Scanner CAP II Income Tax VAT

The Institute of Chartered Accountants of Nepal
Compiler
of
Suggested Answers
Income Tax and Value Added Tax
2010-2015
Compiler of Suggested Answers
IT and VAT
CAP II Examination
Chapter 1:
Basic Concepts

2 of 162
IT and VAT
CAP II Examination
Question No 1
Define Income, Windfall gain, Assessable Income and Taxable Income. (June 2011)(5 Marks)
Answer
As per section 2(ja) of the Act, income is the total amount received from business, employment,
investment or windfall gain. Income denotes the total receipts, which are included in calculation of
taxable income (sec. 7, 8 and 9).
As per section 2(ja1) of the act, windfall gains includes income from lottery, gift, prize, tip, win-
rings and other similar casual incomes.
As per section 6 of the act, assessable income is the sum of income from business, employment,
investment. In case of a resident person, it includes all income from any country for the concerned
income year and in the case of non resident person, it includes the income having source in Nepal.
As per proviso to section 6 of the act, assessable income does not include any concession under
section 11 and income of an Approved Retirement Fund under section 64.
As per section 5 of the act, taxable income is determined by deducting the amount of donation,
subject to limitation under section 12 and 12ka and contribution to approved retirement fund subject
to limitation under section 63 from the assessable income.
Question No 2:
Write short note of the followings with reference to Income Tax Act, 2058.
a. Tax (June 2013)(2 Marks)
Answer
1. As per sec 2 (Dha), "Tax" means income tax imposed under the Income Tax Act and includes
following payments:-
2. Expenses incurred in the process of creating charge and performing auction of the property of
tax Debtors by the department as mentioned in section 104 (8) (a);
3. Amount payable by a withholding agent Withholding agent or withholdee under section 90, or
amount payable by an installment payer under section 94, and on assessment under sections 99,
100,and 101; and amount payable by person who required to deposit tax under section 95 ka
4. Amount payable to the Department in respect of a tax liability of a third party under section
107(2), 108(3) or (4), 109(1), and 110(1);
5. Amount payable by way of interest and fees under Chapter 22; and
Amount payable by way of fines in order of the department as per section 129.
b. Debt Claim (June 2013)(2 Marks)

Answer
As per Sec 2(Tha) of Income Tax Act, Debt claim means a right of one person to receive a payment
from another person and includes a right to repayment of an amount paid by one person to another
person as well as deposits in banks and other financial institutions, accounts receivable, notes, bills
of exchange, bonds, and rights under annuities, finance leases and installment sales.
c. Exempt Organization (June 2013)(2 Marks)

Answer
3 of 162
IT and VAT
CAP II Examination
As per sec 2(Dhna), "Exempt organization" means the following entities:
i. Following entities registered with the Inland Revenue Department as an exempt organization:
a. a social, religious, educational, or a charitable organization of a public character established
without having a profit motive,
b. an amateur sporting association formed for the purpose of promoting social or sporting
facilities not involving the acquisition of gain,
ii. a political party registered with the Election Commission,
iii. a village development committee, municipality or district development committee,
Provided that, in cases where any person has derived any benefit from the property of that
organization and the monies obtained from that organization except in making payment for the
property or the service provided by any person to that organization or in discharging functions in
consonance with the objective of the organization entitled to exemption, tax exemption shall not be
granted.
Underlying Ownership (June 2013)(2 Marks)

Answer
As per Sec 2 (Ra) of Income Tax Act, "Underlying ownership" means following ownership:
in relation to an entity, an ownership created on basis of an interest held in the entity directly or
indirectly through one or more interposed entities by an individual or by an entity in which no
individual has an interest; orin relation to an asset owned by an entity, an ownership of the asset that
is determined on basis of proportion to the ownership held by the persons having underlying
ownership of the entity.
Payment (June 2013)(2 Marks)

Answer
As per Sec 2(Ha), "Payment" means:
i. the transfer by one person of money or an asset to another person or the transfer by another person
of a liability to the one person;
ii. the creation by one person of an asset that on creation is owned by another person or the decrease
by one person of a liability owed by another person;
the provision by one person of services to another person; and the use, or availability for use, of an
asset owned by one person to another person.
Trustee (December 2013)(2.5 Marks)

Answer
As per sec 2(u) of Income tax Act, 2058, A "Trustee" means an individual or Goothi or corporate
body holding assets in a fiduciary capacity, whether held alone or jointly with other individuals or
corporate bodies, and includes the following persons-
(i) any executor or administrator of a deceased individual's estate;
(ii) any liquidator, receiver, or trustee;
(iii) any person having, either in a private or official capacity, the
possession, direction, control, or management of the assets of an
incapacitated person;

4 of 162
IT and VAT
CAP II Examination
(iv) any person who manages assets under a private foundation or other
similar arrangement; and
(v) any person in a similar position to a person mentioned in subparagraphs (i), (ii), (iii) and
(iv).
Royalty (December 2013)(2.5 Marks)

Answer
As per sec 2(ak) of Income tax Act, 2058, "Royalty" means any payment made under a lease of
an intangible asset and includes any payment made for the following purpose:-
(i) the use of, or the right to use, a copyright, patent, design, model, plan, secret formula or
process, or trademark;
(ii) the supply of know-how;
(iii) the use of, or right to use, a cinematography film, video tape, sound recording, or any other
like medium and the supply of information concerning industrial, commercial, or scientific
experience;
(iv) the supply of assistance ancillary to a matter referred to in paragraphs (i), (ii) or (iii); or
(v) a total or partial forbearance with respect to a matter referred to in paragraphs (i), (ii), (iii) or
(iv). provided that, the term
Permanent Establishment (December 2013)(2.5 Marks)

Answer
As per sec 2(bb) of Income tax Act, 2058, "Permanent establishment" means a place where a
person wholly or partly carries on a business, and includes the following places:-
(i) a place where a person wholly or partly carries on a business through an agent, other than a
general agent of independent status acting in the ordinary course of business as such;
(ii) a place where a person has, is using, or is installing substantial equipment or substantial
machinery;
(iii)one or more places within a country where a person furnishes (whether through employees or
otherwise) related services (including technical, professional, or consultancy services) for a
period or periods aggregating more than 90 days within any 12 month period; or
(iv) a place where a person is engaged in a construction, assembly, or installation project for 90
days or more, including a place where a person is conducting supervisory activities in relation
to such a project.
Investment Insurance (December 2013)(2.5 Marks)

Answer
As per sec 2(am) of Income tax Act, 2058, "Investment insurance" means insurance of any of the
following classes:
(i) insurance where the event covered is the death of an individual who is the insured or an
associate of the insured;
(ii) insurance where the event covered is an individual who is the insured or an associate of the
insured sustaining personal injury or becoming incapacitated in a particular manner;
(iii) insurance where the insurance agreement is expressed to be in effect for at least five years or
without limit of time and is not terminable by the insurer before the expiry of five years except
in special circumstances specified in the contract;

5 of 162
IT and VAT
CAP II Examination
(iv) insurance under which an amount or series of amounts is to become payable to the insured in
the future; and
(v) reinsurance of insurance referred to under subparagraphs (i), (ii),or (iv); and
(vi) reinsurance of reinsurance referred to under subparagraph (v).
Company (June 2014)(2 Marks)

Answer
As per section 2(m), "Company" means any company incorporated under the companies' law
in force, and for the purpose of tax the following institutions shall also be treated as if they
were companies:
(1) Any corporate body established under the law in force,
(2) Any unincorporated union, board, association or society or sole proprietorship whether
incorporated or not and any group of persons or trust except a partnership,
(3) Any partnership firm consisting of Twenty or more partners whether registered or not
under the law in force, any retirement fund, cooperative institution, unit trust, joint venture,
(4) Any foreign company;
(5) Any other foreign institution as specified by the Director General.
Lease(June 2014)(2 Marks)

Answer
As per section 2(ab), "Lease" means the provisional right of any person to enjoy or use any
property except movable property belonging to another person, and this term also includes a
license, rent agreement, trenches, royalty agreement or right of a lessee/ tenant.
Investment(June 2014)(2 Marks)

Answer
As per section 2(al),"Investment" means the act of holding one or more properties or
investing such properties, except with the followings:
(1) Holding any property used by the owner thereof in personal use, or
(2) Employment or occupation.
Provided that holding non-business taxable property shall be deemed as investment.
Interest(June 2014)(2 Marks)

Answer
As per section 2(as), "Interest" means the following payment or profit:
(1) Payment under debt liability except the principal,
(2) Profit made from concession, exemption, premium under loan liability, alteration
payment or from similar payment, and
(3) The amounts referred to in Section 32 receivable as an interest out of the payment to be
made by a person who acquires any property under annuities or installment sale or of the
payment made to any person for the use of any property under a financial lease.
Receiver(June 2014)(2 Marks)

Answer
6 of 162
IT and VAT
CAP II Examination
As per Section 108 of Income Tax Act, 2058 “Receiver” means any of the following persons:
(1) a liquidator;
(2) a receiver appointed out of court or by a court in respect of an asset or entity;
(3) a mortgagee in possession;
(4) an executor, administrator, or direct heir of a deceased individual's estate; or
(5) any person conducting the affairs of an incapacitated individual.
"Payment" (June 2014)(2 Marks)

Answer
Section 2(ha) of Income Tax Act, 2058 defines the term "Payment" as follows;
Payment means;
a. The transfer of money, an asset, or a liability by a person to another person;
b. The creation of an asset by one person that on creation it is owned by another person or the taking
of an obligation of liability owned by another person;
c. Service provided by one person to another person; and
d. The use, or making available for use, of an asset owned by one person to another person.
"Business Asset'", "Depreciable Asset" and "Trading Stock"(June 2014)(3 Marks)

Answer
As per section 2(ka ta) of Income Tax Act, 2058, "Business Asset" means an asset used in business.
Provided, the term shall not include trading stock or a depreciable asset in business.
As per section 2 (ka, ra) of Income Tax Act, 2058, "Depreciable Asset" means an asset which is
used for generation of income from any business or investment and whose value declines due to
wear and tear, obsolescence, or the passing of time.
Provided, the term shall not include trading stock.
As per section 2 (ka yng) of Income Tax Act, 2058, "Trading Stock" means the assets owned by a
person and for sale in the ordinary course of business, work-in-progress on such assets and
inventories of materials that are to be included into such assets.
Provided that the term shall not include an asset in foreign currency.
Advance ruling and public circulars are different in nature. (December 2014)(2 Marks)
Answer
Public Circulars are issued to general public to achieve consistency in the implementation of Act
and to assist the tax officers and tax payers in application of the provisions of the law. The public
circular is mandatory for the department, but not for the public. If the tax payer is not satisfied with
the circular issued by IRD, he may choose for legal recourse. Detailed provisions are stated in
Section 75 of Income Tax Act.
Advance Ruling is issued to the applicant tax payer for clarifying application of tax law on
proposed arrangement of the applicant. The advance ruling is only applicable for the concerned
applicant and is not available for general public. Detailed provisions are stated in Section 76 of
Income Tax Act.

7 of 162
IT and VAT
CAP II Examination
Not all persons are required to submit Income Tax returns. (December 2014)(2 Marks)
Answer
Not all persons are required to submit income tax returns.
There are certain exceptions to provisions requiring submission of tax returns by the tax payer. As
per Sec. 97, the following persons are not required to submit tax returns:
 Person who do not involve in any economic activities leading to taxable income
 A natural person with only income from an employment based on a source in Nepal, with all
employers during the income year as resident persons and only one employer at a time and who
only claims medical costs and retirement contribution paid by the employer and do not claim
donations or gifts paid to tax exempt organization.
 Person earning final withholding paymentsNatural persons owning public vehicles who pay
presumptive tax as per Schedule 1 of the Act.
Right of Tax payer. (December 2014)(2 Marks)

Answer
Taxpayer‟s Rights as per section 74 of Income Tax Act, 2058;
i. Tax Payer shall abide by the duties in accordance with this Act.
ii. A taxpayer with respect of paying tax under this Act shall have the following rights:-
a. Right to get respectful behavior;
b. Right to receive tax related information as per the prevailing laws;
c. Right to get opportunity of submitting proof in own favor in respect of tax matters;
d. Right to appoint lawyers or auditors for defense; and
e. Right to secrecy in respect of tax matters and keep it inviolable
[Clarification:- For the purpose of this section, taxpayer means a person whom the tax is
imposed on and realized from as referred to in section 3.
Permanent establishment (December 2015)(5 Marks)

Answer
As per section 2(aab) "Permanent establishment" means a place where any person carries on a
business fully or partly, and this term includes the following place:
(1) A place where any person carries on a business fully or partly, through any agent except a
general agent who acts independently in the ordinary course of carrying on business,
(2) A place where any person's main equipment or main machinery is situated or used or installed,
(3) One or more than one place in any country where any person has delivered technical,
professional or consultancy service through an employee or in any other manner for more than
ninety days at one or several times in a period of any twelve months, or
(4) A place where any person is involved in a construction, installation or establishment project and
has carried out supervisory works of that project for a period of ninety days or more.

8 of 162
IT and VAT
CAP II Examination
Residential status of an individual(December 2015)(5 Marks)

Answer
The residential status of an individual is determined as below:
 If an individual stays in Nepal for 183 days or more in a period of consecutive 365 days
 If normal place of abode is in Nepal
 If the person in an employee of Nepal Government
Normal place of abode is clarified by Income Tax Directives to mean place where economic
activities of a person is concentrated.
If the person is not resident in an income year, he is regarded as non-resident.
Question No 4:
Mr. Rich has purchased a private building amounting to Rs. 2 crores on Kartik 23, 2060 at
Kathmandu. He sold such building on Rs. 3 crores on Poush 26, 2070. During such period, Mr. Rich
was gone abroad, intermittently for a period of 120 days. Will such building be considered as "Non-
Business Chargeable Assets"? What will be your answer if such building was sold after two months
(i.e. on Falgun 26, 2070)? (December 2014)(5 Marks)
Answer
Section 2 (da) (2) of Income Tax Act, 2058 has excluded the following assets from the definition of
"Non-Business Chargeable Assets" in case of an individual;
A private building of an individual that has been;
o owned continuously for ten years or more; and
o lived in continuously or intermittently for a total period of ten years or more.
In the given case, Mr. Rich has owned his private building for a period of ten years in which first
condition is satisfied. But he lived in for a period of less than ten years in which second condition is
not satisfied.
Hence, such building is to be considered as "Non-Business Chargeable Asset" as per Income Tax
Act, 2058.
But, in case where Mr. Rich sold such building after two months (on Falgun, 26, 2070) second
condition of 'lived in continuously or intermittently for a total period of ten years or more' will also
be fulfilled and hence such building shall not be considered as "Non-Business Chargeable Asset".
Question No 5:
State whether following statements are true or false with appropriate provision of Income Tax Act,
2058:
a) Any person who fails to pay Tax within prescribed time without reasonable excuse shall be
liable on contravention for a fine of an amount ranging from Rs. 50,000 to Rs. 80,000 or an
imprisonment for a term of not less than one month and not more than three months or both.
b) In case of person fails to maintain books of account and records as per section 81, the person is
responsible to pay fee higher of following amounts:
i) 0.1 % of turnover or gross receipt during the period for which the person fails to
maintain the accounts and records or
ii) Rs. 1000 per annum.

9 of 162
IT and VAT
CAP II Examination
c) The listed resident company deducted 15% withholding tax while paying interest having source
in Nepal to Tax exempt organization. The Tax exempt organization claims interest earned by it
from listed resident company as final withholding income.
d) In case of gain on the disposal of land & buildings owned by M/S ABC limited which has been
owned for less than 5 years, applicable Tax rate will be 5% and if the disposed land & buildings
has been owned for more than 5 years, applicable tax rate will be 2.5%.
e) Cooperatives societies are allowed to claim as expenses an amount equivalent to the amount set
aside in risk bearing fund to the extent of 15% of outstanding loan. (June 2014)(10 Marks)
Answer
a. False, as per section 123, any person who fails to pay tax within prescribed time without
reasonable excuse shall be liable on contravention for a fine of an amount ranging from 5,000 to
Rs. 30,000 or an imprisonment for a term of not less than one month and not more than three
months or both.
b. True, under section 117(2) In case of person fails to maintain books of account and records as
per section 81, the person is responsible to pay fee higher of following amounts:
i) 0.1 % of turnover or gross receipt during the period for which the person fails to maintain the
accounts and records or
ii) Rs. 1000 per annum
c. True, as per section 92(1) the interest income net of 15 % TDS having source in Nepal earned
by tax exempt organization from listed resident company is final withholding income.
d. False, the given tax rate is applicable for natural person only for non business chargeable assets.
Whereas the company is liable to pay applicable normal tax rate for gain realized on disposal of
land & buildings i.e. @ 25 % or 30%.
e. False, Finance Act 2071 under section 59 (1Kha) extended facility of the loan loss provision to
the cooperatives society, Now they are allowed to claim as expenses an amount equivalent to
the amount set aside in risk bearing fund to the extent of 5% of outstanding loan.
Question No 6:
State whether following statements are true or false with appropriate provision of Income Tax Act,
2058:
f) Progressive Income Tax rate is only applicable to entire income of resident natural person.
g) If tax-exempt entities are unable to submit their financial statement within the stipulated time limit,
fee of 0.1% per annum on income shall be levied.
h) TDS applicable on payment of vehicle hired by resident person to vehicle provider registered in
VAT is 1.5%.

10 of 162
IT and VAT
CAP II Examination
i) Tax exemption has been increased for annual interest income up to of Rs. 25,000 from Rs. 10,000 in
the amount deposited to the microcredit institutions, rural development banks, postal saving bank,
and cooperatives in the rural area.
j) Finance Act, 2072 has introduced mandatory requirement to submit income returns for the natural
person with yearly income exceeding Rs. 4 million. (December 2015)(10 Marks)
Answer
a) True, progressive income tax rate is applicable to income of resident natural person. However, there
are certain income of individual natural person which are based on presumptive basis.
b) True, as per section 117 (1Gha), If tax-exempt entities are unable to submit their financial statement
within the stipulated time limit, fee of 0.1% per annum on income as specified on financial
statement without any deduction submitted to IRD shall be levied.
c) True, as per section 88(5), TDS applicable on payment of vehicle hire by resident person to vehicle
provider registered in VAT is 1.5%.
d) True, as per section 11 (2 ka), Tax exemption has been increased for annual interest income up to
Rs 25,000 from Rs. 10,000 in the amount deposited to the microcredit institutions, rural
development banks, postal saving bank, and cooperatives in the rural area
e) True, as per section 97 (2), finance Act 2072 has introduced mandatory requirement to submit
income returns for the natural person with yearly income exceeding Rs 4 million.

11 of 162
IT and VAT
CAP II Examination
Chapter 2:
Residential Concept

12 of 162
IT and VAT
CAP II Examination
Question No 1
Write in brief the provisions of Income Tax Act in case of a married resident couple elect to be
treated as a couple. (December 2010)(5 Marks)
Answer
In the case of a married resident couples, each spouse is taxed separately. However, married resident couples
may choose to be treated as a couple for a particular income year. In such cases, their income will be clubbed
and added together, and the basic exemption threshold for couple applies. If a couple elects to be taxed as
couple, each spouse is jointly and severely liable together with the other spouse that the tax for the couple is
paid.
If the income of both spouses is calculated separately, each spouse can claim the basic threshold applicable
for individuals
Question No 2
What do you understand by the expenses of Domestic or Personal nature? (June 2011)(5 Marks)
Answer
Expenses of domestic nature or personal nature are not allowed for deduction for the purpose of
income tax. The clarification clause of section 21 explains the nature of domestic or personal nature
as follows:
- Interest incurred on amount borrowed to the extent to which it is used for personal purpose.
- Expenses of very personal nature incurred for an individual in providing residence, meals,
refreshment, entertainment or other leisure activities.
- Expenses incurred by an individual on conveyance from residence to office and office to
residence.
- Expenses incurred on an individual for clothing which is also suitable to wear outside the work
- Expenses incurred on education and training. But the expenses incurred on such training
directly relating to the business, yet not leading to a degree or diploma, are allowed for
deduction.
- Any expenses incurred to make a payment to a natural person or the expenses incurred for a
third person, except in and to the extent of the following conditions:
 The payment is included in calculating the income of the individual- such as house rent, driver
facility, gardener, servant, telephone in residence provided to an employee. If the expenses are
included in the taxable income of the individual, the expenses are allowed for deduction to the
person.
 The individual makes a return payment of an equal market value to the person as a
consideration for the payment.
Small amount incurred in this respect for which keeping an individual account is impracticable,
for tea, stationery, awards, emergency medical facility or any other expenses as provided by IRD
up to Rs. 500 at a time.
Question No 3:
Ram and Krishna had contributed Rs. 20 lakhs & Rs 30 lakhs respectively and deposited the amount
into a common bank account to be used to purchase a plot of land to resale the same later on. After
6 months of depositing the money into the bank account, they purchased a plot of land for Rs. 45
lakhs and got the land registered in their joint name (i.e. in the name of both Ram & Krishna

13 of 162
IT and VAT
CAP II Examination
jointly). Expenses on registration and commission at the time of purchase of land amounted to Rs.
500,000. They later on sold that plot of land at Rs. 86 lakhs and they have paid Rs. 6 lakhs as sales
commission and other incidental expenses related with sales. The bank has given interest @18% PA
on such bank deposit.
Calculate the amount to be incorporated as “income” in the hand of Ram and Krishna respectively
from above mentioned transaction. How much would be the interest income and how it is treated in
the hand of Ram & Krishna? ( June 2012)(5 Marks)
Answer
Amount
Particulars Remarks
Ram Krishna
Expenses
Cost of plot of Land 4,500,000
Other expenses 500,000
Apportioned on the
Total Cost of Land 5,000,000 2,000,000 3,000,000
basis of 2:3
Sales Income
Sales Price 8,600,000
less: Expenses 600,000
Apportioned on the
Net Sales Income 8,000,000 3,200,000 4,800,000
basis of 2:3
Income 1,200,000 1,800,000 in the ratio of 2:3

Apart from abovementioned income, Ram & Krishna have received interest income of Rs. 500,000
from the bank as interest for 6 months. This interest income shall also be shared between Ram &
Krishna in the ratio of 2:3 as follows:
Ram : Rs. 180,000 Krishna : Rs. 270,000
However, the bank will deducted TDS from such interest payment and such withholding shall be
final withholding. Hence, Ram & Krishna need not incorporate the interest income in their annual
income return.
Question No 4:
What are the entities considered as tax exempted entities? Whether Sections 87, 88, 88ka and 89 of
Income Tax Act with regard to TDS are attracted to such entities? Explain. ( June 2012)(5 Marks)
Answer
The definition of Tax Exempted Organization is given in section 2 (dh) of the Income Tax Act,
2058 as follows:
a. An organization registered in Inland Revenue Department as tax exempted organization and
established with either of these two objectives:
- Established without having a profit motive, and have social, religious, educational, or charitable
objectives.

14 of 162
IT and VAT
CAP II Examination
- An amateur sporting association formed for the purpose of promoting social or sporting
amenities without having an aim to distribute the income among its members.
b. A political party registered with the election commission.

c. A village development committee, a municipality, and a district development committee.
But, these organizations can get exemption only those donation amounts and donated assets
received as per the objective of the organization.
Applicability of Section 87, 88, 88Ka, 89 :
All these sections are fully applicable to the Tax Exempted Organizations and therefore these
organizations have to deduct and deposit Tax on payments.
As per the Circular of IRD (Chh No. 235) dated 2064/1/20, these organizations must take PAN and
shall deduct TDS on all the payments in which TDS is applicable.
Question No 5:
Mr. „Z‟ a Canadian citizen is deputed by the Canadian government to work on a Canadian aided
project and he stays in Nepal for 94 days. He receives his salary in Canada and he is provided a free
accommodation and a daily allowance of Rs. 2,000 to meet his boarding and other expenses.
i. Examine the liability to tax under Income Tax Act, 2058.
ii. Will your answer be different if Mr. „Z‟ comes to Nepal under the services of a private
contractor instead of the Canadian government in the above case?
(December 2012)(4 Marks)
Answer
i. The income derived by a natural person from the employment of public service of foreign country
is exempted under section 10 of Income Tax Act, 2058. Following conditions shall have to be
satisfied in order to get the exemption;
a. Such natural person is resident or non-resident of Nepal because of employment only; and
b.Such payments shall be made from the public fund of foreign county.
Hence Mr. „Z‟ satisfies the above conditions, his salary and allowances are exempt from income tax
in Nepal.
The place of receiving the salary of allowances is immaterial for the tax purpose.
ii. If Mr. „Z‟ comes to Nepal under the services of a private contractor instead of the Canadian
government, the salary received in Canada and the allowances received in Nepal combined together
shall be taxable in Nepal.
The private contractor (employer) has to deduct withholding taxes from his salary as per section 87.
In case the contractor does not withhold the tax at source and does not deposit the same to revenue
department, the contractor and Mr. „Z‟ are responsible to pay the tax jointly or severally. As his
total stay in Nepal is of 94 days only, he is non-resident in Nepal for the Income Year and he has to
pay tax at the rate of 25% on the taxable salary without allowing for initial deductions.

