Very Short Questions and Answers
1. Give a brief definition of business as defined in the Income Tax Act, 2058.
The Act has defined business as an industry, a trade, a profession or the like isolated transaction with a business character and includes a past, present or prospective business.
2. List out two incomes excluded from the business.
Two incomes excluded from business are:
- Amounts exempted from income tax under section 10
- Final withholding payments
3. Give any two distinctions between business and profession.
Two distinctions between business and professions are listed below.
- Business includes an activity relating to purchase and sale of goods with an objective of earning profit whereas profession involves the rendering of specialized services for a fee.
- Business needs huge amount of capital as compared to profession.
4. Briefly state the provision related to pollution control cost.
Actual pollution control cost or 50 percent of adjusted taxable income from all business conducted by the person whichever is lower is allowed for deduction. The portion of such cost not allowed as a deduction is capitalized at the beginning of the next income year
Short Questions and Answers
1. What do you mean. by donation to tax-exempt organizations? State the provision mentioned under section 12 of Income Tax Act, 2058.
Donation given to an approved tax-exempt organization is allowed as follows:
|5% of adjusted taxable income (after deducting contribution to approved retirement fund)
or Actual donation paid
or Maximum limit (Whichever is the lowest)
However, the GoN may prescribe, by publishing a notice in Nepal Gazette, to allow full or partial deduction of the expenses incurred for special purposes at the time of assessing income.
Donation given by a company for the work of protection and promotion and ancient, cultural, and religious heritage and building of public physical infrastructure for the development and promotion of sports activities in Nepal given by pre-approval of IRD is allowed as follows:
|10% of total assessable income
or Actual donation paid
or Maximum limit (Whichever is the lowest)
Donation given by a person to the Prime Minister Relief Fund and Reconstruction Fund established by the Government of Nepal (GoN) is fully allowed for deduction while computing taxable income.
2. Mention the provision of depreciation in Income Tax Act, 2058.
Depreciation is the depletion in the value of depreciable assets used in the business or investment by wear and tear, obsolescence, or the passing of time. Depreciation is allowed for a deduction on used depreciable assets owned by the person. For depreciation purpose, the depreciable assets have been classified into five blocks. The block-wise details and rate of depreciation are given in the following table:
|Details of assets
Building, Structures, and similar works of permanent nature
Computers, data processing equipments, furniture, fixtures and office equipments
Automobiles, bus and mini bus
Construction and earth moving equipments, unabsorbed pollution control cost and R&D cost and any tangible assets not included in above blocks (e.g. plant and machinery)
Intangible assets (patent, copy rights, trade marks, software etc. which are not included in Block ‘D’ assets)
rounded down to the nearest half
Blocks A, B, C and D are the blocks of tangible assets whereas Block E is the block of intangible asset. For Blocks A, B, C and D, the diminishing balance method (i.e. written down method) is used while computing depreciation. But for Block E, the straight line method is used.
The block-wise depreciation basis and depreciation are calculated as under:
|Opening depreciation basis
Add: Addition during the year (time-wise)
Less: Disposal during the year
Depreciation of a block = Depreciation basis of a block x Depreciation rate applicable to that block.
Addition during the year in any Block is divided into two parts: absorbed and unabsorbed portion. Such division is based on the later of the time the asset is first owned/used or the cost is incurred. The table is given herewith to clarify the position:
|Shrawan first to Poush end
Magh first to Chaitra end
Baishak first to Ashadh end
During the income year, only the absorbed portion of the addition is considered for calculating depreciation basis. The addition of assets falling under block A, B, C and D is included in respective blocks whereas in case of Block ‘E”, each asset is shown in separate block.
If the depreciation basis after deducting depreciation during an income year is less than Rs. 2,000, the whole amount is allowed as depreciation expenses during the income year. Gain (loss) on disposal of block of depreciable assets is treated as normal gain (loss) of business or investment.
In addition to normal depreciation, the following entities are allowed one-third additional depreciation of the rate prescribed on the assets falling under Blocks A, B, C, and D:
- an entity engaged in building public infrastructure to transfer to the Government of Nepal and any other entity engaged in power generation, transmission, or distribution of electricity.
- an entity wholly engaged in operating a special industry under section 11.
- an entity wholly engaged in the operating road, bridge, tunnel, ropeway, or sky bridge constructed by the entity.
- an entity wholly engaged in operating trolleybuses or trams.
- cooperative registered under Cooperatives Act, 2048 except involved in tax-exempt transactions.
Likewise, a person generating energy power for own business purpose may claim to deduct 50% of the capitalized amount of the assets used to generate such power as depreciation allowance in the same year. Similarly, the person who uses fiscal printer and cash machine to issue invoices may claim to deduct in a lump sum the whole amount incurred for such machines as depreciation allowance in the same year.
