TAXATION notes

1. Introduction

1.1 Concept and objectives of taxation

Taxation is the process of imposing compulsory levies on individuals or entities by governments. Taxes are collected to raise revenue for government expenditures, such as public works, infrastructure, education, healthcare, and social welfare programs. The design and implementation of tax systems is a complex process that involves balancing a number of competing objectives. Governments must strive to create tax systems that are fair, efficient, and effective in raising revenue. The primary objective of taxation is to raise revenue for government expenditures. However, taxation can also be used to achieve other objectives, such as:

·         Redistributing wealth and income: Taxes can be used to redistribute wealth from the rich to the poor, through progressive tax structures.

·         Correcting market failures: Taxes can be used to correct market failures, such as pollution and externalities.

·         Promoting economic growth and stability: Taxes can be used to promote economic growth by stimulating investment and consumption. Taxes can also be used to stabilize the economy by counteracting cyclical fluctuations.

1.2 Nature of taxation

Taxation is a compulsory levy. This means that taxpayers are legally obligated to pay taxes, even if they disagree with the use of tax revenue. Taxes are also non-refundable. This means that taxpayers do not receive any direct benefits in exchange for paying taxes.

1.3 Kinds of Tax

Taxes can be classified into two broad categories: direct taxes and indirect taxes.

Direct taxes are levied directly on the income or wealth of taxpayers. Examples of direct taxes include income tax, wealth tax, and inheritance tax.

Indirect taxes are levied on goods and services consumed by taxpayers. Examples of indirect taxes include sales tax, excise tax, and value-added tax (VAT).

Here are some examples of specific taxes:

·         Income tax: Income tax is levied on the income of individuals and businesses.

·         Corporate tax: Corporate tax is levied on the profits of businesses.

·         Capital gains tax: Capital gains tax is levied on the profits made from the sale of assets, such as stocks, bonds, and real estate.

·         Sales tax: Sales tax is levied on the sale of goods and services.

·         Excise tax: Excise tax is levied on the production or consumption of specific goods, such as alcohol, tobacco, and gasoline.

·         Value-added tax (VAT): VAT is a consumption tax that is levied on the value added at each stage of the production and distribution process.

2. Taxation Law

2.1 Meaning of Taxation Law

Taxation law is the body of law that governs the imposition, assessment, and collection of taxes. It includes the laws that define the different types of taxes, the rates at which they are levied, and the procedures for taxpayers to comply with their tax obligations. Taxation law is a complex and ever-changing area of law. It is important for taxpayers to be aware of the latest tax laws and regulations in order to ensure that they are in compliance.

2.2 Principles of Taxation Law

·         Equity: Taxes should be fair and equitable, meaning that taxpayers with similar incomes and wealth should pay similar amounts of tax.

·         Efficiency: Tax laws should be designed to minimize the costs of tax administration and compliance for both taxpayers and the government.

·         Simplicity: Tax laws should be simple and easy to understand, so that taxpayers can comply with their tax obligations without incurring excessive costs.

·         Certainty: Tax laws should be clear and certain, so that taxpayers know exactly what their tax obligations are.

2.3 Rules of Construction of Taxation Law

Taxation laws are typically interpreted in favor of the taxpayer. This means that any ambiguity in a tax law will be resolved in a way that is most beneficial to the taxpayer. There are a number of rules that courts use to interpret taxation laws. These rules include:

·         The literal rule: This rule requires courts to give the words of a tax law their ordinary and plain meaning.

·         The purposive rule: This rule requires courts to interpret tax laws in a way that is consistent with their underlying purpose.

·         The mischief rule: This rule requires courts to interpret tax laws in a way that is consistent with the intention of the legislature to address the mischief at which the law was aimed.

2.4 Relation between Finance Act and Tax Acts

The Finance Act is an annual act of Parliament that is used to introduce new tax laws and amend existing tax laws. The Finance Act also sets out the rates of tax that will apply for the following tax year. The Finance Act is the primary source of tax law in India. However, it is important to note that the Finance Act does not contain all of the relevant tax laws. Other important sources of tax law include the Income Tax Act, the Central Goods and Services Tax Act, and the Customs Act.

The Finance Act has a higher legislative rank than the other tax acts. This means that if there is a conflict between the Finance Act and another tax act, the provisions of the Finance Act will prevail.

 

3. Constitutional Framework of Taxation

The constitutional framework of taxation in Nepal is designed to ensure that the government has the power to raise revenue to meet its financial obligations, while also protecting the rights of taxpayers. The taxing procedures set out in the tax laws are designed to be fair and efficient.