15 of 162
IT and VAT
CAP II Examination
Chapter 3:
Computation of taxable income

16 of 162
IT and VAT
CAP II Examination
Question No 1:
Mr. Clinton is working in an embassy representing USA and come to Nepal on 1st Ashwin, 2065.
His salary and other emoluments are paid by the country he represents. He declared the following
sources of income during the year 2065/66.
i) Salary of Rs. 2,80,000 per month.
ii) Dearness allowance Rs. 1,50,000 per month.
iii) Foreign allowance Rs. 80,000 per month.
iv) He runs a handicraft business in Nepal and earned a net profit of Rs. 1,75,000 in the income
year 2065/66.
v) He was a member of Royal Golf Club of Nepal. He won a prize of Rs. 1,50,000 from the game.
However he claimed the following expenses:
i) Renewal of membership and subscription Rs. 50,000
ii) Golf Expenses Rs. 32,000
iii) Donation to a school of remote district Rs. 50,000
(School is the organization recognized as tax exempted by IRD)
iv) Tax deducted at source in Nepal Rs. 2,000
You are required to find Mr. Clinton‟s residential status and taxable income for the income year
2065/66. (June 2010)(10 Marks)
Answer
i. Residential status of Mr. Clinton:
Mr. Clinton has lived in Nepal from 1st Ashwin 2065 to last of Ashadh, 2066 i.e 300 days
approximately (10 months x 30 days) which is more than 183 days, thus he is resident for the
income year 2065-66.
ii. Income from Employment:

Remuneration received by a foreign diplomat (representative of foreign countries) is non taxable in
Nepal but other than remuneration income earned in Nepal are taxable.
iii. Computation of Taxable income of Mr. Clinton:

Computation of Taxable income of Mr. Clinton for the Income Year 2065-66
Particulars (Rs.) (Rs.)
Income from Business:
Income from handicraft business 175,000
Assessable income from Business 175,000
Less: Allowable Deduction:
Donation to a school 8,750
Taxable Income 166,250
Taxable income of Mr. Clinton for the Income Year 2065-66 is Rs. 166,250.
Working Notes:
1. Calculation of donation allowable for deduction
Lower of the following amount:

17 of 162
IT and VAT
CAP II Examination
i. Actual donation Rs. 50,000.

ii. 5% of adjustable taxable income (i.e. Rs. 175,000) Rs. 8,750.
iii. Maximum amount Rs. 100,000.
Therefore, donation allowable for deduction is Rs. 8,750.
2. It is assumed that total number of days in a month is 30.
3. TDS @ 25% will be deducted in the prize income and it will be the final withholding.
Note: 2 marks each for Residential status and income from employment and 6 marks for working
notes and solution.
Question No 2
KMC Pvt. Ltd. had these depreciated balances in „Block B‟ of assets as on Ashadh 31, 2066:
Amount (Rs.)
Furniture and Fixtures 50,000
Computers 25,000
Other office Equipments 10,000
Total of Block B 85,000
The company on Shrawan 10, 2066 disposed of the computer for the following considerations:
Condition I: Sales consideration received was Rs. 100,000.
Condition II: Sales consideration received was Rs. 30,000.
Calculate the taxable gain from the disposal of Computer and balances in the Block for the purpose
of depreciation for the year 2066-67 in each of the above conditions. (June 2010)(5 Marks)
Answer
Calculation of Taxable Income under Condition I:
Sale proceeds 100,000
Less: Depreciated balance of the Block B 85,000
Taxable gain from the sale of computer 15,000
Balances in the Block for the purpose of depreciation for the year 2066-67:
In this case the value of assets in Block B after the disposal is treated as nil as the sales proceed is
more than the depreciated value of the Block.
Note: It is assumed that there is no absorbed addition during the year.
Calculation of Taxable Income under Condition II:

Sale proceeds 30,000
Less: Depreciated balance of the Block B 85,000
Taxable gain from the sale of computer Nil
Since the sale proceed of the Block B is lower than the depreciable balance, the taxable balance
from the disposal is nil during the year.
Balance in the Block B for the purpose of depreciation for the year 2066-67:
Balance of Block B at the beginning of the year Rs. 85,000
Less: Sale proceeds of Computer Rs. 30,000
Balance of Block for the year 2066-67 Rs. 55,000

18 of 162
IT and VAT
CAP II Examination
Note: It is assumed that there is no absorbed addition during the year.
Question No 3:
From the following Income Statement of an exempt controlled resident entity, compute the taxable
income for the financial year 2066/67.
Income
Sales Rs. 7,50,000
Interest Income Rs. 5,000
Total Income Rs. 7,55,000
Expenditure
Cost of sales Rs. 5,00,000
Administrative Expenses Rs. 1,20,000
Interest expenses to controlling (exempt) entity Rs. 75,000
Depreciation expenses Rs. 20,000
Rs. 7,15,000
Net Profit Rs. 40,000
(June 2010)(5 Marks)
Answer
Computation of Taxable Income of Exempt Controlled Resident Entity for the financial year
2066/67.
Income
Sales Rs. 7,50,000
Total Income Rs. 755,000
Expenditure
Administrative Expenses Rs. 1,20,000
Interest Expenses (see working note) Rs. 60,000
Depreciation Expenses Rs. 20,000 Rs. 7,00,000
Taxable Income Rs. 55,000
Working note:
Computation of allowable Interest Expenses under sec. [14(b)]
Profit exclusive of Interest Income/Expenses
Net Profit Rs. 40,000
Less Interest Income Rs. 5,000
Rs. 35,000
Plus Interest Expenditure Rs. 75,000
Total Profit Rs. 1,10,000
Total allowable Interest
50% of the above profit Rs. 55,000
Total allowable Interest Expenses Rs. 60,000

19 of 162
IT and VAT
CAP II Examination
Excess of allowable interest expenses over actual interest expenses to controlling entity to be
carried forward to the subsequent year (Rs. 75,000- Rs. 60,000)= Rs. 15,000
Question No 4:
From the following Income Statement of M/S ABC Pvt. Ltd., prepare the taxable income for the
income year 2066/67.
Rs. In „000
Sales 8,000
Cost of sales 5,000
Gross profit 3,000
Administrative expenses 500
Donation 100
Interest expenses 300
Pollution control expenses 1,500
Research & Development expenses 1,000
Depreciation 50
Balance (450)
Other Income 50
Net Profit/ (loss) (400)
Answer
Computation of taxable income of M/S ABC Pvt. Ltd. for the income year 2066/67.
Rs. in „000
Income
Sales 8,000
Other income 50__
Total Income (A) 8,050
Less: admissible deductions
Cost of sales 5,000
Administrative expenses 500
Depreciation 50
Interest Expenses 300
5,850 5,850
Adjusted Taxable income 2,200
Research & Development expenses
50% of ATI Rs. 2200= Rs. 1,100
Actual expense Rs. 1,000 1,000
Pollution control expenses

50% of ATI Rs. 2200=Rs. 1,100
Actual expense Rs. 1,500 1,100
Donation
Actual expenses Rs. 100
5% of ATI Rs. 110
Maximum Rs. 100 100
Taxable income 0

20 of 162
IT and VAT
CAP II Examination
Note 1: The unabsorbed pollution control cost Rs. 400 could be capitalized to Block D assets.
Note 2: It is supposed that donation is not given to tax exempted entity.
Note: In case any student supposes that the donation is not given to tax exempted entity, the answer should
also be treated right.
Question No 5
What is the provision under sec 12(ka) of Income Tax Act 2058 as regards expenses incurred
towards ancient, religious and cultural heritage conservation and sports development activities?
Answer
Under the provisions of Income Tax Act, with the prior approval from the Inland Revenue Department, a
company may claim to have the taxable income from a income year reduced by expenses incurred towards
the conservation of Ancient, Religious and Cultural heritage in Nepal or construction of the physical
infrastructure of public interest under sports development in Nepal.
However, the deduction as aforesaid is limited to the lesser of Rs. 10 crore or 10% of assessable income.
Question No 6
Mr. A, a resident natural person, is a musician deriving income from concerts performed from
various countries outside Nepal. During Financial Year 2066/67, he performed concerts in India.
Details of his assessable income and tax paid in the country as aforesaid where the concerts were
given are:
Income Tax
India Rs. 1,000,000 Rs. 300,000
Also, he earned Rs. 5,00,000 in Nepal during the financial year 2066/67.
Assuming that he has chosen to be couple, find his tax liability on his total income and amount for
foreign tax credit available to him under section 71(1) for the income year 2066/67.
Answer
Income earned
Nepal Rs. 5,00,000
India Rs. 10,00,000
Total assessable income Rs. 15,00,000
Less admissible deductions _____-______
Total taxable income Rs. 15,00,000
Total tax liability (working note) Rs. 3,15,000

Less Allowable foreign tax credit:
On Indian Income (working note) Rs. (2,10,000)
Net tax liability Rs. 1,05,000
Working note:
Computation of average tax rate for foreign tax credit
Assessable income earned in Nepal Rs. 5,00,000

Assessable income earned in India Rs. 10,00,000
Total assessable income Rs. 15,00,000
Less: deductions ______-_____
21 of 162
IT and VAT
CAP II Examination
Tax liability computation: (India)

Up to Rs. 2,00,000 Rs. Nil
Next Rs. 1,00,000 @ 15% Rs. 15,000
Bal. Rs. 12,00,000 @ 25% Rs. 3,00,000
Total Rs. 3,15,000
Therefore, average tax rate= 3,15,000/15,00,000 * 100 = 21%

a) Assessable income earned in India = Rs. 10,00,000
b) Tax paid in India = Rs. 3,00,000
c) Tax to be paid as per average tax rate = Rs. 10,00,000 * 21% = Rs. 2,10,000
d) Excess tax paid to be carried forward for next year (b-c) = Rs. 90,000
Note: Due to different interpretations, in case any student charges 1% or Rs. 2,00,000, that should also be
treated as right answer.
Question No 7
Mr. A has been working in the capacity of senior manager for XYZ Co. Ltd. The company provided
him a Volkswagon car for official as well as personal use. The current market price of the car is Rs.
57,00,000. Details of Mr. A‟s remuneration during the Income year 2066/67 are as follows:
Salary Rs. 1,50,000 per month
Grade Rs. 75,000 per annum
Allowance Rs. 7,000 per month
Other Allowances Rs. 9,000 per month
Quantify the amount for the vehicle facility provided for computing Mr. A‟s taxable income from
remuneration for the F/Y 2066/67.
Will the answer be different in case XYZ Co. Ltd. hired Mr. A for four months in the capacity of
consultant for a fee of Rs. 7,00,000 in total? (December 2010)(5 Marks)
Answer
As per the provisions of Income Tax Act 2058 and rules made there under, cost free vehicle facility provided
to be used for official and personal use by employer to employee, or worker or other persons getting
remuneration on monthly basis, has to be quantified in terms of value to be included in his total remuneration
for tax purpose. In such cases, value of such free of cost vehicle facility has to be quantified at the rate of
0.5% of total salary and grade. Therefore, amount to be included in his taxable income has been quantified
as:
Salary (Rs. 1,50,000 *12) Rs. 18,00,000

Grade Rs. 75,000
Total salary with grade Rs. 18,75,000
Amount to be quantified = Rs. 18,75,000 * 0.5/100 = Rs. 9,375

Therefore, Rs. 9,375 has to be included in his remuneration on account of cost free vehicle provided to be
used for official as well as personal uses.
In case Mr. A is employed in the capacity of consultant then values for such cost free vehicle is to be
quantified for the purpose of including in his taxable business income. Such value to be quantified is 1% of
the current market price of such vehicle or car.
Car will be quantified as:

1% of Rs. 57,00,000 = Rs. 57,000/3 = Rs. 19,000
22 of 162
IT and VAT
CAP II Examination
Total taxable business income of Mr. A is

Consulting fees Rs. 7,00,000
Cost free vehicle/car Rs. 19,000
Total Rs. 7,19,000
Question No 8:
Mr. Ram & Mr. Shyam jointly owned a house property costing Rs. 5,00,00,000. At the time of
acquisition of the said house property, Mr. Ram had invested Rs. 1 crore and rest of the amount
invested by Mr. Shyam. This house property has been sold out for Rs. 6,40,00,000, and incurred Rs.
7,00,000 on account of brokerage commission plus other incidental charges.
You are required to appropriate between Mr. Ram & Mr. Shyam- as per sec 30 of Income Tax Act
2058- for the net income that originated from the jointly owned investment.
Answer
For the purpose of calculating a person‟s income from an investment which is jointly owned with another
person, amounts to be included and deducted in that calculations should be apportioned among the joint in
proportion to their respective interests in the investment. [sec 30]
Mr. Ram Mr. Shyam
Investment Rs. 1 crore Rs. 4 crore
Investment ratio is 1:4
Computation of net income:
Sales (Incoming) Rs. 6.40 crore
Less: brokerage commission Rs. 0.07 crore
Balance Rs. 6.33 crore
Total initial investment (Outgoing) Rs. 5.00 crore
Net Income Rs. 1.33 crore
Net income of Rs. 1.33 crore to be appropriated based on contributory ratio of 1:4 between Mr. Ram & Mr.
Shyam are as follows:
Mr. Ram Mr. Shyam Total

Net Income Rs. 26,60,000 Rs. 1,06,40,000 Rs. 1,33,00,000
Question No 9:
Mr. Yubaraj Thapa, a bank officer, retired from his job in the year 2065/66. He received Rs.
4,50,000 as retirement payment. The payment was made through an approved retirement fund.
From the Shrawan 1, 2066 he is entitled to get a pension of Rs. 21,000 per month. He also entitled
to get one month's pension as dashain bonus. Mr. Yubaraj received interest of Rs. 50,000 from a
fixed deposit from Rastriya Banijya Bank. He has also received a dividend of Rs. 95,000 from Nabil
Bank. He started a consultancy business in the month of Shrawan 2066 and earned net profit of Rs.
25,000 in the year 2066/67.
His wife Mrs. Lolita is a school teacher in a government school and getting Rs. 10,000 monthly
salary. She is also operating a boutique since last five years and the net profit and the annual sales
for the year 2066/67 are Rs. 1,50,000 and Rs. 12,45,000 respectively. Mrs. Lolita owns a house
located at Putalisadak and the rental income of the house is Rs. 50,000 per month. The house was
rented to a commercial bank. She also does the assignment of question paper setting and evaluation
of answers and she received Rs. 1,05,000 during the year 2066/67.

23 of 162
IT and VAT
CAP II Examination
Mr. Yubaraj and his wife have not selected the option as a couple for tax returns purpose. Calculate
the tax liability of Mr. Yubaraj and Mrs. Lolita and also state their responsibility to file the income
tax return for the year 2065/66 and 2066/67. (June 2011)(12 Marks)
Answer
Calculation of Tax Liability for the year 2065/66
Mr. Yubaraj was the bank officer in the year 2065/66 his employer must have deducted TDS from
his salary and deposited to the revenue. The payment from approved retirement fund Rs. 4,50,000 is
exempt (as it is less than 5,00,000) from tax as per the provisions of section 65.
There is no information regarding the total income of Mrs. Lolita for the year 2065/66, therefore we
could not calculate her tax liability for this year.
Calculation of Tax Liability for the year 2066/67
Calculation of Tax Liability of Mr. Yubaraj

Pension income (21000*12) 2,52,000
Dashain Bonus 21,000
Net Profit from consultancy business 25,000
Total assessable income 2,98,000
Tax Liability:
Upto Rs. 1,60,000 @1% 1,600
Additional exemption for pension 25% of Rs. 160000
or actual pension whichever lower = Rs. 40,000 Nil
Balance Rs. 98,000 @ 15% 14,700
Total Tax Liability 16,300
Calculation of Tax Liability of Mrs. Lolita

Salary Income (10,000*12) 1,20,000
Dashain Bonus 10,000
Income from boutique 1,50,000
Income from question paper setting and evaluation 1,05,000
Total assessable income 3,85,000
Tax Liability:
Upto Rs. 1,60,000 @1% 1,600
First Rs. 1,00,000 @ 15% 15,000
Balance Rs. 1,25,000 @ 25% 31,250
Responsibility to file income tax return:
Mr. Yubaraj is required to file income tax return as follows:

24 of 162
IT and VAT
CAP II Examination
i. He is not required to file income tax return for the year 2065/66 as he has only salary income and
his employer must have deducted TDS from his salary.
ii. He should file income tax return for the year 2066/67 as he earned income from pension and
consultancy business.
Mrs. Lolita is required to file income tax return as follows:

i. She is required to file income tax return for the year 2065/66 as she has boutique business in
that year.
ii. She is also required file income tax return in the year 2066/67 as she has salary income as well
as business income.
Notes:
i. Bank interest and dividend are final withholding income of Mr. Yubaraj therefore these incomes
are not included in his income.
ii. House rent income of Mrs. Lolita is also a final withholding income.
iii. It is assumed that Mrs. Lolita will get dashain bonus equal to one month‟s salary.
iv. TDS shall not be deducted while making payment for the setting of question papers and
evaluation of answers but this income shall be included while calculating the taxable income of
the recipient.
Question No 10:
Smart Pvt. Ltd. purchased a piece of land on Ashwin 25, 2064 for Rs. 10,00,000 and incurred an
expenditure of Rs. 1,50,000 on registration and brokerage. It constructed a building on the land
costing Rs. 25,00,000. The building was ready for use on Shrawan 25, 2065. The depreciated value
in Block A was Rs. 10,00,000 at the end of year 2064/65 excluding the cost of the building under
construction. During the year 2065/66 the company capitalized Rs. 60,000 as repair and
improvement cost in Block A.
On Shrawan 1, 2066, the company sold the land and newly constructed building for Rs. 40,00,000.
The market value of land on that date was Rs. 15,00,000 and that of the building was Rs. 25,00,000.
You are required to calculate taxable gain for the disposal of land and building for the year 2066/67.
Answer
Calculation of taxable gain or loss from the disposal of land:
Selling price of land 15,00,000

Cost of land:
Purchase price 10,00,000
Registration and brokerage 1,50,000
Total cost of land 11,50,000
Gain on disposal of land 3,50,000
Calculation of taxable gain or loss from the disposal of building:
Depreciated balance at the end of the year 2064/65 10,00,000
Absorbed addition for the year 2065/66 (cost of building) 25,00,000

25 of 162
IT and VAT
CAP II Examination
Depreciable basis at the end of 2065/66 35,00,000

Less: Depreciation for the year 2065/66 @5% 1,75,000
Depreciated balance 33,25,000
Add: Repairs capitalized 60,000
Depreciated balance at the end of 2065/66 33,85,000
Less: Selling price of building 25,00,000

Depreciable basis of building 8,85,000
Note 1:
Taxable gain from the disposal of land is Rs. 3,50,000 and there is no taxable gain from the disposal
of building. The sales value of building shall be deducted from the total amount of block and the
remaining amount Rs. 8,85,000 will be the depreciable balance of Block A.
Question No 11
In the occasion of Deepawali 2067, Himal Group organized a nationwide song competition and Mr.
Ghanashyam wins a first prize of Rs. 5,00,000. The organizer of the program wants to deduct TDS
@ 25% on the prize amount and pay the balance to him.
Mr. Ghanashyam was of the view that prize is related to the work of art and TDS is not applicable
on this payment. As a tax consultant, you are required to advice to Mr. Ghanashyam whether TDS
is applicable in this payment or not also mention the relevant provisions of Income Tax Act 2058.
Answer
As per section 88ka, TDS @ 25% shall be deducted in any windfall gain. Therefore, the organizer
has to deduct TDS @ 25% while making this payment to Mr. Ghanashyam.
The contention of Mr. Ghanashyam is not correct in this case as this amount has not exempted by
Nepal Government from windfall gain tax.
Question No 12
As a tax consultant, you have been enquired by the clients on the depreciation facility for the
purpose of income tax on following cases:
i) Assets, required for power generation for its industry, capitalized by the production oriented
industries.
ii) If a person who wants to issue the tax invoices using fiscal printer and cash machine.
Answer
i. As per Sec 3(3) of schedule 2 of Income Tax Act 2058, Production oriented industries if capitalize
the assets required for power generation for its industries can claim 50% of total capitalized amount
as depreciation in the year of capitalization.
ii. As per Sec 3(4) of schedule 2 of Income Tax Act 2058, if a person wants to issue the tax invoice
by using fiscal printer and cash machine, then total amount spent for such fiscal printer and cash
machine can be claimed as depreciation in the year of purchase.

26 of 162
IT and VAT
CAP II Examination
Question No 13
XYZ Co. Ltd purchased an Accounting Software for Rs. 50,00,000 with the life span of 10 yrs and
5 months. It was installed on 1st Shrawan 2065. Also, the Company purchased Inventory
Management Software for Rs. 31,50,000 with the working life of 10 yrs and 6 months. This was put
in use in the month of Baisakh 2066.
Compute the allowable depreciation for Tax purpose for Financial Year 2065/066.
Answer
These intangible assets fall under Block “E”. As per section 3 of schedule 2 of Income Tax Act, the
depreciation of intangible assets shall be charged as follows:
Cost of the software/ useful life= Amount of depreciation per year (straight line Basis).
In case the year of useful life is in fraction of a year, the nearest half year shall be considered.
According to section 1(2)(kha) of schedule 2, each intangible assets should be disclosed separately.
Accounting software:
Cost Rs. 5,000,000 and the useful life is 10 years 5 months = 10.5 years.
As the software was installed on 1st Shrawan 2065, for the financial year 2065-66, depreciation shall
be available for the whole year.
Thus, depreciation for 2065-66 shall be:
Rs. 5,000,000 /10.5 = Rs. 4,76,190.48
Inventory Management software:

Cost Rs. 3,150,000 and the useful life is 10 years 6 months = 10.50 years.
As the software was installed on Baisakh 2066, as per section 5 of the schedule, depreciation shall
be available on 1/3rd of the amount for financial year 2065-66.
Thus, the amount of depreciation shall be:

Rs. 3,150,000/10.5/3 = Rs. 100,000.
Thus, the total depreciation for 2065-66 shall be: Rs. 4,76,190.48 + Rs. 100,000= Rs. 5,76,190.48
Question No 14:
Details of annual estimated tax and withholding tax of A & Co. are as follows:
Estimated Tax
Poush end Rs. 10,00,000
Chaitra end Rs. 12,00,000 (Re-estimated)
Ashad end Rs. 12,00,000 (Re-estimated)
Withholding Tax details:

Upto Poush end Rs. 20,000
Magh to Chaitra end Rs. 10,000
Chaitra to Ashad end Rs. 15,000
Compute the total Advance Tax to be paid for each installment. (June 2011)(5 Marks)
Answer
1st Installment (Poush end)
= 40% of estimated tax – withholding tax – Advance tax
= 40% of Rs. 10,00,000 – Rs. 20,000 – 0
27 of 162
IT and VAT
CAP II Examination
= Rs. 3,80,000
2nd Installment (Chaitra end)

= 70% of Rs. 12,00,000 – Rs. 30,000 – Rs. 3,80,000
= Rs. 4,30,000
3rd Installment (Ashad end)

= 100% of Rs. 12,00,000 – Rs. 45,000 – Rs. 8,10,000
= Rs. 3,45,000
Total Advance Tax paid:

Withholding Tax Rs. 45,000
1st Installment Rs. 3,80,000
2nd Installment Rs. 4,30,000
3rd Installment Rs. 3,45,000
Total Rs. 12,00,000
Question No 15
Mr. Bhai Raja is a person working in a Financial Institution as Chief Manager. Besides working in
Financial Institution, he is a professor of Account in Shankar Dev Campus. He generates the
following income from the employers in Fiscal Year 2067/68.
i) Monthly Remuneration NPR 40,000; Dashain Allowance NPR 40,000; Education Allowance
NPR 2,000 per month; Expenditure Allowance NPR 2,000 per month; Bonus NPR 60,000;
Remuneration from teaching in Shankar Dev Campus NPR 6,000 per month.
ii) He is provided a car along with driver for his official and personal purpose. Monthly
remuneration and allowance of driver is NPR 8,000.
iii) Petrol Expenditure is provided for his car which is NPR 10,000 per month and maintenance
expenditure of such car is NPR 25,000 in Fiscal Year 2067/68.
iv) He is provided a housing facility by the employer.
v) Monthly expenditure of Telephone connected in his resident is NPR 2,000 per month. Out of
this 50% is his personal telephone expenditure.
vi) A security guard is being provided in his resident and it is being paid NPR 6,000 per month by
the employer. Because of being used the security guard in his resident, NPR 3,000 is being
deducted from his monthly salary.
vii) He has used the loan amounting to NPR 10, 00,000 under housing loan facility at the rate of
5% interest. 8% interest rate is being charged by the institution under similar loan to other
borrowers.
viii) He has received one month salary against his house leave during Mangsir, 2067.
ix) The employer contributes 10% of his drawn salary and the employee same amount from his
salary, to approved provident fund. Also, the employer contributes NPR 20,000 per month to
Citizen Investment Fund up on request of employee.
x) He has covered the insurance of NPR 250,000 and NPR 150,000 of his wife in Rastriya Beema
Sansthan. He pays the premium of NPR 19,000 and NPR 14,000 respectively in that Fiscal

28 of 162
IT and VAT
CAP II Examination
Year. Also, he has contributed to tax exempted entity approved from department as donation
amounting to NPR 60,000.
xi) He has expensed out NPR 20,000 for his treatment in Teaching Hospital.
xii) He and his wife declared that they are couple in the Fiscal Year 2067/68 and his wife does not
have any income in that Fiscal Year.
Compute Assessable Income, Taxable Income and Tax liability of Mr. Bhai Raja for the Fiscal Year
2067/68. (December 2011)(12 Marks)
Answer
Computation of Assessable Income, Taxable Income and Tax liability of Mr. Bhai Raja for the
Fiscal Year 2067/68
Amount
Particulars (NPR)
Salary 480,000
Dashain Allowance 40,000
Education Allowance 24,000
Expenditure Allowance 24,000
Bonus 60,000
Vehicle Facility (480,000*0.5%) 2,400

Driver's Salary Not taxable
Petrol Expenditure Not taxable
Maintenance Expenditure Not taxable
Housing Facility (480,000*2%) 9,600
Telephone Expenditure (2,000*12*50%) 12,000
Security Guard Facility [(6,000-3,000)*12] 36,000
Loan Facility (8%-5%)*10,00,000 30,000
Salary against House Leave 40,000
Contribution to Provident Fund (PF) 48,000
Income from employment from Financial Institution 806,000
Salary from teaching in Shankar Dev Campus 72,000
Assessable income from employment 878,000

Deductible Amount
29 of 162
IT and VAT
CAP II Examination
Deductible amount against contribution to PF (292,667)

Actual Contribution
Employer's Contribution 48,000
Employee's Contribution 48,000
Contribution to Citizen Investment Fund 240,000
Total Contribution Amount 336,000
1/3 rd of Assessable income 292,667
Maximum Limit 300,000
Adjusted Taxable Income 585,333
Donation Expenditure (29,267)

5% of Adjusted Taxable Income 29,267
Actual Donation Expenditure 60,000
Deduction against Insurance (20,000)

Premium paid for himself and for his wife 33,000
Taxable Income (For Tax Calculation) 536,067

Computation of Tax Liability
Up to NPR 200,000 (For Couple) 2,000
NPR 100,000 @ 15% 15,000
Balance @ 25% 59,017
Total 760,17
Less: Medical Expenditure (750)
Notes:
1. Mr. Bhai Raja has expensed out NPR 20,000 in medical treatment. 15% of NPR 20,000 comes
to NPR 3,000. Out of this NPR 3,000, NPR 750 is deductible from his tax liability as medical
claim and balance NPR 2,250 can be claimed in subsequent Fiscal Year.
2. Since Mr. Bhai Raja has claimed Donation expenditure, contributed to approved fund and has
two employers at the same time he has to file the return of income.
3. As per Income Tax Directive, 2066, In case the employer also provides driver and fuel facility
to the employee along with the vehicle facility, the salary of the driver and the cost of fuel is
also not required to add to the taxable salary of the employee.
4. As per sec. 1 (2) (ka) of Schedule 1 of the Act, income tax at the rate 1% is to be deducted
from the salary income up to Rs. 200,000. The 1% salary tax is also a part of income tax, but,
it is named as social security tax and as per a circular this amount is to be deposited in a
separate account.

