1. Corporate Law Tax scenario in Nepal Presented By Neeraj Sharma Nishma Bajracharya Prasansa Shrestha Sajeeb Chand Vivek Bir Pandey

2. Income Tax Act Background

3. Income Tax was imposed in Nepal by the first Parliamentary Government in 1959. Income Tax Act 1962 was enacted in 1962 replacing business, Profit and Remuneration Tax Act of 1959. The Income Tax Act, 1962 was replaced by Income Tax Act, 1974, which was amended for eight times and existed for a period of 28 years. The Income Tax Act, 1974 and all the income tax related provisions made under other special enactment have been repealed and the existing Income Tax Act, 2002 The Act governs all income tax matters and is applicable throughout the Kingdom of Nepal. It is also applicable to residents residing wherever outside nepal.

4. The Special features of the Act

5. The Act has broadened the tax base. Tax rates are spelled out in the Act itself and the tax rates and concessions are harmonized on equity grounds. A full-fledged self-assessment system is implemented and the presumptive taxation and current year taxation system are strengthened. The scope of discretionary interpretation of the tax administration is drastically reduced ensuring simplicity, uniformity and the transparency. The Act has also defined the power and authority of the tax administration. The Act has separated administrative and judicial responsibilities by distinguishing civil liabilities of the taxpayers from criminal liabilities. The appeal system is further streamlined by making it mandatory for the taxpayers to file an objection with the Inland Revenue Department for administrative review before appealing to the Revenue Tribunal

6. Who is taxed

7. The Act imposes tax on those activities contributing toward the creation of wealth. Wealth is created with the help of labor, capital and a capital-labor mix activities that generate income from employment, investment and business respectively. The Act makes broad classification of income encompassing almost all income- earning activities. A. Employment (an individual`s remuneration income from an employment for an income year) B. Investment (profits and gains of a person from conducting an investment for an income year) C. Business (profits and gains of a person from conducting a business for an income year) D. Income and gains are ascertained only after deducting the corresponding expenses. The income from each business and investment needs to be calculated separately

8. Taxing Subjects The taxpayers on whom income tax is imposed are persons. A person can be a natural person, who is an individual or a couple but includes also a proprietorship, or it can be an artificial person, i.e. an entity. An entity means a partnership, trust, company, and foreign permanent establishment or government body. Income Year For every person the tax is imposed and calculated for an income year. The income year corresponds with Government’s Fiscal Year, i.e. the period from the start of Shrawan of a year to the end of Ashad of the following year (mid- July to mid-July). Taxable Income The taxable income of a person for an income-year is equal to the amount as calculated by subtracting reduction, if any, claimed for the year under section 12 or from the total of the person's assessable income for the year from each of the following income heads : Business Employment and Investment

9. EVADING TAX & CONSEQUENCES

10. Tax Forms and Nature of Evasion Forms of Taxes Income Custom Property Transfer Value Added Under declaring the value of imports Under statement of property values Under declaring business transaction Under/no declaring business transaction Nature of Evasion

11. Poor investment in infrastructure development Weak revenue generation in the country In adequate state support to the needy population High dependency on external funding Weak state redistribution package to the people National priorities shadowed by global interests Economic Consequences

12. Promotion of corruption People’s intervention limited to personal interest Crisis of trust among people/institutions Socio-Cultural Consequence Society lag behind nation building process

13. Lack of people’s concerns over national development Lack of people’s ownership towards economic plan, policies and programs Un accountable government Weak citizen’s participation in national economy Threaten to acquire basic needs Lack of people’s trust on government Political Consequence Vicious Circle

14. Penalties Offences Offences are dealt with in the Act in a sense of criminal offences of taxpayers as well as tax administrators. They lead to punishment in the form of fines and imprisonment on conviction. The offences attracting both a fine and the imprisonment include failures to comply with the Act, failures to pay tax, maintaining documentation or filing income returns and statements of estimated tax, making false or misleading statements, impeding or coercing the tax administration, offences by the authorized and unauthorized persons, offences of aiding or abetting, etc. In case if the Tax return file is not submitted within the period prescribed by the act, the late fee will be charged at the rate of 0.1% per year of the turnover. The Super Act - The Act is made super in regard to all income tax matters. No other Acts except this Act shall be made capable to make changes, amendment and other tax related provisions other than the provisions relating to imposition, assessment, reduction, increment, exemption, or remission of tax to be made by amending this Act itself by annual Finance Acts.

15. Offence and Punishment

16. Charges and Interest Charges are imposed on the taxpayer as explained in the table below. The left column describes the failure that the taxpayer is responsible for. The right column shows the charge that he is obliged to pay as a penalty for this failure.

