of the company in income year 2075/76 (amounts in Rs. thousands) is:

Amount in Rs. thousands

In addition to the expenses that can be separated from the above accounts, the Pvt. Ltd. incurred centralized indirect expenses of Rs. 5,00,000. The tax liability of the Pvt. Ltd. for fiscal year 2075/76 shall be computed as follows:

Amount in Rs. thousands

In this manner, the exemption on the tax rate is available only on the income of the special industry in the less developed area. Furthermore, if one unit incurs a loss, it cannot be set off against the income of another unit. When computing tax, the income computation forms of the Pvt. Ltd. must be prepared separately.

Multiple exemption activities (Sec 11(4)): compute each concession activity's income as if it were a separate person; one unit's loss cannot be set off against another unit's income; prepare separate income computations

(5) A person who is in a position to have more than one exemption in respect of the same income pursuant to this Section shall enjoy only one exemption of his choice in addition to the facility referred to in sub-section (2b).

If a person is eligible for more than one of the exemption concessions in the sub-sections of this Section for the same income, the person may choose only one. For example, a special industry providing direct employment to 100 or more persons throughout the year is entitled to a 10 percent exemption on tax under Section 11(3)(a), and if such industry operates in an underdeveloped area only 20 percent on applicable tax under Section 11(3)(b). In such a case, the person may choose only one exemption, either under Section 11(3)(a) or Section 11(3)(b). This is further clarified through the following example:

Example 10.2.6: Suppose the Dhading unit of Swastik Garment Industry Pvt. Ltd. mentioned in Example 10.2.5 above has more than 100 Nepali workers working throughout the year, of whom more than 33 percent are women, Dalits, and persons with disabilities. In such case, the company may choose either the concession available to industries providing more than the prescribed employment under Section 11(3)(a) of the Act, or the concession available to industries operating in an underdeveloped area under Section 11(3)(b) of the Act. Only one concession may be chosen.

When granting tax exemption concessions to industries within a time limit, if the assets used to operate the industry are old (previously used), the time limit shall be counted from the period of prior use. This is further clarified through the following example:

Same income, multiple concessions (Sec 11(5)): may claim only ONE exemption of choice (plus the 2b employment concession). For time-limited concessions, if the assets were previously used, that prior-use period counts against the exemption period (Sec 11(6))

(6) Notwithstanding anything contained in sub-section (3), if any other person has previously used the properties used to operate the industry referred to in clause (b) of that sub-section for the operation of the industry of the same type, the period during which they have been so used shall also be reckoned while reckoning the time-limit referred to in that sub-section.

(7) Notwithstanding anything contained in sub-sections (3a) and (3c), if the property used in operating the industry or business mentioned in those sub-sections is an old property previously used by another person for the operation of an industry or business of the same or other kind, the facilities referred to in those sub-sections shall not be available.

Example 10.2.7: If the assets used to operate the Dhading unit of Swastik Garment Industry Pvt. Ltd. mentioned in Example 10.2.5 above are new, the exemption concession under Section 11(3)(b) of the Act would be for 10 years. However, if such assets had been previously used for 3 years by another person to operate a similar industry, the Dhading unit of the company would receive the exemption concession only for the remaining period of 7 years.

Explanation: For the purposes of this Section,-

(a) "Agricultural Business" means a business involving the cultivation of grains and crops, fruit farming, animal and poultry farming, fish farming, and beekeeping.

(b) "Least developed", "undeveloped" and "underdeveloped area" means the areas referred to in Schedule-10 of the Industrial Enterprises Act, 2076 (2019).

The list of "least developed", "undeveloped", and "underdeveloped" areas mentioned in Schedule-10 of the Industrial Enterprises Act, 2076 is set out in the schedule of this Directive.

(c) "Special industry" means a production-based industry, industry based on agriculture and forest products and mineral industry as classified in sub-section (2) of Section 17 of the Industrial Enterprises Act, 2076 (2019), other than any industry producing cigarette, Bidi, Sigar, chewing tobacco, Khaini, Gutkha, Pan Masala, other products of similar nature involving tobacco as the principal raw material, liquors, beer and products of similar kind.

(d) "Micro-enterprise" means any micro-enterprise classified in clause (a) of sub-section (1) of Section 17 of the Industrial Enterprises Act, 2076 (2019).

(e) "Information technology industry" means an industry related to technology park, information technology park, biotech park, software development, data processing, digital mapping, business process outsourcing, data mining and cloud computing.

11A. Tax chargeable on construction and operation of infrastructure

If any agreement is concluded between the Government of Nepal and any person for the construction and operation of any infrastructure, the person constructing and operating such infrastructure shall enjoy the tax facilities provided by the Act in force at the time of conclusion of the agreement for the whole period of the agreement.

When the Government of Nepal enters into an agreement with any person for the construction and operation of infrastructure, the tax provisions and concessions in force at that time, such as tax rates and concessions, depreciation provisions, and loss set-off provisions, shall continue to be enjoyed by such person for the duration of the agreement, even if the Act is subsequently amended.

12. Donation and gift given to organizations entitled to tax exemption

(1) In computing the taxable income in any income year, any person may make a claim to subtract the amount of donation and gift given to an organization entitled to tax exemption approved by the Department for the purpose of this Section.

(2) Notwithstanding anything contained in sub-section (1), the expenditure deductible in any income year pursuant to that sub-section shall not exceed three lakh rupees or five percent of the adjusted taxable income of such person for that year, whichever is the lesser.

"Adjusted taxable income" is defined in Section 2(aad1) of the Act as the taxable income computed without deducting any amount under Sections 12, 12A, 12B, and 12C, and without any set-off under Section 14(2), Section 17, or Section 18, in computing the taxable income of any person for any income year.

When claiming a deduction for donation expenses for income tax purposes, only the lesser of five percent of adjusted taxable income, one hundred thousand rupees, or the actual payment may be claimed. When computing adjusted taxable income for donation expense purposes, deductions allowable under Sections 14(2), 17, and 18 of the Act must be deducted.

Example 10.4.1: Suppose the business status of Swastik Nepal Pvt. Ltd. for income year 2075/76 is as follows: Sales Rs. 10,00,000; Cost of sales Rs. 6,00,000; Depreciation expenses Rs. 50,000; Other administrative expenses Rs. 2,50,000; Donation expenses Rs. 15,000. Adjusted taxable income: Rs. 1,00,000 (Sales 10,00,000 less Cost of sales 6,00,000 less Depreciation 50,000 less Other administrative expenses 2,50,000).

(a) Actual donation expenses: Rs. 15,000.

(b) 5% of adjusted taxable income: Rs. 5,000.

Claimable donation expenses (lesser of (a) and (b)): Rs. 5,000.

Accordingly, although the company paid Rs. 15,000 as donation in income year 2075/76, only Rs. 5,000 may be claimed as a deduction from taxable income.

(3) Notwithstanding anything contained in sub-sections (1) and (2), in any special situation the Government of Nepal may, by a notification in the Nepal Gazette, specify that any amount spent or donated by any person for any work specified in that notification may be deducted fully or partly for expenditure in determining the income of that person.

Where the Government of Nepal has published a notice in the Nepal Gazette for a special purpose (such as the Prime Minister Natural Calamities Relief Fund), donations made for such purpose may be claimed without the limit specified in Section 12(2), and such donation expenses may exceed the limit of Section 12(2).

