Documente Academic
Documente Profesional
Documente Cultură
By
SAROJ BHUSAL
South Asian Institute Of Management
P.U. Regd.:- 2014-2-62-0024
Campus Roll No.:- 14220113
Kathmandu, Nepal
15th March 2017
DECLARATION
SAROJ BHUSAL
Researcher
P.U. Regd.: 2014-2-62-0024
Campus Roll No.:- 14220113
ACKNOWLEDGEMENT
In this context this study entitled A comparative study on problems and prospect
of tax system of Nepal in relation to individuals and business houses is mainly
done to analyze the present situation of tax system in Nepal. I am hearty thankful
to Pokhara University and South Asian Institute of Management for providing me
opportunity to make this thesis report.
Finally, I would like to express my sincere gratitude to those who have inspired
me and helped me to complete this work.
Saroj Bhusal.
TABLE OF CONTENTS
Approval Sheet
Declaration
Acknowledgement
Table of Contents
List of Tables
List of Figures
Abbreviation
No. Page
CHAPTER-I: INTRODUCTION
1.1 Background of the Study 1
1.1.1 Tax History chronology 3
1.1.2 Purpose and effects of taxation 9
1.1.3 Taxation in Nepal 11
1.2 Problem Statement 13
1.3 focus of the study 14
1.4 Research questions 16
1.5 objectuves of the study 16
1.6 Theoretical framework 17
1.7 Research Methodology 18
1.7.2 Research Design 19
1.8 Limitation of the Study 19
Bibliography
Questionnaire
LIST OF TABLES
7 Size of samples 50
AD : Anno Domini
B.S. : Bikram Sambat
F.Y. : Fiscal Year
MBA : Masters in Business Adminstration
Pvt. : Private
Ltd. : Limited
SN : Serial Number
VAT : Value Added Tax.
USA : United States of America
DANIDA : Danish International Development
Agency.
GTZ : German Technical Cooperation
RAS : Revenue Adminstrative Support.
Ird : Inland Revenue Department.
GAAR : General Anti Avoidance Ruling.
TDS : Tax Deducted at source
PAN : Permanent Account Number
WHT : Withholding tax
NRB : Nepal Rastra Bank
GON : Government of Nepal.
EXECUTIVE SUMMARY:
Different tax payers argue that tax system of Nepal needs lot of
improvements and there are many loopholes in the system which
needs to be resolved. The rate of import tax is more than 200%,
which affects the business organizations importing goods and
services. Some argue that VAT is not needed for certain amount,
which may affect large business houses. Besides from that tax
assessment process have lot of problems. The assessment procedure
of income tax is not effective. Undue delay in tax assessment not
only reduces the total revenue but also brings harassment to tax
payers. Separate taxation report is required for business
organizations for assessing their income, which is more time
consuming. Besides from that there is lack of systematic account
keeping in Nepalese business organizations which pose a problem in
tax assessment. Many small business organizations use the service
from 3rd party to perform their accounting works which creates more
complications.
According to the opinion survey undertaken on the two group of
respondent, it was found that the respondents view income tax as a
burden. Even those who are capable of paying tax found it
burdensome, without any direct or indirect benefits to the taxpayers.
It was also found that all the respondents pay tax but reluctantly.
They are more inclined towards saving tax through legal or illegal
means.
For the tax payers who are under business houses, they find dealing
with tax officials and tax offices very problematic. They face
problems in assessing and filing the income returns at the end of the
year. The respondents under this research who are mostly under
business argue that current assessment process/system of income tax
is very time consuming and requires complex legal process. In
reality, this is also true because the system demands many
documents and the process is rather lengthy.
1.1 Background
A nation requires sufficient funds to carry out development plans, handle
day to day administration, maintain peace and security and launch other
public welfare activities. The funds required by the government are normally
collected from two sources debt and revenues. The debt can be collected
either from internal sources or from external sources. The debt collected
within the country is known as internal debt while the debt collected from
outside the country is called external debt. The debt financing of the
government is also known as deficit financing. The revenue of the
government comes basically from two sources: tax and non tax. Non tax
sources include different revenues like gifts, grants, revenues from public
enterprises, administrative revenues such as registration, fees, fines and
penalties. Tax sources include customs, excise duty, VAT, income tax. In
Nepal, tax is the major source of government revenues.
1
For launching such programs a government needs several kinds of resource
like human, physical, financial etc. Among these resources, financial
resource is the most important resource without which no other resources
can be acquired. In other words, a country requires huge financial resource
for conducting the development activities or to maintain economic progress.
The government can mobilize both internal and external financial resources.
However, the internal resources are more preferable for making sustainable
economic development.
Great Britain is the first country in the world to introduce the modern
income tax. It introduced income tax in 1799 to finance the war fought with
France. USA introduced income tax in 1862 to generate revenue to finance
civil war. In India, while income tax in its modern form was adopted in
1860, several experiments were made from 1860 to 1886 and finally the
systematic income tax legislation was enacted in 1886.
Although taxes were collected in various forms in ancient era, the history of
modern income tax is not very old in Nepal. The idea of introducing income
tax in Nepal originated in the early 1950s when a multiparty democratic
political system was introduced.
Attempts were made to introduce income tax in subsequent years. In 1954,
an income tax with Rs 10000, basic allowance and progressive taxes ranging
from 5 to 25 percent was purposed. Due to political instability, it could not
be introduced until 1958.
2
The first elected government in 1959 finally introduced business profits and
salaries tax act, 1960 in Nepal. At that time income tax was levied only of
business profits and salaries. After about three years experience of income
tax the government replaced the prevailing tax act by income tax act 1962.
The coverage was extended in the act. In 1974, income tax act 1974 was
enacted. (Wikipedia)
GREECE
In times of war the Athenians imposed a tax referred to as eisphora. No
one was exempt from the tax which was used to pay for special wartime
expenditures. The Greeks are one of the few societies that were able to
rescind the tax once the emergency was over. When additional resources
were gained by the war effort the resources were used to refund the tax.
Athenians imposed a monthly poll tax on foreigners, people who did not
have both an Athenian Mother and Father, of one drachma for men and a
half drachma for women. The tax was referred to as metoikion
ROMAN EMPIRE
The earliest taxes in Rome were customs duties on imports and exports
called portoria. Caesar Augustus was considered by many to be the most
brilliant tax strategist of the Roman Empire. During his reign as "First
Citizen" the publicani were virtually eliminated as tax collectors for the
central government. During this period cities were given the responsibility
for collecting taxes. Caesar Augustus instituted an inheritance tax to provide
3
retirement funds for the military. The tax was 5 percent on all inheritances
except gifts to children and spouses. The English and Dutch referred to the
inheritance tax of Augustus in developing their own inheritance taxes.
During the time of Julius Caesar a 1 percent sales tax was imposed. During
the time of Caesar Augustus the sales tax was 4 percent for slaves and 1
percent for everything else.
Saint Matthew was a publican (tax collector) from Capernaum during Caesar
Augustus reign. He was not of the old publicani but hired by the local
government to collect taxes.
In 60 A.D. Boadicea, queen of East Anglia led a revolt that can be attributed
to corrupt tax collectors in the British Isles. Her revolt allegedly killed all
Roman soldiers within 100 miles; seized London; and it is said that over
80,000 people were killed during the revolt. The Queen was able to raise an
army of 230,000. The revolt was crushed by Emperor Nero and resulted in
the appointment of new administrators for the British Isles.
GREAT BRITAIN
The first tax assessed in England was during occupation by the Roman
Empire.
Lady Godiva
Lady Godiva was an Anglo-Saxon woman who lived in England during the
11th century. According to legend, Lady Godiva's husband Leofric Earl of
Mercia promised to reduce the high taxes he levied on the residents of
Country when she agreed to ride naked through the streets of the town.
When Rome fell, the Saxon kings imposed taxes, referred to as Danegeld, on
land and property. The kings also imposed substantial customs duties.
The 100 years War (the conflict between England and France) began in 1337
and ended in 1453. One of the key factors that renewed fighting in 1369 was
the rebellion of the nobles of Aquitaine over the oppressive tax policies of
Edward, The Black Prince.
4
Taxes during 14th century were very progressive. The 1377 Poll tax noted
that the tax on the Duke of Lancaster was 520 times the tax on the common
peasant.
Under the earliest taxing schemes an income tax was imposed on the
wealthy, office holders, and the clergy. A tax on movable property was
imposed on merchants. The poor paid little or no taxes.
