Taxation

Introduction to tax in Nepal

Features of tax

Types of tax: direct tax & indirect tax

PAN: Concept and registration process in Nepal

INTRODUCTION TO TAX IN BUSINESS

Tax is a compulsory payment to the government by an individual or organization as return to the income made within specific time frame. It is the major source of government revenue required to cover it’s expenses on various public functions. It is a compulsory payment of money to the government by an individual or an organization without expectation of direct return. In other words, there is no direct return to the taxpayer for what he/it pays, though public in general derives a common benefit. It is a part of social responsibility of individual and business organization towards the nation. It is a contribution from citizens for the support of the state.

Government designs the tax rate and types for collection of its revenue to fulfil the administrative as well as developmental expenses. In Nepal, based on the three levels of government i.e. federal government, state government and local government, each level has provision of levying tax to individual and to the business
organizations.

The following are some of the notable definitions of tax, Adams "A tax is a contribution from citizens for the support of the state”. P.E. Taylor “ A compulsory payment to Government without expectation of
direct return in benefit to the taxpayer is known as tax."

From the above discussion and definitions, it may be concluded that a compulsory payment by a person or organization to the government in return of individual and organizational income. Tax is the source of government revenue which supports to meet public expenditures and development requirement.

Features/Characteristics of Tax

1. Compulsory payment:

Tax is the compulsory contribution made by individual and business firms to the government on the basis of their income. It is not a voluntary contribution like grant, donations, gifs financial assistance, etc. It's a compulsory contribution. It is the obligation of all citizens and institutions to pay tax to the government on the basis of their income. Tax is computed and paid as prescribed in the law. If the person defies the tax payment, s/he may be punished in the court of law.

2. Source of government revenue:

Tax is one of the main sources of government revenue. The government generates revenue from income tax. Value Added Tax (VAT), exercise duty, customs duty, service tax, etc. Institutions pay tax on the basis of their income and transaction volume. Individuals pay tax on the basis of their income.

3. Used for public welfare:

To maintain peace and security, social justice, economic development and conduct different development activities of the nation, the government requires financial sources. The government generates resources from tax and that revenue is spent for public welfare and national development. Not only one individual is benefited, but the whole society is also benefited from the above mentioned activities of tax collection.

4. No direct benefit:

A taxpayer is not entitled to compel the government while paying taxes, to give something to him/her in return for the amount s/he has paid. The government spends tax revenue for the welfare of the society as a whole, not for the individual benefits. There is no discrimination between tax payer and non-taxpayer. Every citizen is equal in the eye of law and government. Citizens pay tax on the basis of their income sources. So, taxpayers do not get corresponding benefits from the government in return for the tax paid.

5. Legal procedure:

Tax is computed and paid as prescribed by law and Procedure. The government collects tax on the basis of law and bylaws. In the eye of government and law, everyone is equal and there is no discrimination. While rebating tax, the government strictly follows the rules and regulation of the nation.

6. Personal responsibility:

Tax is generally payable with money and it is the legal duty and responsibility of every citizen to pay tax honestly. Tax payment is made on the basis of the income sources of individual and business activities. It is the obligation of every citizen to pay regular tax honestly. It is the enforced contribution, not a voluntary payment or donations.

TYPES OF TAX

There are basically two types of tax. They are direct and indirect tax.

A. Direct Tax

The tax that is paid directly to the government by an individual or organization is called direct tax. Each individual pays income tax directly from the source a direct tax. For example, a house owner pays property taxes directly to government. Similarly, business organizations pay tax on their net income directly to the government. Direct tax cannot be shared or passed onto other parties. The ability-to-pay principle means that those who earn more should pay more tax is applied in direct tax. It can be further classified into following three types.

Types of direct tax

1. Income tax: Income tax is a direct tax. It is imposed by tax office on net profits of the company, income from house, capital gains, salary, wages, bonus, and income from other sources. Individuals and companies should pay income tax on the basis of their income. Generally, tax is computed as the product of a tax rate times taxable income.

2. Property tax: Property tax is another form of direct tax. It is imposed by tax office on property owned by an individual or a company. In Nepal, the Ward Office of Local Government assesses and imposes the property tax annually. Local government uses such amount in public services like sanitation, construction of local roads, gardening, etc. Generally, property tax is levied on real estate, house, land, and building.

3. Capital gains tax: Capital gain is the difference between purchasing price and selling price of a capital asset. For example, if you bought stocks of XYZ Company at the rate of Rs. 1,100 per stock and you sold it at the rate of  Rs. 1,400 per stock. Here, you earned 300 capital gain on sale of stocks of XYZ Company. Capital gains tax is levied on the sale of assets such as stocks, real estate, or investments.

Calculation of Direct Tax

From the following information calculate the tax payable of Kamakshya Corporation:

Capital gain on sale of land Rs. 3,00,000

Capital gain on sale of shares Rs. 1,00,000

Calculate the tax liability on capital gain.

Solution,

Calculation of Total Capital Gain Rs. 3,00,000+ Rs. 1,00,000 =Rs. 4,00,000

Corporation in general tax rate is 25%, thus, the tax payable of Kamakshya Corporation is

Rs. 1,00,000 (Derived as Rs. 4,00,000 x 0.25).

B. Indirect Taxes

An indirect tax is charged on products or services. Intermediaries or business entities, or suppliers collect indirect tax from customers at transaction level to submit Internal Revenue Department. It increases the price of products or services. Mass participation, convenient, regulate consumption, powerful tool for regulating economy, etc. are the benefits of indirect taxes. Value added tax, excise tax, custom tax, etc. are common indirect taxes.

