Tax Suggested Combine June 19

The Institute of Chartered Accountants of Nepal
Suggested Answers of Advanced Taxation
CAP III Examination June 2010
1. Following Profit & Loss Account is produced to you by the Accountant of M/S Strong
Cements Co. Ltd., listed manufacturing company in NEPSE.
Profit & Loss Account F/Y 2066/67
Particulars Amount (Rs.) Particulars Amount (Rs.)
Cost of Goods Sold 75,000,000 Sales 100,000,000
Administrative Expenses 10,000,000 Share Premium 60,000,000
Selling & Distribution
5,000,000 Duty Drawback 500,000
Expenses
Repair & Improvement 420,000
Expenses-
Block A: 85,000
Bad debts Recovered 1,000,000
Block B:,60,000
Block C: 25,000
Block D: 250,000
Share Issue Expenses 15,000,000 Miscellaneous write off 250,000
Depreciation- 550,000
Block A: 50,000
Block B: 100,000
Block C: 100,000
Block D: 300,000
Income Tax @20% 11,156,000
Net Profit 44,624,000
161,750,000 161,750,000
Additional Information:
 It has collected Rs. 120,000,000 from 600,000 shares at the rate of Rs. 200 each through Initial
Public Offering (IPO). Rs. 200 includes share premium of Rs.100 each.
 Duty drawback is refund of custom duty through one window policy. It was included in raw
material cost in previous year.
 Bad debt recovered includes Rs. 600,000 allowed as expenses in previous year.
 Miscellaneous write off is credit balance of various parties since long, which becomes no longer
payable.
 Opening Stock is understated by Rs. 5,000,000 and closing stock is understated by Rs.
10,000,000.
 Cost of Goods Sold includes computer purchase for office purpose as on 01/09/2066 for Rs.
200,000, cost of purchase of equipment for extract of minerals is Rs. 3,000,000 on 31/01/2067
Suggested Answers of Advanced Financial Reporting
CAP III Examination – June 2010
and land for office complex is purchased for Rs. 300,000 as on 01/09/2066. The purchased
assets were used immediately.
 Calculation of Depreciation is as per Income Tax Act, Annex-2 on the Fixed Assets shown in
books of Accounts.
 Administrative expenses includes the following:
o Director’s foreign trip expenses for his son’s wedding: Rs. 1,000,000
o Director’s foreign trip to arrange import of raw material: Rs. 500,000
o VAT, Additional VAT & Interest paid as per the VAT assessment order of tax office is Rs.
600,000 (250,000, 250,000 & 100,000 respectively.)
 Selling & Distribution expenses includes the dealers meeting expense of Hotel Soaltee Crown
Plaza of Rs. 750,000, was mistakenly not provisioned in F/Y 2064/65.
You are the statutory auditor of the company for the F/Y 2066/67.
Required:
Whether the income tax calculated i.e. Rs. 11,156,000 is correct? If not, calculate the correct
amount of Income Tax. 15
Ignore 1/3rd additional depreciation. No opening unabsorbed Repair and improvement
expense.
Tax Rate: 20%
Answers:
Calculation of Total Taxable income of M/S Strong Manufacturing Co. Ltd.
Particulars (Rs.)
Income
Sales: 100,000,000
Share Premium(Note-1) Nil
Duty Drawback(Note-2) 500,000
Baddebt Recovered(Note-3) 600,000
Miscellaneous Expenses writtenoff 250,000
Total Income(A) 101,350,000
Less: Allowable Expenses
Cost of Goods Sold(Note-4) 66,500,000
Administrative Expenses(Note-5) 8,400,000
Selling & Distribution Expenses(Note-6) 4,250,000
Repair & Improvement Expenses(Note-7) 347,000
Share Issue Expenses Not allowable being of capital return
Depreciation(Note-8) 750,000
Total Allowable Expenses(B) 80,247,000
Total Taxable Income (A-B) 21,103,000
Tax @20% 4,220,600
Hence the tax calculated by the Accountant is not correct & that should be Rs.4,220,600.
Working Notes:
1) Share Premium collected shall be directly transferred to the capital reserve & thus not
included in the income.

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2) As the duty paid was included in raw material cost earlier, it has to be included in
income.
3) Only Rs.600,000 worth of bad debt was allowed as expenses earlier. Thus, the same
amount needs to be included in income.
4) Calculation of allowable Cost of Goods Sold(Section 15)

Cost of Goods Sold (As Per P/L) 75,000,000
Add: Understatement in Opening Stock 5,000,000
Less: Understatement in closing stock 10,000,000
70,000,000
Less: Assets included in cost of Goods Sold
Computer 200,000
Cost of Equipment for extract of mines 3,000,000
Land For Office Complex 300,000
Allowable Cost of Goods Sold 66,500,000
5) Administrative Expenses
Total Expenses(As per P/L) 10,000,000
Less: Disallowable Expenses
-Personal trip for son‟s wedding 1,000,000[Personal Expenses u/s 21(1) (KA)]
-VAT,Additional Tax & Interest 600,000
8,400,000
6)Selling & Distribution Expense

Total Expenses(As per P/L) 5,000,000
Less: Disallowable Expenses
Dealers Meeting Expenses 750,000(u/s 13, previous year expenses)
4,250,000
7) Calculation of allowable Repair & improvement expenses (Section 16)

Block Depreciable Base(a) Allowable Amount (b=7% Expenses Claimed Disallowed
(W.N.8) of a) (c) (c-d)
A 1,000,000 70,000 85,000 15,000
B 600,000 42,000 60,000 18,000
C 500,000 35,000 25,000 -
D 3,000,000 210,000 250,000 40,000
357,000 420,000 73,000
Therefore, Allowable Expenses =420,000-73,000
=347,000
8) Calculation of Depreciation (Section 19)

Block Rate of Depreciation Depreciation Absorbed Total Dep Depreciation
Depreciation(a) in P/L A/c Base(c=b/a) Addition* (d) Base(e=c+d) (f=e x a)
(b)
A 5% 50,000 1,000,000 1,000,000 50,000
B 25% 100,000 400,000 200,000 600,000 150,000
C 20% 100,000 500,000 500,000 100,000
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D 15% 300,000 2,000,000 1,000,000 3,000,000 450,000

750,000
*Absorbed Addition
- Computer as on 01/09/2066= Rs.200,000 [Block B]
- Equipment as on 31/01/2067=Rs.1,000,000 (3,000,000 X 1/3)[Block D]
2.
a) A
non-profit distributing company registered under Sec.166 of the Companies Act 2063, earned a net
profit of Rs.25 lacs before tax for the fiscal year 2065/2066. The company does not pay income tax
as it is registered with the Office of the Registrar of the Companies as a Non-Profit distributing
Company. Comment. 5
b) W
hether the following cash payment at a time by person having turnover of more than Rs. 50 lacs are
deductible expenses? 5
i) A bank has donated Rs. 70,000 to a political party listed at Election Commission. The Bank
has Adjusted Taxable Income Rs. 1,000,000.
ii) A general insurance company settle insurance claim & paid Rs. 150,000 at Kathmandu.
iii) ABC Saving & Credit Co-operative Society deposits its CEO's salary of Rs. 100,000 per month
in the account of CEO opened in XYZ co-operative society Ltd, (not listed at NRB).
iv) Payment of Rs. 55,000 against purchase of trading stock at Kathmandu but the payment was
made at place where banking facility was not available.
v) A-one Induction (P). Ltd. is established at place where banking facility is not available. It has
its head office at Kathmandu. One of its staff was sick and his treatment was going on at Bir
Hospital, Kathmandu. He withdraws his six months salary of Rs. 120,000 from Head Office.
c) A
staff of MNO (P) Ltd., a dealer in liquors, was injured on 01/02/2067 during the course of stocking
of cartons of liquors. He became disabled & the company is going to compensate him as per the
company’s rule. The amount of compensation is Rs. 500,000.
Whether the compensation payment attracts withholding tax and shall it be included in
taxable salary of the staff.
5
Answers:
a) Although the Company is registered with the Register of Companies as a non-profit
distributing Company,it may not be a tax exempted entity as per Income Tax Act 2058.
Under, none of the provisions of Income Tax Act 2058 , such company become Exempted
Entity ipso facto, i.e, is exempted from Income Tax. It has to apply to IRD for tax exemption
and only if it is registered as a tax exempt entity it an claim tax exemption. Thus, the

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company has to deposit Income Tax @25% on the net income, i.e. Rs.25 lacks x 25%
=Rs.625,000 if tax exempted status is not obtained from IRD .
b) i) Not deductible.(cash payment more than Rs.50,000)
(ii) Not deductible.(cash payment more than 50,000)
(iii) Not deductible.(co-operative society is not a bank)
(iv) Deductible (Banking facility is not available at the place of payment)
(v) Not-deductible. (Banking facility is available in Kathmandu)
c) As per the provisions of section 31 of Income Tax Act 2058, if a person receives the
following amount as compensation apart from the insurance claim, it shall be included in the
employment, business or investment income of the person as the case may be.
a) Any compensation against income received or probable income of any business,
employment or investment.
b) Any amount of compensation received against any losses or probable losses of a person
from business or investment.
But any compensation received due to personal accident of any individual is not includible in
income and any expenses incurred for treatment of payment is not taxable.
Therefore it does not attract TDS u/s 88, and shall not be included in taxable income.
3. A telecommunication company Resident in Nepal is facing the following problems with regard to
deducting the TDS. Your suggestion must be based on the legal provisions of the Act. 10
a) The Company is providing international communication services to local customers by using
facilities of optical fiber and satellite service providers situated outside Nepal. The Company
pays fixed charge plus fee based on transmission of information/ data periodically against these
services.
b) The Company has been purchasing various equipment and services from various domestic and
foreign suppliers for the enhancement of its service and maintenance.
c) The Company has been sending its equipment to various domestic and foreign companies for
the maintenance. Foreign Companies do necessary maintenance abroad and are paid directly
through bank transfer in the respective country.
d) The Company procures various materials and services like photocopy paper water, stationery,
vehicle maintenance and advertisement, etc, for the purpose of its business locally.
Answers:
a) As per Sec 67(5) (jha) of the Act, payments received by a person who conducts a business of
transmitting messages by cable, radio, optical fiber, or satellite communications in respect of the
transmission of messages by apparatus established in Nepal, whether or not such messages originate
in Nepal is deemed to have source in Nepal since in the question the optical and satellite service
provider are situated outside Nepal and naturally the equipments are also supposed to be placed
outside Nepal, their income has no source in Nepal and is not liable to tax in Nepal. If the
equipments are situated in Nepal, then the provider of service shall be liable to tax deduction at
source of 5% as per Schedule 1-clause 2(7).

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b) For local purchases

1. For purchase of services, if there is a contract, then 1.5% tax will be deducted. Of if the
service providers being a company provides VAT bill for the services, then also only 1.5%
of the bill amount to be deducted.
2. For local purchases of small amounts no tax is to be deducted. (Preferably, if PAN no. is
quoted in the bill).
For foreign purchases: for purchase of goods not deduction of tax as those will be paid for by letter
of credit at the place of the supplier.
For purchase of services: If the maintenance services are rendered outside Nepal by sending the
equipments outside Nepal and payment is made outside Nepal, no deduction is required.
If for maintenance personnel come to Nepal and payment is made for their services, then tax to
be deducted, if there is an agreement for the same then tax will be deducted at 1.5%. If there is
no DTAA with the country in which the service provider is resident, then tax will be deducted at
15% of the amount paid. If the service provider is a resident of the country with which Nepal has
DTAA, unless the provider could be proved to have a permanent establishment in Nepal, then
tax in the normal course will have to be deducted as if for a resident. If there is no permanent
establishment then no tax could be deducted as per DTAA.
c) Where the equipment is sent to domestic companies which have VAT registration, then tax will be
deducted at 1.5% or the bill amount. If the equipment is sent to foreign companies, then the foreign
companies earn their income by doing service in their own country and so no source of income from
Nepal and hence no tax could be deducted.
d) On purchases no tax is to be deducted. But incase an agreement is entered into for supply of the
goods at prefixed rates, then tax is to be deducted at 1.5% on the value of goods supplied.
4. Mr. Walter, an American citizen is an employee in a Nepali Company who went to U.A.E. to work at
project in U.A.E. which is obtained by the Nepali Company in global tender for one year on Shrawan
1st 2065 and earned US $ 8,000 per month. He returned Nepal on 1st Falgun 2066 and joined the
same company at Nepal from that date @RS.560,000 per month, i.e. the same amount he was
receiving in U.A.E. (Ex. Rate 1 $= Rs.70)
Calculate the tax liability of Mr. Walter for the fiscal year 2065/66 and 2066/67 in Nepal as per
Income Tax Act, 2058. 10
Note: Books of Accounts of U.A.E. project is maintained and tax return submitted at U.A.E.
Answer:
Following provisions of the Act shall be considered.
1) As per the provisions of Section2(NA)(1)(kha),to be a resident for a fiscal year , a person shall reside
in Nepal for a period of minimum 183 days out of the past continuous 365 days period. As Mr.
Walter was not in Nepal for 183 days in F/Y 2065/66 as well as F/Y 2066/67, he is a non-resident in
both the years.
2) Sec 67(6)(zha-1) , As per this section- irrespective of the place of payment, in case of the activities
the service for which is provided in Nepal , the source of payment is considered in Nepal. Thus,
while Mr. Walter was in U.A.E , the place of rendering of service not being in Nepal, his salary is not

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taxable in Nepal. But when he returned to Nepal, inspite of being a non resident as above 1 , his
salary is taxable in Nepal, as the source of payment is in Nepal.
3) As per Section 8 of Schedule-1 of Income Tax Act 2058, tax rate on the taxable income of a non-
resident is 25%.
Calculation of Tax Liability of Mr.Walter
i) F/Y 2065/66
Taxable Salary: NIL
(Source Of Payment Not in Nepal)
Tax Liability: NIL
ii) F/Y 2066/67
Taxable Salary: Rs.560,000 p.m
No. of months(Falgun To Ashad) 5
Total Salary: Rs.2,800,000
Tax@25%(Section 8-Schedule 1) Rs.700,000
5.
a) XYZ Construction P. Ltd. has entered into the contract of purchase of following equipments under
following terms and conditions from GEJUWA International. The equipments were imported by
GEJUWA International under Bank Guarantee.
The import details are as follows:
Name of Equipments Original Cost Import Date

Total Amount (Euro)
Crane (2 Pcs) 1,000,000 2058.04.01
Lorry (1 Pc) 100,000 2064.04.01
Terms and Conditions:
i) Total Purchase Price of Both Equipments shall be Euro 150,000.
ii) Custom Duty shall be paid by XYZ Construction P. Ltd.
Ignore Excise Duty, CSF & other taxes. Custom Duty rate is 10% for both equipments at custom
office.
Required:
Calculate Custom Duty and VAT to be paid by XYZ Construction P. Ltd. at Custom Office if custom
clearance is done on 2066.04.01.( Exchange Rate Euro 1= Rs.110) 10
b) S
TAR Construction P. Ltd. hired a Technical Expert from India for consultancy service architect design
of Hydropower projects on contract basis. The consultant charges NRs. 621,500 towards his service.
Quantify the amount of taxes to be deducted from his payments and deposited at the Inland
Revenue Department. 5
Answers:
a) Calculation:

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i) Crane Amount(Euro)
Cost: 1,000,000
Less : Depreciation 409,510 (Depriciation@10% on Rs.1,000,000 WDV basis for 5 yrs.)
W.D.V 590,490
Equivalent NRS @ 110 64,953,900

Duty @10% 6,495,390
Less: Rebate on Duty (60%) 3,897,234 (More than 5years from Import)
Duty to be paid 2,598,156
ii) Lorry Amount(Euro)

Cost: 100,000
Less: Depreciation 19,000 (2 years Depreciation @ 10% on WDV)
81,000
Equivalent NRS @ 110 8,910,000
Duty @ 10% 891,000
Rebate NIL( No Rebate , since paid for import donot exceed 5 years)
Duty to be paid 891,000
Total Custom Duty to be paid is Rs.3,489,156.
As construction equipment falls under code 84 no VAT is payable on crane on larry. VAT will
have paid at 13% = 1,274,130.
b)As per the section 8(2) of the VAT Act,2052, a person whether registered or not , if takes any
service from the person who is not registered in Nepal , has to collect and deposit Value added
Tax as per the provisions of the VAT Act and its rules at the time of making the payment.
As per the section 89(3) (ka) TDS @ 10% shall be deducted by a resident person while making
payment to a non-resident for service charges. Thus total tax to be deposited is as follows:
VAT:
Total Amount of Rs.621500 is exclusive of VAT, Thus VAT =Rs.621,500 x 13%
=Rs.80,795
TDS on Rs.621,500 @ 10% =Rs.62,150.
6.
a) Mr. Chiranjibi is an engineer and renders consultancy services. He also is the proprietor of M/S
MIS Study Concern, a stationary shop.
His income/turnover for the fiscal year 2066/2067 is as follows.
Total Service Charges Collected=Rs. 8 lacs
Total Sale of MIS Study Concern= Rs. 11 lacs
Total Rs. 19 lacs
Is Mr. Chiranjibi liable to be registered to VAT? 5

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b) Explain the conditions and procedures for Import of Raw Materials by exporting industry on
deposit of Customs Duty.
5
c) ‘
No Vehicles are allowed to be imported temporarily without paying import duty’. Comment on
this statement. Is there any exception to this rule? You are required to explain in the light of the
Customs Regulations. 5
Answers:
a) As per the notice issued by IRD on 2066/04/15, a person involved in the business of taxable goods
and services is compulsorily required to be registered to VAT if the turnover of past 12 months is or
exceeds Rs.10 lacs.
Mr. Chiranjibi is involved in the service & trading of taxable transaction. His turnover of the
past 12 months is Rs.19 lacs that are above Rs. 10 lacs. Thus, he is required to be registered
to VAT.
b) Every exporting industry which has not taken the Bonded Warehouse Facility can import the Raw
Materials, Auxiliary Raw materials and Packing Materials not manufactured in Nepal. On Payment of
customs duty and LDT on Deposit under the following conditions:
1. The packing materials can be imported only on recommendation from the Department of
Industries (DOI) that such packing materials are not produced in Nepal.
2. The person has to Apply to the Customs Officer for clearance of Raw Materials and
packing Materials not manufactured in the Nepal on deposit of customs duty and LDT in
the prescribed format mentioning that materials are imported for the purpose of export.
3. According to the application the goods are cleared after payment of deposits. The goods
so cleared for import or export shall be mentioned in the Pass book maintained for the
purpose.
4. The finished goods produced from such materials has to be exported or sold in foreign
currency (FCY) within the country and has to apply for release of deposit along with
proof of sale in FCY in the country or export. Certificate of receipt of FCY from the
bank or proof of goods exported under barter system and consumption ratio certified by
Department of Industries within 12 months from the date of materials.
5. The project or entity to whom goods are sold in foreign currency must have received the
full or partial duty facility from the Nepal Government.
6. The release of deposit shall be done within one month from the receipt of application
within the prescribed time limit, The release of deposit shall be recorded in the prescribed
time limit. The release of deposit shall be recorded in the Pass Book.
7. There shall be at lease 10% value addition on the transaction value raw materials,
auxiliary, raw materials and packing materials at the time of import.
8. A penalty of 10% shall be imposed in addition to the normal duty chargeable on the value
of raw materials, auxiliary raw materials and packing materials if the finished goods
manufactured from such materials are not exported or sold in FCY within the prescribed
time limit considering the shortfall as local sale.

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9. The customs Officer may fix the customs Officer for import of such materials and export
of the finished goods and he industry has to choose one Customs Officer out of the
prescribed officers.
c) In the following cases, vehicles can be imported into Nepal temporarily without paying import
duty:
i) Import of vehicle of personal use by the tourists can be done under

CARNET system without paying custom duty. The vehicle so imported can be
kept in Nepal for a period of 6 month in a period of one year from the date of first
import. The vehicle cannot be sold or gifted. If the vehicle are not taken back
within the stipulated time of 6 month, the same shall be confiscated automatically.
ii) No customs duty shall be levied on Trailer with tractor entered into Nepal with
goods loaded and returned empty within a period of 48 hours.
iii) No duty shall be levied on Motorcycle, Scooter and town Vehicle from
neighboring country if they go up to the nearest market or airport in Nepal and
return on the same day.
iv) No duty shall be charged as per the agreement in case of running of passenger bus
and minibus between the two countries.
v) Loaded truck or trailer if returned empty after unloading the goods at the
Nepalese destination within 72 hours then no duty shall be levied,
7. Naya Nepal Ltd. is engaged in the business of manufacturing juice. The product of the Industry has
good market in India and Nepal. The company exports the juice to India as well as the same is sold
in the local market. Sales turnover of the company for the following quarters are as follows:
Period Export to India Local sales

Rs. In Lacs Rs. In Lacs
Shrawan- Ashoj 2065 65 85
Kartik- Poush 2065 80 45
Magh- Chaitra 2065 67 100
Baisakh- Asadh 2066 136 44
The company is scheduled to export 900 M tones of the juice to India and the necessary raw
materials are imported at CIF value at Raxaul from South Africa for Rs. 80 lacs. Also the
company is scheduled to import raw materials amounting to Rs. 20 lacs for the local sales. The
company seeks your advice on whether it avails Bank guarantee facility against VAT. If yes
what would be the amount of Bank Guarantee required. 10
Answer:
Calculation of Sales in terms of percentage:
Period Sales to India Rs. Local Sales Rs. In Total

In Lacs Lacs
Kartik- Poush 80 45 125
Magh- Chaitra 67 100 167
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Baisakh- Asadh 136 44 180

Total 448 274 722
62.05% 37.95%
As per section 8a of VAT act 2052, persons exporting at least 60% of total sales during the last
12 month may avail the facility of bank guarantee on import of raw materials required for export
of the finished goods.
In the given case, the export sales amount to more than 60% (Company has exported 62% of its
product) in the last 12 month. So the company can avail the bank guarantee in respect of the
import of raw materials for the export to India i.e. on import of materials of Rs.80 lacs. However,
Bank guarantee facility cannot be availed in respect of import of raw materials for the local sales
and need to be paid.
The bank guarantee required is 13% of Rs. 80 lacs = Rs.10.4 lacs
Vat to be paid : 13% of Rs.20 lacs = Rs.2.6 lacs
Notes:
It is assumed that VAT is charged on the value of Rs.80 lacs and other taxes is assumed to be nil.
The following persons and Industry can apply for the bonded Warehouse Facilities as Per rule
9(1) of customs rules,2064:
1) Those Industries which is exporting Readymade garments.

2) Those Industries which is exporting its produces to foreign countries
3) Industries other then those mentioned in (1) above, which is exporting at least 50%of
their produces to India.
4) Persons importing goods for selling thought duty free Shop after obtaining permission
from Nepal Government.
The other Provisions of the Customs rules 2064 are as follows:
a) The industries applying for the facility has to submit proof of export as mentioned above;
however, if industry is applying before completing one year of operations, it has to
submit their undertaking to adhere to the requirement of export criteria along with the
export plan.
b) The customs Officer will issue License if he thinks appropriate.
c) The license will be valid up to the end of fiscal year and to be renewed every year
within stipulated time with required fee.
d) The License-holder will not be able to enjoy the bonded warehouse facility during the
period in which the license remains un-renewed.
8.
a) S
tate the places where finished commodities are stored under Excise Duty Act. 5
b) R
OLLERS P. Ltd. is one of your client voluntarily registered to VAT on Shrawan 1st 2065. Details of
his transactions are as follows:

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F/Y 2065/66 Amount (Rs.)

Shrawan- Kartik 550,000
Mangsir- Falgun 500,000
Chaitra- Ashad 930,000
1,980,000
F/Y 2066/67
Shrawan- Kartik 400,000
Mangsir- Falgun 680,000
Chaitra- Ashad 590,000
1,670,000
He is submitting VAT return on four monthly basis, since he is voluntarily registered and the
turnover of any F/Y doesn't exceed Rs. 20 lacs.
Justify keeping in views the provision of VAT Act & Rules relating to the time period for
submitting the Vat return. 5
Answers:
a) Every license-holder must store the commodities manufactured by him in godowns situated within
the premises of the factory. Except in case of commodities to be exported under the self issue
system, a representative of the license holder shall keep the key of one of the lock used in the
godowns, and the Excise Officer or the employee deputed by him shall keep the key of the other
locks used in the godowns.
It shall be the responsibility of the license- holder to keep safely the excisable commodities.
In case such commodities suffer any loss or damage as a result of fire, theft or any other
reasons, the GON shall not be held liable for the same.
Excisable commodities kept within the factory shall remain under the supervision of the
Excise Officer. No raw materials related to excisable commodities shall be taken out of the
factory without the permission of the Excise Officer or the employee deputed by him. In case
of commodities to be exported under the self issue system, it shall be sufficient if the Excise
Officer or the employee deputed by him examines and certifies the accounts and particulars.
b) As per section 26(3) of the Vat rules 2053, a person voluntarily registered to Vat whose yearly
turnover is upto Rs.20 lacs, can submit Vat return on quarterly basis.
The turnover of M/S Roller P. Ltd. does not exceed Rs.20 lacs in any fiscal year, but to calculate the
limit of Rs.20 lacs, turnover of past 12 months shall be taken into consideration.
Turnover of M/S ROLLER P. Ltd. of the past 12 months for the period ended on Falgun 2066, exceeds
Rs.20 lacs as below:
Particulars Amount(Rs.)
Chaitra – Ashad 2066 : 930000
Shrawan-kartik 2066 : 400000
Mangsir-Falgun 2066 : 680000

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2010000
Hence, M/s ROLLERS P. Ltd. has to submit monthly VAT return.

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CAP III Examination – December 2010
Marks
Attempt all questions. Working notes should form part of the answer.
1. Majbut Cement (P) Ltd has following transactions during the year 2066/67:
Profit & loss Account

Particulars (Rs) Particulars (Rs)
To Opening stock 1,080,000 By Sales 20,000,000
To Raw Materials Purchase 12,100,000 Less: Sales Return 2,260,000
Less: Purchase Return 1,500,000 By Closing Stock 3,500,000
To Production expenses 2,000,000
To Gross Profit c/d 7,560,000
21,240,000 21,240,000
To Salary Allowance 1,500,000 By Gross Profit b/d 7,560,000

To Depreciation 575,000 By VAT Refund 650,000
To Legal fee & Expenses 50,000 By Gain on sales of generator 10,000
To Business Promotion 2,700,000 set
To Donation 200,000 By Dividend Income (Net of 500,000
To Cash Discount 535,000 tax)
To Freight 250,000 By Gift 25,000
To Interest 700,000
To Office Expenses 500,000
To Vehicle Running 125,000
Expenses 1,610,000
To Net Profit before Tax
8,745,000 8,745,000
a) Sales Return includes the cement return of Rs. 1,130,000 including VAT.
b) Closing Stock includes the sales returned goods of Rs. 2,260,000 & 50% of Opening Stock.
c) Opening Stock includes Repair & Improvement expenses of Rs. 80,000
d) Purchase Return is return of raw materials purchased on Baisakh 2067 & returned in month of
Jestha 2067. However adjustment is done in VAT Return of Bhadra 2067.
e) Production expenses includes the following:
i) The cost of Petrol to run the generator set of Rs. 339,000 including VAT.
ii) Repair & Maintenance of Assets (Block D) Rs. 300,000.
f) Salary Payment of Rs. 200,000 without deducting withholding Tax.
g) VAT Refund of Rs. 650,000 is received during the year which was claimed under section 17 of
VAT Act.
h) Dividend Income is received from Himalayan Bank Ltd. after deducting Tax.
Suggested Answers of Strategic and Decision Making Analysis
CAP III Examination – December2010
i) Gift is received from supplier of Raw Material. Market value of the gift is Rs. 50,000.
j) Legal fee & expenses includes Rs. 10,000 tax penalty.
k) Business Promotion expenses includes the Payment of 2,150,000 to Chandrapur Metal Works
(CMW) India for Consultancy Service Provided by CMW in relation to modification &
improvement of the production process so that the cost per bag is reduced by Rs. 25. (Ignore TDS
& VAT in giving answer)
l) Donation includes the following Payment
Particulars (Rs.)
To Gonaha Village Development Committee (VDC) 75,000
To ABC Education (P) Ltd. 50,000
To villagers of Gonaha VDC 75,000
200,000
m) Cash Discount was given to distributors of the company which met the sales target without
deducting withholding Tax.
n) Office expenses includes the following:
Particular
i) 60% of VAT paid on purchase of delivery van 78,000

for Rs. 1,000,000 (cost excluding tax) on 2066/10/11.
Rest VAT is claimed for offset.
ii) 40% of VAT paid on purchase of car for office purpose 104,000
for Rs. 2,000,000 (cost excluding tax) on 2067/3/15.
Rest VAT is capitalized.
iii) VAT paid on mineral water for office purpose. 13,000

195,000
o) Vehicle running expenses includes Petrol cost of Rs. 56,500 including VAT for running office
car.
p) Interest is related to Bank Loan taken for the establishment of New Cement Factory which is
100% subsidiary of Majbut Cement P. Ltd.
q) Depreciation is charged as per schedule 2 of Income Tax Act, 2058
Required:
Compute the taxable income. 15
Answer No. 1
Incomes (Rs.) (Rs.)
Sales 20,000,000
Less: Sales Return (WN 1) 2,130,000 17,870,000
Add: Closing Stock (WN 2) 3,330,000
Less: Opening Stock (WN 3) (1,000,000)
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Less: Purchase 12,100,000

Purchase Return (WN 4) 1,500,000 (10,600,000)
Less: Production (WN 5)
expenses (1,961,000)
Add: VAT Refund (WN 6) -
Add: Gain on sale of (WN 7) -
generator
Add: Dividend Income (WN 8) -
Add: Gift (WN 9) 50,000
Less: Salary & allowance (WN 10) (1,500,000)
Less: Depreciation (575,000)
Less: Legal fee & expenses (WN 11) (40,000)
Less: Business Promotion (WN 12) (550,000)
Less: Cash Discount (WN 14) (535,000)
Less: Freight (250,000)
Less: Interest (WN 15) -
Less: Office expenses (WN 16) (318,000)
Less: Vehicle running (WN 17) (125,000)
Income before Research & 3,796,000
Development and Donation expenses (Adj. tax. Income)
Less: Research & Development (1,898,000)
u/s 18(2)(WN 13ii)
Less: Donation (WN 13) (75,000)
Taxable income 1,823,000
Working Notes (WN)
WN 1
Total Sales Return 2,260,000
Less: VAT included in Sales Return 130,000 (1,130,000 * 13/113)
2,130,000
WN 2
Closing Stock as given 3,500,000
Less: VAT included in Sales Return (130,000) (VAT shall not be included)
Less: Repair & Improvement expenses (40,000) [(80000*50%), Repair & Improvement expenses
[Part of Opening Stock u/s 15(8)] 3,330,000 should not be included in closing stock as per
section 15(8)]
WN 3
Opening Stock 1,080,000
Less: Repair & Maintenance (80,000) [u/s 15 (8)]
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(1,000,000)
WN 4
Purchase Return is related to F.Y. 066/67, VAT adjustment on purchase can be done within 12 months from
the transaction. Hence it doesn’t have any implication in above calculation of taxable profit.
WN 5
Particulars Remarks
Production expenses as per P/L 2,000,000
Less: VAT on Petrol to run generator (39,000)
(339000*13/113)
1,961,000
(VAT can be offset on petrol used in other
than vehicles) VAT Rule 41 (1) (u)
Repairs and maintenance of Rs. 300,000 is supposed to be within the prescribed limit.
WN 6
VAT Refund shall not be included income, it shall be adjusted with VAT receivables.
Again VAT claimed u/s 17 means offset of VAT, not refund hence it is error in accounting. It shouldn’t be
included in calculation of taxable income.
WN 7
Since the Block D is in existence i.e, not seized gain on sale of generator shall not be taxable. Hence not
included in calculation of taxable income. But the sales should be reduced from the block value. It is
supposed that the amount received from sales is deducted while calculating depreciation.
WN 8
As per section 92, dividend is final withholding payment, hence it shall not be included in calculation of
taxable income as per section # (u)
WN 9
Gift related to business should be included in business income u/s 7(2) (F) & market value shall be taxable
u/s 27 (1) s. Hence, Rs. 50000 is included in calculation of taxable income.
WN 10
Salary & Allowance is deductible u/s 13, Salary paid without deducting withholding tax is deductible
expenses but withholding tax should be deducted & deposited into Inland Revenue Office. As per section 90
(3) though withholding tax is not deducted, it shall be deemed as deducted.
WN 11
Legal fee & expenses
Particulars Remarks
Total expenses 50,000 As per P/L.
Less: Tax Penalty (10,000) Tax expenses is not deductible u/s 13
40,000

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WN 12
Calculation of deductible Business Promotion Expenses
i) Business Promotion 2,700,000
Less: Research & Development u/s 18 2,150,000 (Separately deductible u/s 18)
Deductible expenses u/s 13 550,000
Research & Development

Calculation of deductible Research & Development expenses u/s 18
ii) Research & Development expenses included in business promotion expenses : 2,150,000
50% of adjusted Taxable Income : 1,898,000
Lower of the above is deductible : 1,898,000
Hence not deductible exp. : 252,000
Again as per section 18 (2), expenses up to 50% Adjusted Taxable income of all business shall be deductible.
Research & Development (RID) expenses means expenses incurred for development of business and
improvement in product or process. Here it is incurred for improvement of production process to reduce
cost. Hence the business promotion expense of Rs. 2,150,000 is related to Research & Development.
WN13
Donation
Lower of the following is deductible (u/section 12)
1) Rs. 100,000
2) 5% of Adjusted Taxable Income
(5% *3,796,000) = 189,800 ( To exempt entity only)
3) Actual 75,000
Hence deductible income Rs. 75,000.
u/s 12 gift & donation to exempt entity only shall be deductible.
Here ABC education (P) Ltd. & villagers are not exempted & Ganaha VDC is exempted.
WN 14
Cash discount
Withholding tax should be deducted as per section 88, but such expenses Rs. 535,000 is deductible.
WN 15
Interest
Related to establishment of capital investment shall not be deductible u/s 14. Hence no interest shall
be deductible.
WN 16
Calculation of deductible Office expenses
Particulars Remarks
Total Expenses 500,000 As per P/L

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Less: VAT on purchase of Van (78,000) Total VAT can be claimed u/s 17, of VAT Act,2052
hence not deductible.
Less: VAT on purchase of Car (104,000) VAT can be claimed 40% & rest should be
capitalized as per Rule 41 (2) (v) (VAT Rules 2053)
Less: VAT paid on mineral water - VAT paid on beverage can‘t be offset as per Rule 41
(1) (3)
of VAT rules 2053.
_______
318,000
WN 17
Calculation of deductible Vehicle Running Expenses
VAT paid on petrol to run vehicle can’t be offset hence, it should be shown as expenses . Thus Rs.125,000 is
deductible. (u/s 17 of VAT Act & Rule 41 (1) (u) of VAT Rule).
2.
a) B Limited has requested your advice for following: 15
i) Has issued personal accident policy to its shareholders at half of the amount charged by the
company. The amount of premium normally charged is Rs. 3,000.
ii) Cash paid to B on the day of Shivaratri of Rs. 50,000. It is also ascertained that the payment was
made for promotional work of the company. On the day, the banks were closed to business and
there was urgent requirements that necessitated payment by the company in cash on that day.
iii) The company issued further shares to the public at a premium of Rs. 150 per share. 5% of
shares issued to public was allotted to the employees of the company at face value.
iv) Provided official dress to its employees. The dress can be used only while working.
v) The Company paid cash Rs. 50,000 to Beema Samiti towards renewal fee. 5
b) The following are the information concerning Mercantile Bank Limited.
i) Loans and Advances outstanding at the end of the year Rs.1,044,435,922.
ii) Loans and Advances written off during the year Rs. 270,525.
iii) Loan Loss Provision for the year Rs. 64,566,439.
iv) Loan Loss Provision claimed upto previous year Rs. 50,952,138.
The Bank has claimed Loans and Advances written off during the yearand has claimed full amount
of Loan Loss Provision.
Give with reasons your opinion on claims of the bank. 5

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c) Mr. Engineer is engaged in engineering consultancy. Mr. Engineer has maintained his books of
accounts on cash basis till 2065/66. From 2066/67 he wants to changeover to accrual basis of
accounting. Following information from records of his books of accounts of F/Y 2065/66 is
abstracted.
i) Service provided but fee not received Rs. 50,000 which was not included in the income.
ii) Advance received from customers but service not rendered Rs. 30,000. The amount was included in
the income in the Income year 2065/66
iii) Rent for the period 2066 Shrawan to 2066 Paush paid in Ashadh 2066. The amount is included in
the expense in the Income year 2065/66.
You are required to advise Mr. Engineer. 5
Answer No 2
a)
i) Under section 53 any payment in what so ever capacity to beneficiary of an entity is distribution
of profit. Thus payment provision of personal accident policy at concessional rate shall be
treated as distribution of profit. Hence TDS @5% is required on Rs. 1,500.
ii) The cash expenses at a time for Rs.50,000 is allowed. Even, the banks were closed on the day
and there was urgent requirements that necessitated payment by the company in cash on that
day, the payment is not in contravention of the provisions of the Act in cash the payment was of
more than Rs. 50,000.
iii) Issue of shares at the price lower than issued to public is reward against the services of
employees. Hence, taxable to the employees and the company is liable to deduct tax.
iv) The dress provided can not used outside the office or while not working in the office. Therefore
no benefit is derived by the employee. Thus no treatment is required.
v) Payment in cash to Nepal government or body of Nepal government is allowed. Therefore, no
treatment is needed
b)
Section 59 provides for allowance of Loan Loss Provision. This allowance should be utilized for
bad debts. Thus the bank can not claim loans written off under section 59.
The amount to be allowed under section 59 is as below.
Particulars Rs.
Loans and Advances at the end of the year 1,044,435,922.00
Loans and Advances written off during the year 270,525.00
Loans and Advances at the end of the year 1,044,706,447.00
Total amount allowable @5% 52,235,322.35
Loan loss provision claimed up to previous year 50,952,138.00

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Less: Loans written off 270,525.00
Loan loss provision outstanding before new provision 50,681,613.00
Loan loss provision allowed for expenses as per sec. 59 1,553,709.35
Total loan loss provision 52,235,322.35
Thus, out of the total loan loss provision made during the year Rs. 64,566,439, Rs. 1,553,709.35 is
allowed for deduction from taxable income.
c)
Mr. Engineer requires approval from IRD for change over to accrual basis of accounting. IRD while
giving permission may employ the following conditions:
To include Rs. 50,000 in taxable income of 2066-67 as fee accrued but not accounted for in books,
To deduct Rs. 30,000 from taxable income as advance received from customer but treated as
income, and
To allow the rent paid for the rest period as rent expenses.
3. Answer the followings:
a) What do you mean by Business assets, Depreciable assets and Trading Stock? 6
b) What do you mean by payment? 4
Answer No 3
a)
i) Business assets:
Section 2(kata) has defined business assets as any assets used in a business either for its own use
or for the purpose of an investment. But a depreciable asset and trading stock are excluded from
this definition. It means a piece of land, an interest in any entity, and a security held by a person
are classified as business assets.
ii) Depreciable assets:

Section 2 (kara) has defined depreciable assets as assets used in generating income by a person
from a business or investment and that are likely to lose their value because of wear and tear,
obsolescence, or the passing away of time. Depreciable assets include both tangible and
intangible ones.
iii) Trading stock:

Trading stock is an inventory of raw materials, auxiliary raw materials, chemicals and other
consumables which are kept for production purpose; stock of work in progress which is subject
to conversion to finished goods; and finished goods either produced or acquired for sale.

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b) Payment:
Section 2 (ha) of the Act has defined a payment as follows:
Payment means:
a. The transfer of money, an asset, or a liability by a person to another person;
b. The creation of an asset by one person that on creation is owned by another person or the taking
of an obligation of a liability owed by another person;
c. Service provided by one person to another person; and
d. The use, or making available for use, of an asset owned by one person to another person.
The above conditions specify the different means of payment of a consideration by a person.
4. Answer the following in the light of Income Tax Act 2058. (5×2=10)
a) Thirty Stars & Associates, a law firm having thirty partners has earned Net Profit after tax of
Rs. 300 lakhs in F.Y. 066/67. The firm distributed 50% of profit i.e. Rs. 150 lakhs without
deducting withholding tax stating that profit withdrawn from partnership firm shall not be
treated as dividend. Is it correct?
b) Withholding tax shall not be deducted on the payment of interest to all national
and foreign Banks & Financial institution. Is it true?
c) Loan loss provision up to the amount of 5% of outstanding loan is deductible to all Bank &
Financial institution & Co-operative societies. Is it true?
d) Are appropriations of profit to statutory reserve deductible expenses?
e) Gain on sale of Depreciable assets shall only taxable where there is seize of block of that assets.
Is it true?

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Answer No.4
a) It is not correct.
As per section 2(F) of Income Tax Act 2058, any partnership firm having twenty or more
partners shall be dealt as company for tax purpose. Hence, the firm shall be treated as company.
Again as per section 2 (e) of Income Tax Act 2058 a company is an entity.
Distribution by any entity not to the extent of repayment of capital shall be deemed as dividend.
{section 53(6)}
Now, the dividend distributed by entity shall be final withholding payment.

Hence, the dividend distributed (Profit withdrawal) by Thirty STAR & ASSOCIATES (deemed
company i.e, entity) shall attract withholding tax and the firm should deduct withholding tax of
5% on such payment.
b) It is not true.
As per section 88 (4) (v), interest payment to resident bank or other resident financial institution
shall not attract the provision of deduction of withholding tax. So far, the payment of interest to
Foreign Bank & Financial institution is concerned, as per the provision, the withholding tax is
deductible as they are non-residents.
c) It is not true.
As per section 59 (1 s), loan loss provision up to the limit of 5% of total outstanding loan subject
to the limit prescribed by Nepal Rastra Bank (NRB) by person conducting banking business is
deductible. However, Banking business means banking transactions conducted by approved
bank and financial institution for conducting banking transaction as per current law.
(clarification under section 59) .
Hence, loan loss provision made by co-operative societies is not deductible as all cooperative
societies are not approved financial institutions. However if the co-operative society is approved
by NRB & follow the NRB directives then it shall be deductible.
Again, loan loss provision up to the amount of 5% of outstanding loan is deductible for
approved bank & financial institution by NRB subject to the limit prescribed by NRB.
d) No, appropriation of profit to statutory reserve is not deductible expenses.

As per section-13, expenses shall be deductible if
a) expensed in the income year;
b) expensed by the person; and
c) expensed in relation to the income earned from business or investment.
Here the appropriation is not the expenses and not related to the income earning activity hence
not deductible.
e) Gain on sale of depreciable asset shall be taxable in case of gain in following two cases:
i) In case that block of asset is completely seized/dissolved (As per section-4 (2) (s) of schedule-2 of
Income Tax Act 2058)
ii) In case the net incomings from sale of any asset in that block exceeds the total WDV of that block.
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5.
Plastichem has acquired necessary license and approval from excise authorities for
manufacturing of plastic packing materials and registered itself under VAT. The company
commenced its commercial operation from 1st Shrawan 2066. The company had following
transactions during the month of Sharawan 2066:
Import of plastic 50 ton granules (CIF Kalkota) Rs. 500,000

Clearing and forwarding expenses at Kalkota Rs. 20,000
Carriage inward Rs. 10,000
Factory Wages Rs. 75,000
Other production cost Rs. 50,000
Stock of plastic granules at the end of Shrawan 2066 5 ton
Stock of finished products at the end of Shrawan 2066 5 ton
The company purchased 1 Motorbike, 1 Mini Truck and 1 Van (for passengers) for Rs. 113,000,
Rs. 1,130,000 and 678,000. Price of these vehicles is inclusive of VAT.
There is no production loss, i.e. input output ration of granules and finished product is 1:1.
Custom duty paid @ 30% of landed cost is not included in above data. The company's directors
have formed a partnership firm of distributors. The company has appointed the firm as sole
distributor of the company's products the company sales its product to the distributor @ Rs.
24.84 per kg. The distributor firm sells the product @ Rs. 50 per kg. Normal commission to
distributors/wholesaler for such product paid by other manufacturers is Rs. 7.50 per kg.
Transportation expenses incurred by other manufacturers for distribution of the product is about
Rs. 7.50 per kg. The rate of excise duty on the product is 5% of the value.
a) Calculate amount of VAT payable for the month of Shrawan 2066. 9
b) Excise Officer is not satisfied with the excise collected and is of view that factory price is
not derived properly. Therefore excise authorities are considering imposing additional
excise on the company. You are also required to advise the company on powers of the
excise authorities to impose additional excise duty. 3
c) The company's raw material store was gutted by fire on 31st Shrawan 2066. Is the company
obliged to inform VAT, Excise and Custom authorities? If yes when should the company
inform these authorities? What are the consequences of not informing the authorities? 4
d) VAT authorities also feel that the company is under invoicing its product and informed the
company its intention to buy the stock of finished product at price invoiced by the company.
Can IRD buy the product without consent of the company? 2
e) VAT authorities have assessed additional VAT on packing materials sold on the ground that
the product was heavily under invoiced than prevailing market price. Is the company
obliged to pay additional VAT? 2
Answer No 5
a)
VAT payable for the month of Shrawan

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Particulars Rs. Rs.

Cost of plastic granules 500,000
Clearing and forwarding expenses 20,000.00
Carriage inward 10,000.00
Landed cost 530,000.00
Custom Duty @ 30% 159,000.00
Sub Total 689,000.00
VAT paid @ 13% 89,570.00
Cost of raw material consumed (689,000/50)*45 620,100.00
Factory wages 75,000.00
Other production cost 50,000.00
Factory Cost 745,100.00
Factory cost per kg 745,000/45,000 16.56
Margin @ 50% of factory cost 8.28
Factory price to whole seller 24.84
Excise duty @ 5% 1.24
Sub Total 26.08
VAT per kg @ 13% 3.39
Total VAT collected 40,000*3.39 135,600.00
Less VAT paid
Paid at customs 89,570
Paid in purchase of motorbike 13,000
Paid in purchase of Mini Truck 130,000
Paid in purchase of Van 31,200
Total credit to be claimed 263,770.00
Net credit to be claimed -128,170.00
Notes:
1. Since VAT paid by company in other goods and services are not mentioned in the question,
VAT paid for those goods and services are not considered. VAT paid for other goods and
services, if any, shall reduce VAT payable accordingly.
2. Rule 41(2)(kha) restricts VAT credit for automobiles to 40%. Motorbike (two wheelers) and
Mini truck (not for passenger) does not fall under automobiles. Therefore, only claim of VAT
on Van is restricted under this rule.
b)

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Section 3kha (3) confers power to Excise Officer to collect excise if difference between consumer
price and factory price is not reasonable. In this case excise officer may assess and collect excise
duty after considering consumer price, commission to wholesaler or retailer, transport expenses and
taxes in nearest market. It seems excise officer is not satisfied due to difference in consumer price
and factory price. Therefore, such difference should be calculated before opposing excise officer's
view.
Consumer price 50.00

Normal commission to wholesalers 7.50
Transport expenses 7.50
Estimated selling cost 15.00
Modified consumer price 35.00
Factory price to wholesaler 24.84
Difference 10.16
Since the difference is unreasonable, excise officer's view is not contrary to the legal provisions.
Therefore, Excise Officer may order rightly to pay additional excise duty.
c)
Rule 39ka VAT Regulations requires such event to be informed within 30 days. Similarly rule 17 of
Excise Regulations requires such event to be informed as soon as possible. There is no obligation
under Customs Duty Act. Therefore, the company should inform the authorities within stipulated
time to enable it to write off the loss. If these authorities are not informed the company will have
following consequences:
The company will not be able to write off the loss under VAT. Further under rule 40 of VAT
regulations, tax officer may assume the stock as sold on physical verification and may order to pay
VAT. Similarly the company may be required to pay loss of excise suffered by Nepal Government
under rule 17 of the Excise Regulations.
d)
Yes, under section 23ga(1) of VAT Act, VAT authorities have power to buy stock of goods
considered to be under invoiced. Under section 23ga(2), VAT authorities may choose to buy stock
at the value sold by the company without the consent of the company and pay amount calculated at
the rate invoiced by the company.
e)
VAT Officer is empowered to assess tax under section 20(1)(e) if he has reasonable ground to
believe that the product is sold by under invoicing. Since in this case it seems to be under invoiced
compared to similar products, VAT Officer may rightly assess additional tax.
6. Air Cell Nepal (P) Ltd, a telecommunication Tower Construction company registered in PAN only
in 2067.7.10 as the company has no business in hand. The Company receives some contracts after
registration, hence the company registered in VAT on 2067.7.30.

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The following are VAT paid purchase lying at closing stock as on 2067.7.30.
Date Particulars VAT Amount
2067.7.11 Assembling Accessories 13,000
2067.7.12 Steels 130,000
2067.7.13 Cements 65,000
2067.7.14 Beverage 6,500
2067.7.24 Spare parts 3,900
2067.7.25 Fixed Assets 10,000
228,400
CEO of Air Cell Nepal (P) Ltd is worried about the VAT paid above because one of his consultants
said him that the VAT paid can‘t be claimed for Office set as it is of prior to VAT registration.
Hence he approached you on 2067.8.1.
Required:
a) Give the advice to the CEO of Air Cell Nepal (P) Ltd. regarding the matter of VAT offset. 10
Answer No.6
As per the following purchase prior to registration in VAT is lying in stock, the VAT paid can be offset.
Purchase VAT
Assembling Accessories 13,000
Steels 130,000
Cements 65,000
Beverages - {Rule 41 (1) (v)}
Spare part 3,900
Fixed Assets - (Not inventory)
VAT can be off set. 211,900
As per section 17(7), the offset of VAT paid/payable to the goods lying at stock at the time of
registration of VAT realted to Taxable transaction as prescribed in rule (Subject to declaration at the
time of VAT registration).
As per Rule 43, AIR CELL has to give application to tax otter in format of schedule -16 for the
offset of VAT paid. It has to submit all document related to offset of VAT including tax invoices &
other evidence within 15 days from the date of registration in VAT. If document as prescribed can‘t
be submitted, offset will not be allowed.
7. Answer the following with the provision of the Customs Act, 2064. (4×2.5=10)
a) Custom Duty paid at the time of import of Raw material can be refunded when the finished goods
produced by using the imported raw material is exported. Is it True?
b) Used industrial equipment can’t be imported. Is it True?
c) Excise Duty paid in Indian shall be refunded in cash at custom point of Nepal for import under DRP. Is it
correct?
d) Whose permission is required to import of used aeroplane by an airways service company
in Nepal?
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Answer No.7
a) Yes, As per section 19 (14) of schedule-1 of Finance Act Custom duty paid by the industries not
having bonded warehouse & cash deposit (pass book) facility on raw materials & auxiliary raw
material (including packing material not produced in Nepal) shall be refunded from custom point as
prescribed in Nepal Rajpatra on prescribed goods. But, the manufacturer has to meet the other
applied conditions like the finished product should be exported within 11 months and the value
addition should be at least 10%.
b) It is not true.
As per section 19 (1) of schedule-1 of Finance Act 2066, Industry may import used industrial
equipment for its own use with the recommendation of Department of Industries of Nepal.
c) It is not correct.
As per section 8 of schedule-1 of Finance Act 2066, excise paid in India for the goods imported
under DRP shall be deducted from the custom duty payable. But excise paid in India shall not be
deducted from the custom duty payable on freight, Insurance, difference in value and other
expenses.
Hence, Excise paid in India shall be adjusted/deducted in custom duty payable in Nepal in import
under DRP, subject to maximum of the custom duty payable in Nepal.
d) Airways Service Company may import used aeroplane with the permission/recommendation of
Civil Aviation Authority of Nepal to run the airway service.
8. Answer the following in the light of Excise Act, 2058:

a) Comment on the following statements. (5×1=5)
i) Excise Duty shall be paid at custom point at the time of import of excisable goods.
ii) Excise Duty shall be paid at the time of production and issue for sale of excisable goods of
Physical Control System.
iii) Excise Duty shall be paid at the time of issue of invoice of excisable goods of Self- Removal
System.
iv) Person has to be registered under Excise who stores excisable goods.
v) Bank guarantee can be given at the time of import for excisable goods against excise duty
payable at custom point for the importer who exports its 80% of production.
b) Whether the Excise Duty shall be levied on the followings? (5×1=5)
i) Production of Pet bottles (under Custom Code 3923) by mineral water industry for packing
of its finished goods.
ii) Sale of molasis (Khudo) by manufacturer.
iii) Local production of marble.
iv) Local production of motorcycle
v) Production & sale of junk foods.
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Answer No.8
a)
i) The statement is correct.
As per section 4 (1) (u), Excise Act, 2058 shall be collected at custom point at the time of import of excisable
goods.
ii) The statement is correct.

As per section 4 (1) (s), excise duty shall be collected at the time of production & issue for sale of excisable
goods of Physical Control System.
iii) The statement is correct.

As per section 4(1) (v), excise duty shall be collected at the time of issue of invoice of excisable goods of Self
Removal System.
iv) According to section 9 of Excise Act, 2058, to store excisable goods, a person has to get registered under
excise. But the industry on which self removal system is applicable shall not obtain excise license except the
production of bricks, stone, crusher, cigarette, tobacco, Panmasala, Gutkha, brown sugar industry, and
import of molasis and Gund (u'8)-
v) Bank guarantee cannot be give at the time of import of excisable goods except in the following case:
As per Section 3(v), a Bonded ware house can import the excisable goods to be sold from the bonded
warehouse by furnishing cash deposit or bank guarantee against the excise duty payable on such import.
b)
i) Yes, Excise shall be levied on Production of Pet bottles (under Custom Code 3923) by mineral
water industry for packing of it‘s finished goods. (Schedule-1 of Excise Act)
ii) Excise shall be levied on Sale of molasis by manufacturer. (Schedule-1 of Excise Act)
iii) No, excise shall not be levied on Local Production of marble. (Schedule-1 of Excise Act)
iv) Yes, excise shall be levied on Local production of Motorcycle. (Schedule-1 of Excise Act)
v) Yes, excise shall be levied on Production & sale of Junk Foods. (Schedule-1 of Excise Act)

126 of 126
Adv Taxation-CAP III
Suggested Answer
Roll No……………. Maximum Marks - 100
Total No. of Questions - 6 Total No. of Printed Pages - 6
Time Allowed - 3 Hours

Marks
1. M/S XYZ Jute Mills (P) Ltd, produces Jute bags and trades on raw Jute purchased from
market. It has produced the profit and loss account for the year 2066/67 as follows:
Particulars Trading Manufacturi Total (Rs.) Particulars Trading Manufacturi Total (Rs.)
(Rs.) ng (Rs.) (Rs.) ng (Rs.)
To Opening Stock 1,000,000 3,000,000 4,000,000 By Sales 10,000,000 100,000,000 110,000,000
To Purchase 10,000,000 10,000,000 20,000,000 By Closing 5,000,000 5,000,000 10,000,000
Stock
To Production Expenses 0 75,000,000 75,000,000
To Gross Profit c/d 4,000,000 17,000,000 21,000,000
15,000,000 105,000,000 120,000,000 15,000,000 105,000,000 120,000,000
By, Gross 4,000,000 17,000,000 21,000,000
Profit b/d
To Salary Allowances 1,000,000 4,000,000 5,000,000
To Depreciation 100,000 2,000,000 2,100,000
ToBank commission 0 100,000 100,000
To Bank Interest 0 1,000,000 1,000,000
To Net Profit before Tax 2,900,000 9,900,000 12,800,000
4,000,000 17,000,000 21,000,000 4,000,000 17,000,000 21,000,000
a) The company has accepted the sale in under invoicing as assessed by IRO i.e. under invoiced
trading sales Rs. 100,000 and manufacturing sales Rs. 1,000,000, as on 15.03.067. However the
assessment order is given in 04.04.2067 by IRO.
b) Closing Stock of Manufacturing Unit includes the following:

Particulars (Rs)
Raw Materials 2,000,000
Finished Goods 3,000,000
Raw Materials 1,000,000
Production Expenses (Salary/Wages) 500,000
ECW P.T.O.
(93)
Repair of Plant and Machinery 1,200,000
Depreciation 200,000
Interest 100,000
Total 5,000,000
Repair of Plant and Machinery expenses is included in Production expenses of Rs.

75,000,000.
c) All Salary Allowance and Rs. 37,000,000 out of Production Expenses is payment to workers and
staff of the company as wages & salary. The status of the worker and staff in manufacturing
unit for the year is as follows:
Particulars Indian (Resident in Nepal) Third Country (Non Nepali Total
Resident)
Men 50 10 220 280
Women 20 10 160 190
70 20 380 470
d) The Company consumed 70% of Local raw materials for its production.
e) The paid up capital is as follows:

Date Paid Up Capital ( in Lakh) Remarks
01.04.2066 50 Opening Balance
28.03.2067 50 Addition
f) Depreciation
Depreciation for manufacturing unit is as per Income Tax Act, 2058 where as depreciation in
trading unit includes Rs 25,000 cost of fiscal printer acquired on 30.02.2067 for issuing bills.
Depreciation base for Block D is Rs. 10,000,000 before deducting depreciation.
g) Land has been revalued from Rs. 100 lakhs (cost) to Rs. 150 lakhs in 2067.01.14 and sold for Rs.
200 lakhs on 2067.1.20. Market Price on 2058.12.19 was 125 lakhs as per records of Land
Revenue Office. The sales transaction is not recorded in the books of accounts of the company.
h) Bank Commission includes Rs 15,000 levied on disposal of liability of the company.

i) Company has not paid any installment tax.
j) IRO did assessment as per section 101 and included Rs 75 lakhs in taxable income i.e.
Selling Price of Land Rs. 200

Market Price of Land (on 058.12.19) Rs. 125
ECW P.T.O.
(94)
Profit Rs. 75
k) IRO again included Rs. 50 lakhs i.e. increased in capital during the year in taxable income of the
company as the shareholder can't produce the source of income.
Required:
Calculate the Income Tax liability including interest under section 118 and 119. 13
State the provision of Finance Ordinance, 2067 for the source of capital. 2
Answer No.1
i. Calculation of Income Tax Liability of M/S XYZ Jute Mills P. Ltd for F/Y 2066/67
Particulars Amount Remarks

Trading Manufacturing
Income
a) Sales 10,000,000 100,000,000
b) Additional Sales 100,000 1,000,000 Assessed by IRO
on 15.03.2067.
W.N. -1
c) Closing Stock 5,000,000 3,500,000 W.N. -2
d) Gain on sale of land 7,500,000 0 W.N. -3.
Total Income (I) 22,600,000 104,500,000
Expenses
a) Opening Stock 1,000,000 3,000,000
b) Purchase 10,000,000 10,000,000
c) Production expenses 0 73,800,000 (75000000-
(excluding repair and 1200000)
maintenance)
d) Repair and 0 700,000 W.N. -4.
Maintenance
e) Salary and 1,000,000 4,000,000
Allowances
f) Depreciation 76,250 2,000,000 W.N. -5.
g) Bank Commission 0 100,000 W.N. -6
h) Bank Interest 0 1,000,000
Total Expenses (II) 12,076,250 94,600,000
Net Profit (I-II) 10,523,750 9,900,000
Tax rate 0.25 0.16 W.N. -7
Tax Liability 2,630,938 1,584,000
Calculation of Interest U/S 118. (Interest on Installment)

Total tax liability 4,214,938
Installment Paid NIL
80% of tax liability 3,371,950
ECW P.T.O.
(95)
Amount Payable (%) Amount No. of months Inter
est @
10%
Poush 2067 0.4 1,348,780 3 33,72
0
Chaitra 2067 0.7 2,360,365 3 59,00
9
Ashad 2068 1 3,371,950 3 84,29
9
Total Interest u/s 118 177,0
27
Since, the question is silent about when the tax is paid, the interest is calculated up to the time that
the return is to be filed as per Sec.118(2),i.e. up to Aswin end.
Calculation of Interest u/s 119 (Interest for failure to pay tax)

Interest for failure to pay tax shall be charged @ 10% p.a. for the period from kartik, 2068 to date
of return filing on monthly basis. Since the question is silent when the income Tax Return is filed or
going to be filed, we assume it was filed on time within Aswin 2067. Hence no more interest as per
section 119 shall be chargeable. However, under provision of Sec. 119 'Ka' changes for
noncompliance will be levied as set form in Sec. 128.
If the return is not filed before Aswin, the company will be liable for fees under sec.117(1)kha.
Working Note: 1
Inclusion in Sales
Though the assessment order of IRO is received in F.Y. 2067/68, i.e. 04.04.067 related to F.Y.
2066/67 and accepted by the company, it is to be included in income of F.Y. 2066/67. But unless
the price is a notified price, such inclusion is not possible, provided the sale has been made through
VAT bill. Since the question is silent on these matters, it has been assumed that the article is a
notified article and the sale has been made not through VAT bill.
Working Note: 2
Valuation of Closing Stock (manufacturing)

Raw Materials Rs. 2,000,000
Finished Goods
Raw Materials Rs. 1,000,000
Production Expenses Rs. 500,000 Rs. 1,500,000
Rs. 3,500000
Note: As per section 15, Repair and Maintenance, depreciation shall not be included in Valuation of
Closing stock and again as per the circular of department dated 2066.02.27, interest shall not be
included in calculation of closings stock.
Working Note: 3
Gain on Sale of Land
ECW P.T.O.
(96)
As per section 40(5)(ka) of Income Tax Act 2058, the market price as on date of 19.12.2058 shall be
taken as cost of the property. Hence, though actual cost is Rs. 100 lakh it is taken as Rs 125 lakh,
and gain on sale 75(200-125) lakh assessed by IRO is correct.
Working Note: 4
Calculation of allowable Repair and Maintenance u/s 16.
Depreciable Base of Block D Rs. 10,000,000
Allowable repair @ 7% Rs. 700,000
Working Note: 5
Calculation of Depreciation
Manufacturing Unit = 2,000,000
Trading Unit = 76,250
Under Finance Ordnance 2067, as per section 3(4) of schedule 2 of Income Tax Act, 2058, any
person may deduct the expenditure incurred on fiscal printer and cash machine as depreciation if
the person issues bill through it. But this has come into force from 1.4.2067 and hence not
applicable to FY2066/67, to which the question relates. The depreciation for the trading unit will be
as follows:
Depreciation as per books = 1,00,000
Less cost of fiscal printer = 25,000
Depreciation 75,000
Depreciation on fiscal printer =15%x25000/3= 1,250
Total depreciation for trading business 76,250
Working Note: 6
The question states that bank commission is paid for discharging liability. Bank charges paid for
discharging liability say,on account of purchases is an allowable expense.
Working Note: 7
a) Schedule 1 section (2)1, rate of tax on trading business of entity is 25%.
b) Schedule 1 section (3), rate of tax in income from special industry is 20%. Also, as per section
11 (3) (ka) (Amended as per Finance Act, 2066); if direct employment in the industry
throughout the year is for 100 or more Nepali citizens including 33% of women, handicapped
and dalit, the effective tax rate shall be 80% of prevailing rate. Here, total number of employee
is 470, out of that women were 160 i.e. more than 33% of total employment.
Hence, applicable tax rate is 16% (20%x80%)
Thus, rate of tax for M/s XYZ Jute Mill is,
Trading Income -25%

Manufacturing - 20%*80%=16%
Working Note: 8
Loss of F.Y. 066/67 can't be carried forward, since it is related to tax exempt period [Section-20
(8)]
ii. Section 11 (ka)

ECW P.T.O.
(97)
According to section 11 (kha) of Income tax Act, 2058; production oriented Industries which
gives employment to more than 300 local people and consume more than 50% of local raw
materials (except cigarette, liquor and beer industry), will not be inquired for the investment
made within Chaitra end, 2075.
Here, the company consume 70% of local raw material and gave employment to 380 local
people.
Thus, IRO cannot include 50 lakhs in taxable income in spite of unavailability of source of
capital.
2. Mr. X is a super distributor of a reputed Indian Drug Manufacturer. Mr. X died on 31

Chaitra 2066. Mr. X has two sons Mr. Y and Mr. Z. Both of his sons are engaged in retail
sales of medicines. Since the business of super distributorship was owned by Mr. X, both of
his sons have equal share in the business. Since they are engaged in separate businesses, on
death of his father they agreed to continue the business and hired Mr. A, their brother in law,
to look after their father's business. They could not change the legal status of their father's
business till the end of Ashadh 2067.
On 25 Ashwin 2067 Mr. A prepared statement of income for full year 2066/67 and signed the
documents on behalf of the firm. The IRO refused to accept the statement on the ground that Mr.
A is not authorized to submit the statement of Income.
Required:
i) Advise Mr. Y and Z regarding the course of action to be taken. 10

ii) Mr. Y received 15% discount on all purchases from his father‘s business. The firm
provides discount of 10% to other customers. Mr. Y was provided discount of 10%
after death of his father. Advice regarding treatment of discount given to Mr. Y. 5
Answer No.2
i.
A. Section 96(2) kha provides that the statement of income should be certified by either the person
or the manager. Assuming that Mr. A has powers to make decision he will be considered as
manager under section 2 (ka chha). Therefore, Mr. A is authorized to submit the statement of
Income.
B. Since Mr. X died in the middle of the year and the interests of the business has vested among
his sons, status of the firm has changed to partnership.
c. Since status of the firm has changed to partnership statement of income should be submitted
separately for proprietorship firm and partnership.
D. Therefore, the tax officer has rightly refused to accept the statement of income.
E. Since the deadline for submission of statement is on the same day, Mr. Y and Z should apply for
extension of time for submission of statement of Income.
F. Statement of income for proprietorship firm and partnership should be separately prepared and
submitted within the time.
ii.
A. Mr. Y is relative of Mr. X. Thus he is associated person within the meaning of section 2(ka na).
Therefore, treatment of discount received by Mr. Y is correct under Sec. 33.
ECW P.T.O.
(98)
B. Since the discount given to Mr. Y is transaction between associated, it has to be judged as per
arm length transaction. Since, Mr. Y is given more discount than others for no justified reason,
it cannot be termed as arm length transaction.
C. In view of the tax officer shall be authorized to re quantify expense and income of Mr X and Y
respectively under sec.33(1).
D. Thus, while preparing statement of Income of Mr. X, excess discount given to Mr. Y should be
disallowed.
E. While preparing Statement of Income of Mr. Y, excess discount should not be considered and
should be added in the purchases. But it is not necessary for the tax officer to do so in every
case, depending on the quantum of amount involved.
3. a)
i) What is the provision under Income Tax Act, 2058 on allowability for deduction of Loan
Loss Provision made by a finance company licensed by Nepal Rastra Bank? 3
ii) M/s ABC Development Bank Ltd. as authorized by Nepal Rastra Bank has the loan
outstanding at year end and the provision for loan loss is as under:
2004/5 2005/6 2006/7 2007/8 2008/9 2009/10

( Rs. 000)
Loan
outstanding 30,000 35,000 45,000 55,000 70,000 80,000
Loan loss
provision 1,800 1,575 2,070 3,300 3,220 5,600
Calculate the allowable Loan loss provision under Income Tax Act, 2058 for FY
2009/10 on the assumption that the Bank has made self assessment with necessary
adjustments on any disallowed loan loss provision. 7
b)
i) Following person need not to file estimated tax return. Is it correct? 2
(a) Person receiving payment after deducting withholding tax only.
(b) Person having remuneration income only.
ii) MNO Insurance Company Ltd. has taken a flat on rent for which it pays Rs. 20,000 p.m. and
the flat is given to Mr. Puspendra Rana Manager, of Claims Department for his residence.
Mr. Raju Shrestha, Manager Marketing Department resides in another flat of same area
and Mr. Raju gets reimbursement from the company of Rs. 20,000 p.m. only whereas he
pays rent Rs. 30,000 p.m. Basic Salary of both staff is Rs. 50,000 p.m. Withholding Tax is
deducted by Insurance Company & Mr. Raju while making payment to related house
owner. What amount is to be included in taxable salary of both regarding the above
transaction? 3
iii) States the following payment are sourced in Nepal or not with provision of Income Tax Act,
2058. 3
ECW P.T.O.
(99)
(a) Interest paid by Local Joint Venture Company to foreign Bank for loan used in
Nepal.
(b) Payment made in foreign country against employment in Nepal.
(c) Rent paid by oil industry of Nepal, resident Company to Indian Company for use
of oil storage tank at Calcutta, India.
iv) Define "Contract" as per Income Tax Act, 2058. 2
Answer No.3
a)
i. A Banking Business is allowed a deduction of a provision on loss of doubtful loan provided in the accounts
by it according to the regulation of Nepal Rastra Bank subject to a maximum ceiling of 5% of the
outstanding loan as on the last day of the income year.
Actual expenses for such provision on loan loss, if incurred, should be deducted from the provision
outstanding on that date. In case it is deducted as an expense, it is not allowed for tax purpose.
In case the amount of loan loss provision is capitalized or utilized for distribution, or payment of
dividend in any income year, up to that amount it should be included in the taxable income of the
income year Us 59 of the Act.
ii) Calculation of the allowable Loan loss provision under Income Tax Act 2058 for FY 2009/010 M/s ABC
Development Bank Ltd.
2004/5 2005/6 2006/7 2007/8 2008/9 2009/10

( Rs.
000)
Loan outstanding 30000 35000 45000 55000 70000 80000

Loan loss provision in
book 1800 1575 2070 3300 3220 5600
Allowable limit 5% 1500 1750 2250 2750 3500 4000
Disallowed before and now to allow 0 300 0 250

Available limit with tax paid
provision in earlier year 1500 1750 2250 3050 3500 4250
Disallowed and added back -300 -250 -1350
Allowed 1500 1575 2070 3050 3220 4250

Since disallowance is limited to 5% of the outstanding loan, the allowable limit will be
onlyRs.4000, whatever may the provision by the bank for the same.
b)i)
i. Under Section 97, Yes, if the withholding tax is final withholding tax. But otherwise false.
ii. Under Section 97 True.
ii)
ECW P.T.O.
(100)
i. Section 27 (v) (2), of Income Tax Act, 2058 and Rule 13 (2), of Income Tax Rule, 2059
In case of Mr. Puspendra Rana, 2% of Salary income shall be include in taxable income in case the
employer provides residence to the employee.
Thus, amount of perquisite to be included in taxable salary income = Rs. 50000*2%= Rs. 1000 per
month.
ii. In case of Mr. Raju, Section 8(2) (v) reimbursement of rent for personal house shall be included in
employment income.
Thus, amount of perquisite to be included in taxable salary income= Rs. 20,000 per month and he will
not get any deduction for rent paid.
iii.
i. Source in Nepal,
Section 67(6) (v)
Interest paid by a resident person shall be treated to be having sources in Nepal.
ii. Source in Nepal,
Section 67(6) (ka) (g) Payment done anywhere against employment done in Nepal is treated having
source in Nepal.
iii. Not having source in Nepal
Section 67(6) (3)
Only rent paid for Asset situated in Nepal is treated to be having source in Nepal, Here since rent is
paid for asset situated in India , it is treated as having source in Foreign Country.
iv. As per classification given in Sec. 89 "Contract" means supply of any goods or service or contract or
agreement made for construction installment or establishment of any fixed assets or any other act
determined by the department as contract and if such contract includes service related to such
construction or installation or establishment, payment done against such service shall also be
included as payment done against the contract.
4.
a)
i) SKY Nepal Ltd (SNL), a telecommunication company entered into a contract for
construction of Telecom Tower with Best Tele Tower Construction (P) Ltd (BTTPL) as on
2067.01.14. BTTPL sent request on 2067.01.14 to SNL to release Rs. 1,000,000 as signing
amount to start the work. Again BTTPL send internal memo to release Rs. 1,000,000 for
running bill with backing of work done and certified by the concerned department of SNL
as on 30.01.2067. However the Account Department of SNL stops the payment since tax
invoice is not issued by BTTPL. As per the contract the signing amount shall be released on
2067.01.14 & settled after completion of contract and on account payment to BTTPL
against construction shall be made on the basis of running bill against work done certified
by concerned department of SNL.
Is tax invoice to be issued by BTTPL in both cases? State the provision of the VAT
Act. 5
ECW P.T.O.
(101)
ii) State the following goods or services are VAT able (Taxable) or not with the
provision of the Act. 5
(a) Fresh Water P. Ltd is running the business of supplying water in tanker.
(b) Reinsurance of general Insurance.
(c) Cargo Service for import
(d) Ujyalo Hydro power development company Ltd running its business of
hydropower generation and consultancy on hydropower construction registered
in PAN for Income tax only. Its consultancy income for the Year 2067/68 is Rs.
30 lakhs. What if consultancy income is Rs. 11 lakhs?
iii) Mr. Pure operates dairy and is registered to VAT. His transaction for first month of
operation are as follows:
Particulars Quantity Amount
Purchase of Cow milk 20,000 liters. 1,000,000
Purchase of Powdered Milk 20,000 kg. 800,000
Purchase of Sugar (for ice cream) 18,000 kg. 1,080,000
Sale of Cow milk (pasteurized) 18,000 liters. 1,080,000
Sale of Ice cream 17,500 liters. 4,500,000
Advertisement for Ice cream (from registered party)

50,000
Purchase of office furniture (from registered party) for 200,000

sale counter of milk and ice-cream.
Packing expenses for milk delivery (from registered party) 25,000
2,000 kg of Powder milk was added to cow milk for sale and rest was used for ice-cream
production.
All above data are excluding VAT and VAT is paid & collected on goods which are not
exempted.
Calculate the amount of VAT: 5
(a) Paid
(b) Collected
b)
i) An Inland Revenue Officer has passed Assessment Order under section 23(ga) of
Value Added Tax Act. The order states that goods sold by the firm is under invoiced.
Consequently the firm is ordered to pay additional tax, fine and fee for the under
invoiced amount. The proprietor of the firm is considering to file petition in the
Revenue Tribunal. Advise the firm 5
ii) Best Computers (P) Limited filed statements which included following:
 Purchases Rs. 25 lacs
 Sales Rs. 12 lacs.
ECW P.T.O.
(102)
 Rent Rs. 84 thousands
 Telephone expenses Rs 24 thousands.
The Inland Revenue Officer has served notice for not registering under VAT. Advise
the company. 5
iii) A flying squad of IRD raided on LOCK advertising agency and declared the
following purchases are fake.
Party VAT Remarks
ABC Electronics P. Ltd. 13,000 Non filer
XYZ Printing Media. 26,000 Party not in the market
PQR Designing P. Ltd. 39,000 Sales not shown by PQR in its VAT
Returns
Required: 5
(a) How much VAT credit shall be disallowed & Penalty to be charged if above
purchases are fake? (Ignore additional tax)
(b) Calculate the amount to be deposited to appeal in Administrative Review and
Revenue Tribunal, if Lock advertising agency accepted fake purchase from XYZ
printing media.
(c) Is bank guarantee facility available for appeal in Revenue Tribunal?
Answer No.4
a)
i. As per section 17(1) of Vat Rules 2059, a person registered to VAT shall issue tax invoice at the time of supply of
goods or service.
Now as per Section 6(2), VAT Act, 2052

Time of supply of goods and services shall be determined as the earlier amongst the following
activities:
a) Raising of invoice by the suppliers.
b) In case of supply of goods; at the time the buyer takes away or uses goods from the place of the business of
supplier.
c) In case of supply of service; at the time of rendering of service.
d) At the time when supplier receives the consideration against goods supplied or service rendered.
But in following cases, the time of supply shall be considered to be as follows:

a) In case of supply of service on regular basis such as telecommunication service or such other public service, at
the time of issue of invoice.
b) In case the consideration against the supply of goods or services is to be done in more than one installment as
per the contract, at the time the payment is done or the payment is due, whichever is earlier.
c) In case of goods or services not having facility to deduct tax as per this Act, at the time of use of such goods and
services.
ECW P.T.O.
(103)
Again as per section 2(h), Consideration means anything receivable against the value of the goods or service
supplied.
To issue tax invoice under both the situations, we can consider the following:
i. Rs. 1,000,000 for signing amount on 2068.01.14

- Amount paid as advance as signing amount is not a consideration towards supply of service, as it is
not against the supply of service and thus it is not a supply. Hence, tax invoice shall not be raised
against such request for advance.
ii. Rs. 1,000,000 for running bill as on 2068.01.30
- Running bill is issued against service rendered and it is consideration for service rendered and thus
is a supply. Hence, tax invoice shall be raised as per section 6(2)(3)
ii.
i. Non-tax payable. (Vat Exempt)
ii. Non- Taxable(Vat Exempt)
iii. Taxable
iv. In both case the consultancy income is taxable. [In case of person dealing in service, it has to
get registered under VAT if service income per annum is above Rs 10 lakhs. Otherwise the
customer should not give him the contract for service]
iii.
i) Calculation of VAT Paid on purchase

Purchase Value Vat @ 13% Remarks
1. Cow Milk 1,000,000 Tax exempted Sch-1
2. Powdered Milk 800,000 104,000
3. Sugar 1,080,000 140,400
4. Advertisement ( Ice Cream) 50,000 6,500
5. Furniture 200,000 26,000
6. Packaging Material 25,000 3,250
Total VAT paid on purchase 280,150
ii) Calculation of VAT collected on Sales:

Purchase Value Vat @ 13% Remarks
1. Cow Milk 1,080,000 Tax exempted Sch-1
2. Ice Cream 4,500,000 585,000
ECW P.T.O.
(104)
Total VAT paid on purchase 585,000
iii) Net Vat payable / Receivable in f/Y 2067/68.

