Income From Business | Baker Tilly

1. CORPORATE INCOME TAX

1.1. Resident Entities

a) Residential Criteria

A company is considered to be resident in Nepal if,

It is Incorporated/Formed under the law of Nepal.
It's effective management in Nepal during the year.

A company is considered to be resident in Nepal if,

It is Incorporated/Formed under the law of Nepal.

b) Taxable Income

Worldwide income i.e. Income having source in Nepal and Foreign country. Dual Residence is not recognized for the purposes of Nepalese tax.

c) General Tax rate

S.N.	Particulars	FY 2078/79
S.N.	Particulars	Normal Rate	Rebate	Applicable Rate
1.	Normal business	25%	-	25%
2.	Entities operating as Special Industry under section 11 for whole year	25%	20%	20%
3.	Entities constructing and operating ropeway, cable car or sky bridge	25%	40%*	15%*
4.	Entities constructing and operating roads, bridges, tunnel, railway and airports	25%	50%*	12.5%*
5.	Entities operating trolley bus or trams	25%	40%*	15%*
6.	Entities with export income from source in Nepal	25%	20%	20%**
7.	Entities involved in construction or operation of public infrastructure and to be transferred to GoN or involved in construction of hydropower house and its generation and transmission.	25%	20%	20%
8.	Income earned by selling raw materials or secondary raw materials produced in Nepal to special industry	25%	20%	20%
9.	Banks and financial institutions (Commercial Banks, Development Banks and Finance Companies)	30%	-	30%
10.	Entity carrying General insurance business (Non-life Insurance)	30%	-	30%
11.	Entity engaged in petroleum business under Nepal Petroleum Act, 2040	30%	-	30%
12.	Entity engaged in business of cigarette, tobacco, cigar, chewing tobacco, pan masala, alcohol and beer	30%	-	30%
13.	Entity engaged in Telecommunication and Internet service	30%	-	30%
14.	Entity engaged in Money transfer	30%	-	30%
15.	Entity engaged in Capital market business, Securities business, Merchant banking, Commodity future market, Securities and Commodity broker	30%	-	30%

Note: Above industry-wise applicable tax rate is presented after considering concession available under section 11 of Income Tax Act, 2058 except entities falling under tax holiday period. However, in case of special industry and industry other than presented above, entity can choose any one tax concession available under section 11 of Income Tax Act, 2058.

*Rebate and concessional tax rates applicable only up to 10 years from the date of commercial operation.

**In the case of income earned from the export of goods produced by a production-based industry, an additional concession of 35% of the tax amount calculated by applying this rate is available to the entity. It means the effective rate of applicable tax to a production-based industry in its export income becomes 13%.

d) Method of Accounting

In case of

Company: Accrual basis of accounting.
Other entities: Cash or Accrual basis of accounting (option).

The method selected once can be changed only with the prior approval of IRD.

e) General Deductions (Sec 13):

All the expenses incurred by a person, in connection with the earning from the business, shall be deducted from the income of the business in computing the profit or gain from income from the business. The basic three guiding principles as specified by the Section are as under:

Matching of Year:
In order to claim deduction, it is necessary that the expenditure shall be related to the Income Year for which the tax has been calculated.

Note:
In case when a person adopts a cash basis of accounting, the expenditure paid during the year shall be deducted for tax purpose.
Similarly, in case when accrued system of accounting is adopted, the expenditure accrued during the income year shall be deducted.
Matching of Person:
In order to avail the deduction, it is necessary that the person, the tax of whom is being calculated, shall incur the expenditure. The person, who is debiting the expenditure in his accounts, should be obliged to bear it because the transactions relate to his business. The other person must have an enforceable right to recover the amount from him.
Matching of Inclusion
In order to claim deduction, the expenditure should have been incurred in connection with the person’s business or in connection with his income generating source. The expenditure should be helpful, directly or indirectly, in generating the income from the business.

f) Interest Expenses (Sec. 14):

Interest is an allowable expenditure if it is paid on the borrowed capital but not on one’s own capital. A proprietor cannot charge interest as allowable expenditure on his own capital.

g) Cost of trading stock (Sec. 15):

The cost of trading stock means the cost of sales. In other words, the cost of trading goods sold during the year is the cost of trading stock.

The formula given by the Section for arriving at the value of cost of sales is given hereunder:

Particulars	Amount (Rs.)
The opening value of the trading stock	Rs. xxxxxx
+ The cost of purchases, cost of production or the Cost of acquisition of trading stock during the year	Rs. xxxxxx
- The cost of closing stock	Rs. xxxxxx
Cost of Sales	Rs. xxxxxx

Valuation of Closing Stock:

Valuation of the closing stock of a business for an income year is done at a lower of the followings:

Cost of the trading stock that remains till the end of the year.
Market price of the trading stock on the end of the year.