Charles I was ultimately charged with treason and beheaded. However, his
problems with Parliament came about because of a disagreement in 1629
about the rights of taxation afforded by the King and the rights of taxation
afforded by the Parliament.
The King's Writ stated that individuals should be taxed according to status
and means. Hence the idea of a progressive tax on those with the ability to
pay was developed very early.
Other prominent taxes imposed during this period were taxes on land and
various excise taxes. To pay for the army commanded by Oliver Cromwell,
Parliament, in 1643, imposed excise taxes on essential commodities (grain,
meat, etc.). The taxes imposed by Parliament extracted even more funds than
taxes imposed by Charles I, especially from the poor. The excise tax was
very regressive, increasing the tax on the poor so much that the Smithfield
riots occurred in 1647. The riots occurred because the new taxes lowered
rural laborers ability to buy wheat to the point where a family of four would
starve. In addition to the excise tax, the common lands used for hunting by
the peasant class were enclosed and peasant hunting was banned.
A precursor to the modern income tax we know today was invented by the
British in 1800 to finance their engagement in the war with Napoleon. The
tax was repealed in 1816 and opponents of the tax, who thought it should
only be used to finance wars, wanted all records of the tax destroyed along
with its repeal. Records were publicly burned by the Chancellor of the
Exchequer but copies were retained in the basement of the tax court.
5
COLONIAL AMERICA
Colonists were paying taxes under the Molasses Act which was modified in
1764 to include import duties on foreign molasses, sugar, wine and other
commodities. The new act was known as the Sugar Act.
Because the Sugar Act did not raise substantial revenue amounts, the Stamp
Act was added in 1765. The Stamp Act imposed a direct tax on all
newspapers printed in the colonies and most commercial and legal
documents.
The first known system of taxation was in ancient Egypt around 3000 BC
2800 BC in the first dynasty of the Old Kingdom. Records from the time
document that the pharaoh (a ruler of ancient Egypt) would conduct a
biennial (two yearly) tour of the kingdom, collecting tax revenues from the
people. Early taxation is also described in the Bible. In Genesis (chapter 47,
verse 24 - the New International Version), it states "But when the crop
comes in, give a fifth of it to Pharaoh. The other four-fifths you may keep as
seed for the fields and as food for yourselves and your households and your
children." Joseph was telling the people of Egypt how to divide their crop,
providing a portion to the Pharaoh. A share (20%) of the crop was tax.
(wikipedia.org)
6
Local authorities like local governments, provincial governments, counties
and municipal corporations also have the right to impose taxes. The rates,
rules and regulations of taxation differ from one country to another and they
are complex in character. Tax is collected in money or cash.
There are many different kinds of taxes, most of which fall into a few basic
categories: taxes on income, taxes on property, and taxes on goods and
services.
In addition to federal income taxes, the U.S. government also mandates that
employers subtract payroll taxes from their workers paychecks each pay
period, and then match the sums deducted. These payments are called FICA
taxes because they are authorized by the Federal Insurance contribution Act.
Total FICA taxes on individual workers are 7.65 percent of income; 6.2
percent goes to fund the nations social security system, while 1.45 percent
goes to Medicare. Self-employed individuals are liable for the entire 15.3
percent, although one half of that amount can be taken as an above-the-line
business deduction on a persons income tax return.
Capital gains taxes are those paid on any profits made from the sale of an
asset and are usually applied to stock and bond transactions. Profits made
from the sale of real state are also subject to a capital gains tax.
Estate taxes are imposed on the transfer of property upon the death of the
owner in USA. They were created to prevent the perpetuation of tax-free
wealth within the countrys most affluent families. Many states also impose
their own estate tax, sometimes known as an inheritance tax. Opponents of
these types of taxes believe that they are an unfair confiscation of wealth
passed on to an heir and call them death taxes
7
Taxes on Property
Property tax, sometimes known as an ad valorem tax, is imposed on the
value of real estate or other personal property. Property taxes are usually
imposed by local governments and charged on a recurring basis. For
example, homeowners will generally pay their real estate taxes either once a
year or as a monthly fee as part of their mortgage payments.
Real estate taxes are often subject to fluctuation based upon a jurisdictions
assessment of the worth of a property based on its condition, location and
market value. If property values have fallen due to adverse economic
circumstances, home taxes may decrease.
Other items that may be subject to a property tax are automobiles, boats,
recreational vehicles and airplanes.
Some believe that sales taxes are the most equitable form of taxation, since
they are essentially voluntary and they extract more money from those who
consume more. Others believe that they are the most regressive form of
taxation, since poorer people wind up paying a larger portion of their income
in sales taxes than wealthier individuals do.
So-called sin taxes are imposed on items like cigarettes and
alcohol. Luxury taxes are imposed on certain items, such as expensive cars
or jewelry
In this Thesis, we will be more focused on Income tax.
8
In general, tax can be broadly classified into two types; direct tax and
indirect tax.
a) Direct tax :
Direct taxes refer to those taxes that are collected from the people or
organizations on which they are ostensibly imposed. In other words, a direct
tax is a form of tax, which is directly collected by the government from the
persons who bear the tax burden or who are supposed to pay tax. Corporate
taxes, income taxes and transfer taxes are the main forms of direct tax.
b) Indirect tax :
Indirect taxes are collected from someone other than the person ostensibly
responsible for paying the taxes. More precisely, an indirect tax is a form of
tax, the collection of which is performed by mediators who deposit the taxes
to the government and also perform functions associated with filing tax
returns. In this case, the customers bear the final tax burden. Some of the
main forms of indirect taxes are sales tax and value added tax (VAT).
(wikipedia.org)
Governments use different kinds of taxes and vary the tax rates. This is done
to distribute the tax burden among individuals or classes of the population
involved in taxable activities, such as business, or to redistribute resources
between individuals or classes in the population. Historically, the nobility
were supported by taxes on the poor; modern social security systems are
intended to support the poor, the disabled, or the retired by taxes on those
9
who are still working. In addition, taxes are applied to fund foreign and
military aid, to influence the macroeconomic performance of the economy
(the government's strategy for doing this is called its fiscal policy), or to
modify patterns of consumption or employment within an economy, by
making some classes of transaction more or less attractive.
10
Taxation has four main purposes or effects: Revenue, Redistribution, Re-
pricing, and Representation.
The main purpose is revenue: taxes raise money to spend on roads,
schools and hospitals, and on more indirect government functions like good
regulation or justice systems. This is the most widely known function.
A second is redistribution. Normally, this means transferring wealth from
the richer sections of society to poorer sections. This function is widely
accepted in most democracies, although the extent to which this should
happen is always controversial.
The third purpose of taxation is re-pricing. Taxes are levied to address
externalities: tobacco is taxed, for example, to discourage smoking.
A fourth, consequential effect of taxation in its historical setting has been
representation. The American revolutionary slogan "no taxation without
representation" implied this: tax citizens and citizens demand accountability
from their rulers as the other part of this bargain. Several studies have shown
that direct taxation (such as income taxes) generates the greatest degree of
accountability and better governance, while indirect taxation tends to have
smaller effects. (wikipedia.org)
11
There is no VAT on goods for export, nor on raw materials imported by an
export promotion industry, nor the products of such an industry. (Industrial
enterprise act 1992)
Excise taxes are applied mainly to goods deemed hazardous to health, such
as alcoholic beverages, cigarettes and soft drinks. In January 2002, a new
Excise Act went into effect that raised rates slightly as part of the
government's effort to pay for increased security expenditures since 2001.
Companies engaged in construction, transportation, manufacturing and
power generation are subject to a 20% corporate income tax, whereas
financial institutions are liable for 30%. All other businesses are assessed at
25%.
Since 1997, Nepal has received technical support in implementing its tax
reforms from the Danish International Development Agency (DANIDA) and
German Technical Cooperation (GTZ). In 2002, these agencies were
working in an alliance they called Revenue Administration Support (RAS).