30 of 162
IT and VAT
CAP II Examination
Question No 16:
Mr. Devan Mahara is lawer. He is using cash basis of accounting for the income generated from his
profession. He gave an application to the department to change his basis of accounting from cash to
accrual in Fiscal Year (FY) 2067/68. In accordance with the generally accepted accounting
principles, Income Tax Department has given the approval to account for his income on accrual
basis in Fiscal Year 2067/68. The accounts of Mr. Mahara immediately before changing the basis of
accounting, was as below;
i) Service has already been rendered in FY 2066/67 but amount has not been received and hence
no income is included in that FY NPR 80,000
ii) In FY 2066/67 advance has been taken (service has been rendered on FY 2067/68) but amount
is included in that FY on cash basis though service is still to be rendered NPR 30,000
iii) In FY 2066/67 House Rent from Magh, 2066 to Poush 2067 has been paid and expense has
been claimed in FY 2066/67 on cash basis of accounting NPR 48,000
State how you make adjustments of income and expense in FY 2067/68 in above conditions?
Answer
As mentioned in Chapter 6 of Income Tax Act, 2058, if any person takes the approval from Inland
Revenue Department for the change in basis of accounting for the purpose of taxation, or his basis
of accounting is changed because of various provisions mentioned in the same Chapter, inclusion of
his income, claim of expenditure shall be computed in such a manner that there is no repetition or
short of income or claim of expenditure in that Fiscal Year.
Accordingly, the following adjustments shall be made in Fiscal Year 2067/68;
i. For the service which has already been rendered in FY 2066/67 but no amount is received, the
amount of NPR 80,000 shall be included in income of FY 2067/68 on accrual basis.
ii. The amount of NPR 30,000 taken as advance in FY 2066/67 and included in the income of
same FY is not required to be included in FY 2067/68 though service has been rendered in this
FY. The amount of NPR 30,000 already included in income of FY 2066/67.
iii. House Rent of Six months amounting to NPR 24,000 though pertains to FY 2067/68 has
already been claimed in FY 2066/67 on cash basis of accounting, so no further claim is allowed
in FY 2067/68.
After making adjustments of inclusion of income and claim of expenditure in FY 2067/68, the
income or expenditure shall be accounted on accrual basis for subsequent years.
Question No 17:
Torrent Co. Ltd. is a large publicly listed company whose main activity involves construction
contracts. Torrent won a global contract to build a new football stadium owned by Star Youth Club
at a contracted price of Rs. 40,00,000 thousand. This construction contract was to be completed
over the period of three years starting from financial year 2065/66.
Initially, the total cost of completing the said stadium was estimated at Rs. 36,00,000 thousand.
Star Youth Club had placed additional variation order in 2nd and 3rd financial years with the details
as given below:

31 of 162
IT and VAT
CAP II Examination
2066/67 2067/68
Variation order Rs. 70,000 thousand Rs. 80,000 thousand
As the consequence of variation orders as aforesaid, it had to incur the additional cost which had
been estimated as follows:
2066/67 2067/68
Additional estimated costs Rs. 50,000 thousand Rs. 4,20,000 thousand
Details of actual cumulative costs over the period of 3 years to build above football stadium were as
follows:
(Rs. In ‘000)
2065/66 2066/67 2067/68
Actual accumulated costs to date 18,00,000 26,28,000 39,86,000
Rectification costs - - 34,000
The rectification costs are the costs incurred in widening access roads to the stadium. This was the
result of an error by Torrent‟s architect when he made his initial drawings.
Compute the extracts of taxable income over those three years ending F/Y 2067/68 and amount of
losses carried back. (December 2011)(15 Marks)
Answer
Statement of computation of Taxable Income for M/s Torrent Company Ltd.
(Rs. In „000)
Details F/Y 2065/66 F/Y 2066/67 F/Y 2067/68
Initial contract price 40,00,000 40,00,000 40,70,000
Variation Order - __ 70,000 __ 80,000
Sub-total 40,00,000 40,70,000 41,50,000
Total contract price (A) 40,00,000 40,70,000 41,50,000
Initial estimated total cost 36,00,000 36,00,000 -

Additional estimated cost - __ 50,000 -
Total estimated cost (B) 36,00,000 36,50,000 -
Actual yearly expenses (Cumulative) 18,00,000 26,28,000 39,86,000

Rectification costs - __ - 34,000
Total actual costs (C) 18,00,000 26,28,000 40,20,000
Contract completion percent (E)

C/B * 100 50% 72% 100%
Computation of annual income

Contract revenue (Total) 40,00,000 40,70,000 41,50,000
Contract cost actual (36,00,000) (36,50,000) 40,20,000
32 of 162
IT and VAT
CAP II Examination
Estimated/income from the contract 4,00,000 4,20,000 1,30,000

Portion of this year‟s income 2,00,000 3,02,400 1,30,000
Previous year‟s income 0 2,00,000 3,02,400
Net income of the year 2,00,000 1,02,400 (172,400)
As per sec. 20(4) of the Act, the Company has to seek advice from IRD, and IRD may allow it to
carry back the loss up to profit assessed during the year. So the Company shall get back the amount
of tax paid as prescribed by IRD at the applicable rate on Rs. 172,400. The person can apply for
refund of the amount.
Question No 18
Rolls Airways is conducting the airplane services between Kathmandu and Saudi Arabia. Rolls
Airways has a branch office at Kathmandu for the purpose of operation of its services. The income
of Rolls Airways for the month of Shrawan, 2067 while conducting the airplane services and other
operations are as below:
SN Particulars Amount (Rs.)

1 Amount received from the passengers departed from Kathmandu 10,000,000
2 Amount received from the transportation of the goods having first 5,000,000
point entry at Kathmandu
3 Income from the travels from Bhutan and Lhasa having transit point 5,000,000
at Kathmandu
4 Amount received from the rentals of the goods carried from 5,000,000
Kathmandu which were transported from Bhutan
5 Amount received from the services of restaurant operated for the 2,500,000
facility of passengers at Kathmandu Airport
6 Amount received from the services of Ground Handling for other 2,500,000
airlines‟ operation
Total Income 30,000,000
The followings are the details of expenditures of Rolls Airways:

SN Particulars Amount (Rs)
7 Expenditures from Air tickets 5,000,000
8 Expenditures against the accommodation and fooding for crew 5,000,000
members
9 Expenditures against ground handling services 3,000,000
10 Expenditure for the operation of restaurant 2,000,000
11 Expenditure for the transportation of passengers from Bhutan, Lhasa 5,000,000
12 Expenditure for the re-transportation of the goods transported from 5,000,000

33 of 162
IT and VAT
CAP II Examination
Bhutan
Total Expenditure 25,000,000
Note: Rolls Airways has managed the ground handling against 100 flights of its own and 100 flights
of other airlines during Fiscal Year 2067/68.
Explain about the inclusion of above incomes and allowances of expenditures of a non-resident
person, for the purpose of section 70 of Income Tax Act, 2058 stating the relevant provisions.
( June 2012)(10 Marks)
Answer
Section 70 of Income Tax Act, 2058 prescribes the following provisions regarding taxation on the
income of a non-resident person in Nepal from transport or transmission business.
The gross receipts from the following activities of a non-resident person are treated as the taxable
income of the person from the activities.
A person engaged in Nepal in any road, air, water or a chartered transport services, other than
transmission in Nepal, for any of the following services;
i. The carriage of passengers who embark from within a territory of Nepal.
ii. The services of mail, livestock, or other movable tangible assets that are embarked from the
territory of Nepal.
Expenditure incurred in conducting such activities are neither allowed to be deducted from the
taxable income from the above sources nor allowed to be deducted from any other sources of
income of the person.
The tax rate applicable shall be as prescribed under section 2(7) of annexure 1 of Income Tax Act
(which is 5% of gross receipts during the year).
No tax credits shall be allowed to the person to reduce the tax payable by the person under this
section.
Accordingly, following treatment shall be done for the purpose of section 70 in case of Rolls
Airways.
1. For the purpose of section 70, the income of Rolls Airways for the month of Shrawan, 2067 as
mentioned in point no. 1 and 2 of question shall be Rs. 15,000,000. Tax shall be 5% of Rs.
15,000,000=Rs. 750,000 as per section 2(7) of annexure 1 of Income Tax Act.
2. The amount mentioned in point no. 3 and 4 in the question shall not be taxed as per Income Tax
Act, 2058 being sources of payment not in Nepal.
3. The amount mentioned in point no. 5 and 6 in the question are not the incomes to be included
for the purpose of section 70. These incomes shall be taxed like the entity having general
business income.
4. The expenditures incurred in connection with generation of income as mentioned in point no 5
and 6 in the question are eligible for deduction.

34 of 162
IT and VAT
CAP II Examination
5. The expenditures as mentioned in point no 7, 8 and 9 in the question are not eligible for
deduction for the purpose of computation of income as per section 70 even though they are
incurred in connection with the generation of income from ground handling services by its own.
6. The expenditures as mentioned in point no 11 and 12 in the question are not eligible for
deduction for the purpose of computation of income under section 70 as these are incurred in
connection with generation of income, the taxation of which are not required to be paid under
Income Tax Act, 2058.
7. Half of the ground handling expenditures amounting to Rs. 1,500,000 and expenditure against
restaurant operation amounting to Rs. 2,000,000 (total Rs. 3,500,000) are allowable expenditure
for deduction as these are incurred in connection with generation of income.
8. Corporate tax at the rate of 25 percent shall be paid on the amount as mentioned in point no 5
and 6 in the question amounting to Rs 5,000,000 less expenditure of Rs. 3,500,000 (assuming no
other eligible expenditure to be claimed).
Question No 19:
Mr. Anil has held 500 shares, at the rate of Rs. 100 per share (par value), of Standard Chartered
Bank Nepal Ltd (listed on Nepal Stock Exchange Ltd). He has requested to the stock broker to sell
those shares held by him. Mr. Anil has purchased those shares at the rate of Rs. 1,000 per share. He
has paid Rs. 4,000 as brokerage commission at the time of purchase of shares. He sold those shares
at the rate of Rs. 7,000 per share and paid the brokerage commission of Rs. 17,500 to the broker on
sale.
i) Compute the gain on shares disposal.
ii) Is there any implication of withholding taxes? If yes, calculate the payment to be made to
Mr. Anil stating relevant provisions of the Income Tax Act, 2058.
iii) What will be the implication if the above mentioned shares were held and sold by an entity
instead of Mr. Anil? (June 2012)(6 Marks)
Answer
Section 95 ka of Income Tax Act deals with the gain on disposal of interest on resident entity.
If case any person disposes its interest in a company listed with SEBON for publicly trading of its
securities, NEPSE has to deduct advance tax from the amount payable to it, at the prescribed rate on
the gain on disposal of the security as computed under section 37 of the Act.
The prescribed rate is 5% for a natural person and 10% for others.
Accordingly,
i. Computation of gain on disposal of shares:
Particulars Amount
(Rs)
Sale value (500* Rs. 7,000) 3,500,000
Outgoings:
Share value (500*Rs. 1,000) 500,000

35 of 162
IT and VAT
CAP II Examination
Add: Share Brokerage Commission

On Purchase 4,000
On Disposal 17,500 (521,500)
Gain on disposal of shares 2,978,500
ii. As per section 95ka, NEPSE has to withhold advance tax at the rate of 5% of the gain which is
Rs 148,925 through respective broker and make the net payment Rs. 3,333,575 to Mr. Anil as
computed below;
Particulars Amount
(Rs)
Sale value (500* Rs. 7,000) 3,500,000
Less:
Brokerage Commission on Disposal of shares (17,500)
Withholding Taxes (148,925)
Net Payment 3,333,575
iii. In case shares were held and sold by an entity instead of Mr. Anil, withholding tax shall be
deducted at the rate of 10% on the amount of gain as calculated above.
Question No 20:
Calculate the applicable tax rate on ABC & Co. based on following information;
 ABC & Co. is registered as a special industry as provided in section 11 of Income Tax Act,
2058.
 The industry is situated in an underdeveloped area with an employment of 350 people.
 Mr. Z has a source of income in Nepal and also in more than one foreign country. During the
Fiscal Year 2067/68, income and tax paid in each foreign country is given below;
Name of the Country Income (Rs.) Tax Paid (Rs.)
USA 200,000 60,000
Australia 150,000 30,000
UAE 100,000 5,000
Nepal 250,000 -
He is a resident natural person and selected for the couple as tax payers during the year. Calculate
his tax liability during the Fiscal Year 2067/68. ( June 2012)(5 Marks)
Answer
Calculation of the tax liability of Mr. Z for the Fiscal Year 2067/68
Total assessable income from all the sources
Particulars Amount (Rs)
Net Income from Nepal 250,000
36 of 162
IT and VAT
CAP II Examination
Net Income from USA 200,000

Net Income from Australia 150,000
Net Income from UAE 100,000
Total Income 700,000
Tax Calculation
First Rs. 200,000 0
Next Rs. 100,000 15,000
Remaining Rs. 400,000 100,000
Total Tax 115,000
Average Tax Rate (115,000/700,000*100) = 16.43%
Tax credit for the year shall be available for
Country Income Tax Paid Tax calculated Tax credit Unabsorbed
(Rs) (Rs) at average rate available for the tax credit to
(Rs) year (Rs) be carried
forward (Rs)
USA 200,000 60,000 32,860 32,860 27,140
Australia 150,000 30,000 24,645 24,645 5,355
UAE 100,000 5,000 16,430 5,000 0
Total 62,505 32,495
Tax payable during the year comes to Rs. 115,000 – 62,505 = Rs. 52,495.
Note: It is supposed that all the incomes are from business and he has opted to be a couple.
Question No 21
The status of property, plant and equipments and repair and improvement Expenditure XYZ & Co.
during Income Year 2068/69 is as follows;
Block of Assets Repair and Improvement Depreciation basis (Rs.)
Expenditure (Rs.)
Building Block 2,000,000 100,000,000
Computer 100,000 800,000
Block
Automobile 1,600,000 16,000,000
Block
Total 3,700,000 116,800,000
Answer the followings mentioning the relevant provisions of Income Tax Act, 2058;
i) Can repair and improvement expenditure of Rs. 37, 00,000 be claimed under Income Tax Act,
2058. If not, compute the amount of repair and improvement expenditure that can be claimed
by XYZ & Co. during Income Year 2068/69.
i) What is the implication of the amount of repair and improvement expenditure, if any, which
cannot be claimed during Income Year 2068/69? (December 2012)(8 Marks)
Answer
Section 16 of Income Tax Act, 2058 prescribes the following provisions;

37 of 162
IT and VAT
CAP II Examination
1) Expenses incurred during and Income Year on repair and improvement of an asset owned and
used depreciable asset in order to generate income, is allowed to be deducted from taxable
income.
2) Expenses on repair and improvement regarding a block of owned and used assets during an
Income Year in excess of 7% of the depreciable basis of the respective block at the end of
Income Year, cannot be deducted during the Income Year.
3) The portion of the expenses disallowed during the year is allowed to be capitalized to the
carrying amount of the respective block of the assets,
Accordingly, The entire amount of repair and improvement of Rs. 37,00,000 cannot be claimed.
The amount of repair and improvement that can be claimed under section 16 of Income Tax Act,
2058 can be computed as below;
Block of Assets Dep basis 7% of Dep basis Actual Repair and Improv Claimable Expenses
(Rs.) (Rs.) Exp (Rs.) (Rs.)
Building Block 100,000,000 7,000,000 2,000,000 2,000,000
Computer 800,000 56,000 100,000 56,000
Block
Automobile 16,000,000 1,120,000 1,600,000 1,120,000
Block
Total 116,800,000 8,176,000 3,700,000 3,176,000
i. The following is the implication of the amount which is in excess of the limit prescribed under
section 16(2).
Block of Assets Claimable Expenses Amount in excess of Implications of the amount in excess
(Rs.) limit (Rs.) of the limit
Building Block 20,00,000 - As the entire expense is claimable, no
implication
Computer 56,000 44,000 The excess amount shall be included
Block in the opening depreciation basis of
the following IY.
Automobile 11,20,00,0 4,80,000 The excess amount shall be included
Block in the opening depreciation basis of
the following IY.
Total 31,76,00,000 524,000
Question No 22:
Mr. Ram had purchased a Land on 2063.10.01 for Rs.1 Crore. On 2066.05.06, he divorced his wife
Mrs. Seeta. As part of his divorce settlement, he transferred the land to his ex- wife Seeta on
2066.05.10. At the time of transfer, the market value of the land was Rs. 1 Crore 40 Lacs. During
the transfer, Mrs. Seeta incurred Rs. 10,000 towards registration and other legal charges. Mr. Ram
had informed the details of the transfer of land to ex-wife and elected the application of section 43
in writing to Inland Revenue Office. Mrs. Seeta has sold the land on 2066.10.05 for Rs. 1 Crore 50
Lacs. By mentioning the relevant provision of section 43, calculate the gain or loss on disposal of
the land in the hands of both Mr. Ram and Mrs. Seeta. If they do not elect the application of this
section, how the incomings and outgoings are calculated? (December 2012)(7 Marks)
Answer

38 of 162
IT and VAT
CAP II Examination
As per section 43 of the Act, in case a property is transferred due to a divorce settlement or to one's
husband, wife, ex-husband or ex-wife and election has been done for the application of this section,
then:
- The net outgoings incurred by the transferor will be treated as if they have been received from
the transfer and
- The same amount will be treated as net outgoings for the transferee.
Since election has been done for the application of section 43, gain or loss is calculated as follows:
In the hands of Mr. Ram

Incomings Rs. 1 Crore.
Less: Outgoings Rs. 1 Crore
Gain or Loss Nil
The transferor experiences neither a gain nor loss from the disposal of the property.
In the hands of Mrs. Seeta

Incomings Rs.1,50,00,000
Less:
Outgoings:
Cost of the transferred asset1,00,00,000
Registration and legal charge 10,000 Rs.1,00,10,000
Gain from disposal of land Rs. 49,90,000
If they do not elect the application of this section, then the market value of the property or the actual
outgoings, whichever is higher are treated as incomings for the transferor and outgoings for the
transferee.
Thus, if they do not elect sec 43 to be applicable in this case the gain shall be calculated as under:
In the hands of Mr. Ram
Incomings Rs. 14,000,000
Less: Outgoings Rs. 10,000,000
Gain or Loss Rs. 4,000,000
The transferor experiences Rs. 40 lakhs as gain from the disposal of the property.
In the hands of Mrs. Seeta
Incomings Rs.15,000,000
Less:
Outgoings:
Deemed Cost of the transferred asset 14,000,000
Registration and legal charge 10,000 Rs.14,010,000
Gain from disposal of land Rs. 990,000
Question No 23
Mr. Z , retired person from Nepal Government on Ist Sharwan, 2068 after 30 years of Service. After
retirement, he joined Kathmandu Bank at Kathmandu on the same day, .i.e. Sharwan, 2068 and
remained in service till Ashad end 2069. Information about his income are as follows:
S.N. Particulars Nepal government Kathmandu bank
1. Salary Rs. 3,00,000 Per month
2. House rent allowance Rs. 20,000 Per month
3. Other allowance Rs. 10,000 Per month
39 of 162
IT and VAT
CAP II Examination
4. PF contribution Additional 10 % of basic salary &

grade
5. Pension received Rs. 144,000 during the ----------------
year
Other information:
 He has been provided a vehicle for personal as well as official use by the Kathmandu bank.
 Both employers have deducted 10 % of salary for provident fund and deposited 20 % to the
approved retirement fund.
 He had received all retirement payment in Ashad 2068.
 He has not been provided Dashai allowances during the period.
 His wife does not have any income in this Income year and they declared they are couple.
Calculate the assessable income, taxable income and tax amount of Mr.Z for the income year.
Answer
a) Calculation of Assessable Income, taxable income and tax
Particulars Rs.
Salary 3,600,000
House rent Allowance 240,000
Other allowance 120,000
Addition on Provident fund 360,000
Vehicle facilities (0.5 % of Salary) 18,000
Pension 144,000
Assessable Income 4,482,000
Less: Contribution to Provident fund 300,000
Whichever is lower
Actual contribution Rs. 720,000
One third of Assessable income Rs. 1,494,000
Upper limit as per section 63 Rs. 300,000
Taxable Income 4,182,000
Less Exemption on pension (25% of basic exemption limit) 50,000
Taxable Income after exemption 4,132,000
Tax calculation
Slab Tax Rate Tax Rs.

200,000 1% 2,000
100,000 15% 15,000
38,32,000 25% 9,580,000
Additional tax (see note) 168,200
Total annual tax for Mr. Z 1,143,200

40 of 162
IT and VAT
CAP II Examination
Note:
Taxable income 4,182,000
Less: 2,500,000
Taxable income over
than Rs. 2,500,000 1,682,000
40% of tax @25% 168,200
Question No 24
Mr. Ram had purchased a Land situated at Bhaktapur on 2062.05.01 for Rs. 50 lacs.During the
extension of Arniko Highway, Nepal Government took possession of the land with a notice of
compulsory acquisition on 2066.05.07. As compensation, Nepal Government has given a sum of
Rs. 80 Lacs to Mr. Ram. Mr. Ram purchased another land approximately 2 Kms. away on
2067.04.05 for Rs. 60 Lacs. Mr. Ram has requested in writing to Inland Revenue Office for the
application of section 46 of the act. Compute the gain or loss on disposal of land in the hands of Mr.
Ram by mentioning the relevant provisions of the Act. Will the amount of gain or loss differ if he
has not elected for application of this section? (December 2012)(7 Marks)
Answer
Section 46 of the Act envisages the circumstances when a person has to dispose of an asset or
liability due to orders issued by government or due to changes in legal decisions or when a person
has to dispose of an asset or a liability due to forceful conditions. The conditions applicable for
availing this section are as under:
a. There must be a case of involuntary disposal of an asset or a liability.
b. The asset or liability is exchanged for another same kind of asset or liability within one year of
the disposal.
c. The person requests in writing for application of this section for the disposal with replacement.
Section 46 further states that the total incomings for the transferred assets shall be the sum of the
following amounts:
- The net outgoings for the assets up to the disposal of the asset and
- In case the amount received from involuntary acquisition exceeds the amount paid or payable for
the replaced asset, the excess of the amount.
In the given case,
1. Compensation received from Government Rs.8,000,000
2. Cost of the Replaced asset Rs. 6,000,000
3. Excess of 1-2 Rs. 2,000,000
4. Net Outgoings for the asset before disposal Rs. 5,000,000
5. Total Incomings (3+4) Rs. 7,000,000
6. Total Outgoings Rs. 5,000,000
7. Gain from Disposal Rs. 2,000,000
If he has not selected for application of this section, then the gain is calculated as under:
Incomings Rs. 8,000,000
Less:
Outgoings Rs. 5,000,000
Gain from disposal Rs. 3,000,000

41 of 162
IT and VAT
CAP II Examination
Question No 25:
Explain on the taxability and the implication thereon, of the following transactions as per the
i) A Den airline registered in Denmark, having contact office in Nepal and is operating its airlines
business. During Income Year 2068/69, it has sold the tickets in Nepal as follows:
1. Sale of tickets from the passengers departing from Nepal - Rs. 50 crores.
2. Sale of tickets in Nepal, for the passengers departing from country other than Nepal – Rs. 10
crores.
ii) Singtel Ltd. is a company registered in Singapore. The company, with its objective to transmit
information and storing data, has a communication hub in Nepal (without any office in Nepal).
Through such system, the companies in Europe and America are storing data and transmitting
information. Singtel has received USD 1 million for such services.
Answer
For the provision of section 70 of Income Tax Act, 2058, the 'non-resident' means a resident entity
that is a part of a group of associated entities the main office is situated outside Nepal (explanation
to section 70).
The gross receipts from the following activity of non-resident person are treated as the taxable
income of the person from the activities:
A person engaged in Nepal in any, air, water or chartered transport services, other than transmission
in Nepal, for the carriage or passengers who embark from within the territory of Nepal [section
70(1)].
Hence, the gross receipts of Den Airline from the sale of tickets in Nepal departing the passengers
from Nepal amounting to Rs. 50 crores and for the passengers departing from country other than
Nepal – Rs. 10 crores are taxable at the rates of 5% and 2% respectively as per schedule 1 Section 2
subsection 7
section. Further, expenditures incurred in conducting such activities are neither allowed to be
deducted from the taxable income from the above sources nor allowed to be deducted from any
other source of income of the person.
The gross receipts from the following activity of non-resident person are treated as the taxable
income of the person from the activity:
A person engaged in the transmission of messages by cable, radio, optical fiber, or satellite through
an apparatus or equipment established in Nepal, irrespective of the place of origin of messages
[section 70(2)].
Hence, the gross receipts of Singtel from the communication hub (apparatus) established in Nepal
amounting to USD 1 million is taxable at the rates of 5 % as per schedule 1 Section 2 sub Section 7
irrespective of the place of origin of messages.

42 of 162
IT and VAT
CAP II Examination
section. Further, expenditures incurred in conducting such activities are neither allowed to be
deducted from the taxable income from the above sources nor allowed to be deducted from any
other source of income of the person.
Question No 26:
List out the payments not included in the income from employment under the Income Tax Act,
2058. (June 2013)(5 Marks)
Answer
Following are the payments, which are not included while computing income from employment:
i. Any amount received by an employee for which exemption is given under Section 10 of the Act
and any amount received which is subject to final withholding of tax.
ii. Work-time meals or refreshments provided by the employer in equal terms for all the employees
at working place or uniform applicable to working place only.
iii. Any reimbursement of expenses incurred by the employee:
 That serves the purpose of the business of the employer; or
 That would otherwise be deductible in calculating the individual‟s income from the business
or investment.
 Reimbursement of outstation cost-travelling or daily allowance
Any prescribed small amounts, which are too small and thus unreasonable or administratively
impracticable to make accounting for them. The amount prescribed by the rule is Rs. 500 at a time.
The expenses prescribed by the rule include tea expenses, stationery expenses, prizes, gifts,
emergency medical facility, or other such payments as specified by IRD.
Question No 27:
DCM Pvt. Ltd. is registered as a special industry in 2063. It is a food production industry and
located in underdeveloped area. The company has not submitted its estimated tax return and income
tax return for the year 2067/68 and 2068/69. It has also not paid any installments. Mention the
relevant provision on the payment of tax in installment and calculate the fees and interest under
Section 117, 118 and 119 of the Income Tax Act, 2058 till Chaitra end 2069 on the basis of
following information for the year 2067/68.
The management provides the following information:
 Total sales Rs. 50,000,000
 Cost of sales Rs. 35,000,000
 Total allowable administrative expenses pertaining to this year is Rs. 5,000,000
Answer
Income tax act, 2058 section 94 (1) states that a person who has or will have assessable income in
any income year from any business or investment has to pay tax in three installments as follows:
Date on which payment has to be made Amount to be paid
out of 40% of the estimated tax amount of due and payable tax
43 of 162
IT and VAT
CAP II Examination
Calculation of Total Tax liability

Applicable tax rate is 20 % for special industry as per schedule 1 of income tax act and 30 % of 20
% for the special industry of underdeveloped area.
Taxable income (WN 1) Rs. 10,000,000

Tax rate applicable 6%
Tax assessment under section 99 for the year Rs. 600,000
Fees under section 117 (1) (ka) Rs. 2,000
Fees under section 117 (1) (ga) (WN 2) Rs. 75,000
Interest under section 118 (1) (WN 2) Rs. 42,525
Interest under section 119 from Kartik 2068 to Chaitra 2069 Rs. 135,000
Total tax payable at the end of Chaitra, 2069 is Rs. 854,525.00
Working note 1:
Total sales Rs. 50,000,000
Less cost of sales Cost of sales Rs. 35,000,000
Less allowable administrative expenses Rs. 5,000,000
Taxable Income Rs. 10,000,000
Working Note 2: Calculation of Fees and interest

 Under section 117 (1)(ga): Total assessable income as per the section is Rs. Rs. 50,000,000, fees
0.1 % annually of Rs. 50,000,000 for 18 months (from Kartik 2068 to Chaitra 2069) is Rs.
75,000 or Rs. 100 per month whichever is higher.
 Under section 118: total tax Rs. 600,000, interest shall be charged on Rs. 540,000 (90 % ) of the
tax amount as follows:
Installments To be paid Period for interest calculation Interest

Rs. amount Rs.
Poush end 216,000 Magh 2067 to Ashoj end 2068 24,300
Chaitra end 162,000 Baishakha 2068 to Ashoj end 2068 12,150
Ashad end 162,000 Ashad 2068 to Ashoj end 2068 6,075
Total 540,000 42,525
Question No 28:
Mr. Sinha is an employee of Surya Moon Corporation Ltd. His financial activities F/Y 2069/70
includes the following:
Basic Salary Rs. 40,000 P.M.
Traveling Allowance (From Home to Office and Back) Rs. 4,000 P.M.
Contribution to approved Provident fund Rs. 4,000 P.M.
Dividend income from Surya Moon Corporation Ltd. Rs. 10,000
Mr. Sinha also deposited equal amount to the same provident fund.