In addition to the above, here is a key feature of the constitutional framework of taxation in Nepal:

Taxing power of the federal, provincial and local governments: The Constitution of Nepal has divided the taxing power between the federal, provincial and local governments. The federal government has the power to levy and collect taxes on goods and services of national importance, such as income tax, customs duty and excise duty. The provincial government has the power to levy and collect taxes on goods and services of provincial importance, such as land revenue and vehicle tax. The local government has the power to levy and collect taxes on goods and services of local importance, such as property tax and house tax.

The division of the taxing power between the federal, provincial and local governments is designed to ensure that each level of government has the resources it needs to provide essential services to its citizens.

3.1 Taxing Power and Right to Property in Nepal

The Constitution of Nepal gives the Government of Nepal the power to levy and collect taxes. This power is derived from Article 115 of the Constitution, which states:

The Government of Nepal shall have the power to levy and collect taxes in accordance with law.

The Government of Nepal cannot levy or collect any tax without passing a law that authorizes the tax. This is to protect the right to property of individuals and businesses.

The right to property is enshrined in Article 300-A of the Constitution, which states:

No person shall be deprived of his property save by authority of law.

This means that the government cannot deprive a person of his property without passing a law that authorizes the deprivation.

3.2 Taxing Procedures in Nepal

The procedures for levying and collecting taxes are set out in the various tax laws of Nepal. The most important tax laws are:

·         Income Tax Act, 2058 (BS)

·         Value Added Tax Act, 1997 (BS)

·         Excise Duty Act, 2058 (BS)

·         Customs Act, 2064 (BS)

The tax laws set out the different types of taxes that are levied in Nepal, the rates at which they are levied, and the procedures for taxpayers to comply with their tax obligations.

The general procedure for levying and collecting taxes is as follows:

1.      The Government of Nepal passes a law that authorizes the tax.

2.      The government issues rules and regulations to implement the tax law.

3.      The tax authorities assess the tax liability of taxpayers.

4.      Taxpayers are required to pay the tax assessed on them.

5.      The government collects the tax from taxpayers.

Taxpayers have the right to appeal against the assessment of their tax liability. Taxpayers also have the right to seek refunds of taxes that have been overpaid.

4. Income Tax Law

4.1 Concept of Income and basic terminology under Income Tax Act, 2058 of Nepal

Income

Income is defined in the Income Tax Act, 2058 of Nepal as any profit or gain (other than capital gain) derived by a person from any source within Nepal, including income from employment, business, investment, and other sources.

Basic terminology

·         Assessable income: Assessable income is the total income of a person, after deducting all allowable deductions.

·         Deduction: A deduction is a reduction in the assessable income of a person. Deductions are allowed for certain expenses, such as business expenses, medical expenses, and charitable donations.

·         Allowance: An allowance is a reduction in the tax liability of a person. Allowances are given for certain things, such as personal allowance, dependent allowance, and medical allowance.

·         Tax rate: The tax rate is the percentage of assessable income that a person is required to pay as tax.

4.2 Basis of Charge of Income Tax

Income tax is charged on the assessable income of a person. The assessable income is calculated after deducting all allowable deductions from the total income of a person.

4.3 Heads of Income

The Income Tax Act, 2058 of Nepal divides income into seven heads:

1.      Income from salary

2.      Income from house property

3.      Income from business or profession

4.      Income from capital gains

5.      Income from other sources

6.      Income of non-residents

7.      Income of special industries

4.4 Income from Employment

Income from employment includes salary, wages, bonus, commission, and other allowances paid to an individual for his or her services.

4.5 Income from Business

Income from business includes the profits and gains derived from any business carried on by a person.

4.6 Income from Investment

Income from investment includes interest, dividend, rent, and other income earned from investments.

4.7 Calculation of Assessable Income, Deduction and Allowances

The assessable income of a person is calculated by deducting all allowable deductions from the total income of a person.

Allowable deductions include:

·         Business expenses

·         Medical expenses

·         Charitable donations

·         Personal allowance

·         Dependent allowance

·         Medical allowance

Example: Mr. X is a salaried individual. His total income for the year is Rs. 10,00,000. He is also eligible for a personal allowance of Rs. 2,00,000. Mr. X's assessable income will be calculated as follows: Total income = Rs. 10,00,000 Personal allowance = Rs. 2,00,000 Assessable income = Rs. 8,00,000 Mr. X will have to pay income tax on Rs. 8,00,000.