Example 10.4.2: Suppose Swastik Nepal Pvt. Ltd. mentioned in Example 10.4.1 above also donated an additional Rs. 50,000 for a purpose for which the Government of Nepal has published a Gazette notice providing a tax exemption. In that case, in addition to the 5 percent of adjusted taxable income of Rs. 5,000, the Rs. 50,000 may also be deducted, totalling Rs. 55,000 as a full expense deduction.

Donation/gift to an approved exempt organisation (Sec 12): deductible = least of (actual donation, Rs. 1,00,000, or 5% of adjusted taxable income).

Adjusted taxable income = taxable income before Sec 12/12A/12B/12C deductions and before Sec 14(2)/17/18 set-offs. Special Gazette-notified donations (e.g. PM Relief Fund) = deductible in full, no limit (Sec 12(3))

12A. Expenses on heritage protection and sports development

In computing its taxable income in any income year, any company may make a claim to subtract, upon prior approval of the Department, an amount which is the lesser of ten lakh rupees or an amount equivalent to ten percent of the assessable income, out of the expenditure made by it in that year in the protection and preservation of historical, religious and cultural heritages in Nepal or in the construction of public physical infrastructure of sports.

Prior approval of the Department is required. When seeking such approval, an application must be filed with the relevant office or the Department at least 7 days before the expenditure, stating the purpose of the expenditure, the estimated amount, the timeframe, and the procedure (such as direct payment to the relevant authority, direct arrangement, or payment through cheque).

Company + Approval + Heritage/Sports = Lower of 10 lakh or 10% deduction.

Example 10.5.1: (Incorrect In Directive)

Suppose the business status of Deep Jyoti Nepal Ltd. for fiscal year 2075/76 is as follows:

The deductible donation expense for the company in that fiscal year shall be computed as follows:

12B. Expenses contributed to Prime Minister Natural Calamities Relief Fund and reconstruction fund established by the Government of Nepal

Any person contributing any amount in any income year to the Prime Minister Natural Calamities Relief Fund and reconstruction fund established by the Government of Nepal may deduct such amount in computing the taxable income for that year.

Sec 12B contribution to PM Natural Calamities Relief Fund & GoN reconstruction fund = fully deductible.

12C. Seed capital provided to start-up businesses

Any person making available seed capital of up to one lakh rupees per business as a grant to up to five start-up businesses other than to an associated person may deduct such amount as expenses in computing taxable income.

Sec 12C startup seed grant = up to Rs. 1 lakh per startup, max 5 startups (not associated persons), fully deductible

12D. Deduction for Corporate Social Responsibility (CSR) Expenditure

A person may deduct, while calculating taxable income for an income year, the amount spent during that year for the purpose of discharging Corporate Social Responsibility (CSR) in accordance with the prevailing law.

Provided that, such deductible amount shall not exceed one percent (1%) of the total taxable income of that income year.

Chapter-5 Deductible Amounts

13. General deduction

Any person may, for the purpose of computing his income from any business or investment in any income year, deduct the following expenditures related with the transactions, subject to this Act:-

(a) Made in that income year,

(b) Made by that person, and

(c) Made in earning income from the business or investment.

This section allows claiming expenses incurred by that person in that year related to income-earning activities as general deductions. If all three conditions are not met, expenses cannot be claimed. Preliminary and pre-operational expenses can be claimed all at once in the year business commences. They cannot be deferred to future years, and except for capital-nature expenses, they cannot be added to fixed assets.

General deduction (Sec 13): an expense is deductible only if all 3 conditions are met = (a) incurred in that income year + (b) incurred by that person + (c) incurred in earning business or investment income. Preliminary & pre-operational expenses = claimed fully in the year business commences (cannot defer)

Example 21.6.1 (Investment context)

Suppose Gobinda Prasad had lent money to any entity. For the purpose of collecting interest and maintaining accounts on the loan, an employee was appointed in fiscal year 2080/81, and a salary of Rs. 30,000 was paid to such employee in that income year. Since such expense was incurred in earning investment income in that income year, the salary payment may be claimed as an expense deduction for fiscal year 2080/81.

Example 18.6.1 Nepal Dakshata Company Pvt. Ltd. incurred advertising expenses of Rs. 10,000 for business purposes in FY 2080/81, paid only in FY 2081/82. Since the expense was incurred in FY 2080/81 and is business-related, the deduction can be claimed in FY 2080/81 (accrual basis). However, if not claimed in FY 2080/81 but in FY 2081/82, since it is not related to FY 2081/82 income-earning activities, it cannot be deducted in FY 2081/82.

Bonus Expense Deduction

The Bonus Act, 2030 requires establishments to allocate and distribute bonus to employees at not more than 10% of net profit beyond the base net profit. The Department has clarified that bonus allocation amounts are deductible expenses under Sections 13 and 24 of the Income Tax Act, 2058, as distributed bonuses are included in the recipient's income and the government receives income tax on them.

The following rules apply:

(1) Amounts at not more than 10% of net profit allocated as bonus per the Bonus Act, 2030 must be deducted as expense for income tax purposes.

(2) Bonus amounts claimed as expense deductions in any income year must be fully distributed in the immediately following income year; for public entities requiring Government of Nepal prior approval, bonuses must be distributed in the year for which approval was given.

(3) If allocated bonus and claimed deductions in full or in part are not distributed within the specified time, such undistributed amount must be included in income in the immediately following income year as per Section 25(1)(c); however, amounts deposited in a national welfare fund or establishment welfare fund per the Bonus Act, 2030 in the immediately following year need not be included in income.

14. Interest deduction

(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 created for the act of generating income from business or investment:-

(a) If the debt liability has been created for having borrowed any amount, and that amount has been used in that year or used to purchase any property used in that year, or

(b) That debt liability has been created in any other circumstance.

Interest includes: payments under a debt obligation other than principal; discount, premium, swap payment, or benefit from such arrangements; and amounts treated as interest under Section 32 from financial lease or annuity payments. Interest can be deducted from the year the purchased asset starts being used in business. Even if use starts mid-year, the full year's interest is deductible.

Example 18.6.2: A person took a loan 2 years ago to purchase a machine currently in use. This year's interest on that loan can be deducted. If the machine is not yet in use, interest must be capitalized. Interest on loans for working capital (paying salaries, purchasing raw materials, etc.) can also be deducted.

Example 18.6.3: A person took a loan of Rs. 2 crore on Shrawan 1 at 12% annual interest to purchase machinery this year. The machinery started operation from Baisakh 1. Expenses this year:

a) Service fee 1%, annual renewal fee 0.5%, payable on Shrawan 1 each year.

b) Loan registration fee: Rs. 20,000

c) Mortgage valuation: Rs. 20,000, stamp duty Rs. 2,000, insurance Rs. 30,000

d) Every 4 months independent inspection by bank and insurance company, valuer charges Rs. 2,000 per visit.

Deductible: Interest of Rs. 26 lakh (interest Rs. 24 lakh + service fee Rs. 2 lakh). Since the machine was used from Baisakh 1, all interest per Section 14(1) is deductible.

Loan registration fee Rs. 20,000 and mortgage valuation Rs. 20,000 are liability outgoings. Stamp duty Rs. 2,000, insurance Rs. 30,000, and periodic inspection fee Rs. 6,000 are general asset maintenance expenses.