Amount Remarks
Total Collected 585,000
Less: Claimable
i) Powdered Milk 93,600 (18000/20000*104000) Note-1
ii) Sugar 140,400
iii) Advertisement 6,500
iv) Furniture 20,967 (4500000/5580000*26000)

Note-2.
v) Packing Material 261,467 Note 3.
Net Vat Payable 323,533
Note:
1. As per Section 40 (3) in case of the taxpayer sells both taxable and non- taxable goods, the tax
paid on goods directly related to taxable sales should be claimed.
2. As per section 40(4), in case of taxable purchase not directly related to taxable or non- taxable
goods sold, tax credit shall be claimed on the proportion of taxable sales to total sales is not
allowed for credit claim.
3. Section 40(3), tax on purchase related to non-taxable sales is not allowed for credit claim.
b)
i. Under section 23 (ga), tax officer has power to seize similar goods in stock which are under invoiced
and can be purchased or caused to be purchased by the department or the Internal Revenue Office
at the under invoiced price. The tax officer has no power to levy additional tax, fine, fee and penalty.
ii. If the annual expenses of telephone and rent exceeds Rs. 1 lakh, the person is required to be
registered under VAT. Since, both of these expenses exceed the limit it is required to be registered
under VAT as per section 7(5) kha). Further the transaction for the purpose is either purchase or sale.
Since purchase is more than Rs.25 lakhs, he has to get registered.
iii.
i.
a) Vat credit to be disallowed
Party VAT
ABC Electronics P. Ltd. 13,000
XYZ Printing Media 26,000
PQR Designing P. Ltd 39,000
ECW P.T.O.
(105)
Total Disallowed 78,000
b) Penalty
As per section 29 (2) (s), 100% of tax amount or 6 months imprisonment or both shall be charged as penalty for
submission of false bill.
Thus, Penalty = Rs. 78,000
ii. Amount to be deposited to appeal in

Particulars Administrative Review Revenue Tribunal
- Undisputed Amount (100%) (XYZ 26,000 26,000

Printing)
- Disputed Amount
ABC Electronics 13,000
PQR Designing 39,000 1,7334 26,000
52,000 (one third) (one-half)
Total Deposit to be done 43,3334 52,000
iii. As per section 33 of VAT Act, 2052, Bank guarantee facility is available for appeal in Revenue Tribunal.
5.
a) Describe duty to be levied in event of re-import of exported goods. 5
b) ABC Trading has imported CAT Heavy equipment from Japan. Calculate the
transaction price for the purpose of calculation of custom duty on the basis of following
information: 5
CIF Kolkota price USD 120,000
Exchange Rate while opening LC Rs.74.
Exchange Rate while retiring LC Rs.75.
Exchange Rate while clearing the goods at Kolkota Rs. 72.
Exchange Rate while clearing at Nepal Birgunj Custom Office Rs. 70.
Kolkota port clearance charge including Misc. expenses (includes non-proper bill of Rs.
6,000) Rs. 21,000. Labor charge for unpack and repack at Birgunj customs Rs. 6,000
and unloading at the firm‘s chitwan Site yard Rs. 5,000 respectively.
Transportation and transit insurance from Kolkota to Birgunj Custom Rs. 80,000 and
from Birgunj to Chitwan Rs. 12,000.
Answer No.5
a) Duty to be levied on re-import of goods:
(1) If any person re-imports any goods which have been manufactured or finished in
Nepal and exported, such goods shall be subject to such duty as is chargeable on the
ECW P.T.O.
(106)
importation of the goods of similar kind or to the same value, which have been
manufactured or finished in a foreign country.
(2) Notwithstanding anything contained in sub-section (1), no customs duty shall be
charged on the goods which have been returned back as follows:
(a) Having been exported through parcel by post but could not be delivered to the
concerned person and thus returned, or
(b) Having been returned because the concerned person has refused to take delivery
after clearance made by the Customs Office or after having arrived abroad, or
(c) Having been returned because of being unable to meet standard quality due to an
accident or natural calamity.
(3) Where the raw materials and subsidiary raw materials of the goods returned k
pursuant to sub-section (1) were imported without paying duty, the duty chargeable
on the quantity of the raw materials or subsidiary raw materials used in such goods
shall also be recovered.
b) Calculation of the transaction price for the purpose of calculation of custom duty on the basis of
following information.
Nrs.
Invoice Value USD 120000 @ @ the rate while clearing Nepal
Rs.70 8,400,000 Custom
Kolkota port clearance charge

(proved only) 15,000 Non- proper bill will not be eligible
Transport and Insurance 80,000
Transaction Price for duty purpose 8,495,000
Loading,unloading, transport from Nepal custom will not be included.
6. Signature Distillery has been manufacturing 65 UP Alcohol using Molasses as prime raw
material. The input output ratio is 20 litre per quintal of molasses. During the month Bhadra
2067, it has purchased 200 quintal Molasses on which the excise duty is Rs. 50 per quintal.
The excise duty payable on the production is Rs. 90 per liter. Out of the total production,
70% is sold to a duty-free shop under recommendation from Inland Revenue Office.
Calculate the net Excise Duty payable for the month. 10
Answer No.6
Calculation of Excise duty
payable
ECW P.T.O.
(107)
Excise payable on production
Use of Molasis as RM 200 Quintal
Production Ratio : 20:1
Alcohol production 4000 Ltr
Excise duty paid on Molasses Rs.10000
Excise duty on production @ Rs.

90 360,000 Rs.
Not payable on the sale to duty
free shop 252,000 against Bank/Cash Guarantee
Net ED on production 108,350 Rs.
less: the ED paid while purchasing
the Molasses 10,000 Rs.
Net ED payable to Government 98,350
ECW P.T.O.
ECW P.T.O.
CAP-III, Advanced Taxation, Dec 2011
Suggested Answer
Maximum Marks - 100

Total No. of Questions - 6
Marks
1. Compute the taxable income and the tax liability of M/S Himalayan Confectionery Pvt. Ltd.
with the following information: 15
Rs.
Purchase of raw materials 2,500,000
Opening stock of raw materials 1,500,000
Closing stock of raw materials 1,000,000
Sales 6,500,000
Factory overheads 1,400,000
Administration overheads 900,000
Selling and distribution overheads 800,000
Profit on sale of a vehicle (book value Nil) 1,300,000
Dividend income from a resident company 100,000
Donation expenses (300,000 to exempt entity) 500,000
Notes:
a) Costs include gratuity expenses of Rs. 200,000 for which Rs. 300,000 has been funded to
the approved retirement fund.
b) Company had following assets in the books and charged the depreciation in the financials
as per following: (Rs.)
Assets Category Addition Depreciation Opening WDV per Tax
Amount charged
Building 1,200,000 500,000 10,000,000
Vehicle 1,500,000 200,000 2,300,000
Office equipment 100,000 300,000 700,000
All additions were done in the third quarter of financial year.

c) Of the amount spent in the factory overhead Rs. 100,000 was spent for pollution control
related expenses.
Answer to Q 1)
Computation of taxable income of Himalayan Confectionery
Sales 6,500,000
Less; Raw material consumption(150000 +

2500000 – 1000000) 3,000,000
Less; Overheads u/s 13 1,800,000
Less; Depreciation u/s 19 1,131,667
Less; Gratuity u/s 13 300,000

JRH P.T.O.
(2)
Adjustable taxable income 268,333
Pollution Control Expenses u/s 17

50% of adjusted taxable income 134,167
Actual expenses 100,000
Allowable expenes 100,000
Donation Expenses u/s 12

5% of Adjusted taxable income 13,417
Actual expenes 300,000
Allowable limit 100,000
Allowed expenses 13,417
Taxable income 154,916
Tax thereon @25% 38,729
Working Notes
Calculation of Depreciation
Depreciation Depreciation
Assets Opening WDV Addition Deletion Base Depreciation Amount
Building 10,000,000 800,000 - 10,800,000 5% 540,000
Vehicle 2,300,000 1,000,000 1,300,000 2,000,000 20% 400,000

Office
Equipment 700,000 66,667 - 766,667 25% 191,667
1,131,667
Overheads
Factory Overheads 1,400,000
Administration Overheads 900,000
Selling & Dist. Overheads 800,000
Total 3,100,000
Less; Depreciation 1,000,000
Less; Gratuity Expenses 200,000

Less; Pollution control
expenses 100,000
Total 1,800,000
JRH P.T.O.
(3)
Donation paid to non tax exempt entities is not allowed for deduction.
Profit on sale of vehicle is not added to income as it is assumed that there will be other assets
available in the pool.
Dividend from the resident company is paid after final withholding tax u/s 92 of the Act,
therefore exempt.
2.
a) There was a fire in Suvas Trading Company Pvt. Ltd. due to which its entire furniture and
office equipments were lost. The company lodged a claim with the insurance company
on 2067.03.25. The company had Rs. 500,000 of tax base for this particular pool of assets
at the end of the year and it claimed Rs. 600,000 from the insurance company as that
was the amount insured. On 2067.08.20 it received Rs. 500,000 as compensation from
the insurance company. You are required to derive the amount that is to be included in
the income and the deduction that can be allowed as per Act. 5
b) Mr. Samir Kumar had purchased a property on 2064.07.12 for Rs. 1 crore. On 2065.10.15,
Samir gets divorce from his wife and during the settlement he transfers the property to
his wife Ms. Kamala without any financial consideration. Ms. Kamala incurs Rs. 20,000 as
transfer charges to transfer the property in her name. Mr. Samir notifies the Inland
Revenue Department about his option of application of section 43 of the Act in writing.
On 2066.05.15 Ms. Kamala sold the property for Rs. 1.2 crores. Derive the amount that is
taxable as gain in the hands of Mr. Samir and Mrs. Kamala. What would be the impact if
Mr. Samir does not notify the Department about his option? 5
c) Antarctica Airlines is an airline company registered in Netherland. The company has
operation in Nepal and for this it has opened a liaison office. In the financial year 2067-68
the airlines sold the tickets as per following:
i) Tickets sold to the passengers flying from Nepal Rs. 50 crores,
ii) Tickets sold to the passengers flying from places other than Nepal Rs. 10 crores,
iii) Total expense for the operation of Nepal office 5 crores.
You are required to mention the provision of the Act for the Nepal operations of this
company and the taxable income, applicable tax rates and the tax liabilities. 5
Answer to Q 2 a)
Above case is a situation where the entire pool of a particular asset is destroyed by fire and the
company has made a claim with the insurance company for the loss of the assets. Section 31 of the Act
has prescribed that in case of insurance compensation the compensation should be included in the
income as and when such amount is received. Similarly, when the pool is dissolved with no assets, then
depreciation can be claimed for the entire wdv as per Section 19.
For the financial year 2066-67

Book value of the pool 500,000
Depreciation expenses 500,000 as no assets left in the pool
Depreciation base for the next year nil
For the financial year 2067-68
Opening balance of the pool nil
Compensation reveiced from insurer 500,000
The amount of compensation therefore is to be included in the income.
JRH P.T.O.
(4)
Alternatively, the company need not include the full compensation in to income if the condition mentioned in
Section 46 of the Act is fulfilled. In such case the excess of compensation received than that of the value of
retired assets is only considered as income. There will be timing difference between the loss (involuntary
retirement of assets), compensation receipt and the new assets purchase, therefore after the loss,
depreciation will continuously be charged for such assets. The conditions for this purpose are:
 Company purchases the similar assets within a year,

 Company applies for such facility with Inland Revenue Department,
Answer to Q 2 b)
Section 43 of the Income Tax Act prescribes the basis of valuation of properties which are transferred by the
couple to other as per the process of their separation. In the given case Mr. Samir Kumar transferred the
property as part of settlement during the separation therefore for his case the income derivation as per
above section will be as follows:
Incomings Rs. 10,000,000

Outgoings for the property Rs. 10,000,000
Net gain Nil
Income calculation in the hands of Mrs. Sarala

Outgoings for the property
Value of the property transferred Rs. 10,000,000
Registration expenses incurred Rs. 20,000
Net gain therefore Rs. 1,980,000
In above situation if Mr. Samir does not notify his selection of options u/s 43 then he will have to pay tax in
the income calculated u/s 45 of the Act which prescribes of procedure of determination of income where the
property is transferred to the related parties without considerations.
Answer to Q 2 c)
Antartika Airlines is a non-resident person as per Sectin 70 of the Income Tax Act. The Act
has prescribed the method of taxation for this type of entity operating in Nepal. Section 2 (7) of
the Annexure 1 of the Act prescribes the applicable tax rate, which are different for different
activities. As per above section read with the rates prescribed following will be the taxable
income, applicable tax rate and the tax liabilities.
Income by way of sale of ticket to the passengers flying from Nepal 50 crores
Income by way of sale of ticket to the passetngers flying from elsewhere 10 crores
Taxable income 60 cores
Tax rate applicable
On income by the passenger flying from Nepal 5%
On income by the passenger flying from elsewhere 2%
Tax liabilities
JRH P.T.O.
(5)
On 50 crores 2.5 crores

On 10 crores 0.2 crores
Total tax liabilities 2.7 crores
As per the provisions of Section 70(3)(kha) no deduction shall be allowed while deriving the taxable
income in such case. Therefore the operating expenses of Rs. 5 crores will not be allowed as
deduction for Atlantic Airlines.
3. Define “Non-business chargeable asset” under Income Tax Act, 2058 with minimum 2
examples. Mention the procedures of tax imposition when a company operates real estate
business for buying and selling properties like building and land. (4+6=10)
Answer to Q 3)
Within the definition under section 2(da) of the Income Tax Act 2058, generally, this type of assets
includes properties and securities or an interest in an entity belong to an individual. However, assets not
used for generation of income is also included in this category.
Land, building, share, debenture etc. are classified in the category.
The following assets are excluded from the definition of non business chargeable assets:
 A private residence of an individual that has been owned continuously for ten years or more and used
as residence continuously or intermittently for total of ten years or more.
 A private residence or a land of an individual that is disposed off for less than Rs. 30 Lakh.
 Non business assets which is disposed-off by way of any type of transfer other than sale and
purchase made within three generations.
In additions to above, personnel belongings like gold and ornaments, vehicles, furniture etc. are excluded
from the definition, the income from disposal of these are also non-taxable income.
Tax imposition on real estate business activities

Tax charging on real estate business is very highlighting issues. Imposing such tax is widely
clarified by recent budget when an individual natural person deals in land and building as trading.
Tax liability is calculated on the basis of the net gain from the 1 disposal of those assets. For
example, Mr. Ram has purchased a piece of land at Rs. 60 lakh, incurred Rs. 4 lakh as malpot
23
while getting transfer of the land when he purchased it. He has sold the land at Rs. 80 lakh. The
net gain on the land is Rs. 16 lakh. Withholding tax is managed for such transactions under
section 95 ka (3) of the Act for natural person.
If the land is sold after holding it for more than 5 years the tax is 5% and if it is sold after
holding it for less than 5 years the tax rate is 10% .
But when such transaction is carried out by a company, it will be taxed as normal business
income and no TDS is applicable. But the company will have to pay Advance tax on the
income earned.
4.
a) "Hatke Bahadur, citizen of Nepal provides rental services/hiring services of mini bus,
Power tiller, Auto Rickshaw and other vehicles. Following is the detail of his business.
Vehicles are owned by him in his individual name for Fiscal Year 2067/68.
JRH P.T.O.
(6)
Rates per No. of services Provided Number of

Services during the year vehicle owned
(Rs.)
Power tiller 5,000 200 4
Tractor 4,500 160 7
Auto Rickshaw 6,000 100 10
Micro bus 7,000 50 8
Car 6,500 210 6
Night Bus 9,000 100 3
He incurred following expenses during the year.

Particulars Amount (Rs.)
Petrol 81,000
Diesel 89,000
Oil & Lubricants 20,175
Repair 28,245
Staff's Salary 3,800,000
Mr. Hatke did not have knowledge about tax and its implications.
Required:
i) Calculate the tax to be paid by Mr. Hatke for Fiscal Year F.Y. 2067/68. 4
ii) Mr. Hatke did not submit Income tax return under section 96. What are its
implications? 1
b) Mr. Gopal is a professor in TU. He earned Rs. 600,000 employment income in Nepal in
Fiscal Year 2067/68. Out of which Rs. 150,000 was deposited by employer in Approved
Retirement fund. In that year he went to India for 2 months and earned Rs. 330,000
from consultancy and paid tax Rs. 49,500 as per Indian Income Tax Act. Again he went to
USA for 2 months, worked in a research centre and earned Rs. 300,000 out of which tax
was deducted Rs. 60,000 and deposited in USA as per USA tax law. Nepal has no double
taxation Treaty with USA but it has double taxation Treaty with India.
TDS on employment income of Nepal is not deducted. He opted for couple.
Calculate Income tax to be paid in Nepal. 5
Answer to Q 4 a)
i. As per Schedule 1 of Income Tax Act, 2058. Person engaged in hiring vehicles has to pay a fixed
amount of taxes per vehicle, for different vehicle and if the owner of the vehicle is natural person,
then tax paid in such manner shall be final.
The taxes to be paid by Mr. Hatke shall be as follows, since he is a natural person.
JRH P.T.O.
(7)
Type of Vehicle No. of vehicle owned Tax per Vehicle Total Tax
- Power tiller 4 750

3000
- Tractor 7 750
5250
- Auto Rickshaw 10 850
8500
- Micro bus 8 1200
9600
- Car 6 1200
7200
- Night Bus 3 1500
4500
Total
38050
Thus, Mr. Hatke is liable to pay Rs. 38,050 tax for F/Y 2068/69.
ii. As per section 97 (d), natural person having income from vehicles subject to payment of tax at a
fixed amount annually do not need to submit annual tax return.
Thus, Mr. Hatke need not submit annual tax return.
Answer to Q 4 b)
Employment Income in Nepal 6,00,000
Employment Income in India 3,30,000
Employment Income in USA 3,00,000
Assessable Income 12,30,000
Less:
Contribution to Approved Retirement fund 1,50,000
- Rs. 3,00,000
- 1/3rd of assessable income i.e. 1/3rd X 12,30,000 = 4,10,000
- Actual = 1,50,000
Whichever is lower
Taxable Income 1,080,000
(i) Calculation of tax before Foreign tax Credit
Amount Tax Rate Tax

Rs. 2,00,000 1 % 2,000
Rs. 1,00,000 15% 15,000
Rs. 7,80,000 25% 1,95,000
Ra. 10,80,000 2,12,000
Average Tax Rate (ATR) = Tax Before Tax credit X 100

Taxable Income
= 2,12,000 X 100
1,080,000
JRH P.T.O.
(8)
= 19.62%.
(ii) Calculation for tax credit
Company Income Tax Tax Calculated at ATR Tax Credit

Paid (19.62%)
India 3,30,000 49,500 64,746 49,500
USA 3,00,000 60,000 58,860 58,860
1,08,360
(iii) Net tax payable

Tax Liability as per (i) above 2,12,000
Tax Credit as per (ii) above (1,08,360)
Net Tax Payable 1,03,640
5.
a) M/s Ankur Plastics has the following transactions, calculate the amount of VAT payable
or receivable for the month of Jestha 2068. Rs. 10
i) Purchase of Raw material 650,000
ii) Purchase of packing material 100,000
iii) Purchase of Fuel for generator 23,000
iv) Purchase of Fuel for Vehicle 15,000
v) Purchase of a vehicle 2,300,000
vi) Sale of finished goods 1,500,000
vii) Opening VAT receivable 120,000
viii) Purchase of raw material includes an item for Rs. 35,000 which was purchased (bill
dated) on Baisakh 2067, which could be accounted only this month since the invoice
was misplaced.
ix) Opening VAT receivable balance has been running from Poush 2067.
x) All of above amounts are exclusive of VAT.
b) A motor car made in the year 2004 was imported in Nepal by a diplomatic mission in
August 2006 under full duty exemption facility. The import value of the vehicle
determined for the custom purposes was Rs. 50 lakhs. The mission sold the vehicle in
August 2010. You are required to calculate the value of the vehicle for custom purposes. 5
Answer to Q 5 a)
Collection of VAT
Sale of Finished goods 1,500,000
VAT on above 13% 195,000
Payment of VAT
Purchase of Raw material 79,950
Purchase of packing material 13,000
Purchase of Fuel for generator 2,990
JRH P.T.O.
(9)
Purchase of Vehicle (40%) 119,600

VAT on above 13% 215,540
Statement of Vat Receivable/Payable

Opening VAT receivable 120,000
VAT receivable on purchases 215,540
VAT payable on sales 195,000
Net VAT receivable 140,540
Further comments:
Since the opening receivable is coming for six months now Ankur Plastics should file an application as per
annex 14 for refund of amount in cash.
Purchase of Fuel for Vehicle is not allowable for credit,

Purchase of raw material for more than a year is not allowed for credit
Answer to Q 5 b)
Section 9 of Annexure 1 of Finance Act, 2068 has prescribed the procedure for the calculation of
custom value for the used vehicles and equipments. The same provisions can be applied here to
derive the custom value:
Year of manufacture of the vehicle 2004
Year of import in Nepal 2006
Year on which it is sold 2010
Years it was used abroad 2 years
Year it was used in Nepal 4 years
Maximum depreciation allowed for the duty free vehicle 10% for 5 years
Since the vehicle was used abroad for 2 years after it was manufactured, the depreciation for the two
years will not be allowed to be deducted (u/s 9 (4)).
Value at the time of import 50 lakhs
Depreciation – year 1 5 lakhs
WDV year 1 45 lakhs
Depreciation – year 2 4.5 lakhs
WDV year 2 40.5 lakhs
Depreciation – year 3 4.05 lakhs
WDV year 3 36.45 lakhs
Therefore the value for custom purpose is 36.45 lakhs.
6. Janaki Garment Pvt. Ltd. engaged in production of readymade wear and registered with VAT
at Inland Revenue Department has the following transactions during Jestha 2068. The
Company has VAT refundable Rs. 33,450 as on 31/01/2068.
Required to calculate: (4+6+5=15)
a) amount of VAT collection on sales
b) input tax available for set off and
c) the net VAT payable/receivable to/from Inland Revenue Office.
Sales for the month (before VAT as applicable) Rs.
Export of garments 7,000,000
Local sale 1,200,000
JRH P.T.O.
(10)
Purchases and expenditures:

Particulars Amount(Rs.) VAT (Rs.)
Cloth purchase 5,000,000 650,000
Garment material purchase 400,000 52,000
Packing materials 50,000 6,500
Carton for export Packing 100,000 13,000
Parts for machine 150,000 19,500
Telephone Expenses 50,000 6,500
Purchase of cloth press machine spare parts ( in stock) 200,000 26,000
Misc. factory consumables 200,000 26,000
Plant and factory building repair 100,000 13,000
(No VAT bill on payment of Rs. 200,000)
Purchase of cloth pack machines. 600,000 78,000
Purchase of delivery VAN 800,000 104,000
Purchase of a car 1,600,000 208,000
Construction of a shed for production work 400,000 52,000
Additional information:
Van and Car has been purchased under loan arrangement for 70% of the amount and
the blue book is in the name of ABC Bank Ltd.
Answer to Q. 6)
a. Vat collection VAT Collection
Export 7,000,000
Local sales 1,200,000
8,200,000
VAT 13% on local sale only 156,000
b. Input tax
Items Total VAT VAT claim Remarks
Cloth 5,000,000 650,000
Garment material 400,000 52,000

Packing materials 50,000 6,500
Purchase of cloth
pack 600,000 78,000
Construction of a shed 400,000 52,000
Cartoon 100,000 13,000
Telephone Exp. 50,000 6,500
JRH P.T.O.
(11)
Spare parts 150,000 19,500
Machine parts in store 200,000 26,000
Factory consumables 200,000 26,000
P & B repair 100000 13000
VAN 800,000 104,000
CAR 640,000 83,200 only 40% eligible so adjusted
8,690,000 1,129,700
c. Net VAT payable/(

Receivable)
Input VAT 1,129,700
1,163,150
VAT collection on sales 156,000
NET VAT Refundable 1,007,150
Answer to Q 6)
JRH P.T.O.
(12)
7.
a) Mr. Thomas, a resident of Europe, is out to create a new world record of world tour in a
motor car in minimum time. He entered into Nepal for same purpose under a carnet. He
entered Nepal on 2068.01.01 through Birgunj Border. He moved through Kathmandu to
Pokhara. On his way, he met an accident. Due to his car accident, 2 persons got injured
and police took his car in custody.
Required: (2+2+1=5)
i) Under normal circumstances, what is the time allowed to Mr. Thomas to keep his
motor car in Nepal, without paying import duty?
ii) As per the letter of recommendation given by "District Police Office", the vehicle has
remained in police custody for 30 days and due to the accident it remained in a
registered work shop of 25 days. He takes out vehicle on 01.08.2068 from work shop.
Mr. Thomas approached Custom office to exit from Nepal on 2068.08.10.
How many days' custom duty shall be levied in such case?
iii) Mr. Thomas has received offer of Rs. 2,000,000 for his vehicle. He is interested to sell
off his vehicle against this amount. Is it allowed?
Answer should be in light of provisions of Custom Act, 2064.
b) "Axis Co. Ltd." wants to send its machines for repair purpose to USA. The value of
machine is Rs. 1,050,000. Since, the repair process is supposed to take longer time, the
JRH P.T.O.
(13)
company takes permission from custom office for extended time for re-import for 5
months from date of export. Machines are re-imported within stipulated time.
The bill provided by USA for repair is of Rs. 140,000 (including spare parts replacement).
Calculate the following: (22.5=5)
i) Custom deposit at the time of sending it to USA?
ii) Custom duty to be charged on returning of machines and amount paid to/returned
from Custom office. (Ignore other duties/taxes except custom duty)
Note: Take Rate of custom duty 14%.
Answer should be in the light of the provisions of Custom Act and Rules 2064.
Answer to Q 7 a)
i. As per section 12 (2) of Schedule 1 of Custom Act, 2064, Vehicles of personal use brought in by tourists under
a carnet shall be allowed to stay in Nepal continuously or intermittently for a period of 6 months during the
span of 12 months from the date of first entry in Nepal without payment of import duty.
Thus, Mr. Thomas is allowed to keep his motor vehicle for a period of 6 months during 2068.01.01 to
2068.12.30.
ii. As per section 12 (2) of Schedule 1, for calculation of the time period of 6 months of stay in Nepal, the period
recommended by the District Police Office as the Vehicle concerned has remained in Police Custody because
of an accident or by a registered workshop as the vehicle, shall not be considered.
Thus, period of Police Custody- 30 days and repair in workshop for 25 days i.e. total 55 days shall not be
included in calculation of time of stay. Thus, Mr. Thomas can keep his vehicle in Nepal for 6 months and 55
days under above conditions without paying duty.
Hence, duty shall not be paid on such because he keeps for less than allowed period. i.e. 6 months 40 days.
i.e.
Baisakh to Asoj 6 months
Kartik 30 days
Mangsir 10 days
6 months 40 days
iii. As per section 12 (2) of Schedule 1, Vehicles imported under carnet are prohibited from being donated, gifted
or sold. Thus, Mr. Thomas shall not sell his vehicle es.
Answer to Q 7 b)
i. As per Rule 7, in case it becomes necessary to send any goods or machinery or spare parts thereof to a
foreign country from Nepal for purpose of repair, deposit as defined below shall be taken.
JRH P.T.O.
(14)
0.5% of the value of the goods in case the goods is aircraft, helicopter and parts thereof, otherwise it shall be
5% of value.
Here, the value of machinery sent is Rs. 10,50,000. Thus custom deposit shall be 5% of it. i.e, 5% of 1,050,000
= 52,500.
ii. The time given in rule 7 for re-imports of machine sold for repair is 3 months from date of export. This limit
can be extended for next three months if granted by custom officer. Here, Time limit shall be extended and re
import shall be done within time.
Thus Custom officer shall charge custom duty at prevailing rate on the expenses involved in such repair or on
the price of spare parts which are replaced.
From it, custom deposit furnished earlier shall be deducted and custom officer shall return the balance of the
amount of the person.
Here,
i. Expenses of repair 140,000
ii. Rate of Custom Duty 14%
iii. Custom Duty on repair (i X ii) 19,600
iv. Custom deposit given while machines sent for repair (from (i) as 52,500
per above)
Amount to be received. (iv-iii) 32,900
Axis Ltd. Co. need to receive Rs 32,900 back from Custom Office.
8.
a) A brick kiln owner produces and sells 500,000 brick at Rs. 10 per brick. He had three
chimneys which produced the following numbers of bricks.
Chimney 1 100,000
Chimney 2 80,000
Chimney 3 320,000
500,000
Assess his excise duty liability. 4

b) State the circumstances in which the excise officer can make his own assessment without
accepting the tax payer's assessment of excise liability as per section 10 Gha of the Excise
Act. 6
Answer to Q 8 a)
For Kiln, Excise duty license fee is Rs. 150,000 per chimney irrespective of production of
chimney.
JRH P.T.O.
(15)
But if the kiln owner is registered under VAT he need not pay the above excise duty
license fee if the VAT payable is in excess of the Excise fee. If the VAT payable is less than
Excise fee he has to pay the difference within Srawan after the year end.
In this case, VAT payable is 5,00,000X10=50,00,000X13% = 6,50,000
Excise license fee payable for the three kilns is 1,50,000X3=4,50,000
Since, total VAT payable is more than the excise duty license fee payable he need not pay
any excise duty fee.
Answer to Q 8 b)
The Excise officer can make assessment of Excise duty payable under section 10 Gha of
Excise Act in the following circumstances.
1) If excise return is not filed within time

2) If an incomplete or erroneous return is filed
3) If a fraudulent return is filed
4) If the Officer believes that the duty has been under stated or is not correct
5) If the Officer believes that there is under invoicing and it has to be valued
6) If input/output ratios as prescribed is not maintained
7) If there is a difference of more than 1% of alcohol on removal.
8) Evading of excise duty
9) A person liable for registration deals in excisable goods without registration.
Except in the case of (3) & (4) above, assessment should be made within 4 years from
the earliest date where return is filed or return is due.
JRH P.T.O.
VND
CAP-III, Advanced Taxation, June 2012
Suggested Answer

Marks
1. Compute taxable income and tax liability including all penalty and interest based on
the following information. 15
XYZ Pvt. Ltd.
Profit & Loss A/c
For the Year Ended 2068
Rs.
Sales 17,500,000.00
Less : Cost of Sales 10,500,000.00
Gross Profit 7,000,000.00
Add : Other Income 180,000.00
Less : Operating & Admin. Expenses 2,170,000.00
Interest Expenses 275,000.00
Depreciation 650,000.00
Net Profit 4,085,000.00
XYZ Ltd., a special industry categorized u/s 3 of Industrial Enterprises Act, 1992
has been established in the year 2055. Additional information has been provided
below:
a) Depreciation includes Rs. 300,000/- as depreciation of delivery van which was
purchased on Baisakh 14, 2068 for Rs. 1,500,000/-
b) Operating & Admin. expenses comprises of following:
i) Rs. 175,000/- has been given as donation to tax exempted entity under the
Income Tax Act, 2058.
ii) Rs. 62,999/- has been spent for Repairs & Maintenance of assets.
Depreciation basis amount of the relevant group at the yearend for
depreciation calculation is Rs. 900,000/-
c) Interest expenses of Rs. 275,000/- is payable to Director on Loan & Advances.
d) Business is established in district of Dhading which has been declared
"Underdeveloped Area" by Nepal Government.
JRH P.T.O.
(2)
e) No advance tax is paid for above period.

f) The Company has filed tax return on Magh 2068.
Answer No. 1
Computation of Taxable Income & Tax Liability

Previous Year : 2067-68
Particulars Notes Amount

Sales 17,500,000.00
Other Income 180,000.00
Total Income (A) 17,680,000.00
Less : Administrative & Other
Expenses
Cost of Sales 10,500,000.00
Interest Expenses 275,000.00
Depreciation 1 450,000.00
Repairs u/s 16 4 62,999.00
Other General deduction u/s 13 3 1,932,001.00
Total Deduction
(B) 13,220,000.00
Assessable Income (A) - (B) 4,460,000.00
Less : Donation 2 100,000.00
Taxable income 4,360,000.00
Tax @ 20% 872,000.00
Interest U/s
Penalty u/s
Notes
1. As per section 2(5)(Ka)(E) of Schedule 2 of IT Act 2058. If the assets are purchased between the
end of Chaitra and the end of the income-year, only 1/3rd of the depreciation basis for the assets so
purchased shall be included as depreciable basis of the Block. Thus, in this case the depreciation
basis would be Rs. 1,500,000 X 1/3 i.e. Rs.500,000/- and the depreciation rate applicable for
Vehicle (Class C) is 20%
Thus the allowable depreciation is Rs. 100,000/-. However the Company has charged Rs 300,000/-
.Hence total allowable depreciation is calculated as under:
Particulars Amount
Depreciation charged to PL 650,000.00
Less : Depreciation on asset purchased 300,000.00
on Baisakh
2068
Add : Depreciation allowable 100,000.00
Total allowable depreciation 450,000.00
2. As per Section 12(2) of IT Act 2058, the maximum amount that can be claimed as donation
expenses is Rs. 100,000/-or 5% of person’s Adjusted Taxable Income, whichever is lower.
The allowable amount has been calculated below
JRH P.T.O.
(3)
Particulars Amount
Sales 17,500,000.00
Other Income 180,000.00
Less : Interest Expenses 275,000.00
Cost of Sale 10,500,000.00
Repairs 62,999.00
Depreciation 450,000.00
Other General Deduction 1,932,001.00

Total Deduction
(B) 13,220,000.00
Adjusted Taxable Income (A-B) 4,460,000.00
Donation available lower of :
5% of ATI 223,000.00
Actual Donation 175,000.00
Allowable Donation u/s 12 100,000.00
3. Calculation of General Deduction
Operating & Admin Expenses 2,170,000.00
Less : Donation claimed u/s 13 175,000.00
Repairs & Maintenance claimed u/s 16 62,999.00
Other General Deduction 1,932,001.00
4. As per Section 11(3)(Kha) of IT Act 2058, if a person has a special industry, which is established
at any area declared as "Underdeveloped Area" by Nepal Government, then the tax liability of
such entity is 30% of total tax liability. Since the Co. was established in year 2055 the above
section is not applicable since time period of 10 years has passed.
JRH P.T.O.
(4)
5. Interest paid or payable to directors on their loan & advances is an allowable expenditure. It is
assumed that directors include such interest income in their taxable income and tax is deducted
at source.
6. Calculation of Interest & Penalty
Total Tax Interest u/s 118 @ Penalty

payable 8,72,000.00 90% of the tax months 15% U/s 117(1)
First Installment 40% 3,48,800.00 3,13,920.00 9.00 35,316.00 2,000.00
Second
Installment 30% 2,61,600.00 2,35,440.00 6.00 17,658.00 -
Third Installment 30% 2,61,600.00 2,35,440.00 3.00 8,829.00 582.00
8,72,000.00 61,803.00 2,582.00
Interest u/s119 872000x15%*4/12 43600

Total interest=61803+2582+4600=107985
a. Rs. 2,000/- is for non filing of advance tax return.
b. For delay submission of Annual tax return penalty u/s117(2)has been calculated as below
Date of filing in Magh is not given. It is taken that it is filed on the last date of Magh.
no. of days kartik31+mansir30+poush 30+magh29=120
Higher of:i. (i) 0.1 % P.a.of Rs. 17680000/- for 120 deays =
17680000*120/365*0.1 581.260274 or
ii. Rs. 100 per month (Kartik toMagh) i.e.. Rs 400/-
2.
a) The civil works for Lower Tamakoshi Hydropower project is awarded to
Laligurans/Eastwater JV through a global contract process. The contract value is
Rs. 2,450 million. The contract shall have to be completed over the period of 5
years. After the works were awarded, there has been change in the design, to
cover for the change variation order was awarded to JV for Rs. 130 million in
the second year of the contract. The cumulative cost for respective year has
been Rs. 400 million, 800 million, 1,290 million, 1,600 million and 2,000
million respectively. It was estimated that the cost of the construction is 90% of
the value of the contract.
Calculate the taxable income on this long term contract of Laligurans/Eastwater

JV for each of the five years. 10
b) Mr. Ram Bahadur Sinjali has migrated to UK on 10th Poush, 2068. He has
equity shares in a commercial banks purchased at Rs. 500,000 and a house
which he recently purchased for Rs. 10,000,000. These properties he could not
sell and therefore decided to leave in the country and went out of the country on
permanent basis. He has the plans to sell the shares and house later when he will
come to Nepal on visit. Explain the tax implication on the assets while he is
going out of the country and the time when he will come back and sell. 5
JRH P.T.O.
(5)
Answer No. 2
a)
Calculation of assessable income and allowed deduction of Laligurans/Eeastwater JV in a long term

contract:
In Rs. Million
Particulars Year 1 Year 2 Year 3 Year 4 Year 5
Initial Contract Price 2,450 2,450 2,450 2,450 2,450
Variation Order 130 130 130 130
Total Contract 2,450 2,580 2,580 2,580 2,580 ½
Price
Initial estimated cost 2,205 2,205 2,205 2,205 2,205 ½+½
amount
Add’nl estimated cost 117 117 117 117
amount
Total estimated cost 2,205 2,322 2,322 2,322 2,322 ½
amount
Expenses incurred this 400 400 490 310 400 ½
year
Cumulative expenses 400 800 1,290 1,600 2,000 1+1
Add’nl cost to 1,805 1,522 1,032 722
complete the contract
Percentage cost 18% 34% 55% 69% 100% 1

incurred/ completed
to Total Est. Cost
Income included for
tax 441 877 1,419 1,780 2,580
(percentage
completed X contract
price) 1
Less; income - 441 877 1,419 1,780
considered till last
year
Income for the current 441 436 542 361 800 1
year
Allowed expenses for 400 400 490 310 400 1
the year
Assessable income 41 36 52 51 400 1
Less; Deductions - - -
(assumed nil)
Taxable income 41 36 52 51 400 ½
b) As per the provisions of the Act, in a normal situation, when the ownership in an assets is
relinquished, it is considered that the assets is sold, however there are special provision in
Section 40 (3) of the Act which has prescribed the conditions on which the assets are deemed to
have been sold even if the ownership is not transferred.
JRH P.T.O.
(6)
Provision clarifies that where if the owner of assets other than land or land & building,
becomes non-resident then by the operation of Section 40(3), the assets is deemed to have
been sold at the prevailing market rate. The Act clearly provides the exception for land and
building. It therefore is applicable for all other assets. The asset is deemed to have been sold
the day on which the person becomes non-resident.
In this case the shares in the commercial bank is deemed to have been sold on the day the
person goes abroad, because from then on the person is going to be non-resident. The market
price of the shares (stock exchange price) is considered the consideration for the shares sold
and the cost price will be the cost he incurred while purchasing those shares. The net gain will
be considered to have been realized by Mr. Sinjali and he will have to pay tax.
Subsequently, when he will come to the country to sell these assets, he will have to consider
the cost of the shares to be the earlier notional income, while the income will be the market
price/transaction price of the shares sold on the date of the transaction.
There will be no special treatment for the land and building sale as these are excluded from
presumed sale of assets mentioned in section 40(3), therefore goes as per the normal process
prevailing at the time the transaction is done.
Since the house was recently purchased and he is a non-resident, he will not be elgible for any
concessinal rate of tax on the sale of house and he would have to pay tax at 25% on the gains on
sale of the house as well as shares, as per clause 1(8) of schedule 1 to the Income tax Act, 2058.
3.
a) Describe the provision in the Income Tax Laws for valuation of finished goods of a
consumer food manufacturing industry? Which method of inventory valuation is
appropriate for a edible oil processing industry? (4+3=7)
b) "Twin Tower Housing Pvt. Ltd.", a housing architectural company had received
architectural consultancy, from Key Consultant Pvt. Ltd., India against the housing plan.
Bill provided by Key Consultant Pvt. Ltd., India is as follows:
Particulars Amount (IRS)
Professional charges for architectural consultancy 476,000
Service tax @ 10.30 % 49,028
Total Bill value 525,028
Accountant of "Twin Tower Housing Pvt. Ltd." is confused as regards to

payment to be sent to Key Consultant Pvt. Ltd. and seeks your advice.
Advise him as regards to VAT/TDS applicable on same and net payment to be
sent. Specify the provision of VAT Act, 2052 and Income Tax Act, 2058 in this
regard. (Exchange rate IRS 1=NRS 1.6) (1.5+1.5+1+1=5)
Answer No. 3
a) Section 15 of the Income Tax Act 2058 has made the following provisions in regard to
inventory valuation.
Trading stock includes the stock with a person; Raw materials, chemicals, work in progress,
finished goods, store, etc.
JRH P.T.O.
(7)
The cost of sale of trading stock sold is derived as follows;

Cost of opening stock xxx
Add: produced during the year xxx
Less: Cost of closing stock xxx
Cost of trading stock consumed or sold xxxx
The cost of trading stock should be taken at cost price or selling price whichever is lower.
The person keeping accounts on accrual basis must adopt factory cost basis for valuation of
trading stocks.
In case actual cost could not be derived for the particular trading stock; either of the FIFO or
Weighted Average cost can be adopted. (On WACM, same classification to be grouped and on
FIFO, the earlier stock will be disposed off)
The prime cost is derived as follows: [Sec. 15 (7) (5)]

Cost of raw materials consumed xxx
Direct labour xxx
Factory variable overhead (Exc. Repair) xxx
Prime Cost xxxx
The factory cost is derived as follows

Cost of raw materials consumed xxx
Direct labour xxx
Factory overhead(Exc. Repair) xxx
Factory Cost xxxx
The product of the edible oil industry is Food category on which the batch-wise and date-wise
stocking is required.
To maintain the food fresh, first in first out method must be maintained so that the latest
production will be stocked through the adopted system of inventory management.
Therefore, the appropriate method of valuation will be FIFO for such edible oil processing
industry.
b) As per section 8 (2) of Vat Act, 2052, "Any registered / unregistered person receiving
service from unregistered person outside Nepal, need to determine and collect Vat at
the time of payment on taxable Value as per provisions of this Act. In other word he
has topay VAT on the same. Reverse Vat as per sec.17(5)(kh) has to be paid.
Again, as per section 88 (1) of Income Tax Act, 2058 TDS @ 15% shall be deducted on
payment by resident person of interest, rent, royalty, service fee, commission or sale
bonus and retirement payment having source in Nepal.
Here, Consultancy fee charged by "Key Consultant Pvt. Ltd." is IRS 476,000. TDS @
15% need to be deducted on same.
JRH P.T.O.
(8)
Also bill raised by key consultant is for IRS 525028.Thus, Taxable Value for the VAT
is IRS 525028.
Bill of Key Consultant:
Particulars Amount (IRS) Amount (in NRS)

Professional charges for architectural consultancy 476,000.00 761,600.00
Add: Service Tax @ 10.30% 49,028.00 78,444.80
Total Amount 525,028.00 840,044.80
Thus, following TDS and VAT need to be charged:
Particulars Taxable value Rate Amount Remarks

TDS 761,600.00 15% 114,240.00 As per section 88 (1) of Income Tax Act, 2058.
VAT 840,044.80 13% 109,205.82 As per Section 8 (2) of Vat Act.
Payment to be made:
Particulars Amount
Total Bill Amount 840,044.80
Add: Vat on same 109,205.82
Less: TDS on same (114,240.00)
Less: Vat to be deposited to tax office (109,205.82)
Total 725,804.80
Thus, Payment of Rs. 725,804.80 needs to be paid to Key Consultant Pvt. Ltd.
But in case Key Consultant did not visit Nepal at all for his work or he did not stay in Nepal for more thatn 90
days in connection with his work and thus did not have a permanent establishment in Nepal, he is not taxable
in Nepal as per Article 7 of DTAA with India and no income tax is deudctible from his payment.
4. My Life Pvt. Ltd. has submitted Income Tax Return for Fiscal Year 2067/68 on
2068 Magh 10 in related IRO. Total taxable income for Fiscal Year 2067/68 was
Rs. 20 lacs and the tax liability as per self tax assessment is Rs. 5 lacs. My Life Pvt.
Ltd. has deposited advance tax of Rs. 100,000, Rs. 100,000 and Rs. 180,000 on
Poush 2067, Chaitra 2067 and Ashadh 2068 respectively. Total amount deposited
was Rs. 380,000. Balance of Rs. 120,000 was deposited along with Income Tax
Return in the month of Magh 2068.
Calculate the interest to be paid as per section 118 (under estimating advance tax
payments) and 119 (delay in payment of tax) of Income Tax Act, 2058. 8
Answer No. 4
Interest as per Section 118
Time period for Installment Installment to 90% of the Total Installment Amount less
deposit Rate be deposited Installment (A) Deposited(B) Deposited (A-B)
JRH P.T.O.
(9)
2067 Poush End 40% 200,000 180,000 100,000 80,000

2067 Chaitra End 70% 350,000 315,000 200,000 115,000
2068 Ashad End 100% 500,000 450,000 380,000 70,000
Since, less than 90% of the installment is deposited interest @ 15% (Standard rate of interest) shall be levied
on difference amount up to the date when tax return is to be submitted i.e. Ashwin end 2068. Calculation is as
follows:
Period for
which
interest
need to
90% of Amount be
Time Installment Total less deducted
period for Installment to be Installment Deposited (in
deposit Rate deposited Deposited(B) (A-B) months) Interest
2067 Poush
End 40% 1,80,000 1,00,000 80,000 3 3000
2067
Chaitra End 70% 3,15,000 2,00,000 1,15,000 3 4312.5
2068 Ashad
End 100% 4,50,000 3,80,000 70,000 3 2625
9937.5
Interest as per Section
119
Particulars Amount
Time limit for Submission of Income Ashwin End 2068.
Tax Return
Amount to be deposited =500,000-380,000
=Rs. 120,000
Income Tax submitted & Amount 2068 Magh10.
Deposited
Time Period for Interest 4 months (part of month to be considered
as full month)
Rate of Interest 15% ( Standard Interest Rate)
Interest =120,000 X 4/12 X15%
=6,000
Thus, My Life Pvt. Ltd. needs to pay Rs. 9937.85 interest under section 118 & Rs. 6,000 under Section 119.
The assessable income is not given in the question., Interest u/s 117(2) for late submisisn of return at 0.1% per
annum on the gross income is payable from Kartik 1 to the date of submission of return for thenumber of days
delay.
JRH P.T.O.
(10)
5.
a) Heat & Cool Pipe Industry Ltd. is a pipe manufacturing company. The raw
material imported during various months are as follows:
Month Raw
Material
2069 Baisakh 10,000 Kg
2069 Jestha 11,000 Kg
2069 Ashadh 9,000 Kg
The sale done by company in various periods are as follows:
Month Local Sale Export Sale Total Sales
2068 Baisakh -Chaitra 4,200 kg 4,800 kg 9,000 kg
2068 Baisakh 600 kg 100 kg 700 kg
2068 Jestha 150 kg 550 kg 700 kg
2068 Ashadh 300 kg - 300 kg
2069 Baisakh - 900 kg 900 kg
2069 Jestha 300 kg 300 kg 600 kg
2069 Ashadh 400 kg 500 kg 900 kg
The company marks up 15% to its product. The selling price is same for local
and export market. Raw material required per kg of output is 2 kg.
i) Determine whether the company can claim bank guarantee facility for VAT
at the time of import of raw material. Also specify the provisions of VAT
Act, 2052 in this regards. 6
ii) The company's VAT account showed following balances. Can company
claim refund immediately after closure of month? Specify the provision of
the VAT Act. 2
Month Balance Remarks
Baisakh 40,000 Payable
Jestha 120,000 Receivable
Ashadh 140,000 Receivable
b) Lumbini District Development Committee has called up an auction to sell its
fixed assets (Computer, Furniture & Fixtures) as it is shifting to new office with
modern infrastructures. Detail of amount collected from auction is as follows:
Fixed Assets Amount
Computer 50,000
Table 30,000
Chairs 40,000
Furniture 140,000
Miscellaneous Assets 70,000
Total Amount Received 330,000
JRH P.T.O.
(11)
The officer of Lumbini District Development Committee did not collect VAT
on this sale. Is he correct? Answer in the light of VAT Act, 2052. 3
c) Answer the following in the light of VAT Act, 2052: (2×2=4)
i) Sweet zone industry Pvt. Ltd. manufacturers Sugar and Spirit. For Fiscal
Year 2068/69, it had following VAT transactions:
Spirit Sugar
A.VAT collected on Sales
i. From VAT registered party 1,200,000 1,200,000
ii. From Non-VAT registered party 700,000 700,000
B.VAT paid on purchase 1,000,000 1,000,000
What amount of VAT refund is Sweet Zone Industry Pvt. Ltd. entitled?
ii) Fashion House Ltd. is a textile Industry manufacturing clothes and also
trading in it. The VAT accounts of Fashion House Ltd. showed the
following data for Fiscal Year 2068/69.
Particulars Trading of clothes Manufacturing
(local purchase & of Clothes
Sales)
A.VAT collected on Sales Rs. Rs.
i. From VAT registered party 1,500,000 1,600,000
ii. From Non-VAT registered party 200,000 160,000
B.VAT paid on purchase 1,400,000 1,300,000
Calculate the VAT amount which Fashion House Ltd. is entitled to get
refund from Inland Revenue Department.
Answer No. 5
a)
i) As per section 8(ka) of VAT Act, 2052, Bank Guarantee Facility is provided on import of raw
materials only and that is available for the quantity of the raw materials required for export of the
finished goods. Condition to be satisfied for Bank Guarantee Facility is as follows:
- The facility is available to those industries who have exported equal to or more than 60% of
total sales of its products during latest 12 month.
The industry has to export the goods for the price which is at least 10% value addition above the
consumed value of the raw material.
The amount of the Bank guarantee shall be equal to the VAT payable on the raw material.
Here, Heat & Cool Pipe Industry Ltd. has fulfilled condition of value addition as it marks up 15%
to its product. Now, condition of 60% export in latest 12 months need to be checked.
Export Sale as percentage of sale for Baisakh, Jestha and Ashadh:
JRH P.T.O.
(12)
Month latest 12 Export sales in latest 12 Total sales in latest 12 % Remarks

month months months
For Baisakh Baisakh-Chaitra 4800 9000 53.33% Less than
2069 2068 60%
For Jestha Jestha 2068 +4800-100+900 +9000-700+900 60.86% more than
2069 Baisakh 2069 =5600 =9200 60%
For Ashad Ashad 2068 +4800-100-550+900+300 +9000-700-700+900+600 58.79% less than
2069 Jestha 2069 =5350 =9100 60%
Since, both conditions are satisfied in the month of Jestha 2069, Bank guarantee facility shall be
provided only for the month of Jestha 2069.
ii) As per section 24(4) in case the person has an export equal to or more than 40% of the sale during
the month, it may apply for the refund immediately after the close of the month.
But as per section 8 ka (5), person with the facility of Bank guarantee as per section 8 ka will not
get facility of section 24(4).
Thus, though the company has more than 40% of export sale, it cannot enjoy facility under section
24(4) for Jestha. Only if Vat is receivable for more than 6 months, refund can be claimed.
b) As per section 15(3), VAT need to be collected while selling taxable goods or services, though
it has been sold by local entity or international organizations situated in Nepal or mission or
Nepal Government or Public Institutions dealing in Vat exempted goods.
Thus, though Lumbini District Development Committee falls under Schedule 2 of VAT Act
i.e. Goods and services levied zero rate of VAT, but VAT need to be collected on sale of fixed
assets as it is a taxable goods.
c)
i) As per Schedule 1 of VAT Act 2052, 70% of VAT collected on Sale of sugar shall be refunded as prescribed
by IRD against sugar sold to VAT Register Party.
Thus, Sweet Zone Industry Pvt. Ltd shall have following VAT refund:
VAT collected From Sales to VAT registered party(Of manufactured Sugar)=12,00,000.
VAT Refund ( 70% of it) = 840,000.
Thus, Sweet Zone canl claim Rs. 840,000 VAT Refund.
ii) As per Schedule 1 of VAT Act 2052, VAT refund to Textile, matches (wooden stick only, tyre tube
Industries):
Equal amount of balance of VAT Amount after deducting VAT paid on Purchase/Import from VAT collected
on Sales shall be refunded as prescribed by IRD.
JRH P.T.O.
(13)
Thus, Fashion House being a textile Industry shall have following Vat refund:
o No Vat refund shall be given on trading of clothes.
o Vat refund on manufacturing of clothes:
Particulars VAT Amount

Vat collected on Sales
From VAT Registered Party 16,00,000
From VAT Unregistered Party 1,60,000
Total VAT Collected 17,60,000
Less:
VAT Paid on Purchase 13,00,000
Amount of VAT refund 4,60,000
Thus, Fashion House Ltd. shall claim Rs. 460,000 for VAT refund.
6.
a) State the provisions of the Act for set off VAT for losses of goods due to fire. 5
b) M/s Makalu Food and Beverages had following VAT attractive transactions in
the month of Poush 2068. From these details and notes below, calculate the
VAT payable/receivable for the month of Poush. 5
Details Amount in Rs.

Purchase of raw material – local 4,500,000
Purchase of raw material – import 5,500,000
Purchase of packing material 500,000
Purchase of motorcycle 150,000
Purchase of bus for staff 1,000,000
Purchase of delivery van 800,000
Purchase of diesel for staff bus 50,000
Purchase of petrol for van/motorbike 25,000
Payment of consultancy services to a party in India 90,000
Telephone expenses 15,000
Dealers’ meet expenses 45,000
Miscellaneous expenses 85,000
• Above items are excluding VAT.
• Miscellaneous expenses includes Coke and Fanta purchased for dealers'
meet for Rs. 10,000 and gift items purchased though abbreviated tax
invoice of Rs. 25,000.
c) A car manufactured in 2001 was imported in Nepal on 2005 by Mr. Ramesh
Chandra for his personal use with partial exemption of custom duty for IRS 25
lacs. On 15.05.2012, Mr. Ramesh Chandra wants to transfer its ownership to his
nephew Mr. Balram.
JRH P.T.O.
(14)
i) Calculate the transaction value of the car for Custom Duty purpose. 2.5
ii) What would be the transaction value if the car was manufactured and
imported in year 2005? 2.5
Answer No. 6 (a)
(i) Sec. 39 ka of the VAT Act prescribes the conditions for set off of VAT in case of
loss of goods due to fire, theft, accident, breakage, disturbance or expiry of date
(ii) Where there is loss because of above reason and the goods are to be written off or
to be sold at the lower prices, then within 30 days of such situation application is to
be made to the Inland Revenue Office with the evidence (Subsection 1).
(iii) When after the necessary enquiry by the committee established by the
Department determines such loss then, for upto 1 lakh of tax set off the Office can
decide, beyond which the Office should recommend to the Department. (Subsection
2)
(iv) The Department may decide to allow for the set off of excess tax paid
after considering the tax paid on the purchase and collection of tax while selling the
goods at the lower prices. (Subsection 3)
(v) Irrespective of what is provided in above Subsections, in case of loss of goods

which are insured, the relevant office itself can decide to allow the set off of tax to
the extent of compensation received. (Subsection 4)
b) Calculation of VAT payable
Payment of VAT Amount VAT Remarks
Raw materials – local 4,500,000 585,000 full
Raw materials – import 5,500,000 715,000 full
Packing material 500,000 65,000 full
Motorcycle 150,000 19,500 full
Bus 1,000,000 52,000 allowed only 40% (Rule 41)
Delivery Van 800,000 104,000 full
Diesel for bus 50,000 6,500 full
Petrol 25,000 - not allowed (Rule 41)
Consultancy services 90,000 11,700 Reverse VAT (Sec 17(5)(kha)
Telephone expenses 15,000 1,950 full
Dealers meet expenses 45,000 - not allowed (Rule 41)
Coke/Fanta for meet 10,000 - Not allowed (Rule 41)
JRH P.T.O.
(15)
Gift items purchased through
Abbreviated bill 25,000 Not allowed (Rule 18(3))
Miscellaneous expenses 50,000 6,500 full
Total Input tax credit 1,567,150
Calculation of VAT Payable/Receivable for Poush
Opening Receivable 9,000
Add, Input VAT 1,567,150
Net VAT Receivable 1,576,150
VAT claimable from department per the provisions of Annex 1 Group 11(21) of the Act 1576150.
c)
i)
Particulars Amount Amount in Remarks
Value of car at the time of import 2,500,000 IRS
Depreciation allowed:
60% of value at the time of import. 1,500,000 IRS Note-1
=60% X 2,500,000
=1,500,000
Value for Custom Duty 1,000,000 IRS
Value for Custom Duty in Nepali Currency 1,601,500 Exchange rate=1IRS=1.6015
NRS.
Thus, Value for Custom shall be 1,601,500.
Note-1s per section 9(2) of Schedule 1 of Custom Act, in case the vehicle under
consideration is sold after 10 years of its production, the value for custom purpose shall be
transaction value at the time of import minus 60% of the value as depreciation.
Here, car was manufactured in 2001 & sold off in 2012 i.e. more than 10 years. Thus, 60%
of value shall be deducted as custom.
ii) If manufacured and imporated in 2005:

Particulars Amount in Amount Remarks
Value of car at time of import IRS 2,500,000
Depreciation allowed
Depreciation for Year 1 (2,500,000 @ 10%). IRS 250,000 Note- 2
Depreciation for Year 2 (2,500,000-250,000) X 10% IRS 225,000
Depreciation for Year 3 IRS 202,500
(2,500,000-250,000-225,000)X10%.
JRH P.T.O.
(16)

(2,500,000-250,000-225,000-202,500)X10%
(2,500,000-250,000-225,000-202,500-182,250)X10%
Total Depreciation 1,023,775
Transaction Value for Custom Purpose IRS 1,476,225
Transaction Value for Custom Purpose NRS 2,364,174.33 Exchange rate,
1 IRS=1.6015
Note-2
As per section 9 (2) of Schedule 1 of Custom Act, transaction value determined presently at the time of
sale or transfer determined by deducting the depreciation allowed. The depreciation allowed is 10% each
year on written down value for a maximum 5 years. Since, car is manufactured in year 2005, Depreciation
shall be allowed for maximum 5 years at 10% on written down value.
7.
a) Madhusala Liquors Pvt. Ltd., a liquor Industry has sold liquor to following
parties during the Fiscal Year 2068/69.
Party VAT Taxable Cash
Registration Amount Discount
Status
Friendly Liquor House Not registered 400,000 2,000
Family Department Store Pvt. Ltd. Registered 2,500,000 50,000
Aladin Liquor Mat Pvt. Ltd. Registered 1,400,000 28,000
Madhusala Liquors received a letter from excise office stating that above sale is
not in compliance to the clause mentioned in license.
Is the excise office correct? Answer stating the provision of Excise Act in this
regard. (2+3=5)
b) Answer the following in light of Customs Act, 2064.
i) Mr. Alexender Shah, a Nepali citizen has brought a 40" LED television
while returning from America after his stay of 2 years for completing his
studies. The value of LED TV was $ 750. What amount of duties need to be
paid at custom point. (Assume Exchange rate $ 1=Rs. 70, Custom Rate=5%) 3
ii) Which Industries can be declared as sick Industries by Government of
Nepal? What are the rebates provided to sick industries? Answer in the light
of Custom Act 2064. 2
Answer No. 7
a) As per section 4 (F) of excise act, manufacturers and traders of liquor, Beer and
cigarette Industry are not allowed to conduct any type of gift programme or provide
discount on sale of production to persons unregistered in VAT.
b) On observation of commitment of such activities, the clause of license will be deemed
to have been violated.
JRH P.T.O.
(17)
Since, Friendly Liquor house is not registered in VAT, Madhusala Liquors Pvt. Ltd.
cannot give cash discount on sale of its production to it.
Thus, Madhusala Liquors has violated the clause of license. Hence, excise officer is
correct.
c)
i) As per section 19(15) of Schedule 1 of Custom Act, LCD, Plasma or LED Television
accompanied by Nepali passengers shall be charged a single amount as custom, and no
VAT, excise or custom shall be charged separately.
As per the section Rs. 550 per inch shall be charged on LCD, plasma or LED TV brought
by passenger who have stayed above 6 months abroad.
The following custom will be charged.

Custom per inch =550.
Total Inch =40
Total Custom =22,000.
Thus, custom of 22,000 need to be paid.
ii) As per section 15(2) of Schedule 1 of Custom Act, 2064, Whatever mentioned in Section
25(Ka) of Industrial Enterprises Act, 2049, those Industries which are in huge loss due to
not in operation by the internal and external factors of the country, Government of Nepal
may, for promotion and development of those industries, declare them as sick industries,
Government of Nepal shall frame certain standards for declaring an industry as sick
industry and the fact shall be published in Nepal Gazette.
On recommendation of a nominated government office, such sick industry shall import

industrial machineries and spare parts for its rehabilitation program by paying only 1%
custom duty.
Question No.8.
Write short notes on: (4×2.5=10)
a) Demurrage
b) Under Invoicing
c) Zero Rated
d) Physical Control System and Self Removal System
Answer No. 8
a) As defined in the Section 2 (sha) of the Custom Act, Demurrage is a fee levied by the
government as penalty for not releasing the goods from the customs warehouse in time by
JRH P.T.O.
(18)
the importer or exporter. There is certain time allowed to the importer/exporter to clear the
goods from the custom godowns, if till such time the goods are not cleared then the
demurrage is charged
However if the delay is on the part of custom officer due to issue in valuation, classification
or any other reason then in such situation demurrage is not charged.
In some other special situation, the demurrage can be waived also by the authorized officer.
b) As per the WTO’s General Agreement on Trade and Tariff agreement, the value of
imported goods is determined on transaction value basis. This means that the duty is paid
based on the invoice value of the goods. But there can be cases where the value declared by
the importer for the custom valuation purpose is lower than the value estimated by the
custom officer. Such situation is referred as under invoicing. This means that the valuation
shown by the invoice is suppressed so that the goods could be imported paying lesser duty.
This is a major issue in the developing economy, and this will have far reaching
implication of illegal trade etc.
Rule 29 of the Custom Rule has prescribed the process to control such practice by
empowering the Department to have the right to purchase the goods by paying 5% excess
on the declared value of the goods through a special fund created for the purpose. Ministry
of Finance may provide the budget for this fund which does not get freeze once the fiscal
year is closed. The department should notify the importer or his agent of its decision to buy
the goods from the fund. Goods purchased through the fund may be auctioned or can be
used for the government purposes. There have been cases in the past where the government
decided to buy the goods through this provision.
c) Value Added Tax (VAT) is a single tax rate system in Nepal. Section 7 of the VAT Act
further defines that for goods and services mentioned in the Annexure 2 of the Act zero
percent tax is levied. These goods attract the duty however the rate prescribed is zero
percent1 These are other than the VAT exempt goods where the duty is exempt altogether
set off or refund of which cannot be claimed later.
Where an entity is doing transaction on zero rate VAT items, then it can take the set off the
input tax, fulfilling certain condition it can claim for the refund of the tax also.
d) Section 2 of the Excise Act defines the terms Physical Control System and Self Removal
System. As per the definition, Physical Removal System is a system where the excisable
good’s production, removal, export or import take place under the control of Excise Officer
or the staff nominated by Excise Officer. This is adopted in the case of cigarettes and
tobacco products and liquor.
Without payment of excise duty in advance, the goods are not allowed to be transported
outside the factory premises.
Self Removal system on the other hand is the system where the production, removal, export
or import of excisable goods and services takes place not under the direct control of the
JRH P.T.O.
(19)
excise officer but the production, removal, export or import of excisable goods and
services takes place with freedom to the manufacturer but he has to keep proper records so
that the excise officials canat nay timevist the ploace of manufacture and check the records
for its corectness.
Under this sytemthe manufactuer can pay theexcise duty as per his records within 25 days
from the end of each month
JRH P.T.O.
CAP III Examination- December 2012
1. M/s Solar Power Pvt. Ltd. is engaging in solar power system production for sale in which 60% share capital is
subscribed by DFID which is a tax exemption organization under Income Tax Act of Nepal. The following information
is available from accounts of the Company for FY 2068/069:
Expenses Rs. Income Rs.

Raw Material Consumption 4,000,000 Sales 12,300,000
Salary and wages 1,800,000 Dividend Received net of tax 190,000
Finished Goods stock decreased 510,000 Scrap Sales 140,000
Administrative overheads 600,000 Consulting income 450,000
Donation 310,000
Pollution Control exp. 690,000
R & D Exp. 1,300,000
Interest paid to JICA 2,950,000
Interest to Bank/FI 70,000
Repair of plants 230,000
Depreciation per tax Act 432,000
Profit of the year 188,000
13,080,000 13,080,000
Notes:
Donation to Tax Exempted Organization is only Rs. 220,000
Required to calculate under Income Tax Act, 2058.
a) allowable pollution control expenses 3

b) allowable research & development expenses 3
c) allowable interest expenses 3
d) corporate tax liability 6
Answer:
1. Adjusted total income from donation Rs.
Net profit as per P&L account 188,000
Less: Dividend Exempt income. -190,000
Net Assessable income -2,000
Add: Donations 310,000
Adjusted total income for donation 308,000
5% =15,400
Donation not allowable 310,000 – 15,400 = 294,600
2. Adjusted total income for pollution control expenses Rs.

Net assessable income before tax -2,000
Pollution control expenses 690,000
Adjusted total income 688,000
50% of ATI 344,000
Pollution control expenses not allowable = 6,90,000 – 3,44,000 = 346,000
3. Adjusted total income for Research & Development Expenses Rs.

Net assessable income as per P&L a/c -2,000
Research & Development Expenses 1,300,000
Adjusted total income for research & development 1,298,000
50% of ATI 649,000
Research & development expenses not allowable 1,300,000 – 649,000 = 651,000
4. Adjusted total income for Interest expenses Rs.

Net Assessable income as per P&L a/c -2,000
Interest paid to JICA- exempt organization 2,950,000
(considering JICA as an associate of DFID)
ATI for Interest 2,948,000
50% of ATI for Interest 1,474,000
Suggested Answers – Advanced Taxation
Interest expenses not allowable = 2,950,000 – 1,474,000 = 1,476,000
Assuming JICA is an associate of DFID.
Total taxable income Rs

Net profit as per as per P&L a/c 188,000
Less: Dividend income exempt from tax 190,000
(2,000)
Add: Interest not allowable 1,476,000
Pollution control not allowable 346,000
Research & development 651,000
Donation not allowable 294,600
2,767,600
Tax liabilities at 20% 553,120
If JICA is not an associate of DFID, then there is no case for disallowance of Interest paid to JICA. 1.
2.
a) Following are the excerpts of the transaction of fixed assets in the books of Times Commercial Bank Limited. Calculate
the depreciation and repairs and maintenance as per tax and the closing value of the pool of assets. 5
Opening pool value Rs.

Pool A 120,000,000
Pool B 5,550,000
Pool C 12,000,000
Pool D 13,500,000
Pool E 1,236,000
Addition of assets First half Quarter 3 Quarter 4

(Rs.) (Rs.) (Rs.)
Furniture 500,000 1,200,000 2,000,000
ATM Machine 1,500,000 1,400,000 1,400,000
Generator Set 500,000 600,000 1,200,000
Leasehold improvement - 9,600,000 -
Sale of Assets (Rs.)

Furniture 200,000
Building 3,500,000
Repairs and Maintenance

Repairs of Furniture 100,000
Repairs of Vehicles 550,000
Repairs of Generators 200,000
Repairs of Computers 400,000
Repairs of ATM machine 400,000
Repairs of leased buildings 500,000
1. Opening WDV of leasehold assets are to be amortised for last installment this year.
2. Rs. 3,600,000 of leasehold addition has life of 60 months and addition of Rs. 6,000,000 has life of 120 months,
these were put to use from 1st Magh of the year.
b) What is “Transfer Pricing” under Income Tax Laws? 4
c) ABC Ltd. is holding company with 100% investment in XYZ Ltd. XYZ Ltd. has accumulated loss and ABC Ltd. is
in profit in tax account.
Sales and costs of ABC Ltd. as below:

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Sales Rs. 22450 thousand
Direct cost Rs. 24450 thousand
Adm. cost Rs. 200 thousand
General markup is 10% on the direct cost.
How Tax Department treats this transaction of ABC Ltd.’s sale to XYZ Ltd. on tax loop. 6
Answer:
a)
Calculation of allowable depreciation, repairs and closing WDV of Times Commercial Bank
Opening Allowed Depreciation Allowed Closing
Pool WDV Additions addition Sold base Rate Depreciation Repairs 7% Limit Repairs WDV
A 120,000,000 3,500,000 116,500,000 5% 5,825,000 8,155,000 - 110,675,000
B 5,550,000 3,700,000 1,966,667 200,000 7,316,667 25% 1,829,167 500,000 512,167 500,000 7,220,833
C 12,000,000 12,000,000 20% 2,400,000 550,000 840,000 550,000 9,600,000
D 13,500,000 6,600,000 4,200,000 17,700,000 15% 2,655,000 600,000 1,239,000 600,000 17,445,000
E 1,236,000 9,600,000 9,600,000 10,836,000 prorate 1,896,000 8,940,000
Total 152,286,000 19,900,000 15,766,667 3,700,000 164,352,667 1 14,605,167 1,650,000 10,746,167 1,650,000 153,880,833
Repairs allowed on depreciable assets 1,650,000

Repairs allowed on leasehold u/s 13 500,000
Total Repairs allowed 2,150,000
Allowed Depreciation 14,605,167
b)
Transfer Pricing
Section 33 of the Income Tax Act 2058 has arranged the legal provision on “Transfer Pricing” under the situation of
business activities
(1) in any arrangement between persons who are associates, the Department may, by notice in writing, distribute, apportion,
or allocate amounts to be included or deducted in calculating income between the persons as is necessary to reflect the
taxable income or tax payable that would have arisen for them if the arrangement had been conducted at arm’s length.
(2) in making any adjustment under subsection (1) above, the Department may-
(a) re-characterise the source and type of any income, loss, amount or payment; or
(b) allocate costs, including head office expenses, incurred by one person in conducting a business that benefit an
associate or associates in conducting a business to the associates based on the comparative turnovers of the
businesses.
Transfer pricing happens generally between related parties.
The purpose of this provision is to avoid the profit transfer with the objective of tax reduction or evasion within group.
Example of transfer pricing between holding and subsidiary companies.

Within the Group of business may be between Holding and Subsidiary companies, the profit making unit may sell the
product at the price on gross loss to another unit ( associate or subsidiary or related party organization) which is loss making
so as to manipulate tax liability. Such transaction is especially taken care of while assessing the income of selling company
as well as buying company to manage tax.
c)
When ABC sells to its related company at loss means there is profit transfer. Tax Department may split the income as below
shown as tax loop and assess the tax liability.
Income Splitting is possible under current tax practice. Within the market price environment, XYZ can sell at high profit
and adjust the accumulated loss as set off with the profit of the year. ( 2 mark)
So profit portion of the ABC now is set off with accumulated loss of XYZ thereby nullifying the tax liability.
In normal situation, there is profit of Rs. 2465 but shown as loss of 2245 by ABC.
Business Profit/(loss) Tax loop
Sales 22450 26895
Less:Direct cost -24450 -24450
Adm cost -200 -200
Business profit/(loss) -2200 2245

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3.
a) Safeguard Life Insurance Company Limited is an entity involved in Investment insurance business (insurer). The
company had following transactions for Fiscal Year 2068/69.
Particulars (Rs.)
i. Insurance Premium Receipts (Gross) 2,000,000
ii. Sum insured of Insurance policy. 100,000,000
iii. Commission paid against reinsurance taken. 20,000
iv. Commission received against reinsurance done. 30,000
v. Interest Income on Investments. 3,000,000
vi. Other Miscellaneous Income. 60,000
vii. Amount paid against policy surrendered by a policy holder who had paid Rs. 5 lacs Premium against it. 400,000
viii. Amount paid to dependent of a policy holder on his death, against which premium Rs. 70,000 was 700,000
received.
ix. Amount including bonus paid on maturity of a policy, against which a total premium of Rs. 300,000 was 550,000
received.
x. Commission Expenses. 200,000
xi. Management Expenses. 1,000,000
xii. Medical Fee. 50,000
xiii. Allowable Depreciation Expenses. 200,000
Calculate the taxable income of Safeguard Life Insurance Company for fiscal year 2068/69. 5
b) Sundar's wife owns gold jewellery worth Rs. 1.50 crores. Sundar starts his jewellery business from the 1st Shrawan,
2068 taking over the jewellery his wife was having. In the course of his business he sells the jewellery for Rs. 3.75 crore
during the year 2068/69. Consider the taxability of Sundar and his wife, if
i) Jewellery wholly belonging to his wife was received as a part of her marriage gift from her parents.
ii) Out of jewellery of Rs. 1.50 crores, if Rs. 50 lacs worth of jewellery was purchased by Sundar out of his own resources
and given to his wife at the time of marriage.
Note: Market Value of jewellery, as on 1st Shrawan 2068 was 3 crores 5
Answer:
a)
Taxable Income of Safeguard Life Insurance Co. for Fiscal Year 2068/69.
Particulars Rs.
Amount to be included in Income.
i. Insurance Premium Receipts (Gross) (Working Note-1) -
ii. Interest Income. 30,00,000
iii. Other Miscellaneous Income. 60,000
iv. Commission received against reinsurance done. 30,000
TOTAL (A) 30,90,000
Allowable Expenses
i. Commission Paid against Reinsurance taken. 20,000
ii. Commission Expenses. 200,000
iii. Management Expenses. 10,00,000
iv. Medical Fee. 50,000
v. Depreciation Expenses. 200,000
Gross Loss on Disposal of Liability (Working Note-2) 780,000
TOTAL (B) 22,50,000
TAXABLE INCOME (A-B) 840,000
Working note:
1. Insurance Premium Receipts (Gross)

The Insurance Premium receipts of Rs. 20,00,000 is liability for the insurer and not his income. So, it is not taken for
calculation of Taxable Income. As per Section 61, In computing the income from investment insurance, all the amounts,
which are required to be included as per the other provisions of the Act, should be included in computing the income for the
year except the following amounts.
- Amounts derived in respect of insurance as a premium and a re-insurance premium.