4.8 Method of Filling Tax Returns - Assessment of Tax - Payment of Tax - Recovery of Tax - Tax Deduction at source

Filing of tax returns: All persons with an assessable income are required to file a tax return with the Inland Revenue Department. The tax return must be filed by the due date, which is typically July 31 of the following year.

Assessment of tax: The Inland Revenue Department will assess the tax liability of a person based on the tax return filed by the person. If the Inland Revenue Department finds that the person has not paid the correct amount of tax, the Department will issue an assessment order to the person.

Payment of tax: The person is required to pay the tax assessed on him or her within the time period specified in the assessment order.

Recovery of tax: If the person does not pay the tax assessed on him or her within the time period specified in the assessment order, the Inland Revenue Department may recover the tax by various means, such as attaching the person's bank account or property.

Tax deduction at source: Certain persons are required to deduct tax at source from certain payments made by them. For example, employers are required to deduct tax at source from the salaries of their employees.The person who deducts tax at source is required to deposit the deducted tax with the Inland Revenue Department within the time period specified in the Income Tax Act, 2058 of Nepal.

5. Value Added Tax

5.1 Concepts of VAT

Value added tax (VAT) is a consumption tax that is levied on the value added to goods and services at each stage of the production and distribution process. VAT is a broad-based tax that applies to most goods and services, with the exception of certain basic necessities. VAT is calculated by multiplying the value added at each stage of the production and distribution process by the VAT rate. The value added is calculated as the difference between the selling price of a good or service and the cost of goods and services used to produce it. VAT is a destination-based tax, meaning that it is paid by the final consumer of the good or service. VAT is typically collected by businesses and remitted to the government. Value added tax (VAT) is a consumption tax that is levied on the value added to goods and services at each stage of the production and distribution process. VAT is a broad-based tax that applies to most goods and services, with the exception of certain basic necessities.

Businesses that meet a certain threshold of turnover are required to register for VAT. Businesses that are registered for VAT are required to charge VAT on the goods and services they sell and remit the VAT they owe to the government on a monthly or quarterly basis.

5.2 Registration for VAT

Businesses that meet a certain threshold of turnover are required to register for VAT. The VAT registration threshold in Nepal is Rs. 50 lakhs for goods and Rs. 1 crore for services.

Businesses can register for VAT online or by submitting a physical application to the Inland Revenue Department (IRD).

5.3 Collection of VAT

Businesses that are registered for VAT are required to charge VAT on the goods and services they sell. VAT is charged at a rate of 13% in Nepal.

Businesses must keep records of all their sales and purchases and calculate the amount of VAT they owe to the government. Businesses must remit the VAT they owe to the IRD on a monthly or quarterly basis.

5.4 Return of VAT

Businesses that are registered for VAT are required to file a VAT return with the IRD on a monthly or quarterly basis. The VAT return must include information about the business's sales, purchases, and VAT liability.

5.5 Payment and Recovery of VAT

Businesses must pay the VAT they owe to the IRD by the due date specified on the VAT return. If a business fails to pay the VAT it owes, the IRD may take various measures to recover the tax, such as attaching the business's bank account or property.

Benefits of VAT

VAT has a number of benefits, including the fact that it is a broad-based tax that generates a significant amount of revenue for governments, it is a relatively efficient tax to collect and administer, it encourages businesses to be more efficient and productive, and it can be used to promote economic growth and development.

VAT has a number of benefits, including:

·         It is a broad-based tax that generates a significant amount of revenue for governments.

·         It is a relatively efficient tax to collect and administer.

·         It encourages businesses to be more efficient and productive.

·         It can be used to promote economic growth and development.

6. Wealth Tax, House and Land Tax and House Rent Tax: Objectives and Legal Provisions as to assessment, payment and recovery of tax

The Wealth Tax Act, 2047 (BS), the House and Land Tax Act, 2020 (BS), and the House Rent Tax Act, 2076 (BS) are important tax laws in Nepal. These laws are designed to generate revenue for the government, promote social justice and equity, and discourage speculation in land and property.

Objectives

The objectives of the Wealth Tax Act, 2047 (BS) are to:

·         Reduce the concentration of wealth in the hands of a few individuals and families.

·         Generate revenue for the government.

·         Promote social justice and equity.

Legal Provisions

The Wealth Tax Act, 2047 (BS) defines wealth as any kind of movable and immovable property remaining in cash or in-kind and ownership of which is capable of being transferred. This includes bank accounts, investments, and other assets. The Wealth Tax Act, 2047 (BS) imposes a tax on the net wealth of individuals and Hindu Undivided Families (HUFs). The tax rate is progressive, with higher rates applied to higher levels of wealth.