Example 18.6.4: A jute company borrowed Rs. 30 lakh via overdraft to purchase raw jute, paying Rs. 3,40,000 interest this year. Since this is current capital for raw material and stock-in-trade purchases, all interest is deductible per Section 14(1).

Example 21.6.2 (Investment context):

Suppose Gobinda Prasad had lent Rs. 10 lakhs to any entity. To make such loan investment, he had taken a loan of Rs. 5 lakhs from a bank. In fiscal year 2080/81, he earned interest income of Rs. 1 lakh 20 thousand from such investment and paid interest of Rs. 50,000 on the loan. Since such interest payment was incurred by him to earn investment income in that year, he may claim such interest payment as an expense deduction for fiscal year 2080/81 as it is related to earning investment income.

(c) ......

(2) Notwithstanding anything contained in sub-section (1), if a resident entity controlled by an organization entitled to tax exemption pays interest to the controlling person or associated person, the interest amount deductible pursuant to that sub-section (1) shall not exceed the total of the following amounts:-

(a) All interest amounts received in that year to be included in the computation of the taxable income of that entity, and

(b) Fifty percent of the adjusted taxable income of that entity in that year, computed excluding any interest derived by that entity or without deducting any interest paid by that entity.

This provision (Section 14(2)) is known as the thin capitalisation rule. It limits interest deductions for a resident body controlled by tax-exempt organizations, non-residents, or associated persons, where such interest is paid to the controlling or associated person. The ratio must be calculated on each day shareholders change. If 25% or more ownership is held on any day, interest paid to that group must be calculated per Section 14(2).

Example 18.6.5: Info America Incorporation (non-resident) holds 50% in Info Nepal Pvt. Ltd. In FY 2081/82, Info Nepal paid Rs. 75,000 interest to Info America. The deductible interest is calculated as follows:

Adjusted taxable income:

Claimable interest this year:

Of total interest of Rs. 75,000, only Rs. 60,000 can be claimed this year. The remaining Rs. 15,000 can be carried forward to the next year and claimed within the limit for that year's income.

(3) Any interest not allowed to be deducted or not deducted pursuant to sub-section (2) may be carried forward or credited in the forthcoming income year.

Explanation: For the purposes of this Section, "a resident entity controlled by an organization entitled to tax exemption" means an entity which, being a resident entity in that year, is subject to a vested ownership or control of twenty-five percent or more of the following persons or organizations in any time of that year:-

(a) An organization entitled to tax exemption and a person associated with that organization,

(b) A person entitled to tax exemption pursuant to Section 11 in that year or a person associated with that person,

(c) A non-resident person or a person associated with the non-resident person, or

(d) Any combination of the persons referred to in clauses (a), (b) and (c).

Interest deduction (Sec 14(1)): interest on debt used to earn business/investment income is deductible from the year the asset is put to use (full year even if used only part of the year). Thin capitalisation (Sec 14(2)): where a resident entity is 25% or more owned/controlled by a tax-exempt organisation, a non-resident or an associated person, interest paid to that controller is deductible only up to (interest income + 50% of adjusted taxable income); the excess is carried forward (14(3))

15. Allowances for cost of stock-in-trade

(1) For the purpose of computing the income earned by any person from any business in any income year, no allowances other than the allowances for the cost computed pursuant to sub-section (2) shall be allowed in respect of the disposal of the stock-in-trade of the business of that person in that year.

(2) The allowances for the cost referred to in sub-section (1) shall be computed as follows by deducting the amount referred to in clause (b) from the amount referred to in clause (a):-

(a) The amount to be set by adding the cost of the stock-in-trade derived from any business in any income year to the opening value of the stock-in-trade of that business in that year,

(b) The amount of the final value of the stock-in-trade of any business in the income year referred to in clause (a).

(3) The initial value of the stock-in-trade of any business in any income year shall be the closing value of the stock-in-trade of that business at the end of the last income year.

(4) Whichever is lesser out of the following amounts shall be considered the closing value of the stock-in-trade of that business for that income year:-

(a) The cost of the stock-in-trade of that business at the end of that income year, or

(b) The market value of the stock-in-trade of that business at the end of that income year.

(5) In computing the cost of the stock-in-trade of a business, a person shall do as follows, subject to Section 45 and sub-section (6):-

(a) In computing the income of a business, in the case of a person maintaining accounts on the cash basis, by using the method of production While valuing on the basis of cost of production, the following components must be included:

(b) In computing the income of a business, in the case of a person maintaining accounts on the accrual basis, by using the method of consumption cost.

A. While valuing on the basis of cost of production, the following components must be included:

• Direct Material Cost

• Direct Labour Cost

• Variable Factory Overhead

However, within the variable factory overhead cost, the following expenses shall not be included:

• Repairs and maintenance expenses

• Depreciation expenses

Under this method, while calculating the cost per unit of production:

• Fixed Factory Overhead should not be included in the unit cost.

Instead:

• The entire amount of fixed factory overhead actually paid during the year shall be allowed as a deduction on a cash basis.

B. Under consumption cost valuation, include:

• Direct Material

• Direct Labour

• Factory Overhead

Factory overhead includes:

• Fixed Factory Overhead

• Variable Factory Overhead

Exclude:

• Repairs and maintenance

• Depreciation

(6) If the stock-in-trade of the business of any person cannot be determined, that person may choose either the first-in-first-out method or the weighted average cost method to compute the cost of stock-in-trade.

(7) When computing the cost of stock-in-trade pursuant to sub-section (5), it shall be computed by the following method:-

(a) When computing as per the consumption cost method, to so compute the cost of the stock-in-trade under the widely recognized accounting principle that it is equal to the sum total of direct material cost, direct labor cost and overhead cost of factory.

(b) When computing as per the production cost method, to so compute the cost of the stock-in-trade under the widely recognized accounting principle that it is equal to the sum total of direct material cost, direct labor cost and Variable overhead cost of factory.

(8) When computing the cost of stock-in-trade pursuant to sub-section (6), it shall be computed by the following method:-

(a) When computing as per the weighted average cost method, to compute all the stock-in-trade of the same type in the business under the widely recognized accounting principle as per the weighted average cost method.

(b) When computing as per the first-in-first-out method, to compute on the basis that the stock-in-trade received first is also disposed first, under the widely recognized accounting principle.

(9) ......

(10) ......

Explanation: For the purposes of this Section,-

(a) "Direct labor cost" means the labor cost directly related with the production of the stock-in-trade.

(b) "Direct material cost" means the cost of materials which are or will be an integral part of the stock-in-trade.

(c) "Overhead cost of factory" means the total cost incurred in producing stock-in-trade except the direct labor cost and direct material cost.

Provided that no amount for repair and maintenance and depreciation deduction shall be included in the overhead cost of the factory.

(d) "Variable overhead cost of factory" means the overhead cost of factory that alters directly with a change in the produced quantity of stock-in-trade.

Provided that no amount for repair and maintenance and depreciation deduction shall be included in the Variable overhead cost of the factory.

Stock-in-trade cost allowance (Sec 15) = opening stock + purchases - closing stock; closing stock valued at LOWER of cost or market. Costing method: cash basis = cost price or consumption cost; accrual basis = consumption cost; if not determinable = FIFO or weighted-average. Consumption cost = direct material + direct labour + factory overhead (repair/maintenance & depreciation excluded from overhead)

Example 18.6.6: Nepal Trade Development Pvt. Ltd. made the following purchases and disposals of trading stock.