3. How the term ‘business’ has been defined in the Act? List any five incomes that are included in the business heading?
Generally, business is a commercial activity undertaken with a profit motive. Income Tax Act, 2058 has defined business as an industry, a trade, a profession, or the like isolated transaction with a business character and includes a past, present or prospective business. By contrast to employment, business is an earning activity typically consisting of not only the provision of labor but of the combined provision of labor and capital.
The five incomes included in business heading are as follows:
- Service fees including commission, meeting management or technical service fees.
- Amounts derived from the disposal of trading stock.
- Net gains from the disposal of business assets or liabilities of the business.
- Amounts treated as derived in respect of excess depreciation on the disposal of the person’s depreciable assets of the business.
- Gifts received by the person in respect of the business.
4. A trading company supplied the following information:
Beginning inventory of Merchandise Rs. 250,000
Purchase during the year Rs. 12,00,000
Custom duty paid Rs. 100,000
Closing stock at the end period of Rs. 120,000
Required: Cost of trading stock
Calculation of cost of trading stock
|Beginning inventory of merchandise
Add: Purchase during the year Custom duty paid
Custom duty paid
Less: Closing stock
Cost of trading stock (CTS)
5. Mr. Karna a sole trader involved in business activity in remote area ‘B’ has taxable income Rs. 1,800,000 before exemption. He has insured his life with annual premium of Rs. 21,000.
Required: Tax liability
Statement of taxable income of Mr. Karna, a sole trader, for the relevant (previous) income year.
|Taxable income before exemption
Less: a. Life insurance premium
(Maximum Rs. 20,000 or Actual Rs. 21,000; lower)
b. Remote area exemption (‘B’)
Remaining taxable income
Calculation of tax liability:
Next Rs. 100,000 @ 15%
Balance Rs.12,90,000 @25%
Total tax liability
|Rs. 337 500
6. Following are the receipts and payments account of Dr. Dixit a medical practitioner for the previous year:
|Dr. Receipts and Payments A/C cr.
|To Consultation fees
To Visiting fees
To Royalty from natural resources
To Income from minor surgery
To Loan from bank
To Birthday gifts
To Pension from previous
|By Staff salary
By Office expenses
By Car expenses
By Office rent
By Purchase office furniture
By Domestic expenses
By Advance income tax
By Balance c/d
- Office furniture was purchased on 1st Baishakh of the previous year.
- Repair expenses were related to the office furniture purchased previously.
- The cost of furniture includes Rs. 5,000 interest on the bank loan.
(a) Net (assessable) income from profession.
(b) Statement of total taxable income.
Calculation of assessable income from a profession, investment, and employment of Dr. Dixit for the previous year.
Calculation of allowable repairs of furniture: Allowable repairs = 7% of depreciation basis or actual (lower)
= 7% of Rs. 20,000 or Rs. 2,000 = Rs. 1,400
It is assumed that a loan from the bank was used for professional purposes.
7. The following are the receipts and payments accounts of an accountant for the previous year.
Consultation fees, accounting fees, and interest related to the profession are assumed to be gross.
Interest on fixed deposits is subject to final withholding income.
iii. Income from the agriculture of an individual is tax exempted.
8. Mr. Bhuwan is a film actor submitted the following receipts and payments account for the previous year:
- The car was purchased on 15th Falgun of previous year. Charge depreciation as per rules.
- His wife is also a professional actress and she earned Rs.400,000 during the year.
- Compensation receivable from a producer Rs.200,000 is yet to be receivable. However, he has spent Rs.10,000 for collecting this amount.
a) Assessable income from profession
b) Statement of total income
Computation of assessable income from the profession of Mr. Bhuwan, a film actor, for the previous year
An individual can keep, for tax purposes accounts on a cash or an accrual basis. Here, a cash basis has been considered. Hence, advance receipts has been included in income and receivables have not been included in income.
The income of Mr. Bhuwan’s wife has been assumed to be assessed separately treating her as a single individual.
Interest on bank a/c and rent from home (net) are final withholding incomes for an individual.
9. OR The Receipts and Payment Account of a medical practitioner is given below:
- Provided depreciation on trademarks and surgical equipment as per rule. Both assets were purchased on Bhadra of the previous year.
- 1/3rd of domestic expenses include general expenses incurred for professional purposes.
- Commission received Rs. 10,000 from clients was not shown in books of account.
- Life insurance premium of Rs. 15,000 on his own life was charged in staff salary.
- Traveling expenses include Rs. 2,000 paid for an educational tour for his son. f. Miscellaneous income includes Rs. 5,000 income from agriculture Agro-expenses were borne by himself.
(a) Net (assessable) income from Profession
(b) Net (assessable) income from investment
(c) Statement of Taxable income (total income)
(d) Tax liability
(a) Calculation of assessable income from profession and practitioner for the previous year
b) Calculation of donation:
5% of adjusted taxable income
i.e. 5% of Rs. (344,529+ 20,000) = Rs. 18,226
Or, Actual= Rs. 10,000
Or, Maximum= Rs. 100,000 (Lowest)
Hence, Rs. 10,000 is fully allowed for reduction.