Assessment, Payment and Recovery of Wealth Tax

The wealth tax is assessed on a self-assessment basis. Individuals and HUFs are required to file a wealth tax return with the Inland Revenue Department (IRD) by Ashadh End of each year. The wealth tax return must include information about the taxpayer's net wealth. The wealth tax is payable to the IRD by the due date specified on the wealth tax return. If a taxpayer fails to pay the wealth tax on time, the IRD may take various measures to recover the tax, such as attaching the taxpayer's bank account or property.

House and Land Tax

The objectives of the House and Land Tax Act, 2020 (BS) are to:

·         Generate revenue for the government.

·         Promote the efficient use of land and property.

·         Discourage speculation in land and property.

Legal Provisions

The House and Land Tax Act, 2020 (BS) imposes a tax on all land and buildings in Nepal. The tax rate is based on the value of the land and buildings.

Assessment, Payment and Recovery of House and Land Tax

The house and land tax is assessed on a self-assessment basis. Owners of land and buildings are required to file a house and land tax return with the local government by Ashadh End of each year. The house and land tax return must include information about the owner's land and buildings. The house and land tax is payable to the local government by the due date specified on the house and land tax return. If an owner fails to pay the house and land tax on time, the local government may take various measures to recover the tax, such as attaching the owner's land and buildings.

House Rent Tax

The objectives of the House Rent Tax Act, 2076 (BS) are to:

·         Generate revenue for the local government.

·         Promote the construction of affordable housing.

·         Discourage the exploitation of tenants by landlords.

Legal Provisions

The House Rent Tax Act, 2076 (BS) imposes a tax on all house rent income in Nepal. The tax rate is based on the amount of the house rent income.

Assessment, Payment and Recovery of House Rent Tax

The house rent tax is assessed on a self-assessment basis. Landlords are required to file a house rent tax return with the local government by July 31 of each year. The house rent tax return must include information about the landlord's house rent income. The house rent tax is payable to the local government by the due date specified on the house rent tax return. If a landlord fails to pay the house rent tax on time, the local government may take various measures to recover the tax, such as attaching the landlord's property.

7. Rights and duties of Taxpayer

Rights of taxpayers

·         Be treated with fairness and respect.

·         Have their tax affairs kept confidential.

·         Be informed of their tax obligations.

·         Be given the opportunity to appeal tax assessments.

·         Be refunded taxes that have been overpaid.

Duties of taxpayers

·         File accurate tax returns.

·         Pay taxes on time and in full.

·         Keep records of their income and expenses.

·         Cooperate with tax authorities.

Examples of rights and duties of taxpayers

·         Right to be treated with fairness and respect: Taxpayers have the right to be treated with fairness and respect by tax authorities. This includes the right to be informed of their rights and obligations, and to have their tax affairs dealt with in a timely and efficient manner.

·         Right to have their tax affairs kept confidential: They have the right to have their tax affairs kept confidential. This means that tax authorities cannot disclose a taxpayer's personal or financial information to third parties without the taxpayer's consent.

·         Right to be informed of their tax obligations: They have the right to be informed of their tax obligations. This includes the right to be informed of the types of taxes they are required to pay, the rates at which those taxes are levied, and the deadlines for paying those taxes.

·         Right to be given the opportunity to appeal tax assessments: They have the right to appeal tax assessments if they believe that the assessments are incorrect. Taxpayers can appeal tax assessments to the tax authority that made the assessment, and to the courts if necessary.

·         Right to be refunded taxes that have been overpaid: They have the right to be refunded taxes that have been overpaid. Taxpayers can claim refunds from the tax authority that collected the taxes.

·         Duty to file accurate tax returns: They have the duty to file accurate tax returns. This means that taxpayers must disclose all of their income and expenses to the tax authorities, even if that income and those expenses are subject to tax.

·         Duty to pay taxes on time and in full: They have the duty to pay taxes on time and in full. Taxpayers who fail to pay taxes on time or in full may be subject to penalties and interest charges.

·         Duty to keep records of their income and expenses: They have the duty to keep records of their income and expenses. These records must be sufficient to support the information that taxpayers disclose on their tax returns.

·         Duty to cooperate with tax authorities: They have the duty to cooperate with tax authorities. This includes the duty to provide tax authorities with the information and documentation that they request.