The major structural reforms in which the RAS has assisted were the merger
in late 2001 of the Department of Taxation with the VAT Department to
form the Inland Revenue Office, and the subsequent consolidation of the 40
income tax offices and 17 VAT offices into 21, one-point-of-service, Inland
Revenue Offices distributed around the country. In their division of labor,
DANIDA has been supporting the mergers and the implementation of the
VAT and the new income tax, while GTZ has focused on the development
of Nepal's income tax/VAT system software, and the introduction of the new
income tax. (www.nationsencyclopedia.com)
12
1.2 Problem Statement
Economic development is the prime concern of every nation in the world. To
fulfill this objective every nation in the world are conducting various
developmental activities and projects. Nevertheless, underdeveloped nations
are facing serious problems in the process of economic development. This is
either because of lack of a good budget or because of inefficiency in various
laws, policies as well as the management system of government in utilizing a
countrys resources. Because of such reasons, most underdeveloped nations
are depending on the aid of developed nations. Nepal is not an exception to
this case. For the economic development of a nation sufficient resources are
needed.
Different tax payers argue that tax system of Nepal needs lot of
improvements and there are many loopholes in the system which needs to be
resolved. The rate of import tax is more than 200%, which affects the
business organizations importing goods and services. Some argue that VAT
is not needed for certain amount, which may affect large business houses.
Besides from that tax assessment process have lot of problems. The
assessment procedure of income tax is not effective. Undue delay in tax
assessment not only reduces the total revenue but also brings harassment to
tax payers. Separate taxation report is required for business organizations for
assessing their income, which is more time consuming. Besides from that
there is lack of systematic account keeping in Nepalese business
organizations which pose a problem in tax assessment. Many small business
organizations use the service from 3rd party to perform their accounting
works which creates more complications.
13
Misuse Investigation Commission of Nepal in the recent years has proved
that there is corrupt bureaucracy in revenue office or tax office.
There is poor taxpaying morality among people too. People are not educated
about the type of tax they pay. They dont ask for bills allowing business
man to evade tax. Tax evading culture is rampant because of inefficient tax
administration and poor enforcement of laws related to tax act. The tax
authorities are inefficient and ineffective in tax law enforcement. There are
no integrated programs for taxpayers education, assistance, guidance, and
counseling.
The current study examines and analyzes the tax assessment process for
business organizations, and assesses the opinion of tax payers both business
and individuals regarding the tax payer system. The study aims to identify
the problems in the income tax system, as well as the principal reasons
behind the tax evasion that is rampant. In addition the study examines the
methods adopted by business houses and individuals to reduce taxes through
legal provisions, and to identify the appropriate methods for improvement of
the tax system.
14
To find out the opinion of tax payers about the income tax system in
Nepal in relation to business houses and individuals.
To analyze the income tax assessment process as well as to measure
the reasons for its unsoundness.
To identify the problem in income tax system and to suggest
appropriate mechanisms so it would be rational to the tax payers.
To understand the reasons for wide spread income tax evasion.
To identify areas of improvement in current tax system
To understand about the mechanisms business houses adopt to save
tax.
To understand about the education level of individual tax payers about
the tax they pay.
15
1.4 Research Questions
The study will be carried out to answer the following research questions?
What are the major problems of income tax system in Nepal?
What is the general perception/opinion of corporations and individuals
towards income tax?
What are the reasons for unsound income tax assessment process?
To identify the problem in income tax system and to suggest
appropriate mechanisms so it would be rational to the tax payers.
To identify the areas of improvement.
To understand about the education level of individual tax payers about
the tax they pay.
16
1.6 Theoretical Framework
Income tax plays a very important role in the Nepalese economy. Income tax
is a tool of achieving maximum social and economic objectives as laid down
by the constitution of Nepal. It is also recognized as a good financial lever to
make the inequality in income narrow. According to modern economists,
income tax is essential not only for collecting government revenue but also
to maintain control over consumption, to promote saving and to generate
more employment. The equal distribution of income is also possible through
that the contribution of income tax to the revenue of the government must be
increased in Nepal. But Nepal still has been unable to maximize the
collection of income tax. (H.P. Marhatta, 1980)
If the government maintains and implements good tax system then it has a
lot of positive effects. For example, a good tax system improves the labor
supply i.e. on the individual/labor side, it encourages the workers to work
overtime if their pay is tied with the number of hours they work more
(N.Gregory Mankiw,1997). In other words, if the income tax system is
sound which does not impose much burden on them, the workers choose to
work more. Similarly, from the organization/corporations perspective, a
good income tax system encourages private business investments or the
investments in various projects as well as the foreign direct investment.
Thus, if the income tax system is sound, the country can achieve the
balanced economic development, which further depends on the effective and
efficient income tax management.
17
Although legal provisions are made and updated timely, there are many
problems which exist in the income tax practice in Nepal. The leakage in
tax, feeling of people about tax as a penalty, lack of consciousness among
people, inability of tax management to cover the new tax payers within the
portfolio of tax payers, delay in computation and collection, lack of accuracy
and unity in tax system, inefficiency of tax administration, high cost of tax
collection and administration etc. are some examples. Because of these
reasons, the income tax system of Nepal must be reviewed and immediate
corrections should be made. Further, the whole income tax management
must be made strong. The necessary corrections in the existing provisions
and policies are possible through information feedback system provided by
the management.
Any change in tax system also causes relative changes in market values with
the result that there are some winners and some losers. Further, changes to
tax system inevitably result in deadweight costs as tax payers and tax
administrators are forced to spend time and resources in education and
adjustments to new system. However, deadweight costs associated with
transition to new tax system can be lessened through the efforts of
academics. Scholarly works explaining and contextualizing change can
assist substantially in the education process associated with change and,
therefore, assist in minimizing transitional costs. (Rup Khadka, 2001)
1.8 Limitations
The study will be confined to the Kathmandu valley only.
The research will be mostly based on information related to the historical
secondary data since the present data is very difficult to gather.
Many organizations dont want to share information regarding the tax, so
there may be difficulty in collection of data.
19
Chapter : 2
Literature review.
20
This act has included various provisions to facilitate various things as
follows:
- To unite all the acts related to income tax
- To increase the boundary of tax
- To maintain more clarity of tax system
- To improve the tax system according to the change in international tax
laws
Income tax act 2058 has divided all the income into 4 parts namely,
business, employment, investment and capital gain. According to the act, tax
payers can determine the taxable amount from business, employment and
investment and decide what amount of tax they need to pay. Capital gains
will have to pay 25 % of the amount from various gains like, lottery and
prizes.
Income tax act, 2058 have clearly defined what kind of expenses you can
deduct from your income and what kind of expenses you cannot. It clearly
specifies about the method of calculating tax and time frame for tax
payment. We can also find sections that define about, various discounts, and
facilities that tax payers may receive.
This act have also included proving of the taxable amount, dividing tax into
4 headings, transfer pricing, indirect payments, General anti avoidance
ruling, GAAR to reduce the risk factors included in tax system.
One of the important provisions of the act is tax on capital gains of natural
person. Here person can determine the tax himself from the capital and
liabilities where Depreciable assets, business assets, business related and non
business related incomes can be used to calculate the tax natural person
needs to pay. Here non business taxable amount has been charged with
capital gain tax. Similarly on the share investment, the gains from such will
be charged with tax at the time of gain through the medium of TDS. One
needs to pay for the income from the capital gains and can also reduce their
taxable amount, in case of loss.
21
Income tax act 2058 has clearly defined about how much one needs to pay,
and what facilities he will receive. Husband and wife can remain as separate
natural person if they dont choose to be 1 natural person while paying tax.
Similarly all the natural persons can deduct their taxable income from the
health expense they incur.
In relation to international tax, this act talks about income source, loss, profit
and payments and foreigners managed company. Here temporary residents
in Nepal should only pay for the income generated within the country
whereas for permanent residents, they should pay for the global income.
However, if the tax has already been paid in another country of source, than
such amounts can be deducted from the taxable income in Nepal. Person
conducting business in fields related to water transportation, air
transportation and telecommunication have to pay tax on the revenue they
receive.
For the implementation and administration of tax system, income tax act
2058 have given the responsibility to head of Inland Revenue Department.
Similarly it has divided the responsibilities and authorities for the people
employed in Inland Revenue Department. Tax payers are educated about any
provisions that are implemented or removed, what they receive and how
they benefit. For this they can fill up a form and get all the information
necessary. However, overall responsibility has been given to head of ird.
Nepal Government has been given right to implement both sides tax free
with foreign country. In this age of globalization, income of a person is not
limited to a single country. Person is involved in different countries. So to
ease the transaction between two countries or contracting countries, two
22
sided tax free system can be implemented. Main aim of such system is to
remove double taxation, reduce the burden of tax and reduce tax leakage.