Note: Cost formula to be used:

In case the person cannot use Specific Identification Method for stock valuation, the person shall use either the First in First out Method or the Weighted Average Method for valuation.

h) Repair and Improvement Costs (Sec 16):

Amounts exceeding 7% of the value of depreciable assets in any income year are not deductible and are instead added to the depreciation basis of the relevant asset pool at the beginning of next income year. This limitation does not apply to the aviation industry;

i) Pollution Control Costs (PCC) (Sec. 17):

A cost incurred to install a process to recycle the pollutants so that the substance may not pollute either of air, water or soil, is called pollution control cost. In the pollution control expense, both the capital expenditure and revenue expenditure are included.

Pollution Control Cost is deductible for Taxation purpose subject to the minimum of following twos

Actual Cost incurred during the Income Year or
50% of Adjusted Taxable Income from businesses

j) Research and Development Expenses (Sec 18):

Research & Development Cost is deductible for Taxation purpose subject to the minimum of following twos:

Actual Cost incurred during the Income Year, or
50% of Adjusted Taxable Income from businesses

k) Depreciation

Pool wise depreciation at the rate prescribed by tax authority are allowed.

Pool	Assets Included	Depreciation Rate (%)
A	Buildings, structure and similar works of a permanent nature	5
B	Computers, fixtures, office furniture and office equipment	25
C	Automobiles, buses and minibuses	20
D	Construction and earth-moving equipment and any depreciable asset not included in another class	15
E	Construction and earth-moving equipment and any depreciable asset	as per the lifespan of asset

Each depreciable asset at the time it is first owned or so used, are placed in a pool referred to as pools of depreciable assets. Depreciation is calculated on the reducing balance method and is based on the pool of assets.

The pool of assets concept suggests aggregation of all assets with the same depreciation rate into a common block for computation of depreciation. Depreciation is computed at varying rates as prescribed. In the year of purchase depreciation is available for the full year, if an asset is added to the pool for more than six months period during next financial year. In other cases, depreciation is allowed at either two thirds or one third of the normal rate, if the addition is made for less than six or three-months period, respectively. Amounts derived from the disposal of an asset or assets are reduced from the written down value of the relevant pool.

Accelerated depreciation of 1/3 of applicable rate is also available in case of following entities.

Special
Hydro Power and power generation.
Operation trams and trolley
Export oriented industries.
Entities engaged in infrastructure development under BOOT/BOT scheme.
Co-operatives registered under Co-Operative Act 2074 (only for tax exempt).

l) Carry-forward of Losses

Normal Loss of Business/Investment: Up to next 7 years.
For specific industries: 12 years (industries dealing with petroleum products, BOOT projects, Electricity/power generation, transmission and others).
Loss can be carried back only on the case of long-term contract obtained from the international bidding.

m) Donation paid to Tax Exempt Entities

Allowable expenses shall be minimum of following

Actual
5% of adjusted taxable
Rs.100, 000

However, in case of donation paid with the prior approval of IRD to the tax-exempt entity, shall be minimum of following:

Actual
10% of adjusted taxable
Rs.10, 00,000

n) Other Donations

Donation paid to Prime Minister Relief Fund (PMRF) as notification published by GON in Nepal gazette is fully allowable.

Venture Capital provided as donation to at most 5 start-up businesses to the extent of Rs. 100,000 per business is deductible.

o) Compliance Requirements

i) Income Tax Return:

Within 3 months of completion of Fiscal year. If application is made to Tax office for extension, IRD may extend such limit for maximum 3 months. Such extension application can be filled from IRD website with general login and password.

Note: If there is any error in the income tax return submitted by a person within due date, such return can be revised within 30 days from the date of filing of return.

ii) Advance Tax and Return:

Based on estimated tax liability:

Installment /due date	Advance Tax
Within Poush end,	40% of the total estimated tax liability for the year
Within Chaitra end	70% of the total estimated tax liability for the year
Within Ashad end	100% of the total estimated tax liability for the year

Provided that, taxpayers based on turnover taxation shall pay advance tax as follows:

Installment /due date	Advance Tax
Within Poush end,	Tax at the rate specified on actual transaction up to 20th of Poush.
Within Ashad end	Remaining of tax calculated at the rate specified on estimated transaction amount at Ashad end based on actual transaction up to Ashad 20.

Note: As per section 117(1) Ka of Income Tax Act, 2058, higher of Rs. 5000 or 0.01% of assessable Income, per return, has to be paid as penalty if advance tax return not filled.

p) Audit Requirement

As per Finance Act, 2077, even though small and medium tax payer, having annual turnover not exceeding NRs 10 Million, are waived from audit and they can self-attest their tax return there is compulsory audit requirement for companies registered under Companies Act, 2063.

1.2. Non-Resident Entities

Non-residents are taxed at 25% except the income from transporting passengers, mail or cargo by sea or air that is embarked in Nepal (online) is taxed at 5%, whereas for offline services (i.e., services do not originate in Nepal) the tax rate is 2%.