Chapter 2: Taxation of Income in Nepal

Very Short Question Answer

Enumerate any four characteristics of Income Tax Act 2058. 

The four characteristics of Income Tax Act, 2058 are given below.

1. Confinement of all tax related matters in a single act.
2. Detailed definitions of key terminologies.
3. Broad tax base
4. Allowed deduction for all related expenses

Explain the relationship of Income Tax Act with Financial Act.

Income Tax Act is generally of permanent nature whereas Financial Act is of temporary nature. Financial Act is generally for one fiscal year and its provision will remain effective for that year only. Income Tax Act and Financial Act both are passed by the Parliament. This shows that Financial Act is a complementary to Income Tax Act.

State any four objectives of Income Tax Act, 2058.

The four objectives of Income Tax Act, 2058 are listed below.

• reduce the scope of discretionary interpretation of the tax authorities.
• minimize tax avoidance and tax evasion.
• make taxpayers more responsible by enforcing the self-assessment systems.
• integrate Nepalese tax system with the tax system of foreign countries.

Briefly define the term ‘Income Year’ with an example.

Income year means the period from the 1st day of Shrawan of a year to the end of Ashad of the following year. Income Tax Act, 2058 has considered Nepalese fiscal year as an income year. For example,

Income Year                         Assessment Year

 F/Y 2072/73                         F/Y 2073/74

How do you define a ‘resident individual’?

A resident individual is a natural person:

• whose normal place of abode is in Nepal;
• who has resided in Nepal for 183 days or more during a continuous period of 365 days; or
• who is deputed by Government of Nepal to a foreign country in any time of the income year.

Define the term ‘trading stock’ with an example.

Trading stocks are (a) assets owned by a person that are intended to be sold in the ordinary course of a business, (b) work-in-progress on such assets, and (c) inventories of materials to be incorporated into such assets. Motor cars of an automobile dealer are trading stocks, for example.

Briefly state the heads or sources of income as mentioned in Income Tax Act, 2058.

The following are the heads or sources of income as mentioned in Income Tax Act, 2058:

1. Income from Employment
2. Income from Business
3. Income from Investment
4. Casual Gain

Short Question Answer

State in brief how the term ‘Natural Resource Payment’ is defined in Income Tax Act, 2058. 2061 (C)

Natural resource payment means amounts of any of the following payments.

• amount received for the right to take water, minerals or other living or non-living resource from the land or,
• amount as calculated in whole or part by reference to the quantity or value of water, minerals, or a living or non-living resource taken from the land.

Write in short, any five features of Income Tax Act, 2058.

The five features of Income Tax Act, 2058 are:

1. All income tax related matters are confined within the Act by abolishing all tax related concessions, rebates and exemption provided by different Acts. This Act has been made super in regard to all income tax matters.
2. The Act has broadened the tax base. Unlike the previous tax Act, tax rates are spelled out in the Act. The tax rates and concessions are harmonized on equity grounds.
3. The Act has introduced a pool system of charging depreciation. A provision has also been made for depreciating intangible assets.
4. The Act has first introduced the taxation of capital gains.
5. The Act has provided liberal loss set-off and carry forward/backward provisions. Inter-head adjustments of losses are clearly specified. Such provisions have been made from an international perspective.

Write short notes with example where necessary: 2062 (C)

1. Medical tax credit
2. Assessment year

1. Medical tax credit: Income Tax Act has given medical tax credit facility to a resident natural person for the medical costs paid by him or through others for his or her treatment. The maximum amount that can be deducted from tax liability does not exceed 15% of approved medical cost or Rs.750. Any excess amount due to limitations or lack of tax payable can be carried forward and added to the amount for the next year.
2. Assessment year: The year in which tax is assessed is known as the assessment year. Actually, the year following the income year is the assessment year. For example, for the income year 2072/73, the assessment year is 2073/74.

Write, in brief, the relation of Income Tax Act with Finance Act.

Income Tax Act is generally of permanent nature. For example, Income Tax Act, 2031 lasted for about 28 years. On the other hand, Finance Act is of temporary nature. It is generally for one fiscal year and its provision will remain effective for that year only. Each year, the government enacts the Finance Act to amend temporarily the provisions in Income Tax Act. For permanent change, Income Tax Act has to be amended through parliament. Income Tax Act and Finance Act both are passed by the Parliament. This shows that Finance Act is a complementary to Income Tax Act.

Describe, in short, the objectives of Income Tax Act, 2058. (2066)

The main objectives of Income Tax Act, 2058 are listed below:

-bringing all income generating activities into the tax net.

-harmonizing tax rates and concessions on equity grounds.

-widening the tax base.

-confining all the income tax related matters within the Act.

-making income tax elastic and revenue productive.

-developing a taxpayer-friendly taxation system by making it clear and transparent.

-reducing the scope of discretionary interpretation of the tax authorities. .

-minimizing tax avoidance and tax evasion.

-making taxpayers more responsible by enforcing the self-assessment systems.

Define the term ‘Non-business Assets’ under Income Tax Act 2058 with example. (2067)

Non-business chargeable assets include land, buildings, an interest in an entity or securities. However, it excludes the following assets:

-business asset, depreciable asset or trading stock.

-a private building of an individual that has been owned continuously for at least ten years and resided for a total period of at least ten years either continuously or intermittently.

-interest in a retirement fund of a beneficiary.

-land, house and land or private building of an individual that is disposed of in less than three million (thirty lakh) rupees. [Private building refers to “building and the land occupied” or ‘one ropani land’ whichever is lower.] or,

-asset of an individual that is disposed of by way of any type of transfer other than sales and purchase made within three generations.

Investment in shares is an example of a non-business asset.