Until now Nepal government have made contract with 10 countries ( India,
Norway, Thai Land, Sri Lanka, Mourisos, Austria, Pakistan, China, Korea
and Katar ) to provide both sides tax reduction and remove tax leakage.
Income tax act 2058 has safeguarded the tax payers through this act. Privacy
of taxpayer has been prioritized and punishment for those who provide
information that hampers the privacy of tax payers. For the identification of
tax payers there is a system of PAN number. There is a system of E- filing to
give the details of income.
Taxpayers have to pay tax in installments for their income. Small taxpayers
from prescribed areas should pay estimated tax along with necessary
documents and incase tax is paid after earning income, tax payers have
facility of tax cut from the amount already paid.
Act also includes provisions like time, place and system of tax payment
which is mentioned in the act. Tax officer can search for the information
related to tax payers, and tax payers will be given certificate of tax cut.
Important aspect of income tax act 2058 is tax payers can determine the tax
amount by themselves. Normally, any employment, business, investment
and non business transaction done in Nepal which earns income to resident
or nonresident should provide the details of their transactions. If income
source is only from Nepal or a single employment person or owner of public
transportation, person need not provide details of every transaction.
Generally, a natural person is resident if he stays in Nepal for a period of
183 days or more in an income year or if his habitual place of abode is in
Nepal. A company is considered resident in Nepal if it is incorporated in
Nepal or if effective control and management of the company is in Nepal.
Another important aspect of Income Tax act is that, losses and expenses can
be deducted from taxable amount. Loss and expenses for business can be
carried for 7 years and on petroleum products its 12 years. Along with that,
23
loss from investment cannot be transferred to business and loss in foreign
country cannot be transferred to home country, but the loss from Nepals
business can be transferred to anywhere. Tax cut will not be granted for
businesses which dont require tax, or which requires less tax. Loss during
ownership cannot be transferred as well.
Tax officers have right to fix new tax rate for those taxpayers who fraudly
pay less tax, but such rate should be fixed within 1 year after receiving the
information of such fraud.
Income tax act 2058 has provisions for punishment and fines for non
compliance of the tax. Tax officer can charge you with fees and extra fees,
but punishment and fines are charged by court only. If transaction, related to
income is not provided, not recorded in books, no details from advance tax
payers, no payment in time, providing wrong information, influencing in bad
way, officer who damages privacy, non compliance of this act, will be
forced to pay fines according to the rule and may also go to jail. Officer who
charges taxpayer must go through court and register a case.
Tax act 2058 also has provisions related to tax collection, tax cut and tax
returns. Provisions like forfeiture of assets of tax payer who dont pay tax,
24
auctioning of such assets, restricting from going abroad, collecting tax from
agent of nonresident person and filing a case for non tax payers are also
included. If tax payer is not able to pay tax due to valid reason, government
can free him from his tax as well. If any tax payer pays more tax than he
should have, than his amount will be returned if he ask it back within 2 years
of such payment.
All the rates of income tax are included in this act. These rates cannot be
changed by Nepal Government and can only be changed through process of
bills. Act has also included pool system where depreciable assets and
incomes are classified and total expenses from all categories can be used for
tax cut.
2.2 Rights and Duties of Tax Payers (Related to income tax act 2058 and
income tax rules 2059)
All tax payers have to do certain legal things before starting their transaction
till the completion of such transaction, which falls under the rights and
duties of tax payers. Though there is no special provision regarding the
rights and duties of tax payers in income tax act, it talks about certain things
which taxpayers must follow.
Taxpayers have to register their transaction, provide transaction details
within the time, pay the tax, pay exact amount without any fraud, provide
papers and details if demanded by tax office, should be present whenever
asked to. These are the rights and duties of tax payers.
If taxpayers do not follow the guidelines as mentioned in the act, he may be
charged with extra money, fines, closing of business, auctioning of his
property, or forfeiture of assets.
1) Resister in income tax:
- Before starting any kind of transaction, one must take Permanent
Account Number (PAN) from nearest inland Revenue Department or Tax
office.
- The photo copy of PAN Card must be kept at the workplace where
everyone can see it.
25
- The details of the income shall be provided within 3 months after the
completion of economic year, that is within last date of Ashwin., in inland
revenue department, tax office or big taxpayers office.
2) Register in VAT
- Businesses with taxable income of more than 20 lakhs must register in
VAT (Value Added Tax)
- Individual doing business with taxable income of more than 10 lakhs
from both service and products, must also register for VAT.
- Person doing business of hardware, stationery, furniture fixture,
furnishing, automobiles, motor parts, electronic, marbles, education
consultancy, health club, catering service, party palace, restaurants and bars,
color labs in municipality must also register for VAT.
3) Receive the bills during purchase:
- Whenever you are buying or selling, you must do the transaction with
valid bill. Bill should contain name of the firm, PAN number, date, units of
products and price.
- No bills should be issued with under invoicing.
- Even though, customers dont ask for bill, seller must provide him
with bill, and only than he can receive payments.
26
2.2.1 Rights of the tax payers:
Section 74 of income tax act has clearly defined about rights of the tax
payers. Tax payers are also obliged to follow the income tax act rules in the
act and enjoy the rights they receive. Tax payers are person with taxable
income in any income year. They may also be permanent establishment of
foreign national in Nepal (section 68 sub section 3 and 4) or individuals
entitled to receive amount of tax cut in last income year.
Rights of tax payers
1. Right to equality: Tax office shall treat all the tax payers respectfully.
2. Right to know the information related to tax laws and their rights.
3. Right to calculate their own tax amount according to section 99
4. Right to provide proof relating to tax.
5. Right to hire lawyer to deal with case regarding tax.
6. Right of secrecy: Section 84 states that, all the information received
by tax officers must be kept secret. Sub section 1 states, however officer can
provide information to those who are knowledgeable about that transaction.
Information can only be given to tax officers, court, government worker who
needs data for statistics and to foreign officials with whom Nepal have made
treaty.
7. Right to advance rulling (section 76): if taxpayer is confused about
any law regarding tax system, s/he can give application in inland revenue
department regarding his confusion and he will get the clarification in
written form from the office.
8. Right to administrative review: administrative review is related to
monitoring and checking of decisions made by tax officers and seeing
weather they are in compliance with existing laws or not. If tax payer is not
satisfied with such laws, he can ask for justice. Section 115 states that, for
doing so, he must give application in inland revenue department.
9. Right to appeal in revenue tribunal(section 116): if taxpayer is not
satisfied with decision of administrative review, he can re apply in revenue
tribunal. First tax payer can complain about decision of tax officers in
administrative review and if s/he is still not satisfied. s/he can re apply in
revenue tribunal. While applying in revenue tribunal 50% of taxable amount
and 100 % of fines shall be paid as collateral. 1 copy of application provided
27
in revenue tribunal along with application should also be submitted to inland
revenue department within 15 days of application.
10. Right to tax refund: section 113 states that if taxpayer pays more
amount than s/he should have actually paid, than there is provision of refund
of such amount or such amount can be deducted from next tax payment s/he
has to make. Refund can be received within 60 days of application of such.
To get the excess amount back, one must apply within 2 years.
11. Right to know about possession and auction: section 104 states that
government should provide notice, if it needs to capture the asset of tax
payer. This notice must include details of asset to be captured, limit of
amount from such assets, information related to tax and fines while
auctioning such property.
Individual Couple
Tax Tax
Particulars Rs rate Rs rate
first tax slab 250,000 1% 300,000 1%
next 100,000 15% 100,000 15%
balance
exceeding 350,000 25% 400,000 25%
Table 1: income tax rates of Nepal
28
Notes:
1. Natural person working at remote areas are entitled to get deduction from
taxable income to a maximum of Rs. 50000.
2. Natural person with pension income included in the taxable income shall
be entitled to deduct from taxable income an additional 25% of amount
prescribed under first tax slab.
3. Incapacitated natural person shall be entitled to get deduction from
taxable income an additional 50% of amount prescribed under first tax slab.
4. A Resident natural person who has procured life insurance and paid
premium amount thereon shall be entitled to a deduction of actual annual
insurance premium or Rs. 20000 whichever is less from gross taxable
income.
5. A Resident natural person who has procured Health Insurance and paid
premium amount thereon shall be entitled to a deduction of actual annual
insurance premium or Rs. 20,000 whichever is less from gross taxable
income.