1. Value Added Tax (VAT): 

VAT is an indirect tax placed on product at supply chain where value is added. The normal VAT rate is 13% in Nepal. Some goods or services are exempted from VAT. In every point on Nepal, VAT was introduced since 16 Nov. 1997. VAT was levied in place of the Sales Tax, Hotel Tax, Contract Tax, and Entertainment Tax. VAT is applicable only if there is a transfer of property from one person to another for a consideration. Scientific, easy to computation, harmonizes in the tax structure, avoids double taxation, ensure equitable, etc. are the features of VAT.

2. Excise tax:

An excise tax (sometimes called an excise duty) is another type of indirect tax. It is a type of tax charged on goods manufactured within the country. It is a tax on the production. It is imposed on specific products such as vehicles, cosmetics, tobacco, cigarettes, gasoline, and alcohol. It increases the price of the products because it is levied on total cost of product. According to Internal Revenue Service (IRS), excise taxes are international taxes imposed within a government infrastructure rather than international taxes imposed across country borders. It is a kind of business tax which is different from other taxes like income tax.

3. Customs tax:

Customs tax (sometimes called a custom duty) is another type of indirect tax which is imposed on goods transported across international borders. The custom tax is levied on transactions price of the goods. To raise government revenues, to safeguard domestic industries, and to regulate movement of goods are the objectives of custom tax. The rate of custom tax varies depending on the nature of goods. According to Custom Act, 2007, customs duty shall be chargeable on all goods to be exported or imported except those goods which enjoy customs duty exemption pursuant to this Act or the prevailing law. Any person who exports or imports any goods shall fill up the declaration form, accompanied by the documents as prescribed, and submit it to The Customs Officer of the concerned.

Calculation of Indirect Tax

Following are the information of Selina Collection:

Sales 10 pieces of Suit @ Rs. 5000 each

Sales 5 pairs of Shoes 1,500.00 each

Discount provided to customers @10%

How much VAT collected by the Collection from the customers?

Solution

Calculation of Total Sales

Total Sales Rs. 50,000+ Rs. 7,500 [10 x Rs. 5,000 + 5x Rs.1,500] = Rs. 57,500

Calculation of Net Sales

Net Sales Total Sales Discount

-Rs. 57,500-10%

-Rs. 57.500-5,750

- Rs. 51,750

VAT rate is 13% in Nepal, thus, the amount of VAT collected by the Collection from the customers is Rs. 6,727.5 (Derived as Rs. 51,750 x 0.13).

PERMANENT ACCOUNT NUMBER - PAN

Meaning of PAN

The full form of the PAN is Permanent Account Number. A PAN is a permanent and unique number which is issued to all the taxpayers. It has 9 digit numbers and is allocated to an individual only once. The purpose of PAN is to collect tax. Once an individual has been assigned a PAN number he or she cannot apply for another number even if he or she changes his/her profession or business entity.

Taxpayer is responsible for providing all information required for registration as required by IRD regulation for PAN. He or she can use e-filling or fill up prescribed forms and submit to Inland Revenue Offices (IRO) in Nepal. Nepal Government's IRD has an ePAN service through which any individual can apply for PAN number online on IRD's website www.ird.gov.np. E-PAN is an Internet based system. Individuals and companies who may have to pay income tax must get PAN.

According to Government of Nepal, Ministry of Finance, Inland Revenue Department, the following documents should produce at the time of PAN registration:

-Copy of your Citizenship Certificate.

-Copy of the Company Registration Certificate (if applicable)

-Two identical passport size photos of the person who signs the application form.

-In case of Partnership Firms: two identical size, photos of each partner Proof of deposit if

requested by your Inland Revenue Office (foreigners only)

-Sketched map of the location of your main office or head office.

Procedures of PAN registration

Following procedures are to be fulfilled to get PAN in Nepal

1. Submission of application:

The person who wants to get PAN should submit the application form to the concerned office in the format prescribed by the Inland Revenue Department (IRD). The application form can be obtained from the website of the IRD. It should be submitted with the necessary information. The necessary information includes the full name of the applicant, date of birth, citizenship number and other information as prescribed by the IRD. A person should submit an attested copy of citizenship certificate, bank voucher and other necessary documents along with the application form.

2. Verification of documents:

After getting an application from the Person, an authorized employee of IRD should verify the application form. If all the information and documents are sufficient, they start the process. Otherwise, they instruct the applicant to submit other needed documents and information.

3. Entering information into computer system:

After verifying the application and other related documents, the authorized person of IRD starts the process of entering the information into the computer system. Information is entered into IRD’s database system.

4. Corroborate information:

The process of verifying the information which is entered into the computer system is known as to corroborate. Generally, the tax officer verifies the information. If the information filled in the application and computer system are similar, then the tax officer verifies the system and sends it to the printing unit. If there is a deviation between the application form and system, then it is returned to the entering information unit.

5. Print the certificate:

If every information is correct, then the authorized person prints the certificate. PAN certificate is printed on the prescribed format of the Inland Revenue Department. After printing the certificate, it is then affixed with security seal, stamped and laminated for safety and security purpose.

6. Register, stamp and issue the certificate:

After meeting all the above steps, PAN certificate is registered into register book, then stamped on it and handed over to the concerned person.