44 of 162
IT and VAT
CAP II Examination
On the occasion of 25th Anniversary of the corporation, the corporation organized a National 1 Km.
race competition in association with the Nation Game Association. Mr. Sinha participated in the
race and won the first prize worth Rs. 50,000. Mr. Sinha has a Life Insurance Policy worth Rs.
2,00,000 and annual premium paid is Rs. 15,000.
Calculate the total income and tax liability from the employment for the fiscal year 2069/70, if he
selects to be assessed as couple. (December 2013)(7 Marks)
Answer
Calculation of total income from employment of Mr. Sinha F/Y 2069/70
Particulars Amount (Rs.) Amount (Rs.)

Basic Salary 40000 x 12 4,80,000.00
Traveling Allowances (Note-1) 4000 x 12 48,000.00
Dividend Income (Note-2) -
Contribution of Provident Fund 4000 x 12 48,000.00
Prize in Race (Note-3) -
Total income from employment 576,000.00
Less:
Contribution to approval Provident fund (Note-4) 96,000.00
Life Insurance Premium (Note-5) 15,000.00
Taxable income from employment 465,000.00
Calculation of Employment Tax:
Particulars Amount (Rs.)

Tax on first Rs. 200000 @ 1% 2,000.00
Tax on Next Rs. 100000 @ 15% 15,000.00
Tax on Balance Rs. 165000 @ 25% 41,250.00
Total tax on employment 58,250.00
Notes:
1. As per Sec. 21, payment of traveling allowances from home to office & back is defined as payment
of personal expense. Payment of personal expenses by employer are taxable for employees.
2. Assuming that the payer company is a resident company, dividend is final withholding payment,
subject to 5% WHT and so is not included in the income from employment.
3. Prize won in the race is not related with employment & thus is not to be included in income from
employment but it is subject to casual income tax @ 25%.
4. Contribution to Approved Provident Fund.
As per Section 63 (2) & Rule 21 of Income Tax Act, lower of following is allowed as deduction for
contribution to Retirement fund.
Particulars Amount Amount

45 of 162
IT and VAT
CAP II Examination
i. Actual Contribution
- Employer's Contribution 48,000.
- Employee's Contribution 48,000. 96,000.
(deducted by employer)
ii. 1/3rd of Assessable Income. 1/3 X 576,000 192,000.
iii. Maximum Unit. Rs. 300,000. Rs. 300,000.
Lower of above Rs. 96,000.
5. As per Section 1(12) of Schedule 1 of income tax act, A resident person is eligible to get deduction
of actual premium paid against Investment Insurance or Rs. 20,000 whichever is lower. Here,
Particulars Amount
15000
a. Actual Premium
20000
b.Maximum limit
Allowable(Lower of above) 15000
Question No 29:
Mohit Shrestha, citizen of Nepal provides rental services/hiring services of Mini Bus, Power Tiller,
Auto Rickshaw and other vehicles. Following is the detail of his business. Vehicles are owned by
him in his individual name for fiscal year 2069/70.
Rates per No. of services Provided Number of
Services (Rs.) during the year vehicle owned
Power Tiller 5,500 220 7
Tractor 5,000 180 11
Auto Rickshaw 5,000 10 1
Micro Bus 8,500 50 4
Car 8,500 310 8
Truck 11,000 200 4
He incurred following expenses during the year.
i. Petrol 1,01,000
ii. Diesel 1,20,000
iii. Oil & Lubricants 21,375
iv. Repair 68,245
v. Staff's Salary 39,00,000
Required:
i) Calculate the tax to be paid by Mr. Mohit for fiscal year 2069/70.

46 of 162
IT and VAT
CAP II Examination
ii) Mr. Mohit did not submit Annual Income Tax Return under Section 96. What are its
implications? (December 2013)(5 Marks)
Answer
As per Schedule 1 of Income Tax Act, 2058. Person engaged in hiring vehicles has to pay a fixed
amount of taxes per vehicle, for different vehicle and if the owner of the vehicle is natural person,
then tax paid in such manner shall be final. The amount of taxes are as follows:
Particulars Amount
i. Per minibus, mini-truck, truck & bus 1500
ii. Per Car, Jeep , Van, Micro-bus 1200
iii. Per Three wheeler, auto rickshaw & tempo 850
iv. per tractor and power tiller 750
The taxes to be paid by Mr. Mohit shall be as follows, since he is a natural person.
Type of Vehicle No. of vehicle owned Tax per Vehicle Total Tax
- Power tiller 7 750 5250
- Tractor 11 750 8250
- Auto Rickshaw 1 850 850
- Micro bus 4 1200 4800
- Car 8 1200 9600
- Truck 4 1500 6000
Total 34750
Thus, Mr. Mohit is liable to pay Rs. 34,750 tax for F/Y 2069/70
As per section 97 (d), natural person having income from vehicles subject to payment of tax at a
fixed amount annually do not need to submit annual tax return.
Thus, Mr. Mohit need not submit annual tax return.
Question No 30:
RamhariRice Mill, a complete manufacturing industry has the following transaction during the
Income Year 2069/70. The Mill is a special industry under section 11 of the Income Tax Act, 2058.
The Mill is the sole proprietorship firm and the owner of the Mill has not selected the section 50 of
the income Tax Act, 2058. You are required to calculate the applicable tax rate and compute the tax
liability based on the following information.
Local sales Rs. 11,250,000
Export Rs. 3,750,000
Indirect cost Rs. 500,000
(June 2014)(6 Marls)
Answer
The provisions have been mentioned in 1(1) of schedule 1 of income tax act to determine the tax
liability for the income year 2069/70 of sole proprietorship firm selected single. Further, section
11(3e) of the act has provisioned that if a manufacturing industry exports goods that it has

47 of 162
IT and VAT
CAP II Examination
manufactured, tax rebate shall be granted by Twenty Five percent on the rate of tax leviable on
income earned therefrom. As per the Provisions, applibale tax rate are:
Calculation of applicable tax rate for local sales and export sales
Amount Tax rate
UptoRs. 1,60,000 0
Upto 2,60,000 15 %
Above Rs. 2,60,000 25 % Normal rate
Above Rs. 25,00,000 40 % additional on normal rate
Local sales
For manufacturing industry 20 % instead of 25 % (As per Sec 1(14) of
Schedule I)
Above Rs. 25,00,000 20 % + 40% of 20%= 28%
Export
Applicable rate 15 % instead of 25 % (As per Sec 1(1) of
Schedule I)
For manufacturing industry 25 % less than applicable rate
= 11.25 %
Above Rs. 25,00,000 11.25 % + 40% of 11.25%= 15.75 %
Calculation of tax liability
Income 7(2) Rs. 1,50,00,000 ( Rs. 1,12,50,000+37,50,000)
Less deduction
Indirect cost Rs. 5,00,000
Total allowable expenses Rs. 95,00,000
Local taxable income and taxable income from export are as follows. The taxable income has been
divided proportionately based on sales.
Note: Credits and insurance claims are not considered due to lack of the information provided.
Local sales
4,125,000.00 160,000.00 0% -
100,000.00 15% 15,000.00
2,240,000.00 20% 448,000.00
1,625,000.00 28% 455,000.00
Export Sales
1,375,000.00 All Exceeding 25 lakhs
1,375,000.00 15.75% 216,562.50
- -
Total Tax 1,134,562.50
Question No 31

48 of 162
IT and VAT
CAP II Examination
Mr. Sailesh, a disabled person, is working in Dailekh branch of Nabil Bank Ltd. In Fiscal Year
2069/70, following are the transactions;
i. Salary and allowances Rs. 50,000 per month; Dashain allowance Rs. 20,000; Bonus Rs.
40,000.
ii. Bank has managed to contribute to Provident Fund (approved) Rs. 24,000 from employer as
well as employee side.
iii. In addition to the remuneration received from Bank, Mr. Sailesh has also received Rs. 150,000
from Nepal Government in the form of Pension.
iv. He has covered the insurance and paid the insurance premium of Rs. 25,000 during Fiscal Year
2069/70.
v. He has declared the couple under section 50, in Fiscal Year 2069/70.
Compute Assessable Income, Taxable Income, Tax liability of Mr. Sailesh for the Fiscal Year
2069/70 stating relevant provisions of Income Tax Act, 2058.
Note: Applicable tax rate for the purpose of computation to be considered is as per Finance Act,
2070. (June 2014)(10 Marls)
Answer
Computation of assessable Income, Taxable Income and Tax Liability of Mr. Sailesh for the fiscal
year 2069/070
Particulars Amount (Rs) Working
Reference
Salary (50,000*12) 600,000
Bonus 40,000
Contribution to Provident Fund (PF) 24,000
Pension 150,000
Assessable income from employment 834,000
Deductible Amount
Deductible amount against contribution to PF (48,000)
Actual Contribution
Employer's and Employee's Contribution 48,000
1/3 rd of Assessable income 278,000
Maximum Limit 300,000 Note 1
Adjusted Taxable Income 786,000
Deduction for Remote Allowance under category C (30,000) Note 2
Deduction under pension (62,500)
Note 3
Deduction for Disability (125,000)
Note 4
Deduction against Insurance (20,000)
Premium paid 25,000

49 of 162
IT and VAT
CAP II Examination

Note 5
Taxable Income (For Tax Calculation) 548,500
Computation of Tax Liability
Up to NPR 250,000 (For Couple) 2,500
NPR 100,000 @ 15% 15,000
Balance @ 25% 49,625
Total 67,125
Note 6
Working Notes
Note 1
As per rule 21 of Income Tax Rules, 2059 an individual, who has made a contribution to an
approved retirement fund during a Fiscal Year, is entitled to get exemption of the amount deposited
to the fund subject to a maximum limit of 1/3rd of the Assessable Income of him/her during the year
or Rs. 300,000 whichever is lower.
Note 2
As per section 1(5) of Annexure 1 of Income Tax Act, 2058, in case the income is generated from
an activity at a remote area of Nepal an additional exemption limit has been prescribed for a
resident natural person. The amount prescribed under category “C” (Dailekh district falls under
category “C”) is Rs. 30,000.
Note 3
As per section 1(9) of Annexure 1 of Income Tax Act, 2058, any natural person who has also an
income from pension, the tax exemption limit as prescribed under subsection (1) (a) or (1)(b),
whichever is applicable, shall increase by 25% of the basic limiti.eRs.62,500 (Rs. 2,50,000*25%).
But as per rule 39 of Income Tax Rules, 2059, the additional exemption given to the pension
holders should not exceed the actual amount of pension s/he is receiving.
Note 4
As per section 1(10) of Annexure 1 of Income Tax Act, 2058, any natural person who is disabled
individual or couple, the tax exemption limit as prescribed under subsection (1) (a) or (1)(b),
whichever is applicable, shall increase by 50% of the basic limitRs.1,25,000 (Rs. 2,50,000*50%).
Note 5
As per section 1(12) of Annexure 1 of Income Tax Act, 2058, in case a resident natural person has
taken life insurance on his life, Rs 20,000 or the actual premium paid during the year, whichever is
lower, is available for deduction from the taxable income of the individual.
Note 6
For an individual natural person, who has opted for couple under section 50, the tax applicable shall
be as prescribed under section 1(2) of annexure 1 of Income Tax Act, 2058 and the minimum
exemption shall be Rs. 250,000.
Question No 32:
Worthy Jute Industries Limited, a 100% export oriented entity, is engaged in the manufacturing of
jute products. There are 1501 Nepali citizens working in the company throughout the year. The
accountant of the company computed the taxable income amounting to Rs. 12,550,000 for F/Y
50 of 162
IT and VAT
CAP II Examination
2070/71 and income tax of Rs. 2,008,000. Being a tax auditor, whether you agree with the tax
amount calculated by the accountant of the Company? Will your answer be different if there are
1,499 Nepali citizens working throughout the year instead of 1,501? (June 2014)(5 Marls)
Answer
With reference to the section 11 (3)(ka), if any special industry creates employment for 1200 or
more Nepali citizen throughout the year, than only 80% of normal income tax shall be levied.
Further, under the same section, 25% rebate on applicable tax rate is available for the 11 (3 Nga)
manufacturing industries having profit on export sales. In this case, Worthy Jute Industries Limited
is special industries, so, applicable tax rate is 20% & the income tax of the company would be as
follows:
Particulars Option 1 Option 2
Normal Tax Rate for the company( As per Sec. 2(3a)
of Schedule 1) % 20% 20%
Rebate for export 25% of 20% % 5% -
Applicable Tax Rate % 15% 20%
Taxable income for the year Rs. 12,550,000 12,550,000
Applicable Income Tax Liability Rs. 1,882,500 2,510,000
Concession @ 20% for more than 1200 employment
creation Rs. 502,000
Net Tax Liability for the year Rs. 2,008,000
taxpayer has two option under the provisions of Income Tax Act. As calculated above, as per option
1, the tax liability would be 1,882,500 and as per option 2, the tax liability shall be Rs. 2,008,000.
A rational tax payer shall choose the lower amount. However as the Act has provided option to tax
payer, it can choose to pay 2,008,000 also. Hence, the amount calculated by the accountant is not
incorrect although it is not desirable.
Answer to the second part of the question:
No, there will not be any change in the tax liability whether there are 1499 Nepali citizens working
throughout the year.
Question No 33:
Singha road Ltd. located at Hetauda is a public infrastructure project. The project will be completed
on Chaitra end 2075 as per estimation, and then it will be handover to Government of Nepal. The
Ltd. has incurred loss continuously from income year 2061/62 to 2068/69 as follows:
Income Year Loss amount Rs.
2061/62 1.000,000
2062/63 500,000
2063/64 600,000
2064/65 200,000
2065/66 150,000
2066/67 100,000
2067/68 75,000
2068/69 10,000

51 of 162
IT and VAT
CAP II Examination
During income year 2069/70, it has incurred the profit of Rs. 1,500,000 Compute the taxable
income for the income year 2069/70 and carry forward losses for the income year 2070/71 for set
off with references to the provisions of Income Tax Act, 2058 relevant to this project.
Answer
Section 20 (1) of income tax act, 2058 has the following provisions for carry forward the losses:
For purposes of computing the income earned by any person from any business or
investment in any income year, such person may deduct the loss as mentioned below:-
(a) Loss suffered by that person from any other business and not deducted in that year, and
(b) Loss suffered by that person from any business which was not deducted in the last seven
income years.
Provided that, in the case of the projects which involve building and operation of
public infrastructures to be transferred to the Government of Nepal, powerhouses
construction, generation and transmission of electricity and petroleum works pursuant to the
Nepal Petroleum Act, 2040 any loss not deducted in the last twelve income years.
As per the provisions, the project has not fulfilled the conditions of BOT. It will be handover
after the completion. So, it can carry forward only 7 years losses.
Calculation of taxable income for the year 2069/70.
Net income during the year Rs. 15,00,000
Less: carry forward losses Rs. 16,35,000
2062/63 5,00,000
2063/64 6,00,000
2064/65 2,00,000
2065/66 1,50,000
2066/67 1,00,000
2067/68 75,000
2068/69 10,000
16,35,000
Taxable loss for the year 2069/70 (1,35,000)
Carry forward losses for the year 2070/71
The taxable loss for the income year 2069/70 is Rs. 1,35,000. The loss of 2063/64 to 2065/66 is
14,50,000 which is fully setoff in FY 2069/70. The loss of Rs. 50,000 of 2066/67 and the loss of
2067/68 and 2068/69 is carried forward to 2070/71, total of Rs. 135,000.
Question No 34
Fewa Pvt. Ltd. has been established by Nepalese promoters under foreign direct investment.The
eighty percent of the total capital has been hold by non-resident persons. In addition, The Pvt.
Ltd.has borrowed the amount from the foreign investors. For the year ended Ashadh end, 2070, the
profit and loss account of the company has the following transactions.
Amount in Rs.
Sales 5,000,000
Interest income 75,000
Total income 5,075,000
Expenses
52 of 162
IT and VAT
CAP II Examination
Cost of sales 2,000,000

Administrative expenses 1,100,000
Interest expenses 1,500,000
Pollution control expense 300,000
Total Expenses 4,900,000

Net profit 175,000
i) Interest expense Rs. 1,400,000 out of total has been charged on the borrowed amount from
foreign investors. Answer whether all the above expenses can be claimed under Income Tax
Act, 2058?
ii) If these expenses cannot be claimed during the year, what would be the implication?
Answer
All the amount of cost of sales under section 15 and adminitrative expenses under section 13 can be
claimed for deductions while computing the taxable income. There is limitations on interest
expenses and pollution control expenses.
Calculation of allowable interest expenses
Net Profit: Rs. 1,75,000
Add carry forward interest expenses Rs. 0
Add interest expenses Rs. 15,00,000
Less interest Income (Rs.75,000)
Adjusted taxable income: Rs.16,00,000
50 % of Adjusted taxable income Rs. 800,000
Deductible interest expenses Rs. 8,75,000
Interest expenses under section 14 can be claimed only Rs. 9,75,000 out of total Rs. 15,00,000-
Rs. 8,75,000under 14 (2) and Rs. 1,00,000 under 14(1)
Further, pollution control expenses under section can be deducted fifty percent of adjusted taxable
income.
Calculation of deductible pollution control expenses:
Net Profit: Rs. 1,75,000
Add expenses during the year: Rs. 3,00,000
Adjusted taxable income: Rs.4,75,000
50 %of Adjusted taxable income: Rs. 2,37,500
So, all the expenses of pollution control cannot be allowable for deduction. Pollution control
expenses Rs. 2,37,500 out of Rs. 3,00,000 can be claimed for deductions.
ii) As per section 14 (3) of the act any interest not allowed to be deducted or not deducted
pursuant to Sub-section (2) may be carried forward or credited in the forthcoming income
year. So, the balance interest of Rs. 5,25,000(Rs. 14,00,000-Rs.8,75,000) will be carried forward in
the coming year and computed interest expenses as per above.

53 of 162
IT and VAT
CAP II Examination
The balance amount Rs. 62,500 of pollution control expenses will be capitalized in block D of the
assets and depreciation will be claimed from the next income year.
Question No 35:
Super company is a proprietorship industry producing tobaccos. The Industry has total sales of Rs.
2,00,00,000 and taxable income of Rs. 35,00,000 in Income Year 2070/071. The company has not
submitted estimated tax return during the year. In addition, it has not paid any taxes. You are
requested to assess the total Tax liability for this industry upto Mansir 20, 2071.
Answer
The company is a proprietorship firm, so the tax rate is applicable as per schedule 1(1). Thirty
percent tax rate for tobacco business is applicable only for entity.
Assumption:
The taxpayer has selected for single.
Calculation of total tax liability for F/Y 2070/71
Total taxable income Rs. 35,00,000.00
Particulars Tax rate Tax amount Rs.
Upto Rs. 200,000.00 0% -
Next Rs. 100,000.00 15% 15,000.00
Balance Rs. 32,00,000.00 25% 8,00,000.00
Additional Tax on the tax amount levied @ 25% for
taxable income above 25,00,000.00
(10,00,000.00*25%) i.e on Rs. 2,50,000.00 40% 100,000.00
Total tax amount 9,15,000.00
Fees under section 117 (1)(ka) 2,000.00
Fees under section 117 (1)(ga) (WN 2) 3,333.33
Interest under section 118 (1) (WN 2) 64835.62
Interest under section 119 (from Kartik to Mansir
2071) @ 15 % of Rs.9,15,000.00 22,875.00
Total tax liability till Mangsir end 2071 1008043.95
Working Note 2: Calculation of Fees and interest
 Under Section 117 (1)(ga): Total assessable income as per the section is Rs. 2,00,00,000.00, fees
0.1 % annually of Rs. 2,00,00,000.00 for 2 months (from Kartik to Mansir, 2071) is Rs. 3,333.33
or Rs. 100 per month whichever is higher.
 Under Section 118: total tax Rs. 9,15,000.00
Installments Cumulative Tax 90% of Actual Paid Interest Period Interest @ 15 %

Amount Rs. Cumulative Tax Instalment Chargeable (Months) amount Rs.
(a) Amount (b) (c) Amount (d) =
(b)-(c)
Poush end 3,66,000.00 3,29,400.00 0 3,29,400.00 3 12,337.5
Chaitra end 6,40,500.00 5,76,450.00 0 5,76,450.00 3 21,616.87
Ashad end 9,15,000.00 8,23,500.00 0 8,23,500.00 3 30,881.25

54 of 162
IT and VAT
CAP II Examination
Total 64,835.62
If students assume a Couple u/s 50 for calculation of tax liability, and calculate the interest u/s 118
taking the difference from 100%, full marks will be awarded.
Question No 36:
Munal Trade Link is a various goods supplier. The trade link is using accrual basis of accounting
for the income generated from the business. He gave an application to the department to change his
basis of accounting from accrual to cash in Income Year 2070/071. In accordance with the generally
accepted accounting principles, Income Tax Department has given the approval to account for his
income on cash basis in Income Year 2070/71. Some accounting information of the trade link at the
end of 2069/070 before changing the basis of accounting, was as below;
i) Goods worth of Rs. 75,000 has already been supplied to a retailer in Income Year 2069/070 but
amount has not been received. Advance Rs. 45,000 has been received from another retailer.
ii) Goods worth of Rs. 60,000 has been purchased from a vendor in Income Year 2069/070 but
amount has not been paid. Advance Rs. 35,000 has been paid to another vendor.
iii) Communications and electricity expenses of Rs. 3,500 were paid on Bhadra, 2071. These
expenses were incurred in Jestha and Ashadh, 2070.
State how you make adjustments of income and expense in FY 2070/071 in above conditions?
Answer
As mentioned in Chapter 6 of Income Tax Act, 2058, if any person takes the approval from Inland
Revenue Department for the change in basis of accounting for the purpose of taxation, or his basis
of accounting is changed because of various provisions mentioned in the same Chapter, inclusion of
his income, claim of expenditure shall be computed in such a manner that there is no repetition or
short of income or claim of expenditure in that Fiscal Year.
Accordingly, the following adjustments shall be made in Income Year 2070/71;
i) When goods are supplied, the income shall be recognized in accrual basis of accounting. So, no
need to adjustment for the goods of Rs. 75,000.00 that was included in Income Year 2069/70.
Advance amounting Rs. 45,000.00 was not assessable income for the Income year 2069/70 as
per accrual basis of accounting, so, it shall be included in Income Year 2070/71 on cash basis
ii) When goods are purchased, the expenses shall be recognized in accrual basis of accounting. So,
no need to adjustment for the goods of Rs. 60,000.00 that was deducted in Income Year
2069/70. Advance payment Rs. 35,000.00 was not deductible expenses for the Income year
2069/70 as per accrual basis of accounting, so, it shall be deducted in Income Year 2070/71 on
cash basis.
iii) Communications and electricity expenses of Rs. 3,500.00 were also eligible expenses for the
Income Year 2069/70 on accrual basis of accounting, so no need to adjustment in Income Year
2070/71. After making adjustments of inclusion of income and claim of expenditure in Income
Year 2070/71, the income or expenditure shall be accounted on cash basis for subsequent years.
Question No 37:

55 of 162
IT and VAT
CAP II Examination
Mr. Komal purchased a piece of land at Rs. 30 lakhs. He sold the land at Rs. 45 lakhs. He paid
registration expenses Rs. 2 lakhs for this land. In this case, what would be the tax implications on
the following situations?
i) The land was purchased on Chitra 2064 and sold it on Magh 2070.
ii) The land was purchased on Magh 2067 and sold it on Magh 2070.
iii)The land was purchased on Chitra 2059 and sold it on Baishak 2071.
iv) If selling and buying of the land were completed through a sole shareholder of a Pvt. Ltd. The
shareholder is Mr. Komal. (December 2014)(5 Marks)
Answer
Land and building disposed for a value less than 30 lakhs by any natural person is not treated non-
business taxable assets as per Section 2(Da). The disposal value more than the limit shall be taken
into account in computing the gain and loss on income from investment. Tax liability is calculated
on the basis of the net gain from the disposal of those assets. Withholding tax is managed for such
transactions under section 95 Ka (3) of the Act for natural person. If the land is sold after holding it
for more than 5 years the tax is 2.5 % and if it is sold after holding it for less than 5 years the tax
rate is 5%. The Land Revenue Office withholds the tax on such net gain.
Calculation of net gain on this land:

Particular Amount Amount
Incoming Rs. 45 Lakhs
Outgoings Rs. 32 Lakhs
Purchase cost Rs. 30 Lakhs
Transfer expenses Rs. 2 Lakhs
Net gain Rs. 13 Lakhs
So, TDS shall be as follows in this case. Any exemption limit available reduces the tax liability of
the natural person. This depends on other taxable income of the tax payer and a tax return should be
submitted for this.
i) The land was purchased on Chitra 2064 and sold it on Magh 2070. Mr. Komal sold the land after
holding 5 years. The TDS is Rs. 32,500.00 (2.5% of 13 Lakhs)
ii) The land was purchased on Magh 2067 and sold it on Magh 2070. He sold the land within 5
years. The TDS is Rs. 65,000.00 (5% of 13 Lakhs
iii) The land was purchased on Chitra 2059 and sold it on Baishak 2071. Mr. Komal sold the land
after holding more than 10 years. However, the TDS is Rs. 32,500.00
iv) If selling and buying of the land were completed through a sole shareholder of a Pvt Ltd, it
will be regarded as disposal of business assets. There will be no TDS, but the net gain is
calculated under Sec. 36 of the Act and net gain after set off with any unrelieved lossis included
as income from business under Section 7.
Question No 38:
Saru Pvt. Ltd., Kathmandu declared a Voluntary Retirement Scheme (VRS) for its staffs during FY
2071/72. Provident funds are deposited in CIT, an approved retirement fund. Man Bahadur decided