6. In case of the employee employed at the foreign diplomatic of Nepal only
25% of the foreign allowances are to be included in the income from salary
while calculating tax.
7. In case of the employee posted outside Nepal is getting foreign allowance
will get 75% rebate of such allowances.
8. In case of the female employee whose taxable income is only from
employment than 10% rebate is allowed on tax liability.
9. In case of individual having income from export, tax rate of 15% is
applicable in place of 25%.
10. Productive industries, except tobacco and alcohol industries are eligible
to get 50% discount on land registration fee.
11. Special Industries related with manufacturing, tourist services, electricity
production and distribution listed on NEPSE shall be provided with
concession of 15% on applicable tax rate. This budget has included
Agricultural, Forestry and Mineral Industries also in to the category of
Special Industries.
29
2.4 Coverage of income tax
The Draft Income Tax Act 2001 (followed by Income Tax Act 2002/2003)
has classified income into three major heads which are taxable. However,
the sources of income under each heading might have been updated from
time to time till now. But, the major types of income included under each
head as
as defined by this act are as follows :
1. Employment Income :
All payments or benefits received in respect of employment, including past
or future employment, are made taxable. For example, payments related to
the change of terms of employment, fringe benefits, various types of
allowances, payments received through third parties all are made taxable.
2. Investment Income :
All types of investment income including dividend, interest, natural resource
payment, rent, royalty, gain from unapproved fund interest, or retirement
payment made by an approved retirement fund are included in the taxable
income. Interest, dividends, royalties all are defined broadly. Capital gains
realized on the disposal of fixed assets are also included in the income.
Disposal is defined broadly.
3. Business Income :
Profits and gains from conducting from conducting the business are
considered as the business income for the purpose income tax. This type of
income may include; inter alia, service fees, amount derived from the
disposal of trading, and net gains from the disposable of business assets or
liabilities, etc.
However, though these are the incomes underlying each head, the income
tax revenue has been divided into main four groups viz., individual income
tax, corporate income tax, interest tax and house rent tax. Of these taxes,
corporate tax is collected from the government corporations, public and
private limited companies. Individual income tax is collected from
individuals and proprietorship firms. Interest tax is collected from banks and
30
finance companies that pay interest on all types of deposits and the house
rent tax levied on income obtained from renting out lands and buildings.
( Rup Khadka, 2001)
2.5 Income Tax Rates for Sole Proprietorship firms (RSTCA Nepal)
Sole Propritorship
Firm
Individual Couple
Tax
Particulars Rs Tax rate Rs rate
first tax slab 250,000 1% 300,000 1%
next 100,000 15% 100,000 15%
balance
exceeding 350,000 25% 400,000 25%
Table 2: Income Tax rates for sole proprietorship
31
2.6 Income tax rate for non business income (www.ird.gov.np)
non business
income
Individuals Couple
Tax Tax
Particulars Rs rate Rs rate
Amount
exceeding 250,000 10% 300,000 10%
Table 3: income tax rate for non business income.
In case land and building is owned for more than 5 years, 2.5% is only
charged, if less than 5 years than they will be charged at 5%.
In case the disposed land & buildings has been owned for less than 5 years,
tax rate of 5% shall apply.
32
In case of gain from disposal of shares of listed entities, 5% tax rate shall
apply for resident natural person.
Gain from sale of building owned and resided for less than 10 years and
disposed for more than Rs.30 lakhs and gain from sale of land disposed for
more than Rs. 30 Lakhs
The tax is collected on source, deducted as withholding tax (WHT). The tax
payer should submit tax
returns to avail exemption benefit.
33
2.10. Special tax rates and concession for natural resident person
34
Employees working in Diplomatic Agencies
Category A: Rs 50,000
Category B: Rs 40,000
Category C: Rs 30,000
Category D : Rs 20,000
Category E : Rs 10,000
35
2.12 Taxation of Business & Entities ( Normal Tax Rates Applicable
tax)
General companies/ firms/ industries. 25%
Special Industries. 20%
Banks and Financial institutions. 30%
General Insurance Companies 30%
Entities engaged in business of petroleum products 30%
Industries producing products with tobacco as basic raw material and
industries producing liquors, beers and similar other products. 30%
Entities involved in operation of roads, bridges, tunnels (including
cable-car), ropeways, sky bridge. After construction. 20%
Entities involved in trolley bus 20%
Cooperative societies registered as per cooperative act 2048 and
engaged in business other than tax exempt 20%
Export income of entity with source in Nepal 20%
36
Special industry with capital investment of more than Rs 1 billion and
employing 500 individuals during the whole year and 50% of applicable rate
thereafter for next three years. 0% for first 5 years of operation
Agriculture based industry providing direct employment to 100 or
more Nepalese national during the year and all the employees shall
exclusively be the Nepalese national. 70%
Tourism industry providing direct employment to 100 or more
Nepalese national during the year, and all the employees shall exclusively be
the Nepalese national. 70%
Tourism industry providing direct employment to 100 or more
Nepalese national and all employees should exclusively be Nepalese. 70%
Industries established in special economic zone of hilly district as
specified by the government and mountain district. 0% for 10 years and 50%
thereafter.
Industries established in special economic zone of other areas. 0% for
5 years and 50 % of rate thereafter.
Income from foreign technology, management fee and royalty earned
by foreign investor from industries established in special economic zone.
50%
Capitalization of profit by special industry, agro- based industry and
tourism industry established at special economic zone for capacity
expansion. Dividend tax- Nil
Industries operating in Technology Park, Biotech Park, and IT park
and involved in software development, statistical processing, cyber caf,
digital mapping. 50%
Entity involved in generation, transmission or distribution of
hydroelectricity within end of chaitra of 2080. 0% for 10 years and 50 % for
next 5 years of applicable Rate.
In case of dividend of industries in special economic zones, dividend
tax is exempt for first 5 years of operation and 50% concession is provided
for dividend tax in next 3 years.
Income from construction and operation of roads, bridges, tunnels,
ropeway, sky bridge of investment and operation of. 40% rebate on
applicable rate.
37
Industries producing brandy, cider and wine based on fruits and
established in remote areas. 40% rebate for 1st 10 years.
Industries related to Tourism sector or aviation company for
international flights with capital investment of more than Rs 2 billion. No
tax for first 5 years and 50 % for next three years.
2.14 Income Tax for Person choosing to pay Tax based on Turnover
Resident Natural Persons who derives income only from business having
source in Nepal with annual business turnover exceeding Rs. 20,00,000 and
which is below Rs. 50,00,000 and not registered for VAT purpose may
chose to pay tax as below. In such case, the person cannot claim medical tax
credit or advance tax arising out of tax withheld by withholding agent.
38
Nature of business Rate of tax
Person dealing in goods which are 0.24% of turnover
sold on the basis of commission-the
rate of commission of which is up to
3% or sold by adding up to 3% value
while selling such goods including
gas, cigarette.
Person dealing in goods not specified 0.75% of Turnover
above
Person dealing in services 2% of Turnover
Table 6: Tax rates based on turnover
The person who derives income from consultancy or expert services that are
provided by a natural person including doctor, engineer, auditor, lawyer,
sportspersons, artist or consultant cannot choose to pay turnover tax.
39
that is not set-off in seven years can be carried forward indefinitely to set off
against gain from disposal of non-business chargeable assets.
WHT or TDS is final tax if the payment falls within the list of final
withholding payment. Final withholding payments basically include:
a. Payments received by natural persons other than in connection with
business such as gains from investment insurance, retirement payments,
interest etc.
b. Windfall gains
c. Payments received by tax exempt organization
d. Payments made to non-resident person
40
e. Dividend distributed by resident entity and benefit distributed to a natural
person by Mutual Fund
f. Meeting allowance, Payment for part time lecture
Even if the payer fails to deduct WHT, it is regarded that WHT has been
deducted by the payer (deemed WHT). The Withholding taxes deducted
from the recipient and the return of such taxes shall be filed within 25th of
next month as per Nepalese calendar for every deduction in each month.
The person choosing to pay tax based on turnover shall deposit tax withheld
by it while making payment of tax in installments as per Sec. 95 (1), i.e. by
Poush end (Mid January) along with installment amount and by Ashad end
(Mid July) along with second installment tax amount.