- Amount derived by it during the year under any contract of re-insurance, guarantee, security, or indemnity in
respect of the payment to be made by it as an insurer.
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2. Profit/(loss) on disposal of liability:
Particulars Incomings Outgoings Gain/(loss)

I. Matured Policy 300,000 550,000 (250,000)
II. Death Claim Policy 70,000 700,000 (630,000)
III. Policy Surrendered 500,000 400,000 100,000
Net Gain/(loss) (780,000)
3. Gross Sum Insured of Insurance Policy is neither income nor expenses of insurer.
b)
Jewelry is not covered under definition of Non-business chargeable assets. Since, it is not covered under any definition of
any assets covered under Income Tax Act, so profit from the disposal of Jewelry by Sundar's wife to Sundar is not taxable.
When Sundar has put the jewelry to business, the jewelry now becomes trading stock and it is to be valued at the market
price as on that date, and the market price is the cost for Sundar i.e. 3 crores.
The situations given in the question do not affect the taxability in any way. In both the conditions the jewelry is treated as
belonging to Sundar's wife. Thus, there shall be no change in tax computation in either case.
Calculation of Business Income of Sundar.

Receipt from sale of Jewelry = Rs. 3.75 crores.
Cost of Jewelry to Sundar = Rs. 3.00 crores.
(Market Value as on 1st Shrawan 2068)
Profit from Jewelry = Rs. 75 lacs
Thus, Sundar is obliged to show 75 lacs as profit from Jewelry and after deducting expenses of the business the net profit
will be treated as a taxable profit in hand of Sundar.
Sundar has a choice to be selected as a single assesses.
4. Answer the following questions giving reference to the provisions of the Act wherever required: (2.5×4=10)
a) Mr. Pradip Sharma runs a store in Birgunj Sub-metro which had a turnover of Rs. 20 lakhs and net margin of Rs. 2
lakhs. What will be your suggestion to him for tax compliance and what will be his tax liability for the year?
b) Mr. Sumendra Pradhan, an employee at Progressive Bank Ltd. Has donated Rs. 20,000 to a tax exempt NGO towards
reconstruction of a temple in Kathmandu. Can he claim that as tax deduction in his tax calculation?
c) Dinesh Man Singh Trust, a public charitable trust has an income of Rs. 500,000 in the financial year 2067-68. What
will be the tax liability of the trust for the year?
d) Gulmi Coffee Pvt. Ltd. Has turnover of Rs. 25 lakhs in the year 2067/68. During the year it paid Rs. 60,000 to the
farmers to buy the semi processed grains in cash. Mention the allowability of this expense.
Answer:
a)
Mr. Pradip Sharma can be suggested for paying the presumptive tax as per the provisions of Section 4 of Act. Following are
the conditions of the said Section which he seems to have complied.
• That the person has income which has source in Nepal only,
• The person has not claimed the medical tax credit and TDS,
• The income and the turnover from the business are not more than 2 lakhs and 20 lakhs respectively.
• The person has applied for the applicability of the said Section to the tax office.
With his income of Rs. 2 lakhs and the turnover of Rs. 20 lakhs he can simplify his tax process by applying for the
presumptive tax payment. By doing so he will not be able to claim the medical tax credit, the interest income for the
individual is anyway final withholding payment. He therefore has to apply for payment of presumptive tax with the tax
office.
On the selection of such option, since Mr. Sharma is operating the business in the Birgunj Sub-metro, he will have to pay
Rs. 3500 as tax for the financial year. The tax amounts are different for person doing business in different locations and
have been defined in Section 1(7) of Annexure 1 of the Act.
b)
As per Section 4(3) of the Act, a resident natural person;

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• having only Nepal source employment income,
• all the employers are resident tax payers and the employment was with the single employer,
• the deduction claim is only the medical tax credit in respect to treatment cost paid by the employer, and retirement
contribution paid by the employer,
the tax deducted by the employer will be the total tax payable by such person. Such individual need not file the return. In
other words, if the condition is different from what is mentioned above, then such person shall have to file the tax return to
get the credit for any other deduction allowed in the Act.
Mr. Pradhan has donated Rs. 20,000 towards reconstruction of temple in Kathmandu, such donation
may be allowed as deduction, but for that he will have to file the return claiming the deduction. The employer, Progressive
Bank can not consider the donation and reduce the tax to be deducted from the employee.
In this situation the employer will deduct the tax without considering the donation, while Mr. Pradhan will have to claim for
the credit, along with the details of donations made and claim the excess tax deducted by the employer as refund.
c)
As the trust is a public charitable trust, if it had registered with IRD and the income is from donations, then no tax will be
payable.
If it is from rent, then 10% withholding tax shall be deducted by the payer of the rent and the trust is not liable to any
further tax on the rental income, provided renting out is carried out as part of its objective and the trust is a charitable one.
If while executing the charitable work, any incidental income earned is also exempt from tax.
If it is not registered, the whole income after allowable expenses will be taxable as an entity.
d)
Section 21 of the Income Tax mentions the expenses which are not allowed to be deducted while arriving at the taxable
income from business, employment and investment. ½
Sub section 2 provides that a person having turnover of more than 20 lakhs in a year, if makes the cash payment of more
than Rs. 50,000, then such expense will not be allowed for tax purpose. ½
There are exceptions provided in the Act, fulfilling these exceptions, cash payment more than Rs. 50,000 can still be made.
The exceptions provided include the payments to the farmers to buy raw or semi processed basic agricultural products.
In this case, the payment was made to the farmers for the semi processed agricultural products, therefore such cash payment
will be allowed to be deducted as expenses in tax calculation.
5. Answer the following questions: (10+5= 15)

a) Supreme Garment Pvt Ltd had the following transaction in the month of Ashwin 2069. Calculate the VAT
payable/receivable from the information below.
Particulars (Rs.)
Purchase of clothes 3,500,000
Material for stitching 200,000
Packing materials 300,000
Special packing for export 200,000
Loose tools for machineries 50,000
Payment of consultancy charges abroad 250,000
Purchase of bus for staff transportation 1,000,000
Purchase of motorcycle of hire purchase 200,000
Telephone expenses 38,000
Purchase of diesel for generator 40,000
Purchase of diesel for bus 12,000
Purchase of petrol for motorcycle 15,000
Purchase of computers 45,000
Purchase of soft drinks 6,000
Purchase of Stationery 14,000
Local Sale 2,500,000
Export Sale 5,000,000
Opening VAT receivable for the month was Rs. 45,780

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Diesel for bus for Rs. 8,000 and soft drinks for Rs. 3,000 was purchased through abbreviated tax invoice.
Stationery was purchased from non-registered vendor. Items above are exclusive of VAT.
b) Shree Airlines had taken following items to Israel for repairs on 5th Shrawan, 2068.
Helicopter engine priced USD 10 million

Audi Car engine priced USD 1 million
It had taken the items back in Nepal on 15th Bhadra, 2068 and for the period the helicopter engine was on repairs it brought
an identical engine for the helicopter from Israel on the same day.
The airlines found that the engine of helicopter was not repaired correctly and therefore again on 20th Ashwin, 2068 sent the
engine back for repairing to Israel. It took another 2 months for the repairs to complete and finally the engine was back in
Nepal after repair.
Cost of repair was USD 1 million. Assuming the custom rate to be 10%, calculate the deposit/bank guarantees that the
airline had to provide and the custom duty to be paid. Consider only custom duty in your calculation.
Exchange rates were as follows:

On 5th Shrawan, 2068 Rs. 78
On 15th Bhadra, 2068 Rs. 80
On 20th Ashwin, 2068 Rs. 81
On 20th Mangsir, 2068 Rs. 83
Answer:
a)
Calculation of VAT payable for the month of Ashwin 2069 for Supreme Garment Pvt. Ltd.
Collection of VAT VAT Remarks

Local Sale 2,500,000 325,000 full
Export Sale 5,000,000 - 0% for export
Total output VAT 7,500,000 325,000
Payment of VAT
Purchase of clothes 3,500,000 455,000 full
Material for stitching 200,000 26,000 full
Packing materials 300,000 39,000 full
Special packing for export 200,000 26,000 full
Loose tools for machineries 50,000 6,500 full
Payment of consultancy charges abroad 250,000 32,500 reverse charging
Purchase of bus for staff transportation 1,000,000 52,000 only 40% allowed
Purchase of motorcycle of hire purchase 200,000 26,000 full
Telephone expenses 38,000 4,940 full
Purchase of diesel for generator 40,000 5,200 full
Purchase of diesel for bus 12,000 520 abb. TI not allowed
Purchase of petrol for motorcycle 15,000 - not allowed Rule 41
Purchase of computers 45,000 5,850 full
Purchase of soft drinks 6,000 - not allowed Rule 41
Purchase of Stationery 14,000 - non-VAT bills
Total Input tax credit 679,510
Calculation of VAT Payable/Receivable for the Month of Ashwin 2069

Opening VAT Receivable 45,780
Add; input VAT 679,510
Less; output VAT 325,000
Net Receivable 400,290
Since more than 40% is exported, as per provisions of Sec 24(4) of the Act, the company can claim the entire amount as
refund.
b)

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Rule 7 of the Customs Rule provides the method and rates of deposits and applicability of the bank guarantees for import
and export of the goods to/from Nepal. Similarly Rule 8 provides for the re-export and re-import of the goods. According to
the provisions thereon following are the calculation for deposits and bank guarantees.
On 5th Shrawan, 2068 – Calculation of deposits for engines

For helicopter engine Rs. 3,900,000
(10,000,000 X 0.5% X 78)
For Audi car engine Rs. 3,900,000
(1,000,000 X 5% X 78)
Total Deposits Rs. 7,800,000
On 5th Shrawan, 2068 – Calculation of bank guarantee for replacement engine

Import value of identical helicopter engine Rs. 780,000,000
(10,000,000 X 78)
Custom duty @10% Rs. 78,000,000
Bank guarantee for above custom duty should be provided to Custom Office.
On 15th Bhadra, 2068 – Calculation of Customs Duty for repairs

Cost of repairs Rs. 80,000,000
Custom duty @10% Rs. 8,000,000
Less; deposit paid earlier Rs. 7,800,000
Balance to be paid Rs. 200,000
On 20th Ashwin, 2068 – Return of engine for further repairing

No duty or guarantee is required as per Rule 8(1)
Bank guarantee provided for the replacement engine will be returned by the Custom Office once the engine is sent back
within 6 month of bringing the engine. Since the final repair was completed within 6 months, the engine was returned on
time, therefore no further duty is payable.
6.
a) What is the time limit for Goods, Machinery or Spares parts to be brought back which are sent to a foreign country from
Nepal for the purpose of repair under Custom Act, 2064? 3
b) Explain the Post Clearance Audit with reference to current Custom Act provisions. 3
c) A car manufactured in 2002 was imported in Nepal in 2005 by a project under custom duty privilege paying 2% custom
duty. The value determined at the time of import was $ 20,000 and rate of exchange was Rs 78 for $ 1.
On July 14, 2007 the project has allowed the General Manager in Nepal to get the ownership of the car in his own name free
of cost, but the Manager has to pay duty in cases payable. The exchange rate on that day was Rs 80 for $ 1.
Calculate the transaction value of the car for custom duty purpose. 5
d) Nepal Red Cross imports plastic bags for US $ 2,000 for preserving blood.
What would be the rate of custom duty payable on such import of plastic bags? 2
e) M/s Tempo, a registered party under VAT, is a producer of generators. It imports generating parts for Indian Rupee
500,000 Determine its Custom duty. 2
Answer:
a. Time limit for Goods, Machinery or Spares parts to be brought back which are sent to a foreign country from Nepal for
the purpose of repair under Custom Act, 2064.
As per Rule 6 of Custom Rule, such goods, machinery or spares shall have to be brought back within 3 months from the
date of export.
In case the time limit prescribed above for bringing back such items after repair is inadequate, an application accompanied
with documentary evidence of such inadequacy shall be submitted to the Customs officer. The customs officer may, if he so
deems appropriate, extend the time limit by a period not exceeding four months.
b. As per section 34, Customs department is empowered to order for post clearance audit of the goods which are already
taken delivery by the importer after payment of the customs duty. Customs department may select certain importer, certain
goods or any specified goods for which certain information is received for post clearance audit.
The audit shall be conducted by any officer or custom officer nominated by DG.
The basis of such selections for post clearance audit shall be as prescribed by DG.

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In case as a result of the post clearance audit, the value of the goods declared is less than the assessed value and thereby it is
determined that the revenue is collected less than the actual, a fine of 150% of the custom duty chargeable on the difference
shall be charged.
The customs officer may impose any other penalty on the importer as per this Act.
The audit shall be conducted normally within 4 years of the customs clearance of the goods.
The customs can examine the bank statement, sale bills, expenses voucher etc to ascertain the actual cost to arrive at the
undervaluation or classification.
c. Calculation of the transaction value of the car for custom duty purpose.
Particulars US Dollar
Value of the car at the time of import 20,000
Depreciation allowed- 2,000
Before import, the car was in foreign for 3 years
The maximum period for depreciation allowed is 5 years minus 3 years= 2 years only.
Depreciation for 1st year
Depreciation for 2nd year 1,800
Value for the custom duty 16,200
Value for custom duty in Nepali Currency= 16200*80 1,296,000
d. Nepal Red Cross does not have to pay custom duty on blood bags as it is fully exempted under Schedule 1 (14) (1)(m) of
Custom Tariff of Nepal and is exempted by Ministry of finance.
e. Custom duty will be charged @ 1 % on generators of 10KW and above and for generator parts used to manufacture
electric tempos/cars or for solar generator. For generator parts , applicable custom duty will be 5%. So the custom duty will
be 5% on Rs.800750= Rs.40037.5 as per Finance Act 2068.
7.
(a) Describe about “Reverse VAT” under prevailing VAT laws of Nepal 3
(b) Calculate the net VAT payable after deducting available concession based on the information of Kathmandu Maida
Mill for the month Baisakh 2069. 7
Purchase of wheat grain 1000 Qtl Rs. 2,500,000

Plant consumables Rs. 250,000 plus VAT
Bus for staff transportation Rs 1,130,000 including VAT
Production
Wheat Floor production 850 Qtl
By-product ( bhus) 140 Qtl
Sales of Wheat floor(excluding VAT)
Local sale 600 Qtl Rs. 2,100,000
Export to Tibbet 200 Qtl Rs. 800,000
Answer:
7(a) Reverse VAT
Section 8 (2) of the VAT Act 2052 as amended has made provision relating to reverse VAT.
Person residing in Nepal registered or not registered in VAT receiving service from a person residing outside Nepal has to
pay VAT on such remittance. The person providing service must not have business representation in Nepal.
The person in Nepal who pays VAT on such payment can claim as input tax credit is technically called Reverse VAT.
Computation of net VAT Payable of Kathmandu Maida Mill
a. Collection of VAT
Local sales taxable 2,100,000 273,000 note 1
b. Input tax
Items Purchase amt. VAT claim Remarks
Plant Consumable 250,000 32500
Purchase of staff Bus 1,000,000 52,000 note 2
total input tax of the month 84,500
c. Net VAT payable/( eceivable)
VAT collection on sales 273,000
total VAT credit 84,500
NET VAT Payable before rebate 188,500
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25% rebate under Schedule 1 47,125
NET VAT Payable to tax office 141,375
Note
1. On export sale there is zero collection of VAT U/S 2 of VAT Act 2052 as "0" rate cases.
2. VAT on Purchase of staff bus is claimable for 40% only
8
(a)Describe the following with reference to the Excise Duty Laws of Nepal. 3
(i)Person
(ii) Price
(b)What is the general penalty if a business sells and stores excisable goods without license under Excise Laws of Nepal. 2
(c)What is the rate of export duty for the following goods as per Finance Act, 2068? Explain the unit also. 5
S. No Code Particulars
1 2202.90.00 Alcohol free beverage
2 1404.90.90 Kattha
3 2206.00.10 Country Beer
4 8529.90.10 Spare parts of TV
5 2523.30.00 Aluminium cement
Answer:
8(a)(i)
“person” under Excise laws:
As per section 2 (jha) of Excise Act 2058 , person means individual, academy, organization, association, partnership firm,
cooperative society, joint venture, managers of religious trust or fund, proprietor or the main representative or agent,
institutions or branch or sub-branch of the above that undertake with or without profit motive
(i) the production
(ii) import of excisable goods
(iii) sell or distribute them in wholesale or retail
(iv) provide excisebale services
So whoever may involve in business or transaction of excise chargeable goods or service is under the tax liable definition of
person irrespective of natural or artificial body. (1.5 mark)
8(a)(ii) “price” under Excise laws

As per section 2 (ta) of Excise Act 2058, “Price” means
i. The factory price in the context of goods produced
ii. The price as per the invoice in the context of service provided
iii. The price fixed as per Section 7 in context of imported goods
iv. The price decided under sec.10D(1)(e) of the Act
The above definition indicates that where excise is levied on price basis, the price as defined above is considered for
calculation of excise duty purpose. Determination of factory price is based on prevailing accounting practice and
convention method. In case of service, the charging price is the base where minimum rate cannot be identified. In case of
import, the price as calculated by Custom department for custom purpose is taken as the price. (1.5 mark)
8(b) General penalty operating business without license

Section 16 of the Excise Act 2058 as amended and Rules 2059, a fine upto Rs 5000 to Rs 15000 according to the nature of
the offense is applicable in addition to a one year imprisonment.
ON Tax assessment of excise duty, additional penalty may be leviable.
8(c )Export duty rate and unit as per Finance Act, 2068 is applicable only to the items mentioned in the Schedule 2 and no
export duty on items not mentioned in Schedule 2
S.No Code Particulars Unit Duty rate
1 2202.90.00 Alcohol free beverage Per Litre NIL
2. 1404.90.90 Kattha Per Kg Rs 5 per Kg
3 2206.00.10 Country Beer Per Litre NIL
4 8529.90.10 Spare parts of TV Value NIL
5 2523.30.00 Aluminiums cement Per Mt NIL.
NOTE: Except for katha1401.90.90,other items are not found in the schedule II of the Finance Act both in 2010-11 and
2011-12.

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Suggested Answers
Advanced Taxation
CAP III, June 2013
Marks
1. M/s Hazma construction company Limited entered into an agreement with Rudra
Trade Concern to construct a building for the administrative block of Rudra Trade
Concern. The key points of the agreement are as follows:
The contract price is fixed at Rs. 15 Lakhs. The expected period of completion of the
contract is three years. As per the provision for escalation, if the cost of materials and
wages go high at the end of each year by up to 10% of the level at the commencement
of the contract, the remaining contract value will remain unchanged. But if the price
goes higher than 10%, the remaining contract price will increase by 5%. The
contractor at the outset had estimated the total contract cost at Rs. 12 Lakhs.
The construction work commenced on Shrawan 01, 2066. The portion of the work
completed at the end of each financial period was: 2066-67 = 30%, 2067-68 = 65%
and 2068-69 = 100%. The market price of material and wages increased by 7% of the
original at the end of the first year and by 14% at the end of the second year. The
actual contract cost during each financial year was as follows:
2066-67 Rs. 3.78 Lakhs.
2067-68 Rs. 8.48 Lakhs.
2068-69 Rs. 13.31 Lakhs.
a) You are required to calculate the gain from the long term contract for each year. 9
b) Explain long term contract and how the net gain from a long term contract during
a particular income year is calculated as per Section 26 of the Income Tax Act
and Rule 12 of the Income Tax Rules. How Rule 11 of the Income Tax Rules has
defined Excluded Contract? 6
Answer:
For 2066-67
The contract Revenue was Rs. 15 lacs because the price escalation was not effective.
The contract cost was estimated as follows:
Original contract cost Rs.12 Lacs
Additional Expenses incurred during the year
( Rs. 3.78 Lacs – Rs. 3.60, 30% of Rs.12 Lacs) Rs. 0.18 Lacs
Expected increase in the rest of expenses Rs. 8.40*7% Rs. 0.59 Lacs
The estimated contract cost was Rs. 12.77 Lacs
Thus the gain for the year 2066-67 is 30% of (Rs. 15 Lacs – Rs.12.77 Lacs) = Rs. 66,900
For 2067-68
The contract revenue was the same because the price rise was only 7% and thus the
revenue was Rs. 15 Lacs. The contract cost was estimated as follows:
Original contract cost Rs.12 Lacs
Additional Expenses incurred during the year
( Rs. 8.48 Lacs – Rs. 7.80, 65% of Rs.12 Lacs) Rs. 0.68 Lacs
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Expected increase in the rest of expenses Rs.4.20 L *14% Rs. 0.59 Lacs
The estimated contract cost was Rs. 13.27 Lacs
Thus the gain for the year 2067-68 is 65% of (Rs. 15 Lacs – Rs.13.27 Lacs) = Rs.
112450- 66,900 = Rs. 45,550
For 2068-69
The contract revenue increased by 5% due to the price escalation clause. Thus the
contract revenue was Rs. (Rs. 15 Lacs + Rs. 15 * 35%*5%) = Rs. 15.26 Lacs.
The final actual contract cost was Rs. 13.31 lacs
Thus the gain for the year was Rs. 15.26 Lacs – Rs. 13.31 Lacs – Rs. 112,450 =
Rs.82,550
A long term contract is a contract for production, installation, construction or the
services related to them, which runs for more than twelve months and the
consideration is payable on completion of the contract. In this case, the consideration
means the final settlement of the contract price as the advance payment or payment
according to a running bill is never treated as payment of the consideration. To
establish a long-term contract under section 26, there should, on one hand, be a
deferred return as a condition of the contract and on the other, the contract should not
be an excluded contract.
The net gain from a long term contract during a particular income year should be
calculated on the basis of the percentage of completion of the contract. This means, at
the end of each financial year, a percentage of the total work is to be calculated on the
basis of the work completed. To calculate the gain for an income year from a long-
term contract, it is suggested that these figures be calculated:
a. The estimated contract revenue on the day of the balance sheet on the basis of
cumulative inclusions.
b. The estimated contract cost on the day of the balance sheet on the basis of
cumulative deductions., and
c. The percentage of the completion of the contract on the day of the balance sheet.
The estimated contract revenue may vary from year to year because of further
variations in the contract work, claims and incentive payments. In the same way, the
contract cost may vary in different periods due to an increase in the cost of materials
or other costs, variations in contract work, penalties etc. So at the end of each
financial year, a fresh estimation should be made considering the latest amendments
in the contract, price escalation clause, incentives and penalty clauses, present cost of
materials and other components of cost of the contract, etc.
Rule 11 of the Income Tax Rules has defined excluded contracts as any of the
following:
a. Any contract that is executed solely because the parties to the contract have an
inherent interest in the entity.
b. Any contract that is executed solely because on the parties to the contract has had
the membership of a retirement fund.
c. Any contract for investment insurance.
2.
a) A staff of XYZ (P) Ltd., a dealer in liquors, was injured on 11/09/2068 during the
course of stocking of cartons of liquors. He became disabled and the company is
going to compensate him as per the company’s rule. The amount of compensation
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is Rs. 900,000. Whether the compensation payment attracts withholding tax and
shall it be included in taxable salary of the staff. 5
b) XYZ Insurance Company Ltd. has taken a flat on rent for which it pays
Rs. 25,000 p.m. and the flat is given to Mr. Rabin Sharma, of Claims Department
for his residence. Mr. Binod Shrestha, Manager Marketing Department resides in
another flat of same area and he gets reimbursement from the company of Rs.
25,000 p.m. only whereas he pays rent Rs. 35,000 p.m. Basic salary of both staff
is Rs. 60,000 p.m. Withholding Tax is deducted by Insurance Company and Mr.
Binod while making payment to related house owner. What amount is to be
included in taxable salary of both employees on above transactions? 5
c) Mr. Ram had purchased a property on 2068.07.12 for Rs. 1 crore. 2069.10.15,
Ram gets divorce from his wife and during the settlement he transfers the
property to his wife Ms. Sita without any financial consideration. Ms. Sita incurs
Rs. 20,000 as transfer charges to transfer the property in her name. Mr. Ram
notifies the Inland Revenue Department about his option of application of Section
43 of the Income Tax Act in writing. On 2069.12.15 Ms. Sita sold the property for
Rs. 1.5 crores. Derive the amount that is taxable as gain in the hands of Mr. Ram
and Ms. Sita. What would be the impact if Mr. Ram does not notify the
department about his option? 5
Answer:
a) As per the provisions of section 31 of Income Tax Act 2058, if a person receives
the following amount as compensation apart from the insurance claim, it shall be
included in the employment, business or investment income of the person as the
case may be.
i. Any compensation against income received or probable income of any
business, employment or investment.
ii. Any amount of compensation received against any losses or probable losses
of a person from business or investment.
But any compensation received due to personal accident of any individual is not
includible in income and any expenses incurred for treatment is not eligible for
tax credit under Section 51.
Therefore it does not attract TDS u/s 88, and shall not be included in taxable
income.
b)
i. Section 27 (b) (2), of Income Tax Act, 2058 and Rule 13 (2), of Income Tax
Rule, 2059.
In case of Mr. Rabin Sharma, 2% of Salary income shall be include in
taxable income in case the employer provides residence to the employee.
Thus, amount of perquisite to be included in taxable salary income = Rs.
60000*2%= Rs. 1200 per month.
ii. In case of Mr. Binod Shrestha, Section 8(2) (v) reimbursement of rent for
personal house shall be included in employment income.
Thus, amount of Allowance to be included in taxable salary income= Rs.
25,000 per month and he will not get any deduction for rent paid
.
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c) Section 43 of the Income Tax Act prescribes the basis of valuation of properties
which are transferred by the couple to other as per the process of their separation.
In the given case Mr. Ram transferred the property as part of settlement during the
separation therefore for his case the net gain will be as follows:

Outgoings for the property Rs. 10,000,000
Net gain Nil
Income calculation in the hands of Ms. Sita

Outgoings for the property
Value of the property transferred Rs. 10,000,000
Registration expenses incurred Rs. 20,000
Net gain Rs. 4,980,000
In above situation if Mr. Ram does not notify his selection of options u/s 43 then he
will have to pay tax in the income calculated u/s 45 of the Act which prescribes of
procedure of determination of income where the property is transferred to the related
parties without considerations.
3. (4×2.5=10)
a) Mr. Suresh, after doing his graduation in Nepal migrated to UK for further studies
and for permanent source of income. He was appointed as the advisor for South
Asia Economy Evaluation Committee of UK Government. During the income
year 2068-69, he was in Nepal for almost whole year as a member of a group
appointed to make a study in Nepal. His salary accrued during the year was
Rs. 1,000,000. Is the salary taxable in Nepal?
b) More than fifty percent of the ownership of M/s Neptune International Pvt. Ltd. is
transferred in comparison to the ownership three years previously. The date of
such transfer of ownership was 2068.11.10. The company has not sought for
extension of time limit for filing the return of income. The company seeks your
advice on the due date of filing of tax returns in the referred case. From Income
Tax Department’s point of view, what would be the due date for Amended
Assessment in such case?
c) M/s Genuine Company Pvt. Limited had submitted a tax return showing a total
sale of Rs. 40 Lakhs. In the tax return, the company has claimed total expenses
amounting to Rs. 30 Lakhs. During the course of assessment it was found that the
company has not maintained the documents to substantiate the expenses claimed
in the tax return. As a tax professional, the Tax Officer enquires you whether the
fine mentioned under Section 117(2) of the Act is attracted in this case. If
attracted, calculate the amount.
d) An international non-governmental institution had invited a tender for providing
computer education to street children. One of the competitors, amongst various
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others, was an NGO (a tax exempted entity) having its object providing facilities
and vocational training to street children, was awarded the tender. Is the gain from
this activity exempt from tax for the NGO?
Answer:
a) As per section 10(kha) of the act, income derived by a natural person from an
employment of a public service of a foreign government is exempted from income
tax under the following circumstances:
• The individual is resident of Nepal only because of the posting in Nepal or he
is a non resident of Nepal; and
• The payment of the income is made from the public fund of the foreign
government
In the case given, Mr. Suresh is resident in Nepal during the year only because of
his employment and he received the salary from the public fund of the UK
Government, so the salary of Rs. 1,000,000 is not taxable in Nepal.
b) An entity is deemed to be disposed off when 50% or more of its ownership in

comparison to the ownership three years previously is transferred. In such a case
as per section 57(3) of the act, period before the date of such ownership and
period after such ownership are treated as separate income years. Further, as per
section 96(1) of the act, tax return should be filed within three months from the
expiry of the income year as the company has not sought for extension of time.
Similarly section 101 of the act fixes the time limit for amended assessment as
four years from the due dates of filing of return.
In the given case, date of transfer of ownership is 2068.11.10. Hence, periods

before and after this date is segregated into two income years. From 2068.04.01 to
2068.11.10 is one period whose due date will be 2069.02.10. From 2068.11.11 to
2069 Ashadh end is another income year whose due date will be 2069 Ashoj end.
For income tax department, time limit for amended assessment in the first case
will be 2073.02.10 and for the latter 2073 Ashoj end.
Note for evaluator:

As per sec. 2(jhha), a income year starts from 1st of Shrawan and ends at Ashad
end of next year. Thus, an income year could not be defined otherwise. The return
filing date in both the conditions shall be Asoj 31, 2069.
c) As per section 81(1)(ga) of the act, the tax payer has to maintain the documents
which substantiate the claim of expenses. Since the company has failed to
maintain such documents, it has contravened the requirement. Hence section
117(2) of the act is attracted which states that if a person has an obligation to
maintain accounts and records as per the act and fails to maintain them as per
section 81, a fine of either 0.1% per annum of the assessable income during the
year or Rs.1000 whichever is higher is charged. Assessable income for this
purpose is derived after the inclusion of all the amounts to be included in income
but before any allowed deductions.
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In the case given, assessable income is Rs. 40 Lacs, so 0.1% of 40 lacs is Rs. 4000
or Rs. 1000 whichever is charged as fine. Hence Rs. 4000 is fine in this case.
d) As per Rule 5 of Income Tax Rules 2059, if a tax exempted entity has received
the contribution after facing face to face competition with person dealing in
taxable transaction, it is not entitled for tax exemption on the contribution
received. In this case, as the NGO has acquired the tender through a process of
competition with others having profit motive, thus the gain from such activity
shall not be exempted from tax. In this case, considerable factor that the activity
should be within the objective framework of the NGO also does not work for
providing tax exemption.
4. Mr. Khadka Bahadur Gurung, born as a Nepali citizen, was recruited to the British
Army in 2025 and was based in Hongkong. While staying there, he took British
Nationality in 2040. He retired in 2050. After retirement he got pension from the
British Army and settled down in his village at Palpa in 2065. During 2068-69, he
received a pension equivalent to Rs. 400,000 credited to his bank account in Nepal.
He also undertook cultivation of lands for others. He earned about Rs. 500,000 from
such cultivation of lands and paid Rs. 200,000 to the owners of the land, for the use of
the land. His wife Mrs. Mala Gurung, born, qualified and trained in Nursing in Nepal,
worked in a private Hospital in Hongkong, while living with her husband. Along with
her husband, she also returned to Nepal. She also got pension from the hospital she
worked with, equivalent to Rs. 300,000 during the year 2068-69. After return to
village, she also worked in the Village Health Post and received a salary of
Rs. 200,000 during the year.
a) Ascertain the tax liability in the above cases, quoting the relevant applicable
provisions of the Income Tax Act. 8
b) Will it make a difference if Mrs. Mala Gurung worked for is a Government
Hospital owned by the Government of Hongkong. 2
Answer:
a) Mr. Kadka Bahadur Gurung is a British National.
i. He is staying in Nepal and has the facility to live in Nepal in his ancestral
house. Thus he is a resident of Nepal by virtue of provision of
Sec.2(kagna)(1)(ka)
ii. He has been staying for more than 183 days in the past 365 days and
therefore he is a resident of Nepal by virtue of provision of
sec.2(kagna)(1)kha)
iii. His pension form from British Army is paid by the British Government for
having worked in the British Army, a foreign government
iv. Since he is not a citizen of Nepal, his pension is exempt from tax in Nepal
under sec.10 (ga) of the Income Tax Act.
v. Since his income from cultivation of land is agriculture income earned by an
individual and the land is not covered by Land Related Act of 2021(This can
be ascertained by the amount of income derived),his net income of Rs.3
Lakhs is also exempt under sec.11(1) of the Income Tax Act.
Mrs. Mala Gurung is a Nepali citzen
i. Since Mrs. Mala Gurung has statyed for more than 365 days
[Sec.2(kagna)(1)(ka)] and has a place of residence in Nepal
[sec.2(kagna)(1)kha], she is a resident of Nepal.
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ii. Since she worked in a private hospital at Hongkong, the pension received by
her is not covered by any sub-section of sec.10 and she is liable to tax in
Nepal on the pension received in Nepal from the private hospital in Hongkong
iii. Mrs. Mala is liable to tax in Nepal under Employment (Sec.8 of the Income
Tax Act)
Pension received Rs. 3,00,000
Salary Received Rs. 2,00,000
Total income Rs. 5,00,000
Less:- Pension income@25%of Rs. 1,00,000 Rs. 40,000 [ Schedule 1,1(9)]
Rs. 4,60,000
Tax Liability will be:-
Basic @ 1% 1,60,000 1,600
Next@15% 1,00,000 15,000
Next@25% 2,00,000 50,000
66,600
Les under Schedule 1(1)(11) Less10% = 6,660
Tax liability = 59,940
Since pension is payment made in connection with past employment u/s
8(2)(cha), the pension falls under income from employment and since she has
only employment income ,she is entitled to deduction of 10% under Schedule
1(1)(11).
b) If the hospital she worked is a government hospital, then also her pension income
is taxable in Nepal and is not exempt under sec.10
i. She is a Nepali national. Therefore exemption under Sec.10(ga) will not
be applicable.
ii. She has worked in a hospital and not in Army or police of the foreign
government. Therefore exemption under Sec.10(ja)also is not available
to her.
5. XYZ (P) Ltd. has acquired necessary license and approval from excise authorities for
manufacturing of plastic packing materials and registered itself under VAT. The
company commenced its commercial operation from 1st Shrawan 2069. The company
had following transactions during the month of Shrawan 2069:
Import of plastic 50 ton granules (CIF Kalkota) Rs. 500,000
Clearing and forwarding expenses at Kalkota Rs. 20,000
Carriage inward Rs. 10,000
Factory wages Rs. 75,000
Other production cost Rs. 50,000
Stock of plastic granules at the end of Shrawan 2069 5 ton
Stock of finished products at the end of Shrawan 2069 5 ton
The company purchased 1 Motorbike, 1 Mini Truck and 1 Van (for passengers) for
Rs. 113,000, Rs. 1,130,000 and Rs. 678,000. Price of these vehicles is inclusive of
VAT.
There is no production loss, i.e. input output ratio of granules and finished product is
1:1. Custom duty paid @ 30% of landed cost is not included in above data. The
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company's directors have formed a partnership firm of distributors. The company has
appointed the firm as sole distributor of the company's products. The company sales
its product to the distributor @ Rs. 24.84 per kg. plus excise duty and applicable
VAT. The distributor firm sells the product @ Rs. 50 per kg. Normal commission to
distributors/wholesaler for same product paid by other manufacturers is Rs. 7.50 per
kg. Transportation expenses incurred by other manufacturers for distribution of the
same product are about Rs. 7.50 per kg. The rate of excise duty on the product is 5%
of the value.
a) Calculate amount of VAT payable for the month of Shrawan 2069. 8
b) Excise Officer is not satisfied with the excise collected and is of view that factory
price is not derived properly. Therefore excise authorities are considering
imposing additional excise on the company. You are also required to advise the
company on powers of the excise authorities to impose additional excise duty. 3
c) VAT authorities also feel that the company is under invoicing its product and
informed the company its intention to buy the stock of finished product at price
invoiced by the company. Can IRD buy the product without consent of the
company? 2
d) VAT authorities have assessed additional VAT on packing materials sold on the
ground that the product was heavily under invoiced than prevailing market price.
Is the company obliged to pay additional VAT? 2
Answer:
a)
VAT payable for the month of Shrawan
Particulars Rs. Rs.
Cost of plastic granules 500,000.00
Clearing and forwarding expenses 20,000.00
Carriage inward 10,000.00
Landed cost 530,000.00
Custom Duty @ 30% 159,000.00
Sub Total 689,000.00
VAT paid @ 13% 89,570.00
Cost of raw material consumed (689,000/50)*45 620,100.00
Factory wages 75,000.00
Other production cost 50,000.00
Factory Cost 834,670.00
Factory cost per kg 745,000/45,000 16.56
Margin @ 50% of factory cost[(24.84- 8.28
16.56)/16.56=50%]
Factory price to whole seller 24.84
Excise duty @ 5% 1.24
Sub Total 26.08
VAT per kg @ 13% 3.39
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Total VAT collected 40,000*3.39 135,600.00

Less VAT paid
Paid at customs 89,570
Paid in purchase of motorbike 13,000
Paid in purchase of Mini Truck 130,000
Paid in purchase of Van 31,200
Total credit to be claimed 135,600.00
Net credit to be claimed -128,170.00
Notes:
1. Since VAT paid by company in other goods and services are not mentioned in the
question, VAT paid for those goods and services are not considered. VAT paid for
other goods and services, if any, shall reduce VAT payable accordingly.
2. Rule 41(2)(kha) restricts VAT credit for automobiles to 40%. Motorbike (two
wheelers) and Mini truck (not for passenger) does not fall under automobiles.
Therefore, only claim of VAT on Van is restricted under this rule.
b) Section 10gha (na) confers power to Excise Officer to collect excise if difference
between consumer price and factory price is not reasonable. In this case excise
officer may assess and collect excise duty after considering consumer price,
commission to wholesaler or retailer, transport expenses and taxes in nearest market.
It seems excise officer is not satisfied due to difference in consumer price and
factory price. Therefore, such difference should be calculated before opposing excise
officer's view.
Consumer price 50.00

Normal commission to wholesalers 7.50
Transport expenses 7.50
Estimated selling cost 15.00
Modified consumer price 35.00
Factory price to wholesaler 24.84
Difference 10.16
Since the difference is unreasonable, excise officer's view is not contrary to the legal
provisions. Therefore, Excise Officer may order rightly to pay additional excise
duty.
c) Yes, under section 23ga(1) of VAT Act, VAT authorities have power to buy stock of
goods considered to be under invoiced. Under section 23ga(2), VAT authorities may
choose to buy stock at the value sold by the company without the consent of the
company and pay amount calculated at the rate invoiced by the company.
d) VAT Officer is empowered to assess tax under section 20(1)(e) if he has reasonable
ground to believe that the product is sold by under invoicing. Since in this case it
seems to be under invoiced compared to similar products, VAT Officer may rightly
assess additional tax.
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6.
a) Ganapati Industries registered under the Excise Act has been submitting its
monthly return regularly as follows within 25 days of the next month.
Excise duty Rs.
2068 Shrawan 20.000 Kartik 12,000
Bhadra 25,000 Mansir 25,000
Ashwin 20,000 Poush 25,000
But he did not pay the excise duty. At Magh end the Excise Officer issued notice
to pay off the excise duty. What are the options open to him under the Excise Act
and Rules. 2.5
b) National Pencil Industry imported certain pigments for use in pencil making for
IRs. 500,000. The custom officer classified it under Custom Code 3207 at 15%
instead of under Custom Code 3212 on which only 10% duty is payable. Your
advice is sought as to how to proceed in the matter. 4.5
c) Raghubir is a driver driving vehicle registered as a hired vehicle. When Raghubir
was waiting for customers at Biratnagar, one person approached him to go to
Dharan and he accepted to pay Rs. 2,000 for the trip. He was paid advance for
filling diesel. On the way the hirer stopped the vehicle and loaded some barrels
containing liquor. At Itahari, the vehicle was intercepted by Excise Police and one
enquiry it was found that the liquor was illicit liquor. The person who hired the
vehicle had run away in the meanwhile. The value of the liquor was estimated at
Rs. 3 lakhs. What is the punishment that could be meted out under the Excise Act
under the circumstances, quoting the relevant Sections of the Act and Rules?
What enquiries are to be made before meeting out the punishments? 8
Answer:
In this case he has to pay the excise duty which he has accepted by submitted the
monthly return.
a) If he is not able to pay the amount in one installment, he can ask for suitable
installments to pay the same. In this case, the tax officer may allow him time to
pay the amount in installments up to the period not exceeding one year, under
sec.17KA of the Excise Act.
However he has to pay late fee under sec.10I at the rate of 0.05% per day.
b)
i) Since there is no dispute with regard to the valuation under sec.13, of the Act,
he cannot refer the matter to the Valuation Review committee under sec 61 of
the Custom Act
ii) If he is able to convince the custom officer about the mistake in classification
by showing any previous consignment received of the material at the time of
assessment of duty by the customs officer and the customs officer corrects the
mistake, it will be alright.[Shankarlal vs. Custom officer ,Biratnagar,
(Ne.Kaa.Pa 2046- page1126)where it was held that once the material has been
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accepted under one code by the custom office, it cannot classify the same
material later under different code.]
iii) Otherwise he has to pay the full amount of duty determined or provide
security for the full amount of the duty and release the material. [Even though
there is a Classification committee under sec.89 of the Customs Act, it can
decide classification in the case of material for which no classification is
available in the Tariff, before the material is imported. It cannot look into
disputes in the classification between the custom officer and the importer.]
iv) Then he should file an appeal to the Revenue Tribunal under sec. 62 of the
Customs Act.
v) He should provide a copy of the appeal petition to the custom office within 15
days of filing the appeal.
(Additional 0.5 for quoting case and 0.5 for function of classification committee)
c)
1. The liquor will be confiscated and penalty equivalent to the value of the liquor
will be imposed on the manufacturer of the liquor after making proper
investigation to find out the manufacturer of the liquor, under sec.12(1) of Liquor
Act and Sec 16(1) of the Excise Duty Act.
2. The value of the confiscated liquor for the purpose will be its factory value plus
excise duty on the same for the purpose of calculating the value of penalty
payable. [Explantion to subsection (1)]
3. The manufacturer may be punished with imprisonment for one year without the
penalty or both imprisonment and penalty depending on the nature of the crime
after due investigation.[Sub-section(1) of Sec. 16]
4. If the vehicle used for transportation of the illicit liquor is a vehicle registered as a
hired vehicle, without the permission of the owner, the owner will be levied a
penalty of Rs.25,000[Proviso to Sub.sec.3]
5. The driver will be punished with imprisonment up to three months or a penalty of
Rs.15,000 or both on the basis of the nature of involvement of the driver in the
crime. In this case, he has not knowingly allowed the transportation , he may be
levied minimum penalty. [Proviso to Sub.sec.3]
6. If the vehicle has been used with the involvement of the owner, then the vehicle
can be confiscated. [Sub section 4]But since here act the involvement of owner is
not established, the vehicle may not be confiscated.
7. Proper investigation has to be made with regard to the degree of involvement of
each person before deciding the quantum of punishment.
8. They have to find out the person who ran away to ascertain the manufacturer and his
involvement in the transaction.
7.
a) Whether the Excise Duty shall be levied on the followings? (5×1=5)
i) Production of Pet bottles (under Custom Code 3923) by mineral water
industry for packing of its finished goods.
ii) Sale of molasis (Khudo) by manufacturer.
iii) Local production of marble.
iv) Local production of motorcycle
v) Production & sale of junk foods.
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b) A & A Enterprises has paid custom of Rs. 25,400 on 2068.06.02 and cleared the
required raw materials. On scrutiny of accounts, it came to knowledge that custom
has been overpaid to the department by Rs. 3,200. Answer the following in this
regards. (2+3=5)
i) A & A Enterprises wanted to claim refund of the custom and applied to
related custom department on 2068.09.03. Is A & A Enterprises entitled to
claim for refund?
ii) What are the conditions under which overpaid custom shall not be refunded
by the department? Answer should be based on provisions of Custom Act,
2064.
Answer:
a)
i) No, Excise shall not be levied on Production of Pet bottles (under Custom
Code 3923) by mineral water industry for packing of it’s finished goods.
(Schedule-1 of Excise Act)
ii) Excise shall be levied on Sale of molasses by manufacturer. (Schedule-1 of
Excise Act)
iii) No, excise shall not be levied on Local Production of marble. (Schedule-1 of
Excise Act)
iv) Yes, excise shall be levied on Local production of Motorcycle. (Schedule-1
of Excise Act)
v) Yes, excise shall be levied on Production & sale of Junk Foods. (Schedule-1
of Excise Act)
b)
i) As per Section 75 of Custom Act, 2064, overpaid custom shall not be refunded
if the application to the related custom department is made after 60 days of
goods cleared at custom. Here goods have been cleared on 2068.06.02, but
the application for refund is given on 2068.09.03, i.e. after 60 days of goods
clearance. So, A & A enterprises is not entitled to get refund of extra custom
paid.
ii) As per section 75 of Custom Act, 2064 overpaid custom shall not be
refunded under following situations:
a. Application for refund of amount is not made within 60 days of release of
goods to the concerned customs office.
b.The amount claimed for refund is less than Rs. 500.
c. If, in making decision on an appeal made under this Act against the duty or
fine recovered by the Customs Officer, decision is made to waive all or any
of the duty or fine so recovered, the Customs Officer may, notwithstanding
anything contained in the prevailing laws, refund such customs duty or fine
to the concerned person only where no further appeal can be made against
that order or only after the concerned court decides not to grant permission.
8. Distinguish between the following under Custom Act, 2064. (2×5=10)

a) Transaction value of identical goods and similar goods method.
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b) Deductive value method and computed value method.
Answer:
a) Transaction value of identical goods and similar goods method:
If the customs value of any goods cannot be determined on the basis of the
transaction value declared by the importer or the bills, invoices and documents
submitted by the importer, the customs officer will give a notice, accompanied by
the reason for the same to the concerned importer. If the customs value cannot be
determined on the basis of the transaction value, the customs duty of such goods
will be determined on the basis of the transaction value of identical goods already
imported into Nepal prior to the import of such goods. The term identical goods
means goods which are the same in all respects, including the physical
characteristics, quality and reputation.
If the customs value cannot be determined on the basis of the transaction value of
identical goods, the customs duty of such goods will be determined on the basis of
the transaction value of similar goods already imported into Nepal prior to the
import of such goods. The term similar goods means goods which although not
alike in all respects, have like characteristics and like component materials which
enable them to perform the same functions and to be commercially
interchangeable.
b) Deductive value method and computed value method:
If the customs value cannot be determined on the basis of the transaction value of
similar goods and such goods have already been imported into Nepal and sold at
market to a person who is not related to the importer, the customs value of such
goods will be determined on the basis of deductive value method, by deductive
the tax, duty levied in Nepal on the selling price of each unit of the maximum unit
so sold, and other related costs and profits.
If the customs value cannot be determined on the basis of deductive value
method, the customs value will be determined on the basis of computed value
method, also calculating the costs incurred in the production or manufacturing of
such goods and profits made or likely to be made by the seller while selling such
goods to the importer.
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CAP-III, Advanced Taxation, Dec 2013
Suggested Answer
Marks
1. Management has provided the following income statement and additional information for
the FY 2069/70. From the following details given below compute the tax liability of the
business income of Kumar & Co. for the FY 2069/70. Tax rate is 25%. 15
Rs.
Sales 25,000,000
Misc. Income 5,000
Dividend Income 2,500,000
Cost of Sales
Opening stock 1,500,000
Raw material 11,000,000
Freight 900,000
Custom duty 1,500,000
Repair & Maintenance 700,000

Closing Stock 1,600,000
Interest paid to Financial Institution 300,000

Govt. Penalties 200,000
Repair expenses of hired vehicle (all revenue nature) 50,000
Donation 200,000
Other expenses 2,000,000
Details of depreciable assets

Vehicles
Gross cost 7,000,000
Accumulated depreciation at the end of last FY 6,000,000
Addition (before Poush) 500,000
Other information
Other expenses include personal nature expenses of
telephone 100,000
Personal travelling cost included in other expenses 500,000
Profit on sale of One Vehicle (WDV 20,000, sales
proceeds 100,000) 80,000
Deferred tax liabilities 500,000
Make your own assumptions=
Answer
Working Notes
1. Allowable cost of sales Remarks
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Opening Stock 1,500,000

Purchase of raw
material
Freight 110,00,000
Custom duty
9,00,000
Less, Closing Stock 15,00,000
Allowable amount 1,490,000
1,600,000
1,33,00,000
2. Repair & Maintenance of

Vehicle
Claimed amount 700,000
allowable 7% of depreciation
basis 98,000
Disallowed to be capitalized 602,000 Will be added to WDV
Depreciation basis
Gross cost less accumulated
Opening WDV 1,000,000 depreciation
Addition 500,000 Since procured before poush
Less: Sales
proceeds 100,000
Depreciation basis 1,400,000
3. Depreciation
Depreciation basis 1,400,000 Refer W.Note 2
Depreciation @20% 280,000
4. Allowable donation
Claimed amount 200,000
allowed 5% of adjusted taxable income subject to maximum of Rs 100,000
( Note: Since the question is silent, there are alternative treatment where the donation is not
given to prescribed Institution as per Income Tax Act, 2058, the whole amount is
disallowed.)
5. Calculation of adjusted taxable income
Since Dividend income is under FINAL
Income 25,005,000 TDS not to be included in income
Expenses
Cost of sales 13,300,000
Interest 300,000
1,450,000 Including repairs of hired vehicle
Other expenses
(1,400,000+50,000-
100,000-500,000) Net of personal nature expenses
Allowable limited to 7% of depreciation
Machinery repair 98,000 basis
Total allowable deduction 15,428,000
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5% 483,750
Allowed 100,000
Calculation of Taxable income of Kumar & Co. for the FY 2069-70
Particular Rs
Refer W.Note 5.
Income 25,005,000
Allowable
deduction
Interest paid to FI 300,000
Cost of goods sold 13,300,000 Refer W.Note 1
Depreciation 280,000 Refer W.Note 3
Repair &
Maintenance of
vehicle 98,000 Refer W.Note 2
Total expenses 15,428,000
Assessable income 9,577,000
Donation 100,000 Refer W.Note 4
Tax liability @
25% 2,369,250
Note: Govt. penalties has not been allowed as deduction
2.
a) What are the conditions to be fulfilled to be called as finance lease under the Income
Tax Act? How the Income Tax Act has envisaged the characterization of payments under
annuities, installment sales and finance leases? 5
b) M/s ABC Construction Company Pvt. Ltd., a construction company, has purchased a
heavy duty earth moving machine from M/s XYZ Company Pvt. Ltd. with the amount
payable in five installments which are payable at the beginning of the year. The amount
of each installment is Rs. 10 lakhs. Calculate the amount of interest to be claimed under
Section 14 of the act by showing the year wise interest and repayment of debt claim. 5
c) Define interest, debt claim and debt obligation as per the Income Tax Act. 5
Answer:
a) Section 32(5) of the act states that the following conditions are required to be fulfilled
for a finance lease:
Ka) The term of the lease agreement provides for transfer of ownership to the lessee at
the end of the lease term or the lessee has an option to purchase the asset after expiry
of the lease term for a fixed or estimated price.
Kha) The lease term exceeds seventy five percentage of the useful life of the asset.
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Ga) The estimated market value of the asset after expiry of the lease term becomes less
than twenty percentage of its market value of the asset at the commencement of the
lease.
Gha) In the case of a lease that commences before the last twenty five percentage of
the useful life of the asset, the present value of the minimum lease payments equals or
exceeds ninety percent of the market value of the asset at the commencement of the
lease term or
Nga) The asset is specially made for the lessee and after expiry of the lease term the
asset will not be of practical use to anyone other than the lessee.
“ Lease Term” means the term including an additional period for which the lessee has an
option to renew the lease.
Section 32 of the act deals with characterization of payments under annuities,

installment sales and finance leases.
Payments made by a person for acquiring an asset under annuity or installment sales or
for the use of an asset under finance lease shall be treated as interest and repayment of
capital under a debt claim. All the payments shall be aggregated and the total be divided
into two sections: A) Capital portion being equal to all payments made under annuity or
the market value of any asset at the time it is sold or leased and B) Interest portion being
the total of all payments minus the capital portion.
Interest portion shall be treated as interest paid or to be paid and the capital portion
shall be treated as repayment of capital under a debt claim.
At the time of concluding an agreement of the annuity, installment sale or finance lease,
it is required to segregate the portions of interest and capital while determining
installments and provide with the list of total payment. If list is not provided, it is
required to treat the interest and capital portion of annuity, installment sale or finance
lease as a blended loan with the interest compounded on six monthly basis. A borrower
under a blended loan is required to make in part a payment of interest and in part a
repayment of capital where the interest part is calculated on capital outstanding at the
time of each payment so as to be the uniform rate of interest over the term of the loan.
The lessee shall be treated as the owner of the property leased to the lessee under a
finance lease and the lessor shall be treated as the holder of a debt claim against the
lessee. Present value of lease payments shall be calculated using a discount rate equal to
the standard interest rate.
b) In the case given,

- Per Installment amount Rs. 10 Lacs payable at the beginning of the year.
- Standard Interest Rate for discounting as per Section 32(8) : 15 percent per annum.
Year Installment amount (Rs.) Discount Factor Discounted Value(Rs.)
1 10,00,000 1 1,000,000
2 10,00,000 0.8695 869,500
3 10,00,000 0.7561 756,100
4 10,00,000 0.6575 657,500
5 10,00,000 0.5717 571,700
Present value of payments (Rs.) 3,854,800
Total payments(Rs.) 5,000,000
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Interest (Rs.) 1,145,200

Yearwise Break Up (Rs.)
Year Opening Balance Interest Principal Outstanding
Principal Total Portion Portion Principal
1 3,854,800 1,000,000 - 1,000,000 2,854,800
2 2,854,800 1,000,000 428,220 571,780 2,283,020
3 2,283,020 1,000,000 342,453 657,547 1,625,473
4 1,625,473 1,000,000 243,821 756,179 869,294
5 869,294 10,00,000 130,706 869,294 -
Total 50,00,000 11,45,200 38,54,800
The amount of total interest to be claimed as interest under section 14 is Rs. 11,45,200 on year
wise basis as shown above.
c) Definitions:
Interest – As per section 2(kaJha) of the act, interest means the following payments or gains:
1. A payment under a debt obligation that is not repayment of principal amount.
2. A gain realized by way of a discount, premium, swap payment or similar payment under
a debt obligation.
3. The portion which is treated as interest from the payments made to a person by a
person who acquires assets under an annuity or installment sale or for use of assets
under a finance lease.
Debt Claim – As per section 2(tha) of the act, debt claim means a right of one person to
receive a payment from another person and the expression includes a right to receive back of
an amount paid by one person, deposits in banks and financial institutions, receivable amount,
debentures, bills of exchange, bond, annuities, finance leases and installment sale.
Debt Obligation – As per section 2(ta) of the act, debt obligation means the obligation
equivalent to a debt claim.
3. State the correct answer in the following with proper reasoning. (5×2=10)
a) Excel Insurance Co. Ltd. issued a life insurance policy for Rs. 500,000 to Mr. Murali on
1.4.2068 for 25 years at an annual premium of Rs. 1200 with a condition that if the
premium is not paid every year on due date, the policy will be cancelled.
Mr. Murali did not pay the premium for FY 2070/071 and the insurance company
cancelled the policy within 5 years of its issue. Is this investment insurance or
not?
b) Mr. Govinda took a loan of Rs. 5,000,000 for building his house at 12% p.a. interest on
1.4.2067. The interest amounted to Rs. 600,000 per annum. For the year 2069/70, the
bank reduced the interest from 12% to 10% p.a. Now the Tax Office says Rs. 100,000
difference between the interest is income of Mr. Govind. Is it income or not?
c) A Ltd. receives dividend of Rs. 400,000 and interest (net) of Rs. 200,000. A Ltd.
distributes Rs. 450,000 as dividend. How much tax A Ltd. should deduct from the
dividend distributed by it?
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d) A Ltd. has a taxable income of Rs. 600,000 during the year 2068/69. It had paid advance
tax of Rs. 100,000 on 25th Ashadh 2069. The return was filed on 25th Ashwin 2069 after
paying the balance tax and interest. How much amount the A Ltd. has to pay as interest
under the Income Tax Act?
e) Mr. Madan Lal is running a lodge for stay only on a daily rent basis. It is not registered
under VAT Act. The guests where stay there should deduct TDS on payment. But it is not
practicable in practice. Is the practice right according to the provision of Section 88 and
no guest deducts TDS and pay to the government?
Answer:
a) Here the policy is for more than 5 years. But it was cancelled as per the terms of the
contract. Even though it is cancelled for non-payment of premium within 5 years, it is an
investment Insurance.
b) Interest covers any payment other than payment towards principal amounts. According
to Sedc.2(ka jha)(1). 2(ka jha)(2) states that any discount or variation in payment or any
profit / benefit received from such payments. In this case, the interest rate of bank is
reduced by 2% during the financial year 2069/070. Therefore, there is no question of
refund of interest. It is not any special discount given to Mr. Govinda but a general
reduction in interest charged by the Bank. Threfore, it is not income of Mr. Govinda.
c) As per Income Tax Act, if the dividend is declared from dividend income which is final
tax withholding income, there is no need to pay again dividend tax from such income.
Unless a Company specifies, from which source how much dividend is paid, it will be
assessed that dividend is paid proportionally that the total such available. The total such
is 4,00,000+2,00,000=6,00,000 out of which Rs.2,00,000 is 1/3 of the total remain. So,
the dividend paid shall be deemed to have been paid Rs.1,50,000/- out of interest
income and on that 5% viz. Rs.7,500 have to be deducted at source.
Note: There may be alternative solution. Since the question said Interest income is net
of Tax that is gross Interest Income is 2,35,294. Therefore proportion is
4,00,000+2,35,294= 6,35,294 out of which Rs. 2,35,294 is 37.04% of total. Therefore
dividend paid shall be deemed to have been paid Rs.1,66,680 out of Interest Income and
5% of such amount is subject to Tax i.,e., 8,334.
d) A Ltd. has not paid the advance tax as per Sec. 118(2)
Tax Paid Balance Interest@15%
Poush end(40%) 60,000 0.00 60,000 2,250.00
Chaitra end (70%) 1,05,000 0.00 1,05,000 3,937.50
Ashadh end (100%) 1,50,000 1,00,000 50,000 1,875.00
Total Interest u/s 118 8,062.50
e) If the lodge is registered under VAT and issued VAT bill, then no deduction at source is
applicable.
If the lodge is not registered under VAT but only under Income-tax Act, as per
Sec. 88, the guest is required to deduct tax on rent paid by him and remit to the
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government. But the guests may not have PAN registration and then it becomes
difficult to remit the tax also. Since it is not practicable, it cannot be insisted on.
But the lodge owner has to submit his advance tax return within time with the
required advance tax payment.
4. Write short notes on the following: (4×2.5=10)

a) Foreign Permanent Establishment
b) Transfer Pricing Arrangement
c) Perquisites
d) Jeopardy Assessment
Answer:
a) A Foreign Permanent Establishment (FPE) is a permanent establishment of such a

person who is a resident of some other country. (Section 2 (KaNga) read with 2 (Bha)).
The person may be a company or a partnership registered in a foreign country, a trust
established abroad, a foreign government or its political subdivision up to village level
etc. When any one of these foreign persons establishes a foreign permanent
establishment in Nepal under the same incorporated status in Nepal, the permanent
establishment is said to be a foreign permanent establishment.
Test of a foreign permanent establishment:
 It is entirely owned by a foreign person. Owner foreign person may be controller
foreign entity too.
 It is a branch, a division, warehouse, construction site, factory, sales outlet or
site office of a foreign person.
 It has not got any incorporated status in Nepal.
 It has its effective control and management situated outside Nepal.
b) Transfer pricing is an arrangement of transferring the profit by way of cost rather than
by repatriation of income after tax. Transfer pricing generally happens between
associated parties where the resulting loss and profit from the planned transaction go to
the same person. The better test of whether transfer pricing has happened or not is
whether the transaction is at the arm’s length or not. According to the test, the
payment for transaction is ‘over’ or ‘under’ if it is greater or lesser than the hypothetical
price (the arm’s length price), which the parties would have been paid, had their ties
been unrelated to business. Tax authorities see the risk of transferring the income of
one person to another between associated person, Inland Revenue Department or
Inland Revenue Office may by a notification in writing, distribute, apportion, or allocate
the amounts to be included or deducted in the income between the persons as to
reflect their taxable income or tax liability.
c) Perquisite is a facility provided in kind by the employer to an employee under the terms
of employment. Such facilities include residence facility, vehicle facility, facility from
driver for vehicles, facility of house maid, gardeners, telephone facility for his/her
residence etc. All facilities other than residence and vehicle are included in income from
employment of the employee on the basis of the actual expenses incurred by the
employer. But Rule 13 of the Income Tax Rules has quantified the residence facility and
the vehicle facility and the expenses borne by the employer in providing the facility.
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Residence facility: quantification for house facility is 2% of the salary for the
year. Here salary means the basic salary and the grades. There is no difference
whether the house provided is furnished or unfurnished one. Also it does not
matter if the house was taken on rent and the employer paid different amount to
the land lord.
Vehicle facility: quantification for vehicle facility by the employer for employees
exclusive use or for a part time use, an amount equal to 0.5% of the salary
regularly being paid is quantified as income.
d) Assessment of tax within income year or after the closure of the income year or before
the due date of filing of the returns, when an assessment of tax is done, then that is
called jeopardy assessment. Jeopardy assessment is of two types; jeopardy assessment
as self assessment (Sec 100(1)) and jeopardy assessment by taxation authority (Sec
100(2)). Jeopardy assessment by the IRO is possible only under any of these conditions:
 The person becomes bankrupt, is wound up, or goes into liquidation,
 The person is about to leave Nepal indefinitely,
 The person is about to leave the business, or
 The IRD otherwise considers it appropriate.
Under any one of the above conditions the IRO may serve a notice to the tax
payer to submit a tax return for the specified period of the year within specified
days. In the case of a taxpayer who submits the return as per the notification or
does not submit it, in either case, the income tax assessment is supposed to be
made as per the provisions of the Act. Section 100 (2) has given authority to the
respective Inland Revenue Office to make a jeopardy assessment in the above
case on the basis of the best judgment. When a jeopardy assessment is done for
the full year, then separate return is not required to be submitted, similarly if the
jeopardy assessment is done for the part of the financial year, then returns for full
year should be submitted and the tax paid for jeopardy assessment can be adjusted
with full year assessment.
5. Consider who should pay and how much VAT in the following circumstances with
explanations according to the relevant section and rules:
a) AX & Company receives machinery valued at equivalent to Rs. 500,000 including freight
for repair and testing them and return to the owner in Thailand. (Assure custom duty if
imported for use in Nepal, 5%). Will it make a difference if AX & Company exports it
within one month or after 6 months? 5
b) Exilin Nepal imports £ 40,000 worth 8,000 ltrs. of Scotch Whisky from UK for sale
through duty free shop. Assume custom duty is Rs. 540 per ltr. and excise duty is Rs. 464
per ltr. and exchange rate £ 1 = Rs. 160 at the time of import. 3
c) Mr. Buddhi Bahadur builds his house through a contractor who is not registered in
VAT for own living. The total value of the contract comes to Rs. 90 lakhs. He gets built
another house from the same contractor for a cost of Rs. 45 lakhs for letting out on hire. 3
d) American Embassy is putting on sale its old furniture, computers, cars etc. on auction.
Except car all are local purchase. The car was imported about 6 years earlier. Value at
the time of import assessed at Rs. 500,000. The other locally purchased items were sold
for Rs. 300,000. Custom duty paid on car at that time was 1%. The normal duty rate was
VND P.T.O.
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85%. The car was sold for Rs. 100,000. The car was manufacture about 2 years before its
import into Nepal. 4
Answer:
a)
1. AX & Company should submit the agreement for inspection and testing and
return to the owner at Thailand and with its condition to the Custom Office for
his approval for importing the machinery.
2. AX & Company shall provide a Deposit of Bank guarantee to the extent of

Rs.25,000/- custom duty as directed by the Custom Officer to the amount of
Custom Duty & VAT leviable if imported for use in Nepal and fill up
Pragyapan Patra quoting the agreement to be returned.
3. AX & Company should give proof of receipt of fees / remuneration for doing
the inspection & testing from the person who has agreed to pay for the services
as per the agreement.
4. The machinery should be re-exported within the time allowed by the Custom
Office. Normally time upto 90 days is allowed. If more time is required, AX &
Company shall apply for extension of time with relevant documents.
5. While returning the machinery, AX & Company should prepare Pragyapan

Patra along with the copy of the Pragyapan Patra and other documents
executed at the time of import of the machinery.
6. After the machinery is exported, AX & Company should apply for refund of
the deposit or cancellation of Bank guarantee within one year of the date of
Pragyapan Patra exporting the machinery.
b) Since the Whisky is imported by Exilin Nepal for duty free shop, Bank guarantee is to
the extent of custom duty Rs.43,20,000 + Excise duty Rs.37,12,000 + VAT 18,86,160 as
follows. The goods shall be sold within one year from the date of import.
Value of goods £40,000 @ 160 64,00,000
Custom duty on 8000 ltrs. at Rs.540 per ltr. 43,20,000
Excise duty on 8000 ltrs.at Rs.464 per ltr. 37,12,000
1,44,32,000
VAT at 13% > 18,76,160
1,63,18,160
c) According to Section 8(3), in the case of construction of Buildings for commercial

purpose like House, Apartment or shopping etc. of value of Rs.50 lakhs and more the
owner has to pay VAT on the same if the contractor does not issue VAT bill. Therefore
when a person builds his building for own living, it is not for commercial purpose and no
VAT is payable by the owner.
In the case of the other house also, since the value is less than Rs.50 lakhs, no
VAT is payable.
d) Total Duty payable is 13% on Rs.3,00,000 + Rs.1,00,000 = Rs.4,00,000 = Rs.52,000 only.