FIFO Method

Example 18.6.7 (Weighted Average Method):

Using the same purchase and disposal data as Example 18.6.6, closing stock under the weighted average cost method:

Example 18.6.8 (Direct Material Cost):

ABC Company in Kathmandu purchases raw materials from Birgunj. Per bill Rs. 1,00,000; coolies Rs. 5,000; truck Rs. 20,000; municipality tax Rs. 2,000; other expenses Rs. 1,000; unloading Rs. 10,000. Total direct material cost: Rs. 1,38,000. If the other expenses of Rs. 1,000 relate to the previous year and were not deducted then, the direct material cost is Rs. 1,37,000. All costs of bringing the goods to the place of use are included in direct material cost.

Example 18.6.9 (Direct Labour Cost): A factory employs 10 workers who are paid Rs. 2 lakh in total to produce finished goods. This Rs. 2,00,000 is the direct labour cost, representing remuneration paid to workers directly engaged in converting raw materials into finished goods.

16. Repair and maintenance expenses

(1) When computing the income of any business or investment in any income year, a person may deduct all expenses incurred in the repair and maintenance of the depreciable property owned and used in that year to earn income from that business or investment.

(2) Notwithstanding anything contained in sub-section (1), in deducting the expenses allowable under that sub-section, such expenses shall not exceed seven percent of the depreciation base amount of the class of property remaining at the end of that income year.

Rule 7: In computing the depreciation base of any class of any property for purposes of computing the threshold referred to in Sub-section (2) of Section 16 of the Act, the excess expenses to be incurred pursuant to Sub-section (3) of Section 16 of the Act or any portion thereof shall not be included.

The 7% limit applies to the depreciation base at year-end for each pool separately. Excess repair and maintenance expenses not deductible due to this limit are added to the depreciation base of the concerned pool at the beginning of the following income year. If leased assets are used for business income activities and repairs are incurred, such repair expenses cannot be claimed under Section 16 but must be claimed under Section 13.

Provided that no such limit shall be applicable to repair and maintenance expenses incurred in the testing of an airplane pursuant to the standards determined by the Civil Aviation Authority of Nepal by the person providing air transport service.

(3) Any excess expense or part thereof on repair and maintenance which is not deductible because of the limit referred to in sub-section (2) may be added to the depreciation base amount of the class of the concerned property in the beginning of the upcoming income year.

Example 18.6.10: Suppose Nepal Trade Development Pvt. Ltd.'s repair and maintenance expense and fixed asset position in income year 2080/81 is as follows:

1. Repair and maintenance expenses incurred:

2. Depreciation base:

3. Allowable repair and maintenance expense:

4. Non-deductible repair expense (added to depreciation base):

a. Fully deductible.

b. Rs. 22,000 (50,000 - 28,000) added to opening depreciation base of 'C' pool next year.

c. Rs. 2,40,000 (8,00,000 - 5,60,000) added to opening depreciation base of 'D' pool next year.

Example 21.6.3 (Investment context):

Suppose in fiscal year 2080/81, Gobinda Prasad had rented out a car to Nepal Trade Development Pvt. Ltd. and under the agreement, the repair and maintenance expenses for that car were to be borne by him.

Repair & maintenance (Sec 16): deductible up to 7% of the year-end depreciation base of each pool separately; the excess is added to that pool's opening depreciation base next year (then depreciated).

Repairs on leased assets = claim under Sec 13, not 16.

No 7% limit on aircraft-testing repairs by an air-transport service provider

17. Pollution control expenses

(1) For the purposes of 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.

(2) Notwithstanding anything contained in sub-section (1), in computing the limit of expenses deductible under that sub-section in any income year, it shall not exceed fifty percent of the adjustable taxable income of all businesses operated by such person.

(3) Any excess expense or part thereof which is not deductible in excess of the limit referred to in sub-section (2) may be capitalized and depreciated pursuant to Schedule-2 in the beginning of the upcoming income year.

Only up to 50% of the adjusted taxable income may be deducted for pollution control expenses. Expenses unrelated to any business process cannot be deducted. Excess expenses not deductible due to this limit may be capitalized at the beginning of the following year and depreciation claimed per Schedule 2 (Pool 'D').

Explanation: For the purposes of this Section, "pollution control expenses" means the expenses incurred by any person related with any process for the purpose of controlling pollution or protecting or conserving the environment in any other manner.

Example 18.6.11: Suppose Nepal Trade Development Pvt. Ltd.'s income statement for income year 2080/81 is as follows:

The pollution control expense deductible in that income year is calculated as follows:

Of the Rs. 12,00,000 pollution control expense, only Rs. 6,12,500 may be deducted. The remaining Rs. 5,87,500 is added to the depreciation base of class 'D' assets and may be depreciated from the following year.

18. Research and development expenses

(1) For the purposes of 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.

(2) Notwithstanding anything contained in sub-section (1), in computing the limit of expenses deductible under that sub-section in any income year, it shall not exceed fifty percent of the adjustable taxable income of all businesses operated by such person.

(3) Any excess expense or part thereof which is not deductible in excess of the limit referred to in sub-section (2) may be capitalized and depreciated pursuant to Schedule-2 in the beginning of the upcoming income year.

Explanation: For the purposes of this Section, "research and development expenses" means the expenses incurred by any person for the purpose of developing his business and improving commercial production or process.

Provided that such expenses shall not include the cost incurred in acquiring any property referred to in sub-section (3) of Section 1 of Schedule-2.

Only up to 50% of the adjusted taxable income may be deducted for research and development expenses. Expenses unrelated to business development cannot be deducted. Excess expenses not deductible due to this limit may be capitalized and depreciation claimed per Schedule 2 (Pool 'D').

Example 18.6.12: Continuing Example 18.6.11, The following research and development expenses of Nepal Vyapar Bikash Pvt. Ltd. are deductible in that income year.”

Of the R&D expense of Rs. 7,00,000, only Rs. 3,62,500 may be deducted. The remaining Rs. 3,37,500 is added to the depreciation base of class 'D' assets and may be depreciated from the following year.

Pollution control (Sec 17) & Research and development (Sec 18) expenses: each deductible up to 50% of the adjusted taxable income of all the person's businesses; the excess is capitalised, added to Pool 'D' and depreciated per Schedule 2 from the following year. R&D excludes the cost of acquiring depreciable/capital property

19. Depreciation deduction expenses

Figure: Depreciation Groups and Rates (Section 19 / Schedule 2)

(1) For the purposes of computing the income earned by any person from any business or investment in any income year, such person shall deduct depreciation pursuant to Schedule-2 in lieu of depreciation of the depreciable properties owned and used by that person in that year in earning income from that business or investment.

Conditions for claiming depreciation:

(1) the asset must be used in business or investment income activities;

(2) that person must have ownership of the asset;

(3) the asset must be a depreciable asset.

Depreciation must be claimed per Schedule 2.

Schedule 2 provides:

Sub section 1: Classification and Pooling of Depreciable Assets: Depreciable assets are classified into Classes A, B, C, D, and E. Class A, B, C, and D assets of the same class are pooled together. Class E assets (intangible assets) must be placed in separate pools even if of the same class, as each has different status and useful life.

For depreciation purposes, class 'ka' (permanent structures) includes buildings, roads, tunnels, dams, swimming pools, power houses, warehouses, stadiums, view towers, canals, bridges, airport aprons, parking lots, and similar permanent assets. Structures built on leased land for a fixed period and structures built in rented commercial premises are depreciated over the period determined by the agreement between the lessor and lessee. The cost of such structures must be included in class 'nga' and depreciation claimed subject to the terms of that agreement.