56 of 162
IT and VAT
CAP II Examination
to take VRS with effect from 1st Baishakh 2072. The following details are available for income of
Man Bahadur for the year.
i) Basic Salary till Chaitra 2071 Rs. 50,000 per month.
ii) Monthly Allowance Rs. 30,000 per month.
iii) Provident Fund contributed by employer 10% of basic salary
iv) An equal amount was contributed by employee.
v) Life Insurance premium paid by Man Bahadur for himself Rs. 25,000
vi) Remote area allowance for working in.
vii) Category C district for two months Rs. 5,000 per month.
viii) Provident Fund paid by CIT on 15th Baishakh 2072 Rs. 12,00,000.
Retirement payment paid by Saru Pvt. Ltd. as per VRS was Rs. 20, 00,000, paid to Man Bahadur
directly by the company.
Required:
(a) Calculate taxable income and tax liability of Man Bahadur for F/Y 2071/72 as per Income from
Employment. Assume individual.
(b) Identify any payments subject to final withholding Tax (Final TDS) and applicable TDS rate
and Tax amount. (December 2014)(10 Marks)
Answer
Calculation of taxable income and tax liability of Man Bahadur for FY 2071/72
Details Amount Notes

Salary 450,000.00
Monthly Allowance 270,000.00
Provident Fund by Employer 45,000.00
Remote Area Allowance 10,000.00
Total Assessable Income 775,000.00
Less: Contribution to Approved Retirement Fund (90,000.00) 1
1/3rd of Assessable Income 258,333.33
Contribution 90,000.00
Maximum 300,000.00
Taxable Income 685,000.00
Less: Life Insurance Premium (20,000.00) 2
Less: Remote Area Benefit (5,000.00) 3
Net Taxable Income 660,000.00
Calculation of tax liability for FY 2071/72

Tax Slab Tax Liability
1st Rs. 250000 @1% 2500
Next Rs. 100,000 @15% 15000
Balance Rs. 310,000 @25% 77500

57 of 162
IT and VAT
CAP II Examination

 Note 1- Contribution to approved retirement fund is deductible upto 1/3rd of assessable income
or actual contribution or Rs. 3 lakh whichever is lower. Here, the amount deductible is Rs.
90,000.
 Note 2- Life Insurance premium paid is deductible actual premium paid not exceeding Rs.
20,000.
 Note 3- Remote area benefit available for Category C district is Rs. 30,000, proportionate for
period of stay. Here, two months.
Answer to part (b) of question 1(a)
The retirement payments made to Man Bahadur are subject to TDS as per Sec. 88 of the Act.
a. Provident Fund paid by CIT
Total Payment (Note 1) Rs. 12,00,000
Less 50% of the payment or Rs. 5,00,000 whichever is higher (Rs. 6,00,000)
Net Payment subject to tax Rs. 6,00,000
TDS @ 5% Rs. 30,000
The payment is final TDS as per Sec. 92.
Note 1: The payment for provident fund is assumed to have related only with the period after the
b. Retirement Payment paid by employer is subject to 15% tax as per Sec. 88. The tax amount for
Man Bahadur is Rs. 3,00,000. The payment is final as per Sec. 92 of the Act.
Question No 39:
JKL Limited purchased 100 shares of MNO Bank Limited for each Rs. 200 each including
brokerage and other expenses, as on Chaitra 19, 2058, the company was holding 250 shares of
MNO including the shares purchased and bonus shares paid by MNO. The quoted closing price on
Chaitra 18th, 2058 on MNO shares was Rs. 800 each.
Calculate the gain from the disposal of the shares under the circumstances given below:
i) On Jestha 15, 2071 the company had disposed of the total shares at the rate of Rs. 1,000 each.
The brokerage paid was 1.2% of the sales amount.
ii) On Jestha 15, 2071 the company had disposed the total shares at the rate of Rs. 750 each. The
brokerage paid was 1.2% of the sales amount.
iii) On Falgun 10, 2070 the company had received 125 bonus shares for the 250 shares held by it.
On Jestha 15, 2071 the company had disposed 250 shares at the rate of Rs. 750 each. The
brokerage paid was 1.2% of the sales amount. (December 2014)(10 Marks)
Answer
i. Solution under the first circumstance:
Cost of shares (100 shares @ Rs. 200 each Rs. 20,000
Cost of bonus shares (150 Bonus Share) Nil
Cost of 250 shares Rs. 20,000

58 of 162
IT and VAT
CAP II Examination
But the index value of the shares as on Chaitra 18, 2058 was Rs. 800 per share and so the deemed
cost of the 250 shares shall be Rs. 800×250=Rs. 200,000 + Rs. 3,000 (1.2% of the sale proceeds for
brokerage on sales.)
The amount received from the disposal is 250×Rs. 1000=Rs. 250,000.
Thus the gain is of Rs. 250,000-Rs.203,000=Rs. 47,000.
ii. Solution under the second circumstance:

The index value of the shares as on Chaitra 18, 2058 was Rs. 800 per share and so the deemed cost
of the 250 shares shall be Rs. 800×250=Rs. 200,000 + Rs. 2,250 (1.2% of the sale proceeds for
brokerage on sales.)
Thus the loss is of Rs. 187,500-Rs.202,250=Rs. 14,750.
iii. Solution under the third circumstance:

The index value of the shares as on Chaitra 18, 2058 was Rs. 800 per share and so the deemed cost
of the 250 shares shall be Rs. (800×250) = Rs. 200,000
Plus the cost of 125 bonus shares received after Chaitra 18, 2058 = Rs. Nil
The total cost of 375 shares is Rs. 200,000 and so the cost of one share comes to Rs. = 533.33.
The cost of 250 shares sold comes to Rs. 133,332.50+2,250 (1.2% of the sale proceeds for
brokerage on sales).
Thus the gain is of Rs. 187,500-Rs. 135,582.50 =Rs. 51,917.50.
Question No 40:
Mr. Robert Wooster, a citizen of USA, is employed in research department of Mokshya Pvt. Ltd.,
Nepal with effect from 1st Poush 2071. Due to nature of his job requirements Mr. Wooster has to
reside in Nepal. His employer furnishes him pay slip showing deduction of Rs. 265,000 as
withholding Tax under sec. 87 of Income Tax Act, 2058 for financial year 2071-72.
Mr. Wooster has obtained following information about remuneration from Mokshya Pvt. Ltd.
Basic salary per month 50,000
Uniform allowance 7,000
Technical allowance per month 60,000
Flat rent of Mr. Wooster paid by employer 60,000
Telephone facility per month 500
Free vehicle facility provided
Compensation paid by current employer to previous 200,000
employer of Mr. Wooster which had to be paid by Mr.
Wooster
Advance salary for Shrawan 2072 and Bhadra 2072 100,000
leave pay 50,000
Value of accumulated leave provision payable at the end of 10,000
service period
Tuition fees of son of Mr. Wooster for learning Nepali 40,000
language paid directly by employer to private tutor
Air fare of Mr. Wooster from USA to Nepal paid by 100,000
59 of 162
IT and VAT
CAP II Examination
employer
Canteen bill paid by employer 40,000
Drivers salary of vehicle provided by employer 100,000
Required:
i) Mr. Wooster now seeks your advice whether withholding Tax deducted by his employer under
sec. 87 of Income Tax Act, 2058 is correct.
ii) Whether Mr. Wooster is required to file income Tax Return for financial year 2071-72 in Nepal
as per Income Tax Act, 2058?
iii) Mr. Wooster contends that as he is a citizen of USA, he is required to pay tax in USA and not in
Nepal. Is Mr. Wooster Correct? If not explain why is he required to pay Taxes in Nepal.
Answer
Computation of taxable Income of Mr. Wooster for the financial year 2071-72
Particulars Details Amount
Basic Salary (Poush 2071 to Ashad 2072) 50000*7 month 350000
Uniform allowance 7,000
Technical Allowance 60000*7 month 420,000
Flat Rent of Mr. Wooster Paid by employer 60,000
Telephone Facility 500*7 month 3,500
Vehicle Facility (.5 % of Basic Salary- Perquisites
350000*.5% 1,750
Valuation)
Compensation paid by current employer to previous
employer of Mr. Wooster which had to be paid by Mr. 200,000
Wooster
Advance salary for Shrawan 2072 and Bhadra 2072 100,000
Leave pay 50,000
Value of accumulated leave provision payable at the end of
Not taxable 0
service period (Only provision- taxable on cash basis)
Tuition fees of son of Mr. Wooster for learning Nepali
40,000
language paid directly by employer to private tutor
Air fare of Mr. Wooster from USA to Nepal paid by
100,000
employer
Canteen bill paid by employer 40,000
Drivers salary of vehicle provided by employer Not taxable 0
Total Taxable Income 1,372,250
Computation of Tax
Up to 300,000 (1% Social Security Tax) 3000
From 300,000 to 400,000(max of Rs. 100,000) 15,000
Remaining Amount 972,250 @ 25 % (Max of Rs. 2,500,000) 243,063
Total Tax Liability of Mr. Wooster for 2071-72 261,063
Hence:
i) The amount of tax as per pay slip computed by company is not correct which is more than Rs.
3,973 as computed by the company.

60 of 162
IT and VAT
CAP II Examination
ii) Mr. Wooster is not required to file income tax return assuming that he is employed by only one
employer in Nepal for the income year and does not have any other income.
Further his information does not say that he wants to claim for deduction of donation and
medical tax credit.
iii) All person resident in Nepal during Income Year are required to pay tax in Nepal irrespective of
nationality.
Note: In case of flat rent if any student considers it as residence facility and calculate perquisite of
2% of basic and give answer, full marks will be awarded.
Question No 41:
The investment income and expenses related to Mr. Narayan for the financial year 2071-72 are as
follows:
Particulars: Amount (Rs.)
A. Income:
House rent income net of TDS 180,000
Bank interest income net of TDS- Nepal Bank Ltd. 190,000
Natural resources payments net of TDS 170,000
Interest income net of TDS from ABC Ltd. 2,125,000
Compensation received from loss of last year investment 25,000
Income from investment insurance net of TDS- Rastriya 95,000
Beeme Sanstha
Gift related to investment income 50,000
Dividend income net of TDS from Sanima Bank Ltd. 47,500
B. Expenses:
Expenses related to collection of house rent 4,000
Expenses related to natural resources 8,500
Allowable depreciation allowance as per the Act 5,500
Life insurance premium paid to Rastriya Beema Sanstha 22,500
Donation paid to tax exempt organization 40,000
Required:
i) Compute total Taxable income from investment.
ii) Compute net Tax liability for the financial year 2071-72, assuming Mr. Narayan is a married
and had no other income. (June 2014)(10 Marks)
Answer

61 of 162
IT and VAT
CAP II Examination
Computation of assessable investment Income of Mr. Narayan for the F. Y. 2071-72

Particulars Details Amt. in Rs.
A. Investment Income:
Final
House Rent Income net of TDS -
withholding
Final
Bank Interest Income net of TDS- Nepal Bank Ltd -
withholding
Natural resources payments net of TDS Rs. 170,000 (15% TDS – Rs.
200,000
TDS) 30,000
Interest Income net of TDS Rs. 2,125,000 from ABC TDS – Rs.
2,500,000
Ltd.(15%TDS) 375,000
Compensation received from loss of last year investment 25,000
Income from investment insurance net of TDS- Rastriya B. Final
-
Sanstha withholding
Gift related to investment income 50,000
Final
Dividend income net of TDS from Sanima Bank Ltd -
withholding
A. Total Investment Income 2,775,000
B. Investment Expenses:
Exp. to collect house rent (related to final withholding
Not deductible -
income)
Expenses related to natural resources Deductible 8,500
Allowable depreciation allowance as per the Act Deductible 5,500
B. Total Investment Expenses 14,000
C. Net Assessable Investment Income (A-B) 2,761,000
Particulars Details Amt. in Rs.

Net Assessable Investment Income 2,761,000
Less:
1. Donation to tax exempt organization (least of following):
i. 5 % of Adj. taxable income Rs. 2,761,000 = Rs. 138,050 (40,000)
ii. Actual donation = Rs. 40,000
iii. Maximum limit of Rs. 100,000
2. Life Insurance premium (least of following):
-Actual life insurance premium paid = Rs. 22,500 (20,000)
- or Maximum limit of Rs. 20,000 per annum
Total Taxable Income 2,701,000
Computation of Tax
Up to 300,000 (1% Social Security Tax- Not applicable) -
From 300,000 to 400,000(max of Rs. 100,000) 15,000
From 400,000 to 2,500,000(max of Rs. 2,100,000) 525,000
Remaining Amount 201000 @ 35 % (In excess of Rs. 70,350
2,500,000) 610,350
Total Tax Liability (405,000)
62 of 162
IT and VAT
CAP II Examination
Less: Withholding tax ( Rs. 30,000 + Rs. 375,000) 205,350

Net Tax Liability of Mr. Narayan for 2071-72
Hence:
a) Total taxable income from investment of Mr. Narayan for F.Y. 2071-72 is Rs. 2,701,000.
b) Net tax liability of Mr. Narayan (after calming withholding Tax of Rs. 405,000) is Rs. 205,350.
Question No 42:
XYZ & Co. has provided the following details of its assets during the Income Year 2071-72.
Block Opening Additions during Date of Purchase Disposal during
Depreciation the Year (in Rs.) the year (In Rs.)
Basis
A 3,000,000 Nil - Nil
B 500,000 300,000 Bhadra 01, 2071 50,000
C 1,500,00 500,000 Chaitra 30, 2071 175,000
D 700,000 Nil - Nil
Additional Information:
Before Magh 01, 2071, the company incurred Rs. 300,000 to acquire the patent right for the period
of 5 years and 7 months.
Required:
i) Calculate the allowable depreciation allowances for the Income Year 2071.72 in respect of all the
block of assets.
ii) What will be the implication on depreciation allowance if XYZ & Co. is a special industry as
defined under the Income Tax Act, 2058? (June 2014)(10 Marks)
Answer
Computation of Depreciation Allowance for the Income Year 2071.72
Blocks
Particulars A B C D
Opening Depreciation Base Rs. 3,000,000 500,000 150,000 700,000
Add: Absorbed Additions Rs.
For Block B: 3/3×Rs 300,000 300,000
For Block C: 2/3×Rs. 500,000 333,333
Less: Disposals Rs (50,000) (175,000)
Depreciation base for the year Rs 3,000,000 750,000 308,333 700,000
Rate of Depreciation 5% 25% 20% 15%
Allowable Depreciation 150,000 187,500 61,667 105,000
Computation of Allowable Amortization on patents right, intangible asset, for the Income Year
2071.72
Allowable Amortization = Rs. 300,000/5.5 = Rs. 54,545
Note:
As per section 3 of Schedule 2 of Income Tax Act, 2058, the useful life of an intangible asset is
rounded down to the nearest half year.
(ii)

63 of 162
IT and VAT
CAP II Examination
Entities referred to in section 19 (2) and paragraph 2(3) and (4) of schedule 1 shall be entitled to an
additional depreciation rate added by 1/3 in the depreciation rates referred to in subparagraph (1)
applicable to pools of depreciable assets in Class A, B, C, and D.
Computation of Allowable Depreciation if XYZ & Co is a special Industry

For Block A: 6.67% of Rs. 3,000,000 = Rs. 200,000
For Block B: 33.33% of Rs. 750,000 = Rs. 250,000
For Block C: 26.67% of Rs. 308,333 Rs. 82,232.42
For Block D: 20% of Rs. 700,000 = Rs. 140,000
For Block E: Rs. 54,545
Additional 1/3 depreciation allowance is not applicable for the pool of asset under Block E.
Question no 43:
Gorkhali Cement (P.) Ltd., Rupendehi, has the following transactions during the year 2071/72:
Profit & loss Account
Sales 31,000,000
Cost of Sales 17,600,000
Gross profit 12,400,000
Other Income 500,000
Administrative expenses 2,000,000
Selling & Distribution Expenses 600,000
Depreciation 6,800,000
Interest expenses 2,000,000
Profit before tax 2,500,000
Additional Information:
 Other income was the interest from Bank of Kathmandu. It has presented net of Tax.
 Cost of sales includes the following:
Particulars Amount (Rs.) Amount (Rs.)
Opening stocks 700,000
Clinker and Other raw material purchase 18,000,000
Manufacturing Expenses
Salary and wages for factory 1,200,000
Repair and maintenance expenses 400,000
Other overhead expenses 300,000
Total manufacturing expenses 1,900,000
Closing stocks 3,000,000
 Cost of stocks includes the repair and maintenance expenses, which is approximately 2 % of the
valuation.
 Depreciation includes Rs. 2,000,000 for the construction of Factory which was completed on 20
Mangsir, 2071 with total cost of Rs. 40,000,000 without charging the interest. Depreciation for
others are as follows:
Block Depreciation base (Rs.) Depreciation (Rs.)

64 of 162
IT and VAT
CAP II Examination
B 1,200,000 300,000
D 30,000,000 4,500,000
 Interest expense was charged for the loan borrowed for factory construction. The loan Rs.
20,000,000 with 10 percent interest rate was disbursed on 1st Ashadh 2071 from concerned bank
and remains even during the year.
Based on the above information, you are required to calculate Taxable income and Tax liability of
the Pvt. Ltd. for Income Year 2071/72. (June 2014)(10 Marks)
Answer
Calculation of taxable income and tax liability
Incomes (Rs.)
Sales 31,000,000
Other Income (WN 1) 588,235
Total Income 31,588,235
Less allowable Deduction

Interest under section 14 (WN 2) 2,000,000
Cost of sales under section 15 (WN 3) 17,246,000
Repair & maintenance expenses under section 16 (WN4) 400,000
Depreciation under section 19 (WN 5) 9,079,116
Other expenses under section 13 (WN 6) 2,600,000
Total allowable expenses 31,325,116
Tax @ 20 % Rs.52,624
Less TDS on interest income Rs. 88,235
Net Tax liability (Excess Tax paid) (Rs. 35,611)
Working Notes (WN)

WN 1
Interest Income 500,000 (Net of Tax)
Gross interest Income 500,000/.85= 588,235 [15% is applicable u/s. 88(1)]
WN 2
Interest expense related to this income Year shall be allowable, the factory building was used for the
business, and the date of completion is irrelevant.
WN 3
Opening Stock Rs. 686,000 (700,000 less 2 % of 700,000)
Raw material purchase Rs. 18,000,000
Salary & wages Rs. 1,200,000
Other overhead Rs. 300,000
Less closing stock (Rs. 2,940,000) (3,000,000 less 2 % of 3,000,000)
WN 4
Repair and maintenance expense is within the limit of depreciation base as per section 16.
WN 5
Calculation of allowable depreciation
Loan was utilized for factory construction; the one month interest related to the Ashad, 2070 shall be
capitalized. So, Depreciation base for factory = 40,000,000+ (10% *20,000,000)/12
= 40,166,667
65 of 162
IT and VAT
CAP II Examination
Block Depreciation Depreciation rate Depreciation Rs.

base Rs. (Normal rate +1/3 for
special industry)
A (Factory building) 40,166,667 6.67 % 2,679,116
B 1,200,000 33.33% 400,000
D 30,000,000 20% 6,000,000
Total 9,079,116
WN 6
Administrative expenses Rs. 2,000,000
Selling & Distribution expenses Rs. 600,000
Total other expenses Rs.2,600,000
Question No 44:
Mrs. Indira Dahal was retired on 1st Magh, 2071 after completing 22 years of private banking
service from Kathmandu. She submits the following details with respect to her employment for the
Income Year 2071/72.
i) Monthly salary Rs. 35,000

ii) Two months' salary is provided for dress and festival, one month for each.
iii) She has obtained overtime allowance of Rs. 20,000
iv) The bank deducts 10 % from her salary and contributes 20 % of her salary to an approved
retirement fund.
v) She has car facility from the office for all purpose. Expenses Rs. 1,000 per month and salary
of the driver of Rs. 12,000 per month were paid by the bank.
vi) Compensation received as per Employee Rule Rs. 100,000
vii) Insurance premium paid by Employer on her behalf, Rs. 25,000 that include Rs. 12,000 for
her policy and Rs. 13,000 for her son's policy.
viii) The bank makes payment equivalent one month salary to the employees who work for full
12 months during the years.
ix) The bank has provided her with accommodation facility on leased house for which 2 % of
salary was deducted. Actual rent paid by the bank was Rs. 35,000 per year.
x) On the retirement, she has entitled to receive gratuity amount equivalent to one month salary
for each year services.
xi) The company paid bonus to her equivalent to two month's salary related to the Income Year
2071/72 on 20th Aswin 2072.
She has only income from this employment and opted for single. You are required to assess income
from employment and her tax liability. 10
66 of 162
IT and VAT
CAP II Examination
Answer

67 of 162
IT and VAT
CAP II Examination
Solution
Calculation of Assessable Income and Net tax liability of Mrs. Indira for FY 2071/72.
Particulars Notes Amount in Rs.
Salary (35,000 x 6)
210,000
Festival allowance
35,000
Dress allowance
35,000
Overtime allowance
20,000
Contribution to Provident Fund (PF)
21,000
Vehicle facility (0.5 % of 210,000) 1
1,050
Compensation
100,000
Insurance Premium 2
25,000
One months' salary (note entitled as she has worked
-
only for 6 months
Accommodation facility (2% of 210,000) 3
4,200
Bonus not related to this income year 4 -
Assessable Income 451,250
Less:
Deductible Amount against contribution to PF , lower
(42,000)
of
i) Actual Contribution
42,000
ii) 1/3rd of Assessable Income
150,417
iii) Maximum Limit 3,00,000
Deduction against Insurance premium lower of :-
(12,000)
i) Actual payment
12,000
ii) Maximum Limit
20,000
Calculation of Tax Liability
Up to Rs. 250,000 @1%
2,500
68 of 162
IT and VAT
CAP II Examination
Next Rs. 100,000 @, 15%

15,000
Balance (Rs. 47,250 @ 25%)
11,813
Less: 10% tax credit for women having income from employment
only when opted as an individual 2,931
Net tax liability 26,381
Total Gratuity for 22 Years
770,000
Less: Gratuity Till Chaitra 19, 2058 exempt from tax
(315,000)
Taxable Gratuity
455,000
TDS Rate when paid by employer 15%
Tax Liability on Gratuity 68,250
Total Tax Liability for Mrs. Indira Dahal 94,631
Notes:
1. Car expense and driver's salary is not taxable income.
2. Premium paid by the bank is a taxable income and deduction only is allowed to the tax payer, and
her son is not the tax payer natural person.
3. Rent paid by the bank and deduction from salary are irrelevant for assessment of her income, only 2
% of salary is considered as a perquisite as per the income tax act.
4. Bonus is taxable in FY 2072/73 and not in 2071/72.
Question No 45:
An accounting firm owned by Amber Poudel maintains its books of account on cash basis. Mr.
Poudel submitted his financial information for the financial year 2071-72 as follows:
Receipts Amount in Payments Amount in

(Rs.) (Rs.)
To, Opening cash/bank By, office expenses 75,000
balance. 60,000
To, Consultancy fees-gross 648,000 By, salary to staff 425,000
To, Book writing fee 1,700,000 By, Life Insurance policy
26,000
To, Bank Loan @ 10 % 600,000 By, Purchase of furniture
90,000
To, Sale of old journals 12,000 By, Office Rent 500,000
To, Lottery prize 150,000 By, Interest Exp. 60,000
To, Paper checking from 200,000 By, Water & Electricity
T.U. Expenses
69 of 162
IT and VAT
CAP II Examination
125,000
To. Part time lecture 135,000 By, Purchase of journals
4,000
By, Transportation Expenses
100,000
By, Closing cash/bank bal.
2100,000
3,505,000 3,505,000
Additional information:
i) Salary expenses include salary paid to a staff for last three years amounted to Rs. 125,000 and
advance salary given to another staff amounted to Rs. 25,000.
ii) Opening WDV of furniture was Rs. 170,000 and during the year additional furniture was purchase
during the end of Jestha, 2072.
iii) Consultancy fee received includes advance from Paban Limited Rs. 125,000.
iv) Office Rent paid includes payments for financial 2072-73, 2073-74 & 2074-75
v) Fifty percent of loan used for personal purpose by Mr. Poudel.
Required: (5+5=10)
Compute the taxable income and tax liability of accounting firm owned Mr. Poudel for the financial
year 2071-72.
Answer
Solution
b) Computation of taxable income of Mr. Poudel for the financial year 2071-72:
Particulars Amount in Rs.

A. Inclusive taxable Income:
1. Consultancy fees 648,000
2. Book writing fee 1,700,000
3. Sale of old journals 12,000
4. Paper checking from TU 200,000
Total Taxable Receipt (A)
2,560,000
Less: Allowable deduction
office expenses 75,000
salary to staff - (Allowed on cash basis) 425,000
Office Rent- (Allowed on cash basis) 500,000
Interest Exp. (50% only) 30,000

70 of 162
IT and VAT
CAP II Examination
Water & Electricity Exp 125,000

Purchase of journals 4,000
Transportation Exp 100,000
Depreciation (Rs. 170,000+1/3 of Rs.
50,000
90,000) x 25 %
Total Expense (B)
1,309,000
Total Assessable income from
Business/Prof.(A-B) 1,251,000
Add: Income from employment
135,000
Total Assessable income
1,386,000
Less: Life Insurance premium Max. 20,000
(20,000)
Taxable Income
1,366,000
Total taxable income
1,366,000
Tax on first 300,000 @ 0 % -
Next Rs. 100,000 @ 15 % 15,000
Balance Rs. 831,000 @ 25 % 241,500
Total Tax liability
256,500
Notes
1. It is assumed that lottery prize is paid by resident and so it is final withholding tax as winfall gain
Part time lecture is considered as regular income and included in calculation and as it is not
“patake.”
Question No 46:
a) Smriti works in a private school at monthly salary of Rs. 30,000 for financial year 2072/73.
She is paid Dashain allowance of Rs. 20,000. Her contribution to approved retirement fund is Rs.
40,000 per annum. She has already paid medical insurance of Rs. 25,000 and life insurance
premium of Rs. 15,000 for the year. She incurs Rs. 3,000 for purpose of transportation to and fro
school from her residence, and also pays Rs. 5,000 for baby care of her young child so that she
could work in school. The school pays Rs. 6,000 school fee of her elder child per month. Calculate
the tax liability assume individual.
Answer 5
Calculation of Tax Liability of Smriti

71 of 162
IT and VAT
CAP II Examination
Particulars Amount in Rs Notes
Annual Salary 360,000

Payment of Tution Fee by School 72,000
Total Assessable Income 452,000
Less Contribution to Approved Retirement
(40,000) Note 1
Fund
Less: Deduction for Medical Insurance (20,000) Note 2
Less: Deduction for Life Insurance (15,000) Note 2
Taxable Income for tax calculation 377,000
1st Rs. 250000 1% 2,500
Next Rs. 100,000 15% 15,000
Balance on Rs. 27,000 25% 6,750
Less 10% Tax Credit (2,425) Note 3
Net Tax Liability 21,825
Notes
1. Contribution to Approved Retirement Fund is deductible up to 1/3rd of Assessable Income or Rs.
300,000 or Actual Contribution whichever is lower.
2. Medical insurance premium paid by a natural person is deductible up to Rs. 20,000 from FY
2072/73. Life Insurance premium is available for deduction up to Rs. 20,000.
3. Female employees are entitled to 10% tax credit if they only have remuneration income and opt as
individual.
Question No 47:
b) XYZ Pvt. Ltd. has taken the extension of time for the submission of Income Tax Return for
the Income Year 2070.71 as per section 98 of Income Tax Act, 2058 till Poush end 2071. The
company submitted the Income Tax Return on Magh 09, 2071 instead of Poush end. The amount to
be included in income, as per section 7, was Rs. 5 million and the deductible expense was Rs. 4
million. Since the company has taken the extension till Poush end there is delay of nine days only
and the amount of fees to be paid under Section 117(1) (ga) is for nine days only and shall be on the
basis of net income i.e. on Rs. 1 million. Comment on the claim of the company referring the
provisions of the Act.
Answer
In case a person fails to submit Income Tax Return as per Section 96(1), the fees shall be charged as
follows;
72 of 162
IT and VAT
CAP II Examination
i. In case the person falls under the category as specified under Section 4(4), the fees shall be Rs. 100
per month of delay.
ii. For other tax payers, the fees shall be higher of 0.1% of the 'assessable income' or Rs. 100 per
month of delay. The word 'assessable income' means the income derived after the inclusion of all
the amount to be included in income and before any allowed deduction.
A part of a month shall be treated as delay of one month for this section.

Amount to be included in Income is Rs. 5 million
Amount that can be allowed as deduction Rs. NIL
For the purpose of section 117(1)(ga) assessable income Rs. 5 million
Period of fees to be charged (Kartik to Magh) 4 months
Fees as per Section 117(1)(ga) [Rs. 5 million ×0.1%/12×4) Rs. 1,667
Note: If the Income Tax Return was submitted within the extended time, the fees under Section
117(1)(ga) would not have been charged. But if it is not submitted with in the extended time the
amount of fees under Section 117(1)(ga) shall have to be charged after three months from the end of
Income Year.(i.e. from the date upto which statutory time limit is provided by the Act.)
Hence, the contention of the company is incorrect.
Question No 48:
c) Mr. Ram had purchased land and private building on 2065.07.04 for Rs. 2.8 million. He sold
such property for Rs. 5.2 million on 2071.08.15. Answer the followings mentioning the relevant
provisions of Income Tax Act/Rules.
i) Calculate capital gain and tax thereon. Can Ram claim such tax as advance tax?
ii) What shall be your answer if such property was purchased on 2060.04.15 and Mr. Ram has been
residing continuously?
iii) Will your answer be different if such property was purchased on 2069.04.15 and sold for Rs. 2.9
million?

Answer
Section 2(da) and 95ka(3) of Income Tax Act, 2058 provides the following provisions.
Section 95ka(3)
In case any natural person disposes land and private building, the gain on such disposal is subject to
advance tax and Land Revenue Office (Malpot Karyalaya) shall have to collect such tax at the time
of registration as follows;
(ka) In case of disposal of non-business chargeable asset (land and building) owned for five years or
more at the rate of 2.5%.
(kha) In case of disposal of non-business chargeable asset (land and building) owned for less than
five years at the rate of 5%.
Section 2(da)(2)
'Non-business chargeable asset' means asset other than following land and building;
73 of 162
IT and VAT
CAP II Examination
In case of natural person,

- if the owner of the private building has owned the building continuously for a period of 10 years or
more; and
- he has resided in the building for a period of 10 years or more continuously or intermittently.
Section 2(da)(4)
'Non-business chargeable asset' means asset other than following land and building;
In case of natural person, if the disposal of land, land and building and private building is for less
than Rs. 3 million.
Accordingly,
i. The Capital Gain of Rs. (5.2 million - 2.8million) = Rs. 2.4 million is subject to advance tax at the
rate of 2.5% i.e. Rs. 60,000 which shall be collected by Land Revenue Office (Malpot Karyalaya) at
the time of registration and the amount of Rs. 60,000 can be claimed as advance tax while
submitting Income Tax Return by Mr. Ram.
ii. The property shall not be considered as non-business chargeable asset under Section 2(da)(2) and
hence, no capital gain tax is charged on such transfer.
iii. The property shall not be considered as non-business chargeable asset under Section 2(da)(4) and
hence, no capital gain tax is charged on such transfer.
Question No 49:

74 of 162
IT and VAT
CAP II Examination
Chapter 4:
Withholding Taxes

75 of 162
IT and VAT
CAP II Examination
Question No 1
Mr. Ramseh has sold a building with one ropani land at a consideration of Rs. 15,000,000 on
Chaitra 31, 2066. This building was purchased by him on Falgun 20, 2061 at a consideration of Rs.
5,000,000 and also incurred an expenditure of Rs. 1,000,000 for extension of building. Calculate the
amount of tax to be deducted at the time of the sale of land.
Will your answer be different if Mr. Ramesh had purchased that building on Falgun 20, 2055?
Answer
Calculation of Tax to be deducted at the time of Sale of Building (Section 89 Kha)
Sale proceed 15,000,000

Less: Purchase price 5,000,000
Building Extension expenses 1,000,000 6,000,000
Taxable profit 9,000,000
Tax to be deducted @ 5% of Rs. 9,000,000 Rs. 450,000
As the building was in the ownership of Mr. Ramesh for more than 5 years therefore 5% tax to be
deducted by Malpot Office at the time of sale (section 89 Kha).
If that building was purchased by Mr. Ramesh on Falgun 20, 2055 than tax shall not be deducted in
this transaction as the building was in the ownership of Mr. Ramesh for more than 10 years. In this
case, this building will not be the non-business chargeable asset as per the definition of section 2
(da).
[ Answer should be elaborated with all the provisions. ]
Question No 2:
Mr. X held 500 shares of ABC Ltd., a Listed Company, of Rs. 100 each. He acquired those shares
through a stockbroker by paying Rs. 700 each, and incurred Rs. 2,800 towards broker commission.
He sold all those shares through the broker for Rs. 3,500 each with the brokerage commission of Rs.
8,750. Assuming that Mr. X is a non-resident, compute the gain amount and withholding tax
amount. (June 2010)(5 Marks)
Answer
Computation of gain on the sales of shares of ABC Ltd.
Sales (500 shares of Rs. 3,500 each) (a) Rs. 17,50,000
Less: Outgoings
500 shares at Rs. 700 each Rs. 3.50,000
Brokerage commission:
Acquisition of shares Rs. 2,800
Sales Rs. 8,750
Total outgoing (b) Rs. 3,61,550
Gain on sale of shares (a-b) Rs. 13,88,450
Amount of withholding tax by Stock Exchange Ltd. on total gain amount is:
15 % on Rs. 13,88,450 = Rs. 2,08,267
76 of 162
IT and VAT
CAP II Examination
Note: Withholding Tax @ 15 % on gain is applicable to the non resident person.
Question No 3:
Mr. Ram Kumar has opened a bank account with Grameen Biaks Bank in Parbat with a deposit of
Rs. 50,000 with interest at the rate of 8 percent per annum. During the year, the bank has to pay Mr.
Ram Kumar Rs. 4000 as Bank Interest. The bank seeks for your advice regarding the applicability
of withholding tax?
If for same deposit of Rs. 50,000 with the interest rate of 24%, the bank has to pay Rs. 12,000 for
that year, then will your answer differ? (December 2010)(5 Marks)
Answer
As per section 88(4)(cha) of the act, in case of deposits made in rural community based micro
finance, grameen bikas bank, postal savings bank, cooperative as mentioned in section 11(2) of the
act, interest is accrued upto Rs.10,000 per annnum, then withholding tax shall not be applicable.
In the first case, annual interest from Grameen Bikas Bank is Rs. 4000 which is within thelimit of
Rs. 10,000, so withholding tax is not applicable. But in the second case, it exceeds the limit of
Rs.10,000, hence withholding tax is applicable
Question No 4:
As a tax consultant, you have been enquired of the implication on income tax on the following
transactions:
i) Kanyam Tea Estate Ltd. is a co-operative society established under the Co-operative Society Act
2048. In that society, 40 farmers of Kanyam region are involved in tea gardening and processing. In
the financial year 2067/68, Kanyam Tea Estate has earned Rs. 1 Crore. State with reason on the
taxability of such income earned. Further, what will be the impact on income tax if dividends are
declared by that society?
ii) Income of the Securities Board of Nepal.
iii) Foreign investors have earned Rs. 50,00,000 as foreign technology and management service fee
from the industry established in the special economic zone
iv) Income earned by the Entities listed in the securities market and engaged in the business of
production, Tourism sector.
Answer
i. As per section 11(2) of the Act, Income of a co-operative society, having incorporated under the
Cooperative Society Act, 2048 earned from any or more activities specified including tea gardening
and processing is exempted from income tax. Hence Rs. 1 crore is exempted from income tax.
Further as per the same section, dividend distributed by such cooperatives is also exempted from tax
and hence no need to deduct TDS while making payment to its members.
ii. As per section 10(Chha) of the Act, income of Securities Board of Nepal earned as per its
objectives is exempted from income tax.
iii. As per section 11(3Ka)(gha) of the Act, in case of income earned by a foreign investors towards
foreign technology and management service fee and royalty income from the industries established

77 of 162
IT and VAT
CAP II Examination
in Special Economic Zones, 50% exemption in the applicable tax is available.
iv. As per section 11(3Chha) of the Act, entities engaged in the business of Production, Tourism,
Hydroelectricity generation, distribution and transmission etc. and listed in the securities market get
10% exemption in applicable income tax.
Question No 5:
Adishree & Co. is conducting business in Pokhara and has taken the office premises on rent from
Mr. Garibdash. According to agreement between them, Adishree & Co. is required to pay the house
owner NPR 50,000 per month. Further, Adishree & Co.has taken on rent a vehicle for NPR 25,000
from Mr. Daman Thapa for its business purpose. Mr. Daman Thapa has paid the annual tax as per
Section 1 (13) of Schedule 1 of Income Tax Act.
State whether the TDS as per Income Tax Act, 2058 is to be deducted in above circumstances. If
yes, what is the amount to be deducted as TDS? (December 2011)(3 Marks)
Answer
As per section 88(1)(5) of Income Tax Act, 2058, resident person is required to deduct withholding
tax on payment of rent, having source in Nepal, on building or vehicle @10% of the amount of the
rent.
TDS deducted on house rent is final withholding income for Mr. Garibdash.
In case of rent for vehicle those taxed under sec. 1 (13) of schedule 1 of Income Tax Act, 2058,
even the tax paid is equal to the total of the tax liability of the person for the year, but sec. 88 (4)
does not relieve a person from deducting withholding tax under such situation. Thus, TDS @ 10%
should be deducted from payment of rent.
Question No 6:
AMEXO Bank is registered in the USA and operating its liaison office in Kathmandu. During the
financial year 2067/68, it has following summarized transactions.
(Rs. In ‘000)
Income recognized 50,00
Expenses 40,00 except income tax
The liaison office has policy to repatriate all the remaining profits to its corporate office.
Compute maximum amount that can be repatriated from Kathmandu liaison office.
Answer
As per the provision of Income Tax Act, AMEXO is taxed at two stages i.e.
 Resident bank having taxable income @ 30% of taxable amount.

 5% on repatriated amount.
Now,
Taxable amount = Rs. 5000 thousand – Rs. 4000 thousand
= Rs. 1000 thousand
Tax @ 30% = Rs. 1000 thousand * 30%
78 of 162
IT and VAT
CAP II Examination
= Rs. 300 thousand

Remaining profit = Rs. 1000 thousand - Rs. 300 thousand
= Rs. 700 thousand
Tax of repatriated amount = Rs. 700 thousand * 5/105
= Rs. 33.33 thousand
Therefore, amount that can be repatriated = Rs. 700 thousand – Rs. 33.33 thousand
Question No 7:
The paid up share capital of ABC Ltd. consists of 1,50,000 shares of Rs. 100 each. As of Ashadh
end 2068, the P&L Appropriation Accounts of the company is abstracted as below:
P&L Appropriation Account:
Profit for the year Rs. 10,00,000

Accumulated profit b/d Rs. 15,00,000
Total distributable profit Rs. 25,00,000
The Board of Directors (BOD) of the company proposed to issue bonus share at 10%. Also, it is
proposed that dividend tax on the capitalized profit (sec 88(1)) is to be borne by company by
distributing cash dividend so that shareholders do not have to pay any tax at source as required
under sec. 88(1).
You are required to compute the amount of such cash dividend. (December 2011)(5 Marks)
Answer
Total number of bonus share to be issued @ 10% = 15,000 shares
Total amount of bonus shares = 15,000 share @ Rs. 100 each
= Rs. 15,00,000
Dividend Tax @ 5% = 5% of Rs. 15,00,000
= Rs. 75,000
In case withholding tax on such bonus shares is to be paid by ABC Ltd. itself by proposing to
declare cash dividend, such cash dividend (i.e. tax on bonus shares) is deemed as further
distribution of dividend subject to dividend tax @ 5%.
Therefore, total cash dividend to be proposed = Rs. 75,000 + (5/95 *75,000)

= Rs. 75,000 + Rs. 3,947.37
= Rs. 78,947
Question No 8:
Mention, with reasons, the amount of tax that need to be deducted at source/accounted for in the
books in following cases:
iii) M Ltd. has entered into an agreement with PC Pvt. Ltd. to conduct an awareness
program on maternal health in 5 districts. The total amount paid by M Ltd. against such agreement
was Rs. 40,000. In addition to such amount, M Ltd. also reimbursed Rs. 20,000 as expenses on air –
ticket, lodging and fooding, daily expenses etc of staffs of PC Pvt. Ltd. to PC Pvt. Ltd. as per the
terms of the agreement. PC Pvt. Ltd. did not give VAT invoice.
79 of 162
IT and VAT
CAP II Examination
iv) M/S ABC Company Limited has 60 shareholders. The company has distributed iPhone
worth Rs. 38,000 to each shareholder free of cost in FY 2068/69.
v) Mahesh is constructing a building for his personal residence. He has appointed Ramesh,
an engineer, to take care of the overall construction activities at monthly remuneration of Rs.
30,000.
vi) MNO Company Pvt. Ltd. has taken loan Rs. 10 lakhs from Hamro Bank Limited @ 12%
PA. MNO Company Pvt. Ltd. has paid loan service charge of Rs. 25,000 and interest Rs. 90,000
during the year to the Hamro Bank Limited.
vii) Mr. Ram is invited to deliver lecture on corporate finance by KBC College. KBC
College has paid Rs. 10,000 to Mr. Ram for delivering lectures, Rs. 3,000 for setting up model
questions and Rs. 5,000 for checking the answer-sheets.
Answer
i. 15% on Rs. 60,000 (Rs. 40,000 + Rs. 20,000) = Rs. 9,000
ii. U/S 53, the cost of iPhone Rs. 38,000 shall be considered as deemed dividend and TDS @5% need
to be calculated. Further Rs. 38,000 (cost of iPhone) shall be considered as net of tax i.e. 95%.
Hence the total TDS that need to be accounted for shall be :
iii. No of Shareholders iv. 60

v. Cost of iPhone vi. 40,000
vii. Total deemed
viii. 2,400,000
dividend
ix. TDS @5% x. 120,000
xi. TDS deduction is not required. U/S 88 (4) (Ka), being the payer is a natural person. (2)
xii. Interest payable to the bank is not subject to TDS U/s 88(4)(kha), but the bank charge is subject to
TDS, but in practice TDS is not being deducte
KBC College needs to deduct tax @15% on Rs. 10,000. On 3000 & on 5000 TDS deduction is not
required.
Question No 9:
Anubhav & Co. has taken on rent the premises from Buddhi Shree & Co for the operation of its
business which pays monthly rent of Rs. 100,000. Anubhav & Co. is deducting withholding tax at
the rate of 10% amounting to Rs. 10,000 per month and making payment amounting to Rs. 90,000
per month to Buddhi Shree & Co. While submitting Income Tax Return, tax liability of Buddhi
Shree & Co, to be payable during Income Year 2068/69 came to Rs. 200,000. Answer the following
question mentioning the relevant provision of Income Tax Act, 2058.
ii) What is the amount of tax to be deposited?
iii) Will your answer be different if tax liability of Buddhi Shree & Co comes to Rs. 100,000
instead of Rs. 200,000?

80 of 162
IT and VAT
CAP II Examination
iv)What is the implication if Buddhi Shree & Co had not adjusted the amount of withholding tax
paid through Anubhav & Co. while submitting income tax return?
Answer
a) Section 93 (2) and (3) of Income Tax Act, 2058 prescribes the followings;
1) In case tax has been deducted from payments other than those not subject to final tax deduction,
the person whose tax has been deducted shall be deemed to have paid tax as follows:
(a) The tax amount deducted from payments under Section 87, 88 or 89.
b) The tax amount under Sub-Section (3) of Section 90, or the tax amount which is to be deemed to
have been deducted from payments, deposited, if any, at the Department by the advance tax
deducting person or the person whose tax is deducted.
2) The person whose tax is deducted under Sub-Section (2) may make a claim for its adjustment
only with the amount of tax payable by him in the income year in which the payment has been
made.
Accordingly,
i. The amount of tax liability to be deposited by Buddhi Shree & Co, while submitting income tax
return is Rs.80,000 after adjusting the withholding tax deducted and paid through Anubhav & Co
(Rs. 10,000*12 as TDS on rent).
ii. In this case, Buddhi Shree & Co can make a claim for the carry forward in next year or claim for the
refund under section 113 of the Act, for the amount which is in excess of amount paid as
withholding tax (i.e. Rs. 20,000).
iii. If Buddhi Shree & Co had not adjusted the amount of withholding tax paid through Anubhav & Co.
during Income Year 2068/69 it cannot claim for the adjustment in forthcoming year. It can claim for
the excess tax paid as refund under section 113 of the Act.
Question No 10:
ABC Ltd. has entered into a construction contract with PQR Ltd. with a term of 3 years. The contract price and the total
estimated cost are Rs.60 Billion and Rs. 40 Billion respectively in Year1 of the contract, cost amounting to Rs. 10
Billion was incurred and up to year 2 Rs.25 Billion has been expensed. Calculate the income of ABC Ltd. to be
included in the concerned head of income with respect to long term contract in Year 1 and Year 2 by also showing the
calculation of Cumulative Inclusions and Cumulative Deductions.
Briefly explain on Long Term Contract, Excluded Contract and Deferred Return.
(December 2012)(10Marks)
Answer
Year 1
Percentage of completion of the contract = 10 Billion/40 Billion =25%.
Cumulative inclusion is derived by multiplying total estimative cumulative inclusions up to the completion by
percentage of contract completed.
Rs. 60 Billion * 25% = Rs. 15 Billion.
Cumulative Deductions is derived by multiplying total estimated deductions up to completion by percentage of contract
completed.
Rs. 40 Billion * 25% = Rs. 10 Billion.
Amount to be included as income in Year 1 = Rs. 15 Billion – Rs. 10 Billion
= Rs. 5 Billion.
Year 2
Percentage of completion of contract = 25/ 40 = 62.5%.
Cumulative inclusions = Rs.60 Billion * 62.5% = Rs. 37.5 Billion
Cumulative Deductions = Rs. 40 Billion * 62.5% = Rs. 25 Billion
Amount to be included in year 2 as income = Rs. 37.5 – Rs.25-Rs.5 = Rs. 7.5 Billion.

81 of 162
IT and VAT
CAP II Examination
Long Term Contract – As per section 26(1) of the act, a long term contract is a contract for production, installation,
construction or the services related to them, which runs for more than twelve months. To establish a long term contract
under this section, there should be a deferred return as a condition of the contract and the contract should not be an
excluded contract.
Excluded Contract – As per Rule 11 of the Income Tax Rules, Excluded contract is any contract created by reason of an
interest in an entity or by obtaining a membership in a retirement fund or any contract of investment insurance.
Excluded contract is not taken as a long term contract.
Deferred Return - As per Rule 10 of the Income Tax Rules, a contract shall be called as deferred return contract if any
party to a contract does not declare the information related to the estimated profit and estimated loss for the period of
every six months starting from the commencement of the contract as required by IRD.
Question No 11:
a) Green Development Bank Ltd. has appointed Mr. Hira Paudel as CEO for the effective
operation of the bank. As per the TOR with the CEO, annual salary and allowances Rs. 5,000,000
(net of tax) shall be paid to the CEO by the bank. All tax related to the employment of the CEO
shall be borne by the company and paid to Inland Revenue Office. Mr. Hira is to be assessed as
couple and he claimed Rs. 20,000 of insurance premium. Should the bank deduct the tax amount
from his salary? If yes, then mention the relevant provisions of the Act; compute the tax liability of
Mr. Hira and deductible salary and allowances for this payment on the tax assessment of the bank.
Answer
The bank is liable to pay withholding tax from his salary & allowance. As per section 87 of Income Tax Act,
each resident employer shall deduct withholding tax at the rate referred to in Schedule-1 while
making payment having the source in Nepal. In this case, since Mr. Hira is getting salary &
allowance net of tax, the bank has to do backward calculation of gross salary.
Computation of tax on income of Mr. Hira
Salary & allowance Rs. 5,000,000

Less Insurance premium Rs. 20,000
Remaining taxable amount Rs. 4,980,000
1 % on 200,000 Rs. 2,000

15 % on Rs. 100,000 Rs. 15,000
25 % on Rs. 2,200,000 Rs. 550,000
35% on Rs. 2,480,000 Rs. 868,000
Total tax Rs. 1,435,000
Total tax amount Rs.1, 435,000 is payable if the total salary is Rs. 5,000,000. But in this case Rs.
5,000,000 is net of tax payment. Hence, the amount calculated by performing backward calculation
of gross salary becomes taxable amount. To calculate gross salary including this tax amount, this
tax amount is grossed up considering the maximum effective tax rate for the person. In this case, the
maximum effective tax rate (including additional tax of 40% on highest rate of 25%) 35 %. So, net
of tax amount is Rs. 1,435,000 (65 %) and total tax liability on this payment is Rs.2, 207,692
(1,435,000/65%).
Total salary and allowance paid to him Rs. 5,000,000

82 of 162
IT and VAT
CAP II Examination
Tax liability Rs. 2,207,692

Allowable salary & expenses Rs. 7207,692
Question No 12:
Explain the followings with reasons; on tax/withholding taxes and implication thereon, with
reference to the Income Tax Act, 2058.
i) X & Co., Chartered Accountants, has entered into a contract for tax consultancy services to Z Ltd.
for Rs. 200,000 per month. X & Co. raised VAT invoice for the month of Shrawan, 2068 amounting
to Rs. 226,000 (Rs. 200,000+13%VAT = Rs. 226,000).
ii) Mr. Hari, an individual person, owned the furnished building situated at Kalanki, Kathmandu. He
has given on lease the furnished building to a development bank for Rs. 40,000 per month from
Shrawan 2068. Mr. Hari is not conducting any business and has rent income only.
iii) Mr. Krishna is an economist. He published an article on "Current Status of Economy" in Kantipur
daily and received Rs. 6,000. He also teaches, occasionally, "Economics" in an educational
institution for which he received Rs. 10,000 for a class in Income Year 2068/69.
iv) Mrs. Sila has opened the account in Paschimanchal Rural Development Bank, Parbat and deposited
Rs. 60,000. The interest rate is 8% per annum and Mrs. Sila earned interest income of Rs. 4,800
during Income Year 2068/69.
v) A & Company Ltd. decided to declare and distribute the cash dividend at the rate of 10% amounting
to Rs. 50,000 and bonus shares at the rate of 20% amounting to Rs. 100,000 out of the profit of
Income Year 2067/68, from its annual general meeting dated Mangsir 28, 2068.
Answer
i. As per section 88(1)(4) of Income Tax Act, 2058, any payment made to the service provider
registered under VAT shall be subject to withholding tax at the rate of 1.5%. Hence, X & Co. is
service provider (tax consultancy service) registered under VAT, the payment of invoice for the
month of Shrawan 2068 is subject to withholding tax at the rate of 1.5% and X & Co. is entitled to
receive Rs. 223,000 {(Rs. 200,000 less 1.5% withholding tax) + VAT Rs. 26,000}.
ii. As per section 92(1)(kha) of Income Tax Act, 2058, any payment to an individual person having
source in Nepal against leasing of land or building and associated fittings and fixtures for other than
conducting business, is subjected to final withholding. Since the rent income of Mr. Hari is subject
to final withholding, it is not required to be included in his income. The payment of Rs. 40,000 per
month is subject to final withholding taxes at the rate of 10% i.e. Rs. 4,000 and Mr. Hari will get
Rs. 36,000 per month.
iii. As per section 88(4)(Ka1) of Income Tax Act, 2058, any payment made for the publication of
articles in newspaper is not subject to withholding tax. Hence, Kantipur daily will make the full
payment and is not liable to deduct withholding tax on payment of Rs. 6,000. But Mr. Krishna has
to include the amount received as income in his return of income.
As per section 92(1)(ja) payment made for occasional teaching is subject to deduction of final
withholding taxes. Hence, amount received by Mr. Krishana against occasional teaching is subject

83 of 162
IT and VAT
CAP II Examination
to final withholding tax at the rate of 15% i. e. 1,500 and he will receive Rs. 8,500. The amount
received by Mr. Krishana is not included in his income.
iv. As per section 88(4)(cha) of Income Tax Act, 2058, payment of interest on deposit, by a Rural
Development Bank based on rural community, to the extent of Rs. 10,000 is not subject to
withholding tax. Hence, the bank is not liable to deduct withholding tax on payment of interest of
Rs. 4,800.
v. As per section 88(2)(ka) of Income Tax Act, 2058, payment of dividend from a source in Nepal, by
a resident person is subject to withholding tax at the rate of 5%. Further, as per section 53,
distribution from an entity includes capitalization of profit and dividend tax is attracted on such
distribution as per section 54.
Hence, amount of Rs. 1,50,000 is subjected to dividend tax at the rate of 5% i. e. Rs. 7,500.
Question No 13:
Explain the following with reasons; on tax/withholding taxes and implication thereon, with
reference to Income Tax Act, 2058.
i) Z & Co. has taken loan from M/s Nabil Bank Ltd. amounting Rs. 10 crores for conducting its
business. The company has paid interest at the rate of 10% amounting to Rs. 1 crore during income
year 2069/70.
ii) Mr. Gokul has given a contract to Z & engineers, a construction company for construction of his
residential building for Rs. 1 crore. While making payments to Z & engineers, Mr. Gokul does not
deduct any withholding taxes.
iii) Ms. Rakhi has taken the insurance policy of Rs. 16,00,000 from Rastriya Beema Sansthan. She pays
annual premium of Rs. 80,000. After maturity of the policy, she is receiving Rs. 24,00,000 from
Rastriya Beema Sansthan.
iv) Mr. Smart has won the cash lucky draw of Rs. 1 million from a trading company under its scheme.
He claims that the amount is not subjected to any tax deduction and wants to receive full payment.
v) X & Co. made the following payment to Z & Co., under a contract, for the supply of materials
required for its company. Both the company are registered under Value Added Tax (VAT).
Date Amount (Rs.)
2069.04.08 25,000
2069.04.12 10,000
2069.04.13 5,000
2069.04.15 10,000
2069.04.17 5,000
Since the payments are less than Rs. 50,000, X & Co. claims no deduction of withholding taxes on
such payments.
Answer
84 of 162
IT and VAT
CAP II Examination
i.
As per section 88(4)(kha) of Income Tax Act, 2058, payment of interest to a resident bank or other
financial institution is not subject to withholding tax. Hence, payment of interest of Rs. 1 crore by Z
& Co. is not subject to withholding tax and the company will pay full amount without deduction of
withholding tax.
ii.
As per section 89(4)(ka) of Income Tax Act, 2058, payments made by Mr. Gokul, an individual
natural person to Z & engineers, a construction company, is not subjected to withholding taxes and
hence, no withholding tax is to be deducted. But Z & engineers has to include in its income such
payments.
iii.
As per section 92(1)(ga) of Income Tax Act, 2058, payments on gain of investment insurance by a
resident person is subjected to final withholding taxes. Hence, Rastriya Beema Sansthan (RBS) is
liable to make the payment of Rs. 2,360,000 after deduction of withholding tax at the rate of 5%
(amounting to Rs. 40,000) on gain of Rs. 800,000 (Rs. 2,400,000-Rs. 1,600,000) and it is not
required to be included in the income of Ms. Rakhi.
iv.
As per section 92(1)(jha) of Income Tax Act, 2058, payments from win fall gain is subjected to
final withholding taxes. Amount received from lucky draw is win fall gain to Mr. Smart. Hence, the
trading company is liable to make the payment after deduction of withholding tax at the rate of 25%
of Rs. 1 million i. e. Rs. 250,000 and the claim of Mr. Smart is not tenable. The amount received by
Mr. smart is not required to be included in his income.
v.
Section 89 of Income Tax Act, 2058 provides the following;
1) A resident person, who makes a payment under a contract or agreement exceeding NPR 50,000,
shall withhold tax on the gross amount of payment at the rate of 1.5 percent.
2) The amount referred to in subsection (1) shall be determined by aggregating a payment made by a
person under contract with any other payment made by the person or an associate of the person
during the previous ten days under the same contract to the same payee or an associate of the payee.
Accordingly, for the purpose of ensuring NPR 50,000, the payment made during last ten days is
counted.
Date Last Ten Days Amount (Rs)
2069.04.17 - 5,000
2069.04.15 3 10,000
2069.04.13 2 5,000
2069.04.12 1 10,000
2069.04.08 4 25,000
10 55,000
The payment made during last ten days is NPR 55,000. The amount of withholding tax is to be
deducted is NPR 825 (1.5% of NPR 55,000).

85 of 162
IT and VAT
CAP II Examination
Question No 14:
X & Co. has received from Y & Co., a resident company, Rs. 10 lakhs as dividend after deduction
of taxes. The profit of X & Co. before inclusion of such dividend income is Rs. 90 lakhs. X & Co.
has decided to declare the dividend distribution to its shareholders during current fiscal year
amounting to Rs. 100 lakhs (including Rs. 10 lakhs of dividend received from Y & Co.). Mr. Bibhu
is one of the shareholders of X & Co. and supposed to receive from Rs. 5 lakhs as dividend.
Mention the relevant provision and calculate the amount of Tax to be deducted while making
payment to Mr. Bibhu. (December 2013)(5 Marks)
Answer
As per section 54(1) of Income Tax Act, 2058, dividends distributed by a resident company to its
shareholders shall be taxed in the form of final withholding tax.
Section 54(3) further envisages that notwithstanding anything contained in section 54(1),
distribution of dividend that is derived after withholding tax as per subsection (1) shall be exempt
from tax.
Computation of Tax to be deducted while making payment of dividend to Mr. Bibhu
Total amount of dividend distribution 100 Lakhs
Dividend income after deduction of tax 10 Lakhs
Proportion of dividend income (Rs. 10 lakhs/Rs. 100 lakhs) 10 %
Payment to Mr. Bibhu 500,000
Amount not subject to tax (10%) 50,000
Amount subject to tax (90%) 450,000
Tax amount at the rate of 5% 22,500
Question No 15:
Mr. Ramesh has been retired from Government of Nepal on 15th Jestha, 2071. He has received the
following retirement payments in Ashadh, 2071. He has not any other sources of income except
salary. Remuneration tax already has been deducted and deposited. Assume, no retirement payment
was accrued at the commencement of this act in connection with this employment.
Payment from GON against accumulated leave and Rs. 6,00,000
medical allowances
Payment from Employee Provident Fund against Rs. 7,00,000
contribution
Payment from Citizen Investment Trust against Rs. 5,00,000
contribution
Answer

86 of 162
IT and VAT
CAP II Examination
Fifty percent of the paid amount Or Rs. 5 Lakhs, whichever is higher, shall be deducted on the lump
sum retirement payment from any Approved Retirement Fund or Nepal government in computing
tax liability of any natural person as per section 65(1).
Further, section 88 (1) (1) states that in the case of the retirement payment made by the Government
of Nepal or by the approved retirement fund, at the Rate of Five percent shall be deducted from the
benefits calculated pursuant to section 65(1). Such retirement payment is final withholding as per
section 92 (1) (Chha).
Retirement payment to Mr. Ramesh from retirement fund and Nepal government and 50 percent
thereof are as follows:
Particulars Amount
Payment from GoN against accumulated leave Rs. 6,00,000.00
and medical allowances
Payment from Employee Provident Fund Rs. 7,00,000.00
against contribution
Payment from Citizen Investment Trust against Rs. 5,00,000.00
contribution
Total amount (WN 1) Rs. 18,00,000.00
50% of Total Payment (a) Rs. 9,00,000.00
Fixed amount u/s 65 (b) Rs. 5,00,000.00
Deduction allowed for the higher amount (a) or Rs. 9,00,000.00
(b) above
Taxable Amount RS. 9,00,000.00
The EPF will withhold Rs.10,000.00 @ 5% on Rs. 2,00,000.00 (Rs.7,00,000.00-Rs.5,00,000.00)
and similarly, the CIT will not withhold any amount being only Rs.5,00,000.00. But, the GON will
withhold Rs. 35,000.00 (i.e Rs. 45,000.00 @ 5% on 9,00,0000.00 minus the amount Rs. 10,000.00
already withheld by the EPF). It will be a final withholding u/s 92.
Question No 16:
d) Mr. Pravan has got retirement on Ashadh end, 2072 from government service after completing 12
years. The approved and unapproved retirement fund has providing 10 percent interest rate on its
contribution. The interest is providing monthly basis.
He has received statements from these funds, that statements show the following balances as on first
Shrawan, 2072.
Approved fund: 1,500,000 including total interest of Rs. 300,000
Unapproved fund: Rs. 800,000 including total interest of Rs. 150,000
He came with you for the payment of the balance amount on 30th Ashoj, 2072. Assume you are the
finance officer; calculate the TDS on these payments and mention why have you deducted the TDS?
Answer 5

87 of 162
IT and VAT
CAP II Examination
As per section 65 of Income Tax Act, 2058, in case lump sum payment from approved retirement fund, 50 % or
Rs. 5 lakhs whichever is higher shall be deducted from the retirement payments, the remaining
amount shall be treated as the profit made by the person from the disposal of his non-business
taxable property. Further, as per section 88(1), 5 % TDS shall be deducted from the payment from
approved fund.
In case of payment from unapproved retirement fund, 5 % TDS shall be applicable on the gain of
contributed amount as per section 88(2).
Calculation of TDS
Particulars Approved fund Unapproved Fund Rs.

Rs.
Balance as on 1st Shrawan 1,500,000 8,00,000
Interest Shrawan to Ashoj @10 % 0 0
Total amount 1,500,000 0

Less deduction 50 % 750,000 0
Taxable Amount 750,000 150,000 (total interest,
i.e. gain)
TDS @ 5 % 37,500.00 7,500
Note: As Mr. Pravan got retirement on Ashadh end, 2072, interest is calculated till Ashadh end
only.
Question No 17:

88 of 162
IT and VAT
CAP II Examination
Chapter 5 :
Tax returns, tax assessment and appeals

89 of 162
IT and VAT
CAP II Examination
Question No 1
What are the matters that should be included in the assessment notice issued by Inland Revenue
Department? (June 2010)(5 Marks)
Answer
As per the section 102 of Income Tax Act, 2058, IRO has to give notice of the assessment under
section 100(2) or section 101 to the assessee which shall include the following information:
a. The tax payable by the tax payer for the year of assessment and the tax due to him.
b. The method of calculation of the tax liability.
c. The reason for making the amended assessment by the IRO.
d. The period within which the tax due is payable and
e. Where, when and how to appeal against the order if the taxpayer is not satisfied with the
amended assessment.
A period of 15 days should be given to the tax payer to explain and produce evidence against the
IRO‟s contention.
Question No 2
What are the conditions that enable Inland Revenue Officer to levy interest on failure to pay tax on
due date and to comply with Act under sec. 119 and 119(ka) respectively? (June 2010)(5 Marks)
Answer
In case
- no tax is paid on due date, the tax payer is liable to pay interest for each month and part of a
onth at the standard interest rate (10% p.a) on the tax amount outstanding. For the purpose of
calculating interest payable as above, any time extension granted (u/s 98) will be ignored.
- a withholding agent may not recover from a withholdee interest payable by the agent in respect
of a failure to deposit at Inland Revenue Office, the withheld amount on behalf of withholdee
(u/s 90(4)).
Except as stated otherwise, any person who fails to comply with any provisions of the Income Tax
Act 2058 and Rules made there under will be liable to a interest of not less than Rs. 5000 and not
more than Rs. 30,000 [u/s 119(ka)]
Question No 3
A tax payer had applied for an administrative review with Director General of IRD as per section
115 of the Act. But now he is not satisfied and got aggrieved by the decision of IRD as per section
115. As a tax consultant, you have to advise him on the remedy available by making appeal to
revenue tribunal with the brief procedure for making it. (December 2010)(5 Marks)
Answer
As per section 116 of the act, a tax payer who is aggrieved by a decision of IRD on an application
filed as per section 115 or the tax payer has supposed that the application is rejected due to expiry of
a period of 60 days, may appeal to Revenue Tribunal in accordance with Revenue Tribunal Act
2031. The tax payer who appeals with the revenue tribunal should file a copy of the notice of the
appeal with IRD within 15 days of doing so. As per sec. 116(3) of the act, the enforcement of a
decision taken by a tax officer shall not be treated as stayed unless the tribunal stays or otherwise
affects the enforcement of a decision of the tax officer until the appeal is settled.

90 of 162
IT and VAT
CAP II Examination
The procedures for making an appeal are given in Revenue Tribunal Rules. An applicant should
deposit an amount equal to a sum of 50% of the tax amount assessed by the tax officer and total
amount of fines imposed by him. An appeal to a revenue tribunal should be filed within 35 days of
the receipt of assessment order by the tax payer or the taxpayer receives the decision of IRD or
treats the application rejected by IRD.
The documents of appeal should include the following information:
 Names and addresses of the plaintiff and defendant.
 If the appeal is against any decision, the full details of the case.
 A statement that the appeal is filed within the prescribed time and the fees required is enclosed
with the appeal.
 Reasons of dissatisfaction, sections and rules in support of your appeal and demands of the
plaintiff.
 Any case history with regard to similar application.
 Any other course of action of the tribunal required by the plaintiff with regard to the appeal.
Question No 4
Nirdhan Samaj Sewa is a not for profit organization registered in Kathmandu. It has obtained tax
exemption certificate from IRD. During the year 2067/68 the organization received the following
incomes:
Membership Fees Rs. 275,000
Interest Rs. 170,000
Donation Rs. 450,000
Dividend income Rs. 1,200,000
Net profit from runnig a school Rs. 120,000
Nirdhan Samaj Sewa has claimed that it is a tax exempted organization and so it is not obliged to
pay tax and has filed a refund application for TDS on interest of Rs. 30,000. Justify its claim on the
basis of the provisions of Income Tax Act, 2058.
Also state the legal provisions regarding filing of income tax return and renewal of tax exemption
certificate by Nirdhan Samaj Sewa. (December 2011)(5 Marks)
Answer
Applicability of tax in the income of Nirdhan Samaj Sewa is as follows:
a. As Nirdhan Samaj Sewa is “not for profit organization” and it has obtained tax exemption
certificate from IRD, its income from membership fees and donation will be exempted from tax.
b. Interest Rs. 170,000 and dividend Rs. 1,200,000 are the final withholding income. Therefore,
claim of Nirdhan Samaj Sewa is not tenable and it could not claim for the refund of TDS
deducted in interest income as it is final withholding tax.
c. Profit generated from the operation of school is exempt income of the organization if it is
operated as per its constitution/bidhan. If running of school is not as per its constitution/bidhan,
then it will be fully taxable treating it as business income.
Filing of income tax return and renewal of tax exemption certificate:

91 of 162
IT and VAT
CAP II Examination
According to Rule 5 of Income Tax Regulation, 2053 and Inland Revenue Department Circular No
2065/66 dated 2065/05/02 prescribes the requirement to tax exempted organizations to submit the
documents and renewal of tax exemption certificate.
Question No 5:
N estimated Rs. 1,000,000 for the Fiscal Year 2067/68 as estimated tax and paid Rs. 400,000, Rs.
300,000 and Rs. 300,000 at Poush, Chaitra and Ashadh respectively. Actual tax assessed under
section 99 found Rs. 1,300,000 settled on Kartik end with filing income tax return. Compute interest
under section 118 and 119. (June 2012)(4 Marks)
Answer
Computation of Interest under Section 118 for the Fiscal Year 2067/68
Amount (Rs)
Liability u/s 99 1,300,000

90% 1,170,000
Installmen Installment Amount Interest @

Due on t due Amount due Paid Shortfall/Excess Cumulative 15%
Push-I 40% 468,000 400,000 68,000 68,000 2,550

Chaitra-
II 30% 351,000 300,000 51,000 119,000 4,463
Ashadh-
III 30% 351,000 300,000 51,000 170,000 6,375
1,000,00
Total 1,170,000 0 170,000 13,388
Interest under section 118 13,388
Computation of Interest under Section 119 for the Fiscal Year 2067/68
Interest to be paid for deficit since Kartik for all due amounts at the rate of 15% according to section
119. So the interest under section 119 is Rs. 3,750 [(1,300,000-1,000,000)*1/12*15%].
Question No 6:
State the decisions under which a revision petition can be filled before the Inland Revenue
Department under the Income Tax Act, 2058. (June 2013)(5 Marks)
Answer
In case a taxpayer is not satisfied with any decision of IRO, it has to file an application, as its first
step, to IRD for an administrative review. According toSec 114, an application against the following
decisions should be moved to IRD for an administrative review:
i. Advance ruling issued under Sec. 76 by IRD;
ii. Decision or order to withholding agent under Section 90(8)
iii. Reassessment of estimation of advance payment by a taxpayer made by a Tax Officer under
Section 95(7);
92 of 162
IT and VAT
CAP II Examination
iv. Decision by a Tax Officer to require a taxpayer to file return of tax under Section 96(5) or 97;
v. Decision by a Tax Officer with regard to an extension of time for filling returns under Sec.98;
vi. Jeopardy assessment under Section 100, an amended assessment under Section 101, an
assessment of expenses incurred on auction sales under Section 105(5), or fees and interest
imposed under Sections 122;
vii. Notification by the IRO of an amount to be set aside by a receiver under Section 108(2);
viii. Order by a tax office to a debtor of the taxpayer to pay the amount due to the tax office instead
of to the taxpayer under Section 109(1);
ix. Order by a Tax Officer to a person to pay tax on behalf of a non-resident person under
Section110(1);
x. Decision of IRO on an application by a taxpayer for a refund of a tax under Section 113(5); and
xi. Decision of IRD on an application by a taxpayer for extension of time within which to file an
objection under Section 115(3).
Question No 7:
Mr. X is engaged in legal consultancy services. Mr. X has maintained his books of accounts on cash
basis till income year 2068/69. From income year 2069/70 he wants to changeover to accrual basis
of accounting. Following information from records of his books of accounts of income year 2068/69
is abstracted.
i) Service provided but fee not received Rs. 5,00,000 which was not included in the income.
ii) Advance received from customers but service not rendered Rs. 3,00,000. The amount was
included in the income in the income year 2068/69.
iii) Rent for the period 2069 Shrawan to 2069 Paush paid in Ashadh 2069. The amount is
included in the expense in the income year 2068/69.
You are required to advise Mr. X (December 2013)(5 Marks)
Answer
As per section 22 of Income Tax Act, 2058, Mr. X requires approval from Inland Revenue
Department (IRD) for change over to accrual basis of accounting. IRD while giving permission may
employ the following conditions:
i. To include Rs. 500,000 in taxable income of 2069.70 as fee accrued but not accounted for in
books,
ii. To deduct Rs. 300,000 from taxable income as advance received from customer but treated as
income, and
iii. To allow the rent paid for the rest period as rent expenses.
Question No 8:
The Inland Revenue Department has issued notice to Mr. Rohit Shrestha, a renowned business
tycoon of Nepal; to pay the due tax liability amounting to Rs. 25,566,725 within Baisakh 25, 2071
and the same notice was also published in the National Level Newspaper. The notice also contains
93 of 162
IT and VAT
CAP II Examination
that if Mr. Shrestha does not pay the tax dues on or before the specified time limit then appropriate
action shall be taken against him. Mr. Shrestha aggressively trying to arrange the money but he
could not be able to pay the due tax on time. In the mean time, Mr. Shrestha had a prescheduled
visit to New Delhi on Baisakh 26, 2071 to attend a marriage ceremony of one of his friend's
daughter and accordingly he went to Tribhuvan International Airport (TIA) on the schedule time to
fly to New Delhi. At the TIA, the immigration staff stopped him to enter to the aircraft stating that
the Inland Revenue Department has given notice to stop Mr. Rohit Shrestha to going abroad. In the
light of the above fact, please state whether the immigration staff at TIA has got the right to do so?
If not, what remedy is available to Mr. Shrestha for the unauthorized act of the immigration staff as
per the provisions of Income Tax Act, 2058. (June 2014)(5 Marls)
Answer
As per Section 106 of Income Tax Act, 2058, where a person fails to pay tax on or before the date
the tax is payable, the Department may, by notice in writing served on the concerned office of
Nepal Government, order the office to prevent the person from leaving Nepal for a period of 72
hours after the expiry of time limit specified in a notice served for the purpose of paying tax.
In the given case, as Mr. Shrestha was unable to pay the due tax on time, the IRD has power to issue
a notice to the Immigration of Nepal to prevent him from going Abroad for up to 72 hours. As per
the prescheduled plan of Mr. Shrestha for going New Delhi on Baisakh 26, 2017, the immigration
staff has right to stop him from going abroad.
Question No 9:
Mention the timings of payment of taxes under the Income Tax Act, 2058 prescribed in the
following cases;
i) Deposit of amount of withholding taxes by the person who is required to withhold Taxes.
ii) Amount of Tax payable by a person who has submitted the Income Tax Return as per section
96 and who has due to be paid as per assessment made under section 99
iii) Amount of Tax payable under jeopardy assessment under section 100 (2)
iv) Amount of Tax payable under amended assessment under section 101
v) Installments amount of Tax payable based on estimated Tax (June 2014)(5 Marks)
Answer
Followings are the timings of payment of taxes prescribed in Income Tax Act, 2058 in each case;
SN Particulars Timings of Payments
i. Deposit of amount of withholding taxes by the Within 25 days from the end of the month
person who is required to withhold taxes. wherein withholding tax is being withheld
ii. Amount of tax payable by a person who has Date of filing of Income Tax Return i.e.
submitted the Income Tax Return as per section within three months from the end of
96 and who has due to be paid as per assessment Income Year (Ashwin end)
made under section 99
Amount of tax payable under Jeopardy Within the time limit mentioned in the tax
iii. Assessment under section 100 (2) assessment notice issued under section 102
related to Jeopardy Assessment of that
person
iv. Amount of tax payable under Amended Within the time limit mentioned in the tax
Assessment under section 101 assessment notice issued under section 102
94 of 162
IT and VAT
CAP II Examination
related to Amendment Assessment of that

person
v. Installments amount of tax payable based on First Installment – Within Poush end of the
estimated tax Income Year whose Installment to be paid
Second Installment - Within Chaitra end of
the Income Year whose Installment to be
paid
Third Installment - Within Ashad end of
the Income Year whose Installment to be
paid

95 of 162
IT and VAT
CAP II Examination
Chapter 6:
Other fundamental concepts of Income tax Act

96 of 162
IT and VAT
CAP II Examination
Question No 1
Explain briefly the tax provisions relating to loan loss provisions available to the banks and
financial institutions. (June 2010)(5 Marks)
Answer
Section 59 of the Income Tax Act, 2058 deals about the special provisions applicable to the
Banking Business. A person running a banking business along with other businesses, it has to treat
the banking business as being run by a separate person. It means the accounts, activities,
transactions etc. related to the banking business should be kept separate from the same of other
business.
A banking business is allowed a deduction of a loss of loan provided by it according to the

regulation of Nepal Rastra Bank, subject to a maximum ceiling of 5% of the outstanding loan as on
the last day of the income year.
Actual expenses for a loan loss, if incurred, should be deducted from the provision outstanding on
that date. If deducted as an expense, it is not allowed for tax purpose. In case the amount of loan
loss provision is capitalized or utilized for distribution, or for payment of dividend in any income
year, up to that amount, it should be included in the taxable income of the income year.
Section 24 (3) has given an authority to IRD to accept the accounting procedures followed by
banking businesses as per the instructions given by NRB.
Question No 2
What do you mean by Income Splitting? Mention the right available to Inland Revenue Department
to prevent any reduction in tax payable as a result of the splitting of income. (June 2010)(5 Marks)
Answer
Income splitting is also a kind of Transfer Pricing. Generally income splitting technique is indulged
where the "Progressive Rates of Taxation" is in existence. Income splitting helps to cause tax
reduction where a tax payer attempts to split income with another tax payer.
- Where a taxpayer attempts to split income with another tax payer and this income splitting
is likely to cause a tax reduction, the Inland Revenue Department (IRD) is given the
right to adjust amounts to be included or deducted in calculating the income of each
persons. The duty of IRD is to prevent any reduction in tax payable as a result of
splitting of income. Sec [34(1)]
- If a taxpayer attempts income splitting by a way of transfer of following with an intent to
reduce the total tax payable by the person either directly or indirectly:
- amounts to be derived or costs to be incurred OR
- an amount received by the transferee of an asset that is derived from the asset; or an amount
paid in owning the asset.
In deciding as aforesaid whether a person is seeking to split income, the IRD has power to consider
the market value of any payment made for transfer.
Question No 3
Simple Innovations Pvt. Ltd., a manufacturing company received a tax assessment order for fiscal
year 2066/67 on 2069.08.20 from Inland Revenue Office. Total tax assessed by tax authority is Rs.

97 of 162
IT and VAT
CAP II Examination
75,00,000 which includes disputed tax of Rs. 54,43,500. Some of the issues stated in the assessment
order are as follows:
 Company has capitalized interest cost worth Rs. 19,34,569 (interest till 67.01.10, on loan taken
for machinery) to plant and machinery ready to /put to use in 2067.01.10. As per Section 14(1),
interest on loan which is utilized in the same fiscal year or loan taken for purchase of assets
which is utilized in same fiscal year is allowed as deduction. Thus, interest on assets put to use
in fiscal year 2066/67 is not allowed to be capitalized and need to be removed from depreciation
base.
 Value of opening stock includes Repair & Maintenance Expense of Rs. 7,56,760 and Closing
Stock includes Repair Expense Rs. 6,54, 650. Same is not allowed and need to be written back.
Management is not satisfied with the assessment order and seeks your consultancy.
i. Comment on the above issues in light of provisions of Income Tax Act, 2058.
ii. Company is planning to apply for administrative review. Answer the following in this regards.
a. Time limit to file application for administrative review.
b. Amount of deposit to be kept for administrative review.
Answer
As per Sec. 14 (1) of Income Tax Act 2058, clarified by Income Tax directives, interest paid for the
purpose of purchasing/construction of assets that is put to use during the year, can be claimed as
interest expense for the whole year. This concept differs with normal accounting concept where
direct & indirect expenses (including interest cost) incurred till the machine is ready to use need to
be capitalized. The machine has been ready to use in 2067.01.10, which means all interest expense
for 2066/67 is deductible for tax purpose. So, the tax officer is right to note that the depreciation
base is overstated due to interest expenses deductible as expenses is capitalized in the concerned
pool.
Simple Innovation is a legal entity and so is required to follow absorption-cost method for
calculating cost of trading stock. Section 15(7) (read with clarification) provides that as per
absorption cost method, cost of trading stock is equal to the sum of direct material costs, direct
labour costs, and factory overhead costs, but factory overhead cost do not include any amount of
repair and improvement and depreciation allowances on depreciable assets.
Assuming that the given repair and improvement are incurred for depreciable assets (and not for
stocks in which case the repair of stocks can be claimed u/s15), the Repair & Maintenance expense
is not allowed to be incorporated in factory overhead cost, forming part of Stock Valuation.
Thus, the company is wrong and assessment officer is correct in this regard, and Following amount
need to be added back in its income:
Particulars Amount Effect

Repair expenses incorporated in Opening 756,760 Profit Got decreased due to
Stock same
98 of 162
IT and VAT
CAP II Examination
Repair expenses incorporated in Closing 654,650 Profit Got increased due to

Stock same
Net Effect on Profitability 102,110 Profit got decreased due to
same
Thus, 102,110 need to be added back to cost of goods sold.
The application should be submitted to IRD within 30 days of receipt of the notice of decision by
the tax payer ( section 115 (3 ka)). Here, Simple Innovation can apply till 30 days from 2069.08.20.
In case a tax payer is not able to submit an application within the specified days, it can apply to IRD
for extension of the time, specifying the valid reasons for the delay, within seven days from expiry
of time. IRD may, where a reasonable cause is shown extend the time for a period not exceeding 30
days.
As per section 115(6), one need to deposit an amount equal to 100% of tax & fines in which the tax
payer has no dispute with the assessment order and 1/3rd of the disputed amount. The case gives
disputed amount of tax as Rs. 54,43,500 and so it needs to deposit 1/3rd of 54,43,500=18,14,500 and
100% of undisputed amount of tax, (i.e. 75,00,000-54,43,500=20,56,500). Thus, total deposit
required for administrative appeal
= 20,56,500+18,14,500
=38,71,000.
Question No 4:
Mr. Shyam, a sole shareholder of M/s Ganpati Industries Pvt. Ltd., was worried about the
performance of the Company as it incurred losses to the tune of Rs. 5 crores during last 4 financial
years ending the F/Y 2068/69. Mr. Mohan, an expert acquired 60% stake in the Company on
Ashadh 31, 2069. Miracally, the company has managed to earn Rs. 1.5 crore as profit in F/Y
2069/70. The Company has submitted the Income Tax Return by assessing a taxable loss of Rs. 3.5
crore for F/Y 2069/70 under self assessment by adjusting the carry forward losses of Rs. 5 crore up
to F/Y 2068/69 u/s 20 of Income Tax Act, 2058. The Chief Tax Officer issued an order to pay
income tax on Rs. 1.5 crore along with interest thereon. The management of the Company seeks
your advice on the said order of Inland Revenue Office. (June 2014)(4 Marls)
Answer
As per section 57 (1) & (2) of Income Tax Act, 2058, if the ownership of any entity changes by
50% or more during the last three financial years, the Company is not allowed to carry forward its
accumulated losses of the period prior to such transfer of ownership. In this case, the ownership of
M/s Ganpati Industries Pvt. Ltd. was change by 60% as the shares of the Company was sold by old
management to the new management, therefore, the Company can not adjust any accumulated
losses for the period untillAshad 31, 2069. Thus, the assessment order issued by the Inland Revenue
Office is correct & the Company has to pay tax on the profit of the Company earned during the F/Y
2069/70.
Question No 5:

99 of 162
IT and VAT
CAP II Examination
Standard Chartered Bank has appointed AX Consultancy Pvt. Ltd. as Tax Consultant on Magh 20,
2070 and the effective date of contract is Shrawan 1, 2071. Under the contract, the bank is liable to
pay an annual fee of Rs. 500,000. As per the contract, an advance amount of Rs. 100,000 is to be
paid on appointment date (i. e. on Magh 20, 2070). AX Consultancy Pvt. Ltd. is in confusion
whether the amount of Rs. 100,000 to be included in its income of Income Year 207/071 as the
appointment letter is already received during the Income Year. Advise.
Answer
As per section 22(3) of Income Tax Act, 2058 a company has to account for its income on accrual
basis for tax purpose. Further, as per section 27(2), the time the payment is derived, incurred, made,
received or otherwise taken into account for tax purpose shall be treated as the time of
quantification of amount. In the given case, AX Consultancy Pvt Ltd is a company and has to
account for its income on accrual basis for tax purpose. Performance of service is the time to
recognize the income. The time the payment is derived shall be treated as the time of quantification
of the amount. Hence, advance payment is irrelevant to recognize the income and shall be simply
recorded as advance payment received in Income Year 2070.71. Since the effective date of contract
is Shrawan 01, 2071 the service will accrue only on Income Year 2071.72 and shall be recognized
the income accordingly.