Since VAT is payable on sale proceeds while sold at auction. But custom duty is payable
VND P.T.O.
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on Rs.5,00,000 Rs.2,50,000. Since the car has been in Nepal for more than 5 years, as
per clause 9(1) of the Custom Tariff schedule 1, but less than 10 years from manufacture
the depreciation is to be calculated at 10% for 5 years i.e. 50%. Custom Duty paid on
Rs.2,50,000/- @ 85% = Rs.2,12,500.
6.
a) M/s Jagadish Impex Ltd. has imported 30 sets of Diesel Generating Sets (Harmonic code
8502.11.00) of 20 KW at a total price of Euro 498,645. The Customs officer wants to levy
duty as per Chapter 85 of the Tariff Book which shows applicable custom duty @ 15 %
but the executives of Jagadish Impex says the lower duty is applicable in this case.
Further, along with the generating sets, Jagadish Impex also imported consumable spare
parts for generator sets (Harmonic code 8503.00.00) at a total price of Euro
18,375. As a tax professional, you have to advise the correct duty applicable and
compute the applicable customs duty, VAT and total amount payable to the
Government. Exchange rate is Rs. 134.43 per Euro. 5
b) What are the general rules/principles for the interpretation of the Harmonized System? 7
c) Does the Finance Act, 2070 provide any rebate in customs duty for goods produced in
and imported from India, goods produced in the People’s Republic of China and goods
produced in SAARC country? 3
Answer:
a) Although Chapter 85 of the Tariff Book says applicable customs duty for harmonic code
8502.11.00 as 15% but the finance act 2070 states that for a generator with a capacity
of 10KW or more, applicable customs duty is 1%. Hence the correct duty applicable is
1%.
For Generators (A)
Invoice Value Exc. Rate Total Value(Rs.) Duty Rate % Amount(Rs.)
498,645 134.43 67032848 Customs 1 670,328
VAT 13 88,01,413
Total(A) 94,71,741
For Spare parts (B)

18,375 134.43 2470152 Customs 5 123,508
VAT 13 337,176
Total (B) 460,684
Total (A +B) 99,32,425
Declaration Fee
(Rs. 500 Plus VAT) 565
Total Payable 99,32,990
b) Classification of goods in the nomenclature of Harmonized System shall be governed by

the following principles:
1. The titles of sections, chapters and sub-chapters are provided for ease of reference only;
for legal purposes, classification shall be determined according to the terms of the
headings and any relative section or chapter notes and provided such headings or notes
do not otherwise require, according to the following provisions:
2. a) Any reference in a heading to an article shall be taken to include a reference to that
article incomplete or unfinished, provided that, as presented; the incomplete or
VND P.T.O.
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unfinished article has the essential character of the complete or finished article. It shall
also be taken to include a reference to that article complete or finished (or falling to be
classified as complete or finished b virtue of this rule), presented unassembled or
disassembled.
b) Any reference in a heading to a material or substance shall be taken to include a
reference to mixtures or combinations of that material or substance with other
materials or substances. Any reference to goods of a given material or substance shall
be taken to include a reference to goods consisting wholly or partly of such material or
substance shall be according to the principles of Rule 3.
3. When by application of Rule 2(b) or for any other reason, goods are prima facie
classifiable under two or more headings, classification shall be effected as follows:
a) The heading which provides the most specific description shall be preferred to
headings providing a more general description. However, when two or more headings
each refer to part only of the material or substances contained in mixed or composite
goods or to part only of the items in a set up for retail sale, those headings are to be
regarded as equally specific in relation to those goods, even if one of them gives a more
complete or precise description of the goods.
b) Mixtures, composite goods consisting of different materials or made up of different

components and goods put up in sets for retail sale, which cannot be classified by
reference to 3(a) shall be classified as if they consisted of the material or component
which gives them their essential character, in so far as this criterion in applicable.
4. Goods which cannot be classified in accordance with the above rules shall be classified
under the
Heading appropriate to the goods to which they are most akin.
5. In addition to the foregoing provisions, the following rules shall apply in respect of the
goods referred to therein:
a) Camera cases, musical instruments cases, gun cases, drawing instrument cases,
necklace cases and similar containers specially shaped or fitted to contain a specific
article or set of articles, suitable for long term use and presented with the articles for
which they are intended, shall be classified with such articles when of a kind normally
sold therewith. This rule does not however apply to containers which give the whole its
essential character.
b) Subject to the provisions of rule 5(a) above, packing materials and packing containers
presented with the goods therein shall be classified with the goods if they are of a kind
normally used for packing such goods. However, this provision is not binding when such
packing materials or packing containers are clearly suitable for repetitive use.
6. For legal purposes, the classification of goods in the subheading of a heading shall be
determined according to the terms of those sub headings and any related subheading
notes and mutatis mutandis, to the above rules, on the understanding that only
subheadings at the same level are comparable. For the purposes of this rule the relative
section and chapter notes also apply, unless the context otherwise requires.
c) Finance Act 2070 provides the following rebates in customs duty for the referred cases:
1. Goods produced in and imported from India into the country of Nepal shall be
granted a rebate in the chargeable customs duty based on ad valorem (besides
specific duty) 7% on the goods upto 30% and 5% on the above of it.
VND P.T.O.
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2. Goods produced in the Peoples’ Republic of China and imported through Tibet
Autonomous Region under L/C shall be granted a rebate of 4% in the chargeable
customs duty based on ad valorem.
3. Goods produced in the SAARC country and imported, invoiced and shipped from the
same country unde L/C shall be granted a rebate at a specified rate on specified
goods under SAPTA agreement.
7.
a) What are the penalties specified for committing the following offences as per Section
16(6) of the Excise Act, 2058. (12×0.5=6)
i) Reassessment or additional assessment as per Section 7(4).
ii) Engaged in selling and storing excisable goods or providing excisable services
without license.
iii) Failure to submit statement as per Section 10 Ka on time.
iv) Failure to maintain undated accounts as per Section 10 Kha (1).
v) Failure to maintain accounts approved by excise officer as per Section 10 Kha (2).
vi) Failure to maintain books of accounts of the past six years as per Section 10 Kha
(3).
vii) Obstructing excise duty officer in determining excise duty as per Section 10 Gha
(3).
viii) If the content of alcohol is found deviated by more than one percentage point on
inspection as per Section 10 Chha.
ix) Failure to maintain stipulated ratio of output of excisable goods or services.
x) Failure to comply with the provision of controlling selling and distribution of
excisable goods as specified by the government as per Section 4 Gha.
xi) Violating excise act and rules framed under this act.
xii) Failure to collect or short collection of excise duty in Self Removal (Nishkashan)
System.
b) Who is the responsible person liable to pay excise duty under Excise Act, 2058? 4
Answer:
a)
i) 100 percent of resulting additional excises duties.
ii) Rupees Five thousand to fifteen thousand.
iii) 0.05 percent per day or Rs. 1000 per return whichever is higher.
iv) Rs. 10,000 for not maintaining up to date accounts and Rs. 5000 each time for
obstructing the inspection.
v) Up to Rs.5000.
vi) Rs. 10,000
vii) Rs. 5000 each time.
viii) 100 percent of the revenue loss.
ix) 100 percent of the shortfall of excise duty.
x) Rs. 10,000 each time.
xi) Rs. 1000 each time.
xii) 100 percent of the not collected or short collected excise duty.
b)
i) In case of goods or services produced in Nepal – Producer.
ii) In case of Import of goods – Person mentioned in Bill of Lading, Airway Bill or
application for checking.
iii) Auction of excisable substance – Person accepting the auction.
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iv) Sale from duty free shop except liquor or cigarette if resold or used in any other
purpose – Person reselling or reusing the goods.
v) Change in status from not excisable goods or services to excisable goods or services –
Person in ownership of goods.
vi) Apart from above referred in a to e – Person specified by the department.
8. Answer the following questions: (2×5=10)

a) What is harmonized coding system? How are these determined in Nepal?
b) What is liquor? Mention the conditions a producer of liquor should fulfill as per Excise
Act.
Answer:
a) Goods imported or exported are valued as per Harmonized System. As there could be multiple
variation on the similar products, custom tariff are determined based on the harmonic code of
the goods rather than their names. According to Section 89 of the Customs Act, if in
determining the customs duty, there is a doubt as to in which heading or sub-heading of the
harmonized system do any goods fall, the Custom Officer shall classify such goods in the
heading or sub-heading as prescribed by the Director General.
There may be ambiguity as to which code a particular goods fall, in such casee prior to
the exportation or importation of any goods, exporter or importer submits and
application to the prescribed committee also comprising an expert in the field
concerned for the specification of the heading or sub-heading of commodity
classification of such goods, the committee may, also examining a sample of such
goods, prescribe the heading or sub-heading of such goods.The Director General and
the committee shall, in prescribing a heading or sub-heading, respectively, so prescribe
based on the authentic text of the harmonized system of the ―World Customs
Organization‖.
For the purposes of prescribing the heading or sub-heading of any goods, advice of the
concerned expert or national or international body may be sought.
b) Section 2(Nga 1) of the Excise Duty Act has defined Liquor, as per which liquor means an
alcoholic substance made by organic chemical reaction in decayed fruits or starchy materials,
or otherwise, having more than 0.5% alcohol contents. Liquor includes rakshi, jand, chhyang,
whiskey, rum, gin, brandy, vodka, beer, wine, sherry, cider, perry, mead, malt, industrial
alcohol, rectified spirit, ENA (extra Neutral Alcohol) and heads spirit.
Every person holding license for producing liquor should fulfill the following
conditions:
 Should produce liquor using the blending of spirit manufactured by patent steel plant.
 Must bottle liquor of 15, 25, 30, 40 and 50 UP power.
 Must bottle liquor of 70 UP power in pet bottles of 300 ml.
 Make arrangements for preservation of molasses, spirit, other raw materials.
 Properly labeling in each of the bottle before sending the items to the godown with
batch number, serial number, trade mark, power and producers name.
 Should keep batch control register in the prescribed form.
 Should maintain records explicitly mentioning particulars thereof, of raw materials and
water used at the time of fermentation for manufacturing wash.
 Should maintain records of the quantity and vat number of the wash to be distilled
before pouring the wash ready for distillation into the wash distillation plant.
VND P.T.O.
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 No outsider other than staff of the distillery and brewery may enter into the place
where the liquor is manufactured or where it is preserved.
 Should maintain the accounts of sales of liquor and excise duty chargeable on the sales
in the format prescribed.
VND P.T.O.
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CAP-III, Advanced Taxation, Jun-14
Suggested Answer
Marks
1. Financial statement of KBC Bank Ltd. has following details. On the basis of the details provided,
calculate the taxable income, tax liabilities and interest if any for the income year 2069/70. 15
a) Profit before tax as per financial books was Rs. 100 million.
b) Expenses include the following:
i) Provision for staff gratuity of Rs. 80 lakhs, all of which has been paid to the approved
retirement fund.
ii) Repairs include Rs. 5 lakhs incurred for repairs of branch buildings which are taken on lease.
iii) Staff welfare expenses include Rs. 3 lakhs as reimbursement of personal tour expenses as
part of facility introduced this year.
iv) Rs. 1 lakh paid to Securities Exchange Board of Nepal as fine for not providing the details
related to stocks.
v) Rs. 10 lakhs paid to a software company for the delivery of salary processing system. This
was purchased on 1st Baisakh, 2070, probable life is of 3 years.
vi) Rs. 5 lakhs being the last tranche of the pre-operating expenses have been amortised.
vii) Rs. 5 lakhs paid for sponsorship arrangement with one of the local football club, Inland
Revenue Department’s approval was taken before entering this arrangement.
viii) Donation of Rs. 2 lakhs paid to Nepal Cancer Relief Society which is a tax exempt entity.
c) There was a gain on sale of land of Rs. 20 lakhs booked as income.
d) Following are the information with respect to the loans and advances and the loan loss
provisions:
Opening Balance (Rs. ‘000) Closing Balance (Rs. ‘000)
Gross Loans & Advances 1,000,000 1,200,000

Loan Loss Provisions 60,000 75,000
e) Rs. 10 lakhs has been provided this year for the probable loss on investments that the bank
holds.
f) Advance tax was paid (cumulative) as follows:
i) As on end of Poush 2069 1.2 crores
ii) As on end of Chaitra 2069 2.1 crores
iii) As on end of Ashadh 2070 3 crores
Answer:
Since the net profit and adjustments have been provided, we will calculate the assessable income with the
available information, from there the deduction for donations will be claimed to arrive at taxable income.
Calculation of assessable income
Net profit as per financial books 100,000,000
Adjustments:
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Provisions for gratuity -
(no adjustment is required as full provision amount has been paid to ARF)
Repairs of branches -
(fully allowed for deduction as the expense was incurred on leased buildings)
Staff welfare -
(as it was paid to staff as facility, this is allowed fully)
Fine paid to Securities Board of Nepal 100,000
(as the fine/penalty is not allowed for deduction, this will be added back)
Software purchased 1,000,000
(this is intangible assets, should be depreciated)
Eligible amount of depreciation (WN 1) (111,100) 888,900
Pre-operating expenses 500,000
(this expenses is allowed in the first year itself, therefore amortization is disallowed)
Sponsorship expense with the football club 500,000
(this expense is allowed u/s 12Ka, therefore added back to arrive at assessable income)
Donation to Nepal Cancer Relief Society 200,000
(added back to arrive at assessable income)
Gain on sale of land -
(this is a business assets, therefore gain on sale is part of business income)
Loan loss provision 15,000,000
Less; allowed loan loss provision (WN 2) 10,000,000 5,000,000
Provision on loss on investment 1,000,000
(provision for loss on investment is not allowed as deduction)
Assessable income/adjusted taxable income 108,188,900
Less; reduction of donation to exempt entity

5% of ATI 5,409,445
Actual donation 200,000
Highest allowable 100,000 least of all 100,000
Less reduction of eligible sports development

10% of Assessable income 10,818,890
Actual donation 500,000
Highest allowable 1,000,000 least of all 500,000 600,000
MXU P.T.O.
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Tax @30% 32,276,670
Less; Advance tax 30,000,000

Balance tax payable 2,276,670
Interest u/s 118 - (working note 3)
Interest u/s 119 - it is assumed that the shortfall tax was paid within Ashwin end 2070,
therefore no interest is calculated
Net tax liabilities 2,276,670
Working Note 1:
Software with the expected life of 3 years has to be treated as depreciable assets and depreciation has to be
calculated classifying the assets as Pool E assets.
Since the life of the assets is 3 years, the depreciation rate will be 1/period of usage
= 1/3= 33.33%
Cost of software 1,000,000 (purchased on 1st Baisakh)

Absorbed addition 333,333 (1/3rd as was purchased during last quarter)
Depreciation rate 33.33%
Depreciation expenses 111,100
Opening Dep/base for next yr 888,900
Working note 2:
Here opening loan loss provision is Rs. 60,000,000 but 5% of opening loan and advances is Rs. 50,000,000.
This means Rs. 10,000,000 is already disallowed loan loss provision and tax base is Rs. 50,000,000. So, for
this year expense of Rs. 15,000,000 (75,000,000 - 60,000,000) is allowed as follows:
Outstanding loans 1,200,000,000

Allowable 5% (A) 60,000,000
Loan Loss Provision 75,000,000
Previous disallowed 10,000,000
Qualifying allowable provision (B) 65,000,000
Disallowable this year (C=B-A) 5,000,000
Loan loss provision expenses 15,000,000
Allowed expenses for this year 10,000,000
Working note 3
Calculation of interest u/s 118
Final tax amount 32,276,670
1st installment
40% of the final tax 90% actual paid interest u/s 118
12,910,668 11,619,601 12,000,000 not applicable
2nd installment
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22,593,669 20,334,302 21,000,000 not applicable
Final installment
32,276,670 29,049,003 30,000,000 not applicable
2. (3×5=15)
a) Profit and loss account of Ram Trading P. Ltd.; owned by Mr. Thapar (non-resident) for the year
ended on Ashadh 31, 2070 is as follows:
Income from commission and fees Rs. 500,000
Interest Income Rs. 20,000
Total income Rs. 520,000
Administrative Expenses Rs. 300,000
Interest Expenses Rs. 100,000
Depreciation Rs. 100,000
Total expenses Rs. 500,000
Net Profit Rs. 20,000
Out of total interest expenses, Rs. 40,000 was paid to Mr. Thapar and the balance was
paid to the bank.
Calculate the amount of interest allowed as deduction for the company for the income
year 2069/70.
b) ABC Ltd. has taken a long term contract for the construction of a building for Nepal Government
through an international bidding for Rs. 50 Millions to be constructed within three years
commencing from the year 2067-68. The company has recognized the profit of Rs. 500,000 from
the contract during the year 2067-68 and Rs. 200,000 during 2068-69 on the basis of
estimations at that time but during the final year the accounts show a net loss of Rs. 800,000.
The company seeks permission from IRD to carry back the loss and to recognize the net loss. By
stating the relevant provision mentioned under section 20(4) of the act, suggest whether the
loss can be carried back.
Will your answer differ if ABC Ltd. has taken the contract not through international bidding?
c) Ramesh Karki is employed with a private company in Dhunche of Rasuwa district. He has
received the following income during the income year 2069-70. Calculate his taxable income and
tax liabilities from the following:
i) Salary for the year Rs. 600,000
ii) Allowances Rs. 170,000
iii) Employer contribution to EPF Rs. 60,000
iv) CIT contribution by Ramesh Rs. 60,000
He is given a house for his stay in Dhunche for which employer pays rent of Rs. 5,000 per
month. Allowances include daily allowance of Rs. 50,000 paid to him during the year
relating to his official travel.
Answer:
a)
Section 14(2) of Income Tax Act has provided the limitation for allowance of interest paid to
controlling tax-exempt entity. According to this Section, the tax-exempt entity also includes a non-
resident person or associated person related to it. Therefore the interest is allowed on the following
limit:
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Interest income 20,000
50% of the adjusted taxable profit before interest income
and interest expenses (20,000+100,000-20,000)X50% 50,000
Total allowable interest expenses 70,000
Allowed interest expenses:

Interest paid to bank 60,000
Interest paid to Mr. Thapar 40,000 (within limit of Rs. 70,000)
Total allowed interest expenses 100,000 (fully allowed)
b)
As per section 20(4) of the act, if a person has acquired a long term contract through international bidding and
incurred a loss in the year of completion or the year of disposal, it has to obtain permission from IRD for its better
treatment. IRD may give permission imposing the following terms:
a. The loss could be carried back up to the period of first year from the start of the work of the long term
contract and
b. The net loss from the contract may be calculated by considering the cumulative contract cost and the
cumulative contract revenue and the loss may be treated as a loss to be allowed to set off or carried forward.
In the given case, since the contract is taken through international bidding, if IRD gives the permission, then the loss
could be carried back.
Final figure of net loss Rs.800,000
Less: Profit recognized in 2067-68 Rs. 500,000
Less: Profit recognized in 2068-69 Rs. 200,000
Net loss to be set off or carried forward Rs. 100,000
A credit of tax is allowed to the company for Rs.500,000 and Rs. 200,000 at the average rate of the tax paid by the
company during the year of profit recognition.
But if ABC Ltd. has taken the contract not through international bidding, IRD shall not allow the company to enjoy the
facility of loss carry back. The profits recognized in earlier income years shall not be amended and the loss of
Rs.800,000 could be set off from any other income from business or investment of the company or could be carried
forward for 7 years for set off.
c)
Calculation of Taxable income of Ramesh Karki
Salary for the year 600,000
Allowance 120,000
Employer contribution to EPF 60,000
House facility (2% of 600,000) 12,000
Assessable income from employment 792,000
Less; allowable reduction

a. Contribution to ARF
EPF 120,000
CIT 60,000
Actual contribution 180,000
1/3rd of assessable income264,000
Maximum Limit 300,000
Least of above 180,000
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b. Remote area allowance 10,000
Taxable income 602,000
Calculation of tax liabilities for Income year 2069-70(assuming married)

First 200,000 1% 2,000
Additional 100,000 15% 15,000
Balance 302,000 25% 75,500
Total tax liabilities 92,500
Notes:
 Employer’s payment for house rent is not relevant in this case as the perquisite is valued based
on his base salary.
 Daily allowance paid while on business travel is not included in the income of staff.
 Rasuwa is a remote area where except for one VDC all other VDC in the district is classified “nga”
type remote area.
3.
a) A company has share premium amount being carried forward from previous year. The Board of
Directors of the company decides to appropriate the amount of share premium to issue right
shares to existing shareholders in proportionate to their holdings without charging any amount.
The tax officer while making an amended assessment under section 101 has assessed the
appropriation as distribution of profit and thus charged tax and penalty for not deducting TDS
from the distribution of the profit. The management of the company has a view that it is not a
case of distribution of profit. Share premium is not created out of profit but it is collected from
shareholders as part of capital contribution.
As a tax professional state your arguments in favor or against the order of the tax officer. 4
b) Mr. Shyam has an income of Rs. 120,000 from the disposal of a business assets. He has to adjust
the loss from the disposal of non business chargeable assets amounting to Rs. 50,000 and he had
a loss of Rs. 24,000 from the assets of a foreign source. State your view regarding the
computation of taxable capital gain. 2
c) Mr. Ram Prasad has been engaged in Tea Farming in the land of his own and his joint family. The
land referred is within the limits prescribed under Land Related Act 2021. During the income
year 2069-70, he has an income of Rs. 1,000,000 from such tea farming. Does the income tax act
provide any exemption or concession in the transaction like this? Provide your answer by citing
the relevant provision of the act.
Will your answer differ if such land is owned by a partnership firm (where Mr. Ram Prasad is one
of the partners) registered for doing Tea Business? 4
Answer:
a)
Section 53(3) of the act states that a distribution by an entity to its beneficiaries shall be treated as a
distribution of profit or a return of capital only if it reduces the value of the entity’s assets and liabilities. In
this case, as the shares are issued without charging any amount, it is treated as bonus shares. But, as the
shares are issued by conversion from share premium to share capital, the value of any asset or liability of the
company does not reduce.
MXU P.T.O.
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Share premium is not created out of profit of the company but it is collected as part of capital. When it is not
created out of profit, it cannot be treated as distribution of profit. It is not a case of capitalization of profit as
the company is not providing bonus shares from the retained earnings or general reserve of the company.
Hence the conversion from share premium to share capital is not treated as dividend and the company is not
required to deduct TDS from the amount of conversion.
(Note: It is assumed that the balance in share premium account represents the amount paid by the
shareholders who are entitled for these right shares.)
b)
Mr. Shyam has to include Rs. 120,000 as part of his taxable business income. He is not entitled to deduct Rs.
50,000 as set off from the income because as per section 36 a loss from the disposal of non business
chargeable assets can be set off from the income from another non business chargeable assets only. Further,
the loss from assets situated in a foreign country cannot be set off from the income from assets or income
from a business in Nepal. So the loss of Rs. 24,000 is also not allowed for deduction.
c)
As per section 11(1) of the act, income from agriculture is exempted from income tax, if the following conditions
are satisfied:
- A person registered as a firm, partnership, a company or a corporate body has not run the agriculture.
- An industrial unit has not held the land for industrial purpose as specified by a notification from Nepal
Government and as per the terms of the notification under section 12(d) of the Land Related Act 2021.
- An agro-industrial unit has not held the land for agro-based industries as specified by a notification from
Nepal Government and as per the terms of the notification under section 12(e) of the Land Related Act 2021.
In the case given, income of Rs. 10,00,000 from tea farming (Agricultural Income) is exempted from income tax as
the land is owned by a natural person, Mr. Ram Prasad, and is within the prescribed limit.
Yes the answer will differ in the second case. Agricultural income derived from land beyond prescribed limit or if
derived by firm, company, partnership or a corporate body is taxed as normal business. Hence in the second case,
it will not be exempted from tax.
4.
a) State the procedures prescribed under the Income Tax Act and Rules for obtaining Advance
Ruling. 4
b) Write short notes on the following: (2×3=6)
i) Foreign Tax Credit
ii) Offence of impending or coercing Tax Administration
Answer:
a)
1. Person desiring to have advance ruling under Sec.76, has to file the application in the notified for
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2. The application shall clearly provide the full and factual details about the doubt arising regarding
application of the Act. If the department demands any incomplete information, it should be prov
to the department.
3. No advance ruling can be applied for in any matter if tax liability has already been established o
party has already exited from tax liability or the matter is under consideration of the court or alr
decided by the court.
4. He should apply for Advance ruling before assessment is completed by the Tax Office.
b) i)
This is the age of globalization where cross border business, technology and human skills transfer is a
common phenomenon. Tax on income is charged based on the residential status of the individual, and
a resident having income in foreign country would be paying tax in home and abroad both. Income
Tax Act has taken into cognizance such an activity and provides for when such situation arise. Section
71 of the Act has prescribed the provisions relating to foreign tax credit claim, which are explained
below.
Tax paid by a resident tax payer in the foreign country in an income year, can be claimed for
adjustment to the extent related to the assessable foreign income of that particular individual. Foreign
tax for each of the country is to be claimed separately. Tax credit can be claimed only to the extent of
average tax rate of Nepal, with respect to each of the countries. In case of excess, such tax can be
carried forward to the next year, or can be treated as deposit for the particular country‘s future income
year‘s assessable income. For any income year if a tax payer wants to avail the foreign tax paid
amount as deduction instead of credit, then he can do so.
ii)
Section 125 of the act states that a person who commits the following offences shall be liable to a fine
ranging from Rs. 5000 to Rs. 20,000 or an imprisonment for a term of not less than one month and not more
than three months or both:
i. Obstructing an officer or IRD or IRO on execution of the duties under this act;
ii. Disobeying a written notice issued by any officer from IRD or IRO in compliance with section 83 with
regard to the submission of documents, statements, information, physical presence or
iii. Obstructs, in any way, the enforcement of the act.
A person who attempts to commit the above mentioned offences shall be liable to half of the penalty
chargeable to the person who has committed the offence.
5.
a) M/s ABC Limited has shown the following sales and purchases without VAT. The policy of the
company is to claim VAT refund as and when eligible as per the VAT Act. Calculate the amount of
credit and refund that can be claimed in each month by mentioning the relevant provision of the
act. 8
Month Sales Rs. Purchases Rs. Export
Bhadra 500,000 600,000 45%
Ashwin 520,000 500,000 25%
Kartik 600,000 500,000 45%
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Mangshir 450,000 500,000 35%
Poush 320,000 500,000 45%
Magh 400,000 500,000 25%
Falgun 350,000 500,000 35%
b) Mention the VAT benefit given in the following cases as per Schedule I of the Value Added Tax
Act, 2052. 5
i) When a domestic sugar manufacturer collects VAT by selling its produces to a VAT registered
person.
ii) When a domestic dairy industry collects VAT on its VAT attractive products.
iii) A mobile phone importer sells the imported items to a VAT registered person.
iv) A vegetable ghee manufacturer in Nepal sells its produce to a VAT registered person.
v) Machinery equipment for hydropower project imported by a developer.
c) Premier Ltd. imported an equipment for Yen 7,50,00,000 by opening an L/C for the amount and
paid the amount on 10.12.2069, when the rate of Yen notified by Nepal Rastra Bank was Rs.
12.50=10 Yen. The goods arrived at Birgunj on 25.2.2070, when the rate of Yen notified by Nepal
Rastra Bank came to Rs. 10.30=10 Yen. Determine the Custom Duty liability of the company. 2
Answer:
a)
As per section 24(4) of the act, if any registered person has at least 40% of total sales as export sales during
the month, then the credit is eligible for VAT refund. But once the person applies for the refund of tax, it
cannot claim for set off against the tax payable in next month.
Month Sales Rs. Purchases Rs.Export Export SalesLocal SalesOutput TaxInput Tax Credit Refund
Bhadra 500,000 600,000 45% 225,000 275,000 35,750 78,000 42,250 42,250
Ashwin 520,000 500,000 25% 130,000 390,000 50,700 65,000 14,300
Kartik 600,000 500,000 45% 270,000 330,000 42,900 65,000 36,400 36,400
Mangshir 450,000 500,000 35% 157,500 292,500 38,025 65,000 26,975
Poush 320,000 500,000 45% 144,000 176,000 22,880 65,000 69,095 69,095
Magh 400,000 500,000 25% 100,000 300,000 39,000 65,000 26,000
Falgun 350,000 500,000 35% 122,500 227,500 29,575 65,000 61,425
b)
i) When a domestic sugar manufacturer collects VAT by selling its produces to a VAT registered person, 70%
of the VAT collected should be refunded to the person collecting VAT after fulfilling the procedure
prescribed by IRD. (Group 11; para 24 of Annexure 1)
ii) When a domestic dairy industry collects VAT on its VAT attractive products, 50% of the VAT collected
should be refunded to the person collecting VAT after fulfilling the procedure prescribed by IRD. (Group
11; para 22 of Annexure 1)
iii) A mobile phone importer sells the imported items to a VAT registered person, 60% of the VAT
collected should be refunded to the person collecting VAT after he submits the proof of sales to IRO.
(Group 11; para 23 of Annexure 1)
iv) A vegetable ghee manufacturer in Nepal sells its produce to a VAT registered person, 50% of the VAT
collected should be refunded to the person collecting VAT after fulfilling procedure prescribed by IRD
(Group 11; para 21 of Annexure 1)
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v) Machinery equipment for hydropower project imported by a developer, VAT should be exempted on
import of equipments. The import however should be approved by Alternative Energy Promotion Center
or Electricity Development Department. (Group 11; para 25 of Annexure 1)
c)
As per section 13(16) of the Customs Act, the duty is to be paid on the Nepal Rupee value arrived a
applying the exchange rate prevailing on the date of entry of the goods at the customs
So the custom duty shall be paid on the basis of 7,50,00,000/10 x10.30= Rs. 77,250,000 instead of
93,750,000
6. (3×5=15)
a) Deepjyoti Brick Factory deposited Rs. 30,000 being the installment payment of total excise
license fee of Rs. 150,000 to acquire the license on Shrawan 2069. Balance of payment was to be
made on 2069 Magh and 2070 Jestha on equal installments. The factory did not deposit the
balance two installments, however on 30th Bhadra 2070 applied for renewal of license. Calculate
the amount to be paid on renewal of excise license by Deepjyoti Brick Factory.
b) An importer has imported three Mitshubishi (11MY Pajero GL, 4WD, 5-door, 9 Seater) vehicles of
a cylinder capacity exceeding 2500 CC from Japan. Harmonic code of the concerned goods
(Vehicle) is 8703.33.00 and the total amount of the invoice of the goods is USD 123,000.
Declaration Fee per Pragyapan Patra is Rs. 500 and all the goods were cleared through one
Pragyapan Patra only. Due to delay in clearing of goods, demurrage was charged. Take Rs.
847,071 as calculated demurrage amount by the customs office for this purpose. Calculate the
amount of Customs Duty, Excise Duty and VAT payable. Take Exchange rate 1 USD = Rs. 87.40.
Also state the total amount payable at the customs point.
c) M/s Thirsty Drinkers Ltd. has sold a kind of drink to non VAT registered party for Rs. 10,000. As
per the retail price published by the same company under the direction of IRD, the retail price is
Rs. 12,000. The company has collected VAT from the party on the amount of Rs. 10,000 saying
that it has given the trade discount to the party and the trade discount can be deducted to arrive
at the transaction value. But the assessing officer insists to collect VAT on the published price. As
an expert, give your opinion on this.
Answer:
a)
Calculation of license fees to be paid:
1. For the financial year 2069-70
a. Outstanding for installment 120,000
b. Penalty for Magh installment – 7 months delay 45,000
(60,000 X 75%)
c. Penalty for Jestha installment – 3 months delay 15,000
(60,000 X 25%)
Total for financial year 2069-70 180,000
2. For financial year 2070-71

Excise Act has given the installment facility for those renewing within Shrawan month, therefore in this
case Deepjyoti Brick Factory will have to pay full amount and applicable fines for renewal of license:
a. Renewal fees for 2070-71 150,000
b. Fine of 25% for renewal within 4 month 37,500
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(150,000 X 25%)
Total to be paid for 2070-71 renewal 187,500
Total to be paid as per (1) and (2) above 367,500
b)
Since the total amount of the invoice of the goods is USD 123,000. The value in Nrs. becomes Rs. 10,750,200. For the
vehicles ( HS code 8703.33.00) import duty is 80% and Excise Duty is 60%.
Type Value Rs. Rate % Amount (Rs.)
Customs Duty 10,750,200 80% 8,600,160
Excise Duty 19,350,360 60% 11,610,216
Demurrage
(as calculated by customs) 847,071
VAT 31,807,647 13% 4,134,995
Total 25,192,442
Declaration Fee Per Pragyapan Patra Rs.500 Plus VAT 13% 565
Total Duty and Fees amount payable at customs point 25,193,007
c)
As general rules, the taxable value of an item is net of discount allowed in invoice. But as per section 14(7) of VAT act,
in case a registered person sales a notified item to a non registered person, then the taxable value shall be the retail
published price. If discount is to be given that should be given after charging VAT. Here notified items means the
items for which IRD has notified that a producer of the items is required to publish its retail price. Hence the
contention of the assessing officer is correct.
7. (2×5=10)
a) What are the powers given to the tax officer under sec 23(2) of VAT Act for the purpose of
making an assessment under sec. 18 and sec. 20?
b) Can the custom duty be paid before the goods came to the port or can it be paid provisionally?
Explain.
Answer:
a)
(1) In order to examine as per sub-section (1), of sec 23 of VAT Act for verifying the tax return submitted
registered person under section 18 and for the process to assess the tax under Section 20, tax officer
have the following rights;
(a) To inspect all goods, premises, documents, record books and accounts relating to the liability for t
(b) To search a tax payer's place of transaction and other places, if he has grounds for suspectin
process evidence related to any offence under this Act;
(c) To require, in pursuance of discharging his own duties, information from a person who prepares
records, books, accounts or other documents or makes entry therein;
(d) To take possession of, remove or cease or transfer any documents, books and records from the
payer's transaction place and other transaction places related thereto;
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(e) To perform audits at the taxpayer's place of transaction, at a tax office, or at any other approp
place.
b)
Yes it is possible for the importer to make the payment of Custom Duty before the goods have
reached the custom point. Section 24 of the Custom Act has authorized the Custom Officer to decide
on the application of the importer along with the declaration form and necessary documents, if it finds
reasonable to collect the duty in advance, can allow the duty payment in advance. On the valuation of
the goods, if the conversion rate of the foreign currency differs from the one prevailing on the date of
payment from the one prevailing on the date the goods cleared, then the rate prevailing on the date of
clearance should be considered. Main purpose for payment of the duty in advance is to clear the
goods fast; therefore when the duty paid goods reaches the port, the custom office shall complete the
necessary procedures and make clearance of such goods in priority.
Yes it is possible to pay the custom duty provisionally also. There could be situation where the
importer is not able to provide all the document which are required for valuation of goods for custom
purposes, or there is a situation where the duty could be determined only after the lab test of the
imported goods are done or the custom officer need to make further enquiry on the goods imported, in
such situation the goods can be cleared by importer by paying deposit of the duty chargeable. This is a
case of provisional valuation of goods. Here the custom officer does the valuation of goods basis the
available information and goods are cleared. Section 14 of the Custom Act, has the provision related
to provisional valuation of goods. Custom officer should determine the final valuation and the duty
thereon within 30days of the provisional valuation. Any excess or short payment of duty, should be
paid or collected from the importer once the final valuation is done.

a) Excise duty stickers
b) Custom agent
c) Physical control system in excise
d) Temporary registration for VAT
Answer:
a) As per Rule 30, the producer or the importer of liquor and cigarette has to affix the excise tickets
signifying the required duty have been paid on the items; on the cartons of liquors and cigarette. Such
excise tickets are also called excise stickers.
As per sub-rule (2) of the Rule, Nepal government may prescribe that the excise sticker or ticket
should be affixed on each bottle or pack of liquor and cigarette.
IRD has made it mandatory to affix excise sticker or ticket on each bottle of wine or beer or each pack
of cigarette from Shrawan, 2064.
The producer or the importer of liquor and cigarette has to purchase the excise sticker or ticket
from any IRO by paying prescribed amount. The production unit cannot remove or issue the
goods from the factory without affixing the excise duty stickers for the specified value.
b) A person who wishes to act as the customs agent or representative of any importer or exporter to clear
goods to be imported or exported from Customs Office or to do any act related with the Customs Office
shall obtain the license of customs agent from Department or Customs Office as provided in Sec 51. If an
exporter or importer wishes to appoint an agent to deal with the processes related to import export
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then he may do so as per Sec 52 of the Act. According to Sec 53, if the owners of goods appoint any
person as his or her customs agent to get such goods cleared from the Customs Office or to do any other
act, such customs agent shall, for that purpose, be deemed to be the owner of such goods. If any
customs agent does any act contrary to the Act or the Rules, thereby causing any loss and damage to the
owner of goods, such agent shall pay an amount equal to that loss to the owner of such goods.
c) Excise Act has defined physical control system as a system in which the production, removal, import and
export of excisable goods are controlled by the excise duty officer or his designated employees. The
physical control system is applied to alcoholic beverages, spirit, molasses, beer and cigarette because of
high sensitivity with respect to the revenue as well as negative externalities. They are controlled and
supervised physically from their starting stage of manufacturing to last selling stage. The excise
personnel are stationed in the factory to maintain control of production and sales. The deployed persons
have been made responsible to control, supervise and monitoring the products. In respect of less
sensible goods such as cement, soft drink, plastic products etc and excisable services, they have been
regulated by self removal system.
d) Section 10A of Value Added Tax Act, 2052 provides for temporary registration of VAT. Any unregistered
person desiring to engage in any short–term taxable transactions of goods or services at fair, show,
demonstration, display, exhibitions etc, has to apply for a temporary VAT registration. In the application,
tax officer may demand deposit of the tax as appropriate. Existing registered person can transfer goods
for transaction to the place of exhibition or fair. Within seven days of completion of the fair, show,
demonstration, display, exhibition etc, temporary registered person has to submit VAT return of the
transactions made in such fair, show or exhibition and clear the required taxes collected thereon.
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Suggested Answers - Advanced Taxation CAP-III Examination - December 2014
Advanced Taxation
1. Following are the details of financials of ABC Brandy Company for the year ending on 31stAshadh, 2071. The Company is situated
at remote part of Rasuwa for last 5 years.
Amount (Rs.)
Opening Stock 500,000
Purchases 5,500,000
Transportation 300,000
Salary and Allowances 1,200,000
Depreciation 2,520,000
Repair & Maintenance 500,000
Pollution Control Expenses 600,000
Research & Development Expenses 500,000
Sales 12,500,000
Profit on Sale of Motorcycle 35,000
a) Company has charged depreciation and repairs in the books as follows:
Assets Category Opening WDV Tax Additions Depreciation Repairs
Building 21,000,000 220,000 1,450,000 300,000
Vehicle 1,930,000 550,000 620,000 100,000
Office equipment 2,170,000 300,000 450,000 100,000
b) Motorcycle sold during the year had nil WDV in the financial books.
c) All addition of the assets were during the first half of financial year.
d) Donation paid was Rs. 500,000 out of which Rs. 125,000 was to a tax exempted entity.
e) Company employs 500 Nepalese Citizens.
f) Company had prior year’s loss of Rs. 700,000.
g) Company had a closing stock of inventory costing Rs. 500,000 while the market value of the same was Rs. 450,000
h) Company had paid the following cumulative amount as advance tax. However, it did not file the estimated tax return.
By Poush end Rs. 200,000
By Chaitra end Rs. 200,000
By Ashadh end Rs. 200,000
Company filed its income tax return on Kartik, 2071 and it had not taken the approval for extension of time. You are required to
calculate the Taxable Income, Tax Liabilities and Penalty to be paid while filing the return. 15
Answer
Calcualtion of allowable depreciation, repairs and closing WDV of ABC Brandy Company
Opening Allowed Depreciation Depreciat 7% Allowed Unallowed Closing

Pool Additions Sold Rate Repairs
WDV addition base ion Limit Repairs Repairs WDV
Pool A
21,000,000 220,000 220,000 21,220,000 5% 1,061,000 300,000 1,485,400 300,000 - 20,159,000
Pool B
2,170,000 300,000 300,000 2,470,000 25% 617,500 100,000 172,900 100,000 - 1,852,500
Pool C
1,930,000 550,000 550,000 35,000 2,445,000 20% 489,000 100,000 171,150 100,000 - 1,956,000
Pool D
- 15% - - - -
Pool E
- prorate - -
Total
25,100,000 1,070,000 1,070,000 35,000 26,135,000 2,167,500 500,000 1,829,450 500,000 - 23,967,500
The Institute of Chartered Accountants of Nepal 51

Calculation of Adjusted Taxable Income

(Amount In Rs.)
Sales 12,500,000 sec 7(2)
Less; Allowed Deductions

Cost of sold stock
Opening 500,000
Purchase 5,500,000
Closing 450,000 5,550,000 sec 15
General deduction
Salary & Allowance 1,200,000
Transportations 300,000 1,500,000 sec 13
Repair & Maintenance 500,000 sec 16
Depreciation 2,167,500 sec 19
Adjusted Taxable Income (ATI) 2,782,500
Allowable Deductions Calculation for :

(Amount In Rs.)
Donations sec 12
Actual donation to tax exempted entity 125,000
5% of ATI 139,125
Amount limit 100,000
Allowable amount - least of above 100,000
Allowable pollution control expenses sec 17
50% of ATI 1,391,250
lower of above 600,000
allowable research and development expenses sec 18
50% of ATI 1,391,250
lower of above 500,000
Calculation of Taxable income Rs.
Adjusted taxable income 2,782,500
Less: Donation 100,000
Less: pollution control expesnses 600,000
Less: research &dev expenses 500,000
Less, set off of Loss 700000
Calculation of tax
882,500
Applicable tax rate
Normal tax rate 30%
Tax liability Rs. 264,750
Calculation of interest and penalty
Calculation of interest US 118
Required
MonthReq.Installment Paid Installment 90% of Required
Cumulative Amount Installment Deficit Interest
By Poush end 40% 200,000 113,940 105900 - -
By Chaitra end 70% 200,000 199,395 185,325 - -
By Ashadh end 100% 200,000 264,750 238275 38,275 2428
Calculation of interest US 119
64750 X 15% X41/12 Rs809

Penalty for not filing estimated tax return

Calculation of fee/ penalty US 117
Sec 117(1)(ka)
Rs. 2,000 for each return not filed 2,000
Fee/Penalty for late filing of self assessment return
Sec 117 (1)(ga)
0.1% of turnover or 100 per month whichever is higher 1042
Total tax payable while filing the return

Rs.
Tax amount 64750
Interest for advance tax shortfall Sec 118 2428
Interest for late tax payment of tax Sec 119 809
Penalty for non filing of estimated tax returns Sec 117(1) (Ka) 2,000
Penalty for late filing of returns Sec 117(1) (ga) 1042
Total 71,029
Notes:
1. Prior year loss can be set off as the company was not enjoying special tax rate benefit, as per
section 20(8).
2. Company would not be allowed to claim the benefit of 500 people's employment as per Sec 11(3) (Ka) because benefit of sec
11(3ja) is available for special industry only.
3. As per the Provisions of Industrial Enterprises Act, Rasuwa district is not covered under remote area therefore the provisions of
section 11(3 Ja) is not applicable
2.
a) Iyer Hospitality P. Limited, a hotel industry registered on 2071.04.01 with investment of Rs. 205 crores with objective to run a
4 star hotel at Gairidhara, Kathmandu. The management of the hotel is very positive and predicts to earn profit of Rs. 75 lakhs
in first year of its operation, i.e. 2071/72. Management of the hotel wants to know the estimated tax liability for income year
2071/72 and hence seeks your advice in this matter. Give your advice. 5
b) State whether the source of following payment/ income is considered to be in Nepal or not. If yes, calculate the amount of Tax.
(2×2.5=5)
i) Mr. Walls of Canada invested Rs. 500,000 from his income from Canada in a company incorporated in Nepal and got
dividend of Rs. 200,000.
ii) XYZ cable TV pays Royalty of Rs. 10 lakhs to Crick Africa Channel (a channel incorporated in South Africa) for buying
the copy rights to telecast, in Nepal, the match between India and South Africa,which is going to be held in South Africa.
c) Mr. Sapkota, a married person provides following information pertaining to income year 2070/71. Determine his tax liabilities.
5
Particulars Amount (Rs.) TDS (Rs.)
Interest received from Bank 250,000 12,500
Gratuity received from approval retirement fund 1,000,000 50,000
House rent received from Alliance Insurance Company 900,000 90,000
Dividend from Alliance Insurance Company 1,000,000 50,000
Compensation received due to accident 200,000
Salary income 500,000 54,000
Insurance premium paid 500,000
Insured medical expenses 100,000 (out of which approved
ones are Rs. 50,000)
Commission received 200,000 30,000
Remuneration received for presenting paper at an
International Conference 25,000 3,750
Investment realized from Citizen Investment Trust 385,000 4,250
Answer a)
As per section 11 (3) (ta) of income Tax Act 2058,Establishment of Industry related to Tourism sectoror Airlines company operating
international flights with an investment of more than Rs. 200 Crores shall be given tax holiday for a period of 5 years from the date of its
operation and for the next 3 years50 % tax rebate shall be given.
But, such industries or airlines company currently in operation by making an enhancement of at least 25% of the installed capacity
increases the investment upto 200 crores shall be given tax rebate of 100 % on the income so generated from such expansion for the first
5 years and after that for the next 3 years 50 % tax rebate shall be given.

Therefore, in the given case, as Iyer Hospitality P. Ltd. is hotel industry, i.e. related to tourism sector, with investment of 205 crore, i.e.
more than 200crores it complies the provision of the act & so, willenjoy full taxholdiday for 5 years from the date of operation.Hence,
there will not be any tax liability on profit of Rs. 75lacs for F.Y.2071/72.
b) i) As per section 67(6) (ka) ; dividend paid by a resident entity is treated to be having a source in Nepal & thus Rs. 2 lacspaid
as dividendis taxable in Nepal.
Tax on dividend Rs. 200,000 @ 5%
= Rs. 10,000
ii) As per sec 67(6) (ja) payments made for transmitting messages by apparatus established in Nepal, whether or not such
messages are originated in Nepal are treated having source in Nepal. Hence, royalty paid by XYZ cable TV is considered to
be having source in Nepal.
Calculation of Tax
Royalty paid = Rs. 10 lacs
TDS on royalty as per Sec 88 (1) @ 15% = Rs. 150,000
c) Calculation of Tax Liability of Mr. Sapkota:

(i) Interest from Bank 2,50,000 Final withholding payment
(ii) Gratuity received from approved Retirement
Fund 10,00,000 Final withholding payment
(iii) House rent received from Alliance Insurance

Company 9,00,000 Final withholding payment
(iv) Dividend from Alliance Insurance Company 10,00,000 Final withholding payment
(v) Compensation received due to accident 2,00,000 Exempt
(vi) Medical expenses 1,00,000 Not allowable since
compensation received is exempt.
Taxable Income:
Salary 5,00,000
Commission Received 2,00,000
Remuneration For presenting paper
at an international conference 25,000
7,25,000
Less: Insurance premium 20,000
(Maximum allowed is Rs. 20,000) 7,05,000
Tax Payable
Less: Basic limit 2,50,000 @1% 2,500
4,55,000
Up to 3.5 lakhs 1,00,000 @15% 15,000
Balance 3,55,000 @25% 88,750
1,27,500
Less: Tax paid at Source (54,000+30,000+3,750+4,250) 87,750
Balance Tax Payable: 18,500
4.
a) An assessing officer wants to issue the notice of Tax Assessment under section 100 and under section 101. He seeks your
advice on the contents to be mentioned in the notice to be issued to the tax payer under section 102. Advise him the five things
which are to be mentioned in the notice to be issued under section 102 of the Income Tax Act. 5
b) State the correctness of the following statements quoting the relevant provision. (2×2.5=5)
i) A company having no income need not file any return of Income under sec. 97.
ii) Research and Development expenses in a year are allowable in full for deduction.
Answer a)
When a notice is to be issued to the tax payer under section 102 of the act, following five things should be mentioned in that notice:
- The total tax payable by the taxpayer for the year of assessment and the tax due to him.
- The method of calculation of the tax liability.
- The reason for making the jeopardy/ amended assessment by the IRO.
- The period within which the tax due is payable.
- Where, when and how to appeal against the order if the taxpayer is not satisfied with the jeopardy / amended assessment.

b) i) Sec. 97 gives exemption only to individuals not having taxable income.But a company should file the income return whether it
has tax liability or not.
ii) As per Sec. 18 of income Tax Act, 2058, Research & Development expenses are allowable only up to 50% of adjusted total
income.

a) Double Tax Avoidance Agreement
b) Exempted Entities
c) Amended Assessment
d) Tax Payer’s Rights
Answer a) In the present globlisation age, the economies of the country are interlinked. Businesses have become global and therefore
the residents of one country have business activities in other countries as well. This poses a challenge to the revenue
administration authorities in terms of understanding the whole facets of the business and at times collecting what is due from
the tax payer. Also, from the tax payer’s view point, he may get taxed in two different countries. It is therefore to share the
information about the tax payer having business activities in two countries and to give recognition of the tax collected by one
country in another; sovereigns enter into agreement, this is called double taxation avoidance agreement.
There are internationally accepted general conventions with regard to tax on income, which are;
• Income earned in a particular country with establishment of the permanent establishment & management, the country
will have the right to collect the tax on income,
• Income earned not by having a permanent establishment, but through technology transfer etc, the particular country
will have right to tax at the lower rate,
• When tax is deducted at source at the earning country, the resident country should give credit to the tax such paid and
tax the income in that country,
• Getting credit of the tax paid in another country will benefit the tax payer, where he will not be taxed twice in the
same income.
Following are the major objectives of having the double taxation avoidance agreement:
• Eliminate the double taxation situation,
• Reduce the tax burden,
• Reduce the uncertainty around the tax laws of the country,
• Stop the revenue leakage of the countries.
b)
Exempted entities are defined in Section 2(dha) of the Income Tax Act, 2058. As per the definition, following entities are
Exempted Entities:
1. Following types of entities registered as Tax Exempted Entities in the Department:
a. Social, religious, educational or philanthropic entities of public nature established with the motive of
noprofit.
b. Amateur sports bodies, established with the motive to promote social or sports facilities where such body
or its members have no motive to of taking any benefit.
2. Political parties registered with election commission.
3. Village Development Committee, Municipality or District Development Committee.
Apart from above, Section 10 has also provided the tax exempted status to Nepal Rastra Bank and NepalSecurities Boardon the
income derived by them as per their objectives. Similarly, income of Government of Nepal is also exempted. The entities
mention under point (1) above are to be registered as exempted entities, whereas political parties registered with election
commission and VDC, Municipalities, DDC, NRB and GoN are automatically treated as tax exempted entities. Company
registered as per Companies Act cannot be exempted entities, though they are registered as non-profit motive company.
The main privilege available to these entities is they need not pay tax on their income generated from its stated objectives.
There are various formalities to be fulfilled by the tax exempt entities e.g. entities have to get their accountsauditedand
also,they have to deduct the tax at source on all the payments which attract the withholding tax.
c)
Inland Revenue Officer (IRO) can make an amended assessment of any return filed by any taxpayer solely on the ground that
the IRO thinks it proper to do so. The amended assessment shall be based on the IRO’s best judgment and should be done in
manner that is consistent with the intentions of the Act. In case IRD thinks it proper to do so the amended assessment can be
amended again according to the IRO’s best judgment for as many time as it thinks appropriate. But the IRO has the power to
make an amended assessment within four years of:

• In the case of an assessment under Section 99, the due date for filing the return; or
• In the case of jeopardy assessment, the date on which the notice of assessment is served to the taxpayer under Section
102.
The limitation of four years is effective for conditions except that the tax assessment is affected by fraudulent work. If it is
proved that the tax assessment was affected by some fraudulent work, at any time, even if the four-year period has expired, the
file can be reopened for amended assessment. No clear definition of the fraudulent work has been given in the Act. A
clarification in this regard, stating the probable conditions responsible for the fraudulent work should be given by IRD in time
so as to avoid unnecessary litigation.
Before issuing an order for the amended assessment, the IRO has to serve a notice to the tax payer stating the reason for
disagreement over the figures given in the return filed or the figures available with IRO. In case the IRO is not satisfied with
the explanation and evidence given by the tax payer, it can issue an order stating the facts and method used to determine the
liabilities.
d)
As per the provisions of Section 74 (2) of Income Tax Act 2058, following are the rights available to the tax payer:
• Right to get respectful behavior
• Right to receive any information related to tax as per the prevailing laws
• Right to get an opportunity of submitting a proof in one’s own favor in respect of tax matters
• Right to appoint lawyers or auditors for defense, and
• Right to secrecy in respect of tax matters and to keep it inviolable.
6. (3×5=15)
a) Mr. Prakash was engaged in the hardware business and now wants to quit from this business. He wants to sell and transfer the
business to a willing buyer. He has the followings assets:
Furniture & Fixtures Rs. 300,000 made to order but no VAT paid
Computer System Rs. 100,000 purchased by paying VAT
Hardware Stock Rs. 2,500,000, out of which Rs. 20 lakhs was VAT paid
Mr. Dark offered to purchase the business for Rs. 2,600,000 and approached the VAT office for effecting the transfer. What are
the procedures to be adopted, various commitments required and VAT, if any, to be paid by Mr. Dark?
b) M/s ABC Pvt. Ltd. deals in purchase and sales of various items. During a month, it has made the following transactions.
Calculate the amount of allowable Input Tax Credit.
Purchase (Rs.) Sales (Rs.)
Asparagus 5,000 10,000
Onions and Shallots 5,000 5,000
Fish Fillets 5,000 2,500
Livers and Roes 5,000 2,500
Shorn Wool 5,000 5,000
Garlic 20,000 10,000
Potato 20,000 30,000
Green Tea 5,000 10,000
Black Tea 10,000 5,000
Purchase of Office Supplies 20,000
All the amounts are exclusive of VAT.
c) Sayami Infosys Pvt. Ltd. deals in computer and related IT technology business. In the course of its business, it received
services from Magnet Technology Corp., Japan. Magnet Technology Corp., raised bill of Rs. 21.60 Lakhs against the services
provided. Management of Sayami is confused as to whether VAT shall be charged or not?
Advise the management of Sayami as regards to VAT applicable in this case and net payment to be sent. Specify the provision
of VAT Act, 2052 in this regards. (Ignore other taxes, if applicable).
Answer a)
As per sec 5 (ka) of Value Added Tax Act, 2052, VAT shall not be levied incase of transfer of business ownership. Procedures
and commitments required are as follows:
(i) First both will have to give notice to VAT Office for the transfer of business.
(ii) The person acquiring the business must be already registered under VAT.
(iii) The Tax Office can call both the parties and acqaint them with the rules and procedures.
(iv) If the ownership of any industry or business is transferred, the transferee of the business should undertake to bear all the
tax legally determined in respect of the transferor of business.

(v) The transferee should maintain & preserve the books and records and the account books for the period (before and after
transfer) as notified by the Tax Office.
(vi) No VAT is payable on such transfer of assets & liabilities in course of transfer of business.
b)
Purchase (Rs.) Sales(Rs.) Remarks
Fish Fillets 5000 2500 VAT Attractive
Livers and Roes 5000 2500 VAT Attractive
Garlic 20,000 10,000 VAT Attractive
Black Tea 10,000 5000 VAT Attractive
Total 40,000 20,000
Asparagus 5000 10,000 VAT Exempted

Onions and Shallots 5000 5000 VAT Exempted
Shorn Wool 5000 5000 VAT Exempted
Potato 20,000 30,000 VAT Exempted

Green Tea 5000 10,000 VAT Exempted
Total 40,000 60,000
Purchase of Office
Supplies 20,000 Mixed
VAT Attractive Ratio = Attractive Sales/ Total Sales = 20,000/ 80,000 = 25%
As purchase of Fish Fillets, Liver and Roes, Garlic, Black Tea are VAT attractive, VAT paid on purchases (Rs.40,000) i.e
40,000 *13% = Rs.5,200 is allowed for input tax credit. Out of Office supplies, only 25% is eligible for input tax credit, i.e. Rs.
650 (Rs. 20,000 *25%*13%).
c) As per section 8 (2) of VAT Act, 2052, "Any registered / unregistered person receiving service from unregistered person
outside Nepal, need to determine and collect VAT at the time of payment.
Also,bill raised by magnet Technology is for Rs.2,160,000.Thus, Taxable Value for the VAT is Rs. 2,160,000.
Thus, following VAT need to be charged:
Particulars Taxable value Rate Amount Remarks

VAT 21,60,000 13% 280,800 As per Section 8 (2) of Vat Act.
Payment to be made:
Particulars Amount
Total Bill Amount 2,160,000
Add: VAT on same 280,800
Less: VATto be deposited to tax office (280,800)
Total 2,160,000
Thus, VAT Of Rs 280,800 need to be charged on the above service ,and deposited to VAT office. The paid VAT can be claimed for
set-off under Reverse Charging System.
7.
a) Mr. Victor wanted to export Carpets of Rs. 12 lakhs to Finland. The buyer promised him that the price and expenses of export
would be paid immediately on receipt of documents evidencing export from Kolkata Port to Helsinki. As per rule, export is not
allowed unless proof of receipt of foreign exchange is produced before export to the satisfaction of the custom office. Examine
the situation, and suggest Mr. Victor if there is any way out for the export.
In case the buyer did not send the money, what will be the consequence? 5
b) Vogue Fashions, an international brand of apparel, has opened a manufacturing unit in Nepal. Company plans to import the
fabrics and other material from its head office in France and export the product to India. Advise the company the most suitable
custom process it should follow and also mention the conditions that it needs to fulfill. 5
c) Binani Cement Manufacturing Industries Ltd. has following transaction regarding excise paid/collected for the month of
Kartik.

Particulars Excise Amount (Rs.) Remarks

Cement Sales 800,000 Collected
Raw Material Purchase 500,000 Paid in purchase
Raw Material Consumption 400,000 Consumed in production of cement sold
Packaging Material Purchase 100,000 Paid in import
Packaging Material Consumption 50,000 Consumed in production of cement sold
Company has not any previous due on excise.

Required: (3+1+1=5)
i) Excise amount to be deposited for the month of Kartik.
ii) Due date of submission of excise return.
iii) Late fine for late deposit of excise payable.
Answer a) According to Sec.5 of Schedule 2 to Custom Tariff of 2071-72, if a person is not able to provide evidence of receipt of
Foreign exchange against the exports of goods produced in Nepal, then he is not allowed to export the same. If the exporter
cannot produce the evidence of receipt of foreign exchange immediately, export of goods produced in Nepal up to US$
10,000 may be allowed on condition of submitting the evidence later against bank guarantee equivalent to the amount of
foreign exchange to be received. Exporter should release the Bank guarantee within 6 months from the date of export by
producing evidence of receipt of foreign exchange or that the goods exported have been returned. In case the bank guarantee
is not released within six months or the goods are not returned, the concerned Custom Office shall demand the amount of
bank guarantee and the bank shall compulsorily send the amount to the Custom Office within 15 days. The amount so
received shall be deposited immediately into the Revenue account (RajaswaKhata). Since the value of Carpets of
Rs.1,200,000 is more than US$ 10,000 at current exchange rate, he cannot export the carpet without valid L/C.
b) In the given case, the manufacturing unit is in Nepal and the raw materials are being brought from abroad with an arrangement
to do the production in Nepal and export the finished goods to India. In this case the most suitable process to be followed
would be to apply for bonded warehouse facility by Vogue Fashions in Nepal. By doing this it can import the main and sub raw
material by providing the bank guarantee. Following are the process to be followed and the conditions to be fulfilled on getting
the license to operate the bonded warehouse.
Vogue Fashion has to get the written recommendation from Department of Commerce to Department of Customs, where the
importer would be allowed to import the goods without opening the letter of credit. While importing the raw materials,it should
submit the Department of Commerce’s recommendation, contract with the foreign buyer, invoice value for customs purpose
along with the custom declaration form. After the customs duty is derived, the company should provide the bank guarantee
equivalent to the amount of duty plus 25 percent additional amount. Rule 10 of Customs Rules provides for facilities available
to Bonded warehouse licensee.
The industry using the bonded warehouse facility should export the goods though establishing the letter of credit or established
banking channels. Finished goods must be exported within 11 months from the time the raw materials or ancillary raw
materials are imported. There should be at least 10 percent value addition as per the valuation during import and export of
finished goods.
(Procedure 1, Substance 3, overall 1)
c) i) Excise to be deposited:
Excise collected on sale of Cement 800,000
Less:
i. Excise paid on raw material purchase (500,000)
Net Excise to be deposited 300,000
Note: As per section 3 (ka) (3) of excise act, 2058, tax payer is allowed to deduct excise paid on raw material purchase or
import from the excise collected on sale of excisable goods. 2
Since, cement is under self removal system Binani Cement manufacturing Industries Ltd. is allowed to deduct excise paid
on raw material purchased and not allowed to deduct excise paid on purchase of packing material.
ii. As per section 4 (kha), goods and services under self removal system, need to submit excise return within 25 days of
expiry of month in which invoice was raised.
Thus, "Binani Cement manufacturing industries" need to submit excise return with in Mangsir 25.
1
iii. As per section 10 (jha), late fine @ 0.05% per day shall be levied on excise amount, if the excise amount is not submitted
within time. (Sec. 0.5, overall 0.5)

8.
a) Real Maaza Pvt. Ltd. is a company producing fruit juice. Answer following queries placed to you by its management.
(1+1+1+2=5)
i) Is it necessary to take license under Excise Act?
ii) If the license needs to be taken when the license shall be renewed?
iii) It has no production or any other excisable transaction in the month of Ashwin. Accountant is of the view that no excise
return needs to be submitted for the month of Ashwin. What are the requirements and implications as per Excise Act?
iv) What shall be the fine amount imposed if the renewal is done on Bhadra 1st (as per excise act).
b) Has section 30 of the Customs Act, 2064 given authority to Customs Officer for special test? 5
Answer a)
i. As per section 9 (1) of Excise Act, 2058, without taking license nobody shall undertake the production, import, sale or storage of
excisable goods or provide excisable services.
Since, fruit juice is excisable goods, 'Real Maaza P. Ltd," needs to take license under excise Act, 2058 before starting its
production.
ii. As per section 9 (4), license issued in accordance with section 9 (1) shall be valid for 1 financial year and as per section 9 (5) it
need to be renewed within month of Shrawan after expiry of financial year along with renewal fee at a time.
iii. As per section 10 (ka), excise return of transaction relating to excise need to be submitted by person liable to impose and collect
excise within 25 days of expiry of month to which the transaction relate. Excise return need to be submitted irrespective of any
excisable transaction done or not.
Thus, "RealMaaza P. Ltd." needs to submit excise return for the month of Aswin. In case company does not submit excise return
within Kartik 25, higher of the following shall be levied.
0.05% per day on excise amount or Rs 1000 per Return.
iv. As per section 5(3) of Excise Rule, 2059, if the renewal is done on within 1st three months from expiry of time from application
of renewal, 25% of renewal fee shall be changed as fine.
Since renewal has been done in the month of Bhadrai.e, 1month of the expiry of time (i.e. shrawan) 25% of renewal fee shall be
taken as fine.
b) According to section 30 of Customs Act, for the health or environmental perspective, if it is required to conduct special test, the
customs officer may get such goods tested by the concerned body or laboratory. For this purpose:
a. The officer may take a specimen of such goods from the consignment or packet and send it to the concerned body or
laboratory.
b. The concerned authority or laboratory shall promptly test the goods sent for test and send results thereof to the customs
office promptly.
c. If, in carrying out the test, the goods appear to cause adverse effects or damage to the environment or health, the customs
officer shall order the concerned importer to return such goods back to the concerned exporter of the foreign country and
recover the foreign currency paid to the vendor, in such manner as prescribed.
If the concerned importer does not send back such goods pursuant to the order issued, the customs officer may seize such goods
and destroy or decompose such goods and shall recover from the concerned importer the expenses incurred or likely to be
incurred in such destroy or decomposition
9. Write short notes on the following, giving consideration to VAT, Customs and Excise Act. (4×2.5=10)
a) Proportionate credit
b) Demurrage
c) Under invoicing
d) Physical control system and self removal system
Answer a)
Value Added Tax (VAT) paid on purchase is allowed as full set off if output of registered person is VAT attractive only.
Similarly, VAT paid on purchase is not allowed as credit in full if the output is VAT exempted. There can be cases, where
registered person deals both VAT attractive and VAT exempt items at a time; in such situation VAT credit is allowed on the
VAT paid on purchase of:
Raw material for VAT attractive output full credit Rule 40(3)
Raw material for VAT exempted output no credit Rule 40(3)
Common cost (raw material or overheads) proportionate credit Rule 40(4)

As per Rule 40(4), the tax payer dealing in both taxable and tax exempt goods and services shall apportion the common cost in
the ratio of taxable sales value to total sales value. The tax payer can claim credit for VAT paid on purchase or import
proportionally in the ratio of taxable sales to total sales values.
b)
As defined in the Section 2 (sha) of the Custom Act, Demurrage is a fee levied by the government as penalty for not releasing
the goods in time by the importer or exporter. There is certain time allowed to the importer/exporter to clear the goods from the
custom godowns, if till such time the goods are not cleared then the demurrage is charged, however if the delay is on the part of
custom officer due to issue in valuation, classification orany other reason then in such situation demurrage is not charged. In
some other special situation, the demurrage can be waived also by the authorized officer.
c)
As per the WTO’s General Agreement on Trade and Tariff agreement, the value of imported goods is determined on
transaction value basis. This means that the duty is paid based on the invoice value of the goods. But there can be cases where
the value declared by the importer for the custom valuation purpose is lower than the value estimated by the custom officer.
Such situation is referred as under invoicing. This means that the valuation shown by the invoice is suppressed so that the
goods could be imported paying lesser duty. This is a major issue in the developing economy, and this will have far reaching
implication of illegal trade etc.
Rule 29 of the Custom Rule has prescribed the process to control such practice by empowering the Department to have the
right to purchase the goods by paying 5% excess on the declared value of the goods through a special fund created for the
purpose. Ministry of Finance may provide the budget for this fund which does not get freeze once the fiscal year is closed. The
department should notify the importer or his agent of its decision to buy the goods from the fund. Goods purchased through the
fund may be auctioned or can be used for the government purposes. There have been cases in the past where the government
decided to buy the goods through this provision.
d)
Section 2 of the Excise Act defines the terms Physical Control System and Self Removal System. As per the definition,
Physical Control System is a system where the excisable good’s production, removal, export or import are taken place at the
control of Excise Officer or the staff nominated by Excise Officer.
Self Removal system on the other hand is the system where the production, removal, export or import of excisable goods and
services takes place other than that under the Physical Control System. This means that under Physical Control System, there is
constant control by the Excise Officer while in the Self Removal System, there is lesser control.

CAP-III
Advanced Taxation
Suggested Answer-June 2015
Marks
1. Following is the profit & loss account of B & B Cements Pvt. Limited. Calculate the
taxable income and income tax liability of the company for the year 2070/71.
B & B Cement Pvt. Ltd.
Profit and Loss Account
For the year ending Ashadh 32, 2071

Cost of goods sold 24,540,000 Sales 35,060,000
Gross profit c/d 10,520,000
35,060,000 35,060,000
Interest 2,900,000 Gross profit b/d 10,520,000
Salary 2,500,000 Interest income 15,000
Rent 1,520,000 Bad debts recovered 200,000
Vehicle running expenses 275,000
Insurance 240,000
Net profit c/d 805,000
10,735,000 10,735,000
a) B&B Cements Pvt. Ltd. is special industry as per the provision of Income Tax
Act, 2058.
b) B&B America Incorporation (Non-resident person) has a shareholding of 31% in
B&B Cements Pvt. Ltd.
During the year, B&B America Incorporation had given a loan to the company
and against it received interest of Rs. 630,000. Interest expense includes the same
interest.
c) Fixed assets schedule, as per Income Tax Act, is as follows:
Opening WDV including unobserved repair &

Block maintenance of previous year (Rs.)
A 300,000
B 1,600,000
C 400,000
D 500,000
Company has received tax assessment order from IRO for fiscal year 2069/70 and
company did not file any appeal to concerned authority within due time. As per
INR P.T.O.
(2)
assessment order, following depreciation for fiscal year 2069/70 is not allowable
as deductible expenses due to false VAT bill capitalized on 2069.04.02. Company
has claimed depreciation on such capitalization as per rates provided by Income
Tax Act.
Particulars Disallowed Depreciation Amount (Rs.)
Block A 10,000
Block B 25,000
Block C 30,000
No purchase and sales of depreciable asset is made during the year. The company
also desires to claim additional depreciation as per Income Tax Act, which was
not claimed in previous year.
d) Details of insurance expenses is as follows:
Insured Item Total Insurance Premium (Rs.) Prepaid Insurance (Rs.)
Stock 45,000 5,000
Building 15,000 7,000
Other assets 180,000 85,000
Total 240,000 97,000
e) Other expenses include personal expenses of director amounting to Rs. 100,000
f) Other expenses include commission given to the marketing agents Rs. 500,000,
on which no TDS has been deducted.
g) Bad debts recovered include the amount which was not allowed as expenses in
previous year.
h) Inland Revenue Office (IRO) has raid on the accounts department of the company
on 2070.09.30 and has found sales to one of its sister concern as follows:
Bill No. Quantity Rate (Rs.) Amount (Rs.)

10 4,000 250 1,000,000
However the same product was sold to others at the rate of 400 per unit. Then
finally IRO issued tax assessment order to submit tax Rs. 120,000. (20% on 4,000
X 150) 15
Answer
Calculation of taxable Income of B & B Cements Pvt. Ltd. for income year 2070/71.
Working
Particulars Amount(Rs)
Note
Sales 35,060,000.00
Additional Sales Determined under assessment 1 600,000.00
Interest Income 15,000.00
Bad debt Recovered 2 -
Cost of Goods Sold 24,540,000.00
Salary 2,500,000.00
Rent 1,520,000.00
Depreciation 3 690,333.33
Vehicle Running Expenses 275,000.00
INR P.T.O.
(3)
Other Expenses 4 1,825,000.00

Insurance Premium 5 143,000.00
Interest Expenses 6 2,900,000.00
Total Expenses (B) 34,393,333
Taxable Income (A -B) 1,281,667
Tax Rate 20%
Tax Liability 256,333
Working Note: 1
As per the assessment order of IRO, additional tax of 120,000 is claimed. Accordingly,
additional sales determined is Rs. 600,000 ( 4000 X 150) i.e. ( Units sold X rate
difference). Under section 33, it is taxable.
Working Note: 2
Bad Debt Recovered.
Since bad debt recovered was not allowed as bad debt expenses earlier, it is not included in taxable
income.
Working Note: 3
Calculation of Allowable Depreciation.
Amount not
Additional
allowed in Allowable Rate of Total
Particulars Opening WDV Depreciation Depreciation
Opening WDV opening WDV Depreciation Depreciation
(1/3rd) ( WN 3.4)
( WN 3.1)
Block A 300,000.00 190,000.00 110,000.00 5% 5,500.00 1,833.33 7,333.33
Block B 1,600,000.00 75,000.00 1,525,000.00 25% 381,250.00 127,083.33 508,333.33
Block C 400,000.00 120,000.00 280,000.00 20% 56,000.00 18,666.67 74,666.67
Block D 500,000.00 - 500,000.00 15% 75,000.00 25,000.00 100,000.00
517,750.00 172,583.33 690,333.33
3.1) Non-Allowable Depreciation Basis.
Disallowed
Rate of Capitalized Amount to be deducted form
Particulars Depreciation
Depreciation (B) Amount ( C= A/B) Depreciation base (C-A)
(A)
Block A 10,000.00 5% 200,000.00 190,000.00
Block B 25,000.00 25% 100,000.00 75,000.00
Block C 30,000.00 20% 150,000.00 120,000.00
Block D - 15% - -
3.2) Since the Company did not claim additional depreciation in previous year, only depreciation
as per the rates provided by Act is used for backward calculation of capitalized amount.
3.3) As the Company did not file any appeal in assessment order of IRO, it is established that the
company admits the disallowed depreciation and capitalization of concerned fixed Assets.
3.4) As per Schedule 2 of Income Tax Act, Special Industry can claim additional 1/3rd depreciation
on Block A,B,C,D.
Working Note: 4
Allowable Other Expenses
As per section 13 of Income Tax Act, all actual costs to the extent incurred in the production of
income from the business or investment shall be deducted. So, personal expenses of director are not
deductible in the computation of taxable income.
Expenses on which TDS has not been deducted as per Section 88 of the income tax Act are deemed to
be deducted at the time of payment as per Section 90(3) .
INR P.T.O.
(4)
Particulars Amount
Total Other Expenses Incurred 1,925,000.00
Less: Expenses of Personal Nature 100,000.00
Allowable Other Expenses 1,825,000.00
Working Note: 5
Allowable Insurance Expenses.
Expenses related to the Income Year is only allowed for deduction (Section 13). So, Insurance
Premium relating to Income Year 2070/71 is only allowed as deduction.
Particulars Amount
Total Insurance Premium Paid 240,000.00
Prepaid Insurance 97,000.00
Insurance Premium relating to Income Year 2070/71 143,000.00
Working Note: 6
Calculation of Adjusted taxable Income:
Particulars Amount
Sales 35,060,000.00
Additional Sales Determined under assessment 600,000.00
Interest Income 15,000.00
Bad debt Recovered -
Less: Allowable Expenses
Cost of Goods Sold 24,540,000.00
Salary 2,500,000.00
Rent 1,520,000.00
Depreciation 690,333.
Vehicle Running Expenses 275,000.00
Insurance Premium 143,000.00
Other Expenses 1,825,000.00
Total Expenses (B) 31,493,333
Adjusted Taxable Income (A-B) 4,181,667
Since B & B America Incorporation who is a non-resident person holds 31% share i.e. more than
25% of underlying ownership, the company shall claim interest expenses up to a sum of the amounts
as calculated below, Section 14(2):
Particulars Amount
A. Interest derived during the year 15,000.00
B. Adjusted taxable Income 4,181,667
Less: Interest Income -15,000.00
Adjusted Taxable Income excluding Interest Income 4,166,667
50% of it (B) 2,083,333
Allowable (A+B) 2,098,333
INR P.T.O.
(5)
Interest paid to Non-resident amounting to Rs. 630,000 is fully allowed. Balance interest
(2,900,000 – 630,000) = 2, 270,000 paid to other than the controlling entity is also fully
allowed for deduction.
2.
a) Calculate the tax liabilities for the following individuals who have regular
business income as below for the Income Year 2070/71: 5
Particulars Mr. A Mr. B Mr. C Mr. D Mr. E
Taxable income (Rs.) 290,000 390,000 690,000 2,090,000 3,090,000
Gain on non-business
chargeable assets
(NBCA) (Rs.) 290,000 290,000 290,000 290,000 290,000
NBCA nature Listed Land & Listed Land& Unlisted
shares Building shares Building shares
Holding period 2 years 7 years 3 years 4 years 1 year
b) Mr. Vikash has been appointed as liquidator of a limited liability company. At the
time of liquidation, the company has outstanding withholding tax liability (which
the company has collected from payments made to others) of Rs. 10 lakh and
other tax liability of Rs. 30 lakh. Tax office has notified Mr. Vikash in the
capacity of receiver to deposit the taxes outstanding. After selling the assets of the
company, Mr. Vikash has collected Rs. 1 crore after deducting the liquidation
expenses. The company has secured loan of Rs. 30 lakh which has been given
preferential right over the taxes and the assets of the company has been put as
collateral for the loan. Apart from that, the company has unsecured liabilities of
Rs. 50 lakh. Tax Officer instructs the liquidator as receiver to deposit the
withholding tax with the utmost preference over other payments. Is the instruction
of the tax officer justified as per the provisions of section 103 and section 108 of
the Income Tax Act, 2058? Can Mr. Vikash be called as receiver? If yes, define
receiver. Also, state the priority for other payments. 5
c) Mr. Ram, a resident person, received dividend of Rs. 50,000 from BalGopal
Limited. BalGopal Limited distributed dividend of Rs. 600,000 out of
Rs. 950,000 received as dividend from A One Ltd., who declared a dividend of
Rs. 2,500,000 and distributed the dividend after deducting the tax at source.
Calculate the amount of tax to be deducted by BalGopal Ltd. on the dividend
amount to be paid to Mr. Ram.
Will your answer differ if BalGopal Ltd. is non- resident entity? What will be
your answer if BalGopal Ltd. is a cooperative, incorporated under Cooperative
Society Act, 2048, industry based on agro-products or forest products?
Provide your answer by mentioning the relevant provisions of the act. 5
INR P.T.O.
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Answer a) Particulars Mr. A Mr. B Mr. C Mr. D Mr. E

Taxable income (Rs) 290,000 390,000 690,000 2,090,000 3,090,000
Gain on NBCA (Rs) 290,000 290,000 290,000 290,000 290,000
Exemption limit 0% 200,000 200,000 200,000 200,000 200,000
Balance (Rs) 90,000 190,000 490,000 1,890,000 2,890,000
NBCA Taxable amt (Rs) 90,000 190,000 290,000 290,000 290,000
Normal Taxable amt (Rs) - - 200,000 1,600,000 2,600,000
Tax liability
On NBCA (Rs) 4,500 4,750 14,500 14,500 29,000
(@5%) (@2.5%) (@5%) (@5%) (@10%)
On Others
First 1 lakh - - 15,000 15,000 15,000
Next - - 25,000 375,000 625,000
Additional tax - - - - 10,000
Total tax 4,500 4,750 54,500 404,500 679,000
b) Section 103 of the act states, IRD or IRO has a preferential right to receive the withholding tax by
a person over any other persons. Withholding tax is the amount collected on behalf of Nepal
Government and thus it is never included in the assets of withholding agent. Government of
Nepal has preferential right over any order of a court or any other law.
As per clarification clause to section 108, Receiver means the following person:
a. A liquidator
b. A receiver appointed by a court or out of a court in respect of an asset or an entity
c. A person who has taken the assets in possession in case the asset is mortgaged to him
d. An executor, administrator, or direct heir of a deceased individual’s estate or
e. Any person conducting the affairs of an incapacitated individual.
As per section 108 of the act, the tax office shall notify the receiver, in writing, about the amount
of tax payable by the person. After receiving the notice from tax office, the receiver shall, after
selling sufficient assets that come into the receiver’s possession, appropriate the amount as
follows:
- Set aside an amount and pay to the revenue, for any amount due to the defaulter for tax
deducted at source, but not deposited
- Pay the amount having a priority over tax, and
- Set aside and pay the amount of tax on behalf of the tax payer as notified by the tax office.
As per above stated provisions, the instruction of the tax officer is justified. Mr. Vikash is
receiver as per the provisions of the act. The receiver has to first deposit the withholding tax
amounting to Rs. 10 Lacs. Then after paying the liquidation expenses, secured loan, having
preferential right over the taxes, amounting to Rs. 30 lacs, other taxes amounting to Rs. 30 lacs
have to be paid. Then out of the remaining amount of Rs. 30 Lacs, unsecured liabilities have to
be paid proportionately.
c) As per section 54(3) of the act, a company that receives an amount of dividend after deduction
of tax, is not obliged to deduct tax on dividend paid by it to its shareholders out of the amount
of dividend received. In this case, Mr. Ram received the dividend from BalGopal Ltd. and
BalGopal Ltd. has distributed dividend out of the dividend received from AOne Ltd. The
dividend from AOne Ltd. is received after deduction of the tax. So BalGopal Ltd. is not
obliged to deduct tax on payment of dividend to Mr. Ram.
INR P.T.O.
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Yes the answer will differ. As per section 54(2) of the act, if a non-resident entity pays
dividend to a resident person, the amount of the dividend is to be included in income from
investment of the payee.
As per section 11(2) of the act, if dividend is distributed by a cooperative registered under the
cooperative society act, 2048 and running industry based on agro- products or forest products,
then it is exempt from tax.
3.
a) Ram Products is a proprietorship firm dealing in paper manufacturing works.
Total sales in fiscal year 2070/71 is Rs. 25 crores. Export sales out of total sales is
Rs. 10 crores. The profit earned out of total sales is Rs. 2.5 crores. Profit from
export sales is Rs. 1 crores. Mr. Ram, the proprietor of Ram Products, is
handicapped. Mr. Ram is assessable as couple as per the Income Tax Act.
Calculate the tax liability of Ram Products. 5
b) Mention the provisions of Income Tax Act, 2058, relating to set off of loss of one
head with the gain of other heads in the same financial year. 2.5
c) A foreign airline having office in Kathmandu sells tickets for destinations to
Europe and Africa from Delhi. It does not run any flight from Kathmandu. For
catching the flight at Delhi, the customer makes his own arrangement to reach
Delhi or at the request of the customer it provides tickets purchased from Nepal
Airlines. During Ashadh 2071, the airlines sold ticket for destinations in Europe
and Africa form Delhi for Rs. 800,000 and purchased tickets worth Rs. 200,000
for flight to Delhi. Find its tax liability. 2.5
Answer (a)
Particulars Export (Rs) Local (Rs) Total (Rs)
Gross Taxable Business Income 10,000,000.00 15,000,000.00 25,000,000.00
Deduction to the handicapped
125,000.00 125,000.00
(50% of the 1% slab )
Taxable Business Income 10,000,000.00 14,875,000.00 24,875,000.00
Computation of Tax Liability:
Upto Rs. 250,000 @ 0%(Being proprietorship
firm) - -
Next Rs. 100,000 @ 15% 15,000.00 15,000.00
Next Rs. 21,50,000 @ 20% ( Manufacturing
Nature) 430,000.00 430,000.00
Balance Rs. 22,375,000 1,575,000.00 3,465,000.00 5,040,000.00
@ 15.75% on Export Income of Rs. 10,000,000
@ 28% on Balance taxable local income of Rs.
12,375,000
Total Tax Liability 5,485,000.00
Note: a)Tax rate for export = 15 *(1-0.25)*1.40 = 15.75%