Class 'nga' (intangible assets) includes patents, copyrights, trademarks, formulas, brands and other time-limited rights (but goodwill is not treated as an asset for tax purposes). A royalty tied to per-unit production or sales is not an intangible asset but a royalty.

Example 18.6.12 A:

Sunrise Boarding School Pvt. Ltd. purchased chairs/tables worth Rs. 1,00,000 and Diamond Restaurant Pvt. Ltd. purchased chairs/tables worth Rs. 2,00,000 for a party hall. Both must add to Class 'B' depreciation base.

Example 18.6.12 B:

Sunrise Boarding School Pvt. Ltd. bought a bus for Rs. 30,00,000 to transport students. Angela Travel Pvt. Ltd. bought a jeep for Rs. 40,00,000. Both are Class 'C' assets.

Section 3 Depreciation Rates: Three types are available:

(1) Normal Rate per Schedule 2, Section 3(1);

(2) Accelerated Rate per Schedule 2, Section 3(2) for manufacturing industries and specified bodies.

The following entities may claim an accelerated rate of one-third additional depreciation on Class A, B, C and D assets.

(a) Special industries (as defined in the Industrial Enterprises Act, 2076, Section 17) - meaning manufacturing industries other than cigarettes, bidi, cigar, khansu (tobacco), mines, industries whose main raw material is tobacco and similar products, wine, beer and similar products.

(b) Entities operating trolley buses or mini-buses on a specific route, or constructing and operating a ropeway, cable car or sky bridge, or constructing and operating roads, bridges, tunnels, railways or airports.

(c) Entities constructing public infrastructure and transferring it to the Government of Nepal, and hydropower generation, production and transmission projects.

(d) Cooperative unions and institutions registered under the Cooperative Act, 2074, other than tax-exempt ones.

• A person who has developed an asset for the purpose of generating electricity required for their own business purpose may claim fifty percent of the capitalised amount of such asset as depreciation expense in the same year.

• A person who issues bills and invoices using a fiscal printer and cash machine may claim the entire amount of expenditure incurred on such printer and cash machine as depreciation expense in the same year.

Section 2 Depreciation of Asset

(1) General Rule

Any person can claim depreciation expense for each pool of depreciable assets in an income year.

Depreciation Formula

Depreciation=A×B

Meaning

A- Depreciation base of the pool at year-end

B- Depreciation rate applicable to that asset class

(2) Calculation of Depreciable Base

The depreciation base of depreciable assets in Class "A", "B", "C" and "D" is computed pool-wise, while the base of each asset in Class "E" is computed separately.

The depreciation base of each depreciable asset under Class "E" at the end of any income year shall be the total of the following amounts:

(3) How New Asset Cost is Added to Pool

The full cost is not always added immediately.

A proportion is added in the year of purchase depending on when the asset is acquired.

First Instalment Formula

A/3×B

Meaning

A-Time factor as shown below B-Cost of asset

Remaining Cost

The balance not added in the first year:

Added in the following income year

Not added if the pool is dissolved before then.

(4) Additional Depreciation for Small Balances

Applicable only to Class A, B, C and D.

After calculating normal depreciation:

Section 4 Disposal of Depreciable Assets

Disposal of Depreciable Assets:

SubSection (1): If disposal proceeds of Class A, B, C, or D pool assets exceed the depreciation base at year-end, the excess (Balancing Charge) must be included in income.

SubSection (2): If all assets in a pool are disposed of before year-end, the pool is dissolved: if base exceeds proceeds, the excess is Terminal Depreciation (expense); if proceeds exceed base, the excess is income.

Summary of Depreciation (Sec 19, Schedule 2): asset must be (i) owned, (ii) used in business/investment, (iii) of a depreciable nature.

Pools (declining balance): A buildings/structures 5%, B computers/furniture/office equipment 25%, C automobiles/buses 20%, D plant/unclassified + assets capitalised u/s 17(3)/18(3) 15%; E intangibles = cost ÷ useful life (straight line, each in a separate pool).

Accelerated rate (manufacturing & specified bodies) = normal + one-third (A 6.67%, B 33.33%, C 26.67%, D 20%). Addition timing: added Shrawan-Poush = 100% of cost, Magh-Chaitra = two-thirds, Baisakh-Ashadh = one-third (balance added the next year)

Example 18.6.14: Suppose Nepal Trade Development Pvt. Ltd.'s depreciation base for pool 'kha' at the end of income year 2080/81 is Rs. 1,00,000. The depreciation expense for that pool in that income year is:

Example 18.6.15: Suppose Nepal Trade Development Pvt. Ltd.'s class 'kha' depreciation base at the end of income year 2080/81 is Rs. 2,400. After deducting 25 percent depreciation of Rs. 600, the balance is Rs. 1,800. Since this is less than Rs. 2,000, the entire remaining balance of Rs. 1,800 may be claimed as additional depreciation in that income year.

Example 18.6.16: A computer worth Rs. 60,000 purchased in FY 2080/81: if added within Poush 2080, full Rs. 60,000 included in that year's pool; if added Magh-Chaitra, two-thirds Rs. 40,000 added this year and Rs. 20,000 next year; if added Baisakh-Ashadh, one-third Rs. 20,000 added this year and Rs. 40,000 next year.

Example 18.6.17 (Class E - Trade Mark License): Trade mark license purchased on Magh 10, 2080 at Rs. 6,00,000 with useful life 5 years 2 months (rounded to 5 years). Annual rate: 20%. Annual depreciation: Rs. 1,20,000. Since purchased in Magh-Chaitra, two-thirds of cost (Rs. 4,00,000) is added in FY 2080/81 and Rs. 2,00,000 in FY 2081/82.

Example 18.6.18: Nepal Trade Development Pvt. Ltd. at end of FY 2079/80 had Pools C and D. In Magh FY 2080/81, added a motorcycle worth Rs. 1,00,000. In FY 2080/81, sold car for Rs. 17 lakh and machinery for Rs. 9 lakh. Motorcycle destroyed in accident; no assets remain in either pool.

Balancing Charge (excess proceeds over base) of Rs. 1,00,000 in Pool C is included in income per Section 7(2)(d). Pool D has no remaining assets but a value of Rs. 1,50,000 remains, so Terminal Depreciation of Rs. 1,50,000 is claimed per Schedule 2, Section 4.

If an asset still exists but its block value is zero, any repair/improvement cost is added to the depreciation base and depreciated in future years instead of being immediately deducted.

(2) Notwithstanding anything contained in sub-section (1), the following provisions shall apply in respect of the depreciation deduction of the devices, equipment and other machineries installed by any entity in the projects involving construction and operation of public infrastructure to be transferred to the Government of Nepal and in the projects on construction of powerhouses and generation and transmission of electricity:-

(a) If the devices, equipment and other machineries installed previously become obsolete because of being old or worn out and new devices, equipment and other machineries have to be installed in lieu thereof, the value which remains by subtracting the depreciation deduction up to the income year from the cost of the obsolete property that was installed previously in the income year in which such new installation was made may be deducted as expenses.

(b) In respect of properties other than the old properties replaced pursuant to clause (a), if any value remains by subtracting the depreciation deduction up to the income year when transfer takes place from the cost of those properties at the time when the entity transfers such a project to the Government of Nepal, that entity may deduct such remaining value as expenses.

