Very Short Question Answer
Describe the provision of quantification of vehicle facility as per Income Tax Act, 2058.(2073)
An employer that provides motor vehicle facility to an employee or others for wholly or partly private use, should quantify the benefits in the following ways:
- If it is provided to employee, labour or any other individual receiving monthly remuneration, 0.5% of his/her salary should be included in employment income.
- If it is provided to other individuals other than mentioned above, 1% of market value of vehicle should be included in employment income.
Explain how do you quantify accommodation facility provided to employee or others.
An employer providing accommodation facility to an employee or others, should quantify in the following ways:
- If it is provided to employee, labour or any other individual receiving monthly remuneration, 2% of his/her salary should be included in employment income.
- If it provided to other individuals not mentioned above 25% of actual rent (in case of rented building) or providing rent (in case of own building) should be included in employment income.
How is interest benefit quantified? Explain in brief.
If the interest of a loan paid by the payee is less than the interest to be paid as per the prevailing interest rate, the amount to the extent it is lower is included in the income of the payee. Prevailing interest rate refers to 15% interest rate.
How do you apportion the amounts to be included or deducted between owned investment? Explain with suitable example.
In case a person has a joint investment with another person, amounts to be included and deducted should be apportioned among the joint owners in ratio of their investment
For example,
Mr. A and Mr. B made a joint investment of Rs.3,00,000 in 1:2 ratio to undertake a job. They earned Rs.60,000 by incurring Rs.27,000 as expenses. The income of A and B is computed as follows:
| Total Income
|
A
|
B
|
|
| Income from investment
Less: Expenses. Total net income Ratio (1:2)
|
Rs.60,000
27,000 |
20,000
9,000 |
40,000
18,000
|
| Rs.33,000
|
Rs.11,000
|
Rs.22,000
|
Briefly explain the provision of income splitting.
With a view to reducing tax liability, a person may attempt to split income with another person. In such case, the tax office may, adjust amounts to be included or deducted in calculating the income of each person to prevent any reduction in tax payable as a result of splitting of income. The tax office will consider the market value of any payment made for the transfer to identify the case of income splitting.
Numerical Problems
Mr. Pradhan is an employee of Nepal Bank Limited borrowed loan of Rs.1,000,000 from the bank to construct his residential house in 1″ Shrawan of previous year at an interest rate of 8 percent. The prevailing interest rate is 10 percent.
Required: Amount of interest to be included in employment income.
SOLUTION:
Total loan from NBL (employer) = Rs.10,00,000
Interest rate charged by employer = 8% p.a.
Prevailing interest rate = 10% p.a.
Amount of interest to be included in employment income of Mr. Pradhan for the previous income year.
= Total loan from employer x (Prevailing interest rate – actual interest rate)
= Rs.10,00,000 x (10% -8%) p.a.
= Rs.10,00,000 × 2%
= Rs.20,000
Mr. Sparsh works as an officer in Nepal Oil Corporation (NOC). Besides the monetary compensation, NOC provides him 25 litre petrol a month for free of cost. The market price of petrol per litre is Rs. 109. Determine the quantified benefit that should be included in his income.
SOLUTION:
Quantity of petrol free of cost 25 litres
Market price of petrol per litre= Rs.109
Quantified benefit = 25 x 109= Rs.2725
Mr. Rahul is an employee of a private company. His annual salary and other allowances are Rs.500,000 and Rs.100,000 respectively. He is enjoying a car and accommodation facility given by his office. Calculate his assessable income.
SOLUTION:
Calculation of assessable income
| Salary income
Allowance Accommodation facility (2% of 500,000) Car facility (0.5% of salary, i.e. 500,000)
Assessable income
|
Rs.500,000
100,000 10,000 2,500
|
| 612,500 |
Ms. Sushma is an employee in a bank. The bank has provided her a housing loan facility of Rs.10,00,000 at a subsidized interest rate of 2% p.a. Compute the characterized interest benefits assuming 10% as prevailing market interest rate.
SOLUTION:
Characterized interest benefit = 10 -2 = 8% of loan amount. Ms. Sushma require to include
8% interest on loan provided office into employment office.
Total interest benefit = 10,00,000 × 8/100= 80,000
Mr. Anish is a manager in a private company. He is enjoying services of a housekeeper at a monthly salary of Rs.6,000. The company deducts Rs.2,000 from his monthly salary. Calculate the characterized amount of benefit.
SOLUTION:
Monthly salary of house keeper paid by office Rs.6,000 p.m.
Deduction from his salary Rs.2,000 p.m.
Characterized benefit of house keeper facility = 6,000 -2,000 = Rs.4,000 p.m.
Total amount to be included = 4,000 x 12 = Rs.48,000.
Short Question Answer
Briefly describe any two provisions related to quantification of amount.
Payments are not always made in monetary terms. The payments made other than in terms of money should be quantified for income tax purposes. The two provisions are:
- Transfer of asset: If a person receives assets as a payment, then the market value of asset transferred is considered as paid.
- Provision of vehicle and accommodation facility: If a motor vehicle is availed wholly or partly for the private purpose, 0.5 % of salary in respect of employee or labour, or any other person receiving monthly salary or 1 % of market value of vehicle in respect of others is included in the income of a payee. Similarly, if a provision of a house is made to an individual, 2 % of salary in respect of employee or labour, or any other person receiving monthly salary or 25 % of actual rent (or prevailing rent) in respect of others is included in the income of a payee.
How fringe benefit is quantified according to ITA, 2058? Describe with an illustration.
For the provision of following facilities, the amount of expenses incurred by the payer as reduced by any contribution of the payee is included in the income of the payee.
- the services of a housekeeper, driver, gardener or other domestic assistant.
- any meal, refreshment or entertainment.
- drinking water, electricity, telephone and the like utilities in respect of the payee’s place of residence.
Example: An employee was provided by an employer a service of a housekeeper at a monthly salary of Rs. 3,000. For this, the employer deducted Rs.1,000 from the employee’s salary. In this case, characterized amount for housekeeper facility is computed as follows:
House keeper’s salary (Rs.3,000 × 12) Rs.36,000
Less: Employee’s contribution (Rs.1,000 x 12) Rs.12,000
Taxable benefit to be included in the employee’s income Rs.24,000
Define ‘general anti-avoidance rule’. Also state the related provision in the Act.
Tax avoidance scheme refers to any arrangement, one of the main purposes of which is the avoidance or reduction of tax liability. The tax office may:
- recharacterize an arrangement or part of an arrangement that is entered into or carried out as part of a tax avoidance scheme.
- disregard an arrangement or part of an arrangement that does not have substantial economic effect.
- recharacterize an arrangement or part of an arrangement the form of which does not reflect its substance.
- In a nutshell, the tax office may determine tax liability by disregarding any such arrangement.
What do you mean by income splitting? Briefly mention the related provision in the act.
Income Tax Act, 2058 has made a provision of income splitting. With a view to reducing tax liability, a person may attempt to split income with another person. The tax office may, by notice in writing, adjust amounts to be included or deducted in calculating the income of each person to prevent any reduction in tax payable as a result of splitting of income. In determining whether or not a person is seeking to split income, the tax office will consider the market value of any payment made for the transfer.