The house rent tax for an Income Year shall be deposited at once during the
month of Ashad of the particular Income Year (applicable to resident person,
not in connection with business)
41
2.18 Exceptions- WHT not required
42
2.19 Tax Assessment, Appeal & Review and Renewal of Tax Exemption
Certificate
1 Self Assessment
The taxpayer is required to make self assessment of its tax and should file
annual return and pay tax within 3 months from the end of an income year.
So, the tax should be paid and return should be filed within Ashoj end 2074
(Mid October, 2017) for the income year 2073/74 (2016/17). However, a
taxpayer may have due date extended for a maximum period of 3 months i.e.
up to Poush end 2074 (mid January, 2018) on request to IRD with bonafide
reasons for such extension.
2 Amended Assessment
The tax return filed as per self assessment by a taxpayer is not final. Tax
Authority may revise the assessment within four years from the date of
submission of tax return under self assessment. It may revise it as many
times as it deems necessary but within the four years period. If tax authority
obtains evidence that the tax return of any year is misleading due to
fraudulent assessment, it may revise the assessment at any time after the
submission of return, but within one year of obtaining the information. If
any authorized body restricts tax authority to make additional assessment,
the tax authority cannot make amended assessment.
Tax Exempt Organizations are also required to submit tax returns in cases
where the income is composed of such incomes which are not exempted.
After renewal of tax exemption certificate, a new certificate is issued by Tax
Officer. A Tax Exempt Organization cannot enjoy tax exemption benefits
unless the certificates are renewed.
44
2.20 Special Budget Proposals A. Tax Proposals- Income Tax & VAT
45
All students departing from Nepal who are obtaining exchange facility for
educational fees: 1% of Fees at the time of granting such exchange facility
Infrastructure Tax
Rs. 5 per liter at the point of import when importing aviation fuel, petrol and
diesel.
Road Repair and Improvement Fees:
Rs. 4 per liter in petrol and Rs. 2 per liter in Diesel at the point of import.
Royalty of Casino
8.1. Royalty of Rs. 30 Million per annum by the license holder which is Rs.
7.5 Million for gaming industry using modern machines and equipments
8.2. The amount shall be paid within 2 months of the beginning of fiscal
year
47
Respondents Number
Business houses 30
Individuals 30
48
g. Publications, Budget Speeches and Economic Survey of various
fiscal year of Ministry of Finance, the Government of Nepal.
h. Newspapers, such as, Gorkhapatra, The Rising Nepal, Kantipur Daily, and
so on
i. Publications of various inland revenue department.
j. Websites: The collected data through secondary sources have been
tabulated in different ways according to the requirements of the study
49
Chapter 4
DATA ANALYSIS AND PRESENTATION
50
4.2 Monthly salary of the respondents
Monthly Income
Less More than
Group 500,00-
than 100000-500,000 10,00,000
10,00,000
100,000
Business 10
8 5 7
organizations
Employment 24 6 - -
Total 60
Table 8: Monthly salary of respondents
51
4.4 Knowledge about current self assessment process
Question no. 5 in the questionnaire had asked about whether the respondents
are knowledgeable about the current self assessment system or process of
income tax assessment. The response was to be given (to be ticked in the
question) in yes or no answer. Their response is shown in the table
below.
The table shows the percentage of respondents in each group who know or
dont know about the current system/process of income tax assessment. The
tables show that most of the respondents are not knowledgeable about the
current process/system of income tax assessment. However, there is also
significant portion of respondents who know about it. It is likely that those
who are employees do not know about the process or system of income tax
assessment since their income tax is assessed and submitted by the
organization itself. But, it is also found that many business organizations are
also not knowledgeable about it. According to opinion survey only 47% of
business organizations are knowledgeable about current income tax
assessment process. This may be because many small business organizations
use the service from 3rd party to do their accounting and legal work.
52
Figure 1: Pie chart on awareness about tax assessment system from business
houses
53
problems of tax assessment process and asked to rank 1 for most important
reason, 2 for less important reason and so on.
The answer of the respondents shows that, most business organizations think
that major problem in income tax assessment process is, separate taxation
report is required for general expense, which is difficult to prepare during
the time of assessment. Second problem they see is the lack of systematic
account keeping in Nepalese business organizations, which pose as a
problem in tax assessment. Many small organizations use 3rd organization to
do their accounting and taxation work. They may manipulate the datas.
Third reason is that since separate taxation report is required, it is more time
consuming, which creates complex legal process which is the 4 th problem.
Need to provide audited balance sheet during tax assessment is considered as
5th problem and finally 6th problem is tax officers reacting to false bills. As
many business organizations get the bills without any VAT or PAN numbers
in it in their daily transactions. This bills cannot be presented for tax
assessment as tax officers will not accept these kind of bills.
It can be shown in following pie- chart as well.
54
Figure 3: pie chart: problems of tax assessment
55
23.7% respondents think that main problem of income tax evasion is that tax
payers get no benefits for paying their taxes. 19.9 % respondents think poor
enforcement of laws related to tax as reason for tax evasion. 19.5%
respondents were of the view that inefficient tax administration is the reason
for tax evasion. 18.7 % of respondents think that people are evading tax due
to widespread practice of illegal business in the country who dont pay tax at
all. And remaining 18.2% respondents think that people have poor taxpaying
morality.
The individual response shows that 27% of respondents think that reason for
wide income tax evasion is tax payers gets no benefit from government.
They just pay tax for nothing in return, which is why they are de-motivated
to pay tax. 25% believe that inefficient tax administration is another reason
for tax evasion.23% of respondents thinks that there is very poor taxpaying
morality in Nepalese individuals. 11% respondents believe that there are
many illegal businesses in operation so tax evading culture is growing.
56
Figure 5:pie chart of business houses reason for tax evasion.
57
particulars Business house (%) Individuals(%)
Rate of import tax is 20.80 25
high
Vat is not needed for 17.25 19.7
certain amount which
may hamper big
organizations
Tax assessment system 21.78 8.3
is not systematic
tax evasion culture 18.72 22.3
Corrupt tax officers 21.41 24.7
total 100 100
Table 13: Problem of income tax for business houses
Most of the business houses think that main problem in tax system of Nepal
is that tax assessment system is not systematic. Second highest opinion was
of tax officers being corrupt. Tax officers try to take the full advantage of
any mistakes or errors that business houses have made by corruption. Third
in majority thinks that high rate of import tax causes problem in operating
business. Specially, business that requires importing of raw materials or
58
finished product from abroad view it as major problem. The rate of import
tax is above 200%, which increases the price of product. As a result
businesses face competitive disadvantage. 17% of respondents think that
there is problem in VAT. vat is not needed for certain amount, so small
business organizations can take full advantage of it, however big
organizations have high transaction amount and need to go through vat. so
big business houses may be affected to some extent.
Most of the individual respondents 25% of them think that main problem in
tax system of Nepal for business houses is rate of import tax is high. So that
the price of imported goods increases too. Second highest majority thinks
that corruption in tax office is second problem. 22% individuals think that
high tax evasion culture is another problem of tax system of Nepal.
59
4.8. Tendency of business organizations to save tax
Question 9 asked about whether business organizations have adopted any
measures to save tax? This question was asked only to business organization
and not to individual tax payers. The result is shown in table
Particulars Percentage
Yes 51%
no 49%
Table 14: tendency of business houses to save tax.
60
Answer choice responses percentage
CIT / contribution to 8 38.10
approved retirement fund
Insurance pay 5 23.81
Corporate social 4 19.05
responsibility
donation 4 19.05
total 100
Table 15: mechanism to save tax
Most of the business organization has opened account for their employees in
citizen investment trust that is 38.1% of business organizations are saving
tax through contribution to retirement fund. 23% of business organizations
have saved their tax by doing insurance. 19% of organizations are doing
corporate social responsibility which helps them to save tax and 19% of
organizations are saving tax through donation. However, only donation upto
100,000 will help in saving tax according to the law.
4.9. Mechanism to make tax payment easier and rational for tax payers
Question 10 was about the mechanism that can be adopted to make the tax
payment easier and rational for tax payers. Respondents were asked to rank
1 for most important reason, 2 for less important reason and so on.
61
The data gathered from opinion survey are presented below:
details No of Percent No of Percentage
business age % individual %
houses respondents
education and 18 19 15 30.61
training to tax
officers and tax
payers
Transparency of 16 18 20 40.82
rules and
regulations to avoid
corruption
Motivation to tax 14 14 -
payers should be
provided
Guatantee from 15 17 14 28.57
government to get
the benefits
Providing awards 13 14 -
for best tax payers
Easy access/ ease 15 17 -
of payment
Total 100 100
Table 16: mechanism to make tax payment easy and rational
In this question I tried to understand tax payers view regarding, how we can
make the current tax system easier and rational for tax payer.