Example 18.6.21 Nepal Hydropower Project Pvt. Ltd. received a 30-year license for a 30-megawatt BOOT project. In addition to other assets, land worth Rs. 90 lakh was purchased for the project. Since this is a BOOT project requiring land handover at the end of the 30-year contract period, the land investment can be included in Class 'E' and claimed as Rs. 3 lakh per year (Rs. 90 lakh / 30 years) for income tax purposes.

Example 18.6.23 A company purchased a fiscal printer and cash machine for Rs. 50,000. Since these are assets specified under Schedule 2, Section 3(4), the full cost of Rs. 50,000 can be claimed as depreciation in the year the assets are put into use.

Example 18.6.22: Kattha Limited, special industry, installed a generator worth Rs. 9 lakh in Magh 2080. Pool D other assets opening depreciation base Rs. 29 lakh. The opening depreciation base of class 'D' other assets at the start of the year is Rs. 29 lakh. Since the generator qualifies for 50 percent first-year depreciation, the calculation is:

Example 21.6.9: Suppose the assets in Gobinda Prasad's Pool "C" at the end of fiscal year 2079/80 were as follows. He did not add any assets in fiscal year 2080/81. In fiscal year 2080/81, he sold his car for Rs.14 lakhs. The outgoings and incomings of that pool are as follows:

Since the incomings exceeded the outgoings in that asset pool and there are no other assets in that pool, the pool is considered dissolved, and the excess of incomings over outgoings of Rs.2 lakhs must be included in investment income. If he had sold the car for only Rs.11 lakhs, since outgoings exceeded incomings by Rs.1 lakh, he would have been entitled to claim such amount as an expense deduction in that fiscal year under Section 19.

20. Loss from business or investment

(1) For the purposes of computing the income earned by any person from any business or investment in any income year, such person may deduct the following loss:-

(a) Loss suffered by that person from any other business and not deducted in that year, and

Example 18.8.1: Ganesh Sinkhada had Rs. 1 crore import business income and Rs. 50 lakh hotel operation loss in FY 2080/81. He can claim the hotel loss against import income in that year's return.

Example 18.8.2: If Ganesh Sinkhada had only hotel losses of Rs. 50 lakh in FY 2080/81 with no other income, losses can be carried forward for 7 years (until FY 2087/88) and deducted from business or investment income from 2081/82 through 2087/88.

Per Section 57, if 50% or more of any body's ownership (control) changes compared to three years prior, the body is deemed to have disposed of its assets or liabilities, and losses incurred before the ownership change cannot be deducted after the change.

Example 21.8.1: Suppose Ganesh Bahadur incurred a loss of Rs. 10 lakhs from a hotel business in fiscal year 2080/81. He sold shares of a listed company (investment income) in that year and earned a gain of Rs. 15 lakhs from such sale. In computing the net gain from share disposal in that fiscal year, the hotel business loss of Rs. 10 lakhs may be deducted, leaving a net gain of only Rs. 5 lakhs. In the above example, investment loss cannot be claimed as a deduction against income from hotel business.

Example 21.8.2: Suppose Ganesh Bahadur sold shares of a listed company (investment income) in fiscal year 2079/80 and incurred a loss of Rs. 6 lakhs from such sale, and such loss could not be adjusted in that year. In fiscal year 2080/81, he sold land (non-business taxable asset) for Rs. 1 crore (investment income) and earned a gain of Rs. 20 lakhs. In computing the net gain from disposal of non-business taxable asset in that fiscal year, the investment loss of Rs. 6 lakhs from fiscal year 2079/80 may be deducted, leaving a net gain of only Rs. 14 lakhs.

(b) Loss suffered by that person from any business and not deducted in the past seven income years.

Provided that in the case of a project of building and operation of any public infrastructure to be transferred to the Government of Nepal, a project on construction of a powerhouse and generation and transmission of electricity, and an entity conducting petroleum work pursuant to the Nepal Petroleum Act, 2040, loss not deducted in the last twelve income years.

(2) For the 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 and the loss incurred by that person from such investment or any other investment which could not be deducted in the past seven income years.

In this sense, while business loss may be claimed as a deduction against investment income, investment loss cannot be claimed as a deduction against business income. Similarly, losses from business or investment cannot be deducted from employment income.

(3) Subject to sub-sections (1) and (2), and for the purposes of those sub-sections, any loss suffered by any person in respect of 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 the non-taxable income of that person.

Any undeducted loss incurred by a person from a foreign source may be deducted only in computing income of that person from that foreign source, and any undeducted loss incurred in receiving a tax-exempt income may be deducted only in computing the tax-exempt income of that person. That is, investment losses incurred in a particular country may only be deducted against investment income earned in that same country.

(4) Subject to sub-sections (1) and (2), if any person suffers a loss in an income year when a long-term contract obtained by carrying on the business at the international level in competition was completed or disposed of in any other manner, or where a loss not deducted which the liability whereof is allowed to be carried forward to the coming year pursuant to clause (b) of sub-section (1) is 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 to the last income year or years, and

(b) The loss not deducted may be treated only to the extent of the excess where, in computing the income of the business related with that long-term contract, the amounts to be included in the incomings exceed the amounts to be included in the outgoings.

Comprehensive Numerical Illustration

Company: ABC Infrastructure Pvt. Ltd.

Business: Construction of large infrastructure projects

Nature of Contract: Long-term construction contract obtained through international competitive bidding (Global Contract)

Contract Period: FY 2077/78 to FY 2080/81

Accounting Method: Percentage of Completion Method (Estimated Cost Basis)

Applicable Income Tax Rate (assumed for illustration): 25%

FY 2077/78:

Contract Revenue Recognised: Rs. 100,000,000

Contract Cost Incurred: Rs. 80,000,000

Profit: Rs. 20,000,000

FY 2078/79:

Contract Revenue Recognised: Rs. 120,000,000

Contract Cost Incurred: Rs. 95,000,000

Profit: Rs. 25,000,000

FY 2079/80:

Contract Revenue Recognised: Rs. 60,000,000

Contract Cost Incurred: Rs. 120,000,000

Loss: Rs. 60,000,000

FY 2077/78 Tax: Rs. 20,000,000 × 25% = Rs. 5,000,000

FY 2078/79 Tax: Rs. 25,000,000 × 25% = Rs. 6,250,000

Total Tax Paid in Earlier Years: Rs. 11,250,000

In FY 2079/80, the company incurs a loss of Rs. 60,000,000 related to the long-term contract. Upon completion of the contract, the Inland Revenue Department issues a written notice allowing carry-back of the loss.

Step 1: Set-off against FY 2078/79 profit

Profit available: Rs. 25,000,000

Remaining loss: Rs. 60,000,000 − Rs. 25,000,000 = Rs. 35,000,000

Step 2: Set-off against FY 2077/78 profit

Profit available: Rs. 20,000,000

Remaining loss: Rs. 35,000,000 − Rs. 20,000,000 = Rs. 15,000,000

Tax Benefit:

Refund/Credit Adjustment of FY 2078/79 tax: Rs. 6,250,000

Refund/Credit Adjustment of FY 2077/78 tax: Rs. 5,000,000

Total immediate tax refund/Credit Adjustment: Rs. 11,250,000

Balance loss of Rs. 15,000,000 carried forward to future years.

Assume that carry-back is not approved by the Department. In such a case, clause (b) applies.