8. Tax Administration

8.1 Kinds of authorities (administrative, quasi-judicial and judicial)

Administrative authorities: The administrative authorities are responsible for the day-to-day administration of the tax laws. These authorities include the Inland Revenue Department (IRD), the Department of Customs, and the Department of Excise. The IRD is the main tax authority in Nepal. It is responsible for the assessment and collection of income tax, value added tax (VAT), and other taxes. The Department of Customs is responsible for the assessment and collection of customs duties. The Department of Excise is responsible for the assessment and collection of excise duties.

Quasi-judicial authorities: The quasi-judicial authorities are responsible for hearing and deciding tax disputes. These authorities include the Tax Review Commission and the Tax Court. The Tax Review Commission is a three-member body that hears appeals against tax assessments made by the IRD. The Tax Court is a five-member body that hears appeals against the decisions of the Tax Review Commission.

Judicial authorities: The judicial authorities are the courts of Nepal. The Supreme Court, the High Courts, and the District Courts have jurisdiction to hear tax disputes. The Supreme Court is the highest court in Nepal. It has jurisdiction to hear appeals against the decisions of the Tax Court. The High Courts have jurisdiction to hear appeals against the decisions of the Tax Review Commission. The District Courts have jurisdiction to hear appeals against the decisions of the IRD.

8.2 Powers and functions of the authorities

Administrative authorities

·         To assess and collect taxes;

·         To enforce tax laws;

·         To investigate tax evasion and avoidance;

·         To issue notices and summons to taxpayers;

·         To conduct audits of taxpayers' records;

·         To impose penalties and interest charges on taxpayers who fail to comply with their tax obligations.

Quasi-judicial authorities

·         To hear appeals against tax assessments made by the IRD;

·         To make its own assessments, if it finds that the IRD has made an incorrect assessment;

·         To issue orders to the IRD to refund taxes that have been overpaid.

Judicial authorities

• To hear appeals against decisions made by the Tax Review Commission;
• To make its own decisions, if it finds that the Tax Review Commission has made an incorrect decision;
• To issue orders to the IRD to refund taxes that have been overpaid.

9. Judicial Control over Tax Administration (Jurisdiction, Powers and Procedure)

Judicial control over tax administration is important to protect the rights of taxpayers. The Tax Court provides taxpayers with a forum to challenge tax assessments and decisions made by the IRD. The Tax Court also helps to ensure that the IRD acts fairly and in accordance with the law. Judicial control over tax administration in Nepal is exercised by the Tax Court. The Tax Court is a judicial body that was established under the Tax Court Act, 2006 (BS). The Tax Court has the following jurisdiction:

·         To hear appeals against decisions made by the Tax Review Commission;

·         To make its own decisions, if it finds that the Tax Review Commission has made an incorrect decision;

·         To issue orders to the Inland Revenue Department (IRD) to refund taxes that have been overpaid.

The Tax Court has the following powers:

·         To summon witnesses and require them to produce documents;

·         To conduct inquiries and investigations;

·         To pass orders and judgments;

·         To enforce its orders and judgments.

The procedure for filing an appeal with the Tax Court is as follows:

1.      The taxpayer must file a notice of appeal with the Tax Court within 30 days of the date on which the taxpayer received the decision of the Tax Review Commission.

2.      The notice of appeal must state the grounds on which the appeal is being filed.

3.      The taxpayer must pay a court fee along with the notice of appeal.

4.      The Tax Court will then issue a summons to the IRD, requiring it to file a response to the appeal.

5.      The Tax Court will then hear the appeal and pass its judgment.

6.      The Tax Court's judgment is final and binding on both the taxpayer and the IRD.

If a taxpayer is dissatisfied with the judgment of the Tax Court, the taxpayer can file an appeal with the Supreme Court of Nepal. However, the taxpayer must first obtain leave to appeal from the Supreme Court. Here are some examples of cases that have been heard by the Tax Court:

·         A taxpayer appealed against a tax assessment made by the IRD. The Tax Court found that the IRD had made an incorrect assessment and ordered the IRD to refund the taxes that had been overpaid.

·         A taxpayer appealed against a decision of the Tax Review Commission to reject the taxpayer's claim for a refund. The Tax Court found that the Tax Review Commission had made an incorrect decision and ordered the IRD to refund the taxes that had been overpaid.

·         A taxpayer appealed against a penalty that had been imposed by the IRD. The Tax Court found that the IRD had imposed the penalty unfairly and ordered the IRD to cancel the penalty.