Tax rate for domestic sale = 20*1.4 =28%
b) There are four heads of incomes as specified by the Act. These are; income from business,
income from employment, income from investment and income from windfall gain. The Act
has rightly supposed that there is no chance of a loss from employment and income from
windfall gain. That is the reason, there shall be option of set off with loss from business or
investments only. Section 20 of Income Tax Act prescribes the conditions for set off of loss.
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Inter-head setoff is allowed under these conditions:

• Loss from business can be set-off with gain from business or gain from
investments.
• Loss from investments can be set off with gain from investments only.
Loss from Nepal can be set off with gain from Nepal or from foreign, whereas loss from
foreign can be set off with gain based on individual country basis.
c) As per section 70 of Income Tax Act, 2058, foreign airline having office in Kathmandu and
selling tickets for overseas has to pay tax at rates specified under schedule 1(2) (7) of the Act.
According to this schedule if ticket is sold for overseas destination originating from Nepal, the
tax rate is 5% and if ticket is sold for overseas destination originating from any country other
than Nepal, the tax rate is 2%. Hence, in this case the tax is payable at the rate of 2% on sales
of its own tickets and not of other airlines. Therefore, the airline has to pay tax of Rs. 16,000
(2% of 800,000).
4. (4×2.5=10)
a) The price of a contract is Rs. 200,000 but the part payments are made in five
monthly installments of Rs. 40,000 each. Will the provision of withholding tax as
per section 89 be applicable?
Will your answer differ if the monthly installments are fixed at Rs. 60,000,
Rs. 50,000, Rs. 40,000, and Rs. 50,000?
b) Mr. Jharkhande, an Indian national, is a resident in India as per Indian Income
Tax Act. He is a businessman in Mumbai and also stayed for 190 days in Nepal in
last 365 days ended in Ashadh end and thereafter he returned back to India. Is he
considered a resident in Nepal?
c) What is the penalty/fine for obstructing an officer of Inland Revenue Department
on performance of his duties under the Income Tax Act?
d) Mention the taxability on dividend paid by a partnership firm. What will be your
answer if the firm’s sole income source is dividend from resident companies?
Answer a) As per section 89 of the Income Tax Act, 2058, a resident person making payment of more
than Rs. 50,000 related to a contract has to withhold tax at 1.5% of the amount of payment.
The provision is applicable where the payment for the contract is higher than Rs. 50,000
irrespective of the volume of total contract price of a single contract.
In the first case, as the installments are below Rs. 50,000, the provision of withholding tax
is not applicable. In the second case, withholding tax is applicable in case of installment of Rs
60,000 only and the provisions of withholding tax will not be applicable for other
installments.
b) Mr. Jharkhande has stayed in Nepal for more than 183 days during the period of 365
consecutive days. Thus, he seems to be a resident in Nepal. But as he is also a resident of
India, as per Article 4 of DTAA between Nepal and India, if any person is resident in both the
countries, then the status of normal place of abode has to be seen. Hence, he is a resident of
India and not of Nepal.
c) Section 125 of Income Tax Act has provided the provisions of penalty to a person who
commits the offense of obstructing an officer of Inland Revenue Department or Inland
Revenue Office acting in the performance of duties under the Income Tax Act. Person
committing such offence is liable to a fine ranging from Rs. 5,000 to Rs. 20,000 or an
imprisonment for a term of one to three months or both. A person who attempts to commit the
above mentioned offences shall be liable for half of the penalty chargeable to a person who
has committed the offense.
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d) Section 54 of the Income Tax Act prescribes for treatment of dividend income by an
individual, as per which dividend paid to a partner in partnership firm is treated as final
withholding payment. Similarly, Section 88(2) prescribes the withholding tax rate for
dividend, which is 5% of the amount paid. Therefore, the dividend distributed by a partnership
firm to its partners is taxable at 5% as final tax, this is similar to dividend payment by a
resident person.
As per Section 54(3) a person that receives an amount of dividend after deduction of tax is not
obliged to deduct tax on dividend paid by it to its shareholders or partners out of the amount
of dividend received.
5.
a) Lalitpur Handicrafts P. Ltd. has following transactions in respective months;
calculate the amount of VAT refund the company would have claimed and the
carried over balance of VAT as receivable. 5
Month Total Sales (Rs.) Purchases (Rs.) Export Sales (Rs.)
Bhadra 500,000 600,000 225,000
Aswin 520,000 500,000 130,000
Kartik 600,000 500,000 270,000
Mangsir 450,000 500,000 157,500
Paush 320,000 500,000 144,000
Magh 400,000 500,000 100,000
Falgun 350,000 500,000 122,500
All items of purchase and sale are VAT attractive.
b) Calculate net VAT payable after deducting available concession based on
following information of Kathmandu Private Limited, a VAT registered match
(wooden stick) and incense sticks Udhyog, for the tax period of Baishakh 2071. 5
Purchase of VAT exempted raw material Rs. 2,500,000
Plant consumables Rs. 250,000 plus VAT
Bus for staff transportation Rs. 1,130,000 including VAT
Sale of Match (wooden stick) Rs. 1,500,000 excluding VAT
Sale of incense sticks Rs. 600,000 excluding VAT
Export sale of incense sticks Rs. 800,000 excluding VAT
If Kathmandu Private Limited is a Maida industry, will your calculation differ?
c) Mr. Ram has taken voluntary registration in VAT on 2070.05.02. He feels it
troublesome to comply with legal requirements of VAT Act, and wish to cancel
his registration. He seeks your assistance in this regards. Answer the following
queries placed to you by Mr. Ram:
i) When can he apply for cancellation of registration?
ii) The books of Mr. Ram showed following balances at the date of cancellation.
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Account head Closing balance (Rs.) Market value on date of cancellation (Rs.)
Items on Items on Total Items on which Items on which Total
which VAT which VAT VAT input was VAT was not
input was was not claimed. claimed.
claimed. claimed.
i) Inventory 10 lakh 5 lakh 15 lakh 12 lakh 7 lakh 19 lakh
ii) Fixed assets 20 lakh 7 lakh 27 lakh 11 lakh 3 lakh 14 lakh
What shall be the tax implication on the above items on the date of cancellation?
State the provision of Act. 5
Answer a) Here, all the items of purchase and sale are VAT attractive. Company can offset all the VAT
paid on purchase, since there are no non-VAT or partial VAT items. Therefore all the
purchase is qualifying for credit or refund, as the case may be. The applicable VAT rate is
13% for purchase and local sale whereas 0% for export. Accordingly, output tax and input tax
is calculated below:
(Amount in Rs.)
Month Purchase Local Sale Export Output tax Input tax Credit
Bhadra 600,000 275,000 225,000 35,750 78,000 42,250
Aswin 500,000 390,000 130,000 50,700 65,000 14,300
Kartik 500,000 330,000 270,000 42,900 65,000 22,100
Mangsir500,000 292,500 157,500 38,025 65,000 26,975
Paush 500,000 176,000 144,000 22,880 65,000 42,120
Magh 500,000 300,000 100,000 39,000 65,000 26,000
Falgun 500,000 227,500 122,500 29,575 65,000 35,425
The refund of VAT as well as carried over balance as VAT receivable would be as follows:
Month Export % Cu. Credit Refund Remarks
Bhadra 45% 42,250 42,250 more than 40% export
Aswin 25% 14,300
Kartik 45% 36,400 36,400 more than 40% export
Mangsir 35% 26,975
Paush 45% 69,095 69,095 more than 40% export
Magh 25% 26,000
Falgun 35% 61,425
Note: Since export is more than 40%, Refund can be claimed as per as per section
24(4) of VAT Act, :
b) Calculation of Net VAT payable for the month of Baishakh, 2071

Sale of match Rs. 1,500,000@13% Rs. 195,000
Sale of incense sticks Rs. 600,000@13% Rs. 78,000
Total VAT payable on sale Rs. 273,000
Plant consumables Rs. 250,000 @13% Rs. 32,500

VAT on Purchase of staff bus Rs. 130,000 *40% Rs. 52,000
Total VAT receivable Rs. 84,500
Net VAT payable Rs. 188,500
Notes:
- Export sales are taxed at 0% as per schedule 2 of the act.
INR P.T.O.
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- VAT paid for purchase of bus for staff transportation can be claimed upto 40% only.
As per clause no. 11 of group 11: other goods and services of schedule 1 of the act, amount
equal to such tax as deemed payable that remains in balance upon deducting the tax paid on
purchase from the tax collected on the sale of goods by match (wooden stick), incense sticks
industries shall be refunded to these industries in accordance with the procedures specified by
IRD. Hence, the amount of net VAT payable of Rs. 188,500 is refundable in accordance with
the procedures specified by IRD.
If Kathmandu Private Limited is a maida industry, net payable calculation will be the same as
Rs. 188,500. But as per clause no. 12 of group 11: other goods and services of schedule 1 of
the act, only 25% of the amount equal to such tax as deemed payable that remains in balance
upon deducting the tax paid on purchase from the tax collected on sale shall be refunded to
these industries in accordance with the procedures specified by IRD. Hence in this case, only
Rs. 47,125 shall be refunded.
c) i) As per Section 11 (1) (ka) of VAT Act, 2052, if the person acquires the registration
voluntarily, he shall not be allowed for cancellation of registration before expiry of one year from
the date of registration. So, Mr. Ram shall be allowed cancellation of registration on or after
2071.05.02 i.e. one year after the registration date of 2070.05.02.
ii) As per Section 11(3), in case the registered person has certain stock of inventories or capital
goods at the time of cancellation, on which tax credit facility was availed earlier, it has to pay the
tax on the stock of taxable goods as these are disposed off at that time at their market rate.
So, Mr. Ram need to pay VAT on stock of goods & Fixed Assets on which VAT credit facility
was availed earlier.
Calculation of VAT payable by Mr. Ram on cancellation of registration is as follows:
Account Head Stock of items on which Market value of items in Rate of VAT
VAT credit was claimed which VAT credit was VAT Payable
earlier claimed earlier (Rs)
i) Inventory 10 lacs 12 lacs 13% 156,000
ii) Fixed Assets 20 lacs 11 lacs 13% 143,000
Total 30 lacs 23 lacs 299,000
Thus, Mr. Ram needs to pay VAT of Rs. 299,000 at the time of cancellation of registration.
6.
a) A manufacturing company producing excisable goods and have obtained approval
for self-removal system. As per the financial statements for the year 2070/71 of
the company, there is excise payable of Rs. 2,500,000 of which Rs. 100,000 is
related to sales of Baishakh, 2071, Rs. 50,000 is related to the sales of Jestha,
2071 and the balance amount is related to the sales of Ashadh, 2071. The
company has not paid the excise amount till 15th Bhadra, 2071.
In this case, briefly mention the excise duty payment in case of self removable
system and calculate fee if applicable till 15th Bhadra, 2071. 5
(No. of Days: Baishakh 2071: 31, Jestha 2071: 31, Ashadh 2071: 32, Shrawan
2071: 31, Bhadra 2071: 31)
b) Rock Cement Industries (P) Ltd. has paid custom duty of Rs. 70,000 as deposit at
the custom duty rate of one percent on Rs. 7,000,000 ($100,000 @ 70 as on
17.07.2070) for the import of raw material of 10,000 MT. However, the duty
payment is for partial import on following period. At the time of import the
deposit was reversed and total duty was shown as Rs. 70,000. The quantity and
date of import were as follows:
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Date MT (Qty.) Exchange Rate for 1 USD

18.07.2070 8,000 Rs. 71
19.07.2070 2,000 Rs. 70
Is the duty calculated on import i.e. Rs. 70,000 correct? State the Provision
relating to computation of custom at the time of clearance of goods. 5
c) Mention the process related to levy and collection of Excise Duty. 5
Answer a) As per (1) (kha) of section 4kha of Excise Act, 2058, the taxpayer has to pay the excise duty
collected during a month within 25th day of the end of the month in which the invoice for
excisable goods or services is issued. Further, sub-section 2 of section 4kha states that if a tax
payer did not make payment as per 1 (kha), late fee @ 0.05% per day shall be charged on the
outstanding excise amount.
The company has excise payable of Rs. 2,500,000 that is related to Baisakh, Jestha and Ashadh,
2071. So, late fee shall be as follows till Bhadra 15, 2071.
No. of delay days
Amount Stipulated time for Per day late fee till Bhadra
Month Payable (Rs) deposit (Rs) 15,2071 Late Fee(Rs)
Baisakh 100,000.00 Jestha 25, 2071 50 84 4,200.00
Jestha 50,000.00 Asadh 25, 2071 25 53 1,325.00
Asadh 2,350,000 Shrawan 25, 2071 1,175 21 24,675.00
Total 2,500,000 30,200.00
b) As per section 24(1), (2) & (3) of Custom Act, 2064; in case of goods cleared at custom on partial
basis, the exchange rate prevailing at the day of clearance of consignment shall be considered for
computation of duty.
Thus, the custom duty shall be as follows:
Date MT Value Exchange Value in Duty @ 1%
(USD) rate NRS
18.07.2070 8,000 80,000 Rs. 71 5,680,000 56,800
19.07.2070 2,000 20,000 Rs. 70 1,400,000 14,000
Total Custom Duty 70,800
Advance deposited 70,000
Balance due 800
Hence, the duty calculated i.e. Rs. 70,000 is wrong.
c) Excise duty is levied broadly in two methods, first of which is physical control system while the
other is self removal system. Liquor, spirit, molasses, beer and cigarette are allowed to be
removed from production only by paying the applicable duty. Apart from above goods, all other
goods which attracts Excise Duty will be allowed to be removed based on self removal system. In
case of physical control system, the excise officer may require the producer to deposit the duty
applicable for the expected output for the year as an advance. If in case the deposit made by the
producer is short then it will have to pay the additional amount, similarly if the deposit paid is
excess then the producer will get the excess refunded.
For the goods and services removed on self removal system the duties are ascertained and
collected through the invoice and to be paid as per Section 3 of the Excise Act. For physical
control system also invoice has to be raised once the removal demand form has been approved for
the goods being removed. For the duty chargeable on the goods being imported, the duty shall be
levied at the port from where the goods are being imported in to Nepal.
The producer, importer or other person who have the responsibility for the payment of the duty as
per the Act, should make the payment of duty either on advance or within 25th calendar days of
the immediate next month on which the invoice was raised depending on the type of goods being
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removed as explained above. In case of import of goods the duty should be paid while the goods
are being cleared from custom. For the excisable services import the payment will have to be
made as prescribed by Inland Revenue Department. Section 4, 4(kha) and the Rule 6 has the
provisions related to levy and collection of duty as mentioned above.
7.
a) What are the documents to be submitted in the customs while goods are to be
imported from India against the payment of convertible foreign exchange? 5
b) Does custom duty get levied if re-import is done for exported goods? 5
Answer a)
The documents are:
• Declaration Form
• LC/ T.T/ Draft
• ARE 1 Form of Indian Excise Dept.
• Document of Insurance
• Packing List
• Bill of Export
• Certificate of VAT Registration
• Certificate of Registration of firm or company
• Certificate of Industry Registration in case of Industry
• In case of requirement of permission of certain institution for import of particular goods,
such permission of the concerned institution
• TA and COP documents for the import of vehicle
• Bi. Bi. Ni. Form 4
• Appointment letter of customs agent in case of appointed agent.
b) As per section 6 of customs act, duty is levied in event of re-import of exported goods if:
1. Any person re-imports any goods exported from Nepal after having been manufactured or
finished in Nepal, such goods shall be subject to such duty as is chargeable on the import of
the goods of similar kind or to the same value, which have been manufactured or finished in
foreign country.
2. Notwithstanding anything contained in (1), no customs duty shall be charged on the goods
which have been returned back due to the following reasons and with following conditions:
a. Having been exported through parcel by post but could not be delivered to the concerned
person and thus returned back, or
b. Having been returned back because the concerned person has refused to take delivery after
clearance made by the customs officer or after having arrived abroad or
c. Having been returned back because of being unable to meet standard quality due to an
accident or natural calamity.
Where the raw materials and subsidiary raw materials of the goods returned back pursuant to (1)
were imported without paying duty, the duty chargeable on the quantity of the raw materials or
subsidiary raw materials used in such goods shall also be recovered.
8.
a) State whether the following statements are true or false with justification or other
wise and quoting the relevant provisions of relevant Act. (4×2=8)
i) Excise registration once taken shall not be renewed every year.
ii) Excise duty is not leviable on liquor produced at home.
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iii) VAT is not leviable at the custom point on imported cell phones as the VAT
shall be refunded to them.
iv) The owner of the building who constructed the building at a cost of Rs. 4
lakhs for the purpose of his business paid VAT of Rs. 40,000 on account of
non-submission of VAT bills for purchase of materials and labour under
section 8(3) of the VAT Act. Can the businessman set off this VAT payment
of Rs. 40,000 against his VAT liability on sales he makes when he starts his
business of trading?
b) What are the provisions with regards to collection of VAT on construction of
commercial building/ apartment/ shopping complex? 2
Answer. a)
i) Partially True
Excise license has to be renewed every year only for products which are under physical
control of excise department and for production of bricks, stone crushing, bidi, tobacco,
khaini, paan masala,Gutkha, khandsari and import of molasses and jaggery (gund) requires
license renewal. Other industries on self removal system do not require renewal of license
every year once the license is taken. Provisions relating to license and its renewal are given in
Sec. 9 of Excise Duty Act, 2058
ii) True
Liquor distilled at home for own consumption or for use for guests in home celebrations do not
require any license. But liquor distilled for sale will require license to be taken.
iii) False
Vat has to be paid at the time of import at the custom point and deduction from VAT payable
on sale is allowed on the basis of cell phones sold to VAT registered persons only. Cell phone
sold to non-VAT registered persons is not entitled to any concession. As per Group 11 of
schedule 1 of VAT Act, 60% of VAT paid at custom point by cellphone importer shall be
refunded as per specified procedure, if the evidence of such cellphones sold to VAT registered
persons is provided.
iv) False
VAT paid under sec. 8(3) is not listed under sec. 17 (5kha) for set off. Hence, such VAT paid
on construction is not allowable for set off from the VAT liability on account of sales he
makes.
b) As per section 8 (3) of the VAT Act, VAT shall be collected from the owner of the commercial
Building/Apartment/Shopping Complex or similar other structure as prescribed by the
Department for business purpose having value more than 50 lacs, though the construction is not
done by Registered Person.
Commercial Purpose for the same includes sales of building, apartments, shopping complex and
any other structure as specified by department exclusively constructed for sales purpose or shown
as current and fixed assets for income generating activities.
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Advanced Audit & Assurance
Suggested Answer
Total No. of Questions - 6 Total No. of Printed Pages -12

Marks
Attempt all questions.
1. Comment and give your views with reasons on each of the following cases, giving
consideration to Nepal Accounting Standards, Nepal Standards on Auditing and Code
of Ethics: (4×5=20)
a) While verifying the employees’ records in a company, it was found that a major
portion of the labour employed was child labour. On questioning the
management, the statutory auditor was told that it was outside his scope of the
financial audit to look into the compliance with other laws.
b) Mr. Prastrut, a Chartered Accountant was invited by the Bankers Association of

Nepal, to present a paper in a symposium on the issues facing Nepalese Banking
Industry. During the course of his presentation he shared some of the vital
information of his client’s business under the impression that it will help the
Industry to cope with present problems faced by the industry.
c) XYZ Ltd. filed a law suit against ABC Ltd. for Rs.200 millions. The management
of ABC Ltd. felt that the suit was without merit, so ABC Ltd. merely disclosed
the existence of the law suit in the notes accompanying the financial statements.
d) During the financial year 2071-72, a company started research work with a view
to the eventual development of a new product. By 31stAshadh 2072, it had spent
Rs.1.6 million on this project. The company has a past history of being
particularly successful in bringing similar projects to a profitable conclusion. As a
consequence the assistant has treated the expenditure to date on this project as an
asset in the statement of financial position.
Answer of Q.No.1.(a)
Auditor’s responsibility for consideration of other Laws and Regulations:

 As per NSA 250 “consideration of Laws and Regulation in an Audit of financial
statements” requires the auditor to obtain sufficient appropriate audit evidence
regarding the compliance with the provisions of those laws and regulations
generally recognized to have a direct impact on the determination of material
amounts and disclosures in the financial statements including tax and labour law.
 For the other laws, the auditor’s responsibility is limited to undertake specified
audit procedures to help identify non-compliance with those laws and regulations
that may have a material effect on the financial statements.
 Non compliance with other laws and regulations may result in fines, litigation or
other consequences for the entity, the cost of which may need to be provided for.
AOL P.T.O.
(2)
In the instant case, major portion of the labour employed was child labour.
Auditor should ensure the disclosure of above fact and provision of the cost of
fines, litigation or other consequences. In case auditor concludes that non-
compliance may have a material effect on financial statements, he should modify
his opinion accordingly
Answer of Q.No.1.(b)
As per Section 140 of Part A of the Code of Ethics, the principle of confidentiality
imposes an obligation on all professional accountants to maintain confidentiality
of information acquired as a result of professional or business relationship unless
there is legal or professional right or duty to disclose.
As per this section, the exceptions where confidential information can be
disclosed are:
 Disclosure is permitted by law and is authorized by the client or the
employer,
 There is a professional duty or right to disclose, when not prohibited by
law,
 To comply with the quality review of a member body or professional
body,
 To respond to an enquiry or investigation by a member body or regulatory
body,
 To protect the professional interests of a professional accountant in legal
proceedings, or
 To comply with technical standards and ethics requirements.
The Code of Ethics further clarifies that such a duty continues even after
completion of the assignment.
In the given case, Mr. Prastrut has disclosed vital information of his client’s
business without the consent of the client under the impression that it will help
theindustry. Thus it is a professional misconduct.
Answer of Q.No.1.(c)
As per NAS 37 "Provisions, Contingent Liabilities and Contingent Assets", a

provision shall be recognized when
a. An entity has present obligation (legal or constructive) as a result of past
event,
b. It is probable that an outflow of resources embodying economic benefits will
be required to settle the obligation , and
c. A reliable estimate can be made of the amount of the obligation.
NAS 37 further provides that an entity shall not recognize contingent liability but
shall disclose it unless the possibility of an outflow of resources embodying economic
benefits is remote.
NSA 570 “Going Concern” requires that the auditor shall consider whether there are
events or conditions that may cast significant doubt on the entity’s ability to continue
as a going concern. Pending legal or regulatory proceedings against the entity that
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may, if successful, result in claims that the entity is unlikely to be able to satisfy is
one of the example of such event.
When the auditor concludes that the use of the going concern assumption is
appropriate in the circumstances but a materiality uncertainty exists, the auditor shall
determine whether the financial statements adequately describe the principal events or
conditions that may cast significant doubt on the entity’s ability to continue as a going
concern and management’s plan to deal with these events or conditions.
In the given case, as there is no present obligation to pay, no provision shall be made.
However the auditor shall evaluate the source data on which basis the opinion is
formed and come to the conclusion whether to disclose it as a contingent liability and
evaluate the appropriateness of use of going concern assumption.
Answer of Q.No.1.(d)
The work on the new product is research with the aim of eventually moving into
development work. NAS 38 requires all research expenditure to be expensed as
incurred. In the research phase, an entity cannot demonstrate that an intangible asset
exists that will generate probable future economic benefits.Therefore such expenses
are recognized as expense when it is incurred. Even at the development stage, it will
not be possible to capitalize the development costs unless they satisfy the NAS 38
criteria. When the criteria are satisfied and development costs can be capitalized, it
will still not be possible to go back and capitalize the research costs. The company’s
past successful history makes no difference to this. So, the treatment given is not
correct. The amount should be charged to statement of profit or loss.
2. Answer the following: (2×8=16)
a) A statutory auditor is required to follow the procedures so as to identify the risk of
material misstatement associated with related parties. What are the auditor’s
duties when he identifies related parties or related party transactions that
management has not previously disclosed to him?
b) Explain in brief the behavioral aspects encountered in the management audit and
state the ways to solve them.
NSA-550 “Related Parties” requires the auditor to perform procedures so as to

identify the risk of material misstatement associated with related parties. Accordingly
auditor should perform the following:
a. Inquire the management regarding
 Identify of entity’s Related Party, changes from prior period
 Nature of relationships between entity and Related Party.
 Type and purpose of transactions with Related Party during the period.
b. The auditor shall remain alert, when inspecting records or documents, for
arrangements or other information that may indicate, the existence of Related
party relationships or transactions that management has not previously identified
or disclosed to the auditor.
c. If the auditor identifies related parties or significant related party transactions that
management has not previously identified or disclosed to the auditor, the auditor
shall:
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i. Promptly communicate the relevant information to the other members of the
engagement team;
ii. Request management to identify all transactions with the newly identified
related parties for the auditor’s further evaluation; and Inquire as to why the
entity’s controls over related party relationships and transactions failed to
enable the identification or disclosure of the related party relationships and
transactions;
iii. Perform appropriate substantive audit procedures relating to such newly
identified related parties or significant related parties transactions;
iv. Reconsider the risk that other related parties or significant related party
transactions may exist that management has not previously identified or
disclosed to the auditor, and perform additional audit procedures as necessary;
and
v. If the non-disclosure by the management appears intentional (and therefore
indicative of a risk of material misstatement due to fraud), evaluate the
implications for the audit.
Financial auditors deal mainly with figures. Management auditors deal mainly with
people. There are many causes for behavioral problems arising in the review
function of management audit. Particularly, when management auditor performs
comprehensive audit of operations, they cannot be as well informed about such
operations as a financial auditor in a financial department. Operating process may
be unfamiliar and complex. The operating people may be speaking a language and
using terms that are foreign to the auditor's experience. The nature and causes of
behavioral problems that the management auditor is likely to face in the discharge
of the review function that is expected of him and possible solutions to overcome
these problems are discussed below:-
(i)Staff/line conflict: management auditors are staff people while the members of
other departments are line people. Management auditors tend to discount the
difficulties the line staff may face. If called on to act on the ideas of management
auditors. Management auditors are specialists in their field and they may think
their approach and solutions are the only answers.
(ii)Control: the management auditor is expected to evaluate the effectiveness of
controls. There is an instinctive reaction from the auditee that the report of the
auditor may affect them. There is fear that the action taken based on the
management audit report will affect the line people. It breeds antagonism. the
causes are as under:
(a)Fear of criticism stemming from adverse audit findings.
(b)Fear of change in day to day working habit because of changes resulting
from audit recommendations.
(c)Punitive action by superior prompted by reported deficiencies.
(d)Insensitive audit style
(e)Hostile audit style.
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Solution to behavioral problems: the following steps may be taken to
overcome the aforesaid problems-
a. To demonstrate that audit is part of an overall program of review for
protective and constructive benefit.
b. To demonstrate the objective of review is to provide maximum service in
all feasible managerial dimensions.
c. To demonstrate the review will be with minimum interference with regular
operation.
d. The responsible officers will be involved in the process of review of the
findings and recommendations before the audit report is formally released. It
is essential to create an atmosphere of trust and friendliness so that audit
reports will be understood in their proper perspective.
Finally, it needs hardly any emphasis that there should be right management culture,
enlightened auditees and auditors of the right caliber. May be to expect a
combination at all times of all the three is asking for the impossible. But, a concerted
effort by the management, auditors and auditees to achieve a more acceptable
climate would go a long way to achieve the goal.
3. Comment and give your views wih reasons on each of the following cases: (4×4=16)
a) Mr. Pramesh who passed his CA examination of ICAN on 18th Bhadra, 2072
started his practice from Ashwin 15, 2072. On 16th Ashwin 2072, one female
candidate approached him for articleship. In addition to monthly stipend, Mr.
Pramesh also offered her 1 % profits of his CA firm. She agreed to take both 1 %
profits of the CA firm and stipend as per the rate prescribed by the ICAN. The
Institute of Chartered Accountants of Nepal sent a letter to Mr. Pramesh objecting
the payment of 1 % profits. Mr. Pramesh replied to the ICAN stating that he is
paying 1 % profits of his firm over and above the stipend to help the articled clerk
as the financial position of the articled clerk is very weak.
b) A Chartered Accountant in practice has been suspended from practice for a period
of 6 months and he had surrendered his Certificate of Practice for the said period.
During the said period of suspension, though the member did not undertake any
audit assignments, he undertook representation assignments for income tax
whereby he would appear before the tax authorities in his capacity as a Chartered
Accountant.
c) Big Ltd. has borrowed Rs. 30 lakhs from Bank during the Financial Year 2071-
72. The borrowings are used to invest in shares of Small Ltd., a subsidiary
company of Big Ltd., which is implementing a new project estimated to cost Rs.
50 lakhs. As on 31stAshadh 2072, since the said project was not complete, the
directors of Big Ltd. resolved to capitalize the interest accruing on borrowings
amounting to Rs. 4 lakhs and add it to the cost of investments.
d) During the course of audit of D Co. Ltd. you as an auditor have observed that
inter corporate deposit of Rs 50 lakhs has been overdue. The D Co. Ltd. has
disclosed this in the notes to accounts stating that Rs. 50 lakhs is overdue from
XYZ Co. Ltd. and the said company is in the process of liquidation. The
management is taking steps to appoint the liquidator.
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As per the provision of section 34 of the Nepal Chartered Accountants Act 1997,
No member shall share or distribute as profit the auditing fees or remuneration
with any person other than a member of the institute and shall not pay any
commission, brokerage etc. out of the professional fees earned to any person or
member.
In view of the above provision, the objections of the Institute of Chartered
Accountants of Nepal, as given in the case, are correct and reply of Mr. Pramesh,
stating that he is paying 1 % profits of his firm over and above the stipend to help
the articled clerk as the position of the articled clerk is weak is not tenable.
Hence, Mr. Pramesh is guilty of professional misconduct.
In the instant case, a chartered accountant not holding certificate of practice

cannot take up any professional work because it would amount to violation of the
relevant provisions of the Nepal Chartered Accountants Act, 1997. In case a
member is suspended and is not holding Certificate of Practice, he cannot in any
other capacity take up any practice separable from his capacity to practices as a
member of the Institute. This is because once a member becomes a member of the
Institute; he is bound by the provisions of the Chartered Accountants Act, 1997
and its Regulations. If he appears before the income tax authorities, he is only
doing so in his capacity as a chartered accountant and a member of the Institute.
Having bound himself by the said Act and its Regulations made there under, he
cannot then set the Regulations at naught by contending that even though he
continues to be a member and has been punished by suspension, he would be
entitled to practice in some other capacity. Thus in the instant case, a chartered
accountant would not be allowed to represent before the income tax authorities for
the period he remains suspended
The cost of investment includes acquisition charges such as brokerage, fees and
duties. In the instant case, Big Ltd. has used borrowed funds for purchasing shares
of its subsidiary company Small Ltd. Rs. 4 lakhs interest payable by Big Ltd. to
Bank cannot be called as cost of investment. The NAS 23 on “Borrowing Costs”
also does not consider investment in shares as qualifying asset that can enable a
company to add the borrowing costs to investments. In the instant case, the
statutory auditor would qualify his report by stating that the borrowing costs have
been wrongly added to the cost of investments rather than charging them to profit
and loss account. The effect of the same on the profits for the year would also
have to be mentioned.
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As per NAS 10 “Events after reporting period” adjustments to financial
statements are required for events occurring between the end of reporting period
and the date when financial statements are authorized for issue that provide
additional information materially affecting the determination of the amounts
relating to conditions existing at the end of reporting period. If the events are only
indicative, then mere disclosure will be sufficient.
In the instant case, it appears from the note that the overdue of outstanding inter
corporate deposit may not be realizable in full. The company is in the process of
liquidation, makes it clear that at the end of reporting period, the amount of
deposit is not safe and is not likely to be realized. Therefore, as per NAS 10,
necessary adjustment is required to be made in the financial statements.
a) While commencing the statutory audit of ABC Limited, you as an auditor
undertook the risk assessment and found that the detection risk relating to certain
class of transactions cannot be reduced to acceptable level. How would you deal
with the situation?
b) The management of X Ltd. has prepared a summary financial statements to be
provided to its investors. Consequently, the company wants to appoint you for
conducting audit of such summary financial statements. Mention the factors you
would consider before accepting such engagement to report on summary
financial statements.
c) Mr. Shyam was appointed as the auditor of SagarmathaTrading Limited and
intends to apply the concept of materiality for the financial statements as a
whole. Guide him as to the factors that may affect the identification of an
appropriate benchmark for this purpose.
d) What are the professional obligations of an auditor who has resigned from the
audit before completion of his term due to non-co-operation of the Management
in completing certain audit procedures?
NSA 315 “identifying and Assessing the risk of material misstatement through
understanding the entity and its environment” and NSA 330 “ The Auditor’s
Responses to Assessed Risks” establishes standards on the procedures to be
followed to obtain an understanding of the accounting and internal control
systems and on audit risk and its components.
NSA 315 and NSA 330 require that the auditor should use professional judgment
to assess risk of material misstatement and to design audit procedures to ensure
that it is reduced to an acceptably low level.
Risk of material misstatements comprises of inherent risk and control risk. “
detection Risk” is the risk that an auditor’s substantive procedure will not detect a
misstatement that exists in an account balance or class of transactions that could
be material.
The higher the risk of material misstatement, the more audit evidence the auditor
should obtain from the performance of substantive procedure. When both inherent
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and control risks are assessed as high, the auditor needs to consider whether
substantive procedures can provide sufficient appropriate evidence to reduce
detection risk , therefore audit risk, to an acceptably low level.
The auditor should use his professional judgment to assess audit risk and to
design audit procedures to ensure that it is reduced to an acceptably low level. If
itcannot be reduced to an acceptable level, the auditor should express a qualified
opinion or disclaimer of opinion as may be appropriate.
As per NSA 810 “engagement to report on summary Financial statements”, before

accepting an engagement to report on summary financial statement an auditor shall –
(i) Determine whether the applied criteria are acceptable.
(ii) Obtained the agreement of the management that it acknowledges and
understand its responsibility
a) For the preparation of summary financial statements in accordance with the
applied criteria
b) To make the audited financial statements available to the intended users of the
summary financial statements without undue difficulty
c) To include the auditor’s report on the summary financial statements in any
document that contains the summary financial statements and that indicates
that the auditor has reported on them.
Agree with the management the form of opinion to be expressed on the summary
financial statements.
NSA 320 “Audit Materiality” prescribes the use of benchmarks in determining

materiality for the financial statements as a whole. Accordingly determining
materiality involves the exercise of professional judgment. A percentage is often
applied to a chosen benchmark as a starting point in determining materiality for
the financial statement s as a whole. Factor that may affect the identification of an
appropriate benchmark include the following:
i. the elements of the financial statements (for example, assets, liabilities, equity,
revenue, expenses);
ii. whether there are items on which the attention of the users of the particular
entity’s financial statements tends to be focused (for example, for the purpose
of evaluating financial performance users may tend to focus on profit, revenue
or net assets);
iii. the nature of the entity, where the entity is at in its life cycle, and the industry
and economic environment in which the entity operates;
iv. the entity’s ownership structure and the way it is financed (for example, if the
entity is financed solely by debt rather than equity, user may put more
emphasis on assets, and claims on them, than on the equity’s earning); and
v. the relative volatility on the benchmark
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NSA 701 “Modifications to the Independent Auditor’s Report” provides the
consequence of an inability to obtain sufficient appropriate audit evidence due to
a management - imposed limitation after the auditor has accepted the engagement.
The practicability of resigning from the audit may depend upon the stage of
completion of the engagement at the time that management imposes the scope
limitation.
When the auditor concludes that resignation from the audit is necessary because
of a scope limitation, there may be a professional, regulatory or legal requirement
for the auditor to communicate matters relating to the resignation from the
engagement to regulators or the entity’s owners.
As per NSA 210 “Terms of Audit Engagements”, If the auditor is unable to agree
to a change of the engagement and is not permitted to continue the original
engagement, the auditor should withdraw and consider whether there is any
obligation , either contractual or otherwise , to report to board of directors or
shareholders, the circumstances necessitating such withdrawl.
a) What are the purposes of cost audit?
b) Mention any four information which assists the auditor in accepting and
continuing of relationship with the client as per NSA 220.
c) How would you vouch/verify assets acquired on hire purchase?
d) What are the areas excluded from the scopes of peer reviewer?
The undernoted circumstances may warrant the introduction of cost audit in an entity:
i. Price fixation: The need for fixation of retention prices in the case of materials of
national importance, like steel, cement etc. may be useful in knowing the true cost
of production.
ii. Cost variation within the industry: Where the cost of production varies
significantly from unit to unit in the same industry, cost audit may be necessary to
find the reasons for such differences.
iii. Inefficient management: Where a factory is run inefficiently and uneconomically,
institution of cost audit may be necessary. It may be particularly useful for the
government before it take over any unit.
iv. Tax-assessment: Where a duty or tax is levied on products based on cost of
production, the levying authorities may ask for cost audit to determine the correct
cost of production.
v. Trade disputes: Cost audit may be useful in settling trade disputes about claim for
higher wages, bonus, etc.
As per NSA 220” quality control for audits of historical financial information” the
information which assists the auditor in accepting and continuing of relationship with
the client may include the following:
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 The integrity of the principal owners, key management and those charged with
governance of the entity;
 Competency of the engagement team to perform the audit engagement and
availability of necessary capabilities, including time and resources;
 Compliance with relevant ethical requirements by firm and the engagement
team; and
 Significant matters that have arisen during the current or previous audit
engagement, and their implications for continuing the relationship.
(i) Examine the Board’s minutes book approving the purchase on Hire Purchase
terms
(ii) Examine the Hire Purchase Agreement carefully & note the description of the
machinery and cost of machinery, Hire Purchase charges, terms of payment
andrate of purchase
(iii) Assets acquired under Hire Purchase system should be recorded at full cash
value with corresponding liability of the same amount. In case cash value is
not readily available, it should be calculated presuming an appropriate rate of
interest
(iv) Hire Purchased assets are shown in Balance Sheet with appropriate narration
to indicate that the enterprise does not have full ownership thereof. The
interest payable along with each installment, whether separately or included
therein, should be debited to the interest account, and not to the asset account
Thearea excluded from the scope of peer reviewer are:

i) Management consultancy engagements;
ii) Representation before various authorities.
iii) Engagements to prepare tax returns or advising clients in taxation matters.
iv) Engagements for the compilation of financial statements.
v) Engagement solely to assist the client in preparing, compiling or collating
information other than financial statements.
vi) Testifying as an expert witness.
vii) Providing expert opinion on points of principle, such as Accounting Standards
or the applicability of certain laws, on the basis of facts provided by the client
viii) Engagement for due diligence.
6. Write short notes on the following: (3×4=12)

a) Internal check system
b) Examination in depth
c) Cut Off arrangements
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Internal check system implies organization of the overall system of book keeping
and arrangement of staff duties in such a way that no one person can carry
through a transaction and record every aspect thereof. It is a part of overall control
system and operates basically as a built-in-device as far as organization and job
allocation aspects of the controls are concerned. The system provides existence of
checks on the day to day transactions which operates continuously as part of the
routine system whereby the work of each person is either proved independently or
is made complimentary to the work of another.
Examination in Depth implies examination of a few selected transactions from

thebeginning to the end through the entire flow of the transaction, i.e., from initiation
to thecompletion of the transaction by receipt of payment of cash and delivery or
receipt of thegoods. This examination consists of studying the recording of
transactions at the variousstages through which they have passed. At each stage,
relevant records and authoritiesare examined; it is also judged whether the person
who has exercised the authority in relation to the transactions is fit to do so in terms
of the prescribed procedure. Forexample, if payment to a creditor is to be verified “in
depth”, it would be necessary to examine the following documents:
 The invoice and statement of account received from the supplier.
 The entry in the stock record showing that the goods were received.
 The Goods Received Note and Inspection Certificate showing that the goods
onreceipt were verified and inspected.
 The copy of the original order and authority showing that the goods in fact
were ordered by an authority which was competent to do so.
Accounting is a continuous process because the business never comes to halt. It is,
therefore, necessary that transactions of one period would be separated from those in
the ensuing period so that the results of the working of each period can be correctly
ascertained. The arrangement that is made for this purpose is technically known as
“cut-off arrangement”. It essentially forms part of the internal control system of the
organization. Accounts, other than sales, purchase and stock are not usually affected
by the continuity of the business and therefore, this arrangement is generally applied
only to sales, purchase and stock. The auditor satisfies by examination and test-
checks that the cut-off procedures are adequately followed and ensure that:
 Goods purchased, property in which passed on to the client, have in fact been
included in the inventories and that the liability has been provided for in case
of credit purchase.
 Goods sold have been excluded from the inventories and credit has been
taken for the sales. If the value of sales is to be received, the concerned party
has been debited.
The auditor may examine a sample of documents, evidencing the movement of stock
into and out of stores, including documents pertaining to period shortly before and
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after the cut-off date and check whether stocks represented by those documents were
included or excluded as appropriate during stock taking for perfect and correct
presentation in the financial statements.
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Advanced Taxation
Suggested Answer
Marks
1. M/s Good Products Manufacturing Industry Ltd., a resident company, has furnished you the
following information with respect to the income year 2071/2072:

Opening Stock 15,000 Sales 1,550,000
Purchase of raw 650,000 Gain on sale of business 60,000
materials assets
Freight Inwards 40,000 Prize from display 25,000
competition
Direct wages 80,000 Miscellaneous Income 10,000
Manufacturing 150,000 Income from natural 120,000
Expenses resources
Administration 260,000 Bad debts recovered 28,000
Expenses
Interest Expenses 300,000 Interest received 5,000
Repair Expenses 42,000 Closing stock 10,000
Depreciation 212,000 Net loss 680,000
Entertainment 12,000
Expenses
Miscellaneous 49,000
Expenses
Audit Fee 40,000
Pollution control cost 280,000
Advertisement 13,000
Donation 145,000
Research and 200,000
Development Cost
a) Purchase includes Rs. 60,000 incurred for purchase of office equipment in Chaitra 2071.
b) Administration expenses include a cash payment of Rs. 75,000 to Approved Retirement
Fund towards retirement contribution.
c) Opening WDV of assets are : Building Rs. 1,500,000 : Plant & Machinery Rs. 350,000 :
Office Equipment Rs. 80,000.
WTQ P.T.O.
(2)
d) Repair expenses include Rs. 20,000 of building and Rs. 22,000 of office equipment.
e) Donation was made for conservation and promotion of religious heritage in Nepal with
the prior approval of IRD.
f) Out of bad debts recovered, 20% was not allowed previously.
g) Interest was paid to owner entity. The company’s ownership lies with Non-resident
person 20 percent and with its associated person 10 percent.
h) Expenses related to natural resource amounting to Rs. 2,000 was not recorded in above
statement.
i) No advance tax has been deposited during the year and advance tax return was also not
filed.
j) Extension for filing Income Tax return has been taken upto Poush end 2072 but the
return was filed on Magh 09, 2072. Number of days in a month is 30.
k) During the course of assessment, the assessing officer has assessed additional tax
liability of Rs. 1,000,000 out of which Rs. 100,000 is undisputed and Rs. 900,000 is
disputed. Hence, the company wants to go for administrative review of the disputed tax
liability. The assessing officer wants to levy fines as per section 120(ka) of the income
tax act.
l) During the course of assessment, the assessing officer found that the company has
deducted Rs. 20,000 as withholding tax in the month of Shrawan 2071. Although the
withheld amount was deposited within Bhadra 25, 2071, the statement of the same was
submitted only on Ashwin 20, 2071.
You are required to calculate the Taxable Income, Tax Liability and Fines as per section
117 along with Interest as per section 119. Give your answer with relevant working
notes and explanations. Ignore interest under section 118 of the act. Also calculate the
amount to be deposited for administrative review and fines as per section 120(Ka) of
the act. 15
Answer:
Rs. Rs.
Income from Business
Sales 1,550,000
Gain on sale of business assets 60,000
Prize from display competition 25,000
Miscellaneous Income 10,000
Bad debts recovered (80%) 22,400 1,667,400
Less: Allowable Deductions
Cost of sales (w.n. 1) 865,000
Administration expenses 260,000
Depreciation (w.n. 2) 210,000
Repair Expenses (w.n. 3) 28,400
Entertainment expenses 12,000
Miscellaneous expenses 49,000
Audit Fee 40,000
Advertisement 13,000 (1,477,400)
Assessable Income from business before PCC, R&D cost and
Interest expenses 190,000
Less:
Interest Expenses (w.n. 4) 159,000
WTQ P.T.O.
(3)
Assessable Income before PCC and R&D cost 31,000
Less: Pollution control cost (w.n. 5) 15,500
Less: R & D Cost (w.n.5) 15,500
Assessable Income from Business 0
Income from Investment:
Interest received 5,000
Income from natural resource 120,000 125,000
Less:
Expenses related to natural resource (2,000)
Assessable Income from Investment 123,000
Total assessable income 123,000
Less:
Donation (w.n. 6) 12,300
Taxable Income 110,700
Tax Liability @20% 22,140
Calculation of Fines as per section 117
1. Fines for not filing of advance tax return 2,000
2. Fines for late filing of tax return
(1,667,400 Plus 125,000 i.e. Rs. 1,792,400 481
*0.1%*98/365 or Rs. 100 per Month whichever is higher)
3. Penalty for not submitting TDS statement/ return: As per section 117(3) of the act, if TDS return
is not submitted within the time frame as per section 90(1) of the act, fine shall be levied at the
rate of 1.5 percent per annum treating a part of the month as a month. In this case, for 2
months fines shall be levied as under:
Rs. 20,000 * 1.5% *2/12 = Rs. 50
4. Interest as per section 119
22,140 * 15% *4/12 = Rs. 1,107
5. Calculation of amount to be deposited for Administrative Review:
As per section 115(6) of the act, for administrative review, total undisputed tax amount and 1/3
of disputed amount has to be deposited. It means Rs. 400,000 has to be deposited. (Rs. 100,000
plus 1/3 of Rs.900,000 i.e. Rs. 300,000.)
6. Calculation of Fines as per section 120(Ka) of the act: The assessing officer wants to levy fines as per
section 120(ka) of the income tax act. The provision states that in case of erroneous statements
without willful act, 50% of tax evaded shall be levied. Hence, in this case, Rs. 500,000 shall be paid as
fine.
Working Notes:
1. Cost of sales : Opening stock + Purchases + Freight + Direct wages + Manufacturing Expenses –
Closing Stock
= 15,000 + (650,000 – 60,000) + 40,000 + 80,000 +150,000 - 10,000
= 865,000
2. Calculation of Depreciation:
Block A Block B Block D
Opening WDV (Rs.) 1,500,000 80,000 350,000
WTQ P.T.O.
(4)
Addition (60,000 *2/3) (Rs) 40,000
Depreciation Basis(Rs) 1,500,000 120,000 350,000
Depreciation Rate 5% 25% 15%
Depreciation Amount (Rs.) 75,000 30,000 52,500
Additional Depreciation for
Manufacturing Industry (1/3) (Rs) 25,000 10,000 17,500
Total Allowable Depreciation (Rs) 100,000 40,000 70,000
Total Depreciation for all Blocks (Rs) 210,000
3. Calculation of Allowable Repair:

Block A Block B Block D
(Rs.) (Rs.) (Rs.)
Depreciation Basis 1,500,000 120,000 350,000
7% Limit 105,000 8,400 24,500
Actual Expenses 20,000 22,000
Allowable 20,000 8,400
Total Allowable Rs. 28,400
4. Calculation of Interest
Interest was paid to owner entity. The company’s ownership lies with Non - resident person 20
percent and with associated person 10 percent. As per section 14(2) of the act, an entity is
deemed to be resident entity controlled by exempt organization for any income year, in case the
entity is resident and specified entities including non resident persons and/ or its associated
persons hold at least 25% shares at any time during the income year. In case a resident entity
controlled by exempt organization pays interest to controlling entity, then the interest allowable
is the lower of actual interest paid or 50% of entity’s adjusted taxable income for the year. ATI
shall be calculated without including the interest income and the interest expense, Pollution
control cost, research and development expense and donation.
Rs.
Assessable Income from business before PCC, R&D cost and
Interest expenses 190,000
Assessable Income from Investment before Interest Income 118,000
ATI 308,000
Allowable Interest expenses to controlling entity
Interest IncomeRs. 5,000
50% of ATI Rs. 154,000 159,000.
Since the calculated amount is lower than the interest expenses of Rs. 300,000, Rs. 159,000 is
allowable.
5. Calculation of Pollution Control Cost and R& D Cost:
ATI = 190,000 – 159,000 = 31,000
50% of 31,000 = Rs. 15,500 or actual whichever is lower is allowable.
WTQ P.T.O.
(5)
6. Donation: As donation was made for conservation and promotion of religious heritage in Nepal
with the prior approval of IRD, as per section 12 ka of the act, limit of claim is the minimum of
actual expenditure or 10% of the assessable income or Rs. 10 Lacs. Here, 10% of assessable
income is Rs. 12,300 which is less than the actual expenditure of Rs. 145,000. Hence, Rs. 12,300
is allowed for deduction.
7. As per section 21(2) of the act, if a person, having annual turnover of more than Rs. 20 lacs,
makes any payment by cash for amount more than Rs. 50,000 at a time, then the expenditure is
not deductible. But the exception is for retirement contributions, hence it is allowable.
2.
a) M/s Nepal Creative Company Limited has been operating approved retirement fund for its
employees. The fund has been approved by Inland Revenue Department on Ashadh end 2070.
The particulars related to the retirement fund are as follows:
Retirement fund contribution in 2070/71 Rs. 2,500,000
Investment Income in 2070/71 Rs. 150,000
Retirement fund contribution in 2071/72 Rs. 3,000,000
Investment Income in 2071/72 Rs. 400,000
Retirement payments in 2070/71 Rs. 1,500,000
Retirement Payments in 2071/72 Rs. 1,400,000
Fund Operating Expenses in 2070/71 Rs. 100,000
Fund Operating Expenses in 2071/72 Rs. 110,000
IRD has cancelled the approved status of the same fund from Jestha end 2072. The
management of the fund has the contention that income of the retirement fund is not
taxable. But the tax officer has the contention that this is taxable transaction as per the
provisions of the act. Advise the Company about the tax liability, if any. 5
b) Global Construction Limited purchased an excavator from ABC Earthmovers Limited on finance
lease. As per the terms of the lease the construction company is required to pay Rs. 5 lakhs for 5
years at the end of each year and additionally at the end of 5th year it is required to pay Rs. 30
lakhs. The current market price of the equipment is Rs. 35 lakhs and the prevailing interest rate
is 12%. Mention the tax treatment for the deal and calculate the amount of interest allowed to
be deducted in each of the financial years. 5
c) Droll Company Limited had purchased a plot of land for Rs. 30 Lakhs and shares of Nepal Bank
for Rs. 21 lakhs at the rate of Rs. 210 per shares during income year 2061/62. Now, being in dire
need of funds, the company wants to sell these assets. It is expected that the plot of land will
realise Rs. 5 Crores and the shares can be sold at Rs. 250 per share. Explain the tax implication of
the above sales under the provisions of the Income Tax Act, 2058. 5
Answer:
a) As per section 64(3) of the act, in case the approval of an approved retirement fund is
withdrawn by IRD, it has to pay income tax at the rate of 25% of the amount calculated as
follows:
1. Contributions received by the fund from the day when the approval was granted to the day
when the approval is withdrawn plus
WTQ P.T.O.
(6)
2. Any other amount that would be included in the income if the approval was not granted
less
3. Retirement payments made from the day when the approval was granted to the day when
the approval was withdrawn.
Hence, tax liability of the company would be as follows:
Particulars Amount ( Rs.)
Total contribution received (2,500,000 + 3,000,000) 5,500,000
Investment income (150,000 +400,000) 550,000
Less: Retirement Payments (1,500,000 +1,400,000) (2,900,000)
Taxable Income 3,150,000
Tax Liability @25% 787,500
b) This is a case of finance lease and it requires splitting of the interest and principal from the
payment as per Section 32. Expenses on account of depreciation and interest are to be claimed
accordingly. Global Construction Limited is allowed to claim the depreciation from very first year
as per Sec 32(7). Interest on this lease is to be claimed as per below calculation:
Current Market Price (Rs) 3,500,000
Interest rate 12%
Payment term Rs. 500,000 each year and Rs. 3,000,000 at the end of 5 yrs.
Year Principal(Rs) Payment(Rs) Interest(Rs) Principal paid(Rs) Balance Principal(Rs)

1 3,500,000 500,000 420,000 80,000 3,420,000
2 3,420,000 500,000 410,400 89,600 3,330,400
3 3,330,400 500,000 399,648 100,352 3,230,048
4 3,230,048 500,000 387,606 112,394 3,117,654
5 3,117,654 3,500,000 382,346 3,117,654 -
Total 5,500,000 2,000,000 3,500,000
c) Gain on sale of land : Rs.Crores

Sale Price 5
Cost 0.3
Gain on sale of land 4.7
Gain on sale of Nepal bank's share
Sale Price ( 10,000 shares at Rs 250) 0.25
Cost 0.21
Gross Gain 0.04
Broker fee at 1% 0.0025
Gain on sale of shares 0.0375
Total Gain 4.7375
Tax Rate 25%
Tax Amount 1.184375
Less: TDS on sale of shares@10% 0.00375
Net Tax Payable 1.180625
Note: Nepal Bank's shares are assumed to be listed in Stock Exchange.

WTQ P.T.O.
(7)
3.
a) A tea manufacturing unit in Sindhupalchowk named Kanchanjanga Tea Estate was badly
affected by the devastating earthquake which hit the country on 25th April followed by
12th May along with numerous aftershocks. As a result of the same the entity had to
face huge repair and maintenance expenses for its plant and machinery during the
financial year 2072/73.
Details of Machinery as well as repair expenses are as stated below:
Opening Balance of Block D: Rs. 10,000,000
Addition during the Year (On 21st of January, 2016): Rs. 1,750,000
Sales during the Year (On 18th of April, 2016): Rs. 385,500
Repair & Improvement Expenses Incurred: Rs. 2,500,000
Mr. Gopal, accountant of the entity is confused whether such expenses incurred on
repairs of its plant and machinery will be allowed as a deduction or not. So, as a tax
consultant suggest Mr. Gopal regarding the following:
i) What will be the allowable repair and improvement expenses as per the provisions
of Income Tax Act based on the levied threshold percentile in normal
circumstances? 1.5
ii) Will your answer be the same if we see the above case from the view point of an
earthquake struck country based on various amendments and additions made by
the Government in this regards? 1.5
b) M/s Budhi Ganga Hydropower Ltd. is seeking your advice on various income tax related
matters. As a tax professional, advise the company on the following issues:
i) Is there any exemption and concession in income tax if power generation is done by
the end of Chaitra 2080? Will the exemption differ if the company tries to generate
power using solar or wind?
ii) If hydropower Generation Company is listed in stock exchange, whether the act
offers any concession?
iii) In case of power generating companies, if plant or equipment are replaced during
the year, is there any provision of terminal depreciation?
iv) Whether the loss can be carried forward by the power generating companies?
v) What is the applicable income tax rate for power generating companies?
vi) Is accelerated depreciation is available for power generating companies?
Give your answer by quoting the relevant provisions of the act. 3
c) Mr. Anand Dhakal purchased a house in Chitawan in 2060 BS for Rs. 24 lakhs and
incurred Rs. 1 lakh in registration etc.. After staying for sometime in the house his whole
family went to Australia where he got employment and worked there for 5 years. After
coming back he sold the property at Rs. 45 lakhs. Mention the tax implication on his
property deal. 2
WTQ P.T.O.
(8)
d) M/s Progress Traders purchased following items from abroad through LC and Trust
Receipt Loan and in the process paid the interest as given below. What would be the tax
treatment? 2
i) Purchase of Raw Material: interest paid Rs. 285,000
ii) Purchase of equipment: interest paid Rs. 250,000
Answer:
a)
i) Calculation of allowable repair & maintenance expenses as per the provisions of Income Tax Act,
2058 in normal circumstance is as follows:
Particular Amount Rs) Remarks

Opening Balance of Block D 10,000,000.00
Rs.1,750,000 addition on 21st Janaury
Absorbed Addition 1,166,666.67 2016 (2/3rd Absorbed)
Sales (385,500.00)
Depreciation Basis of Block D 10,781,166.67
Allowable R & M Percentile 7.00% Of Block Depreciation Basis
Allowable R & M Expenses 754,681.67 Out of Rs.2,500,000
In case of normal circumstances only Rs.754,681.67 shall be allowed as expenses out of

Rs.2,500,000 and balancing amount of the same shall be capitalized in the same block D against
which depreciation shall be allowed in the next coming financial year.
ii) But considering the devastating situation which the country felt and based on various
amendments which were released from the ministry to support the aggrieved entities and
personnel our reply or solution in this point shall vary from that quoted in above answer and the
entity shall be allowed 100 % claim of expenses so incurred by it i.e. Rs. 2,500,000 for repair and
Improvement of its Plant and Machinery so damaged by the earthquake.
As per Sec: 16(2)(kha), the limit of 7 % of depreciable base is not applicable on the repair
and improvement expenses incurred for assets located at earthquake affected areas prescribed
by Government of Nepal, in case the person desires to apply this provision this facility shall
be allowed until F/Y: 2073|74.
b)
i) As per section 11(3Gha) of the act, if licensed person or entity commences its operation of
power generation, transmission or distribution latest by end of Chaitra 2080, it shall be
provided a tax holiday of 10 years from the commencement of the production and
transmission and/ or distribution and in addition to that it can avail a tax concession of 50%
of the rate of tax applicable for 5 more years after the expiry of 10 years. These facilities are
also equally available to power generation using solar, wind or genetic materials.
ii) As per section 11(3Chha) of the act, if hydropower Generation, transmission and
distribution network Companies are listed in stock exchange, tax concession is available at
10% of the rate applicable to them.
iii) As per section 19(2) of the act, in case of power generating companies, if during the
year plant or equipment or machinery are replaced, then the remaining value of such
replaced equipment, plant or machinery shall be allowed as additional depreciation (terminal
depreciation).
WTQ P.T.O.
(9)
iv) As per section 20 of the act, in case a loss is incurred by a unit engaged in the construction
of a power station, generation and transmission of power, it is allowed to carry forward the
losses for 12 subsequent years.
v) As per section 2(4) of schedule 1 of the act, entities engaged in power generation,
transmission or distribution is charged at the rate of 20 percent.
vi) As per section 3(2) of the schedule 2 of the act, accelerated depreciation is available, and
hence, depreciation rate shall be increased by 1/3 of the normal rate for entities engaged in
power house construction, generation and transmission.
c) In this property disposal case there is a clear gain on sale of the land and building of Rs. 20 lakhs.
The building has been owned by Mr. Dhakal for more than 5 years. Though the ownership
period is more than 10 years, he has not stayed in the house for 10 years. Therefore, this is a
case of disposal of non-business chargeable assets. As per schedule 1 of the Income Tax Act, the
tax rate for such property sale is 2.5% i.e. Rs.50,000 will be the tax liability.
d) Progress Traders purchased the items by taking the loans from banks and thus this is governed by the
public circular of Inland Revenue Department dated 2066.02.11. This circular requires the person
purchasing trading stock or raw material through sight letter of credit followed by bank’s trust receipt
loan, the interest incurred thereon should be interest expenses and not part of the cost of goods. The
interest paid for purchase of capital goods shall be capitalized as part of the cost and depreciated.
Therefore interest of Rs. 285,000 paid with respect to raw materials shall be treated as interest
expenses and interest of Rs. 250,000 paid with respect to equipment shall be capitalized.

a) Presumptive tax
b) Final withholding payments
c) Involuntary disposal of assets with replacement
d) Resident person
Answer:
a) Income Tax Act has allowed simplified process of payment of tax to small traders. There are
some income relating to natural person who are taxed at fixed amount of tax, irrespective of
amount of income tax required to be paid based on tax slab rates, it is called presumptive tax.
There are various types of presumptive tax applicable for the income of an individual. A natural
person having business income only in Nepal having turnover not more than Rs. 2 million and
profit not more than Rs. 2 lakhs may opt for being presumptive tax payer and depending on the
place of business pay the tax ranging from Rs. 1,500 to Rs. 5,000. Similarly natural person
holding public transport also needs to pay presumptive tax ranging from Rs. 1,000 to Rs. 3,000
depending on the type of vehicle.( Sec 1(7) and 1 (13) of schedule 1)
Since 2072.4.1 a new provision has been brought in Sec 4(4a) where a natural person having
Nepal source income only, not claiming withholding tax credit, medical tax credit and having
turnover more than Rs. 20 lakhs but less than Rs. 50 lakhs, not registered in VAT can pay the tax
on presumptive tax basis. The person choosing to pay presumptive tax should not be the
professional earning from consultation or income from specialized services e.g. doctor,
engineer, auditor, legal professional, sportsman, artist etc. Presumptive tax rate ranges from
0.5% to 2% depending on the type of business and profit margin subject to minimum of Rs.
5,000.
WTQ P.T.O.
(10)
b) Income Tax Act has prescribed certain income to be final withholding payments. Following
payments shall be treated as final withholding payments as per sec 92 of Income Tax Act, 2058.
1. Dividends paid by a resident company;

2. Rent for the lease of land or a building and associated fittings and fixtures, having a source in
Nepal, and that is received by an individual other than in conducting a business;
3. Payment made by resident person for gains from investment insurance;
4. Payment made by an resident unapproved retirement fund for the interest on that fund
5. Interest paid by the bank, financial institution, or any other institution issuing debentures or
company listed under prevailing laws referred to in Subsection (3) of Section 88 and having
following conditions:
 Payment which has a source in Nepal and which is not received by the individual
in the course of conducting a business,
 Payment made to an exempt organization referred to in Section 2(dha),
6. Payments made to non-resident persons that are subject to withholding tax under section 87,
88 or 89.
7. Apart from regular pension payments, all types of retirement payments made either by
Government of Nepal or an approved/unapproved retirement fund,
8. Meeting fee, payments made for occasional teaching,
9. Wind fall gain payment
10. Gain paid to a natural person by a mutual fund
c) Section 46 of Income Tax Act has provided for the cases of involuntary disposal of assets or
liabilities with replacement. For the assets disposed off involuntarily, this is an option available
to the tax payer who has plans to replace the assets within one year with the similar assets to
manage his tax liabilities due to sale. This is a facility to the tax payer where he does not have to
pay tax in case of involuntary disposal of assets which he plans to replace in the near future.
To obtain this facility the tax payer should make an application to the tax office. There are
basically 5 conditions to be fulfilled for the tax payer to take this benefit.
i. There has to be involuntary disposal e.g. takeover, compulsory acquisition etc.

ii. There is compensation given for involuntary disposal.
iii. The disposal is followed by replacement of the assets.
iv. The replacement is of similar assets.
v. The replacement happens within one year.
There could be gain or additional assets value in the tax accounting depending on the
value of the replacement assets. Following will be the amount received in disposal and
the value of the replaced assets:
Amount received on disposal = net outgoings of disposed assets + surplus on
compensation received and the amount paid for new assets purchased.
Value of the replaced assets = net outgoings of the disposed assets + additional cost paid
for the new assets in excess of the compensation received.
d) Section 2(Ka Nga) defines the term Resident in the Income Tax Act. As per the said section – in
respect to any financial year following person are to be considered resident,
1. In case of natural person
a. Normal place of residence is in Nepal,
b. Resided in Nepal for 183 days or more in a continuous 365 days, or
WTQ P.T.O.
(11)
c. Person deployed by Government of Nepal to abroad any time in the financial year,
2. Partnership firm
3. In case of Trust those Trusts, which
a. Is established in Nepal,
b. Trusty is resident in the particular income year, or
c. Trust has been controlled by resident person or association of person where such
resident person is directly or through the intermediary entities involved,
4. In case of company, those companies, which
a. Is established as per the laws of Nepal, or
b. In any income year, the effective management is in Nepal
4ka. Government of Nepal

5. Village Development committee, Municipality or District Development Committee
6. In respect to any foreign government or entities under state or local government of such
government, which
a. Is established as per Nepalese law, or
b. In any income year, the effective management is in Nepal,
7. Any entity established as per any treaty,
8. Foreign permanent establishment in Nepal of non-resident person.
5.
a) Following items, which are exclusively used in hydropower projects, operated with the approval
of alternative energy promotion center, were imported by a company:
Equipment Rs. 100,000
Machinery and Spare Parts Rs. 100,000
Calculate the amount of VAT payable with reference to the provisions of the Act. Ignore
other taxes and duties.
If the domestic manufacturer wants to supply the above items at the same rate, what
would be the amount of VAT payable? 5
b) A foreign embassy in Kathmandu sells its used car for Rs. 30 lakhs to an INGO, a tax exempt
entity. VAT office demanded tax on the sale of car from the embassy. The embassy denies its
liability to pay tax as it enjoys diplomatic facilities in Nepal. The INGO states, since it is a tax
exempt entity it need not pay any tax. Advise the parties, giving consideration to the provisions
of Value Added Tax Act, 2052. 5
c) A manufacturer has the following details during the month of Chaitra 2072. Calculate VAT
receivable/payable. 5
Rs.
Purchase of raw materials 200,000
Salary expenses 50,000
Reverse VAT attractive service fees 10,000
Purchase of motorcycle 150,000
Office supplies inclusive of VAT 22,600
Total sales for the month 400,000
Out of total production 80% is VAT attractive and 50% of total production is
exported.
WTQ P.T.O.
(12)
Answer:
a) As per schedule 1, Group 11: Other goods and services clause no. 20 of Value Added Tax
Act, 2052, value added tax shall be exempted in relation to imports of such machinery,
equipment, tools and related spare parts, and raw materials required for making such
equipment (steel sheet) that are required for hydropower projects, on the
recommendation of alternative energy promotion center. Hence in this case, VAT shall
be exempted.
Similarly, as per schedule 2, clause no. 7, facility of zero VAT shall be provided to the
industry, if any machinery, equipment, tools and spare parts, penstock pipes or iron
sheets used in making thereof that are required for hydropower projects are produced
and supplied by domestic industry, on the recommendation of alternative energy
promotion center. Hence, in this case, VAT shall be charged by the domestic industry at
zero rate.
b)
Even though Embassy itself is not liable to any tax, in this case the embassy has
to collect VAT from the purchaser and pay it to the tax office as per sec 15(3)
of Value Added Tax Act, 2052.
Similarly, even though INGO is a tax exempt entity, it is exempt from income
tax only in respect of confirm transactions that are exempt for tax as per the
Income Tax Act, 2058. Hence, the INGO has to pay the VAT on the purchase
of Vehicle to the Embassy, and the Embassy should deposit the same with the
tax office.
c) In the given case the input is not clearly segregated between taxable and non-taxable
therefore sales ratio between taxable, non-taxable and zero tax items needs to be
derived. Sales ratio between taxable and zero tax item is 50-50. Similarly 80% of the
production is VAT attractive. The tax credit in this case is allowed in proportion to the
taxable sales.
Calculation of VAT Receivable
Particulars Taxable value VAT Proportion VAT Receivable(Payble)

Opening Credit 20,000
Purchase 200,000 26,000×80% 20,800
Salary Exp - - -
Purchase of Motorcycle 150,000 19500 x 80% 15,600
Office supplies 20,000 2,600×80% 2,080
Total Credit 58,480
Taxable Sales Local 400,000×80%×50%=160,000 (20,800)
Taxable Sales Export 160,000 -
Other non-taxable sales 80,000 -
Net VAT Receivable 37,680
Since the export sale is more than 40% of the total sales, the net receivable
amount can be claimed as refund. The effect of reverse VAT attractive service fee
shall be nil.
WTQ P.T.O.
(13)
6.
a) Platinum International purchased goods worth $200,000 on CFR Kolkata basis and
incurred following cost associated with import. Calculate the value for custom purposes
explaining if each of the components of the cost is allowed or disallowed.
Transit insurance
From source to Kolkata $ 2,000
From Kolkata to Nepal port INR 50,000
From Nepal port to factory NPR 50,000
Agent commission
At Kolkata port INR 10,000
At Nepal port INR 20,000
Transportation cost
From source to Kolkata $ 5,000
From Kolkata to Nepal port INR 50,000
Demurrage
At Kolkata port INR 10,000
At Nepal port NPR 10,000
Buying commission paid abroad $ 5,000
LC commission paid to banks $ 1,000
How the custom valuation would change if the term of this purchase is FOB
source country. Consider exchange rate of Rs. 1.60 for INR and Rs. 105 for USD. 5
b) Rameswaram Exim is an export oriented unit which imports raw material from India as
well as 3rd Country and then reprocesses the same to be further exported back to India,
Japan and other European Countries.
During the year it has imported various raw materials, sub raw materials along
with packing material (which are not manufactured in Nepal) subjected to a total
custom duty of Rs. 1,500,000 which were further used in manufacturing of a final
consumable product to be exported to the prospective clients abroad. At present,
Rameswaram Exim is not having any bonded warehouse license and performs all
its export through proper banking channel that also through Letter of Credit.
So, on the basis of above stated information answer the followings:
i) Will Rameswaram Exim be able to import the above stated raw materials, sub raw
materials as well as packing material (not manufactured in Nepal) by keeping
deposit against Custom Duty amounting Rs. 1,500,000 i.e. through Pass Book
System or will Rameswaram be required to pay the entire amount, if on later stage
it will export the resulting final consumable product? Will your answer be the same
if the resulting final consumable product is a Tobacco Oriented Product? 2
ii) What basic requirement needs to be followed to avail benefits of Duty Draw Back at
the time of Export of the final consumable product? 1.5
iii) Will the entity be allowed to avail the benefits of Duty Draw Back if it sales locally
but in convertible foreign currency instead of exporting to its prospective clients
abroad? 1.5
WTQ P.T.O.
(14)
c) Everest Distillery produces high quality alcohol and sells in the local as well as foreign
market. The major raw material for the distillery is molasses and the input output ratio
is 20 liters per quintal of raw material. During the month of Chaitra 2072, it has
following transactions; calculate the amount of excise Duty payable for the month. 5
i) Purchase of raw materials 510 quintals (10 quintals lost due to fire)
ii) Purchase of bottles, label and cartoons 100,000 (inclusive of 5% excise duty)
iii) Usage of raw material for production 400 quintals
iv) Rate of excise duty Rs. 100 per litre or per quintal, as applicable
v) 50% of the production for the month has been exported.
Answer:
a) Platinum International’s purchase term for the goods have been on CFR Kolkata basis,
the valuation of the goods should be done accordingly. On CFR basis, the price includes
transportation cost up to the destination port which in this case is Kolkata port. The
valuation therefore should be done considering that. The buyer would bear the cost of
insurance from the port of shipment and transportation from destination port to Nepal
port and other related cost should form part of the valuation.
Therefore the valuation will be as follows:
NRs.
Calculation of Custom Value:

Cost of goods (CFR Kolkata) 200,000×105 = 21,000,000
Insurance from source to Kolkata 2,000×105 = 210,000
Insurance from Kolkata to Nepal 50,000×1.6 = 80,000
Agent commission at Kolkata port 10,000× 1.6 = 16,000
Transportation cost from Kolkata to Nepal port 50,000×1.6 = 80,000
Demurrage at Kolkata port 10,000×1.6 = 16,000
Buying commission paid abroad 5000 x 105 = 525,000
Total value = 21,927,000
If the goods were imported on FOB basis then on above valuation, additional cost of
transportation from source to Kolkata port would also be included in the valuation as on FOB
basis the purchase price only includes loading till the ship at the origin location. Hence, in case
of FOB basis the custom value would be NRs. 22,452,000 (NRs. 21,927,000+NRs. 525,000).
b)
i) Yes, Rameswaram Exim will be able to Import the above stated Raw Materials, Sub Raw
Materials, packing material through Pass Book System by depositing the amount of
Rs.1,500,000 if on later stage it will export the resulting final consumable product.
But on second instance our answer will not be the same if the resulting final consumable
product to be exported is a Tobacco Oriented Product. So in such situation Rs.1,500,000
will be required to be paid in cash.
ii) In order to avail the benefits of Duty Draw Back at the time of export of the final
consumable product there must be a value addition of 10% and the export must take place
within a period of 12 months from the date of Import. (As Per Annexure 1, Sec: 11 of the
Custom Act, 2064)
WTQ P.T.O.
(15)
iii) Yes, the entity will be allowed to avail the benefits of Duty Draw Back even if the sales are
made locally/ Domestic Markets but the same should be made in Convertible Foreign
Currency.
c) Statement of Excise duty payable for Chaitra 2072 by Everest Distillery

Excise duty payable on production
Use of raw materials 400 quintals
Production ratio 20:1
Alcohol production 8,000 liters
Excise duty on production (Rs.) 800,000
Not payable for the exported items 400,000
Net duty on production 400,000
Less, excise duty paid on purchase (Rs.) 51,000
(510 X 100)
Net duty payable (Rs.) 349,000
Note:
 Credit for purchase of packing materials is not allowed.
 The loss of stock by fire has to be notified to the Department within 30 days with all required
details to avail the claim of excise as per the normal recovery rate.
7.
a) State the procedure for deduction of excise duty on damaged goods. 5
b) M/s XYZ Imports enquires you about the special provisions relating to import of vehicles.
Briefly mention about the key conditions to be fulfilled while importing the vehicles.
Will the same provision hold good for import of fire engine? 5
Answer:
a)
Excise duty paid on products which are damaged or destroyed or lost can be refunded in the
following cases.
In the case of loss due to fire, theft, accident, Terrorist activities or date expiry, excise duty
paid on such stocks will be refunded on certain conditions.
Any kind of accident that happen in the production area should be intimated to the excise
office or the department as soon as possible
If loss occurs due to transportation of the excisable goods from one place to another and the
product is insured for loss, then the loss of excise duty to the extent insurance amount is
received need not be born by license holder.
In the case of loss due to fire, theft, accident or terrorist activities or expiry of date of use,
for claiming loss, the license holder should have submitted excise details/returns to the
excise office up to the time of such accident.
WTQ P.T.O.
(16)
If the goods are insured, as soon as the reimbursement is received, the quantity and value of
the goods in respect of which insurance amount is received should be submitted to the
excise office for claim of deduction of excise duty.
The excise office will examine the insurance payment, the quantity up to which and the
amount of the claim that has been paid, and calculate the proportionate excise duty and give
deduction of the same within 30 days.
In the case of non- insurance