While computing income from the business related to the long-term contract in FY 2079/80:
Income side amount: Rs. 60,000,000

Expense side amount: Rs. 120,000,000

Excess of income over expense: Nil

Result under clause (b):

Entire loss of Rs. 60,000,000 is treated as ‘loss not allowed to be deducted’. The loss is legally recognised but cannot be set off against other business income. The loss is carried forward and adjusted only against future income from the same long-term contract.

• If carry-back is allowed: Immediate cash-flow benefit through tax refund of Rs. 11,250,000.

• If carry-back is not allowed: Genuine loss of Rs. 60,000,000 is preserved for future adjustment and not permanently disallowed.

(5) The following loss suffered by any person in any income year shall be allocated as if it were related with a long-term contract or contracts of that person:-

(a) The loss resulted from a long-term contract or contracts related with the business, and

(b) The loss on excess of the expenses to be deductible in computing the income earned from that business in the year related with the contract for each such contract over the amounts to be included.

(6) If, when computing the income earned by any person from more than one business or investment in any income year, that person is allowed to deduct the loss not deducted from more than one business or investment, that person may on his own determine the priority of the business or investment from which the portion of loss is deducted.

Example 18.8.3: Globe Nepal Pvt. Ltd. has a Trading Business in Kathmandu and LPG factories in Bhairahawa (Rs. 1 crore income) and Dhangadhi (Rs. 20 lakh income). Trading Business had Rs. 10 lakh loss in FY 2080/81. The company must decide itself whether to deduct the loss from Bhairahawa or Dhangadhi income, as per Section 20(6).

(7) If, when computing the loss suffered by any person from any business or investment in any income year, this Section is not applied and the deductible amounts exceed the amounts includable in computing the income from the business or investment of that person, such excess amounts shall be computed.

(8) If any person has received full tax exemption in respect of income of business or investment in any income year, the loss incurred in that income year shall not be carried forward to the upcoming income year.

For example, a loss from a business that is fully exempt from tax under Section 11 of the Act cannot be claimed as a deduction against computing income from other businesses or investments, and such loss also cannot be carried forward.

Example 18.8.4: Globe Electricity Company Pvt. Ltd. operated a small hydropower plant with full tax exemption until FY 2079/80, accumulating Rs. 60 lakh in losses. In FY 2080/81, the company earned Rs. 10 lakh. Since full exemption was received in 2079/80, losses cannot be carried forward to 2080/81. The company must file tax on Rs. 10 lakh at 20% = Rs. 2 lakh.

Example 18.8.5: If Globe Electricity Company received only partial tax exemption until FY 2079/80, the Rs. 60 lakh losses can be carried forward and deducted from FY 2080/81 income. Any undeducted amount can be carried forward subject to Section 20(1).

Loss set-off & carry-forward (Sec 20): business loss → deductible against business AND investment income; investment loss → only against investment income (NOT business); neither against employment income.

Carry forward 7 years (12 years for BOT/BOOT infrastructure, power and petroleum projects). Foreign-source loss → only against same-country foreign-source income; tax-exempt-income loss → only against that exempt income.

Sec 20(6): taxpayer chooses which business/investment to set the loss against.

Sec 20(8): a fully tax-exempt year's loss cannot be carried forward. Sec 57: if ownership changes 50% or more vs 3 years earlier, pre-change losses lapse

21. Expenses not allowed for deduction

(1) Notwithstanding anything contained elsewhere in this Act, for the purpose of computing the income earned by any person from any business, employment or investment in any income year, the following expenses or amounts shall not be deducted:-

(a) Expenses of domestic or personal nature,

(b) Tax payable under this Act and a fine or similar other fee paid to the government of any country or any local body thereof for a violation of any law or regulation or byelaw framed thereunder,

Provided that the tax paid to the Provincial Government and Local Level shall be deducted as expenses.

(c) Expenses to the extent of those spent by any person to obtain the amounts enjoying exemption pursuant to Section 10 or expenses made to obtain the amounts from which tax has been finally deducted,

(d) Expenses for the payments referred to in sub-section (2),

(d1) Remuneration and wages expenses distributed to employees and workers having no Permanent Account Number except for wages of a periodic nature paid up to three thousand rupees,

(d2) Expenses against invoices of more than two thousand rupees wherein the Permanent Account Number is not mentioned,

Provided that the purchase expenses shall be valid if the seller does not have a Permanent Account Number, in the case of a natural person directly buying agricultural, forest, animal or other household goods without carrying on commercial business transactions.

(e) Distribution of profits by any entity,

(e1) Remuneration of more than twenty-five thousand rupees per person per month not paid through a banking channel,

(f) Similar other amounts notwithstanding that they are not so mentioned in clauses (a), (b), (c), (d), (d1), (d2), (e) and (e1) as not to be deductible, except those allowable under this Chapter or Chapter-6, 7, 10, 11, 12 or 13.

(2) If a person whose annual turnover is more than twenty lakh rupees in any income year makes a cash payment of more than twenty five thousand rupees at a time in that income year, he shall not be allowed to make that deduction except in the following circumstances:-

(a) Payment made to the Government of Nepal, a constitutional body, a corporation or bank or financial institution owned by the Government of Nepal,

(b) Payment made to a farmer or producer producing a primary agro-product, and payment to a farmer who has processed such product on his own, notwithstanding that primary processing of such product has already been carried out,

(c) Payment for retirement contribution or retirement payment,

(d) Payment made in a place where banking services are not available,

(e) Payment made on the day when banking services are closed or payment involving a mandatory provision of payment in cash, or

(f) Amount deposited in the bank account of the recipient of payment.

(3) Subject to the provisions of Sections 14, 15, 16, 17, 18, 19, 20 and 71, no amount shall be deductible for capital expenses or foreign income tax.

Explanation: For the purposes of this Section,-

(a) "Expenses of domestic or personal nature" means the following expenses:-

(1) Private expenses of any natural person, and expenses including the following expenses to the extent a loan has been used for personal purpose, in respect of interest on a loan borrowed by an natural person:-

(a) Expenses made for an natural person for the provision of lodging, food, snacks, entertainment or other activities of amusement,

(b) Expenses for the movement by an natural person from his house to the place where the business or investment is operated, except for movement in the course of business or investment,

(c) Expenses made to purchase clothes for an natural person except those clothes which are not proper to put on at times other than working times, and

(d) Expenses made for education or training.

Provided that the expenses made only for education directly related with the business or investment, where no degree or diploma is achieved, shall be deductible.

(2) Except in the following circumstances and to that extent, expenses incurred in respect of a payment made by any person to any natural person and expenses made for a third person:-

(a) If that payment has been included in computing the income of an natural person,

(b) If the natural person has made, as a consideration, a return payment to that person in a sum equal to the market value of the payment received, or

(c) If payment is made for such prescribed petty amounts of which accounts are difficult or administratively impracticable to be maintained.

(b) "Place where banking service is available" means any place within a ten-kilometer area whereof banking service is available.

(c) "Cash payment" means a payment other than a payment by letter of credit, account payee cheque, draft, money order, telegraphic transfer, money transfer (Hundi) through a bank or financial institution to be deposited in a bank account, payment made through a digital wallet approved by Nepal Rastra Bank, and a transfer made by any other means between banks or financial institutions.