Most of the business organizations think that education and training should
be given to tax officers and tax payers. There are many small companies
who hire another company to perform its entire accounting works because
they dont understand the tax laws and view it as complex work. If we could
provide a small training of 1 week, than we can help all the business
organization (mostly small) to understand about the functioning of tax
62
system and the motive behind the law, this way there wont be any 3rd
person between company and tax office.
18.11 percent of respondents think that the tax laws should be made more
transparent so that they can avoid corruption, however tax officers like
Bhav Nath Dahal have different view regarding this matter, they say tax
law is transparent enough and if you make tax assessment of your company
yourself without going to any third party, you wont face any problem you
can easily pay tax without bribing anyone. However he also agrees that
there are some problems in tax system.
Third in majority, think that tax payers are having difficulty in paying tax
because of limited access to tax office. If someone goes to pay tax, than it
will take full one day of that person. So, small companies with limited staffs
are mainly facing this problem. Many business organizations think that tax
payment mechanism is not good enough and we can implement online
payment of tax which will be much faster and easier for tax payers.
Fourth in majority, thinks that there should be tax recognition from
government, meaning that, they should get benefits from government for
paying the tax. If we look at country like America tax payers get different
kinds of facilities and benefits for paying tax and still they evade tax, ours is
a country where we dont get any benefit so tax payers have propensity to
evade tax. 13.94 percent of respondent think that awards should be provided
to best tax payers. The results are illustrated in Venn diagram:
63
Figure 9: pie chart showing rational mechanism.
64
Fig 10: pie chart showing areas of improvement in current tax system
Source: business houses opinion survey
4.11: Individual tax payers knowledge about the type of tax they pay.
Here I tried to understand the individual tax payers knowledge about the
different kind of tax they pay.
This question was asked only to individual tax payers who work in different
organizations. This was a tricky question. Here I tried to understand
individual tax payers knowledge regarding the type of tax they need to pay.
Basically all individuals pay income tax, VAT and Excise duty. Where
income tax is direct and VAT and Excise duty are indirect tax. However
when asked non of the respondents said that they paid all of these tax. So we
can say that tax payers knowledge regarding tax they pay is really poor.
65
Figure 11: pie chart of individuals knowledge about tax they pay
66
no one wants to pay a large portion their income as a tax, even those with a
very high levels of income. This can also be shown in the following pie
chart.
68
Chapter 5
SUMMARY, CONCLUSION AND RECOMMENDATION
5.1. Summary
For the tax payers who are under business houses, they find dealing with tax
officials and tax offices very problematic. They face problems in assessing
and filing the income returns at the end of the year. The respondents under
this research who are mostly under business argue that current assessment
process/system of income tax is very time consuming and requires complex
legal process. In reality, this is also true because the system demands many
documents and the process is rather lengthy. Further, there is the harassment
from tax officers as they exert their power on tax payers. In fact, the
government personnel in reality try to exert their power over the public
when providing specific service.
69
updates are made from time to time in the provisions of existing income tax
acts and rules, which are not easily known. When, gathering information
about the current exemption limit, especially to those who has just started a
business, one has to look for primary source such as tax office or the tax
experts. Such information is rarely available through secondary sources such
as published sources or internet. If anyway, the information is available, it is
the information related to past years and not current year. Apart from
unavailability of information, there is also a lack of awareness among the tax
payers about the current system of income tax.
Large portion of respondents are not aware about the tax assessment system
of Nepal. It is likely that those who are employees do not know about the
process or system of income tax assessment since their income tax is
assessed and submitted by the organization itself. But, it is also found that
many business organizations are also not knowledgeable about it. This may
be because many small business organizations use the service from 3rd party
to do their accounting and legal work.
Most of the business organizations think that major problem in income tax
assessment process is that, separate taxation report should be prepared when
accessing the income, which is difficult to prepare during the time of
assessment. Apart from this most of the business organization also lack
systematic account keeping system, which pose as a problem in tax
assessment. .It is more time consuming. Business organizations are also
required to provide audited balance sheet during tax assessment.
The response towards the practice of widespread tax evasion was also build
around the idea of more tax burden or no benefits involved. However,
the evasion is also caused by poor enforcement of laws and rules related to
the income tax act. Tax administration is also inefficient. It is also true in the
case of Nepal that there is poor taxpaying morality among tax payers. Even
in developed country, where tax payers get different benefits, people try to
evade tax. Ours is the country where tax payers gets no benefit at all so
people try to pay as little tax as possible. They even use clever tricks to
70
evade tax. Most of the business organizations increase their expenses and
reduce the revenues than the actual figure, so that they will have to pay less.
The main problem in income tax system of Nepal is that tax assessment
system is not systematic. Large portion of respondents think that tax officers
are corrupt and they try to take unfair advantage from any mistakes tax
payers make. Many business organizations that imports goods from foreign
country and sell it in Nepal think that, rate of import tax is too high, more
than 200%, which increase the price of goods.
There were also the respondents who adopted both measures like CIT fund
as well as insurance. Many organizations are also spending money in
corporate social responsibility and donations. However, only donations up to
Rs 100,000 will help to save tax. Some also give donations to save tax,
saying that it is more beneficial in terms of personal satisfaction than paying
tax to the government without any return. Hence, it can be analyzed from
this research that people see tax as a burden and try to save it from various
measures as far as practicable.
Most of the business organizations think that education and training should
be given to tax officers and tax payers. There are many small companies
who hire another company to perform its entire accounting works because
they dont understand the tax laws and view it as complex work. If we could
provide a small training of 1 week, than we can help all the business
organization (mostly small) to understand about the functioning of tax
system and the motive behind the law, this way there wont be any 3rd
person between company and tax office.
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Another majority of respondents think that tax payers are having difficulty
in paying tax because of limited access to tax office. If someone goes to pay
tax, than it will take full one day of that person. So, small companies with
limited staffs are mainly facing this problem. Many business organizations
think that tax payment mechanism is not good enough and we can
implement online payment system which will be much faster and easier for
tax payers.
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organizations like Nepal Electricity Authority and Nepal Telecom for
collection of revenues.
It is also found from the survey that, individuals do not always ask for bills
after shopping or purchase, allowing shop keepers to evade tax. Even if they
ask for bills, retail shop provides them bill in a piece of paper without VAT
and PAN number and customers accept it. This helps many business
organizations in evading tax. Individual buyers need to be educated to help
them understand the importance of taking bills so that government will earn
more revenue which will be further invested in development of country.
Eventually individuals will get benefit from it.
5.2. Conclusion:
Tax is something paid without any hope of benefit because government will
spend it all over the country. Even saints paid tax in old days. They paid tax
to nature in the name of GOD. No one wants to pay tax but we need to be
responsible towards it and think it as a responsibility and not as a force.
People try to evade tax. Even in developed country, they try to evade tax,
ours is a country where tax payers gets no benefits at all so they try to evade
tax through various legal and illegal means. However according to Benjamin
Franklin, In this world nothing can be said to be certain, except death and
taxes.
However government should constantly refine its tax laws and change it
according to the changing time. People think income tax as burden. Even
those who are capable of paying tax found it burdensome, without any direct
or indirect benefits to the taxpayers. It was also found that those who pay tax
pay it reluctantly. They are more inclined towards saving tax through legal
or illegal means (though there were very few respondents who used clever
techniques or illegal method to save tax).
Business houses, find dealing with tax officials and tax offices very
problematic. They face problems in assessing and filing the income returns
at the end of the year. They argued that current assessment process/system
of income tax is very time consuming and requires complex legal process.
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There is tax evading culture in the country. People try to save as much tax as
possible through various legal and illegal means. Most of the business
houses increase their expense and reduce their income and try to save tax.
Besides from this people need to be educated about the motives behind the
tax rules so that they understand the importance of paying tax. So first thing
Nepal should do is to educate tax payers and tax officers about the tax acts
and its motive. Besides from this government should provide recognition to
tax payers who pay tax in form of some benefits.
Another problem in the tax system was found to be lack of access to tax
offices to pay tax. Many small organizations said that, if someone goes to
tax office to pay for tax. Their whole day will be wasted and government
officers try to take undue advantage of any small mistakes tax payers have
made.
There is difficulty in getting refund too. If tax payer makes any mistake, s/he
will be penalized, but if they pay more tax by mistake, it is not easy to get
refund. You will not be refunded, but you will have to adjust that money in
next lot of paying tax.
Another problem that I found from my study was that, all the tax payers are
categorized in same group. One who pays high tax and one who pays less
tax are kept in same category. High tax payers should have received
incentives which is not seen in Nepal.
If a person wants to start a business in Nepal, s/he well have to spend about a
week going to different departments of government. If they want to rent a
government land, it will require around 3 months. However in our neighbor
country India, new comers can start business within 24 hours if they want to.
This type of support from government is not available in Nepal. This type of
support is necessary to develop the spirit of entrepreneurship in people. If
more business runs in the country, government will able to collect more tax.
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5.3. Recommendations
On the basis of the findings, the recommendations can be made on the
following areas:
Success of income tax system is highly dependent upon the quality of
income tax law. So, the income tax law should be clear, comprehensive and
simple. It should not involve any loopholes or ambiguity. Therefore, it
should be reviewed and reformed frequently. The following suggestions can
be given for the improvement of existing tax laws and policies:
1. The related provisions should be aggregated in one head or section,
the language used should be simplified and vague words should be well
defined.
4. The provision of punishment to the tax officers who harass tax payers
should be widened.
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6. There should be recognition to tax payers in form of some benefits.
For example government can introduce law saying 5% discount on taxable
amount if paid within 1st week after completion of economic year.
8. There should be easy access of tax office to tax payers. Online tax
payment mechanism can be introduced which will provide access to tax
office from anywhere. Online payment has already been enabled in different
government offices.
9. The administration should try to increase effective public participation
to minimize the income tax evasion. Applying the following suggestions can
help to minimize the tax evasion :
Increase the administrative effort.
Enforce laws to maintain proper accounts.
Minimize illegal business activities.
Revenue department should also try to find out the income tax evaders
through spying activities or research mechanisms.
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level should also be considered. This is because without motivation of the
employees, providing training is worthless. So, at first, the sole motivating
factors of the staffs should be recognized. In government organizations, the
sole motivating factors of the employees are generally the good incentives
and rewards. But, the government has always failed to recognize such
motivating factor or has shown no interest in providing benefits, incentives
and rewards to its personnel. This is the reason corruption mostly occurs in
government offices. Because of low benefits of working in the government
organizations, the employees here also give less effort in performing their
job effectively because of which the tax evaders are taking advantage. So,
the government should also enhance mechanism of good incentives and
rewards to its personnel.
11. In order to make the income tax payment friendly to the tax payers,
the slabs of tax rates should also be reduced to only one for the personal
income tax with a single rate that is satisfactory to the tax payers. Further,
the progressive tax rates can be levied on the partnerships and corporations
but with suitable rates. However, according to the principle of economics,
tax causes dead-weight loss. If the tax is high, the higher will be the dead-
weight loss and the government can raise only a small amount of revenue
(N. Gregory Mankiw). Hence, the government must also be aware of side-
effects caused by taxation. To add more, the government must also employ
those who are more knowledgeable in economics.
Though efforts have been made to hold these characteristics in the existing
income tax system, the complete success hasnt been achieved. The current
political scenario of the country has also acted a hindrance in such efforts.
There are many things to be reformed in the existing income tax system of
Nepal. Therefore, it is the responsibility of all the Nepali citizens to
participate in the efforts made by the state for introducing Nepal as an
advanced and independent (if not developed) nation with systematic policies
and procedures through better mobilization of internal resource.
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79
APPENDIX
BIBLIOGRAPHY
Wikkipedia.org
Taxworld.org
www.thinkexit.com
Debt.org
Handbook on Taxation
N. Gregory Mankiw, 1997
www.nationsencyclopedia.com
H.P. Marhatta, 1980
Rup Khadka, 2001
Bhava Nath Dahal 2016
Income tax act 2058
RSTCA Nepal
www.ird.gov.np
Central bureau of statistics
Hello, my name is Saroj Bhusal. I am student of MBA (Global Business), at South Asian
Institute of Management. I am conducting a survey on problem and prospect of tax
system of Nepal as part of my thesis. This research is done for the sole purpose of the
fulfillment of the course of Masters of Business Administration. So please help me by
filling this questionnaire. Thank you.
Questionnaire for income tax payers
1. Name of organization
Amount: ..
5. Are you aware about current Self assessment process/system of income tax? If yes
go to question no. 6, else go to question no. 8.
Yes ( ) No ( )
6. What are the problems you see in tax assessment system of Nepal? Please rank 1 for
most important, 2 for less important and so on.
Need to provide audited balance sheet( )
Tax officers reacting to false bills ( )
Separate taxation report is required ( )
More time consuming. ( )
Complex legal process. ( )
Lack of systematic account keeping(
Other reasons (you can specify) ( )
..
8. Where do you think lies the major problem in Income tax system of Nepal? Please
rank 1 for most important, 2 for less important and so on.
Rate of Import tax is very high ( )
Value Added Tax is not needed for certain amount, which may affect large
business houses ( )
Tax assessment process is not systematic( )
Tax evasion culture ( )
Corrupt tax officers( )
Others
Why?
10. What mechanism can be implemented to make the tax payment easier and rational for
tax payers? (Please rank from 1-5, 1 for most important, 2 for important, 3,4 and 5 for
less important accordingly)
Education and training to tax officers and tax payers (business houses) ( )
Transparency of rules and regulation to avoid any confusion ( )
Tax recognition.(guarantee from government to get the benefit) ( )
Providing award for best tax payers. ( )
Ease of payment / easy access ( ).
11. What can be the areas of improvement in current tax system of Nepal? You can
choose more than 1 options.
Education and training to tax officers and tax payers ( )
Provide recognition to tax payers in form of some benefits ( )
Make easy access for payment of tax( )
Increase the boundary of taxable amount ( )
Hello, my name is Saroj Bhusal. I am student of MBA (Global Business), at South Asian
Institute of Management. I am conducting a survey on problem and prospect of tax
system of Nepal as part of my thesis. This research is done for the sole purpose of the
fulfillment of the course of Masters of Business Administration. So please help me by
filling this questionnaire. Thank you
1. What is your profession:.
6. Do you think that government can increase tax revenue by increasing tax limit?
Yes( ) No( )
Why.
10. Where do you think lies the major problem in Income tax system of Nepal? Please
rank 1 for most important, 2 for less important and so on.
Rate of Import tax is very high ( )
Value Added Tax is not needed for certain amount, which may affect large
business houses ( )
Tax assessment process is not systematic ( )
Tax evasion culture ( )
Corrupt tax officers( )
Others
Why?
11. What mechanism can be implemented to make the tax payment easier and rational for tax
payers? (Please rank from 1-5, 1 for most important, 2 for important, 3,4 and 5 for less
important accordingly)
Education and training to tax officers and tax payers (business houses) ( )
Transparency of rules and regulations to avoid corruption ( )
Tax recognition.(guarantee from government to get the benefit) ( )
Providing award for best tax payers. ( )
Ease of payment / easy access ( ).
12. What can be the areas of improvement in current tax system of Nepal? You can choose
more than 1 options.
Education and training to tax officers and tax payers ( )
Provide recognition to tax payers in form of some benefits ( )
Make easy access for payment of tax( )
Increase the boundary of taxable amount ( )
5th National tax day:
5th National tax day was celebrated in Nepal in 2073 Mangshir 1 with the
motto pay tax with pride, we wish for prosperous nation. Surya Nepal pvt
ltd was recognized as the highest tax paying company and from individuals
Siddhartha shamsher Jabara was recognized as the highest tax payer.
Highest tax payers in different Tax payer
fields
Company Surya Nepal Pvt Ltd
Exporter Dabur Nepal
Highest VAT payer Nepal telecom
Company paying highest income tax Unilever pvt ltd
Business firm paying highest income Sipradi traders
tax
Agricultural company oom feed
Finance company National sahakari bank
Corporatives Chimek
Bank Nabil bank
Insurance company LIC insurance
Remittance company IME
Tourism industry Tara gaun regency
Small company Sangrila energy
Medium company Ciwek hospital
Person paying highest amount of tax Siddhartha smasher Jabara