The accident has to be reported to the police and after taking list of the lost or damaged
goods with certification from police or other authorities should be sent within30 days to
the department.
In the case of date expired goods, particular of the date of production, should be given
within 3 days of the date of expiry.
These goods should be kept separate and produced for inspection later, if the goods had
been earlier sold and returned, the proof of return through credit note / debit note should be
produced.
Investigation committee will examine the documents and excise duty deduction will be
allowed as per the recommendation of the committee.
If the loss recommended by the committee is Rs. 1 lakh and less, the excise office itself can
give the deduction. If it is more, the recommendation should be sent to the Department for
its approval.
In the case of liquor, only if proper safeguard in storing the raw materials is adopted, refund
will be processed. Otherwise, no processing will be done.
b) Following conditions should be fulfilled while importing vehicles for the transportation of goods
or persons:
a. Only authorized dealers of Nepal can import new vehicles for the transportation of goods
and persons from the manufacturing companies or its authorized dealers of that country.
b. Reconditioned, used vehicles or the vehicles which do not comply with the Nepal vehicles
emission standard 2069 are not permitted to import.
c. Vehicles imported as per (a) for the purpose of sale, the importer compulsorily should
publish in national newspapers the maximum retail price of such vehicles three times (in
every four months) in a year.
d. If the importers do not publish maximum retail price of vehicles as per ©, the department
of customs can take action by stopping import and sales transactions of such importers.
e. Vehicles for the transportation of goods and persons, if imported by violating the conditions
of sub clause (a) and (b), the vehicles can be seized.
In case of import of fire engine, there shall be no effect of above stated sub clause of (a) and (b).
8. Write short notes on the following considering the provisions of Value Added Tax Act,
Customs Act and Excise Act, as applicable: (4×2.5=10)
a) Provisions related to gifts and cash discounts in excise act.
b) Attachment of documents with declaration form in case of export of goods.
c) VAT credit in case of purchase under finance lease.
WTQ P.T.O.
(17)
d) VAT assessment in doubtful conditions.
Answer:
a) As per section 4(nga) of the excise act, liquor, beer or tobacco based products related
industries, importer of such products and seller of such products shall not be allowed to operate
any kinds of gifts program or give discount while selling its products (other than to those
registered in VAT). If they are involved in such activities, then it shall be contravention of the
license conditions.
b) According to Rule 21 of Custom Rules, 2065, following documents should be attached
with the declaration form in case of export of goods.
1. Invoice
2. Packing list
3. Certificate of origin
4. Banking documents regarding payment procedure, in case of export to third country.
5. Documents which are required as per prevailing law regarding the recommendation, license
or certificate from any institution.
Also, if the firm or industry is exporting for the first time, such firm or industry shall submit
certified documents relating to their registration and PAN number.
c) Provision relating to VAT credit in case of purchase under finance lease is given in Section
17(5Ka) of VAT Act, 2052. As per the provision, capital goods, like vehicles, plant and machinery,
if purchased by entering into a loan agreement under the finance lease with a bank or financial
institution or producer or distributor, VAT credit can be claimed. In such cases, seller of such
goods issues invoices in the name of the person who provides the loan. As per such invoice,
ownership of goods vests with the person providing loan rather than the buyer of such goods. In
spite of this, the act has provided the provision which allows the actual buyer of the goods to
take tax credit instead of the person providing the loan.
d) As per section 22 of VAT Act, notwithstanding anything mentioned in this act, where there is a
reason to believe that the collection of tax is in jeopardy because a tax payer is about to leave
the territory of Nepal or to transfer the assets to others or to remove or conceal assets, the tax
officer with the approval of director general may immediately assess, recover or ask for deposit
of tax payable or to be payable.
WTQ P.T.O.
(76)
Advanced Taxation
P.T.O.
(77)
Suggested
Roll No……………. Maximum Marks
- 100
Total No. of Questions - 6 Total No. of Printed
Pages - 19
Marks
1. Atal Cement Ltd. an entity established and operating since 5 years in Dhankuta an
underdeveloped area in Nepal has the following transactions during the year 2072/73:
Profit & Loss Account
Amount Amount
Particulars Particulars
(Rs.) (Rs.)
To Opening Stock 2,080,000 By Sales 25,000,000
To Raw Materials
14,100,000 (-) Sales Return (2,260,000)
Purchased
(-) Purchase Return (1,700,000) By Closing Stock 4,500,000
To Production Expenses 2,700,000
To Gross Profit c/d 10,060,000
27,240,000 27,240,000
To Salary Allowance 2,500,000 By Gross Profit b/d 10,060,000
To Depreciation 675,000 By VAT Refund 750,000
To Rates & Taxes 75,000 By Securities Premium 5,000,000
By Custom Duty Refund
To Business Promotion 2,800,000
(Under Drawback) 1,000,000
To Donation 300,000 By Bad Debt Recovered 200,000
By Gain on Sales of
To Cash Discount 635,000
Generator set 20,000
By Dividend Income (Net
To Freight 370,000
of Tax) 1,500,000
To Interest 900,000 By Gift 35,000
To Office Expenses 600,000
To Vehicle Running
Expenses 225,000
To Net Profit Before
9,485,000
Tax
18,565,000 18,565,000
a) Sales return includes the cement return of Rs. 1,695,000 including VAT.
b) Company has collected Rs. 55,000,000 from 500,000 shares at the rate of Rs. 110
each through initial public offering (IPO). Rs. 110 includes share premium of
Rs.10 each.
c) Custom Duty refund relates to duty drawback which is a refund of custom duty
through one window policy. It was included in raw material cost in previous year.
d) Closing stock includes the sales returned goods and 50% of opening stock
e) Opening stock includes repair & improvement expenses of Rs.160,000
f) Purchase return is return of raw material purchased on Baisakh 2073 and returned
in month of Jestha 2073. However adjustment is done in VAT return of Bhadra
2073.
g) Production expenses includes the following:
i) Cost of petrol to run a generator set of Rs. 339,000 including VAT.
P.T.O.
(78)
ii) Repair & maintenance of plant & machinery Rs. 400,000.
h) Salary expenses includes Rs. 500,000 paid without deducting withholding tax.
i) Bad debt recovered includes that amount which was allowed as expenses in
previous year.
j) VAT refund of Rs. 750,000 is received during the year which was claimed u/s: 17
of VAT Act.
k) Dividend income is received from Everest Bank after deducting dividend taxes.
l) Gift is received from supplier of Major raw material. Market value of the same is
Rs. 75,000.
m) Rates & taxes includes Rs. 25,000 as tax penalty.
n) Business promotion expenses includes personal expenses of director incurred for
his son‟s marriage amounting Rs. 1,500,000.
o) Donation includes the following payment
i) Paid to Village Development Committee (VDC) = Rs. 75,000
ii) Paid to Sisu Bidhyalaya = Rs. 50,000
iii) Paid to Local Villagers = Rs. 55,000
p) Cash discount has been provided to distributors which met the sales targets but
TDS on the same has not been deducted.
q) Office expenses includes the followings:
i) 60% of VAT paid on Purchase of Delivery VAN (Rest 40% is claimed for
Offset) = Rs.78,000
ii) 40 % of VAT paid on purchase of Car for office purpose (Rest 60% is
capitalized) = Rs. 104,000
iii) VAT Paid on mineral water purchase for office uses = Rs. 17,000
r) Vehicle running expenses includes petrol cost of Rs. 56,500 including VAT for
running office car.
s) Interest is related to Bank Loan taken for establishment of new cement factory
which is 100% subsidiary of Atal Cement Ltd.
t) Carry forward loss as per management is Rs. 2,700,000 whereas the same as per
tax assessment order is Rs. 1,900,000 (No Appeal has been filled against the
same within the stipulated standard time)
Required: 20
Compute the income tax liability of the entity. (For the calculation purpose ignore
1/3rd additional depreciation. Beside that no opening unabsorbed repair &
improvement expenses).
Answer
Remark
Particulars Working Amount s
Sales 25,000,000.00
(-) Sales Return 22,935,000.00 W.N: 1
(2,065,000.00)
(+) Closing Stock 4,225,000.00 W.N: 2
(-) Opening Stock W.N: 3
(1,920,000.00)
Raw Material Purchased 14,100,000.00
(-) Purchase Return (12,400,000.00) W.N: 4
(1,700,000.00)
(-) Prodn Expenses W.N: 5
(2,661,000.00)
P.T.O.
(79)
Gross Profit 10,179,000.00
(+) VAT Refund - W.N: 7

(+) Gain on Sales of Generator set - W.N: 17
(+) Dividend Income (Net of Tax) W.N: 8
(+) Gift 75,000.00 W.N: 9
(+) Share Premium - W.N: 18
(+) Duty Draw Back 1,000,000.00 W.N: 19
(+) Bad Debt Recovered 200,000.00 W.N: 20
(-) Salary Allowance W.N: 6
(2,500,000.00)
(-) Depreciation
(675,000.00)
(-) Rates & Taxes W.N: 10
(50,000.00)
(-) Business Promotion W.N: 11
(1,300,000.00)
(-) Cash Discount W.N: 13
(635,000.00)
(-) Freight W.N: 16
(370,000.00)
(-) Interest -
(-) Office Expenses W.N: 14
(418,000.00)
(-) Vehicle Running Expenses W.N: 15
(225,000.00)
Profit Before Donation 5,281,000.00
(-) Donation Expenses W.N: 12

(75,000.00)
Taxable Income 5,206,000.00
Carry Forward Losses of Previous
Years
As Per Management
(2,700,000.00)
As Per Income Tax Assessment Order W.N: 21
(1,900,000.00) (1,900,000.00)
Final Taxable Income 3,306,000.00
Income Tax Liability
Tax Rate: Special Industry 20.00%
Tax Rate: Under Developed Area 6.00% 198,360.00 W.N: 22
Working Notes
W.N: 1
Total Sales Return
2,260,000.00
(-) VAT Included (1,695,000 * 13/113)
(195,000.00)
2,065,000.00
P.T.O.
(80)
W.N: 2
Closing Stock as given
4,500,000.00
(-) VAT Included in Sales Return (As Per W.N: 1)
(195,000.00)
(-) R & M Expenses (Part of Op. (80,000 * 50%) R & M Expenses not
Stk) (80,000.00) to be included in Closing Stock
4,225,000.00
W.N: 3
Opening Stock as given
2,080,000.00
(-) R & M Expenses U/S 15(8)
(160,000.00)
1,920,000.00
W.N: 4
Purchase return is related to FY: 2072|73 and VAT is adjusted in FY: 2073|74 which can be done within 12
Months So no implication on the above calculation.
W.N: 5
Production Expenses as per PL
2,700,000.00
(-) VAT on Petrol to Run
(339,000 * 13/113)
Generator (39,000.00)
2,661,000.00
Note 1: VAT can be offset on petrol used in other than vehicles

Note 2: Repair and Maintenance of Rs.400,000 is assumed to be within prescribed limit.
W.N: 6
Salary Expenes are deductible u/s 13, Salary paid without deducting withholding tax is deductible but
withholding
tax should be deducted & deposited to IRD. Beside that as per Sec: 90(3) though withholding tax is not deducted,
it shall be deemed as deducted.
W.N: 7
VAT Refund received against claim made u/s: 17 is to be adjusted with VAT Receivables and is an offset of
VAT, not refund. So it being a Balance Sheet item need not be included in Taxable Income.
W.N: 8
As per Sec: 92 of Income Tax Act, 2058, Dividend is a Final Withholding Payment, hence it shall not be included
in Calculation of Taxable Income.
W.N: 9
Gift related to business is to be included in Business Income u/s: 7(2)(E) & Market Value shall be taxable u/s:
27(1)(a). Hence, Rs.75,000 is to be included in calculation of Taxable Income.
W.N: 10
P.T.O.
(81)
Rates & Taxes
Rates & Taxes as per PL
75,000.00
(-) Tax Penalty Not deductible expenses
(25,000.00)
50,000.00
W.N: 11
1. Business Promotion Expenses
Business Promotion
2,800,000.00
Expenses Incurred for Director Son
(-) Personal Nature Expenses
(1,500,000.00) Wedding
Deductible Expenss u/s: 13
1,300,000.00
W.N: 12
Donation
Lower of following is deductible (u/s: 12) (Allowed only if given to Exempt Entity)
Threshold of
100,000.00
5 % of Adjusted Taxable Income
264,050.00
Actual Expenses
75,000.00
Hence Deductible Expenses is

75,000.00
Note: Sisu Vidhayala & Local Villagers are not exempted & Whereas VDC is exempted.
W.N: 13
Cash Discount
Withholding tax should be deducted as per section 88, but such expenses shall be deductible.
W.N: 14
Deductible Office Expenses
Office Expenses As Per PL
600,000.00
(-) 60% VAT Paid on Purchase of VAT can be claimed for Offset in case
Delivery VAN (78,000.00) u/s: 17 of VAT Act, 2052
40 % VAT can be claimed for Offset in
(-) 40% VAT Paid on Purchase of
case u/s: 17 of VAT Act, 2052 and rest
Car (104,000.00)
should be capitalised
VAT paid on Beverages cannot be setoff
(-) VAT paid on Mineral Water -
so its deductible
418,000.00
W.N: 15
VAT paid on petrol for running vehicle is not allowed for offset so its deductible expense.
P.T.O.
(82)
W.N: 16
Interest incurred for Capital Investment is not Deductible u/s: 14 of Income Tax Act, 2058.
W.N: 17
From Repair & Maintenance expenses of Block D it is clear that the same is in existence so as per Block Concept
profit on sale of Generator shall not be determined beside that entire amount of sales need to be reduced from
block value. Hence it is not included in calculation of taxable income.
W.N: 18
Share Premium shall be transferred to Capital Reserve and thus it is not an income. (Question is silent about
share issue expenses but if the same would have been provided such preliminary expenses would have been
adjusted with premoum amount)
W.N: 19
As Duty paid was included in Raw Material Cost Earlier, it has to be included in Income now.
W.N: 20
Bad Debt was allowed as expenses earlier so during the year its realisation is considered as income.
W.N: 21
As no appeal has been filled against the assessment order carry forward loss as per Income Tax authority shall be
considered final.
W.N: 22
As per Sec: 11(3)(Kha) of Income tax act, 2058 any special industry established in under-developed area shall be
subjected to tax rebate and will be liable only for 30% of the prevailing tax resulting into tax liability of 6%.
Dhankuta 5 Years Back.
2.
a) Miss Anuradha, worked as a general manager at Godavari Cement Industries Pvt.
Ltd. from 5th Shrawan 2070 to 4th Shrawan 2073. During her tenure at the
company, she has given full authority to take decisions regarding finance,
accounts, taxation. After quiting Godavari Cement, she joined Hitco Cements
Ltd. from 1st Bhadra 2073. On Mangsir 15, 2073 she received a notice from tax
department to pay 3rd installment tax of Rs. 2,500,000 for financial year 2072-73
of Godavari Cement as the company failed to pay such installment tax during her
tenure. Miss Anuradha being surprised with the letter from tax department and
rushed to assessing officer and argue that she is currently no more associates with
Godavari Cement and will not pay any tax on behalf of Godavari Cement. Is her
contention is right? You are required to describe the relevant provisions of
Income Tax Act, 2058. 7
b) M/s XYZ commercial bank has announced a VRS under the following terms:
VRS payment shall be 2 month‟s salary for each year of completion of service.
Mr. Ram has accepted the VRS scheme and got retirement with effect from the
last day of the income year.
Gratuity shall be available equal to 2 months‟ salary in case he completes 15
years of service and 2.5 months‟ salary in case the service years exceed 20 years.
He was given a medical allowance equal to 3 months‟ salary on his retirement as
per employees‟ rules prevailing before Chaitra 18, 2058
Other information are as under:
Pay scale at the time of retirement Rs. 20,000 per month
Pay scale at time of Chaitra 2058 Rs. 15,000 per month
Allowances Rs. 10,000 per month
P.T.O.
(83)
Service period 25 years (upto 2058.12.18 – 19 years)
Accumulated leaves 150 days (up to 2058.12.18 – 60 days)
Dashain allowance Rs. 20,000
Calculate the assessable Income from employment for the income year and
taxable retirement payment. Also calculate the TDS amount in taxable
retirement payment. 7
c) BB & Sons, a proprietorship firm, was keeping the books of accounts on cash
basis. The firm made the following transactions during the income year 2072/73.
 Out of total sales amounting to Rs. 1,000,000, the firm could realize Rs.
900,000 in cash during the year.
 Collected Rs. 30,000 from its debtors of the income year 2071/72
 Out of Rs. 120,000 (an annual interest payable on bank loan), the firm paid
Rs. 70,000 during the year. The balance of interest payable amounting to Rs.
50,000 was paid as on Shrawan 15, 2073
 Cost of trading stock Rs. 550,000 was fully paid during the year
 Out of total salary payable of Rs. 200,000, Rs. 170,000 was paid to staffs
during the year. The balance of Rs. 30,000 was paid as on 2073.04.10
 In respect of house rent, the firm paid the amount as follows
During the end of Amount of rent paid (Rs.) Type of Payment
2071.72 90,000 In advance for the

Income Year 2072/73
2072.73 99,000 In advance for the

Income Year 2073/74
You are required to make the calculations (i.e. inclusions and

deductions) under the following basis of accounting for the income
year 2072/73. 6
i) Cash basis
ii) Accrual basis
Answer
a)
Section 107 of Income Tax Act 2058 describes about the liabilities of the Officers of the
Entity. The relevant provisions of the section is as follows:
1. Where an entity does not comply with laws, every personn who is an officer of the entity at that
time shall be liable for that.
2. Where an entity fails to pay tax on or before the date on which the tax is payable, every person
who is an officer of the entity at that time or was such an officer within the previous six months
shall be jointly and severally liable to such for payment of the tax.
3. Notwith standig sub section 1 & 2, those sub-sections shall not apply in the following cases:
(Ka) Where the offence is committed by the entity without that person's knowledge or consent; and
(Kha) where the officer has exercised the degree of care, diligence, and skill that a reasonably
prudent person would have exercised in identical circumstances to prevent the commssion of
offence.
4. Where the officer pays tax under subsection 2,
(ka) the person may recover the payment of tax from the entity.
(Kha) for the purpose of clause (ka), the person may retain out of any assets including money of
the entity in or coming into possession of the person an amount not exceeding the payment; and
5. No claim may be made against the person by the entity or any other person with respect to the
retention referred to in sub-section 4(Kha).
P.T.O.
(84)
(Clarification: For the purpose of this section, Officer of Entity means a manager of the entity or a
person purporting to act in that capicity.)
With the provisions of section 107 of Income Tax Act 2058, Miss Anuradha can not excuse
that she is currently not associates with the Godavari Cement Industries Pvt. Ltd. because her
association with Godavari Cement not elasped by more thn six months. Now Miss Anuradha
has only two options as follows:
Option 1: Defend herself that either she has not knowledge about the offence or she has
exercised due care and diligence to prevent the offence.
Option 2: Pay such tax and claim that amount from the entity.
b)
Suggested Answer
Particulars Income from Employment Retirement Payment
Salary 20000*12 240,000
Allowances 10000*12 120,000
Dashain Allowance 20,000
Gratuity:
25 years * 2..5*20000:12,50,000
Less:
19* 2.5*20000 : 950,000 300,000
Medical Allowance Nil
(Being less than Rs.180,000)
VRS Payment
(25*2*20000) 10,00,000
Leave Encashment:
(150*20000/30) – (60*20000/30) 60,000
Total 380,000 13,60,000
The bank has to deduct TDS on income from employment as per usual manner on slab wise basis.
With regard to TDS, TDS @15% as per section 88(1) shall be deducted. It means Rs. 204,000 shall be
deducted and such shall be final.
c)
i) Calculations (i.e. inclusions and deductions) under "Cash basis of Accounting" for the
Income Year 2072.73
Particulars Inclusions (Rs.) Deductions (Rs)
 Cash realized from sales 900,000 -
made during the Income
Year 2072.73
 Cash realized from the sales 30,000 -
made during the Income
Year 2071.72
 Interest paid during the - 70,000
Income Year 2072.73
 Cost of trading stock paid
during the Income Year - 550,000
2072.73
 Salaries paid during the
Income Year 2072.73 - 170,000
 Advance rent paid during the
Income Year 2072.73 for the
Income Year 2073.74
- 99,000
Total 930,000 889,000
ii) Calculations (i.e. inclusions and deductions) under "Accrual basis of Accounting" for the
Income Year 2072.73
P.T.O.
(85)
Particulars Inclusions (Rs.) Deductions (Rs)
 Total sales of the Income Year 1,000,000 -
2072.73
 Interest expense of the Income - 120,000
Year 2072.73
 Cost of trading stock paid
during the Income Year - 550,000
2072.73
 Salaries of the Income Year
2072.73 200,000
-
 Rent for the Income Year
2072.73
- 90,000
Total 1,000,000 960,000
3.
a) Section 84 of the income tax act has stated that every officer from IRD or IRO
shall keep the documents and information coming to his possession or knowledge
in secret while performing his duties under the act. Mention seven circumstances/
specified persons (which the section has envisaged) before whom the tax officer
can convey such information. 5
b) Write short notes on: (2×2.5=5)

i) Debt claim
ii) Statement made to the department
Answer
a) As per section 84(2) of the act, the tax officer can convey the information to the following
persons under the given circumstances:
a. To the extent required in order to perform the officer‟s duties under this act.
b. To a court or tribunal as required by them in proceedings with respect to a matter
under this act.
c. To the finance minister.
d. To any person when the disclosure is necessary for the purpose of any other fiscal law.
e. To any person in the service of GON, who requires the information for revenue or
statistics related works.
f. To the Auditor General or any person authorized by the Auditor General when such a
disclosure is necessary for the performance of his official duties
g. To the competent authority of the foreign government with which Nepal has entered
into an international agreement, to the extent permitted under the agreement.
Any person, court, tribunal or authority receiving such documents and information as stated above is
also required to keep them secret, except to the minimum extent to which the disclosure is necessary.
b)
(1.) Debt Claim
Debt claim u/s 2 (da) means a right of one person to receive a payment from another person
and includes a right to repayment of an amount paid by one person to another person as well
as deposits in banks and other financial institutions, accounts receivable, notes, bills of
exchange, bonds, and rights under annuities, finance leases and installment sales.
(2.) Statement made to the Department
Statement made to Department u/s 120 of Income Tax Act, 2058 means a statement made in
writing to the Department or an authorized officer of the Department acting in the
performance of duties under this Act, and includes the following:
P.T.O.
(86)
(a) a statement made in an application, notification, return, objection, statement, or other document
made, prepared, given, or filed under this Act;
(b) a statement made in a document furnished to the Department or such an officer otherwise than
pursuant to this Act;
(c) a statement made in answer to a question asked of a person by the Department or such an officer;
or
(d) a statement made by any person with the knowledge to the Department or such an officer through
the other person.
4.
a) Smart Pvt. Limited furnished the following particulars of VAT for the month of
Shrawan, 2072:
Particulars Amount
(Rs.)
Sales
Local Sales To a registered party in Nepal 5,000,000
Local Sales To a party not registered in Nepal 500,000
Export Sales Of services to a party outside Nepal. Party 2,200,000
outside Nepal is not having any legally
registered party in Nepal
Total Sales 7,700,000
Purchases
Local Purchase
Purchase of Foundation Materials 400,000
Purchase of Advertisement Materials 100,000
Purchase of Motocycle 200,000
Purchase of Trucks 500,000
Purchase of bus for carrying its staff 600,000
Purchase of bus for Delivery Van under 650,000

Hire
Purchase of liquor and Beverage during 100,000
promotional event
Purchase of Petrol* 300,000
Purchase of Diesel for generator 50,000

Purchased gift items from Super market** 75,000
Miscellaneous Purchase 30,000

Purchase from non-VAT Registered Party 30,000
Total Local Purchase 3,035,000

Import of
Goods
Purchase of Infrastructure Equipment 650,000
Purchase of Infrastructure Equipment on
Deposit (Dharauti) 250,000
Temporary import of Infrastructure

Equipment for testing purpose 500,000
Total Import of Goods 1,400,000

Import of From a party not registered outside Nepal 300,000
Services
P.T.O.
(87)
Total Import of Services 300,000
Total Purchase 4,735,000
* 20% of petrol purchased is used for running its machinery and
rest others for vehicle.
** This includes the items purchased through Abbreviated Invoice
amounting to Rs. 50,000.
Amount mentioned are exclusive of taxes unless otherwise stated.
Answer the followings; (6+1+3=10)
i) Opening VAT Receivable is Rs. 500,000. The company is on credit
for continuous period for last 7 months. Can the company claim
refund of VAT?
ii) Opening VAT Receivable is NIL. Calculate VAT Receivable/
(Payable).
iii) The company paid VAT payable amount as computed under (ii)
above on Kartik 25, 2072. Compute the amount to be paid as VAT,
Additional Fee under Section 19(2), Interest under Section 26 and
Fine under Section 29.
b) Extracts of data of a Rolling Mill for the month of Ashwin, 2073 are as follows:
Sales (All are Domestic)
Basic Sales Amount
Particulars Unit Quantity
(Rs.)
GI Wire Kg. 75,000.00 4,000,000.00
Steel Bar Kg. 100,000.00 6,000,000.00
Angle Kg. 45,000.00 2,500,000.00
TMT Bars Kg. 25,000.00 1,500,000.00
Channel Kg. 30,000.00 2,000,000.00
16,000,000.00
Purchases (All Imported)
Particulars Unit Quantity CIF Custom
Billet Kg. 225,000.00 8,500,000.00
Wire Rod Kg. 72,000.00 2,600,000.00
Zink Kg. 3,000.00 375,000.00
11,475,000.00
Rate of custom duty are as follows:

Items Rate of Custom
Billet 8%
Wire Rod 10%
Zink 15%
Rate of excise is Rs. 1 per kg. on excisable items
Compute: (2+2+6=10)
i) Excise payable for the month
ii) Net custom duty
iii) VAT on sale, VAT on purchase & net VAT payable.
Answer
Particulars Amount VAT Total Remarks

(Rs) (Rs) VAT
(Rs)
Sales
P.T.O.
(88)
Local Sales To a registered party in 5,000,000 650,000 13% VAT
Nepal applicable
Local Sales To a party not registered 500,000 65,000 13% VAT
in Nepal applicable
Export Of services to a party 2,200,000 0 715,000 Zero rate tax as per
Sales outside Nepal. Party schedule 2
outside Nepal is not
having any legally
registered party in
Nepal
Total Sales 7,700,000
Purchases
Local
Purchase
Purchase of Foundation 400,000 52,000 Full credit
Materials allowable
Purchase of 100,000 13,000 Full credit
Advertisement allowable
Materials
Purchase of Motorcycle 200,000 26,000 Full credit
allowable
Purchase of Trucks 500,000 65,000 Full credit
allowable
Purchase of bus for 600,000 31,200 40% credit is
carrying its staff allowable Rule 41
Purchase of bus for 650,000 84,500 Full credit
Delivery Van under allowable as per
Hire section 17(5ka)
Purchase of liquor and 100,000 0 No credit available
Beverage during as per Rule 41
promotional event
Purchase of Petrol* 300,000 7,800 Rule 41, Petrol
used for running
machinery allowed
to take credit
Purchase of Diesel for 50,000 6,500 Full credit
generator allowable
Purchased gift items 75,000 3,250 Credit not allowed
from Super market** for abbreviated
invoices under
Rule 18(3)
Miscellaneous Purchase 30,000 3,900 Full credit
allowable
Purchase from non- 30,000 0 No credit available
VAT Registered Party
Total Local Purchase 3,035,000 293,150
Import of
Goods
Purchase of 650,000 84,500 Full credit
Infrastructure allowable
Equipment
Purchase of 250,000 0 Equipment
Infrastructure purchased on
Equipment on Deposit Dharauti not
(Dharauti) allowed under
Rule 48(3)
P.T.O.
(89)
Temporary import of 500,000 0 Equipment
Infrastructure purchased for
Equipment for testing testing purpose
purpose will be imported
under Deposit and
hence could not be
claimed as input
tax credit.
Total Import of Goods 1,400,000 84,500
Import of From a party not 300,000 39,000 Reverse VAT
Services registered outside Nepal Section 8(2)
Total Import of 300,000
Services
Total Purchase 4,735,000 39,000
416,650
Computation of VAT Receivable/(Payable)
VAT Receivable 500,000
Add: VAT on Purchase 416,650
Less: VAT on Sales (715,000)
Net VAT Receivable 201,650
As per Rule 39(4) where the amount of tax paid by a registered person on purchase or import
is higher than the amount collected on sale, the person may deduct such excess amount in the
next tax period. Where the amount allowed to be deducted in the next tax period remains in
balance for six continuous months, the person is required to file an application to the tax office
in the format prescribed in schedule 10 for a refund in a lump sum. Upon receipt of such
application, the tax officer shall refund the remaining tax in accordance with Rule 45.
Hence, as the company is on credit for a period of last 7 months, it can apply for refund of
VAT.
ii.
VAT Receivable 0
Add: VAT on Purchase 416,650
Less: VAT on Sales (715,000)
Net VAT Receivable (298,350)
iii.
Calculation of Additional Charge under Section 19(2)
Period of delay is from Bhadra 25 to Kartik 25 = 63 days (Bhadra, 7 days, Ashwin 31 days,
Kartik 25 days)
VAT Amount (Rs.) 298,350
No. of days for calculation of Additional Fee 63 days
Additional Fee rate per annum 10%
Amount of Additional Fee = Rs. 298,350*10%*63/365 Rs. 5,150
Calculation of Interest under Section 26
VAT Amount (Rs.) 298.350
Period of delay in payment 3 months
Amount of Interest = Rs. 298,350*15%*3/12 Rs. 11,188
Calculation of Fine under Section 29(1)(ja)
As per Section 29(1)(ja), if there is failure to submit tax return as per Section 18, 0.05% per
day of tax payable or Rs. 1,000 per tax period whichever is higher shall have to be paid as
P.T.O.
(90)
Fine. Accordingly, Rs. 298,350*0.05%*63/365 = Rs. 25.75 or Rs. 1,000*3 = Rs. 3,000
whichever is higher i.e. Rs. 3,000 shall have to be paid by the company as fine.
Total Amount of Liability to be paid by the company Amount (Rs)
VAT Amount 298,350
Additional Fee as per Section 19(2) 5,150
Interest as per Section 26 11,188
Fine as per Section 29(1)(ja) 3,000
Total 317,688
b)
1) Excise is levied Rs.100 per quintal on Iron Rod & TMT Bars only as per schedule related to
section 3 of Excise Act, 2058
Items Quantity Excise Amount

Steel Bar 100,000.00 100,000.00
TMT Bars 25,000.00 25,000.00
Total Excise Collected on Sales 125,000.00
Less: Excise Paid on Wire Rod 72,000.00 72,000.00
Excise Payable for the Months 53,000.00
2) Computation of custom duty payable
Items CIF Custom Rate Custom Duty

Billet 8,500,000.00 8% 680,000.00
Wire Rod 2,600,000.00 10% 260,000.00
Zink 375,000.00 15% 56,250.00
Total cutom duty payable 996,250.00
3) VAT on Sale, vat on purchase & net vat payable
i) Vat on Sales
Base Sales VAT on Sales

Particulars Excise Duty Vatable Sales
Amount @ 13%
GI Wire 4,000,000.00 - 4,000,000.00 520,000.00
TOR Steel Bar 6,000,000.00 100,000.00 6,100,000.00 793,000.00
Angle 2,500,000.00 - 2,500,000.00 325,000.00
TMT Bars 1,500,000.00 25,000.00 1,525,000.00 198,250.00
Channel 2,000,000.00 - 2,000,000.00 260,000.00
Total 16,000,000.00 125,000.00 16,125,000.00 2,096,250.00
ii) Vat on purchase
VAT on
Custom Vatable
Particulars CIF Custom Excise Duty Purchase @
Duty Purchase
13%
Billet 8,500,000.00 680,000.00 - 9,180,000.00 1,193,400.00
Wire Rod 2,600,000.00 260,000.00 72,000.00 2,932,000.00 381,160.00
Zink 375,000.00 56,250.00 - 431,250.00 56,062.50
Total 11,475,000.00 996,250.00 72,000.00 12,543,250.00 1,630,622.50
iii) Net vat Payable
Particulars Amount
Vat on Sales 2,096,250.00
Less: VAT on purchase 1,630,622.50
P.T.O.
(91)
Net vat payable for the month 465,627.50
5.
a) Mr. Jugal Jain, a resident of India being a part of a Religious group, entered
Nepal through Birgunj on 25th Magh, 2071 to visit various religious sites at
different locations in the country. He was travelling with his personal car having
an Indian number plate. Later on he moved to Kathmandu and had plans for
Bhairawa also but unfortunately his plans and group were badly hit by the
devastating earthquakes which hit the country on 12th Baisakh, 2072. His vehicle
was also badly damaged and had to undergo repairs.
Required: (4+2+1=7)
i) Under normal circumstances, what is the time allowed to Mr. Jugal Jain to
keep his car in Nepal, without paying a form of Import Duty and under what
circumstances can vehicles be imported temporarily without paying import
duty?
ii) As per the letter of recommendation given by “District Police Office”, the
vehicle has remained in a registered workshop for 55 Days. Mr. Jain takes
out his Vehicle on 07th Ashadh, 2072 from the workshop. Mr. Jain
accordingly approached the custom office to exit from Nepal on 10th Bhadra,
2072. How many days custom duty shall be levied in such case?
iii) While he was in Nepal Mr. Jugal Jain received an offer for sale of his 1600
CC Ford Figo Aspire at a promising price of Rs. 2,500,000. Can he sale the
same or not?
b) Queenfisher Brewery Industries Limited, a multinational company having
manufacturing unit at Bharatpur, Chitwan manufacturing Queenfisher Brand
Beer. The management of the company announced a scheme that the customer
will get sure shot Rs. 10 to 100,000 as printed in the tin cap of the bottle.
Accordingly, the company makes the scheme to the public via Kantipur Daily.
On the next day the department has issued a show case notice to the company
citing "why the license is not cancelled". Is the notice of the Department is
correct? Will your answer be different if the company made the scheme to the
public via Hoarding Board at Tripureshwor instead of Kantipur daily? 5
c) Is there any provision under which an industry shall enjoy excise exemption
under Excise Act, 2058 although its products are excisable? 2
d) M/s ABC Impex has imported three consignments which are lying at the
Tribhuban International Airport custom office warehouse from January 01,
2016. Consignment one is of 10,000 Kgs, consignment two is of 20,000 Kgs and
Consignment three is of 30,000 Kgs. The consignments could not be cleared
within next seven days. From the next date of expiry of seven days, consignment
one got cleared on 30th day, consignment two got cleard on 60th day and
consignment three got cleared on 90th day. Is ABC Impex liable to pay
demurrage in any of cases specified and if yes in any of the case, then calculate
the amount as per the act and rules? For the purpose of calculation, customs
value of consignment one, two and three is Rs. 500,000, Rs. 2,000,000 and Rs.
3,500,000 respectively.
Give your answer along with the relevant provisions of act and rules on demurrage. 6
Answer
a)
i) As per Section 12(2) of Schedule 1 of Custom Act, 2064 In the following cases, vehicles
can be imported into Nepal temporarily without paying import
duty:
i) Import of vehicle of personal use by the tourists can be done under CARNET system
without paying custom duty. The vehicle so imported can be kept in Nepal for a period of 6
P.T.O.
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month in a period of one year from the date of first entry in Nepal without payment of Import
Duty.
“Thus Mr. Jugal Jain is allowed to keep his Car for a period of 6 months here in Nepal from
25th Magh, 2071.
ii) No customs duty shall be levied on Trailer with tractor entered into Nepal with goods
loaded and returned empty within a period of 48 hours.
iii) No duty shall be levied on Motorcycle, Scooter and town Vehicle from neighboring
country if they go up to the nearest market or airport in Nepal and return on the same day.
iv) No duty shall be charged as per the agreement in case of running of passenger bus and
minibus between the two countries.
v) Loaded truck or trailer if returned empty after unloading the goods at the Nepalese
destination within 72 hours then no duty shall be levied.
ii) As per Section 12(2) of Schedule 1 of Custom Act, 2064, for calculation of the time of 6
Months of stay in Nepal, the period recommended by the District Police Office for which the
Vehicle concerned has remained in registered workshop as a result of the earthquake damages,
shall not be considered.
Thus, period of repair in workshop for 55 days shall not be included in calculation of time of
stay.
Thus, Mr. Jugal Jain can keep his vehicle in Nepal for 6 months and 55 days under above
conditions without paying duty.
Hence, his stay in Nepal is as follows and he will not be liable for any custom duty as his stay
is within the limited period.
Months Days
Magh 5 Days
Falgun - Shrawan 6 Months
Bhadra 10 Days
i.e. 6 Months & 15 Days
3) As per section 12 (2) of Schedule 1, Vehicles imported under carnet are prohibited from
being donated, gifted or sold. Thus, Mr. Jugal Jain shall not sell his vehicle.
b) Section 4 (E) of the Excise Act, 2058 stipulates that alcohol, beer & cigarette
manufacturing industries & trading of these goods can not operate any kind of gift scheme.
Operating gift scheme is constitute a violation of the license term. In this case of
Queenfisher Brewery Industries, the company announces the sure shot offer of Rs. 10 to
Rs. 100,000 to the customer which is violation of the license term under Excise Act, 2058,
so, the notice given by the Department is correct.
As per Excise Act, 2058, operating gift scheme constitute the violation of license term, so,
the answer above will not differ whether the management made the scheme to the public
via hoarding board instead of Kantipur daily.
c)
Section 4C (3) of Excise Act 2058 describe that an industry producing goods by using 90
percent or more native worn and torn or unusable goods shall enjoy exemption of excise
duty leviable on such goods or products.
d)
As per section 72(1), if the owner of the goods stored in customs godown operated by the
customs office does not get clearance and get delivery of such goods within the prescribed
time limit, demurrage shall be charged as prescribed. Provided that no demurrage shall be
P.T.O.
(93)
charged in the case of those goods which could not be cleared by the customs officer because
of confusion about the valuation, classification of goods or for other reason.
As per rule 50(1), no demurrage shall be charged for seven days from the date on which the
goods are stored in the customs office operated warehouse.
As per rule 50(2), in case the goods are not cleared within the time limit prescribed in sub rule
(1), the demurrage shall be charged from the eight day at a rate mentioned in schedule 9. The
demurrage shall not be more than the customs value of goods.
As per schedule 9, rate of demurrage at airport customs office shall be as per following:
Upto 30 days – Rs. 0.60 per Kilogram per day
From more than 30 days to sixty days – Rs. 1 per kilogram per day
For more than sixty days – Rs. 1.40 per kilogram per day.
In the cases specified, ABC Impex is liable to pay demurrage in all the cases which is as per
following:
Consignment one: 10,000 Kgs * 30 days * Rs. 0.60 per Kg per day = Rs. 180,000
Consignment Two: 20,000 Kgs * 60 days * Rs. 1 per Kg per day = Rs. 12,00,000
Consignment Three: 30,000 Kgs * 90 days * Rs. 1.40 per Kg per day = Rs. 37,80,000. As the
customs value of this consignment is Rs.35,00,000, hence as per the law, demurrage is
restricted to be Rs. 35,00,000.
6.
a) How the income tax Act has given authority to Government of Nepal for entering
international treaties with other countries for avoiding double taxation? 5
b) Define the followings terms: (2×2.5=5)
i) Controlled foreign entity
ii) Assessable foreign Income
Answer
a)
As per section 73 of the Income Tax Act, Government of Nepal may enter into a treaty or an
agreement with other countries having the provision of giving a relief to taxpayers form double
taxation, for prevention of fiscal evasion and for reciprocal administrative assistance in the
enforcement of tax liabilities.
If a competent authority of the country requests IRD, in course of executing an agreement or a treaty to
recover a certain amount of tax due to any person according to the regulations of that country, IRD
may by serving a notice in writing require the person to pay the amount to IRD on or before a date
specified in the notice.
In case an international agreement includes a term that Nepal will exempt income or a payment or will
charge a tax at a lower rate of tax on income or a payment, the exemption or reduction shall not be
available to any following entity:
a. Who, for the purpose of agreement, is a resident entity of the other contracting state; and
b. 50% or more of whose underlying ownership is held by individuals or entities in which no
individual has an interest and who for the purpose of the agreement are not residents of that
other contracting state or Nepal.
International treaties are basically adopted under UN Model or under OECD Model. Almost all the
taxation treaties are similar. OECD has published series of documents relating to international taxation.
Model convention on income and capital published by OECD has extensively described the provisions
of international treaties and their implications.
b)
i)
Section 69 (8 Kha) of Income Tax Act 2058 defines the term as Controlled foreign Entity for
an income year means a non resident entity in which a resident person holds an interest,
directly or indirectly through one or more interposed non resident entities, and the person is
P.T.O.
(94)
associated with the entity or would be if the person and not more than four other resident
persons were associated".
ii) Assessable foreign Income:
Section 71 of Income Tax Act 2058 defines the term as Assessable Foreign Income of a
resident person for an income year means the following income that is included in the person's
assessable income from any employment, business, or investment for the year.
1) foreign source income; and
2) Income of a non- resident person, from whatever source, treated as distributed to resident
person under section 69 of IT Act.
P.T.O.
(14)
Advanced Taxation
P.T.O.
(15)
Suggested
Pages - 6
Marks
1. Ghimire and Company is an industry of special nature established in specified
economic zone (SEZ). The industry is located at normal place (not in Himali district)
and has a net profit of Rs. 2,000,000 for the income year 2072/73. The following are
the facts available.
a) C
ommission income of Rs. 50,000 is not included in net profit
b) D
ividend from a resident company of Rs. 28,500 was included in net profit
c) O
pening and Closing inventories were respectively valued at Rs. 300,000 and Rs.
200,000. The cost price of these stocks as on opening and closing date were Rs.
275,000 and Rs. 180,000 respectively
d) A
n asset under block D was purchased on Jestha 01 of income year costing Rs.
1,200,000. But it was not used in manufacturing process in the year. However,
its depreciation was found to be already adjusted in net profit.
e) I
n addition, the following amounts were not included in net profit
(a) Bad debt recovered Rs. 50,000
(b) Penalty under income tax Rs. 20,000
(c) Interest from tax free government securities Rs. 30,000
(d) Donation to tax exempt organization Rs. 200,000
(e) Net assessable income from investment of Rs. 150,000
(f) Business loss Rs. 250,000
(g) Total cost of pollution control device Rs. 1,500,000
(h) Speculation gain (winfall) of Rs. 40,000
f) H
owever, following items are recorded in profit and loss account
(a) Expense of income tax appeal Rs. 15,000
(b) Total cost of research and development Rs. 600,000
g) T
he industry is established 6 years ago
h) T
hough withholding tax has been paid on behalf of company by other entities, the
company has not deposited any advance tax during the year nor filed advance
tax return.
i) T
he company has not maintained the documentary evidence and papers as
required under section 81.
j) T
he return of income has been filed on Kartik 10, 2073 though extension for filing
Income Tax Return has been taken up to Poush end 2073. The contention of the
company is that the company has filed the return before the extended period;
there is no implication of interest under section 119.
k) D
uring the course of tax assessment, the Tax Officer assessed additional tax
P.T.O.
(16)
liability of Rs. 50,000 including tax, interest and fine. Out of which Rs. 20,000 is
undisputed and Rs. 30,000 is disputed tax liability. Also, the company is in
confusion whether to pay the interest and fine assuming that these are the
amounts not considered as tax as per act. Further, the Tax Officers reached to
the conclusion that the company has submitted erroneous statement and liable
for fine under section 120 (kha).
Required: (14+2+2+1+1=20)
i) Compute the Taxable Income and Tax Liability of Ghimire and Company.
Explain on each item on your computation with reference provisions of
Income Tax Act, 2058.
ii) Compute fine and interest under sections 117 and 119. Number of days in a
month 30. Ignore Section 118 interest computation, if any.
iii) What is the remedy available for disputed tax liability and implication
thereon? Also, the company is suffering from liquidity problem and does not
have sufficient cash, is there any possibility of providing bank guarantee
facility for disputed tax liability remedy?
iv) The company is very sure that the tax assessment performed by authority is
challengeable. If the remedy available under (iii) is opted and could not get
the decision on stipulated date, the company is in dilemma that whether
any recourse is available. Advise the company.
v) Compute the Fine to be charged as per Section 120 (kha).
Answer
(i)
Computation of Taxable Income and Tax Liability from business for the Income Year 2072.73
Particulars Amount (Rs) Amount (Rs)
Net income as per statement 2,000,000
Add: Commission Income 50,000
Over valuation of opening stock 25,000
Depreciation of unused asset 60,000
Bad debt recovered 50,000
Expense of Income tax appeal 15,000
Total cost of research and development 600,000 800,000
Total 2,800,000
Less: Over valuation of closing stock (20,000)
Dividend income (28,500) (48,500)
Adjusted Taxable Income before loss 2,751,500
Less: Business loss (250,000)
Adjusted Taxable Income for Pollution Control Cost 2,501,500
(PCC) and Research and Development Cost (R & D)
Less: Allowable Pollution Cost
50% of 2,501,500 (1,250,750)
Or actual cost incurred (1,500,000) (1,250,750)
(whichever is less)
Allowable Research and Development Cost
50% of 2,501,500 (1,250,750)
Or actual cost incurred (600,000) (600,000)
(whichever is less)
Net Assessable Income From Business 650,750
Statement of Total Taxable Income
Net Assessable Income From Business 650,750
Net Assessable Income From Investment 150,000
Total Net Assessable Income 800,750
Less: Allowable Donation (100,000)
Tax Liability (50% of 20% = 10%) 70,075
P.T.O.
(17)
Notes:
1. Commission income is to be part of total assessable income from business.
2. Dividend income is to be excluded while computing the assessable income as it is subject to
final withholding tax as per section 92(1)(ka).
3. Over valuation of opening and closing stock to be adjusted while computing total assessable
income from business.
4. Depreciation shall be allowed only when the asset is put to use as per section 19. The asset is
purchased in Jestha 01 and hence, the adjustment of depreciation comes to Rs.
1,200,000×1/3×15% = Rs. 60,000.
5.
a. Bad debt recovered of Rs. 50,000 is to be included while computing total assessable
income from business.
b. As penalty amount of Rs. 20,000 is not allowed while computing total assessable income
from business and hence ignored.
c. Interest from Government Securities of Rs. 30,000 is subject to final withholding tax as
per section 92.
d. As per section 12, the donation amount to tax exempt organization is allowed as lower of
- 5% of Adjusted taxable income i.e. 5% of 2,651,500 = Rs. 132,575; or
- Actual donation paid i.e. Rs. 200,000; or
- Rs. 100,000.
Hence, 100,000 is allowed.
"Adjusted Taxable Income" means
Adjusted taxable income for pollution control cost and R & D 2,501,500
Add: Net assessable income from investment 150,000
Adjusted taxable income for donation 2,651,500
e. Net assessable income from investment of Rs. 150,000 is investment income and hence
separately included while computing total taxable income.
f. Business loss of Rs. 250,000 is allowed to be set off as per section 20.
g. Pollution Control Cost (PCC) is not included in net profit. Separate allowance as per
section 17 is allowed as follows;
50% of adjusted assessable income i.e. 50% of 2,501,500 = Rs. 1,250,750; or
Actual PCC paid i.e. Rs. 1,500,000
Whichever is less.
Hence, Rs. 1,250,750 is allowed.
6.
a. Speculation gain (winfall) of Rs. 40,000 is subject to final withholding tax as per section 92
and hence not included as part of assessable income.
b. Expense of income tax appeal of Rs. 15,000 which is recorded in profit and loss account
has been adjusted while computing assessable income from business.
c. Cost of R & D is allowed as per section 18 as follows
50% of adjusted assessable income i.e. 50% of 2,501,500 = Rs. 1,250,750; or
Actual R & D cost paid i.e. Rs. 600,000
Whichever is less.
Hence, Rs. 600,000 is allowed.
7. Section 2(3) of schedule 1 of Income Tax Act prescribes the tax rate of 20% for the industry
which is of special nature. Further, as per section 11(3ka)(kha), an industry which is located in
special economic zone and it has operated for more than five years, an exemption of fifty
percent on the applicable tax rate is allowed. Hence, Ghimire and Company is special industry
and situated in special economic zone, the applicable tax rate is 10% (fifty percent of twenty
percent).
P.T.O.
(18)
(ii)
Computation of Fine under Section 117 and Interest under Section 119
Computation of Fine under Section 117
Fine as per Section 117(1)(ka) for not filing Advance Tax Return Rs. 2,000
Fine as per Section 117(2) for not maintaining documentary evidence and papers under
Section 81
(Rs. 2,751,500 plus Rs. 150,000 = Rs. 2,901,500*0.1%=Rs. 2,901 or Rs. 1,000 whichever is
higher) Rs. 2,901
Computation of Interest under Section 119
Rs. 70,075*15%*1/12 = Rs. 876
Note: As per S ection 119(2), the amount of interest is chargeable even for extended time.
Hence, the contention of the company that the interest is not chargeable under section 119 is
not tenable though Income Tax Return filed before extended time.
(iii)
The remedy available to the company is that it can apply for administrative review as per
Section 115 by depositing one third of disputed amount as per Section 115(6). The one third of
the disputed tax liability is Rs. 10,000.
As per Section 2(dha)(4) the term tax includes fine and interest. Hence, fine and interest shall
form part of tax as per act.
Further, the provision of Section 115(6) specifically mentioned on the payment and hence no
bank guarantee facility is available as per act while making the application for administrative
review.
(iv)
If the company opted to file an application for administrative review and could not get the
decision within sixty days therefrom, it can apply to Revenue Tribunal as per Section 116 by
providing the information of such application to the department in writing within fifteen days.
(v)
Computation of Fine under Section 120(kha)
As per Section 120(kha), a person who makes the erroneous statement willfully, 100% of the
tax evaded shall be charged. The Tax Officer reached to the conclusion that the statement is
erroneous and the company is liable for fine of 100% of tax evaded. In this case, it shall be Rs.
70,075.
2.
a) J
anta Bank Ltd. has prepared its financial statements for the fiscal year 2072/73
and you are appointed as a tax auditor. Calculate loan loss provision allowed for
deduction as per Income Tax Act, 2058. 7
Amount in Rs. millions
Total outstanding loans and advances as on 2072.3.31 85,000
Total outstanding loans and advances as on 2073.3.31 125,000
Total outstanding loans loss provision as on 2072.3.31 6,000
Total outstanding loans loss provision as on 2073.3.31 9,000
During the year 2072/73, the bank has written off a debt of Rs. 150 million
from the outstanding loan loss provision.
b)
i) X
Investment Company invested Rs. 100,000 for 7% convertible debentures.
Debentures are converted to 1,000 share of Rs. 100 each. Market value of
share after conversion is expected to be Rs. 150. Calculate gain (loss) on
disposal in the following cases mentioning the relevant provisions of Income
Tax Act/Rules; (2+2=4)
(a) If the debentures were redeemed one year before of due date with
4.5% additional shares at par value.
P.T.O.
(19)
(b) I
f the debentures were redeemed one year before of due date with
premium of 4.5% of par value. Full value was settled by way of issued
shares at 2.25% of premium.
ii) T
ech Pvt. Ltd. has taken the extension of time for the submission of income
tax return for the income year 2072/73 as per section 98 of Income Tax Act,
2058 till Poush end 2073. The company submitted the income tax return on
Magh 09, 2073 instead of Poush end. The amount to be included in income,
as per Section 7, was Rs. 5 million and the deductible expense was Rs. 4
million. Since the company has taken the extension till Poush end there is
delay of nine days only and the amount of fees to be paid under Section
117(1) (ga) is for nine days only and shall be on the basis of net income i.e.
on Rs. 1 million. Comment on the claim of the company referring the
provisions of the Act. 3
c) M
r. Ramesh has taken voluntary retirement from ABC Ltd. on 2073.10.31 after
serving the employer for 13 years and 2 months. The employer has paid him Rs.
210,000 in connection with voluntary retirement, a gratuity of Rs. 180,000 and
leave salary of Rs. 150,000.
The employee was getting the basic pay Rs. 15,000 p.m. at the time of
retirement. The employer has unrecognized provident fund and has
contributed Rs. 3,000 p.m. to the unrecognized provident fund. The
employee has also contributed an equal amount. The employer has
credited interest of Rs. 27,000 to the unrecognized provident fund @ 11%
p.a. on the date of retirement. After retirement the employer has paid him
provident fund balance of Rs. 500,000, out of which employee‘s
contribution is Rs. 200,000. The employer‘s contribution is also Rs.
200,000 and balance is the interest on employee‘s and employer‘s
contribution. The employee has taken voluntary retirement after
completion of the age 50 years though he was to be retired at the age of 58.
The employer has allowed him one month leave per year of service. The
employee has availed seven months leave throughout his service and has
encashed six months leave.
Compute employee‘s tax liability for the income year 2073/074 and TDS
amount on taxable retirement payment. 6
Answer
a)
A. Total loan before the loan write off 125,000
+150 125,150
B. 5% on A 6,257.50
C. Loan Loss Provision claim up to
Previous year:
Loss loan provision Balance 6,000
Claimable Balance or claimed (85,000×5%) 4,250 4,250
Disallowed prev. year 1,750
D. Difference between B and C (6,257.50 -4,250) 2007.50
E. Actual Expense debited in income statement
Opening balance 6,000
Write off Adjustment (150)
Loan Loss Expenses 3,150 3,150
P.T.O.
(20)
Closing balance 9,000
F. Lower of D or E = 2007.50
(Claim to be made)
b)
i.
As per section 40(3)(d) an asset (a business asset, non-business chargeable asset, depreciable
asset, or trading stock) is deemed to be disposed if the form of the asset is changed just before
the new form of asset is used.
Further, as per section 41, in the case of an asset;
1. the person shall be treated as deriving an amount in respect of the disposal equal to the
market value of the asset at the time of the disposal; and
2. for the purpose of subsequent disposal of the asset, the net outgoings for the asset to the
time of the disposal under this section shall be treated as equal to the amounts derived.
Accordingly;
i. Incomings on disposal = Rs. 156,750 (1,000×1.045×150)
Outgoings = Rs. 100,000
Gain (loss) = Incomings – Outgoings
= Rs. 156,750 – Rs. 100,000
= Rs. 56,750
ii. Number of shares received = 1,022 (100,000×1.045/102.25)
Amount received at disposal = Rs. 153,300 (1,022×150)
Hence,
Incomings = Rs. 153,300
Outgoings = Rs. 100,000
Gain (loss) = Incomings – Outgoings
= Rs. 153,300 – Rs. 100,000
= Rs. 53,300
ii.
Section 117(1)(ga) prescribes the following provision.
In case a person fails to submit Income Tax Return as per Section 96(1), the fees shall be
charged as follows;
i. In case the person falls under the category as specified under Section 4(4), the fees shall be
Rs. 100 per month of delay.
ii. For other tax payers, the fees shall be higher of 0.1% of the 'assessable income' or Rs. 100 per
month of delay. The word 'assessable income' means the income derived after the
inclusion of all the amount to be included in income and before any allowed deduction.
A part of a month shall be treated as delay of one month for this section.
Accordingly,
Particulars Amount (Rs)
Amount to be included in Income is Rs. 5 million
Amount that can be allowed as deduction Rs. NIL
For the purpose of section 117(1)(ga) assessable income Rs. 5 million
Period of fees to be charged (Kartik to Magh) 4 months
Fees as per Section 117(1)(ga) [Rs. 5 million ×0.1%×4/12) Rs. 1,667
Conclusion: If the Income Tax Return was submitted within the extended time, the fees under
Section 117(1)(ga) would not have been charged. But if it is not submitted with in the
extended time the amount of fees under Section 117(1)(ga) shall have to be charged after three
months from the end of Income Year.
Hence, the contention of the company is incorrect
c)
P.T.O.
(21)
Computation of taxable Income and Tax Liability of Mr. Ramesh for the Income Year
2073-74
Particulars Amount
Basic Pay (15000*7) 1,05,000
Employers Contribution to Retirement 21,000
Fund (3000*7)
Tax Liability
Social Security Tax on 126,000 @ 1% 1,260
Computation of Taxable Amount of Retirement Payment and Withholding Tax

Particulars Detail Amount
Voluntary Retirement Payment 2,10,000
Gratuity 180,000
Leave Salary 1,50,000
Taxable Amount 5,40,000
Withholding Tax @ 15% U/S 88(1) 81,000
Unrecognised Provident Fund Balance 500,000
Less: Contribution 400,000
Gain (Taxable Amount) 1,00,000
Withholding Tax @ 5% U/S 88(2) 5,000
3.
a) M
th
r. Gopal Shrestha has migrated to UK on 10 Poush, 2073. He has equity shares
in a commercial banks purchased at Rs. 500,000 and a house which he recently
purchased for Rs. 10,000,000. He could not sell these properties and therefore
decided to leave them in the country and migrated to UK on permanent basis.
He has plans to sell the shares as well as the house later on when he will come
to Nepal on a visit.
Explain the tax implication on the assets while he is migrating to UK and the
time when he will come back and sell the same? 5
b) S
ection 21 states that no deduction is allowed for expenses to the extent which
they are of domestic or personal nature. What do you understand by the
expenses of domestic or personal nature? Explain with reference to relevant
provision of Income Tax Act, 2058. 5
Answer
a)
As per the provisions of the Act, in a normal situation, when the ownership in an assets is
relinquished, it is considered that the assets is sold, however there are special provision in
Section 40 (3) of the Act which has prescribed the conditions on which the assets are deemed
to
have been sold even if the ownership is not transferred. Provision clarifies that where if the
owner of assets other than land or land & building, becomes non-resident then by the
operation of Section 40(3)(cha), the assets is deemed to have been sold at the prevailing
market rate. The Act clearly provides the exception for land and building. It therefore is
applicable for all other assets.
The asset is deemed to have been sold the day on which the person becomes non-resident.
In this case the shares in the commercial bank is deemed to have been sold on the day the
P.T.O.
(22)
person goes abroad, because from then on the person is going to be non-resident. The market
price of the shares (Stock Exchange Price) is considered the consideration for the shares sold
and the cost price will be the cost he incurred while purchasing those shares. The net gain will
be considered to have been realized by Mr. Gopal and he will have to pay tax.
Subsequently, when he will come to the country to sell these assets, he will have to consider
the cost of the shares to be the earlier notional income, while the income will be the market
price/transaction price of the shares sold on the date of the transaction.
There will be no special treatment for the land and building sale as these are excluded from
presumed sale of assets mentioned in section 40(3) (cha), therefore goes as per the normal
process
prevailing at the time the transaction is done
Since the house was recently purchased and he is a non-resident, he will not be eligible for any
concessional rate of tax on the sale of house and he would have to pay tax at 25% on the gains
on sale of the house as well as shares, as per Clause 1(8) of schedule 1 to the Income tax Act,
2058
b)
Expenses of a domestic or personal nature means the following expenses-

(1) Personal expenses incurred for an individual and the following expenses, including
interest incurred with respect to money borrowed to the extent to which it is used
for personal purpose-
(Ka) expenses incurred in maintaining the natural person, including in providing
shelter as well as meals, refreshment, entertainment, or other leisure
activities;
(Kha) expenses incurred with respect to the individual commuting, other than
commuting in the course of conducting a business or investment that does
not involve commuting between the individual's home and a place at which
the business or investment is conducted;
(Ga) expenses incurred in acquiring clothing for the individual, other than
clothing that is not suitable for wearing outside of work; and
(Gha) expenses incurred in education and training.
Provided that the deduction of the expenses incurred for education that is directly
relevant to a business or investment conducted by the individual and which does not
lead to a degree or diploma is allowed.
(2) where a person makes a payment to an individual, expenses incurred in making the
payment, including expenses incurred in favour of a third person, except in and to
the extent of the following conditions-
(Ka) the payment is included in calculating the income of the individual;
(Kha) the individual makes a return payment of an equal market value to the
person as consideration for the first mentioned payment; or
(Ga) the payments of the prescribed small amounts which are so small and thus
unreasonable or administratively impracticable to make accounting for them.
4.
a) A
One Ltd. imports/purchases the taxable raw materials to manufacture them
into different taxable and non-taxable items for VAT purpose. The company
furnished following information for the month Shrawan of year 2073.
Details of total imports excluding VAT are as follows;
Cost of raw materials declared by the company Rs. 300,000
Revised cost fixed by customs officer Rs. 350,000
Freight Rs. 50,000
Insurance Rs. 5,000
P.T.O.
(23)
Import duty @ 6%
In addition, it has purchased following raw materials:
Raw material 1 (Exclusive of VAT) Rs. 100,000
The products manufactured out of the above raw materials are sold out
with the details given below:
Ammonium Sulphate Rs. 20,000
Sodium Nitrate Rs. 20,000
Potassium Chloride Rs. 10,000
Pedestrian Controlled Tractor Rs. 200,000
Furniture Rs. 100,000
Sale of manufactured items to special economic zones
Established as per prevailing law. Rs. 200,000
Calculate: (5+2+1+2=10)
i) Amount of net VAT receivable or payable for the month.
ii) If the amount calculated is receivable and the same amount remains
unadjusted upto Poush 2073, whether the company could apply for refund?
Has the act specified final date for application of refund?
iii) The company insists that the refund, if any, shall have to be deposited in the
bank account of the company as per VAT rules. Is the company request
tenable as per law?
iv) If the tax office delays the payment of refund, if any, whether the tax payer
is entitled for interest? If interest is applicable, from which date such
interest is given?
b) A
nswer the followings by mentioning relevant provisions of Double Taxation
Avoidance Agreements (DTAA). (3+4+3=10)
i) Mr. Khamer, a resident of Pakistan, has conducted a hotel business in
Pakistan in income year 2072/73. As per law of Pakistan, Mr. Khamer has to
pay tax of Rs. 1 million to Pakistan Government out of the income from
operation of such business. Mr. Khamer left Pakistan without paying such
tax and has been residing in Nepal being resident person in income year
2073/74. There is DTAA between Nepal and Pakistan which mentions the
clause of assistance in collection of taxes. Though DTAA mentions such
clause, Mr. Khamer has not committed any tax related offences in Nepal;
Inland Revenue Department (IRD) cannot do anything in collection of such
taxes as per law of Nepal. State your views.
ii) Mr. Ravi Kanta Dawedi, a senior Ophthalmologist of Nepal, worked as a
resource person in AIIMS, New Delhi for a period of four months in income
year 2072/73. He generated Rs. 1 million as income in the form of service
fee. As per DTAA between Nepal and India, if any person provides the
service to a country wherein he is not residence of such country and resides
less than 183 days thereon, the income generated by providing service is not
taxable to a country wherein he provides the services (to a source country).
Since the service has been provided in New Delhi, Indian Income Tax
Department demanded tax on income of Rs. 1 million generated by Mr.
Dawedi. State your opinion.
What will be your opinion if there is no DTTA between Nepal and India?
P.T.O.
(24)
iii) Mr. Jalaluddin, a resident of Qatar provided loan to a hydropower in Nepal
amounting to Rs. 100 million and generated interest income of Rs. 10 million
charging interest at the rate of 10 percent. There is DTAA between Nepal
and Qatar wherein it has mentioned that if a resident person of a country
provides loan to a resident of another country and receives interest income,
the tax shall be charged at the rate of 10 percent. But as per Income Tax of
Nepal, any person other than resident natural person receives interest
income it is subject to withholding tax of 15 percent and in case of non-
resident person it shall be considered as final. State your views on the
taxability of such interest income.
Answer
a)
i.
In the case given, ammonium sulphate, sodium nitrate, potassium chloride and pedestrian
controlled tractor are Value Added Tax (VAT) exempted items as per Group 4: Agricultural
Items of Schedule 1 of VAT Act. Hence, no VAT shall be collected on those items.
Accordingly, input tax credit for that proportion shall also be disallowed.
Further, sale of manufactured items to special economic zones established as per prevailing
law shall be charged VAT at the rate of zero percent.
Computation of input VAT amount on import
Cost of raw materials Rs. 350,000
Freight Rs. 50,000
Insurance Rs. 5,000
Total Rs. 405,000
Import Duty @6% Rs. 24,300
Total cost for VAT purpose Rs. 429,300
Input VAT on import @13% Rs. 55,809
Computation of Input VAT amount on local purchase
Total cost Rs. 135,000
Input VAT @13% Rs. 17,550
Total VAT paid on Input Rs. 73,359
Computation of sales
VAT exempted sales Rs.250,000
Furniture @13% on Rs. 100,000 Rs. 13,000
Sale of manufactured items to special economic zones
established as per prevailing law @ 0% on Rs. 200,000 Rs. 0
Total VAT collected on sales Rs.13,000
Ratio of taxable and non-taxable sales is 300,000:250,000 i.e. 55:45
Input tax credit which can be claimed is: 55% of Rs. 73,359 is Rs. 40,347.45.
Amount of net VAT receivable is Rs. 40,347.45 – Rs. 13,000 is Rs. 27,347.45.
ii.
As per Section 24(3) of the Act, a registered person may file an application to a tax officer for
a lump sum refund, as prescribed, for an excess remaining amount that remains after taking
tax credit for a consecutive period of six months under this section. Hence the company may
file an application for refund.
As per Section 24ka of the act, notwithstanding anything mentioned in Section 24 of the Act,
the amount to be refunded as per VAT act shall not be refunded if the application for such
refund is not made within 3 years from the end of the tax period. In this case, last date for
application of refund is end of Shrawan, 2076.
iii.
As per Rule 45(2) of the rules, if refund of more than twenty thousand rupees has to be made,
payment has to be made so that the amount is credited in his bank account. Hence, the request
of the company is tenable as per law.
P.T.O.
(25)
iv.
As per Rule 47 of the VAT Rules, the rate of interest to be given by government of Nepal for
purposes of Section 24(5) of the Act shall be fifteen percent per annum. Such interest amount
shall be calculated only after sixty days from the date of claim for refund pursuant to sub-
sections (3) and (4) of Section 24 of the Act.
b)
i.
As per Section 73(2) of Income Tax Act, where Inland Revenue Department (IRD) receives a
request pursuant to an international agreement from the competent authority of another
country for the collection in Nepal of an amount payable by a person under the tax laws of the
other country, IRD may require such person to pay the amount.
Accordingly, as per DTAA arrangement between Nepal and Pakistan, IRD has the right to
summon a notice to collect such tax from Mr. Khamer. Such act is lawful under the law of
Nepal though Mr. Khamer who is citizen of Pakistan has not committed any tax related
offences in Nepal. As per DTAA, IRD has to assistance in collection of such tax defaulted by
Mr. Khamer in Pakistan.
ii.
As per Section 73(1) of Income Tax Act, 2058, in case any income of a person is subject to
income tax under Income Tax Act or any other prevailing law of Nepal during any Income
Year and the same income is subject to tax under laws of any other country, Government of
Nepal may conclude a Double Tax Avoidance Agreement (DTAA) to avoid any such double
taxation on same income.
Based on above provision, Nepal has entered into DTAA arrangement with India and
following provision have been mentioned.
If any person provides the service to a country wherein he is not residence of such country and
resides less than 183 days thereon, the income generated by providing service is not taxable to
a country wherein he provides the services (to a source country). Accordingly, the income of
Rs. 1 million as service fee generated by Mr. Dawedi is not taxable in India and the demand of
tax by Indian Income Tax Department is invalid. But if there is no DTAA arrangement
between Nepal and India, the income generated by Mr. Dawedi could also be taxable in India
as per the law of that country. There could be possibility of double taxation in case there is no
DTAA arrangement.
iii.
As per Section 73(4) of Income Tax Act, 2058, where an international agreement provides that
Nepal will exempt income or a payment or subject income or a payment to reduced tax, this
Sub-section shall apply.
If there is a provision in the tax law which states that the tax is levied as per act or at a higher
rate, and there is no tax or charged at lower rate as per Double Taxation Avoidance Agreement
(DTAA), the provision mentioned in DTAA shall prevail to a transaction wherein there is
DTAA arrangement.
Accordingly, tax rate mentioned in DTAA between Nepal and Qatar is 10 percent which is the
taxable rate if the loan is provided by a person resident of Qatar to a person resident of Nepal
superseding the tax rate mentioned in the provision of Income Tax of Nepal. The amount of
tax to be paid by Mr. Jalaluddin on income generated of Rs. 10 million of interest shall be Rs.
1 million (10 percent of Rs. 10 million).
5.
a)
P.T.O.
(26)
i) A
brick kiln owner produces and sells 500,000 brick at Rs. 10 per brick. He had
three chimneys which produced the following numbers of bricks.
Particular Amount (Rs.)

Chimney - 1 100,000
Chimney - 2 80,000
Chimney - 3 320,000
Total 500,000
Assess his Excise Duty Liability 4
ii) A
n Inland Revenue Officer has passed assessment order under section 23 (ga) of
Value Added Tax Act. The order states that goods sold by the firm are under
invoiced. Consequently the firm is ordered to pay additional tax, fine and fee for
the under invoiced amount. The proprietor of the firm is considering to file
petition in the Revenue Tribunal. Advise the firm. 3
b) B
utwal Power Company Ltd. had sent its machines for repair purpose to Norway
on Magh 1, 2072 and the value of machine is US$ 800,000. Since, the repair
process is too longer time and the company takes permission from custom office
for extended time for re-export for 5 months from date of export. The machine
was returned after repairing on Chaitra 30, 2072. The bill provided by Norway
for repair is of US$ 250,000 (including spare parts replacement). The company
found that the machine was not repaired correctly and therefore again on 1st
Baisakh 2073 sent the machine back for repairing to Norway. It took another 1
month for the repair to complete and finally the machine was back in Nepal
after repair on Jestha 1, 2073. Calculate the custom deposit/bank guarantee at
the time of sending machine to Norway and custom duty to be paid on returning
of machines. Assuming the custom rate to be 14%. 4
Exchange rates were as follows:
On Magh 1, 2072 Rs. 102.50
On Chaitra 31, 2072 Rs. 104.50
On Baishakh 1, 2073 Rs. 106.75
On Jestha 1, 2073 Rs. 107.50
c) S
tate the penal provisions under the Custom Duty Act and Excise Duty Act for the
following cases. 3
i) I
f any person cause or attempts to cause a loss of revenue or duty by
submitting a forged, fake or false document to the custom office.
ii) I
f any person deliberately obstructs or hinders the Custom Officer or any
employee or the custom office in the exercise of the power conferred by
Custom Act and the Rules.
iii) I
n case of committing any offense in contravention of Excise Act by preparing
false account or forged documents.
d)
i) P
QR Pvt. Ltd. is engaged in supply of taxable goods and is an unregistered
P.T.O.
(27)
under VAT. There is an exhibition scheduled on Poush 3, 2073 and the
company wants to participate in the exhibition for promoting its products.
Exhibition is for a period of one week. Since the company is unregistered, it
claims that registration is not mandatory as its participating in exhibition for
a week only. In other hand, Tax Officer demanded deposit of Rs. 500,000
citing the reason that the company is participating in exhibition. Also, Tax
Officer asked for the submission of tax return. Since the transactions
occurred on Poush, 2073, the company is in the view that it will submit tax
return by Magh 25, 2073.
Comment referring to the provisions of VAT Act/Rule. Also, mention
the fine to be paid by the company, if any, on non-compliance of
registration. 3
ii) M
s. Binita is a proprietor of a VAT registered firm. For the month of Shrawan
2073, she has collected VAT of Rs. 300,000 which she has to deposit within
25th Bhadra, 2073. But on Bhadra 10, 2073, she has delivered a baby boy due
to that she could not deposit the VAT amount within Bhadra 25. The tax
officer wants to levy additional fee of 10% per annum on her. She has
submitted an application to Director General, Inland Revenue Department
on Bhadra 26, 2073 for waiver of additional fee levied by the tax officer as
the non-payment of VAT was due to the circumstances beyond her control.
Can Director General waive that additional fee levy imposed by the tax
officer? Give your opinion. 3
Answer
a)
i) As per Excise Rules, 2059 Schedule – 2, Point 3 (ja(Excise duty license fee for Brick Klin is
Rs. 150,000 per chimney irrespective of production of chimney.
But if the kiln owner is registered under VAT he need not pay the above excise duty
license fee if the VAT payable is in excess of the Excise fee but if the VAT payable is less
than
Excise fee he has to pay the difference within Month of Shrawan from the year end.
In this case, VAT payable is 5,00,000 X 10 = 5,000,000 X 13% = 650,000
Excise license fee payable for the three Brick Kilns is 1,50,000 X 3 = 4,50,000
Since, total VAT payable is more than the excise duty license fee payable he need not pay
any excise duty fee.
Comments: This provision has been revised. As per amended provision, license fee for brick
industry, per chimney of Rs. 150,000 has been withdrawn. Such industry has to be
mandatorily registered under VAT as per provisions mentioned in VAT Act. Hence, Excise
duty payable is NIL.
ii) Under section 23 (ga), tax officer has power to seize similar goods in stock which are under
invoiced and can be purchased or caused to be purchased by the department or the Internal Revenue
Office at the under invoiced price but at the same time the tax officer has no power to levy additional
tax, fine, fee and penalty. So, the order to pay additional tax, fine and fee for the under invoiced
amount is not in compliance with Section quoted i.e. 23 (ga).
b)
As per Rule 7, in case it becomes necessary to send any goods or machinery or spare parts thereof to
a foreign country from Nepal for purpose of repair, deposit as defined below shall be taken.
P.T.O.
(28)
0.5% of the value of the goods in case the goods is aircraft, helicopter and parts thereof, otherwise it
shall be 5% of value.
Here, the value of machinery sent is US$ 800,000 *102.50 = NRs. 820,00,000. Thus, custom shall be
5% of it i.e. 5% of NRs.8,20,00,000 = NRs.41,00,000.
The time given in Rule 7 for re-exports of machine sold for repair is three months from date of
export. This limit can be extended for next three months if granted by custom officer. Here time
limit shall be extended and re-import shall be done within lime limit.
Thus, Custom Officer shall charge custom duty at prevailing rate on the expenses involved in such
repair or on the price of spare parts which are replaced.
From it, custom deposit furnished earlier shall be deducted and custom officer shall return the
balance of the amount of the person.
Particulars Amount NRs
Expenses of repair USD 250,000 * NRs. 104.50 2,61,25,000.00
Rate of Custom Duty 14%
Custom Duty on repair 36,57,500.00
Custom deposit given while machines sent for repair 41,00,000.00
Amount to be received 4,42,500.00
BPC need to receive Rs. 442,500 back from Custom Office.

Bank guarantee proved for the replacement spare parts will be returned by the Custom Office
once the machine is sent back within 6 months for bringing the machine. Since the final repair
was completed within 6 months, the machine was returned on time, therefore no further duty is
payable.
c)
i) 200% of the amount of duty or revenue the loss of which has been so caused or attempted
to be caused or with imprisonment for a term from six months to one year or with both
punishments.
ii) Fine not exceeding Rs. 5,000 or with imprisonment for a term not exceeding one year or
with both punishments, if such person is a government employee, and with a fine not
exceeding Rs. 1,000 or with imprisonment for a term not exceeding six months or with
both punishment if such person is not a government employee.
iii) Fine equal to the amount involved in the offense, or with imprisonment for a term not
exceeding one year, or with both.
d)
i.
Value Added Tax Act, 2052 prescribes the following provisions.
Section 10(ka)(1)
Any unregistered person, willing to engage in any taxable transactions of goods or services at
fair, exhibition and similar activities as organizer or participants, shall have to be temporarily
registered as prescribed under VAT before starting such transactions.
Section 10(ka)(3)
P.T.O.
(29)
After completion of the fair or exhibition, within seven days, the person registered under
subsection (1), has to submit a tax return of the transactions made at the fair or exhibition, pay
the tax accordingly and cancel the temporary registration thereof.
Section 29(1)(ka)
On infringement of section 10ka, Rs. 10,000 for each tax period is to be charged.
Accordingly,
PQR Pvt Ltd is participating in exhibition Ltd has to be temporarily registered under VAT
before participating in it i.e. before Poush 3, 2073.
The Tax Officer cannot demand deposit any deposit as the provision of deposit has been
withdrawn by Finance Act.
Tax Return has to be submitted by the company within seven days from the end of exhibition
and tax thereon has to be paid and cancel the temporary registration thereof, i.e. within Poush
17, 2073.
If the company is submitting tax return on Magh 25, 2073, Rs. 10,000 for each tax period is to
be paid as fine under section 29(1)(ka).
ii.
As per Rule 35 of the Value Added Tax Rules, 2053 In case a woman required to pay tax
delivers a child; up to thirty five days of the date of delivery is considered as circumstances
beyond the control. Further, as per Rule 36 of VAT Rules, for the remission of the additional
charges pursuant to 19(4) of the Act, an application shall be submitted to the Director General
within thirty days of the expiry of time-limit prescribed for payment of tax. In case an
application is not submitted within the time-limit referred, the waiver of additional charges
shall not be granted.
In this case, she has made an application within the limit mentioned in Rule 36. So, applying
the provision of section 19(4) of the Act which states if a taxpayer applies to the Director
General for the exemption of the additional charges levied due to non-payment of VAT within
time stating the reason that the failure to make a timely payment was caused by extraordinary
circumstances beyond the taxpayer‘s control, the Director General may, if he finds the reason
reasonable, exempt such charges.
The Director General after the necessary verification of the matter can waive the additional fee
levied.
6.
a) W
hether the Excise Duty shall be levied on the followings? (5×1=5)
i) P
roduction of Pet bottles (under custom code 3923) by a Beverage Industry
for packing of its final product.
ii) S
ale of Molasis (Khudo) by a sugar manufacturing unit.
iii) L
ocal production of marble.
iv) L
ocal production of motorcycle (Electric)
v) P
roduction and sale of Pasta /Noodles/ Macaroni
b) A
t what conditions excise duty is exempt and what is the penalty if the person
fails to furnish information to extend co-operation as per Excise Act? 5
Answer
P.T.O.
(30)
a)
i) Yes, Excise shall be levied on Production of Pet bottles (under Custom Code
3923) by a Beverage Industry for packing of its Final Product. (Schedule-1 of
Excise Act)
ii) Excise shall be levied on Sale of Molasis by manufacturer. (Schedule-1 of
Excise Act)
iii) No, excise shall not be levied on Local Production of marble. (Schedule-1 of
Excise Act)
iv) No, excise shall be levied on Local production of Electric Motorcycle.
(Schedule-1 of Excise Act
v) Yes, excise shall be levied on Production & sale of Junk Foods. (Schedule-1 of
Excise Act)
b)
In the following cases excise duty is exempt as per Excise Act:
i. No excise duty shall be levied on converting into government number plate by handing
over vehicle imported in diplomatic privilege or duty privilege by foreign mission and
donor agency to a project as per approved annual program and on handing over of vehicle
imported under full or partial duty privilege (except imported under pass book or bank
guarantee) to government entity by converting into government number plate with the
approval from the Ministry of finance on completion of the project.
ii. No excise duty shall be levied on canceling registration with the approval from the Ministry of
Finance by scraping in a not reusable way of vehicle that is old over 15 years from the date of
manufacture and was imported on duty privilege by diplomatic mission, project, and other entity,
iii. Excise duty will be exempted on transferring the vehicle exported on customs duty privilege for
personal use in the name of husband or wife on death of owner of the vehicle.
In case any person who is under obligation to furnish information about any action taken,
about to be taken, or being taken in contravention of Excise Act after getting information
thereof, or to extend cooperation as demanded by the Excise Officer, does not willfully furnish
such information or extend such cooperation, as the case may be, he shall be punished with
imprisonment for a term not exceeding three months, or with a fine not exceeding Rs 10,000,
or with both, according to the nature of the offense.
P.T.O.
Advanced Taxation
Maximum Marks - 100
Marks
1. Texture Cement Limited is a company engaged in manufacturing and sale of premium grade
cement and it provides employment opportunity to 1,300 people. The company is listed in
Nepal Stock Exchange and it has domestic as well as export sales. Also, the company has 50
foreign employees out of total employment. Following is the provisional Income Statement
of the company for the year ended Ashadh 31, 2074.
Particulars Amount in NPR
Income:
Export Sales 6,000,000
Domestic Sales 4,000,000
Dividend Received (Net of Tax) 150,000
Rent Income (Related with Business) 50,000
Total Income 10,200,000
Expenditure:
Cost of Materials Consumed 3,000,000
Manufacturing Expenses 500,000
Employee Cost 1,000,000
Selling and Administrative Expenses 1,500,000
Interest and Bank Charges 500,000
Exchange Loss 250,000
Loss on Sale of Assets 300,000
Total Expenditure 7,050,000
Operating Profit 3,150,000
Less: Provision for Bonus 300,000
Profit Before Tax 2,850,000
a) Cost of material consumed
For export sales : NPR 1,800,000
For local sales : NPR 1,200,000
b) Exchange loss includes NPR 100,000 against revaluation of creditors at the year-end.
c) Selling and Administrative Expenses include NPR 700,000 donation given to Prime
Minister Disaster Relief Fund and NPR 300,000 given for construction of school.
d) Out of total provision for bonus, NPR 200,000 was distributed to the employees till the
time of filing of income tax return. It has been decided by the management not to pay
the undistributed portion.
e) You are given following information with regards to some expenses.
i) NPR 50,000 included in employee cost as staff welfare is personal expenses

of directors.
ii) Manufacturing expenses include NPR 30,000 for electricity bill of previous
year.
iii) Selling and Administrative Expenses include NPR 10,000 for business
promotion which is not related to business.
f) Income Tax Authority made the reassessment for the Income Year 2072/73 and
reassessed the tax payable amounting to NPR 900,000. Out of this amount the
Company accepted to pay NPR 300,000 and decided to go for appeal for NPR 600,000.
The disputed amount includes NPR 300,000 penalty.
g) The management of Company is very strong and legal team is suggesting that the
reassessed amount is challengeable as it has valid legal ground to defend. If needed,
the company is willing to resort to higher judicial authority to challenge the reassessed
figure.
Based on the above information, 20
i) Compute taxable income and tax liability of the company segregating income from
domestic sale and export sale. Apportion common cost on the basis of cost of material
consumed.
ii) With respect to reassessment order issued by Tax Authority pertaining to Income Year
2072/73, the Company seeks your advice on the recourses that can be taken.
Answers:
As per section 11 of Income Tax Act, 2058 below are the exemptions available to Texture
Cement Limited being a Special Industry –
i. The Company employs more than 1,200 Nepali employees whole year. So, it is entitled for
20% tax rebate as per section 11(3)(Ka) for employing 1,200 or more Nepali Employees
ii. The Company has export sales. So, 25% tax rebate for export Income only as per section
11(3)(3anga).
iii. The Company is a listed production based Company. Hence, it is entitled to 10% rebate as per
section 11(3)(3chha).
Selection of Tax Exemption
As per section 11(5), if more than one tax exemption is available for the same income, then only
one tax exemption should be availed as per choice of the Taxpayer.
Hence, the Company should choose one of the exemptions mentioned below:
Exemption Rebate on Export Rebate on Domestic Income
Income
20% tax rebate as per section 11(3)(Ka) for 20% 20%
employing 1,200 or more Nepali Employees
25% tax rebate for export Income only as 25% 0%
per section 11(3)(3anga)
10% rebate as per section 11(3)(3chha) for 10% 10%
being a listed production based Company
Selection of Exemption (highest rebate 25% tax rebate for 20% tax rebate as per
exemption for particular Income) export Income section 11(3)(Ka) for
only as per section employing 1,200 or more
11(3)(3anga) Nepali Employees
Computation of Taxable Income and Tax Liability of Texture Cement Limited for the year ended
Ashadh 31, 2074
Particulars Export Domestic Total(Rs.) Remarks
Income(Rs.) Income(Rs.)
Income From Business
Export Sales 60,00,000 - 60,00,000
Domestic Sales - 40,00,000 40,00,000
Dividend - - - Final Withholding
Tax
Rent Income - 50,000 50,000
Total Income 60,00,000 40,50,000 1,00,50,000
Allowable Expenses:
Cost of Material Consumed 18,00,000 12,00,000 30,00,000 Working Note 1
Manufacturing Expenses 2,82,000 1,88,000 4,70,000 Working Note 2
Employee Cost 5,70,000 3,80,000 9,50,000 Working Note 3
Selling and Administrative 7,14,000 4,76,000 11,90,000 Working Note 4
Expenses
Interest and Bank Charges 3,00,000 2,00,000 5,00,000
Exchange Loss 90,000 60,000 1,50,000 Working Note 5
Loss on Sale of Assets - - - Working Note 6
Provision for Bonus 1,20,000 80,000 2,00,000 Working Note 7
Total Allowable Expenses 38,76,000 25,84,000 64,60,000
Net taxable Income 21,24,000 14,66,000 35,90,000
Income Tax @ 20% being 424,800 293,200 718,000
Special Industry
25% tax rebate for export 106,200 - 106,200
Income only as per section
11(3)(3anga)
20% tax rebate for Domestic - 58,640 58,640
Income as per section
11(3)(Ka) for employing more
than 1,200 Nepali Employees
Net Tax Liability 318,600 234,560 5,53,160
Working Notes
1. Common Costs Allocation ratio for Export and Local Income
Cost of Material Consumed for Export Sales 18,00,000 (60% of Total Cost)
Cost of Material Consumed for Local Sales 12,00,000 (40% of Total Cost)
Total 30,00,000
2. Manufacturing Expenses
Particulars Amount
Manufacturing Expenses as per Income Statement 5,00,000
Less : Prior Period Electricity Expenses not allowed 30,000
Net Allowable Manufacturing Expenses 4,70,000
Manufacturing Expenses for Export Income – 60% of Total Expenses 2,82,000
Manufacturing Expenses for Domestic Income – 40% of Total Expenses 1,88,000
3. Employee Cost
Particulars Amount
Employee Cost as per Income Statement 10,00,000
Less : Personal expenses of directors not allowed 50,000
Net Allowable Employee Cost 9,50,000
Employee Cost for Export Income – 60% of Total Expenses 5,70,000
Employee Cost for Domestic Income – 40% of Total Expenses 3,80,000
4. Selling and Administrative Expenses
Particulars Amount
Selling and Administrative Expenses as per Income Statement 15,00,000
Less : Donation given to School not allowed 300,000
Less : Business promotion Expenses not related to business 10,000
Net Allowable Selling and Administrative Expenses 11,90,000
Selling and Administrative Expenses for Export Income – 60% of Total 7,14,000
Expenses
Selling and Administrative Expenses for Domestic Income – 40% of 4,76,000
Total Expenses
Donation given to Prime Minister Disaster Relief Fund is
allowable.[Sec 12 (Kha)]
5. Exchange Loss
Particulars Amount
Exchange Loss as per Income Statement 2,50,000
Less : Exchange Loss on revaluation of creditors(unrealized, not all) 1,00,000
Net Allowable Exchange Loss 1,50,000
Exchange Loss for Export Income – 60% of Total Expenses 90,000
Exchange Loss for Domestic Income – 40% of Total Expenses 60,000
6. Loss on sale of Assets
As per Income Tax 2058, the realized value of sold assets shall be adjusted in the
depreciation base amount of respective group of assets Schedule 2 Section 2(3)]. It is
assumed that the total realized value has been adjusted accordingly and hence loss on
sale of assets has not been claimed as expenses.
7. Provision for Bonus
Particulars Amount
Provision for Bonus as per Income Statement 3,00,000
Less : Undistributed Bonus 1,00,000
Net Allowable Bonus 2,00,000
Bonus for Export Income – 60% of Total Expenses 1,20,000
Bonus for Domestic Income – 40% of Total Expenses 80,000
ii.
The Company has the following recourses.
- If the Company is not satisfied with the reassessment made by Tax Authority it can apply for
administrative appeal to Director General (DG) of Inland Revenue Department (IRD) within thirty
days from the receipt of reassessment order.
- If, the Company has valid reasons for not submitting its appeal within 30 days, it can apply within
seven days of the expiry date of 30 days for extension and IRD can extend further 30 days period.
- The Company has to pay the undisputed amount and make the payment as deposit of one third of
disputed amount (including penalty) before making appeal to DG. In this case, the company has to
pay NPR 200,000 (1/3rd of NPR 600,000).
- The Company has further recourse that if the notice of decision is not made by DG within 60 days
from the date of application it shall be deemed that the application is not accepted, and it can apply
to Revenue Tribunal as per Revenue Tribunal Act, 2031 notifying the DG of IRD. A copy of application
filed to Revenue Tribunal shall have to be gives to DG within fifteen days. Further, if the taxpayer is
not satisfied with the decision of DG it can apply to Revenue Tribunal as per Revenue Tribunal Act.
- As per Section 9 of Revenue Tribunal Act, fifty percent of tax payable i.e. fifty percent of NPR
300,000 = NPR 150,000 and hundred percent of penalty i.e. NPR 300,000 has to be paid as deposit
before making application to Revenue Tribunal.
2.
a) SAPROS Nepal is registered with Kathmandu District Office and has taken approval from
Inland Revenue Department as tax exempt entity. The entity has earned following
income for the income year 2073/74: 7
Amount NRs.
a. Interest on deposit received from Rastriya Banijaya 250,000
Bank Ltd.
b. Membership fee received from members 150,000
c. Amount received from the canteen operated in 320,000
Kathmandu
d. Motor Bike received from Mr. Ram Shrestha as a gift. (Market value of
Motor Bike is
NPR 25,000)
e. Rent received from let out ground floor 360,000

f. Amount received from sale of old newspapers 45,000
g. Grant received from GON 800,000
h. Interest received from other than bank 250,000
Calculate the total tax liability of SAPROS Nepal for the income year 2073/74 and
describe which income is exempt from income tax as per Income Tax Act 2058.
b) Nepal Tech Ltd. is established as a wholly owned subsidiary of India Tech Ltd. which is
50% subsidiary of UK Tech Ltd. The following particulars are furnished for your
information:
Nepal Tech Ltd. had a turnover of Rs.50 million, which included Rs.20 million
from India Tech Ltd., Rs.20 million from UK Tech Ltd. and Rs.10 million from
other third parties. Nepal Tech Ltd. was charging Rs.1,000 per hour to India Tech
Ltd. and at an equivalent of Rs.2000 per hour to UK Tech Ltd. It was charging
third parties at the rate of Rs.1,500 per hour.
Nepal Tech Ltd.'s summarized Balance Sheet as at 31.3.2074 is as follows:
Million Million Rs.
Rs.
Share Capital 1.00 Assets after Depreciation 2.00
Loan from UK Tech Ltd. 20.00 Work in progress 20.00
Profit & Loss A/c 5.00 Bank 4.00
26.00 26.00
Profit & Loss Account and Balance Sheet items shown above is after deduction of office
expenses, depreciation amounting to Rs. 0.30 million and interest on loan amounting to
Rs. 4 million.
Determine the taxable income of Nepal Tech Ltd. according to the provisions of Income
Tax Act, 2058.7
c) Cream Pvt. Ltd. declared staff bonus of NPR 1,000,000 out of its profit of Income Year
2072/73 as per Bonus Act, 2030. The declared amount of bonus is charged to profit and
loss account of the company and the same is claimed as deduction of expenses as per
Income Tax Act, 2058. Such declared amount of bonus has been distributed to the staff
in the Income Year 2073/74 as per Bonus Act, 2030. After distribution of bonus as per
Bonus Act, 2030, the amount remained undistributed to staff was NPR 300,000. Now,
Tax Officer made the rapid assessment of Income Year 2073/74 and demanded to
include the undistributed portion of NPR 300,000 in the income of Income Year
2073/74. Based on facts available, answer the followings quoting the relevant
provisions and circulars, if any.
i) Whether the inclusion of NPR 300,000 in income of Income Year 2073/74 by Tax
Officer is correct?
ii) What will be your answer if the company is public institution wherein the pre-
approval of Nepal Government for distribution of bonus is required as per statute
and the approval provided was in Ashadh 31, 2073?
iii) If, out of NPR 300,000, NPR 90,000 has been deposited in National Level Welfare
Fund, what will be your answer? 6
Answer: 2(a)
Amount derived by a tax-exempt organization in the form of:
 Donation
 Gift, and/ or
 A contribution that is related directly to the objective of the organization with or without
consideration is exempt from income tax.
Contribution that relates directly to the objectives has not been defined and clarified
anywhere in the Act. But as per generally accepted interpretation, this contribution may
include:
 Membership fee
 Advertisement charge for the publication of a souvenir being published by the
organization.
 Fee for participation in a program run by the organization.
 Entrance fee for any program run by the organization.
The income derived by a tax-exempt organization other than a gift, donation or contribution is
taxable in hand of the organization. Such taxable income may include:
 Interest or dividend from investment
 Profit from sale of investment
 Profit from any business activity conducted by the organization
 Profit from sale of assets.
\
If the tax-exempt organization provides any benefit, which is neither according to the
objective of the organization nor given in consideration of assets provided to the
organization, to a person, the benefit or tax exemption is not available to the organization.
Computation of Total Tax Liability of SAPROS Nepal for the income year 2073/74.
S.N. Particulars Amount (NRs.)
Income from Business:
1 Membership fee received from members (Note 2) -
2 Amount received from the canteen operated in Kathmandu 320,000
3 Gift received from Mr. Shrestha (Note 3) -
4 Rent received from let out ground floor 360,000
5 Amount received from sale of old newspaper 45,000
6 Donation received from GON. (Note 3) -
A Assessable income from Business 725,000
Income from Investment:
1 Interest on deposit received from Rastriya Banijaya Bank Ltd. -
(Note 1)
2 Interest received from other than bank 250,000
B Assessable Income from Investment 250,000
Total Assessable Income (A+B) 975,000

Tax Liability 25% 243,750
Notes
1. Interest received on deposit from bank is final withholding amount as per Section 92 of Income
Tax Act, 2058. Hence not required to include in the total taxable income.
2. Contribution directly related to the functions of an exempt entity with or without expecting any
returns received by the tax exempt entity shall be exempted from tax according to Section 10
(Chha) of Income Tax Act, 2058.
3. Donation & Gift received by tax exempt entity is exempt for taxation purpose[Sec 10(Chha)].
Answer: 2(b)
Rs. in millions
Profit as per Profit & Loss Account 5
When third party is being charged at Rs.1,500/- per hr. India
Tech has been charged at Rs.1,000/- per hr. only. India Tech
is an associated company. Taking from the market rate, services
to India also has to be charged at Rs.1,500/- only i.e. at a rate
of 50% more. So the Income from India Tech under invoiced
= 500 x 20 million = 10
1000 15
Since interest is paid to UK Tech Ltd., which is also an associated company. (50%
owner of Indian Tech Ltd., which is 100% owner of Nepal Tech Ltd.) Sec. 14(2) will be
applicable.
Add the interest paid 4
Adjusted taxable income 19
50% of the adjusted taxable income is 9.5 million.
Since interest paid is less than 50% of the adjusted taxable income, no disallowance under
interest is applicable. Taxable income will Rs.15 million.
Under Sec.33.and 34, if any person tries to reduce the taxable income by dividing with
another person, then in order not to allow reduction of tax liability, the tax officer can
recharacterise the amount according to market rate.
Answer: 2(c)
Inland Revenue Department (IRD) has issued the public circular on 2061.03.14 on allowance of
bonus expenses for the purpose of Income Tax. As per circular, the provision of bonus expense,
which is as per Bonus Act, 2030, is allowed as deductible expenses subject to provisions of Section
13 and 14 of Income Tax Act, 2058.
Further, IRD clarified the allowance of bonus expenses for tax purpose vide public circular dated
2072.11.28. According to that circular,
 if the amount of bonus is taken as deductible expense for the purpose of Income Tax in any Income Year
and such amount of bonus is not distributed, or
 the excess amount set aside as bonus expense & taken as deductible expense over the amount specified
as per Bonus Act or
 is not required to be distributed
Then the followings shall have to be done;

1. The amount of provision of bonus as per Bonus Act, 2030 shall have to be provided for after deducting
such expenses from net profit not exceeding 10% of net profit and the amount to such extent is allowed
to be taken as deductible expense for Income Tax purpose.
2. The amount taken as deductible expense for a particular Income Year shall have to be distributed
immediately in succeeding Income Year. But, for those specified public institution wherein pre-approval
of Nepal Government for distribution of bonus is required, the bonus amount shall have to be distributed
in the year in which the approval for bonus distribution is provided.
3. If, out of bonus amount set aside and taken as deductible expense, the amount in full or partial, could not
be distributed within the time limit as mentioned per clause (1) and (2) above, such undistributed amount
shall be included in the income of immediately succeeding Income Year in which bonus amount is taken
as deductible expense. But, out of undistributed bonus amount, the amount to the extent deposited into
National Level Welfare Fund is not required to be included in the income.
Accordingly,
i. As per public circular above mentioned, the inclusion of NPR 300,000 which remained undistributed, as
income for the Income Year 2073/74 by Tax Officer is correct.
ii. If the company is public institution wherein pre-approval of Nepal Government for distribution of bonus
is required, the bonus amount shall have to be distributed in the year in which the approval for bonus
distribution is provided. The pre-approval for distribution was on Ashad 31, 2073 i.e. in Income Year
2072/73 and hence it has to be distributed in the Income Year 2072/73 itself. If it remained undistributed,
it shall have to be included in the Income Year 2073/74 i.e. NPR 300,000 is to be included in the income of
Income Year 2073/74.
iii. The undistributed amount to the extent deposited into National Level Welfare Fund is not required to be
included in income as per circular. Hence, NPR (300,000-90,000) = NPR 210,000 only shall be included in
the income of Income Year 2073/74.
3.
a) Company Q is a company incorporated in Nepal but wholly owned by a company P
registered in British Virgin Island (BVI). Company P is wholly owned subsidiary of
company R registered in Australia. All the directors live in Australia and the board
meetings are also held in Australia. Decide the residential status of company Q in Nepal
mentioning the relevant provisions of Income Tax Act, 2058.
If company Q is not incorporated in Nepal but in USA and is having permanent
establishment in Nepal, what will be its status under Income Tax Act, 2058? 5
b) Are all interest expenses paid to financial institutions are allowed for deduction as per
Income Tax Act, 2058? Can the company claim interest for funds borrowed from an
individual? What is the documentation required to claim interest expenses as per
Income Tax Act, 2058? 5
Answer: 3(a)
According to section 2[kang (4)(ka)] of Income Tax Act, 2058, a company, if it is incorporated in
Nepal, is a resident company for Nepal. The company's residential status is never affected by the
residential status of the holding company and also the residential status of the directors. So, the
company Q is a resident for Nepal.
Even if Company Q is not incorporated in Nepal but having permanent establishment in Nepal, it
will not be treated as non-resident for Nepal. According to section 2(kang)(8), a permanent
establishment in Nepal of non-resident is always treated as a resident of Nepal.
Answer: 3(b)
The following Interest expenses incurred in connection with the activities of generating income
from business can be deductible under Sec 14 (1).
Interest in relation to loan used up in the year or used in purchasing an asset used in the same
year, or interest in relation to debt obligation emerged in some other circumstances. It is not
necessary that loan should be availed from banks and other financial institutions, it can also be
borrowed from an individual. The important factor to be considered for deducting its interest
under Sec14 (1)is the application of the loan which may either be used in purchasing fixed assets
or in other activities of the normal course of business.
Therefore, we can claim interest for funds borrowed from an individual if above conditions are
met.
Documents required for claiming interest on funds borrowed from an individual.
 Loan deed
 Documents disclosing personal information of the individual
 Documents evidencing inflow of loan to the entity (For example: credit in entity’s Bank account)
 Documents evidencing payment of interest to the individual
 Interest paid to individuals would be subject to TDS @ 15% as per Sec. 88 of the Act. The amount is
not final withholding for the tax payer and legally the recipient is required to submit income tax
return.
 The interest paid preferably is on arm’s length basis. For e.g. if excessive interest has been paid to an
associated person, this may raise further questions.
 In case loan is taken from an individual who is subject to Sec. 14(2) of the Act, additional limits apply.
Individual covered by Sec. 14(2) means non-resident person or person earning exempt income who
individually or collectively owns more than 25% shares in a company and also provides loan to the
company.
Tax Office would be particularly concerned if diversion of funds has taken place. This could
be where loans have been taken from a bank, when there is significant non-interest advance
provided to directors.
4.
a) Drone Plastics has the following transactions. Calculate the amount of VAT payable or
receivable for the month of Jestha 2074. 10
Particular Amount(Rs.)
Purchase of Raw Material 650,000
Purchase of Packing Material 100,000
Purchase of Fuel For Generator 23,000
Purchase of Fuel For Vehicle 15,000
Dealer Meet at Annapurna 100,000
Purchase of Ford Figo 2,300,000
Purchase of Maruti Omni for Cargo 3,000,000
Purchase of Excavator (Earth Moving Equipment) 6,000,000
Sale of Finished Goods 1,500,000
Raw Material purchased includes an item amounting to Rs. 35,000
purchased in the month of Baisakh 2073, which could be accounted 35,000
for in this month as the misplaced invoice was found
Opening VAT Receivable is same since Poush, 2073
All of the above items are exclusive of VAT
b)
i) Casterly Rock Pvt. Ltd. is a Television Assembling Unit in Nepal which imports
Television Receivers under HS Code: 8529.90.10 which is the major raw materials
for Television Manufacturing. Excise Duty on the same is levied @ 10% at the time
of imports as well as is charged @ 10% at the time of Sales of Final Product.
Whereas on the other hand Custom Duty for the same is NIL i.e. no duty is imposed
on import of items falling under HS Code: 8529.90.10. During 2074/75 Casterly
Rock imported around 10,000 Units of Television Receivers @ of Yuan 750 CIF
Birgunj Custom Point each (1 Yuan = 15 NPR). Further assembled the same and sold
around 7,500 Units of Television @ NPR.15,000 each. With Due respect to the
provision of Excise & Custom Act suggest about the following:
a. What will be the cost per unit of Television Assembling Unit so imported?
b. Will Casterly Rock be allowed to Claim Credit of the Excise Paid on Import of
Raw Material? If Yes, Why?
c. Will your answer in b above be same if the item was imported in the first 6
months i.e. Shrawan to Poush of FY: 2073/74 instead of 2074/75?
ii) Bajaj construction Co. Ltd. had imported 15,000 Kg cements and construction
materials from Lucknow, India and imported 2,000 Kg spare parts from Singapore
by Air. Both the goods were arrived on Magh 1, 2073 in Nepalgunj Custom Office
and Tribhuvan International Airport. But due to strike in the company and shortage
of funds, the company had taken delivery of the goods only after 90 days from
Nepalgunj Custom Office and TIA Custom Office. Calculate demurrage charges in
the above cases as per Custom Act.
Answer: 4(a)
Notes:
 Since the opening VAT receivable is same for six months, Drone Plastics should file an application as per
annex 14 for refund of amount in cash. [Sec. 24(3)] of VAT Act, 2052
 Purchase of Fuel for Vehicle is not allowable for credit.[Sec 41(1) of VAT Rule, 2053]
 If the student assumed disel, then it is allowable.
 Dealer Meet at Annapurna is not allowable for credit. .[Sec 41(1) of VAT Rule, 2053]
 Excavator is a VAT Exempted Item so no credit available.
Computation of VAT payable/receivable for the month of Jestha 2074
Particulars Amount(Rs.) Amount(Rs.) VAT (Rs.) Remarks

VAT Collected:
Sale of Finished Goods 1,500,000 195,000
VAT Collected On Sales 195,000
VAT Paid:
Purchase of Raw Material 615,000 79,950
Raw Material Purchase 650,000
(-) Time Barred Item (35,000) 1 Year Lapse
Purchase of Packing Material 100,000 13,000
Purchase of Fuel For Generator 23,000 2,990
Purchase of Ford Figo 2,300,000 119,600 40% Allowed
Delivery Van
Purchase of Maruti Omni for Cargo 3,000,000 390,000
100% Allowed
VAT Paid On Purchases 605,540
VAT Receivable:
VAT Paid On Purchases 605,540
Less:
VAT Collected On Sales (195,000)
Total 530,540
Answer: 4(b)(i)
a) Cost per unit of Television Assembling Units so imported shall be Rs.12,375 as follows:
Particulars Units Yuan/Unit Rate Amount

Cost Price of Television Receiver 10,000 750 15 112,500,000
Custom Duty at Custom Point -
Excise Duty at Custom Point 10% 11,250,000
Total Cost of Purchase 10,000 123,750,000
Cost Per Unit of Purchase 12,375
b) Casterly Rock Pvt. Ltd. will not be allowed to Claim Credit of Excise amounting Rs.11,250,000 so paid at
the time of import even though it is the Major Raw Material for Television manufacturing. Reason for
the same is amendment in Sec: 3(Ka)(5) of the Excise Act, 2058 by Finance Bill: 2074/75 which restricts
an entity from claiming credit of excise so paid at the time of import on items on which no custom is
levied i.e. which are custom exempted. In our scenario also Custom is NIL on the item being imported.
So, Excise paid at the time of import needs to be accounted as an expenses instead of claiming the same
as a credit on purchase.
c) No, my answer will differ if the item was imported in first six months i.e. Shrawan to Poush of FY:
2073/74 instead of 2074/75. In this the scenario would have been different and the entity would have
been allowed to claim credit of the excise so paid at the time of import based on the provision so laid
down by Sec: 3(Ka)(3) of Excise Act, 2058. As the above stated amendment by Finance Bill: 2074/75 is
applicable from Jestha 15, 2074 onwards.
Answer: 4(b)(ii)
The warehouse facility is provided free of cost for 7 days of delivery of the goods to the warehouse. Customs
warehouse are mostly owned by government of Nepal. But as per Rule 11, a person with prior permission of
Government of Nepal can establish a custom warehouse. These warehouses are called Non –government
warehouse.
The importer should pay demurrage charges if he fails to take delivery of goods stored at the customs
warehouse within the prescribed time limit. When goods are delivered to custom warehouse for custom
clearance, 7 days’ time is allowed for storing at the warehouse without payment of any charge. But in case
the person fails to take delivery of the goods after custom clearance within the prescribed days, it has to pay
demurrage as per the prescribed rate. It may call rent of warehouse for storing goods. No demurrage shall
be charged in the case of those goods which could not be cleared by the Customs Officer because of
confusion about the valuation, classification of goods or for other reason. Notwithstanding anything
contained in Section 72 subsection (1), if there is a reasonable ground for remitting demurrage chargeable of
any goods because of the occurrence of any special circumstance or condition, the prescribed authority may
make full or partial remission, as prescribed.
Demurrage charge rate as per Rule 50, Annex -9 is as follows:
Days Rate NRs. Amount
NRs.
Up to 7 days = 7 days No charge -
8 days to 30 days = 23 days NRs 0.40 per kg per day 138,000
Total days = 90 days Total demurrage charges to be paid to 768,000

Nepalgunj Custom Office (A)
2
31 days to 60 days = 30 days NRs 1 per kg per day 60,000
Total days = 90 days Total demurrage charges to be paid to TIA 171,600

Custom Office (B)
Grand Total (A+B) 939,600
5.
a) Polyvinyl Pvt. Ltd. has the following transactions during the month of Shrawan, 2074
 Import of plastic raw materials 100 ton: NPR 1,000,000
 Clearing expenses at Custom Point: NPR 40,000
 Other handling expenses at Custom point: NPR 20,000
 Factory wages: NPR 150,000
 Other production cost: NPR 100,000
 Stock of plastic raw materials at the end of Shrawan 2074: 8 ton
 Stock of finished products at the end of Shrawan 2074: 8 ton
The company purchased 1 Mini Truck and 1 Van (for passengers) for NPR
2,260,000 and NPR 1,356,000 respectively. General Service Fee incurred was
NPR 339,000. Cost of these vehicles and service are inclusive of VAT.
There is no production loss, i.e. input output ratio of finished product is 1:1.
Custom duty paid @ 30% of landed cost is not included in above data. The
company‘s directors have formed a partnership firm of distributors. The company
has appointed the firm as sole distributor of the company‘s products. The
company sales its product to the distributor @ NPR 24.80 per kg plus excise duty
and applicable VAT. The distributor firm sells the product @ NPR 50 per kg.
Normal commission to distributors/wholesaler for same product paid by other
manufacturers is NPR 7.50 per kg. Transportation expenses incurred by other
manufacturers for distribution of the same product are about NPR 7.50 per kg.
The rate of excise duty on the product is 5% of the value.
i) Calculate the amount of VAT receivable/payable for the month of Shrawan, 2074. 6
ii) Assume that VAT payable for the month of Bhadra, 2074 is NPR 598,350. The
company filed VAT return and paid such amount on Kartik 25, 2074. Calculate the
amount of additional fee under Section 19, interest under Section 26, fine under
Section 29 and total liability of the company. For the purpose of calculation assume
30 days in a month, 365 days in a year. 6
b) BB Engineering is engaged in the business of selling inverters. As part of inverter sale,
within one year of warranty period from the date of sale, it provides free servicing up
to five times. For such servicing function, BB Engineering has appointed 100 authorized
service centers throughout the country. The service centers charge NPR 3,000 per
Inverter from BB Engineering, which is charged on monthly basis. Since it is a part of
services under warranty period, the service centers are in confusion whether the
service fee is taxable as per VAT Act. Advise mentioning the relevant provisions of the
Value Added Tax Act. 4
c) XYZ Ltd. dealing excisable goods and services under physically controlled system. As per
the books of account of the company, there is excise payable of NRs. 1,500,000 of
which Rs. 500,000 is related to sales of 1 Baisakh 2074, Rs. 700,000 is related to sale of
25 Baisakh 2074 and the balance amount is related to sale of 10 Jestha 2074. The
company has not paid the excise amount till 31 Asadh 2074. In this case, briefly
mention the duty payment system and calculate late fee if excise payable amount is
paid on 31 Asadh 2074. 4
Answer: 5(a)
i)
Calculation of VAT Receivable/Payable for the month of Shrawan, 2074
Particulars NPR NPR
Cost of Raw Materials 1,000,000
Clearing Expenses at Custom point 40,000
Other handling expenses at Custom point 20,000
Landed Cost 1,060,000
Customs Duty @ 30% 318,000
Sub-total 1,378,000
VAT paid @ 13% 179,140
Cost of Raw Materials Consumed (1378,000*92/100) 1,267,760
Factory Wages 150,000
Other Production Cost 100,000
Factory Cost 1,517,760
Factory Costs per kg (1,517,760/92000) 16.50
Margin per kg [24.80-16.50)/16.50=50%)] 8.25

Factory Price to whole seller 24.80
Excise Duty @ 5% 1.24
Sub-total 26.04
VAT per kg @ 13% 3.39
Total VAT collected [84,000*3.39] 284,760
Less: VAT paid:
at Custom 179,140
while purchasing Mini Truck(Full credit) 260,000
while purchasing Van(40% credit) 62,400
for Service 39,000
Total VAT to be claimed 5,40,540
VAT credit to be claimed (Receivable) (2,55,780)
ii)
Calculation of additional fee, interest, fine and total liability
Calculation of additional fee U/S 19
Period of delay is from Ashwin 25 to Kartik 25 = 30 days
VAT amount (NPR) 598,350

No. of days for additional fee calculation 30 days
Additional Fee rate per annum 10%
Amount of Additional Fee = NPR 598,350×10%×30/365 4,918

Calculation of interest U/S 26
VAT amount (NPR) 598,350

No. of days for additional fee calculation 2 months
Interes rate per annum 15%
Amount of Interest = NPR 598,350×15%×2/12 14,959

Calculation of Fine under Section 29(1)(ja)
As per Section 29(1)(ja), if there is failure to submit tax return as per Section 18, 0.05% per day of
tax payable or NPR 1,000 per tax period whichever is higher shall have to be paid as fine.
Accordingly, NPR 598,350×0.05%×30/365=NPR 24.59 or NPR 1,000×2=2,000 whichever is higher
i.e. NPR 2,000 shall have to be paid by the company as Fine.
Calculation of Total Liability NPR
VAT 598,350
Additional Fee u/s 19
4918
Interest u/s 26 14,959
Fine u/s 29 2,000
Total 620,227
Answer: 5(b)
As per Section 5(1), of VAT Act, except otherwise provided for in the act, value added tax shall be
imposed on supply of goods or services.
As per Section 2(Chha) "Supply" means sale, exchange and transfer of goods or services or an act of
granting permission thereto or entering into a contract thereto for a consideration.
As per Section 2(ja) "Consideration" means anything to be received as value for the supply of goods
or services.
As per Section 2(cha) "Service" means anything other than goods.
Authorized service centers are treated as agents of BB Engineering. The service provided by them to
the customers is on behalf of the principal-BB Engineering. There is supply of services for
consideration. Hence, the fee charged by service centers to BB Engineering is service fee taxable as
per Value Added Tax Act, 2052.
Answer: 5(c)
The time frame prescribed for payment of Excise Duty as per section 4 (kha) (1) of Excise Act are:
a) Section 4 kha(1)(ka) for goods & service under Physically Controlled System- At the time of
removal of goods from the warehouse.
b) Section 4 kha(1)(kha) for goods & service under Self-Removal System - Within 25 days of the
following month in which goods have been invoiced.
c) Section 4 kha(1)(Ga) for goods & service to be imported - At the time of clearing goods from
custom point in Nepal.
d) Section 4 kha(1)(Gha) for import of service – As specified by the department.
 If Excise duty is not paid within due time, late fee of 0.05% per day shall be paid.
The company has excise payable of NRs. 1,500,000 that is related to 1 Baisakh, 25 Baisakh and
10 Jestha 2074. So late fee shall be as follows till 31 Asadh 2074.
Month Amount Time period Per day late No. of delay Late fee
Payable for deposit fee days till 31 NRs.
(0.05%)NRs. Asadh 2074
1 Baisakh 2074 500,000 31 Asadh 250 92 23,000
2074
25 Baisakh 2074 700,000 31 Asadh 350 68 23,800
2074
10 Jestha 2074 300,000 31 Asadh 150 52 7,800
2074
Total 1,500,000 54,600
6.
a) Mr. Hari is professor of Pokhara University and was a resident of Nepal during income
year 2072/073. On Ashwin 1, 2073, he went to Beijing under an assignment for carrying
out specific research work in Shangai University. For his outstanding work, Shangai
University paid remuneration of Chinese Yuan 200,000 for the period Ashwin 1, 2073 to
Ashadh 31, 2074. Discuss the tax liability of Mr. Hari giving consideration to the
agreement between Nepal and China for avoidance of double taxation and prevention
of fiscal evasion with respect to taxes on income. You need not to calculate the tax
payable. (Assume exchange rate of One Yuan=NRs.16). 5
b) Mr. Banwarilal, an Indian tourist, visited Nepal in the year 2016. He purchased taxable
goods of NPR 16,000 from Pokhara and decided to take the purchased goods along with
him while going back to India via Sunauli boarder by his own vehicle. He seeks your
advice on refund of VAT paid by him on purchase of such goods. What would be your
answer if he had purchased the taxable goods worth NPR 26,000 instead of NPR
16,000? 5
Answer: 6(a)
According to Article 20 of the agreement between Nepal and China for avoidance of double taxation
and prevention of fiscal evasion with respect to taxes on income, a professor or teacher who is or was
a resident of one of the contracting states immediately before visiting the other contracting state for
the purpose of teaching or engaging in research, or both, at a university, college, school or other
approved institution in that other contracting state shall be exempt from tax in that other state on any
remuneration for such teaching or research for period not exceeding two years from the date of his
arrival in that other state. This provision applies to Mr. Hari because he was resident in Nepal during
FY 2072/073 and his stay in China has not exceeded two years. Therefore, remuneration of Chinese
Yuan 200,000 received by Mr. Hari during income year 2073/74 is exempt from tax in China.
However, the income is taxable in Nepal, as he has been in Nepal for a continuous period of 183
days before departure to Beijing.
Answer: 6(b)
Under Section 25ka of Value Added Tax (VAT) Act, 2052, a foreign tourist who has paid VAT on
purchase can claim for refund of such VAT amount. However, for such refund, following conditions
must have been fulfilled –
(i) He must have purchased taxable goods of more than NPR 25,000.
(ii) He must be returning via air transportation mode. Refund facility is not available for foreign
tourist returning by road.
(iii) The purchased goods must have been taken out of country by the foreign tourist himself.
As the amount of goods purchased is less than NPR 25,000 and Mr. Banwarilal is travelling back by
road through Sounali boarder, he cannot claim the refund of VAT.
In the second instance, though the amount of purchased goods is NPR 26,000 (in excess of NPR
25,000) Mr. Banwarilal is travelling back through road transportation mode; he cannot claim the
refund of VAT.
It is to be noted that service charge at the rate of 3% of the amount to be refunded shall be deducted
by the department at the time of refund.
CAP III Suggested Answer- Dec 2018
Paper 6:
Advanced Taxation

Advanced Taxation
Suggested
Marks
Use separate answer book for each question.
1. Ramro Saathi Foundation is a not for profit Company incorporated under Company
Act, 2063 for providing assistance in education field for the betterment of deprived
children. The Company has also obtained tax exemption certificate from Inland
Revenue Department. Details of its transactions for Income Year 2074/75 are given
below:
a. Donation of USD 10,000 has been received on 15 Falgun 2074 from USA.
Applicable USD rate at the date of receipt of donation is 1 USD = Rs. 103.37.
Foundation deposited the amount in USD Bank Account which remained idle in
bank account till year end. USD rate at the year end is 1 USD = Rs. 109.34.
b. Foundation has received donation of Rs. 500,000 from local cement factory for
construction of school. Rs. 600,000 was spent on construction of local community
school which was handed over to the local community. Foundation has contributed
Rs. 100,000 from its own fund.
c. Foundation also runs a school for benefit of deprived children where it charges
normal fee to general students and provides scholarships to deprived students.
During the income year, School was in loss of Rs. 1,000,000 after charging
following expenses:
i. Special scholarship of Rs. 100,000 to a student who is son of one of trustees
of the Foundation.
ii. Contribution of Rs. 50,000 to local club for maintenance of road so that its
students can reach school safely.
iii. Gift of Rs. 100,000 to the employee of the local donor.
iv. Travelling expenses of Rs. 100,000 incurred for the wife of one of the trustees
of the Foundation.
v. Repair expenses of Rs. 1,000,000 for repair of school building damaged by
earthquake.
d. Opening WDV of the Property, Plant and Equipment as per Income Tax Act is as
given below:
Block Particulars Amount (Rs.)
A Buildings 5,000,000
B Computers and Office Equipment 1,000,000
C Vehicles 5,000,000
D Other Assets 500,000
e. During the year, Foundation decided to hire vehicles for carrying school children, and
hence sold all of the vehicles for Rs. 6,000,000.

f. Foundation has received donation of Computers for school worth Rs. 600,000 on 1
Baishak 2075, which is not considered for computing the loss.
g. Foundation has received donation of ERP system for school worth Rs. 1,000,000 on 1
Shrawan 2074, which is not considered for computing the loss. Its life is 5 years.
h. Depreciation expense has not been provided for yet.
i. Foundation has opened a Fixed Deposit of Rs. 10,000,000 with a Bank on which it
received interest income of Rs. 1,020,000 after TDS of Rs. 180,000.
j. Foundation had conducted a workshop on “Best Practices for Betterment of
Educating Young Children”, where it charged Rs. 50,000 per participant. Total
numbers of participants were 100. Total expenses incurred for the workshop was Rs.
500,000. Foundation plans to utilize the surplus amount for its objectives. Foundation
also appealed for the contribution and it was able to collect total donation of Rs.
1,000,000 from the participants of the said workshop.
k. It has not deposited any advance tax except for the tax deducted at source.
Required: 20
i) Citing relevant provisions of the Income Tax Act, 2058 and Rules 2059, advise
whether Ramro Saathi Foundation is required to file tax return or not?; and
ii) Determine the Tax Liability of Ramro Saathi Foundation, including fine, interest and
penalty if the foundation intends to submit tax return, if any, on due date.
Answer:1
i) Section 96(1) of the Income Tax Act, 2058 provides that every person is required to
submit income tax return for the income year within 3 months of the end of the income
year. Further, Section 97 of the Income Tax Act, 2058 provides for exemptions from
filing of the income tax return. Section 97 of the Income Tax Act, 2058 does not exempt
tax exempt entities from filing of income tax return. Further, Rule 5ka(2) of the Income
Tax Rules, 2059 specifically provides that tax exempt entities are required to file income
tax return for getting its tax exemption certificate renewed. Hence, Ramro Saathi
Foundation is required to file income tax return.
ii) Computation of Tax Liability of Ramro Saathi Foundation
Tax Taxabale Remarks

Exempt(Rs.) (Rs.)
Particulars
Donation from USA 1,033,700 Exempt u/s 10(chha)(1)
Donation from local donor 500,000 Exempt u/s 10(chha)(1)
School Construction Cost (600,000) Non-deductible as not
related to income generation.
Income from school (1,000,000) Not exempt u/s 10(chha)(2)
as school is run with a
motive of earning income
Add : Special Scholarship to 100,000 Personal benefit to trustee
son of one of trustee
Add: Contribution to club 50,000 Non-deductible expenses as
given to a non-TEO
Add: Repair and 650,000 Repair and Improvement

Improvement Expenditure Expenditure for earthquake

reconstruction was fully
deductible until IY 2073/74
but is under the limitation of
7.5% of respective
depreciation base from IY
2074/75.
Add : Gift to Local Donor‟s 100,000 Personal expenses
employee
Add : Travelling expenses 100,000 Personal expenses
of
the wife of trustee
Add : Donation of 600,000 Taxable as related to school
Computers which generates normal fees
Add : Donation of ERP 1,000,000 from students
Less : Depreciation (825,000) Refer Below Note
Add : Gain on Sale of 1,000,000 Refer Below Note
Vehicle
Add : Interest on Fixed 0 Interest income earned by
Deposit tax exempt entity is a final
withholding income as per
Section 92 and is not
included in income as per
Section 7(3).
Add : Income from 5,000,000 Not exempt u/s 10(chha)(1)
Workshop as workshop is run with a
motive of earning income
Less : Workshop Expenses (500,000)
Donation collected at 1,000,000
Workshop
Total 1,933,700 6,275,000
Tax @ 25% 1,568,750
Fee u/s 117 for not filing 2,000
estimated return
Interest u/s 118 for non - 111,185.15 Working Note
deposit of advance tax
Total Tax Liability 1,681,935.15
Calculation of Depreciation and allowable Repair and Maintenance

Block A Block B Block C Block D Block E Remarks
Opening 5,000,000 1,000,000 5,000,000 500,000 0
WDV
Add : 1,000,000 Refer
Addition Below
during the Note
year – upto
Poush end
100%

Add :
Addition
during the
year – After
Poush but
before
Chaitra end
2/3
Add : 200,000 Refer
Addition Below
during the Note
year – After
Chaitra but
before Ashad
end 1/3
Less : 6,000,000
Disposal of
Vehicle
Closing 5,000,000 1,200,000 (1,000,000) 500,000 1,000,000
WDV Block is
zero.
Hence this
amount
treated as
profit as a
balance
charge.
Depreciation 5% 25% 20% 15% 200,000
Rate per
annum
Depreciation 250,000 300,000 0 75,000 200,000 825,000
Calculation of Interest for Non Deposit of Advance Tax

Particulars First Second Third Total
Installment Installment Installment
40% 70% 100%
627,500 1,098,125 1,568,750
Amount Deposited 0 0 0
90% of concerned 564,750 988,312.50 1,411,875
installment minus
Deposited Amount
Interest for 3 21,178.12 37,061.72 52,945.31 111,185.15
months @ 15%
2.
a)
Apeksha Community Hospital operated by Jagaran Yuba Club, a tax exempt
organization, paid interest to the Club @ 18% on a loan of Rs. 2,000,000 borrowed

on 2074/02/03 from the club and refunded the whole loan amount on 2074/12/06.
With the following relevant information, calculate the interest allowable for
deduction in the income year 2074/75. 7
Fees collected by the hospital 1,630,000
Salaries 740,000
Lab Expenses 60,000
Interest Earned from Fixed Deposit 71,000
Telephone Expenses 35,000
Previous Years‟ Loss 56,000
Fuel 83,000
Donation to a political party registered in Election 25,000

Commission
Interest paid to Bank 43,000
For your information, following are the days in the months of 2074/75:
Month Days Month Days
2074 Shrawan 32 2074 Magh 29
Bhadra 31 Falgun 30
Ashwin 31 Chaitra 30
Kartik 30 2075 Baishakh 31
Marga 29 Jeshtha 31
Poush 30 Ashadh 32
Total 366
b)
Rastriya Jana Party is a political party registered with Election Commission and
has the following income for the fiscal year 2074/75.
Amount (Rs.)
a. Interest on deposit received from Rastriya 200,000
Banijya Bank Ltd.
b. Membership fees received from members 340,000
c. Amount received from the canteen operated in 250,000
Kathmandu

d. Amount received from sale of office equipment 50,000

e. Dividend received from Investment 25,000
f. Motor Bike received from Mr. Ram Shrestha as a (Market value of Motor
gift to the party Bike is Rs. 125,000)
g. Rent received on letting out the ground floor of 360,000

party office
h. Interest received from other than Bank 250,000
I Donation received from FNCCI 80,000
j Amount received from sale of old newspaper 7,500
Required: 7
Calculate the tax liability of Rastriya Jana Party for the income year 2074/75.
Also mention which income is exempt from income tax.
c)
Swastik Private Limited has shareholding pattern on 1 Shrawan 2074 as
mentioned below:
Shareholder No. of Shares Share Capital
Ram Shrestha 20,000 2,000,000
Hari Adhikari 25,000 2,500,000
Prem Yadav 25,000 2,500,000
Som Saud 10,000 1,000,000
Krishna Singh 120,000 12,000,000
Total 200,000 20,000,000
Krishna Singh decides to sell all of his shares. Accordingly, he makes application
to the board of the directors for approval for the sale of his shares. Board approves
for sale of shares owned by Krishna Singh to Shyam Rawal at the rate of Rs. 150
per share on 1 Poush 2074.
Below is detail of transactions of Swastik Private Limited for the income year
2074/75:
Particulars Upto 1 Poush 2074 From 1 Poush 2074 Total
to 32 Ashadh 2075
Sales 4,500,000 15,000,000 19,500,000
Cost of Sales 2,400,000 9,000,000 11,400,000
Employee Cost 500,000 2,000,000 2,500,000
Interest Expenses 500,000 500,000 1,000,000
Total carried forward accumulated loss pertaining to last 3 income years is
Rs. 1,500,000 as on 1 Shrawan 2074 as per Income Tax Return.
Detail of Assets and Laibilites are as below:
Book Value Market Value As Book Value Market Value
As On 1 On 32 Ashadh As On 32 As On 32
Poush 2074 2075 Ashadh 2075 Ashadh 2075
Stock 500,000 400,000 1,000,000 900,000
Debtors 1,500,000 1,000,000 2,500,000 2,000,000
Creditors 1,000,000 1,000,000 1,500,000 1,500,000

Compute the Total Tax Liability of Swastik Private Limited for the income year
2074/75. 6
Answer:2(a)
According to Section 14(2), interest paid to a controlling tax exempt organization is
deductible to the extent of the amount of interest income and 50% of adjusted taxable
income before any interest items.
Inclusions Fees collected by the hospital 1,630,000
Deductions Salaries 740,000
Lab Expenses 60,000
Telephone Expenses 35,000
Previous Years‟ Loss 56,000
Fuel 83,000
Adjusted Taxable Income before interest items 656,000
50% of Adjusted Taxable Income before interest items 328,000
Interest Income 71,000
Maximum ceiling of the interest deductible 399,000
Actual interest paid 243,934.43

(2000000*18%*(32+31+31+30+29+30+29+30+6)/366
Deductible interest 243,934.43
Answer:2(b)
According to Sec. 10 (chha) of Income tax Act, 2058 amount derived by a tax-
exempt organization in the following form are exempt from income tax:
 Donation
 Gift, and/ or
 A contribution that relates directly to the objective of the organization with
or without consideration.
“Contribution that relates directly to the objectives” has not been defined and
clarified anywhere in the Act. But as per generally accepted interpretation, this
contribution may include:
 Membership fee
 Advertisement charge for the publication of a souvenir being published by
the organization.
 Fee for participation in a program run by the organization.

 Entrance fee for any program run by the organization.

The income derived by a tax-exempt organization other than a gift, donation or
contribution is taxable in hand of the organization. Such taxable income may
include:
 Interest or dividend from investment

 Profit from sale of investment
 Profit from any business activity conducted by the organization
 Profit from sale of assets.
If the tax-exempt organization provides any benefit, which is neither according to
the objective of the organization nor given in consideration of assets provided to
the organization, to a person, the benefit or tax exemption is not available to the
organization.
Computation of tax liability of Rastriya Jana Party for the income year 2074/75.
S.N. Particulars Amount

(NRs.)
A Income from Business
1 Membership fee received from members (Note 3) -
2 Amount received from the canteen operated in Kathmandu 250,000
3 Amount received from sale of office equipment 50,000
4 Gift received from Mr. Shrestha (Note 4) -
5 Rent received on letting out the ground 360,000
6 Donation received from FNCCI. (Note 4) -
7 Amount received from sale of old newspaper 7,500
8 Interest on deposit received from Rastriya Banijya Bank -
Ltd. (Note 2)
9 Interest received from other than bank 250,000
10 Dividend received from Investment (Note 2 ) -
Assessable income from Business (A) 917,500
Tax Liability 25% 229,375
Notes
1. In Section 2.dha of Income Tax Act, 2058, Political party registered in Election
Commission shall be treated as tax exempted entity even though it has not been
registered with Inland Revenue Department as a tax exempted entity.
2. Interest received on deposit from bank and dividend received from the company is
final withholding amount as per Section 92 of Income Tax Act, 2058. Hence not
required to include in the total taxable income.
3. Contribution directly related to the functions of an exempt entity with or without
expecting any returns received by the tax exempted entity shall be exempted from tax
according to Section 10 of Income Tax Act, 2058.
4. Donation & Gift received by tax exempted entity is exempt for taxation purpose.

Answer:2(c)
Note: Transactions up to 1 Poush 2074 is considered to be the transactions before

the transfer of shares of Krishna Singh and the transactions from 1 Poush 2074 to
32 Ashadh 2075 is considered to be the transactions after the transfer of shares of
Krishna Singh.
Computation the Total Tax Liability of Swastik Private Limited
Upto 1 Poush From 1 Poush Remarks
2074 2074 to 32 Ashad
2075
Sales 4,500,000 15,000,000
Less : Cost of Sales (2,400,000) (9,000,000)
Less : Employee Cost (500,000) (2,000,000)
Less: Interest (500,000) (500,000)
Expenses
Less : Loss on disposal (100,000) 0 Asset deemed to be
of Stock disposed off on date
of share transfer u/s
57
Less : Bad Debts 0 0 Not Allowed
Net Profit 1,000,000 3,500,000
Carried Forward Loss (1,500,000) 0 Balance Carried
Forward Loss not
Allowed u/s 57
Net Taxabale Profit 0 3,500,000
Income Tax @ 25% 875,000
3.
a)
Inland Revenue Department has done tax assessment of Ashok Industries Limited for
the Income Year 2072/73. Accordingly, IRD has assessed the tax amount of Rs.
50,000,000 which the management of the Company is unable to pay. Management of
the Company asks for your opinion regarding various actions that Inland Revenue
Department can take against them for recovery of the tax amount. The management
of the company also seeks your opinion whether they can pay tax on installment
basis? 5
b)
Can a statutory auditor provide taxation services to its audit client?
Explain, giving consideration to ICAN Code of Ethics. 5
Answer:3(a)
Income tax Act, 2058 has provided various measures for collection of taxes due to the
Government of Nepal. Some of the actions that Income Tax Department can take
against Ashok Industries Limited is as below –
(a) Lien Over Property of the Tax Payer u/s 104: Section 104 of the Income Tax
Act, 2058 provides that Government of Nepal will have lien over the entire
property of the person who has not paid tax. However, Government of Nepal has to
claim lien on such property and fulfil prescribed procedures.

(b) Auction of Property of the Tax Payer u/s 105: Section 105 of the Income Tax
Act, 2058 provides that Government of Nepal can auction the lien property of tax
payer who has not paid tax.
(c) Travel Ban u/s 106: Section 106 of the Income Tax Act, 2058 provides that
Government of Nepal can impose travel ban on the tax payer who has not paid tax,
and stop from leaving the country.
(d) Recovery from Liquidator u/s 108: Section 108 of the Income Tax Act, 2058
provides that Government of Nepal can recover tax amount from the liquidator of
the Company.
(e) Recovery from a person who has to pay to the Tax Payer u/s 109: Section 109
of the Income Tax Act, 2058 provides that Government of Nepal can recover tax
amount from a person who is liable to pay to tax payer who has not paid tax.
Section 110A of the Income Tax Act, 2058 provides the facility of paying tax amount
on installment basis. However, for availing the facility of paying tax on installment
basis, the tax payer has to make application to the tax officer before filing of the suit in
court u/s 111 by the Government of Nepal. In that case, tax officer can allow payment
of tax on installment.
Answer:3(b)
ICAN code of ethics emphasizes for minimizing threats and enhancing safeguards. The code of
ethics explains about self-interest threat, self-review threat, advocacy threat, familiarity threat,
and intimidation threat. Performing certain tax services creates particularly self-review and
advocacy threats. To overcome from the threats, the code of ethics prescribes some measures
for safeguarding the service of the accountant.
Thus, the code of ethics does not prohibit an accountant to provide the service of statutory
audit and taxation services to the same client.
4.
a)
Shrestha Electric Co. Ltd. has imported 10,000 Kg. different types of electronic goods
from Singapore and 7,000 Kg. goods were arrived in Birgunj Custom Office and 3,000
Kg. goods were arrived in Tribhuvan International Custom Office on Shrawan 1, 2074.
But due to shortage of funds the company could take delivery of the goods only after 90
days from Birgunj as well as Tribhuvan International Custom Office.
Required:
i)
Whether Custom Office can charge demurrage in the above cases as per Custom Act?
If yes, what would be the demurrage charge? 7
ii)
Explain who has authority to grant remission for the demurrage. 3
b)
Hanuman Trading Private Limited, a VAT registered Company, is considering for closure
of business due to continuous loss suffered by it.
Below is the detail of its assets and liabilities, and VAT receivable/payable as on
1st Baishakh 2075.

a. As per VAT return filed for Falgun 2074 on due date, it has VAT payable of Rs.
5 lacs, which it did not pay. All earlier VAT liabilities have been cleared on
time. It has not yet filed VAT return for Chaitra 2074.
b. Below is the detail of its stock and capital goods and other assets and liabilities
as on 1st Baishakh 2075:
i. Finished Goods Inventory (VAT applicable) – Rs. 10 lacs (Market Value
Rs. 5- lacs)
ii. Raw Material (VAT applicable) – Rs. 2 Lacs (Market Value Rs. 1.5 lacs)
iii. Damaged Goods (VAT applicable) – Rs. 5 lacs (Market Value Rs. 1 lacs)
iv. Plant and Machinery (VAT applicable) – Rs. 100 lacs (Market Value
Rs. 40 lacs)
v. Vehicle – 4 Wheeler (VAT applicable) – Rs. 30 lacs (Market Value Rs. 20
lacs)
vi. Vehicle – 2 Wheeler (VAT applicable) – Rs. 1 lacs (Market Value Rs. 1
lacs)
vii. Land – Rs. 2 Crores (Market Value Rs. 5 Crores)
viii. Sundry Debtors – Rs. 10 lacs (Rs. 5 lacs is bad debts)
ix. Sundry Creditors – Rs. 40 lacs (all amount payable)
x. Secured Bank Loan against Land – Rs. 5 Crores
xi. There is no sale in the month of Chaitra 2074.
In this regard, suggest management of the Company regarding
i)
Amount of VAT payable or refundable to the Company at the time of
voluntary liquidation of the Company on 1st Baishakh 2075. 5
ii)
What would be the consequences if the Company is unable to pay VAT to
the Government after voluntary liquidation? 5
Answer:4(a)
i.)
The warehouse facility is provided free of cost for 7 days of delivery of the goods
to the warehouse. Customs warehouse are mostly owned by government of Nepal.
But as per Rule 11, a person with prior permission of Government of Nepal can
establish a custom warehouse. These warehouses are called Non –government
warehouse.
The importer should pay demurrage charges if he fails to take delivery of goods stored at
the customs warehouse within the prescribed time limit. When goods are delivered to
custom warehouse for custom clearance, 7 days‟ time is allowed for storing at the
warehouse without payment of any charge. But in case the person fails to take delivery of
the goods after custom clearance within the prescribed days, it has to pay demurrage as per
the prescribed rate. It may call rent for warehouse for storing goods. No demurrage shall
be charged in the case of those goods which could not be cleared by the Customs Officer
because of confusion about the valuation, classification of goods or for other reason.
Notwithstanding anything contained in Section 72 subsection (1), if there is a reasonable
ground for remission of demurrage chargeable of any goods because of the occurrence of

any special circumstance or condition, the prescribed authority may make full or partial
remission, as prescribed.
Demurrage charge rate as per Rule 50, Annex -9 is as follows:
Days Rate NRs. Amount
NRs.
A. Birgunj Custom Office For 7,000 KG
31 days to 60 days = 30 NRs 0.60 per kg per day 126,000
Total days 90 days Total demurrage charges (A) 358,400
B. Tribhuvan International For 3,000 KG

Custom Office
31 days to 60 days = 30 NRs 1 per kg per day 90,000
Total days 90 days Total demurrage charges (B) 257,400
Grand Total (A+B) 615,800
ii.) Remission for the demurrage
If the owner of the goods has reasonable ground for the remission of the demurrage, the
owner may apply for the remission with the evidence and documents to prove the claim to
the chief of the custom office.
The Chief of the custom officers may decide in writing within the limitation granted under
Rule 51 sub rule (3) and (6) to grant remission from demurrage either partially or in full in
respect of goods to be exported or imported, in case he is satisfied that there exist specific
reasons for granting such remission.
In case of remission of the demurrage, following officers can grant remission to the
following amount.

 Up to Rs 25,000/ if non-gazetted staff is the chief of the custom office

 Up to Rs 100,000/ if third class gazetted officer is the chief of the custom office
 Up to Rs 300,000/ if First or Second class gazetted officer is the chief of the custom
office
If the chief of the custom office is satisfied that the remission should be granted over and
above the amount within his authority, the chief should write to the Director General with
his recommendation along with the relevant documents.
Upon the enquiry into the recommendation if the Director General is satisfied that either
partially or in full remission should be granted, he should approve and instruct the chief of
the custom office.
Answer:4(b)
Computation of VAT Payable on closure of Business
Particulars Amount Market VAT Remarks
(Rs.) Value (Rs.) Amount
(Rs.)
Finished Goods 1,000,000 500,000 65,000 VAT on
Market
Value
Raw Material 200,000 150,000 19,500 VAT on
Market
Value
Damaged Goods 500,000 100,000 13,000 VAT on
Market
Value
Plant and 10,000,000 4,000,000 520,000 VAT on
Machinery Market
Value
Vehicle – 4 3,000,000 2,000,000 260,000 VAT on
Wheeler Market
Value
Vehicle – 2 100,000 100,000 13,000 VAT on
Wheeler Market
Value
Land 20,000,000 50,000,000 0 Land is Not
a VAT
Applicable
Sundry Debtors 1,000,000 500,000 0 Not VAT
Applicable
Sundry Creditors 4,000,000 4,000,000 0 Not VAT
Applicable
Secured Loan 50,000,000 50,000,000 0 Not VAT
Applicable
Total VAT 890,500
payable for the
Month

Opening VAT 500,000

Payable
Fee u/s 19 for 36 (500,000/365*6*10%) 822
days @ 10% per
annum on VAT
payable of Falgun
Interest u/s 26 for (500,000/12×2×15%) 12,500
36 days @ 15%
per annum on
VAT payable of
Falgun
Total VAT 1,403,822
payable
Consequences if the Company is unable to pay VAT
Section 29B(2) of the Value Added Tax Act, 2052 provides that each of the Officers
who are in position at the time of due date of the payment or were in position within 6
months of the due date of the payment are severally and jointly responsible for
payment of such VAT amount. Hence, Officers are liable to pay VAT.
5.
a)
Bajaj Electric Company sold its products on a scheme of buy two get one free of
Laptop Computers. The Company issues VAT bill on the value of Laptop
Computers on every sale of three Laptop Computers and collects VAT
accordingly. During the tax period company sold computers having taxable value
of Rs. 5,000,000.
However, the tax officer claimed that the company has sold three Laptop
Computers on every sale, so VAT should be collected on the taxable value of three
Laptop Computers on each sale by the company. Tax office is on the contention
that the company has done under invoicing of the goods and wants to levy fine
according to Section 29 for under invoicing. Decide with brief note whether the
opinion of VAT officer is correct? 7
b)
Thamel Agro Private Limited has imported hatchery plant set at the cost of USD
100,000 FOB Germany. The goods arrived at Customs point on 10 Jestha 2075,
and Customs Agent filed Pragyapan Patra on the same date. He has submitted
transportation bill of USD 2,000 for the same, and insurance bill of Rs. 20,000.
Packing charges of USD 5,000 has also been incurred for the same. The Customs
Officer refused to accept the invoice value of the machine set stating that it is
under invoiced, and fixed transaction value of USD 125,000 on the basis of
similar machinery imported by another importer in the same month, and made
assessment on 20 Jestha 2075. Rate of Customs Duty on the said machine on 10
Jestha 2075 was 10% and 1 USD = Rs. 100, and Rate of Customs Duty on the
said machine on 20 Jestha 2075 was 15% and 1 USD = Rs. 110. Customs Officer
applied rate of 20 Jestha 2075 for USD and Custom Duty. Thamel Agro Private
Limited is not satisfied by the assessment done by the Customs Officer. Stating
the relevant provisions of the Customs Act, 2064 and Rules 2064, advise the

management of the Thamel Agro Private Limited regarding process to be

followed for correction of the same, and calculate the Total Customs Duty
payable by the company. 7
c)
Hi-Tech Appliances sells Washing Machines on installment basis. It has a scheme
of sales promotion. According to the scheme, every customer will deposit
Rs. 1,500 per month in 12 installments and out of the customers; one will receive
the television set irrespective of installments paid. During 2075 Ashwin, 2
television sets were gifted in 3rd and 5th installment payment. The tax officer
levies VAT on full amount of Television set at Rs. 18,000 but the firm had
accounted VAT collection for Rs. 4,500 and Rs. 7,500 respectively on the two
sets. Evaluate the tax officer's decision. 6
Answer:5(a)
According to Value Added Tax Act, 2052, taxable value of goods or service is
defined in Section 12 as amount received from the buyer as consideration. The
VAT manual has clarified that quantity discount can be allowed by the supplier
which will not be part of the taxable value. Likewise, Rule 24 of VAT Rule 2053
allows the registered person to distribute goods without any consideration on the
promotional scheme.
In given case, the company has received the amount of only two Laptop Computers
by giving quantity discount. This is not a case of under-invoicing and therefore, the
contention of the tax officer that the company had sold the goods by under
invoicing is not correct.
Answer:5(b)
(A) Determination of Base Date for Customs Valuation
As per section 8(1) of the Customs Act, 2064, Customs Duty will be levied on the
basis of custom duty rate prevalent on the date of filing of Pragyapan Patra at the
Customs Office except for the case where Pragyapan Patra has been filed before
arrival of the goods at the Customs Point. So, act of the Customs Officer of
assessing the Custom Duty on 20 Jestha 2075 is incorrect. Customs Duty should be
levied on the basis of Customs Duty Rate and USD Rate Prevalent on the 10 Jesth
2075, i.e. date of filing of Pragyapan Patra.
(B) Determination of Transaction Value for Customs Valuation

Section 13 of the Customs Act, 2064 provides for the process to be followed for
determination of the transaction value upon which Customs Duty is to be levied. It
clearly states that transaction value will be determined on the basis of documents
submitted by the importer. The Customs Act has given power to determine the
transaction value on the basis of similar goods only if the Customs officer has
reasonable doubt that the transaction value declared by the importer is not correct.
Here, act of Customs officer of determining transaction value on the basis of
import of similar goods by another importer is not correct. Hence, act of the
Customs Officer is not correct.

(C) Recourse to the Importer

Section 61 of the Customs Act, 2064 provides for the recourse to the assessment
done under section 13. As per section 61, if the importer is not satisfied by the
assessment done by the Customs Officer, it can file review petition to the
“Valuation Review Committee” within 15 days of the date of assessment. The
“Valuation Review Committee” will assess the case and give their decision. If the
importer is not satisfied by the decision of the “Valuation Review Committee”,
then it can again file appeal to Revenue Tribunal within 35 days as per Section 62
of the Custom Act, 2064.
(D) Determination of Customs Duty Payable by the Importer

FOB price of Machine USD 100,000 x 100 NPR 10,000,000
Transportation Cost USD 2,000 x 100 NPR 200,000
Insurance Cost 20,000
Packing Charge USD 5,000 x 100 NPR 500,000
Total Transaction Value 10,720,000
Customs Duty @ 10% Customs Duty on the date of 1,072,000
filing of Pragyapan Patra
Answer: 5(c)
Sub-section 3 of Section 12 of Value Added Tax Act, 2052 has mentioned that
Taxable value does not include the amount of discount, commission or other
similar commercial rebate granted on value in supplying goods or services.
Likewise, Sub-section 6 of Section 12 mentions that if the value of any goods or
service is found to be much lower than the prevailing market value, the taxable
value of such goods or services shall be equal to the market value. Sub-section (7)
further states that the taxable value of goods or service supplied for partial
consideration shall be equal to the market value.
VAT Manual issued by IRD has not allowed deducting any amount from taxable
value which is not certain before supplying the goods.
On the background of the above legal provisions, the VAT collection amount
shown by Hi-Tech is not a discount as per Sub-section 3 and are seemed as less
than the market value. So, in this case Hi-Tech has collected VAT on lesser
amount and, therefore, the decision of Tax Officer is correct under the prevailing
law.
6.
a)
What is transfer pricing and explain briefly about the remedy stipulated by the
Income Tax Act, 2058 against Transfer Pricing. 5

b)
Describe the mechanism for taxation on "Independent Personal Service" in the
light of Double Taxation Avoidance Agreement between the Government of Nepal
and the Government of Islamic Republic of Pakistan. 5
Answer:6(a)
Transfer pricing is an arrangement for minimizing tax liability through transactions
between two or more related persons.
As per Section 33 of the Income Tax Act, 2058 if any arrangement for tax
avoidance scheme between associated persons is made, the department may, by
notice in writing, distribute, apportion, or allocate amounts to be included or
deducted in calculating income between the persons as is necessary to reflect the
taxable income or tax payable that would have arisen for them if the transaction
had been held at arm‟s length price.
In making any adjustment, the department may re-characterize the source and type
of any income, loss, amount, or payment; or allocate costs, including head office
expenses, incurred by one person in the business.
Associated person means two or more persons or group of such persons where one
may reasonably be expected to act in accordance with the intention of the other
persons.
Answer:6(b)
The followings are the mechanism for taxation of Independent personal services
under double tax avoidance treaty:
 Income derived by a resident of a Contracting State in respect of professional

services or other activities of an independent character shall be taxable only in
that State unless he has a fixed base regularly available to him in the other
Contracting State for performing his activities or he is present in that other
State for a period or periods exceeding in the aggregate 183 days in any twelve-
month period. If he has such a fixed base or is present in that other State for the
aforesaid period or periods, the income, may be taxed in that other State but
only so much of it as is attributable to that fixed base or is derived in that other
State during the aforesaid period or periods.
 Notwithstanding the provisions of paragraph 1, income derived by a resident of
Contracting State in respect of professional services or other activities of an
independent character performed in the other Contracting State, may be taxed
in that other State if the remuneration for those services or activities is paid by
a resident of that other State or is borne by permanent or a fixed base situated
in that other State.
 The term "professional services" includes especially independent scientific,
literary, artistic, educational or teaching activities as well as the independent
activities of physicians, lawyers, engineers, architects, dentists and accountants.

Specific Comments on the Performance of the Students

Batch: - December 2018
Level: - CAP-III
Subject- Advanced Taxation
Qn.1 Student‟s performance was Average. No conceptual knowledge on filing

income tax return by tax exempt organization.
Qn.2 (a) Adjusted taxable income was not properly calculated or understood by most
of the students.
Qn.2 (b) Although, calculations are correct, explanations notes were not sufficient.
Qn.2 (c) Most of the student have done well, but failed to adjust the stock material.
Qn.3 (a) Most of the students have lack of knowledge of installment basis of payment
provision and proper presentation of the answer.
Qn.3 (b) There was lack of knowledge about code of ethics of ICAN regarding
providing taxation services provided by statutory auditor.
Qn.4 (a) Student performed well.
Qn.5 Students have very poor preparation and lack of conceptual understanding and
very little knowledge of provision of the Act.
Qn.6 (a) There was satisfactory level of performance by the students.
Qn.6 (b) Students performed very poor, hardly about 5 to 6 students have written
correctly. Most of the students did not even attempted part (b) of the
question.

Suggested Answer - June 2018
Paper 6:
Advanced Taxation

CAP II Paper 6: Advanced Taxation
Roll No……………. Maximum Marks

- 100
Pages - 18
Marks
1. You are given following information of Samrat Cements Pvt. Ltd. pertaining to income
year 2073/74.
Sales 500,000,000
Profit Before Tax as Per Financial Book 4,500,000
a) Samrat Cements Pvt. Ltd. is a Special Industry as per the provision of Income Tax
Act, 2058.
b) Property, plant and equipment as per Financial Books are as follows:
Block Opening WDV (Rs.)
A 260,000
B 1,400,000
C 300,000
D 450,000
Depreciation on the same is calculated as per the rates prescribed by Income Tax Act,
2058. However, for tax purpose, property, plant and equipment are as follows:
Opening WDV including Unabsorbed Repair &

Block
Maintenance Expenses of previous year (Rs.)
A 300,000
B 1,600,000
C 400,000
D 500,000
Company has received tax assessment order from IRD for income year 2072/73 and
the company did not file any appeal to concerned authority. As per the assessment
order, following depreciation relating to income year 2072/73 is not allowed as
deductible expenses due to unsupported purchase capitalized on 2072.04.02.
Company has claimed depreciation on such capitalization as per the rates so provided
by Income Tax Act, 2058.
Particulars Disallowed Depreciation (Rs.)
Block A 10,000
Block B 25,000
Block C 30,000

No purchase and sales of depreciable assets is done during the year. The company
desires to claim additional depreciation as per Income Tax Act from this year
onwards, which is available to a special industry. This claim is only for tax purpose.
Besides that the assessment order also recalculated the carry forward losses and
assessed the same as Rs. 335,000.
c) Expenses include the following:
i) Other expenses include expenses of Rs. 100,000 not related to business.
ii) Office expenses include expenses worth Rs. 250,000 for which neither supporting
documents nor justification could be provided by the management.
iii) Donation has been paid amounting Rs. 200,000 to the Prime Minister Relief Fund
and Rs. 150,000 to Futsal Football Club.
d) Samrat Cements Pvt. Ltd. had sold a land at a profit of Rs. 1.5 Lakh, the land was
acquired in the year 2073. Gain is included in the net profit for the year 2073/74.
e) The entity had filed return under self-assessment on Mangsir 19, 2074. But time
extension for filing of return was not taken.
f) The entity employs 348 Nepalese citizens during the year.
g) Advance Tax details for the year 2073/74 is as follows:

Upto Poush, 2073 250,000
Additional Upto Chaitra 2073 200,000
Additional Upto Ashad 2074 150,000
Additional Upto Mangsir 2074 350,000
Total 950,000
h) Carry forward loss details of Samrat Cements Pvt. Ltd. are as follows:
2065|66 40,000
2066|67 50,000
2067|68 55,000
2068|69 65,000
2069|70 75,000
2070|71 45,000
2071|72 65,000
2072|73 80,000
Total 475,000
i) Samrat Cements Pvt. Ltd. did not file estimated Income Tax Return for the Income
Year 2073/74.
Required: 20
Based on the information provided above, calculate the following:
i) Taxable Income,

ii) Income Tax Liability, and

iii) Interest Chargeable, if any, for the income year 2073/74.
Answer:
In lack of details of expenses, the taxable income can be calculated only
on the basis of Net profit.
1)
i. Computation of Taxable Income:
Particulars Reference Amount (Rs.)
Net Profit As Per Financial Books 4,500,000.00
(+) Expenses Disallowed As Per Income Tax Act W.N. 1 350,000.00
(+) Donation W.N. 2 150,000.00
(+) Depreciation As Per Financial Books W.N. 3 490,500.00
(-) Depreciation As Per Income Tax Return W.N. 3 (690,333.33)
Gross Total Income 4,800,166.67
(-) Carried Forward Loss (As Per Assessment Order) W.N. 4 (335,000.00)
(-) Unadjusted Loss of Previous Years W.N. 5 (40,000.00)
Total Taxable Income 4,425,166.67

ii. & iii. Computation of Income tax liability along with Fine & Interest.
a. Tax Computation:
Amount Tax Rate Tax Amount

Particulars
(Rs.) (W. N. 6) (Rs.)
Business Income 4,425,166.67 18.00% 619,523.00
b. Additional Charges for Delay in filling Annual Return: [(Sec. 117(ga)]
SN. Particulars Amount (Rs.)

A. 0.1 % of Turnover
Turnover 500,150,000.00
0.1 % of the same 500,150.00
For 2 months (Kartik - Mangsir) 83,358.33
B. Rs. 100 Per Month
For 2 months (Kartik - Mangsir) 200.00
Fine is Higher of A & B 83,358.33
c. Additional Charges for failure to file estimated Income Tax Return.

As per Section 117(ka), additional charges for non-filing of estimated tax
return is 2,000 per return. So, Rs.2,000.00 shall be charged.

d. Interest for short payment of advance tax as per Sec:118

As per Section 118, where an installment of tax paid by a person is less than
90% of stipulated amount of tax payable, the person shall be liable to pay
interest of each month and part of month from the date of first installment on
the amount to the excess of installment that would have to be paid over the
installment paid. So, interest to Samrat Cements Pvt. Ltd. would be:
1st 2nd 3rd

Particulars Installment Installment Installment
40% 70% 100%
Installment Amount (A)
318,612.00 557,571.00 796,530.00
Minimum Installment To Be Paid (90%) (B)
286,751.00 501,814.00 716,877.00
Instalment Paid (C)
250,000.00 450,000.00 600,000.00
Amount Subject to Interest (B-C) 36,751.00 51,814.00 116,877.00
Interest Applicable Month
3.00 3.00 3.00
Interest Rate 15% 15% 15%
Interest Amount
Total Interest As Per Sec 118
1,378.16 1,943.02 4,382.89
e. Interest for delay in Payment of Final tax as per Sec: 119
Amount Payable Till Ashoj, 2074

796,530.00
Amount Deposited Till Ashoj, 2074
600,000.00
Amount Remaining To Be Deposited
196,530.00
19th
Balance Amount Deposited In
Mangsir, 74
Delay of Months Post Ashoj (Kartik &
Mangsir) 2.00
Applicable Interest Rate 15%
Total Interest As Per Sec 119
4,913.25
Net Tax Liability (Including Fine & Interest)

SN Amount
Particulars
. (Rs.)
a Tax Liability 786,530.00
b Additional Charges for Delay in filling Annual Return 83,358.33
c Interest for delay in Payment of advance tax (Sec: 118) 7,704.06
Additional Charges for failure to file estimated Income Tax Return
d 2,000.00
(Sec: 117)
e Interest for delay in Payment of Final Tax (Sec: 119) 4913.25
Total 886,801.58
Less: Advance Tax Paid 600,000.00
Net Tax Liability (Including Additional Charges & Interest) 286,801.58
Working Notes:
1. Expenses Disallowed as Per Income Tax Act
Amount
Particulars
(Rs)
Other Expenses (Expenses not related to business) 100,000.00
Office Expenses (No documentation available – So disallowed as per Sec:
250,000.00
13)
350,000.00
2. Donation paid to Prime Minister Relief Fund amounting Rs.200,000.00 is

allowed as deduction. Whereas the Futsal Football Club should fulfill some
criteria and procedure to get the tax exemption status, in lack of information
of the same, the Footsal Club shall not be taken as a TEO and cannot be
allowed the donation for reduction.
3. Calculation of Allowable Depreciation.
Depreciation
Opening Disallowance Allowable Additional
Particulars WDV in Op WDV Op. WDV Rates Normal 1/3rd Total
As Per Tax (W.N. 3.1) As Per Tax
Block A 300,000.00 190,000.00 110,000.00 5.00% 5,500.00 1,833.33 7,333.33
Block B 1,600,000.00 75,000.00 1,525,000.00 25.00% 381,250.00 127,083.33 508,333.33
Block C 400,000.00 120,000.00 280,000.00 20.00% 56,000.00 18,666.67 74,666.67
Block D 500,000.00 0.00 500,000.00 15.00% 75,000.00 25,000.00 100,000.00
517,750.00 172,583.33 690,333.33
3.1. Non - Allowable Depreciation Basis.
Particulars Disallowed Rates (B) Capitalized Disallowance

Depreciation (A) Amount (C = A/B) (C - A)

Block A 10,000.00 5.00% 200,000.00 190,000.00
Block B 25,000.00 25.00% 100,000.00 75,000.00
Block C 30,000.00 20.00% 150,000.00 120,000.00
Block D - 15.00% 0.00 0.00
Since the Company did not claim additional depreciation in previous year, only
depreciation as per the rates provided by Act is used for backward calculation of
capitalized amount.
3.2. As the company did not file any appeal in assessment order of IRD, it is established
that the company admits the disallowed depreciation and capitalization of concerned
fixed Assets.
3.3. As per Schedule 2 of Income Tax Act, Special Industry can claim additional 1/3rd
depreciation on depreciable blocks of assets.
3.4. Depreciation Computation as Per Financial Books
Opening
Block Rates Depreciatio
WDV
n
A 260,000.00 5.00% 13,000.00
1,400,000.0 25.00
B 350,000.00
0 %
20.00
C 300,000.00 60,000.00
%
15.00
D 450,000.00 67,500.00
%
490,500.00
4. Carry forward loss calculation.

As Per Section 20 (1 b) of the Income Tax Act 2058, any unrelieved loss of the
previous seven income years incurred by the person from any business can be
deducted while calculating income from business or investment in an income year but
in this case this clause will not be applicable as we have accepted the Tax Assessment
Order for income year 2072/73 and along with that the carry forward loss of 335,000
is also accepted and will be used for Taxable Income Calculation.
5. Unadjusted Loss of IY 2065/66

According to Section 36, the gain from disposal of business assets can be deducted
from any loss from business for any previous years. So, the gain Rs. 150,000.00 from
disposal of land is deducted with the unadjusted loss Rs. 40,000.00 of IY 2065/66.
6. Applicable Income Tax Rate

The tax rate applicable to the entity is 90% of the applicable tax rate. (As per Section
11(3), any Special Industry & Information Technology Industry providing direct
employment throughout the year for 300 or more Nepali Citizens shall be levied tax @
90% of applicable tax).
Note: If the question had clearly mentioned that there were only Nepalese citizen
working in the special industry, the tax rate would be 70% under Section 11 (3) (Ka).
It is assumed that working 348 Nepalese citizen does not mean that there are only
Nepalese citizen.
If a student solves the question with clear assumption that all employees in the
industry are Nepalese citizens and has applied 70% tax rate, it is assumed as correct
answer.
2.
a) Orange Technology Private Limited has profit of Rs. 15,000,000 for the Income Year
2073-74, subject to below adjustments, if any, earned exclusively from export of
services. It has work force of 50 employees only.
a. Orange Technology Private Limited has paid a secret consultancy fee of Rs.
1,700,000 after deducting TDS @ 15% for which there is no supporting available
except invoice of the Party of Rs. 2,000,000. Party is also not registered under
VAT.
b. Interest Expenses of Rs. 1,000,000 has been charged as expenses against a loan
taken for purchase of a Server. The loan has been taken on 20th Shrawan 2073, and
the assets was put to use on 1st Bhadra 2074.
c. Company has paid advance tax of Rs. 500,000 for first installment, Rs. 2,500,000
for second installment and Rs. 1,000,000 for third installment.
You are required to compute the total tax liability of Orange Technology Private
Limited for the Income Year 2073-74 including fee and interest, if any, by providing
appropriate justification as per the provisions of the Income Tax Act, 2058 and Rules
2059 for treatment of above adjustments. The Company has taken time extension for
filing of the tax return till Poush end 2074 and intends to pay the balance amount of
tax on Poush end. 7
b) Mr. Ferguson, a European resident wanted to do business in Nepal and accordingly he
brought foreign currency amounting to US$ 50,000 and promoted a one man
company and purchased agricultural land in the name of the Company equivalent to
US$ 50,000 at that time. The total amount invested in the Company was Rs.
2,500,000 at the exchange rate prevailing at that time. But due to various reasons he
could not start his operation for more than 5 years and so he lost interest in the project
and wanted to sell the Company at an agreed price of Rs. 7,500,000 and get the
money remitted back to his country. Discuss the tax implication of the above
transaction in view of the provisions of the Income Tax Act, 2058. Also state how
much Mr. Ferguson can remit back to his country? 7

c) Mr. Captain America, an American citizen is an employee in a Nepali Company who

went to Qatar on 7th Shrawan, 2072 to work in a project for 1 year. The project was
obtained by the Nepali Company in a global tender. Mr. Captain America earned US
$ 5,000 per month in Qatar. He then returned to Nepal on 1st Falgun 2073 and joined
the same company in Nepal from that date and was entitled to a salary of Rs. 500,000
per month, i.e. equivalent to amount he was receiving in Qatar (Ex. Rate $ 1 = Rs.
100). Calculate the tax liability of Mr. Captain America for the income year 2072/73
and 2073/74 in Nepal as per Income Tax Act, 2058. Note: Books of Accounts of
Qatar project is maintained and tax return is accordingly submitted in Qatar itself. 6
Answer:
2 a)
Computation of Tax Liability of Orange Technology Private Limited
Particulars Amount Remarks
Income from Business 15,000,000
Disallowances:
Add: Secret consultancy fee 2,000,000 As per section 13 of the Income Tax Act,
paid 2058, expenses made for business of the
Company is only allowable as expenses.
Expenses made without any valid reason is
not allowed even though TDS is deducted.
Add: Interest Expenses against 1,000,000 As per section 14(1) of the Income Tax
a loan taken for purchase of Act, 2058, interest expenses incurred for
Server assets which has been used for business
purpose in the Income Year is only
allowable. If the asset is not used during
the income year, then the same should be
capitalized.
Net Income from Business 18,000,000
Income Tax @ 20% 3,600,000 Applicable Tax Rate for export income by
Orange Technology Private Limited is
20% [Schedule 1(2) of Income Tax Act,
2058]
Total Tax Liability 3,600,000
Additional Charge u/s 117 0
Interest u/s118 29,850 See calculations below.
Interest u/s 119 Nil Total Tax = 3,600,000 Less Total Advance
Tax Paid 4,000,000,
Total Tax Liability including 3,629,850
fee and interest.
Calculation of Interest for Advance Tax :
Tax 90% of Tax Advance Tax Shortfall Interest u/s 118
Amount Amount Paid (Rs.) (Rs.) for 3 months
(Rs.) (Rs.) @ 15% pa
First Installment – 1,440,000 1,296,000 500,000 796,000 29,850.00

40% of total Tax

Liability
Second Installment – 2,520,000 2,268,000 3,000,000 - -
70% of total Tax
Liability
Third Installment – 3,600,000 3,240,000 4,000,000 - -
100% of total Tax
Liability
29,850.00
2 b)
(1) In this case, when he sells his company, in which his investment was Rs.25 lakhs for
Rs.75 lakhs, there is gain of Rs. 50 lakhs on which the new management of
company, has to collect 15% tax at source on the gain i.e. Rs.750,000 and deposit it
with the Tax Department.[Sec. 95 ka(2)(kha)]
(2) When he first invested in the Company, he should have taken permission from the
Department of Industries. Now also he should take permission of Department of
Industries by filing the original copy of the documents of transfer of shares.
(3) The same should be intimated to the office of the Company Registrar also with the
prescribed fees along with the share transfer document and the permission from the
Department of Industries. The change of shareholder should be registered in
Company Registrar's Office.
(4) Then he shall apply to Nepal Rastra Bank with all the documents for remitting the
money.
(5) For giving permission, Nepal Rastra Bank will require evidence of earlier receipt of
US$ 50,000.
(6) Since he is non-resident / individual, he will have to pay tax at 25% in the whole
amount without any basic exemption.
His total tax liability will be as follows:
Since he is a non-resident, the tax on Rs.5,000,000 will be Rs.1,250,000. Apart from
his paying Rs.750,000 as tax in advance, he has to pay a further tax of Rs.500,000
and get tax clearance certificate from the Tax Department.
(7) Nepal Rastra Bank, after being satisfied with his inward remittance of US$50,000
and tax clearance, will give permission for the remittance of Rs.3,750,000
(Rs.5,000,000-1,250,000) to his home country.
2 c)
Following provisions of Income Tax Act shall be considered.
1) As per the provisions of Section 2 (Ka Nga)(1)(Kha), to be a resident for an income

year, a person shall reside in Nepal for a period of minimum 183 days out of the past
continuous 365 days period. As Mr. Captain America was not in Nepal for 183 days in

income year 2072/73 as well as in income year 2073/74, he is a non-resident in both the
years.
(Note: If a student has assumed that he was in Nepal even before departing to Qatar, the
residential status and tax implications shall be different and upon disclosing the logic,
the answer shall be taken as correct.)
2) Sec 67(6)(Jha-1): As per this section- irrespective of the place of payment, in case of
the activities the service for which is provided in Nepal , the source of payment is
considered in Nepal. Thus, while Mr. Captain America was in Qatar, the place of
rendering of service not being in Nepal, his salary is not taxable in Nepal. But when he
returned to Nepal, inspite of being a non-resident as above in point no. 1, his salary is
taxable in Nepal, as the source of payment is in Nepal.
3) As per Section - 8 of Schedule-1 of Income Tax Act 2058, tax rate on the taxable
income of a non-resident is 25%.
Calculation of Tax Liability of Mr. Captain America
i) Income Year 2072/73:

Taxable Salary: NIL (As Source of Payment Not in Nepal)
Tax Liability: NIL
ii) Income Year 2073/74:

Taxable Status: Non-Resident
Taxable Salary: Rs.500,000 P.M.

No. of months (Falgun To Ashad) = 5
Total Salary: Rs.2,500,000
Tax @ 25% = Rs.625,000
3.
a) Double & Associates, statutory auditor of a limited company, is also appointed to
provide taxation services. Explain about the conflict of interest situations that may
arise and the remedy for the same. 5
b) The audit firm is charged for abetting in tax avoidance of a company while claiming
bad debt in excess of supporting evidences. Explain about the legal provisions and
additional charges and penalties that the audit firm may be liable. 5
Answer:
3 a)
Taxation services comprise a broad range of services, including:
Tax return preparation;
Tax calculations for the purpose of preparing the accounting entries;
Tax planning and other tax advisory services; and
Assistance in the resolution of tax disputes.

While taxation services are provided by a firm to an audit client, they are addressed
separately under each of these broad headings; in practice, these activities are often
interrelated. Performing certain tax services creates self-review and advocacy threats.
The significance of any threat shall be evaluated and safeguards shall be applied
when necessary to eliminate the threat or reduce it to an acceptable level. The
safeguards may include:
• Using professionals who are not members of the audit team to perform the service;
• Having a tax professional, who was not involved in providing the tax service, advise
the audit team on the service and review the financial statement treatment;
• Obtaining advice on the service from an external tax professional; or
• Obtaining pre-clearance or advice from the tax authorities.
Professional accountants engaged in the audit of the financial statements and the tax
returns to an audit client shall not provide any services falling under the
responsibilities and obligations of the management of the client for example making
accounting entries, posting into the ledgers, giving advice or consultancy services in
regard to tax matters, tax planning, assisting in the resolution of tax disputes,
representing clients to tax authorities etc.
b)
The legal provisions and additional charges and penalties that the audit firm may be
liable in charge of abetting in tax evasion are:
Section 96 (3)/(4) has stipulated that if a tax advisor has supported in taxation service
of a tax payer, the tax advisor should clearly mention in its report to the tax payer
about any non-compliance to the tax laws.
If the tax advisor is found guilty in abetting in the tax evasion, then, as per Section
121 of Income Tax Act, 2058 s/he is liable for equivalent additional charges that are
levied to the tax payer. In addition, the tax advisor may be penalized up to 50% of the
penalties imposed on the tax payer as per Section 127 of the Income Tax Act, 2058.
4.
a) Shri Ram Hospital Private Limited runs a 200 bed hospital at Pokhara. During the
income year 2073-74, it has done various construction works at its hospital site. The
details of various construction works done by the hospital is as below:
(a) Construction of Parking Lot:
Parking lot was constructed through a local contractor who is not registered under
VAT. The total cost paid to the contractor was Rs. 1,500,000 net. Apart from the
above cost, hospital has incurred Rs. 100,000 for clearance of the site which was
paid to the employees of the hospital as overtime.
(b) Construction of Canteen:
Hospital constructed canteen itself for which hospital has paid below amount:

i. For Construction Material from VAT registered party – Rs. 565,000

(including VAT)
ii. For Labour and Engineering services from individuals not registered under
VAT – Rs. 100,000
iii. For Design of Canteen by individual not registered under VAT – Rs. 100,000
iv. Various Expenses for approval of building design – Rs. 100,000 (paid to
individual not registered under VAT)
(c) Repair of a Private Ward:
i. Hospital has given contract to a VAT registered party for repair of Private
Ward at Rs. 10,000,000 plus VAT.
ii. Hospital has taken loan of Rs. 1,500,000 from a bank for repair of the Private
Ward. It has paid interest of Rs. 100,000 till the date of completion of repair
work.
Shri Ram Hospital Private Limited has duly submitted its VAT return showing
VATable and non-VATable transactions on due date. Assessing Officer during Audit
of the VAT raised issue that the Hospital has not paid VAT on construction as
required by the law, and should be assessed for the same. Management of the
Hospital is surprised to know that it has to pay VAT on construction of various
facilities for which there is no VAT bill. Citing relevant provisions of the Value
Added Tax Act, 2052 and Rules 2053, advise the management of the Hospital on the
above matter, and compute the amount of VAT payable, if any. 10
b) Avengers Pvt. Ltd. has entered into a contract for the purchase of following
equipments under following terms and conditions from Stark Enterprises. The
equipments were imported by Stark Enterprises under Bank Guarantee facility. The
import details are as follows:
Name of Equipment Original Cost (In Euro) Import Date
Excavator (2 Pcs) 500,000.00 01-04-68
Lorry (1 Pc) 100,000.00 01-04-72
Terms and Conditions:
i) Total Purchase Price of Both Equipments shall be Euro 150,000.00
ii) Custom Duty shall be paid by Avengers Pvt. Ltd.
Ignore Excise Duty, CSF and other taxes. Custom Duty rate is 10% for both
equipments.
Required: 10
Calculate Custom Duty and VAT to be paid by Avengers Pvt. Ltd., if custom
clearance is done on 2074.04.01 (Exchange Rate: Euro 1 = Rs. 120).
Answer:
4 a)

Section 8(3) of Value Added Tax Act, 2052 provides that if any construction work of
more than Rs 50 Lakh has been carried out for business purpose from non VAT
registered party, then VAT on such construction work should be deposited as if the
said construction work has been done from VAT registered Party. If the VAT is not
deposited for such construction works, then VAT can be assessed and recovered from
owner of such property.
Further, Value Added Tax Act Directives, 2069 provides that for ascertaining the
ceiling of Rs 50 Lakh, all the construction works carried out in a particular location
should be considered even though various construction works has been undertaken
from various different parties. However, while paying VAT on construction, interest
cost should not be considered. Further, if VAT has already been paid on certain
expenses, then such VAT amount should be adjusted from final VAT payment.
Hence, contention of the Tax Officer is correct if total expenses incurred for
construction is more than 50 Lakh.
Computation of VAT Payable on Construction by Shri Ram Hospital Private Limited
Particulars Expenses VAT Balance Remarks
(Rs.) Paid(Rs.) VAT(Rs.)
(a) Construction of Parking
Lot:
Paid to Local Vendor 1,500,000 195,000
Site Clearance Expenses 100,000 13,000
(b) Construction of Canteen:
Purchase of Construction 500,000 65,000 0 VAT already Paid
Material
Labour and Engineering service 100,000 13,000
Design of Canteen 100,000 13,000
Expenses for approval of 100,000 13,000
building design
(c) Repair of Private Ward:

Contract Value 10,000,000 1,300,000 0 VAT already Paid
Interest 0 0 Interest should not be
included in
Construction cost
Total Construction Value 12,400,000 1,365,000 247,000
4 b)
Notes:
- Excavator is a construction equipment and falls under HS Code Group 84.29 so no
VAT shall be payable on that.
- Rate of Depreciation has been taken as provided by Custom Act, 2064 i.e. 10% to the
Maximum of 5 Years (As Per Custom Act, Schedule – I, Section: 9(1)).
Particulars Rate Amount Particulars Rate Amount

Excavator (In Euro) 500,000 Lorry (In Euro) 100,000

(-) Depreciation 1 10% (50,000) (-) Depreciation 1 10% (10,000)
WDV 450,000 WDV 90,000
(-) Depreciation 2 10% (45,000) (-) Depreciation 2 10% (9,000)
WDV 405,000 WDV 81,000
(-) Depreciation 3 10% (40,500)
WDV 364,500
(-) Depreciation 4 10% (36,450)
WDV 328,050
(-) Depreciation 5 10% (32,805)
WDV 295,245
Excavator WDV (Euro) 295,245 Lorry WDV (Euro) 81,000

Excavator WDV (NPR) 120 35,429,400 Lorry WDV (NPR) 120 9,720,000
(+) Custom Duty 10% 3,542,940 (+) Custom Duty 10% 972,000
(-) Rebate (More Than (-) No Rebate (5 Year
60% (2,125,764) 0% -
5 Yrs of Import) Not Crossed)
Custom Duty To Be
1,417,176 Custom Duty To Be paid 972,000
paid
WDV + Custom Duty 36,846,576 WDV + Custom Duty 10,692,000

VAT To Be Paid Exempt - VAT To Be Paid 13% 1,389,960
5.
a) General Households Pvt. Ltd. provides you the following information:
Particulars Period Amount (Rs.)
Total Sales 2074 Baishakh to Chaitra 4,054,000
2074 Chaitra 360,000
Export 2074 Baishakh to Chaitra 2,400,000
2074 Chaitra 200,000
The company seeks your opinion based on Value Added Tax Act, 2052 and wants to
know: 7
1. Does the Company get bank guarantee facility for importing finished goods?
2. Does the Company get bank guarantee facility for importing raw materials?
3. Does the Company get tax refund facility in the month of return submission?
b) You have been appointed as an Auditor of Parimal and Sons, a sole proprietorship
firm established on 5th Asoj 2073 without being registered under VAT, for the
Income Year 2073-74. It deals in trading of various vatable goods. During the audit,
you came across below facts:

Particulars Days in a Sales Purchase with Closing Stock

Month (Rs.) VAT (Rs.) with VAT (Rs.)
Asoj 2073 30 500,000 1,000,000 700,000
Kartik 2073 30 700,000 500,000 800,000
Mangsir 2073 30 1,000,000 600,000 600,000
Poush 2073 29 800,000 500,000 500,000
Magh 2073 29 1,000,000 500,000 200,000
Falgun 2073 30 1,000,000 1,000,000 300,000
Chaitra 2073 31 1,695,000 1,130,000 300,000
Baishakh 2074 31 1,130,000 1,695,000 900,000
Jestha 2074 31 1,130,000 452,000 400,000
Ashad 2074 31 2,260,000 1,808,000 100,000
On Bhadra 2074, you advised the owner of Parimal and Sons that the firm needs to
get registered under VAT and pay applicable VAT since it has turnover over the
threshold limit for not registering under VAT. Owner agreed for the same, and asks
you for computing the total amount of VAT along with fine, interest and penalty, if
any, he needs to pay if he intends to clear his VAT liability on 25 Bhadra 2074. Also
explain in brief the provisions for registration under VAT. No. of Days in Shrawan
2074 is 32.
7
c) Royal Stag Distillery has been manufacturing 65 UP Alcohol using Molasses as
prime raw material. The input output ratio is 20 litre per quintal of molasses. During
the month Bhadra 2074, it has purchased 200 quintal Molasses on which the excise
duty is Rs. 50 per quintal. The excise duty payable on 65 UP Alcohol is Rs. 90 per
liter. It is assumed that all the production has been sold, out of which 70% is sold to a
duty-free shop under recommendation from Inland Revenue Office. Calculate the net
Excise Duty payable for the month? 6
Answer:
5 a)
Section 8Ka of the VAT Act, 2052 allows bank guarantee facility for import of
necessary raw materials by industry exporting more than 40% of its total sales in the
latest 12 months from the date of industry operation and import of goods for duty free
shop through bonded warehouse can be made by submitting bank guarantee to the
related customs office for the tax to be levied.
Provided that, in order to avail such facility, 10 % value addition from the raw material
should have been made at the time of exporting the finished goods by the exporter
except by the duty free shop importing through bonded warehouse.
The liquor and cigarettes imported under the privilege should be sold only to the
diplomatic or duty privileged person or entity recommended by the Ministry of
Foreign Affairs of the GON. The liquor and cigarettes in stock in Tribhuvan
International Airport at the time of introduction of this Section can be transferred to
approved own bonded warehouse or can be sold after paying due taxes. The bank
guarantee maintained shall be released from the respective customs office as per the

prescribed procedure by the Department. The facility under Sub-section (4) of Section
24 shall not be available to persons availing facility under this Section.
As per Section 24(4), notwithstanding anything contained in Sub-sections (2) and (3)
any registered person whose export sales for a month are 40 percent or more of his
total sales for that month, and files a claim following the procedures underlined in this
Section for the refund of the amount pertaining to Section 17 shall be entitled to a
refund of the remaining excess after setting off any outstanding amount.
Taking into consideration of the above provisions:
1. Bank guarantee facility is not available as the import is related to finished goods.
2. The export is more than 40% (2,400,000/4,054,000*100=59%) of total sales in the
just previous 12 months, so, bank guarantee facility is available in import of raw
materials.
3. The export sales is greater than 40% (200,000/360,000*100 = 55%) of the month‟s
total sales, the Company gets tax refund facility in the month of return submission.
5 b)
A person needs to be registered under VAT if his annual transaction is more than Rs.
50 Lakh. If any person has not registered under VAT assuming its transaction will not
cross threshold of Rs. 50 Lakh per annum, but it has crossed, then such person should
get registered under VAT within 30 days of crossing of the threshold of Rs 50 Lakh.
If, a person does not get registered under VAT within such period, then such person is
liable for fine, interest as per VAT Act.
Date on which turnover of the Firm crossed Rs 50 Lakh

On Falgun 2073, the turnover of the firm crossed Rs 50 Lakh. Hence, Parimal and
Sons should have been registered under VAT within 30 days of Falgun 2073. Since, it
has not been registered under VAT, it has to pay VAT on the sales made from Chaitra
2073 assuming the sales amount is inclusive of VAT.
Computation of VAT Liability of Parimal and Sons
Particulars Chaitra Baishak Jestha Ashadh Total

Liability
(Rs.)
Opening VAT – VAT A 34,513 (30,487) 34,513 (43,487)
on closing stock on
Falgun 2073
Purchase VAT B 130,000 195,000 52,000 208,000
Sales VAT C 195,000 130,000 130,000 260,000
Closing VAT Liability D (30,487) 34,513 (43,487) (95,487) 95,487
(A+B-C)
Total No. of overdue 31 31 31 32
days
Additional Tax u/s 19 @ E 258.93 0 369.34 837.15 1,465.42
10% pa

Interest u/s 26 @ 15% F 388.40 0 544.01 1,255.72 2,188.13

pa
Penalty u/s 29(1)(ka) G 10,000 10,000 10,000 10,000 40,000
Penalty u/s 29(2) 100% H 0 0 0 95,487 95,487
of VAT Liability as per
D
Total Amount Payable 234,627.55
5 c) Calculation of Excise Duty Payable is as follows:
Excise Payable on Production

Particular UOM Rate Quantity Amount(Rs.) Remarks
Use of Molasses as Raw
Quintal 200
Material
Excise Duty on Molasses
Quintal 50 200 10,000
purchased
Alcohol Production & Sales Liters 4,000 Ratio is 20:1
Excise Duty on Alcohol Sold Liters 90 4,000 360,000
Backed by Cash &
Exicse Duty Not Payable on
70% 252,000 Bank Guarantee
Sale to Duty Free Shops
Net Excise Duty Payable on
108,000
Balance Sales
(-) Excise Duty Paid on
(10,000)
Molasses Purchased
Final Excise Duty Payable to
98,000
Government
6.
a) What is the concept of Arm‟s Length Principle as per OECD Model Tax Convention?
Explain significance of Arm‟s Length Principle. 5
b) Himalayan Expeditions (P) Ltd., Bangalore provided travel service in India to a group
of employees of Surya Tobacco (P) Ltd., Nepal. Explain about the tax withholdings
and income tax liability of Himalayan Expeditions (P) Ltd. on the service fee it
received from Surya Tobacco, giving consideration to Double Taxation Avoidance
Agreement between Nepal and India. 5
Answer:
6 a)
The Arm‟s Length Price (ALP) of a transaction between two associated enterprises is
the price that would be paid if the transaction had taken place between two
comparable independent and unrelated parties, where the consideration is only
commercial. The OECD transfer pricing guidelines provides guidance on the
application of the arm‟s length principle in order to arrive at the proper transfer

pricing range between associated enterprises. Market forces determine business

relations between independent parties. The Arm‟s length principle seeks to adjust the
profits between two associated enterprises by comparing the same as if the transaction
is carried out between two independent enterprises. It treats each enterprise as a
separate independent entity rather than as inseparable parts of a single unified
business.
Significance of Arm’s Length Principle

(1) Parity of Tax Treatment
ALP provides broad parity of tax treatment for MNCs and independent enterprises.
Since the ALP puts associated and independent enterprises on a more equal footing
for tax purposes, it avoids the creation of tax advantages and disadvantages that
would otherwise distort the relative competitive positions of these entities. The
ALP, thus promotes the growth of international trade and investment by removing
these tax considerations from economic decisions.
(2) Determines Real Taxable Profits

The transfer price adopted by a multinational has a direct bearing on the
proportional profit it derives in each country in which it operates. If inadequate or
excessive consideration is paid for the transfer of goods, services or intangible
property between the members of an MNC group, the income calculated for each
of these members will be inconsistent with their relative economic contribution.
An arm‟s length price is needed to determine taxable profits earned in each
country.
(3) Reduction of Artificial Price Distortion

If the ALP is not followed, an MNC will sell goods/provide services to a
controlled entity in a high tax regime at a high price (which exceeds the market
price) and to an entity in a low tax regime or a tax heaven at a low price (which is
lower than the market price). This would result in extreme price distortion of
goods and services in the international market. Thus following the principle of
ALP leads to reduction of such artificial price distortion.
(4) Minimization of Double Taxation

The ALP is an international concept and it represents the international practice.
The potential for double taxation thus is minimized, since in international transfer
pricing, adjustment to the transfer price in one tax jurisdiction requires a
corresponding adjustment in the other tax jurisdiction.
(5) ALP ensures proper amount of income being attributed to where it is earned.
The ALP provides accurate measurement of the fair market value of the economic
contribution units of a MNC. The focus of the ALP is to ensure that the proper
amount of income is attributed to where it is earned. This results in each unit of the
MNC earning a return commensurate with its economic contribution and risk
assumed.

6 b)
Article 7 of the Double Taxation Avoidance Agreement between Nepal and India
stipulates that the income from business of an enterprise is taxed only in the country of
the enterprise except for the portion of its businesses carried through its permanent
establishment in the other country.
In the given case, Himalayan Expeditions (P) Ltd, Bangalore has provided travel
service without a permanent establishment in Nepal and the service is also provided in
India to a group of employees of Nepal, so, there is no provision of taxing the income
in Nepal. Since, the income is not taxed in Nepal, no question of tax withholding and
any other income tax liability arises in Nepal to the Indian Company.

Specific Comments on the performance of the students

Batch: -June 2018
Level: -CAP-III
Paper 6: Advanced Taxation

1. Performance was very poor. Question was also confusing a little.
2. Lack of conceptual knowledge. The answer should be specific and students should
mention section.
3.
a) Candidates who have appeared part (a) only have answered properly.
b) Students are confused between Sec. 120 (a), (b) and Sec. 121, 127 in most of
the case.
4.
a) Though Provision is correctly written, most failed to apply and interpret
correctly.
b) None of the student correctly stated the 'rebate part'. Most were not aware of
the appreciable Depreciation.
5.
a) Most of candidates attempted this question satisfactory performance. Could
not address the bonded warehouse part.
b) Poor performance. Almost all the candidates failed to attempt this question.
c) Excellent performance.
6.
a) Average performance.
b) Poor performance.

Paper 6: Advanced Taxation
CAP III Paper 6: Advanced Taxation
Marks
Use separate answer book for each question.
1. Mr. Bipin Koirala is working as a manager in Nabil Bank Ltd. and he received the
following amount during the income year 2074/2075.
Salary Rs. 75,000 per month
Grade Rs. 5,000
Dashain Allowance Rs. 50,000
Gratuity Rs. 75,000
Bonus Rs. 150,000
Conveyance Allowance Rs. 20,000 per month
Employer’s contribution to approved P.F. 10% of salary
Following additional information is provided to you:
a) He contributed similar amount to Provident Fund and contributed Rs. 75,000
gratuity amount received from the bank plus Rs. 100,000 to Citizen Investment
Fund.
b) He retired from service on 30th Poush 2074. He received a pension of Rs. 50,000
per month after the date of his retirement.
c) He was allowed free accommodation by the employer, who allowed him to stay
there till Ashadh 2075.
d) He received his Provident Fund amount of Rs. 1,550,000 from the approved
Provident Fund on Magh 2074. The balance of the Provident Fund amount in his
account as on 18th Chaitra 2058 was Rs. 700,000.
e) He was also paid the sum of Rs. 100,000 by the Managing Director as his
personal token in appreciation of his sincere service to the employer.
f) He received a sum of Rs. 150,000 as unutilized leave salary as per the rule on 1 st
Magh 2074.
g) He has received Rs. 30,000 as fee for question setting for BBS students.
h) He has taken loan from the company amounting to Rs. 2,000,000 @ 8% p.a.
interest. The market interest rate of such loan is 12% p.a.
i) He was provided car facility for both official and personal purposes. Employer
allowed him to retain the car with him till end of Ashadh 2075 and also paid
Rs. 5,000 per month for fuel and car maintenance expenses.
j) During Aswin 2074, he was admitted to a private hospital for one week and the
employer spent Rs. 150,000 on his medical treatment at the hospital and also
reimbursed Rs. 175,000 his personal expenses.
k) Other employees presented him with a sliver casket engraving costing Rs.
250,000.
l) He received dividend of Rs. 500,000 from various listed companies and received
Rs. 150,000 bank interest.
m) He had paid Rs. 50,000 life insurance premium and Rs. 30,000 medical insurance
premium of his families to Shikhar Insurance Company Ltd.
n) The company has provided 100 shares of Uniliver Co. as a gift to him at the time
of his retirement. The market price is Rs. 22,500 per share.
© The Institute of Chartered Accountants of Nepal 2

Required:
i) Calculate his taxable income and total tax liability explaining with reasons for
including or for not including any particular item in the taxable income. 12
ii) Explain what type of payments are not included in remuneration income. 3
iii) Describe whether Bipin has to file an income tax return to Inland Revenue Office
for the income year 2074/75. 3
iv) If same situation remains in income year 2075/76, what would be his tax liability? 2
Answer:
Calculation of Taxable Income
of Mr. Bipin Koirala
for Income Year 2074/75
(Assumed Single Status) (See also WN 2)
Section/Rule of Amount
S. Particulars Income Tax Act, Basis and Workings
(Rs.)
No. 2058
Assessable Income from
8 1,351,875
1 Employment
Salary @ Rs. 45,000 for 6
Salary 8(2) (Ka) 455,000 months plus grade (See also
1.1 WN 1)
Festival Allowance 8(2) (Ka) 50,000 WN 2
1.2
1.3 Bonus 8(2) (Ka) 150,000
1.4 Conveyance Allowance 8(2) (Kha) 120,000 Rs. 20,000 for 6 months
1.5 Additional Provident Fund 8(2) (Cha) 45,500
1.6 Pension 8(2) (Cha) 300,000
27(1) (Kha) (2)
Free Accomodation 9,100 WN 3
and Rule 13(2)
1.7
27(1)(Kha)(2) and
Vehicle Facility 2,275 WN 4
1.8 Rule 13(1)
Fuel and Maintenance
8(2) (Kha) 30,000 WN 5
Expenses
1.9
Medical Treatment
8(2) (Ga) 150,000
1.10 Reimbursements
Reimbursement of
8(2) (Ga) 175,000
1.11 Personal Expenses
WN 6
Concession of Interest on
40,000
Loan
1.12
Inclusion/Assessable Question setting fee is a
30,000
2 Income from Business professional income.
2.1 Question Setting Fee 30,000

Total Assessable Income 1,381,875

3
Being less than 1/3rd of the
assessable income or NRs
300,000 or actual
Less: Deduction for PF contribution (20% PF
Sec 63 Rule 21 266,000
contribution contribution and CIT
contribution) = 45,500 +
45,500 + 75,000 +100,000);
4 whichever is lower.
25% of Exemption Limit
Schedule 1
Rs. 350,000.00 or Actual
Pension Allowance Section 1 (9) and 87,500
Pension Rs. 300000.00;
Rule 39
5 whichever is less.
Net Taxable income 1,115,875
Segregation of Net Taxable Income into Various Sources
The Net Taxable Income includes income from employment including pension, and also business. The
exemption slab is taxed @ 0% for pension and business and @ 1% for income from employment except
pension. So, the net taxable income should be segregated in all three sources, which can be done in the
proportionate basis:
Net Taxable Income 1,115,875
Segregated into:
Income from employment except

pension 1051875/1381875*988375 849,397.39
Pension 300000/1381875*988375 242,252.37
Business 30000/1381875*988375 24,225.24
Total 785,875.00 1,115,875.00
Calculation of Tax Liability (Single Status) for Income Year 2074-75
Particulars Taxable Amount Tax Rate Tax
Exemption Limit from Pension 214,572.59 0% -
Exemption Limit from Business 21,457.26 0% -

Exemption Limit from
Employment except Pension 83,522.39 1% 835.22
First Slab 100,000.00 15% 15,000.00
Rest 665,875.00 25% 166,468.75
Tax Liability 182,303.97

If the same situation remains in income year 2075/76, his taxable income
shall have changed by excluding the question setting fees as it is taken as a
final withholding income. Accordingly, the taxable income shall be less by
Rs. 30000, and shall remain Rs. 1085875. The tax liability shall be changed
as follows:
Calculation of Tax Liability (Single Status) for Income Year 2075-76
Tax
Particulars Taxable Amount Rate Tax
Exemption Limit from Pension 214,572.59 0% -
Exemption Limit from Business 21,457.26 0% -

Exemption Limit from
Employment except Pension 113,970.15 1% 1,139.70
First Slab 100,000.00 10% 10,000.00
Next 200,000.00 20% 40,000.00
Rest 435,875.00 30% 130,762.50
Tax Liability 181,902.20
Tax Calculation on Retirement Payments

Tax Exempt Taxable
Amount Amount
Related to Related to Tax
Period before Period after Calculatio Tax
S Total Income Tax Income Tax n Amount
N Particulars Amount Act, 2058 Act, 2058 Workings Rs. Remarks
(850000-
Provident 500000)*5
1 Fund 1,550,000.00 700,000.00 850,000.00 % 17,500.00
Since he is already
drawing pension; this
gratuity should be
something extra
benefit at the
retirement rather than
41130*15 the gratuity as per the
2 Gratuity 75,000.00 33,870.00 41,130.00 % 6,169.50 Labout Act.
Unutilized Leave 42260*15
3 Pay 150,000.00 67,740.00 82,260.00 % 12,339.00
Gift Shares at the 1233900*
4 Retirement 2,250,000.00 1,016,100.00 1,233,900.00 15% 185,085.00
Total 4,025,000.00 1,817,710.00 2,207,290.00 221,093.50

Working Notes:
1. The amount of grade is given Rs. 5,000.00 without mentioning per month or per year. In lack of
information, the grade amount Rs. 5,000.00 is assumed as on annual basis. (If a student assumes
the grade per month, mark should be awarded as correct.)
2. Normally, the festival allowance shall be of one month’s salary including grade. However, the
amount is included as provided in the question.
3. Free accommodation to employee, worker and person drawing monthly salary is characterized
and quantified @ 2% of salary. Free accommodation for about 6 months even after retirement is
normally not provided. But, the question has mentioned so. Thus, free accommodation given to
Mr. Bipin after retirement is attracted Rule 13 (2) (Kha), which mentions that the free
accommodation should be characterized and quantified @ 25% of applicable rent. In lack of
rent amount, the free accommodation for after retirement could not be quantified.
4. Vehicle facility to employee, worker, and person drawing monthly salary is characterized and
quantified @ 0.5% of salary. Vehicle facility for about 6 months even after retirement is
normally not provided. But, the question has mentioned so. Thus, vehicle facility given to Mr.
Bipin after retirement is attracted Rule 13 (1) (Kha), which mentions that the vehicle facility
should be characterized and quantified @ 1% of market value of the vehicle. In lack of the
market value, the vehicle facility for after retirement could not be quantified.
5. The expenses given for 6 months during his service period can be taken within the vehicle
facility and the monthly fixed amount given for after his retirement should be included in
income at the market value of the facility.
6. The loan should be supposed to have recovered at the time of retirement as is normally
practiced. So, the concession in interest = 2,000,000.00*(12-8%)*6/12
7. Normally, every natural person shall have single status unless they have elected for couple
status.
8. The gifts from the Managing Director and other employees are not included as they fall under
personal nature.
9. Dividend and interest from bank received by a natural person are final withholding incomes
under Section 92. Such incomes are excluded for income tax purpose as per Sections 8 (3), 7 (3)
and 9 (3).
10. The insurance premiums paid for family is not reducible to the taxpayer. So, no reductions
available for Rs. 50,000 life insurance premium and Rs. 30,000 medical insurance premium of
his families to Shikhar Insurance Company Ltd.
11. The question setting fee is an income from occupation/profession, and is not related to
employment, so it should be income from business.
i) The following payments are not included in course computing the income from
employment:
a) Any amount received by an employee for which exemption is given under Section 10
of the Act.
b) Any amount received which is subject to final withholding tax
c) Daytime meals or refreshment provided by the employer in equal terms for all the
employees.
d) Any reimbursement of expenses incurred by the employee:
 That serves the purpose of the business of the employer: or
 That would otherwise be deductible in calculating the individual’s income from
the business or investment.
e) Any prescribed small amounts, which are too small and thus unreasonable or
administratively not practical to make accounting for them. The amount prescribed by
the Rule is Rs 500 at a time. The expenses prescribed by the Rule include tea

expenses, stationary expenses, prizes, gift, emergency medical facility or other such
payments as specified by IRD.
ii) According to Section 97, unless a written order is issued or a public notice is published
by IRD, the following person are not obliged to file an annual return:
a. The person who has no liability to pay tax during the year
b. The person who has only incomes, subject to final withholding tax
c. A natural person having income from vehicles subject to payment tax at a fixed
amount annually.
d. A resident individual under the following condition:
e. The income for an income year consists exclusively of income from an employment
having a source in Nepal
f. Who has only one employer at a time and all of the employers are residents of Nepal
during the year;
g. Who claims for medical allowance and a retirement contribution allowed by the
employer only, but does not claim the donation given during the year.
Hence, Mr. Bipin Koirala should file income tax return for the income year 2074/75
separately to IRO within Aswin end 2075.
2.
a) Employees’ Provident Fund, Nepal (EPF), established under the Employees’
Provident Fund Act, has the following incomes for Income Year 2074/75. Find
out its tax liability. 7
Interest Income from Bank Deposit Rs. 150,000,000
Dividend Income from Hydro-power projects from consortium financing with a
bank Rs. 150,000,000
Rent Income Rs. 150,000,000
b) Ms. Aksheta Sharma has received Rs. 23,000,000 on 2075.01.23 from

Budhigandaki Hydro Power project as a compensation of land acquisition by the
government. She had owned that land on 2072 Magh 1 after getting property
transferred from her mother. The value of land at the time of ownership transfer
was Rs. 3,000,000. She acquired another land at Rs. 20,000,000 on 2075/06/19.
Find out her tax liability, if any, giving consideration to legal provisions. Will the
tax liability be different if she acquired the land on 2076/02/14? 7
c) Him Electronics Pvt. Ltd. has the following assets on Shrawan 1, 2074:
S.N. Assets Written down value on 2074/4/1
1 Building 45,050,000
2 Office Equipment 250,000
3 Motor Car 4,550,000
4 Plant & Machinery 1,275,000
Following additions have been made and following repair & maintenance
expenses have been incurred during income year 2074/75:

S.N. Assets Date of Cost Rs. Put to use Repair

Acquisition and
Maintena
nce
Expenses
1 Building Shrawan 4, 2074 2,575,000 Magh 25, 2074 1,500,000
2 Office Equipment Magh 20, 2074 150,000 Baisakh 10, 2075 0
3 Motor Car Poush 15, 2074 4,500,000 Baisakh 20, 2075 450,000
4 Plant & Magh 30, 2074 500,000 Phalgun 30, 2074 520,000
Machinery
5 Accounting Chaitra 10, 2074 550,000 - -
software 5 years
4 months life
The company sold the following assets during income year 2074/075:
S.N Assets Date of Sale Sale Consideration (Rs.)
1 Office Equipment Ashadh 20, 2075 298,000
2 Plant & Machinery Ashadh 25, 2075 520,000
Determine the amount of depreciation, repair and maintenance expenses
allowable under Income Tax Act, 2058 for the income year 2074/2075. Also
explain pooling date and mention whether the company can claim accelerated
depreciation? 6
Answer:
a) EPF is an Approved Retirement Fund (ARF) under Income Tax Act and Rules (Section
63 and Rule 20). Section 64 (2) of the Act has exempted for all incomes of an ARF from
income tax. However, Rule 20 has prescribed that the investment of an ARF can be only
in ‘approved investment’. Approved investments are – the investments in Citizen
Investment Trust, investment in banks established under the prevailing banking laws,
investment in government bonds, investment in consortium financing with bank, and
investment to the own beneficiaries of the ARF except to the own shareholders.
If the investment is not an approved investment, any income from the investment are not
exempted. Accordingly, the rent income is taxable and the other two incomes are not
taxable. Thus, the taxable income and tax liability shall be as follows:
S. No. Particulars Amount Rs. Workings
1 Inclusion 150,000,000
An ARF is tax exempted for the
Interest Income income from approved investment.
from Bank The bank deposit is an approved
1.1 Deposit - investment, so, it is not taxable.
Dividend Income
from Hydro- An ARF is tax exempted for the
power projects income from approved investment.
from consortium The investment in a consortium
financing with a financing with a bank is an approved
1.2 bank - investment, so, it is not taxable.

An ARF is tax exempted only for the

income from approved investment.
Renting a house is not an approved
1.3 Rent Income 150,000,000 investment, so, it is taxable.
2 Taxable Income 150,000,000
3 Tax Rate 25%
4 Tax Liability 37,500,000
b) This is an involuntary disposal under Section 46. According to the Section, income tax is
levied on the net gain from the disposal. The net gain is calculated as the surplus over the
outgoings for acquiring the similar assets by the taxpayer within a year from date of
involuntary disposal.
The tax amount if she acquired the land on 2075.06.19 will be as follows:
Particulars Amount Rs. Workings
According to Section 46, if another similar asset is
acquired within a year, the incomings shall be:
Outgoings + Surplus. Where, surplus = compensation
received – cost for newly acquired property =
Incomings 6,000,000 3,000,000 + (23,000,000 – 20,000,000)
Outgoings 3,000,000
Gain 3,000,000
Reduction 0
Net Gain 3,000,000
Tax Rate 5%
Tax 150,000
The tax amount if she acquired the land on 2076.02.14:
Particulars Amount Rs. Workings
If similar another asset is not acquired within
one year, the incomings shall be the whole
amount received as compensation. Since, she
acquired the land on 2076.02.14, one year is
Incomings 23,000,000 elapsed from the date of compensation received.
Outgoings 3,000,000
Gain 20,000,000
Reduction 0
Net Gain 20,000,000
Tax Rate 5%
Tax 1,000,000
c) Depreciation is computed on the date latest of date of payment for the assets or date of
put to use. This latest date is called polling date. In case of machinery, it is purchased in
earlier period than its put to use in business. Here pooling date is later date i.e. date of put
to use. If any assets have used in business under sale or purchase on approval basis, date
of put to use will come first and then date of purchase (approval date). In this case,
pooling date is date of approval.
The company cannot have claimed accelerated depreciation. According to Section 3(2) of
Schedule 2, depreciation rate shall be increased by 1/3rd in the following entity for Pool
A, B, C and D:

 Special Industry as defined in Section 11

 Construction of Road Bridge, Tunnel, Rope-way, Sky Bridge
 Operation of Trolley Bus and Tram
 Cooperative Union or Society (non-taxable business
 Power house construction, generation and power transmission
 Built Own, Operate and Transfer (BOOT) business
Calculation of depreciation and repair and maintenance expenses:
Him Electronics Pvt. Ltd.
Computation of Allowable Depreciation
(Income Year: 2074/75)
I. Building: Amount Rs.
Written down value on 2074/4/1 (Depreciation basis amount) 45,050,000.00
Addition during the year:
Date of put to use Cost Depreciation basis amount
2074/10/25 2,575,000 2,575,000 x 2/3 1,716,666.67
Total depreciation basis amount: 46,766,666.67
Allowable depreciation: (A) 46,766,666.67 X 5% 2,338,333.33
1
II. Office Equipment:
Written down value on 2074/4/1 (Depreciation basis amount) 250,000.00
Date Cost Depreciation basis amount
2075/1/10 150,000 150,000.00 x 1/3 50,000.00
300,000.00
Sold during the year: Sold on 2075/3/20 (298,000.00)
Total depreciation basis amount: 2,000.00
Allowable Depreciation: 2,000 X 25% 500.00
Balance: 1,500.00
However, as per Sec. 2 (6) of Schedule-2 of Income Tax Act, 2058, if the balance of
depreciation basis amount becomes less than NRs. 2,000, additional depreciation
equivalent to that balance amount should be charged. Therefore, in this case the
allowable depreciation would be Rs. 2,000 (Rs. 500 + Rs. 1,500).
Allowable depreciation (B) = 2,000
III. Motor Car: Amount NRs.

2075/1/20 4,500,000.00 4,500,000.00 X 1/3 1,500,000.00
Allowable depreciation: (C) 6,050,000.00 X 20% 1,210,000.00
IV. Plant & Machinery
2074/11/30 500,000.00 500,000.00 X 2/3 333,333.33
Less: 1,608,333.33
Sold during the year: Sold on 2075.3.25 (520,000.00)
Allowable depreciation: (D) 1,088,333.33 X 15% 163,250.00
V. Accounting software
Addition during the year 2074.12.10 550,000.00
Depreciation base 550,000*2/3 366,666.67

Life: 5 years 4 months

Allowable depreciation= 366,666.67 * 20% 68,750.00
Calculation of allowable repair and maintenance expenses as per Income Tax Act 2058.
S.N Particulars Depreciation Actual R & M 7% of Allowed
base for expenses NRs Depreciation repair
2074/75 NRs base NRs. expenses
NRs
1 Building 46,766,666.67 1,500,000 3,273,666.67 1,500,000.00

2 Office Equipment 2,000 - - -
3 Motor Car 6,050,000 450,000 423,500 423,500.00
4 Plant and Machinery 1,008,333.33 520,000 112,583.33 112,583.33
5 Accounting software 366,666.67 - - -
Total 2,470,000 3,809,750 2,036,083.33
Actual repair and maintenance expenses = Rs. 2,470,000.00
Allowed repair and maintenance expenses = Rs. 2,036,083.33
Disallowed repair and maintenance expenses = Rs. 433,916.67
Note:
Depreciation has been calculated as per Schedule 2 of the Income Tax Act, 2058.
3.
a) As per the prevailing code of ethics, what are the taxation services that can be
provided by a professional accountant to its client? 5
b) Every officer of IRD or IRO shall keep the documents and information coming to
his possession or knowledge secret while performing his duties under Income Tax
Act. In which circumstances he can convey the information to other persons? 5
Answer:
a) Taxation services comprise a broad range of services, including:
a. Tax return preparation;
b. Tax calculations for preparing the accounting entries;
c. Tax planning and other tax advisory services; and
d. Assistance in the resolution of tax disputes.
However, the professional accountant should maintain his integrity and independence.
b) As per Income Tax Act Section 84, the tax officer can convey the information to the
following person under the given circumstances:
a. To the extent required in order to perform the officer's duties under Income Tax Act;
b. To a court or tribunal as required to perform by them in proceedings with respect to a
matter under this Act;
c. To the Finance Minister;
d. To any person when the disclosure is necessary for the purpose of any other fiscal
law;
e. To any person in the service of GON, who requires the information for revenue or
statistics related works;
f. To the Auditor-General or any person authorized by the Auditor-General when such a
disclosure is necessary for the performance of his official duties; or

g. To the competent authority of the foreign government with which Nepal has entered
into an international agreement, to the extent permitted under the agreement.
4.
a)
i) ABC Co. is a transportation company which carry goods from one place to
another. Mr. Hari Bhadur Thapa called the ABC Co. and entered into an
agreement to hire a vehicle for carrying goods from Bhairahawa to
Kathmandu. The price for the service was Rs. 100,000. Hari Bhadur Thapa
loaded some barrels containing liquor and headed towards Kathmandu along
with the driver. At Mugling, the vehicle was intercepted by Excise Police and
on enquiry it was found that the liquor was illicit liquor. The person who hired
the vehicle had run away in the meanwhile. The value of the liquor was
estimated at Rs. 10 lakh. What is the punishment under the Excise Act in such
circumstances? What enquiry is to be made before any punishment? 5
ii) Mr. Ram Krishna Neupane wanted to import the goods from USA. The goods
which are to be imported did not arrive to Customs boarder but he wanted to
make the payment of duty in advance so that goods after arrival could be
cleared from Customs faster. He paid the customs duty on March 26, 2018 for
the goods to be imported at the exchange rate of 1 USD = Rs. 112. The goods
arrived on April 26, 2018 and Mr. Neupane wanted to clear the goods on that
day and the exchange rate on that day was 1 USD = Rs. 116. Mr. Neupane
claims that there will not be any impact of the difference in exchange rate as
he has already paid the duty in advance. State your views on the claim of Mr.
Neupane referring the provisions of Customs Act/Rules. Will there be any
difference if the exchange rate on April 26, 2018 was 1 USD=Rs. 110? 5
b) Ram Private Limited deals in manufacturing and sales of VATable goods. It has
started its operation from 15 Bhadra 2075 without registering under VAT. Below
is it’s transactions for the month of Bhadra 2075, Asoj 2075 and Kartik 2075
including VAT wherever applicable.
Particulars Bhadra 2075 Asoj 2075 Kartik 2075

Purchase of Raw Materials 5,000,000 3,000,000 4,000,000
(VATable)
Purchase of Car for CEO 0 5,000,000 0
(VATable)
Liquor Expenses 200,000 100,000 0
Petrol Expenses 0 15,000 10,000
Machineries (VATable) 50,000,000 0 0
Sales 1,000,000 7,000,000 20,000,000
You are a Tax Official and came to know that Ram Private Limited is doing
business without registering under VAT, and you intend to carry out VAT
assessment of Ram Private Limited. Discussing the relevant provisions of VAT
Act, 2052 and Rules 2053, assess the total VAT liability of Ram Private Limited
including fine, interest and penalty, if any, as on 30 Poush 2075. 10

Answer:
a)
i)
1. The liquor will be confiscated and penalty equivalent to the value of the liquor
will be imposed on the manufacturer of the liquor after making proper
investigation to find out the manufacturer of the liquor, under Sec. 12 (1) of
Liquor Act and Sec 16 (1) of the Excise Duty Act.
2. The value of the confiscated liquor for the purpose will be its factory value plus
Excise Duty on the same for the purpose of calculating the value of penalty
payable.
3. Mr. Hari Bahadur Thapa may be punished with imprisonment for one year
without the penalty or both imprisonment and penalty depending on the nature of
the crime after due investigation.
4. If the vehicle used for the transportation of the illicit liquor is a vehicle registered
as a hired vehicle, without the permission of the owner, the owner will be levied a
penalty of Rs. 25,000.
5. The driver will be punished with imprisonment up to three months or a penalty of
Rs. 15,000 or both on the basis of the nature of involvement of the driver in the
crime. In this case, he has not knowingly allowed the transportation, he may be
levied minimum penalty.
6. If the vehicle has been used with the involvement of the owner, then the vehicle
can be confiscated. But since here the involvement of the owner is not
established, the vehicle may not be confiscated.
7. Proper investigation has to be made with regard to the degree of involvement of
each person before deciding the quantum of punishment.
8. They have to find out the person who ran away to ascertain the manufacturer and
his involvement in the transaction.
ii) Section 24 of Customs Act, 2064 prescribes the following provisions.

As per Section 24(1) if any importer wishes to pay the duty chargeable on any goods
to be imported by the importer prior to the arrival of such goods at the concerned
Customs Office, the importer may, for that purpose, make an application,
accompanied by the declaration form filled up and such documents relating such
goods as referred to in Section 18, to the Customs Officer.
If on examination of the application received pursuant to sub-section (1), it appears
reasonable to collect the duty, the Customs Officer may determine the duty pursuant
to Section 22. The importer shall pay the duty so determined to the Customs Office.
If the rate of the duty determined pursuant to sub-section (2) or the exchange rate of
convertible foreign currency prevailing on the day of payment of payment of duty
differs from that prevailing on the day of clearance of goods, the rate prevailing on
the day of clearance of goods shall be applied. Hence, the payment of duty prior to
arrival of goods is possible. As per Section 24(3), if there is difference in exchange
rate, the exchange rate prevailing on the day of clearance of goods shall be applicable.
Mr. Ram Krishna has to pay the difference in duty due to increase in exchange rate
(Rs. 116-Rs. 112=Rs. 4).
If the exchange rate is lesser than the amount paid prior to the arrival of goods (Rs.
112 - Rs. 110 = Rs. 2), Mr. Neupane has to apply for refund of excess duty paid and
the Customs Officer has to refund the amount which arose due to exchange rate
difference on the date of payment and the date of clearance of goods.

b)
i) Section 5(1) of the Value Added Tax Act, 2052 provides that until unless provided
otherwise, VAT is to be levied on all goods and services supplied within Nepal. In the
given case, Ram Private Limited deals in VATable goods. Hence, it should have
registered itself under VAT. However, mere fact that it has not registered under VAT,
that does not mean it has no liability for payment of VAT since section 5(1) has
specifically cast VAT liability on sales of goods and services within Nepal. So, if any
person who is required to be registered under VAT has not registered under VAT, and
carries out transaction in Nepal, in the said case it will be assumed that the transaction
done by the said Company is inclusive of VAT, i.e. even though Company has not
collected VAT, it will be assumed that VAT is collected and included in sales.
ii) Further, section 20(g) of Value Added Tax Act, 2052 provides that VAT Officer can
carry out VAT assessment of the person who is required to be registered but not
registered.
iii) Section 17(1) of the Value Added Tax Act, 2052 provides that VAT credit will be
allowed to a registered person. Here, since Ram Private Limited is not registered
under VAT, VAT credit on input shall not be allowed.
iv) So, total VAT liability of Ram Private Limited will be as below
Particulars Bhadra 2075 Asoj 2075 Kartik 2075
VAT Credit Not Available Not Available Not Available
since not since not since not
Registered Registered Registered
VAT Payable
Total Sales 1,000,000 7,000,000 20,000,000
VAT on Sales A 115,044.25 805,309.73 2,300,884.96
(Sales/113*100)
Penalty u/s B 10,000 10,000 10,000
29(1)(a) – Rs
10,000 for each
VAT period
Penalty u/s 29(2) – C 115,044.25 805,309.73 2,300,884.96
100% of VAT
Liability
Additional Fee u/s D 3,035.89 14,540.31 22,369.71
19 – 10% per
annum calculated
on a daily basis
Interest u/s 26 – E 5,752.22 30,199.11 57,522.12
15% per annum
Fee and Interest 4 Month 3 Months 2 Months
Month till 30
Poush 2075
Total VAT 248,876.61 1,665,358.88 4,691,661.75
Liability
Grand Total 6,605,897.24
5.
a) Nepali Pahichan, a typical handicraft exporting firm imported some VAT
attractive auxiliary materials from India for INR 1,000,000. Kolkata-Jogbani
freight and insurance are INR 50,000 and INR 5,000 respectively. Customs
clearing charges is Rs. 10,000. Excise and Customs Duty Rates are 25% and 40%

respectively. The sales value is 25% more than the cost by adding 25% cost from
Jogbani to sales level. 60% of the production has been sold. Calculate the amount
of VAT payable and find out the VAT carry forward or payable amount, if any,
on the transactions assuming there are no other purchases affecting in VAT
calculation. 7
b) Adrian EXIM Co. Ltd. has imported motorcycles by declaring INR 6,000,000
CFR Raxaul. Customs Officer assessed at the customs point and found that there
is under-invoicing by 50%. How can the Customs Officer assess the import? If
the under-invoicing was found out during post clearance audit, how would the
assessment be done?
Customs and Excise Duty Rates are respectively 60% and 40%. 7
c) Prabhu Helicopter Pvt. Ltd. had sent its engine for repair purpose to Singapore on
Bhadra 5, 2075. The value of engine is US$ 2,000,000 and incurred US$ 200,000
repair cost (including spare parts replacement). The engine was back in Nepal
after repair on Falgun 5, 2075. What is the time limit for goods to be brought back
which were sent to a foreign country from Nepal for the purpose of repair?
Calculate the amount of Custom deposit at the time of sending the engine to
Singapore and Custom duty to be charged on returning of engine. Assume rate of
custom duty is 14%. Exchange rate on Bhadra 5, 2075 is 1 US$ = Rs. 115.50 and
on Falgun 5, 2075 is 1 US$ = Rs. 112.50. 6
Answer:
a) Calculation of VAT Paid at the Customs Point:
Particulars Amount Rs. Working
Invoice Value 1,601,500.00 1000000*1.6015
Freight and Insurance 88,082.50 55000*1.6015
Customs Value 1,689,582.50
Duty Rate 40.00%
5% discount for duty rate
Duty Rate after discount for Import upto 30% and 3% discount
from India 38.80% for above 30%.
Customs Duty 655,558.01
Excise Value 2,345,140.51
Excise Duty 586,285.13 25%
Customs Clearing Charges 10,000.00
Taxable Value 2,941,425.64
VAT 382,385.33
Handicrafts are VAT-exempted items under Group 8 of Schedule 1 of the VAT Act. So,
there shall not be VAT return filing and accordingly no matter arises about VAT carry
forward or VAT payable.
b)
As assessed by the Customs Officer:
CFR Raxaul Value 19,218,000.00 12000000*1.6015
Any reasonable assumption of the
Insurance Charges insurance charges shall be awarded the
Assumed 500,000.00 mark.
Duty Rate 60.00%

Duty Rate after discount 5% discount for duty rate upto 30% and
for Import from India 58.20% 3% discount for above 30%.
Customs Duty 11,475,876.00
Excise Duty 12,477,550.40 40%
As declared by the Importer:
CFR Raxaul Value 9,609,000.00 6000000*1.6015
Any reasonable assumption of the
Insurance Charges insurance charges shall be awarded the
Assumed 500,000.00 mark.
Duty Rate 60.00%
Duty Rate after discount 5% discount for duty rate upto 30% and
for Import from India 58.20% 3% discount for above 30%.
Customs Duty 5,883,438.00
Excise Duty 6,396,975.20 40%
Additional Duty and Penalty to be levied by the Customs Officer at the Customs
Point:
Additional Customs Duty 50% additional duty or buying the
as per Section 13 (15) of goods giving 5% more on the declared
Customs Act 2,796,219.00 value.
Penalty as per Section 16
(4) (Ka) of Excise Act 6,080,575.20 100% additional duty
Penalty to be levied by the
Customs Officer if
assessed under Post
Clearance Audit:
Penalty for Customs Duty 5,592,438.00 100% (Section 34 (2)
Penalty for Excise Duty 6,080,575.20 100%
c)
i) As per Rule 7, in case it becomes necessary to send any goods or machinery or spare
parts thereof to a foreign country from Nepal for purpose of repair, deposit as defined
below shall be taken.
0.5% of the value of the goods in case the goods are aircraft, helicopter and parts
thereof, otherwise it shall be 5% of value.
Here, the value of machinery sent is for helicopter engine (US$ 2,000,000 * Rs.
115.50) = Rs. 231,000,000.
The custom duty deposit shall be 0.5% of it i.e., 0.5% of 231,000,000 = Rs.
1,155,000.
ii) As per Rule 7 of Custom Rule, such goods, machinery or spare shall have to be
brought back within 3 months from the date of export.
iii) In case the time limit prescribed above for bringing back such items after repair is
inadequate, an application accompanied with documentary evidence of such
inadequate shall be submitted to the Custom officer. The custom officer may, if he so
deems appropriate, extend the time limit by a period not exceeding three months.

iv) The time given in Rule 7 for reimports of machine sent for repair is three months if
granted by custom officer. Here, Time limit shall be extended and re-import shall be
done within time.
Thus custom officer shall charge custom duty at prevailing rate on the expenses involved
in such repair or on the price of spare parts which are replaced.
From it, custom deposit furnished earlier shall be deducted and custom officer shall
return the balance of the amount of the person.
Here,
Particulars Amount Rs
Expenses of repair = US$ 200,000 = 200,000 * 112.50 22,500,000
Rate of custom duty 14%
Custom duty on repair 3,150,000
Custom deposit given when machine sent for repair 1,155,000
Amount to be deposited 1,995,000
6.
a) Discuss the main objectives of entering into double taxation avoidance agreement
with various countries as mentioned in Income Tax Directives, 2068. 5
b) What are the various methods used for determination of arm's length price under
OECD model? 5
Answer:
a) Every country levies income tax. Income tax is levied on two principles –
(i) Source of Income Rule, and
(ii) Residence Rule
As per source of income rule, the income may be subject to tax in the country where the
source of such income exists whether income earner is resident in that country or not. On
the other hand, resident rule stipulates that the power to tax should rest with the country
in which tax payer resides.
Nepal and many other countries follow mixture of these two systems. Accordingly, this
leads to taxation of same income of a person in more than one country. Thus problem of
double taxation arises if a person is taxed in respect of any income on the basis of source
of income rule in one country and on the basis of residence in another country or on the
basis of mixture of above two rules. Accordingly, same income is taxed multiple times.
To address this problem, many countries enter into double taxation relief agreements with
each other with below main objectives as mentioned in Income Tax Directives, 2068 –
(i) To Eliminate Incidence of Double Taxation: As discussed above, the main principle
of income tax is same income cannot be taxed twice. So, to provide relief of taxation
of same income in different countries, double taxation avoidance agreement is entered
into.
(ii) To reduce the burden of Tax : It may happen that the rate of income tax on a
particular income in the source of country may be higher than the rate of tax provided
in the double taxation avoidance agreement. This helps to reduce the burden of tax in
source country on the income earned by non-resident person.
(iii)To reduce the uncertainty of tax liability: Income Tax Act is a flexible law. It can be
modified by respective country anytime as per its own benefit. However, in the
context of the global economy where big foreign investments are made by a resident
of one country in another country, they want certainty of tax laws. To provide these
certainties also, double taxation avoidance agreement are entered into between
countries.
(iv) To control tax leakage: In the context of current globalization, there is always a
possibility of transfer of income from high tax rate country to low tax rate country or

altogether no taxation of income. This leads to leakage of income tax which is

harmful to both of the countries. To stop this leakage also, double taxation avoidance
agreement is being entered into.
b) Various Methods used for determination of arm’s length price under OECD
model :
(a) Comparable uncontrolled price method (CUPM) : Under this method price is
determined on the basis of price charged or paid for property transferred or services
provided in comparable uncontrolled transaction or number of such transactions by
adjusting for differences which could materially affect the price in open market.
(b) Resale Price Method : Under this method, the price is calculated by identifying the
price at which goods or services are sold to unrelated party and normal gross profit
and normal expenses for transactiong such transactions are deducted.
(c) Cost Plus Method: Under this method, the cost of the product or service is identified
and the same is increased by normal gross profit margin.
(d) Profit Split Method: Under this method, combined net profit of all associated
enterprises engaged in international transaction is determined, and the profit is
apportioned on the basis of functions performed, assets employed, risk assumed by
different enterprises.

Specific Comments on the performance of the students

Batch: -June 2019
Level: - CAP-III
Paper VI: Advanced Taxation
Question No. 1
Students were found to be lacking of conceptual knowledge in a question and they were unable to
give clear answer. Lack of complete study of contents was observed in the students.
Question No. 2
Students have not adequately practiced the chapter. Lack of conceptual knowledge and lack of
analysis was observed in the students.
Question No. 3
(a) Students have good knowledge about this question.
(b) Students have shown good conceptual knowledge in this question.
Question No. 4
(a) i. Students have tried to answer in a general way without properly referring the sectors /
provisions of act.
ii. Students have written well.
(b) Students need to read the question’s requirement very well first and then write the answer.
Question No. 5
(a) Most of the students have not answered correctly. Students were unable to differentiate
between VAT exempt and zero rated VAT.
(b) Most of the students have not answered correctly. Answers written were lengthy but not
relevant and the provision of the act was not understood by students.
(c) Answers were well attempted.
Question No. 6
Students’ performance was not adequate as required.
.
.

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The Institute of Chartered Accountants of Nepal

Suggested Answers of Advanced Taxation

CAP III Examination June 2010

The Institute of Chartered Accountants of Nepal

4) Calculation of allowable Cost of Goods Sold(Section 15)

6)Selling & Distribution Expense

7) Calculation of allowable Repair & improvement expenses (Section 16)

8) Calculation of Depreciation (Section 19)

D 15% 300,000 2,000,000 1,000,000 3,000,000 450,000

The Institute of Chartered Accountants of Nepal

The Institute of Chartered Accountants of Nepal

b) For local purchases

The Institute of Chartered Accountants of Nepal

Name of Equipments Original Cost Import Date

The Institute of Chartered Accountants of Nepal

Equivalent NRS @ 110 64,953,900

ii) Lorry Amount(Euro)

The Institute of Chartered Accountants of Nepal

The Institute of Chartered Accountants of Nepal

i) Import of vehicle of personal use by the tourists can be done under

Period Export to India Local sales

Period Sales to India Rs. Local Sales Rs. In Total

Baisakh- Asadh 136 44 180

1) Those Industries which is exporting Readymade garments.

The other Provisions of the Customs rules 2064 are as follows:

The Institute of Chartered Accountants of Nepal

F/Y 2065/66 Amount (Rs.)

The Institute of Chartered Accountants of Nepal

Hence, M/s ROLLERS P. Ltd. has to submit monthly VAT return.

The Institute of Chartered Accountants of Nepal

CAP III Examination – December 2010

Profit & loss Account

To Salary Allowance 1,500,000 By Gross Profit b/d 7,560,000

i) 60% of VAT paid on purchase of delivery van 78,000

iii) VAT paid on mineral water for office purpose. 13,000

Compute the taxable income. 15

Less: Purchase 12,100,000

Working Notes (WN)

The Institute of Chartered Accountants of Nepal

Research & Development

The Institute of Chartered Accountants of Nepal

b) The following are the information concerning Mercantile Bank Limited.

i) Loans and Advances outstanding at the end of the year Rs.1,044,435,922.

iii) Loan Loss Provision for the year Rs. 64,566,439.

The Institute of Chartered Accountants of Nepal

Loans and Advances at the end of the year 1,044,435,922.00

Loans and Advances written off during the year 270,525.00

Loans and Advances at the end of the year 1,044,706,447.00

Total amount allowable @5% 52,235,322.35

Loan loss provision claimed up to previous year 50,952,138.00

The Institute of Chartered Accountants of Nepal

Less: Loans written off 270,525.00

Loan loss provision outstanding before new provision 50,681,613.00

Loan loss provision allowed for expenses as per sec. 59 1,553,709.35

Total loan loss provision 52,235,322.35

3. Answer the followings:

ii) Depreciable assets:

iii) Trading stock:

The Institute of Chartered Accountants of Nepal

The Institute of Chartered Accountants of Nepal

Now, the dividend distributed by entity shall be final withholding payment.

d) No, appropriation of profit to statutory reserve is not deductible expenses.

Import of plastic 50 ton granules (CIF Kalkota) Rs. 500,000

The Institute of Chartered Accountants of Nepal