(d) "Capital expenses" means the following expenses, excluding the ones incurred in the issuance of shares or debentures:-

(1) Expenses incurred in feasibility study, exploration and development of natural resources,

(2) Expenses incurred in acquiring any property with useful life for more than twelve months, or

(3) Expenses in disposing of a liability.

Non-deductible expenses (Sec 21): (a) domestic/personal expenses + (b) income tax & fines/penalties for legal violations (BUT provincial & local tax = deductible) + (c) expenses to earn Sec 10 exempt or final-WHT income + (d) Sec 21(2) cash payments > Rs. 25,000 + (d1) wages to employees without PAN (except periodic wages up to Rs. 3,000) + (d2) invoices over Rs. 2,000 without PAN + (e) distribution of profits + (e1) remuneration over Rs. 25,000/month not paid through a banking channel + (f) similar amounts.

Sec 21(2): turnover over Rs. 20 lakh + single cash payment over Rs. 52,000 = not deductible (exceptions: govt/bank payee, farmers, retirement, no-banking areas, bank-closed days, deposit to payee's account). Sec 21(3): capital expenses & foreign income tax not deductible.

Chapter-6 Tax Accounting and Time

22. Method of tax accounting

Rule 8(1): In maintaining accounts of tax pursuant to Section 22 of the Act, accounts shall be maintained in accordance with the accounting standards, if any, prescribed by the prevailing law.

Rule 8(2): In cases where any accounting standards are not specified pursuant to Sub-rule (1), tax accounting shall be carried out as per the accounting standards specified by the Department based on any prevailing international principle or practice.

In this context, the Act provides that accounting must be done in accordance with Nepal Accounting Standards/Nepal Financial Reporting Standards (NAS/NFRS) issued by the Institute of Chartered Accountants of Nepal (ICAN), and where such standards are not available, in accordance with International Accounting Standards/International Financial Reporting Standards (IAS/IFRS) or other prevailing principles.

(1) The matter of when any person receives any income or makes any expense shall be determined in accordance with the widely recognized accounting principle, subject to this Act.

(2) An natural person shall, while computing the income to be earned from his employment and investment, maintain accounts on the cash basis, for purposes of tax.

Provided that where, after the filing of a case in court and its determination, any natural person receives a lump-sum payment of remuneration for past income years in respect of employment, such remuneration shall be accounted for on the accrual basis in the relevant income years for tax purposes.

This provision is clarified in the following example:

Example 8.2.1: Suppose Kamal Pariyar is an employee at the Agriculture Supplies Corporation. He received the total amount of Rs. 2,40,000 due as salary and allowances at the rate of Rs. 20,000 per month from 2080 Shrawan to 2081 Ashadh only in 2081 Shrawan. In this situation, since accounting is on a cash basis, the amount must be included in income for tax purposes in the month in which it was received, namely 2081 Shrawan. Therefore, under this method, regardless of which income year the income relates to, it must be accounted for as income in the income year in which it is received.

(3) A company shall maintain accounts on the accrual basis, for purposes of tax.

For tax purposes, the term "company" has a broader meaning than "company" in the corporate sense. The entities that fall within the term "company" for tax purposes are listed in Section 2(m) of the Act. Such companies must account on the accrual basis. The provision is clarified in the following example:

Example 8.2.2: Suppose Kamal Services and Company Pvt. Ltd. entered into a contract to provide security guards to the Agriculture Supplies Corporation, and in this context, the company provided 5 security guards in 2081 Ashadh. The invoice value under the agreement for providing security guards for that month was Rs. 30,000. Since the right of the company to receive Rs. 30,000 from the Agriculture Supplies Corporation for providing security guards was created, even though the cash payment was not received from the Agriculture Supplies Corporation, the company must include the above-mentioned Rs. 30,000 in its income for income year 2080/81.

(4) Except if the Department has otherwise specified by issuing a notice in writing, any person may, for purposes of income tax, shall maintain accountxs on the cash or accrual basis, subject to sub-sections (1), (2) and (3).

An natural person must account on a cash basis for income from employment and investment, and a company must account on an accrual basis for tax purposes. In other circumstances, such as an natural person or a partnership firm with fewer than 20 partners accounting for business income, either the cash or accrual basis may be used.

(5) Any person may make an application to change the method of accounting for tax purposes, subject to sub-sections (2) and (3). If the Department thinks that it is necessary to change the method of accounting to clearly show the income of such person, the Department may give permission to change the method of accounting.

Generally, an accounting method once adopted must be used consistently. However, a person other than a company who considers that their accounting method has become difficult to compare with the accounting method used by other persons conducting similar businesses, or for any other valid reason, may apply to the Department to change the accounting method. That is, a person who has been accounting on a cash basis and wishes to account on the accrual basis, or a person who has been accounting on the accrual basis and wishes to change to the cash basis, may apply to the Department. If the Department considers it necessary to change the accounting method in order to clearly present income, it may grant approval for such change. Since the employment and investment income of an natural person must be on a cash basis except for the restrictive provision under the proviso to Section 22(2), and the accounting for a company's income must be on the accrual basis for tax purposes, applications to change these provisions cannot be submitted.

(6) If the method of accounting of any person for purposes of tax is changed pursuant to sub-section (5), in computing the income of that person in the income year when such change is made, adjustment shall be so made that no amounts out of those included, deducted or to be included or deducted are omitted or duplicated.

Where an accounting method is changed for tax purposes without obtaining the Department's approval, an adjustment must be made in the income year of the change to ensure that no amount is omitted or duplicated. This provision is clarified in the following example:

Example 8.2.3: See Example 6.2.7

Tax accounting method (Sec 22): natural person → CASH basis for employment & investment income (exception: court-awarded lump-sum back-pay = accrual in the relevant years);company → ACCRUAL basis; others (incl. partnership with fewer than 20 partners) → cash OR accrual by choice. Method once chosen must be applied consistently; a change needs Department approval, with an adjustment in the change year so no amount is omitted or duplicated.

23. Cash basis accounting

Any person shall, in maintaining accounts on the 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 received and include it in his income computation only at the time when payment is received by him or made available to him.

(b) To deduct for expense only after he makes payment.

The system of including amounts in income only after cash is received, and recording expenses only after cash has been paid, is called the cash-basis accounting method. However, even where accounting is on a cash basis, expenses under Section 15 (Cost of Goods Sold) must be recorded on the accrual basis. The provisions on cash-basis accounting are clarified in the following example:

Example 8.3.1: Suppose Mohan Kasaju & Sons is a sole proprietorship. That firm accounts for its income and expenses on a Cash Basis for income tax purposes. The position of the firm's transactions in income year 2080/81 is as follows:

a. Cash received in 2080/81 from credit sales made in 2079/80: Rs. 50,000.

b. Total sales of 2080/81 were Rs. 10,00,000, of which Rs. 9,00,000 was received in cash.

c. Employee salary expense of Rs. 2,00,000 for 2080/81, of which Rs. 1,80,000 was paid; Rs. 20,000 was paid only on date 2081.4.14.

d. Cost of sales of Rs. 6,00,000 already paid.

e. In 2080/81, advance payment of Rs. 1,00,000 for rent for 2081/82 was made.

f. The rent of Rs. 90,000 for 2080/81 was paid in cash in income year 2079/80.

g. Of the total interest expense for 2080/81 of Rs. 60,000, Rs. 10,000 was paid only on date 2081.4.20.

Based on the above, the income of that firm for income year 2080/81 must be computed on a cash basis as follows: