Concept of income tax

Assignment
Of
Business Tax

Submitted To:
Prajwal sayami
Faculty of Business Tax

Submitted by:
Priyanka Khadka
MBA V
Section ‘A’
Ace institute of management
Introduction:

Income tax is a financial charge that governments impose on people and businesses based on their
incomes and profits. It is an important source of income for governments and is essential for paying for
social programs, building infrastructure, and providing public services.

Income tax Act 2058 B.S:

The main body of law governing income taxation in Nepal is the Income Tax Act, 2058 B.S. It describes
the policies, guidelines, and processes pertaining to the estimation, computation, and collection of
income tax from people, businesses, and other entities residing in Nepal.

Finance Act, ordinance or Bill:

The phrases "Finance Act," "Finance Ordinance," and "Finance Bill" refer to legislative measures that can
change or update the income tax laws specified in this Act. The "Income Tax Act, 2058 B.S." is the
fundamental law controlling income taxation in Nepal. A Finance Ordinance can be temporarily issued by
the executive branch and later calls for parliamentary approval, whereas the Nepalese Finance Act, once
authorized by the country's parliament, enacts changes to tax rates, deductions, and exemptions for a
fiscal year. A finance bill, which collectively shapes Nepal's income tax administration and policy, is the
initial proposal made to parliament for discussion and eventual passage as a finance act or ordinance.

Income tax regulations 2059 B.S:

Income Tax directives 2077 B.S

Notice of IRD circulars

Section 3: (Charging Section)

Tax to be levied:

Those mentioned individuals and entities shall be subject to yearly payments of taxes, and the taxes shall
be collected according to with the rules of this law. It follows that the law sets out who must pay taxes
annually and how they must be collected.

a. A person who has taxable income in any income year,

 This refers to any person or organization that generates money within a specific tax year and
is consequently subject to taxation in Nepal. Taxable income comes from a variety of
sources, including wages, business profits, rental income, interest income, and capital gains,
among others.
Take the example of Mr. Hrishav, a resident of Nepal, who receives a salary of NPR 1,000,000
for a specific tax year. He is required to pay income taxes on his taxable income in
accordance with the applicable tax rates and deductions.
b. A non- resident person’s foreign permanent establishment situated in Nepal, which sends
income of any income year pursuant to Sub-sections (3) and (4) of section 68 and,

This is used to describe foreign companies that have an ongoing presence (such as an office or
branch) in Nepal and make money there. On the money they receive from domestic sources,
these foreign corporations must pay taxes in Nepal.
A good example would be the international corporation XYZ Corporation, which has a permanent
establishment (a branch office) in Nepal. The branch office must pay tax in Nepal on any income
it made there if it makes money from its operations there.

c. A person who receives payment final tax withholding in any income year.
When A person or entity receives money, the payer deducts a percentage of the payment and
pays the government on their behalf; consequently, the recipient may not have any additional
tax obligations with respect to that particular income.
Example: Suppose that ram play at a concert as a musician. He receives a $1,000 payment from
the concert organizer for his performance, but they first deduct $200 as a tax payment.
This time around, ram is the "person who receives payment with final tax withholding." The
$200 they deducted is regarded as the whole tax. The concert organizer has already taken care
of the taxes for this money, so ram don't need to do anything more. The remaining $800 is rams
to keep, and ram don't have to worry about paying additional taxes on that particular income.

Section (2) what is a person?

Person means a natural person or an entity.
A. Single natural person
This term denotes a person who is not married or legally joined in a civil partnership. It
frequently denotes a single person in tax and legal contexts.

B. Sole proprietorship
A business structure known as a sole proprietorship is one in which just one person owns and
runs the company. The owner is personally liable for every part of the firm, including its
earnings, outgoings, and obligations, as it is not a distinct legal entity.

C. Couple u/s 50
The word "couple" most likely refers to a married couple or a pair of people who are civilly
joined. Couples who fall under the region's tax laws would be subject to the specific provisions
and regulations detailed in section 50. If both spouses of a married couple are residents, they
can seek to be regarded as a single entity for tax purposes in a certain income year by giving
written notification in accordance with Section 50. But if they pick this course of action, they
take on a single responsibility for the taxes due that year. Whether or not they are legally
married, a resident widow or widower with dependents is treated as having a spouse for tax
reasons.

Section 5-Taxable Income Heads of income

A person or entity's taxable income for a particular year is calculated by deducting any
deductions under Sections 12 or 63 from their total income from the following three main
sources:
(a) business income- The income obtained from operating a business or engaging in self-
employment activities can be considered too. It consists of earnings from commercial
activities such as profits, revenues, or earnings.
(b) employment income- This includes earnings from employment, including pay received from
an employer in the form of salaries, wages, bonuses, or other forms of compensation.
(c) investment income- This includes earnings on investments, such as interest from savings
accounts, stock dividends, or capital gains from selling holdings.
 (d) Income from Casual Gains- This is an additional category that frequently includes
inconsistent or occasional sources of income. Gambling winnings, lottery winnings, and other
irregular sources of income that don't cleanly fall under the business, job, or investment
categories may be included.
(e) All of these sources of income are taken into account when determining the taxable income,
and any Section 12 or 63 deductions or claims that are allowable are then applied. This
formula aids in determining the total income for a certain income year on which an individual
or corporation must pay taxes.

Residential status under income tax act: According to the income tax statute, a person's or an entity's
income tax liability is decided by their residency status and the source of their incomes. According to the
statute, there are two sorts of residential status

1. resident:

2. non-resident

Determining a person's or a natural person's residential status: Any person is considered to be a

resident of Nepal if they meet any of the qualifications listed below.

1. Nepal is the person's usual place of stay

2. lived in Nepal for 183 days or longer within a period of a full 365 days.

3. The Nepali government exiled him for an entire fiscal year.

He/She will be considered a non-resident for income tax purposes if he/she does not fulfill any
requirements.

Tax implications

Individual

Resident:

Taxes must be paid on worldwide income (revenue with Nepali and international sources). Foreign tax
credits may be claimed if any taxes were paid abroad.

Nonresident:
Taxes must only be paid on income with a Nepali source. On the income generated abroad, no tax will be
applied.

Entity:

Resident:

Except for exempt entities, tax will be applied to net worldwide income, which is calculated as gross
income less business-related expenses. Foreign tax credits may be claimed if any taxes were paid abroad.

Non- resident:

Only net income with a Nepali source is subject to tax. The income earned abroad shall not be subject to
tax.

Section 6. Assessable income:

The following incomes that any person earns from any business, employment, or investment in any
income year shall, subject to this Act, be considered assessable income:

a. No matter where the income comes from, it is considered assessable income if it is obtained by a
resident person during any income year through employment, a business, or an investment. In
other words, you must pay taxes on any income you receive from any of these sources while you
are a resident of the country. For instance, if a person is a residence of Nepal, then if he earn
income from India, China, Japan he have to pay tax in Nepal.
b. Any non-resident who receives income during the income year from a job, a business, or an
investment with its source of revenue in Nepal is also regarded to have earned assessable
income. This implies that non-residents who make money in Nepal must pay taxes on it.
c. But there are several exceptions: Assessable income does not include any income that the Act's
Sections 11 or 64 clearly declare are exempt from taxation.

Permanent account number: A Permanent Account Number (PAN) is a special identification number
given to people and companies that are subject to income tax by the Inland Revenue Department (IRD)
in Nepal in accordance with the Income Tax Act, 2058. Here is a description of PAN and its types:

a. Personal PAN: Individual taxpayers who must disclose their personal income for tax purposes are
awarded this form of PAN. It is utilized to locate and monitor a person's tax-related transactions.
 b. Business PAN: Entities doing business activity are given business PANs. They aid in keeping track
of and disclosing the revenue made by businesses, as well as ensuring that tax laws are followed.
c. Withholder PAN: Entities or people in charge of withholding taxes are given withholder PANs.
These organizations are required to withhold and remit taxes on payments made to third parties,
such as contractors or suppliers.

Who shall obtain PAN:

• A PAN must be obtained by any person or organization that generates income that is subject to
taxation under the Income Tax Act of 2058. Both people and companies fall under this category.
• A PAN is also necessary for organizations or people who are in charge of withholding and
remitting taxes on payments made to others, such employers or vendors.
• Based on particular conditions or transactions, the Inland Revenue Department may define
additional people or businesses that require a PAN.

Deducting specific expenses:

• Salary & Wages (Casual payments up to Rs. 3000 allowed): If an entity pays its employees’
salaries or wages, including casual payments, in excess of a predetermined threshold (Rs. 3000 in
this case), a PAN may be required.
• Vendor Invoices (Allowed up to Rs. 2000): PAN required for organizations that pay suppliers
based on invoices, however this requirement often arises when the payment surpasses a certain
threshold (in this case, Rs. 2000).
• Not required for agriculture-based product.

Income from employment:

According to Nepal's Income Tax Act, an individual's income from employment for a certain income year
constitutes the compensation received by that individual during that income year.

Inclusions:

All payments made to a person throughout the tax year, including salaries, benefits, bonuses, and
retirement contributions, are regarded as taxable income in Nepal. If employee shift to another district
and company provides flat to that employee then in his/her salary 2% inclusion will be added and also if
company provide car to the employee, then 0.5% inclusion will be added on his/ her basic salary.
Employee can use that car for his/her prosomal use and office use until his/her working turn over period.
Subsidies loan- if company give loan 12% per Anum to normal person but if company give loan 5% to the
member of the company, then remaining 7% will be added to inclusion.

Exclusion:

The calculation of taxable employment income excludes some types of income. Included in this are sums
that are excluded under Section 10, final withholding payments, employer-provided meals, fair
reimbursements, and modest sums that would be challenging to manage.

Deduction:

➢ Provident fund: 10% is withheld from the employee and 10% is withheld from the employer if
the basic wage is Rs. 100. The basic wage may be reduced by a total of 20%.
➢ The citizens investment trust (CIT) IS AN OPTIONAL INVESTMENT PROGRAM.

Allowed deductions:

➢ Lower of the following:

• Actual Contribution
• 1/3 of total income
• NRs.300000 (500000 in case of SSF)

➢ In case of social security fund

• 1/3 of total income
• Rs 500,000
• Actual Contribution

Social security fund:

Employees routinely set aside a percentage of their earnings through the Social Security Fund (SSF) in
Nepal, which acts as a retirement savings plan to ensure pension income for their post-retirement years.
For instance, if a worker receives a base salary of Rs. 100, 11% of that amount, or Rs. 11, is automatically
withdrawn from their monthly pay and directed to the SSF. Additionally, employers are required to make
contributions to the fund on behalf of their employees by designating 20% of the employee's base wage,
or Rs. 20, to the SSF. Through this combined contribution effort, a sizeable 31% of the employee's base
income is earmarked for retirement savings inside the SSF.
Additionally, the SSF gives workers the choice to choose supplemental insurance coverage. In certain
circumstances, the following deductions are made:

It is budgeted to deduct Rs. 40,000 for life insurance.

A further 20,000 rupees will be used for health insurance.

Last but not least, an additional Rs. 5,000 is allocated for housing insurance, with the requirement that
this insurance be purchased through a Nepalese insurance provider. These deductions protect
employees' access to pension benefits once their active employment years have ended by ensuring that
they have a solid financial safety net in place for retirement.

Tax rates

• Diplomatic Mission: People who work in diplomatic missions are eligible for a sizable tax break.
In particular, their taxable income is reduced by 75% of their overseas allowance, which lowers
their overall tax burden.
• Disability: Tax benefits are also available to those with disabilities. On the first slab of their
taxable income, they are given a 50% discount. Individuals must present a certificate of disability
in order to get this benefit. When a couple is involved, and one of the people is disabled, they
can all benefit from these tax advantages.
• Pension: For people receiving pensions, a 25% additional deduction is applied to the first income
slab, reducing the amount of their pension income that is subject to tax.
• Female Taxpayers: Female taxpayers get a 10% tax rebate, which lowers their overall tax
obligation. Women with salaried income can now receive a rebate that is applied to their taxable
income.

Income from Business: The profits and benefits made by any person in any year from any year from any
business shall be computed in the income of that business.

Inclusions:

Taxes must be paid on all earnings or benefits resulting from business operations during a year.
Service fees, the money obtained from trading stock, and business-related gifts are a range of included
profit sources.

Exclusions:

• Income exempted by Section 10.

• Dividends are excluded from the definition of taxable income.
• profits distributed to resident entities (apart from corporations and partnerships) and then
redistributed.
• Income from businesses with foreign ownership that publish their financial statements after the
2058 tax year.

Deduction income from business:

Sections 13 to 21 of the Income Tax Act define the deductions that are available to businesses.

1. Section 13 (General deduction sections): Personal expenses are not deductible, and they must
be incurred within the tax year and be related to business operations. Preliminary costs may be
written off at the beginning of the business or after the first year of operation.
2. Section 14 (General interest): includes the taxation of earnings from any source associated with
a trade or profession. This comprises earnings made by people, partnerships, businesses, and
other legal organizations involved in a variety of commercial endeavors. "Fifty percent of the
entity's adjustable taxable income for that year, as determined after the entity has excluded any
interest income it may have earned or without taking into account any interest expenses it may
have incurred." The following income year may be credited or carried forward for interest
expenses that are not deductible or have not been claimed under Section 14 of the Internal
Revenue Code.
3. Section 12 (donation): Businesses may deduct contributions given to recognized nonprofits for
social welfare, usually up to 5% of revenue.
4. Section 12 (A) and section 12 (b): There are deductions available for costs associated with
preserving cultural heritage, advancing sports, and making donations to the Prime Minister's
Natural Calamities Fund and Reconstruction Fund.
5. Section 17 (pollution control cost): Deductions usually equal the lesser of actual contributions
or 50% of adjusted taxable income when it comes to environmental conservation and pollution
control costs.
6. Section 18 (Research and development expenses): This section enables people and companies
to write off costs incurred for research and development efforts that are meant to enhance
business operations. There is a cap on these deductions, which is set at 50% of the total taxable
income from all of their enterprises for that year. If the expenses go over this cap, the extra can
be considered an asset and written off next year. The cost of acquiring property, as described in
the tax regulations, is not covered by these deductions.
7. Section: 16 (Repair and maintenance expense): When determining taxable income in the
context of business income, costs associated with the upkeep and repair of depreciable assets
used to generate income might be subtracted. There is a cap on the amount that can be
deducted for repairs and maintenance, which is 7% of the assets' remaining value after
depreciation at the end of the tax year. When you test an airplane in accordance with the safety
requirements established by the Civil Aviation Authority of Nepal as part of offering air
transportation services, this rule does not apply. If your repair and upkeep expenses go above
the cap, you can factor in the extra money when figuring out the asset's worth for the following
tax year.
8. Deductions Disallowed: Personal expenses, taxes, and fines are examples of expenses that
cannot be deducted when determining taxable income. Unless an exception applies, cash
payments that total more than Rs 50,000 all at once or that generate more than Rs 20,00,000 in
revenue during the year are not deductible. Except for modest payments, deductions may also
be denied for payments made without the required paperwork or a Permanent Account
Number (PAN). The exceptions include payments made to banks, farmers, government agencies,
locations without nearby banks, and days when banks are closed.
9. Section:19 (depreciation): "If the asset fulfills the following requirements," The asset has been
utilized to produce revenue for a firm. Write income from business using the information
provided here in an appropriate manner because the asset is owned by the individual and
qualifies as a depreciable asset.