17. Charges and Interests FailureCharges No maintenance of documentation No filling of statements or returns(s117) 0.1% pa of all amounts to be included or Rs 1,000 per year, which ever is the higher. No filing of a statement as a withholding agent [ s117(3) ] 1.5% pa of the tax to be withheld False or misleading statement or omission from a correct statement (s120) Without reasonable excuse Knowingly or recklessly 50% of the underpayment 100% of the underpayment. Aiding or abetting (incl. Counseling or inducing) an offence (s121) 100% of the underpayment

18. Administrative Review If a taxpayer is dissatisfied by a review. He may file an objection within 30 days after the decision is made. In doing so, such Taxpayer has to deposit 50% of due amount. The Department may extend this period for another 30 days upon request. The Department may stay or amend or do necessary corrections with regard to these review able decisions. If the Department fails to serve a taxpayer with a notice of an objection decision, within 90 days, the taxpayer may elect to treat the Department as having refused his objection and appeal to the Revenue Tribunal.

19. REVENUE, REVENUE DISPUTES AND ROLE OF REVENUE TRIBUNAL

20. Revenue in Nepal is mainly based on import trade. Revenue from sales tax and import duty constitutes more than 60 percent of the total revenue. Major sources of revenues are custom duties on import and export, sales tax and excise, income tax, other taxes, fines, fees and registrations, etc., dividend, interests receipts and payback of principal of loan by government companies. The following table provides the picture of revenue for the last three years.

21. Procedures and Methodology In Revenue Audit Audit Planning Evaluation of Internal Control Systems Examination of Individual Tax Files Appraisal on the Socio-Economic Effect of Revenue Supervision and Review of Audit Work Reporting of Revenue Audit Interpretation of Revenue Statutes

22. Settlement of Revenue Disputes It is an obligation of tax payer to pay tax assessed on him by tax authorities. Tax legislations has also protected every tax payer by way of legal remedy if he is not satisfied with tax officer's assessment. Generally disputes have not arisen on self- assessment files and on other files where assessment is based on books and accounts. Disputes normally arise on assessment based on best judgment basis if the tax authority does not keep sufficient business information of the assessee.

23. A tax payer can go either to the Director General of the Department of Taxation or to the Revenue Tribunal Office (a judicial authority) against tax assessment order or penalty order if he does not agree with such orders. According to these provision there are four Revenue Tribunals, one Administrative Court, one Labor Court, one Debt Recovery tribunal and one Debt recovery Appeal Tribunal and one special court are functioning under the respective laws.

24. Tax authority has also remedial options against tax disputes. If tax office thinks the decisions of the Revenue Tribunal Office have legal mistakes which will cause revenue leakage, it can move the Appellate Court against the decision of Revenue Tribunal Office. This kind of remedial channel protects both the assessee and revenue.

25. Conflicting Judgments In Revenue Issues problems include non-submission of financial statement, lack of adequate records and information, lack of internal audit, absence of bank reconciliation, action not initiated against tax payers for not paying tax and weaknesses in the collection of confidential information of tax payer etc.

26. EXCISE RULES, 1962 Power to Dispose of Cases (1) The power to take preliminary action on and dispose of every case filed under the act and these rules shall vest solely in the appropriate Excise Officer. (2) In case any person is aggrieved by the decision made by the Excise Officer under Sub-Rule (1), he may file and appeal with the Revenue Tribunal within two months after receiving notice of such decision.

27. Penalties Any person who acts in contravention of the provisions of these rules may be punished with imprisonment for a term not exceeding two months, or with a fine not exceeding Rs 500, or with both.

28. AS PER THE INCOME TAX ACT, Administrative Review and Appeal - A taxpayer who is aggrieved by a review able decision may file an objection within 30 days after the decision is made. In doing so, such Taxpayer has to deposit 50% of due amount. The Department may extend this period for another 30 days upon request. The Department may stay or amend or do necessary corrections with regard to these review able decisions. If the Department fails to serve a taxpayer with a notice of an objection decision, within 90 days, the taxpayer may elect to treat the Department as having refused his objection and appeal to the Revenue Tribunal.

29. Role of the commission on the settlement of the Revenue/ Tax Arrears Minimize untaxed and under tax money Right Tax Right way Mission

30. Meaning of Tax arrears: The balance unpaid on tax payable under the income tax act for which the payment Is past due Tax evasion or outstanding is not just a punishable offence but it also does harm to the country by not having the trickle down effect

31. Primary functions of the Commission  Educate the mass about income tax, its necessity and consequence of failure to comply  Marginalize Black money and Tax evasion  Improve and enhance law enforcement mechanism  Modernization of administration through people, process and technology reforms  Improve service options  Facilitate participation in the tax system by all sectors  Simplification in tax process  Monitor abuse of tax exemption  Monitor professional standard of tax practitioners  Discourage and deter non compliance

32. Thank You