100 of 162
IT and VAT
CAP II Examination
Part B : VALUE ADDED TAX

101 of 162
IT and VAT
CAP II Examination
Chapter 8:
Basic concepts

102 of 162
IT and VAT
CAP II Examination
Question No 1:
State with reason whether the following statements are True or False.
i) A person shall apply for the registration of VAT in the format prescribed in Schedule – 3 of
VAT Regulation, 2053.
ii) A shopkeeper can issue abbreviated tax invoice for the transaction upto Rs.10,000.
iii) A registered person shall preserve all the VAT records upto 6 years.
iv) A separate record for purchase and sale shall be maintained for the used goods which have
purchase price more than Rs. 20,000.
v) Government organizations shall take VAT bill purchasing goods and services above Rs.
5,000.
vi) The rate of VAT for the import of goods and services will be same as VAT applicable for the
purchase of goods and services in Nepal.
vii) In the case of purchase and sale of land and building, VAT is not applicable.
viii) In the case of import of goods from USA, the place of transaction is USA.
ix) A foreign tourist can take refund of VAT on the purchase of goods amounting to Rs. 15,000 or
more.
x) VAT will not applicable in cable car service. (December 2010)(10 Marks)
Answer
State with reason whether the following statements are True or False.
a) False. Application for VAT registration shall be filed in the format prescribed in Schedule – 1
of VAT Regulation, 2053.
b) False. Abbreviated tax invoice can be issued by the shopkeeper for the transaction upto Rs.
5,000.
c) True. VAT records shall be preserved by registered person for 6 years (Rule 23(7) of VAT
Regulation, 2053)
d) False. Separate record shall be maintained for used goods costing Rs. 10,000 or more.
e) True. As per Rule 56 of VAT Regulation, Government organizations shall take VAT bill for
the purchases more than Rs. 5,000.
f) True. Same rate of VAT shall be applicable to import and local purchases.
g) True. Land and building is included in Schedule – I of VAT ACT.
h) False. In case of goods import in Nepal, customs entry point will be the place of transaction.
i) True. As per section 25Ka of VAT Act, tourists can take refund of VAT on the purchase of
goods amounting to Rs. 15,000 or more.
j) False. VAT is applicable in Cable car service as it is excluded in Schedule – I of VAT Act.
Question No 2
Explain the provisions of the Value Added Tax Act relating to the following:
Applicability of VAT on import of goods and services. (December 2011)(5 Marks)
Answer
Section 28 of the VAT Act, 2052 prescribes provisions relating to import of goods. Customs Officer
shall collect VAT on the goods imported into Nepal as per VAT Act, 2052 if Ministry of Finance,
Government of Nepal has not prescribed otherwise.
The Customs Office can use all the authorities as per Value Added Tax Act, 2052 and Customs Act
for the purpose of collecting tax at the point of import.
103 of 162
IT and VAT
CAP II Examination
As per section 8(2) of VAT Act, a person in Nepal receives services in Nepal from any person not
registered in Nepal and residing outside Nepal, in that case the person in Nepal is required to assess
tax on the value of the service and deposit the amount. The assessment of tax shall be as per the
Act.
Question No 3:
“Situation out of control” as prescribed in Section 19(4) of VAT Act, 2052.
Answer
Section 19(4) of the Value Added Tax Act, 2052 prescribes the situation when the taxpayer can
apply to the Director General to waive the additional duty/tec which was applied due to situation
out of the control of the tax payer. In this situation the Director General can waive the fine if he
found the causes genuine.
The “situation out of control” as prescribed in this section is elaborated in the Rule 35, of VAT
Regulation, 2053. For the purpose of section 19(4) the following are the situation out of control:
a. The tax payer recovered from the illness, then within 7 days from the date of recovery.
b. The tax payer has to do rituals due to the death of parents, then within 7 days from the finishing
date of ritual.
c. The female tax payer has given birth of a child, then within 35 days from the date of maternity.
d. In case of death, mental disorder or missing, the legal heir has to apply within 35 days, then
within 7 days from the date of application.
e. In case of road blocked due to flood, landslide or snow and tax payer could not reach to tax
office, then within 7 days from the date of opening of the road.
f. The transportation has totally halted and the tax payer could not reach the tax office, then in the
very next day of opening.
The tax payer shall apply for the extension of date with the recommendation of
VDC/Municipality.
Question NO 4:
You are a tax expert. Answer stating the provisions relating to “Time of Supply” as per Value
Added Tax (VAT) Act, 2052, what happens when:
i) A customer takes delivery of the goods from the business place before the supplier issues
invoice.
ii) A customer paid NPR 10,000 to a supplier along with a list of certain goods to be supplied to
the customer. As per the list the total goods are worth NPR 12,000
iii) A supplier at Kathmandu receives order for supply goods from a customer from Pokhara. The
supplier packs the goods as per the order, asks a labor to deliver the goods to the transporter
and the transporter gives delivery of the goods to the party of Pokhara at Pokhara. When the
buyer receives the goods, the supplier issues the invoices.
Answer
Section 6 of VAT Act, 2052 deals with time of supply.
104 of 162
IT and VAT
CAP II Examination
For the purpose of assessment and collection of tax under this Act, the supply of any goods or
services shall be considered to have taken place at the earliest time of the following times;
a. When an invoice is issued by a supplier
b. In the case of the supply of the goods, when the recipient removes or takes possession of the
goods from the supplier‟s transaction place
c. In the case of supply of services when the services are provided; and
d. When the supplier receives a consideration for the goods or services.
Accordingly;
i. As soon as the customer takes delivery of the goods from the business place of the supplier, as
per section 6 of the Act, the supply is completed. Thus, supply without issuing invoice is
infringement of provisions of VAT Act.
ii. The customer has given order for supply of goods with cash before delivery of NPR 10,000.
Such consideration shall be treated as payment of consideration and thus, VAT to be collected.
Had it be the advance only, VAT would not require to collect.
iii. As per the usual practice the labor when picks up the goods from the business place of the
supplier, it is supposed that the buyer itself has taken the delivery of the goods. The supply of
the goods is completed as and when the labor has removed the goods from the place of supplier.
Question No 5:
State the place of supply as per Value Added Tax Act, 2052/Value Added Rules, 2053, in case of:
i) Sale of movable goods
ii) Immovable goods
iii) Imported goods
iv) Self-consumption
v) Service (June 2012)(5 Marks)
Answer
a) Following are the place of supply for any goods under rule 15 or services under rule 16 of Value
Added Rules, 2053 for any transaction:
i. Sale of Movable goods: In the case of movable goods transferred by sale, the place where such
goods were sold or transferred.
ii. Immovable goods: In the case of any immovable goods whose location cannot be transferred even
if their ownership is changed, the place where such goods are located.
iii. Imported goods: In the case of imported goods, the custom point in Nepal through which such
goods are imported.
iv. Self-consumption: In case any producer or vendor supplies the goods to itself for self consumption,
the place where the producer or vendor of such goods resides.
Service: The place of supply of a service shall be the place where the benefit of that service is
received.

105 of 162
IT and VAT
CAP II Examination
Question No 6:
Explain the term “Abbreviated Tax Invoice” as per Value Added Tax Act, 2052.
Answer
Rule 18 of Value Added Tax Rules, 2053 prescribes for the provision of “Abbreviated Tax
Invoice”.
A retailer, with prior permission from the tax office, can issue an abbreviated tax invoice, the format
of which is given in Annexure 6 of the rules. An abbreviated tax invoice shall not be issued for
more than NPR 5,000.
A registered person, in case it is a retailer, it may apply to the respective Inland Revenue Office for
permission to issue abbreviated tax invoice. Any registered person cannot issue abbreviated tax
invoice without such permission.
Abbreviated tax invoice is issued including the amount of VAT. Means the amount of VAT is not
shown separately. Moreover, the seller is not required to give details about the sold goods as these
are necessarily to be mentioned in the tax invoice issued as per annexure 5.
The selling price mentioned in an abbreviated tax invoice is including of VAT and so the selling
price and the amount of VAT shall be calculated by using the following formula:
Sales Amount = Selling Price including VAT × 100
100+rate of Tax
VAT Amount = Selling Price including VAT× Rate of VAT
100+rate of Tax
As per the rule, in case the buyer requires tax invoice as per Annexure 5, the supplier has to issue
the tax invoice as required by the buyer, instead of issuing abbreviated tax invoice to him.
Question No 7:
Moonlight Traders is engaged in the business of selling Television sets on installment basis. As per the policy and
contract agreement, forty percent of the Price of the Television Rs. 20,000, i.e. Rs. 8,000 has to be paid as upfront
payment in cash and thereafter monthly installment of Rs.1000 along with interest 1% per month has to be paid at the
end of the month. Mr. Ram Binod has purchased a television set by paying Rs. 8000 in cash on 2066.09.07.
Installment of Magh and Falgun has been paid on Falgun 05, 2066. By mentioning the relevant provision, determine the
time of supply for Magh and Falgun Month installments. (December 2012)(4 Marks)
Answer
As per section 6(3)(kha) of the VAT Act, in the case of contractual provision for paying the value of goods or services
partially in more than one day on an installment basis, earliest of due date as per the contract or actual payment date
shall be considered as Time of Supply.
In the month of Magh 2066, due date is Magh end but actual payment date is Falgun 05, hence in this case, time of
supply is Magh End.
For the month of Falgun 2066, due date is Falgun end but actual payment date is Falgun 05, hence in this case, time of
supply is Falgun 05.
Question No 8:
What is Debit / Credit Note? (December 2012)(4 Marks)
Answer
106 of 162
IT and VAT
CAP II Examination
As per Rule 20 of the VAT Rules, a debit note/credit note is a document issued by a registered
person owing to a change in the value of the goods or services supplied by him previously.
The debit or credit note must include the following contents:
(a) Serial Number,
(b) Date of issue,
(c) Name, address and registration number of the supplier,
(d) Recipient's name, address, and registration number if he is a registered person,
(e) Number and date of the tax invoice connected with the transaction,
(f) Particulars of the goods or services and reason of credit or debit,
(g) Amount credited or debited,
(h) Tax amount credited or debited.
A registered taxpayer shall maintain a monthly record of credit or debit notes referred to in sub-rule
(1)
Question No 9:
A lawyer practicing in Nepal has provided consultancy services to the Legal Firm situated in United
Kingdom. The legal firm situated in United Kingdom has used such services for the release of
persons in USA. Where is place of supply of services as per Value Added Tax Act/Rules?
Answer
Section 6 of Value Added Tax Act, 2052 deals with time and place of supply of goods or services.
For the purpose of assessment and collection of tax under this Act, the determination of the fact
whether the supply of any goods or services has taken place within or outside Nepal shall be as
prescribed.
Further, as per rule 16 of Value Added Rules, 2053, the place of supply of a service shall be the
place where the benefit of that service is received.
In the case given in question, the lawyer in Nepal has provided service to Legal Firm in United
Kingdom, the Legal Firm of United Kingdom in turn has used such services and the payment of
such services has been made from United Kingdom to Nepal, and hence the place of supply is
United Kingdom.
Question No 10
In case of used or second hand goods, tax shall be assessed on the amount which is difference
between the selling price and buying price. Buying price means price including taxes.
Explain about the “Tax Periods” under the Value Added Tax Act/Rules. (June 2013)(5 Marks)
Answer
Tax Period means a period prescribed by the Act or Rules for calculation of net VAT payable or
receivable.
Generally, a registered person has to adopt a month as per Nepali Calendar as tax period. The tax
starts from day 1st of a month and ends at end day of the same month.
As per Rule 26 of VAT Rule, 2053, the different tax periods could be adopted by certain specific
taxpayers.
i. Tax Period of 2 months:
Tax period of 2 months is allowed to a taxpayer having taxable transaction during previous 12
months more than NPR 2 million but not more than NPR 10 million.

107 of 162
IT and VAT
CAP II Examination
The tax period shall be, Shrawan and Bhadra, Ashwin and Kartik, Marg and Paush, Magh and
Falgun, Chaitra and Baisakh and Jestha and Ashad.
If hotel and tourism enterprises opt, the department may be allowed a tax period of 2 months.
ii. Tax period of 4 months:
Tax period of 4 months is allowed to a taxpayer who has taken the registration voluntarily and
having taxable transaction during previous 12 months less than NPR 2 million.
The tax period shall be Shrawan to Kartik, Marg to Falgun, and Chaitra to Ashad.
iii. Different tax period:
In case a registered person who maintains its accounts adopting computer systems, it may apply
to a tax officer for allowing it to adopt different tax period. In case the tax officer finds it proper,
it may allow the taxpayer to adopt different tax period.
iv. Tax period for first time of registration:
In case of a person has obtained registration at a middle of a month, the tax period shall be
started from the date on which the registration is obtained to the end of the month.
Question No 11
State with reasons whether the following statements are true or false with reference to Value Added
Tax Act/Rules.
i) 'No VAT' and 'Zero VAT' have the same meaning as VAT in both the cases is zero.
ii) In the case where there is provision of a contract for paying partly the value of goods or services
in more than one day on an installment basis, the time of supply shall be the date of payment.
iii) Roy & Co. is a VAT registered firm engaged in the business of importing passengers' car and
selling them in local market. The firm is claiming full input tax credit on purchase of such cars.
iv) If a taxpayer fails to submit tax return as per section 18, the penalty imposed is Rs. 10,000 per
month.
v) A separate record for purchase and sale shall be maintained for the used goods which have
purchase price more than Rs. 20,000. (June 2014)(10 Marls)
Answer
The statement is false. 'No VAT' and 'Zero VAT' have different meaning.
Transactions of those goods and services which are included in schedule 1 of the VAT Act, 2052
are exempted from tax. This is called no VAT items.
Where a supply of a goods or services is exempt from VAT, the input tax credit is not allowable.
Out of the goods or services, which are subject to VAT and are transacted as per schedule 2 of the
Act, the rate of VAT shall be charged by zero percentage.
Where a supply of a goods or services is at zero rate, the input tax credit is allowable.
ii.
The statement is false.
As per section 6(3)(kha) of Value Added Tax Act, 2052, in the case where there is provision of a
contract for paying partly the value of goods or services in more than one day on an installment
basis, the time of supply shall be
- at the time of the payment or
- the day on which the payment is to be made according to the terms of contract
whichever occurs earlier.

108 of 162
IT and VAT
CAP II Examination
iii.
The statement is true.
As per rule 41(3) of Value Added Tax Rules, 2053, for a registered person, who carries on a
business of those goods mentioned in sub- rule (1) and (2) of Rule 41 as the principal business,
there shall be no restriction for the tax credit in accordance with the procedures mentioned in these
rules.
Hence, Roy & Co. is allowed to claim full input tax credit on purchase of cars as their principal
business is to import passengers car and sell into local market.
iv.
As per section 29(1)(ja) of Value Added Tax Act, if a taxpayer fails to submit tax return as per
section 18, 0.05% per day of tax payable or Rs. 1,000 per tax period whichever is higher.
v.
As per Rule 33(3) of Value Added Tax Rules, 2053, where the purchase price of each item of used
goods exceeds Rs. 10,000, separate records of purchase or sale shall have to be maintained.
Question No 12
Explain whether the following statements are true or false with reasons:
i) A person shall apply for the close of taxable transaction in the format prescribed in Schedule 10
ii) A person shall be imposed fine of Rs. 10,000 at each time in case of refusal for the inspection of
books of account by the Tax officer.
iii) The Tax paid by a diplomatic body or diplomat on the purchase of taxable goods or services
shall not be refunded if the amount purchase is less than Rs. 5,000 at one time.
iv) Tax Officer may assess Tax as per section 20 if Kathmandu District Development Committee
collects the tax on taxable transactions and deposit in its internal revenue account.
v) A foreign tourist can take refund of VAT on the purchase of goods amounting to Rs. 15,000 or
more. (December 2014)(5 Marks)
Answer
i) False. Application for the close of VAT shall be filed in the format prescribed in Schedule – 11
ii) False. A person shall be imposed fine of Rs. 20,000.00 at each time in case of refusal for the
inspection of books of account by the tax officer.
iii) True. The tax paid by a diplomatic body or diplomat on the purchase of taxable goods or
services shall not be refunded if the amount purchase is less than Rs. 5,000.00 at one time.
iv) True. Tax officer may assess tax as per Section 20 if Kathmandu District Development
Committee collects the tax on taxable transactions and deposit in its internal revenue account.
v) False. A foreign tourist can take refund of VAT on the purchase of goods amounting to Rs.
25,000 or more.
Question No 13:
Answer the followings with reference to Value Added Tax Act/Rules, whether the statements are
correct or not, with reasons.
109 of 162
IT and VAT
CAP II Examination
i) While filing an appeal to Revenue Tribunal, the undisputed amount of the assessed Tax due shall
have to be deposited and fifty percent of the amount of the Tax in dispute plus the amount of fine
shall have to be deposited.
ii) In case the person has not made the accounts available for inspection under section 16 (1), the
penalty amount is Rs. 5,000 for each time.
iii) The color of tax registration number plate for registered person shall be green, for unregistered
person doing Taxable transaction shall be yellow and for person dealing in tax exempted goods and
services shall be white.
iv) Nepal Government is not required to collect Value Added Tax even if it engages in supply of goods
or services which attract VAT.
v) No Tax is to be levied for a supply of service by a person residing in Nepal to a person outside
Nepal who has no business transaction in Nepal (June 2014)(5 Marks)
Answer
True.
As per section 33 of Value Added Tax Act, 2052, while filing an appeal to Revenue Tribunal, the
undisputed amount of the assessed tax due shall have to be deposited and fifty percent of the
amount of the tax in dispute plus the amount of fine shall have to be deposited or a bank guarantee
for the same has to be furnished.
ii.
False.
As per section 29 (1) (ng) in case the person has not made the accounts available for inspection
under section 16 (1), the penalty amount is Rs. 20,000 for each time as amended by Finance Act,
2071.
iii.
True.
As per Rule 14(ka) of Value Added Rules, 2053, registered person shall have to place tax
registration number plate in the format prescribed by Inland Revenue Department IRD) in his place
of transaction in a clearly visible manner within thirty days from the effective date of VAT rule.
Further, as per circular dated 2062.06.21 by IRD, the color of tax registration number plate for
registered person shall be green, for unregistered person doing taxable transaction shall be yellow
and for person dealing in tax exempted goods and services shall be white.
iv.
False.
Notwithstanding anything contained in subsection (1) or (2) of section 15, local body or
International institution/association/commission based in Nepal or Nepal Government or
corporations engaged in non-VAT transactions shall collect value added tax if they engage in
supply of goods or services which attract VAT.
v.
False.

110 of 162
IT and VAT
CAP II Examination
As per clause 2 of schedule 2 of Value Added Tax, 2052, a supply of service by a person residing in
Nepal to a person outside Nepal, who has a no business transaction, business representative or
legally recognized agent in Nepal, is subjected to zero rate of tax.

111 of 162
IT and VAT
CAP II Examination
Chapter 9:
Registration and cancellation

112 of 162
IT and VAT
CAP II Examination
Question No 1
What are the conditions for compulsory registration on VAT? Explain. (June 2010)(5 Marks)
Answer
As per the Section 10 (2) of the Value Added Tax Act, if any person who is dealing in the product
which is taxable as per the Act, or any person doing business with in metropolitan, sub-
metropolitan, municipality or such other area specified by the Department in hardware, sanitary,
furniture, fixture, furnishing, automobiles, motor parts, electronics, marble and color lab operation
shall apply for registration with in 30 days of starting the business.
Above provision requires person who deals in the taxable goods and does business of a particular
nature in a particular area shall have to compulsorily get registered. There is exception to this
mandatory provision in Sec 9 which provides that up to a specified threshold of taxable transaction
by a small scale business, the registration requirement is waived. Such threshold is 20 lakh
currently. Such small scale business, however can get registered voluntarily.
Question No 2:
Temporary registration of VAT. (December 2011)(5 Marks)
Answer
Section 10Ka of the VAT Act, 2052 prescribes the special conditions of temporary registration.
1. In case of exhibition or mela organized in temporary basis, the organizer of the mela etc or any
other person participating in the mela by hiring stall but who is not registered with VAT dealing
with taxable goods shall apply for the temporary registration. The tax officer can ask for the
deposit in this case.
2. The existing registered person can transfer its stock for the purpose of putting in the exhibition.
The person registered temporarily, will have to file VAT return and deposit the tax amount within 7
days of the closure of exhibition. He shall also get the temporary registration cancelled.
Question No 3:
There are some cases where Value Added Tax (VAT) paid on purchase is not allowed- no credit,
even if output of registered person is VAT attractive. Mention those cases as prescribed under
Value Added Tax/Rules. (December 2012)(5 Marks)
Answer
For the purpose of section 17 of Value Added Tax Act, 2052 following are the goods or services
wherein VAT paid on purchase is not allowed-no credit, as per rule 41 of Value Added Rules, 2053.
i. Consumption of drinkable items (soft drinks, water juice or similar)
ii. Liquor items (beer, wine, whiskey or similar)
iii. Petrol for vehicles used for human transport
Expenses on Entertainment
Question No 4:
Describe the circumstances beyond the control under the Value Added Tax Act, 2052.
113 of 162
IT and VAT
CAP II Examination
Answer
As per Rule 35 of Vat Rule 2053, the following circumstances shall be deemed to be circumstances
beyond control for the purpose of sub-section (4) of Section 19 of the Act:
(i) In case the person required to pay tax becomes disabled due to falling ill; up to seven days of the
date of his recovery.
(ii) In case the person required to pay tax is to observe obsequies; up to seven days of the end of the
obsequies,
(iii)In case a woman required to pay tax delivers a child; up to thirty five days of the date of
delivery,
(iv) In case the person required to pay tax dies or becomes insane or disappears and his heir or
guardian submits an application within thirty five days of the date of such incident; up to seven
days of receipt of such application,
(v) In circumstances when the person required to pay tax has not been able to come to the IRO
because of the closure of a road due to floods, landslides or similar other reasons; up to seven
days of opening of the road,
(vi) In circumstances when he cannot come to the IRO due to total haltage of transport; up to the
next day of the end of such haltage.
In case where the natural calamities like fire earthquake, arises; up to thirty days from the date when
such calamities occur.
In case an additional time limit shall be required to be requested due to circumstances beyond
control referred to point (ii), (iii), (iv), (v) & (vii) above ; the recommendation of the concerned
Village Development Committee or Municipality shall be submitted.
While requesting for an additional time-limit due to the circumstance referred to point no. (vi) , the
recommendation of the Village Development Committee or Municipality concerned with the place
where the haltage of means of transport has taken place, shall be submitted.
Question No 5:
Merchantile Pvt. Ltd. is a company providing telecommunication services in Nepal. It has
purchased a consultancy service from a company in US for setting up and expanding its operation in
Karnali zone of Nepal. The company has paid USD 500,000 against such services in the month of
Jestha 2069. Merchantile Pvt. Ltd. is of the view that since payment is made to foreign company
there is no implication of Value Added Tax. State your view referring relevant provision of the
Value Added Tax Act, 2052. (June 2013)(4 Marks)
Answer
According to section 8(2) of Value Added Tax Act, 2052, any person (registered or not) in Nepal,
receiving service from a person registered outside Nepal, has to assess and collect tax as per Value
Added Tax Act and rules made thereon. This is called Reverse Charging.
Further, the amount paid as value added tax (VAT) on procurement of such services is allowed to
take VAT credit under section 17(5kha).
Hence, the view of Merchantile Pvt Ltd is not acceptable. It has to assess and collect VAT on the
amount paid (i.e. USD 500,000) against the consultancy services in the month of Jestha, 2069. VAT
is charged at the rate of 13% on the amount paid as consultancy services.

114 of 162
IT and VAT
CAP II Examination
The amount paid as VAT on such consultancy service is allowed to take VAT credit while
submitting the VAT return.
Question No 6:
State the conditions, procedures for and effect of cancellation of registration under Value Added
Tax Act/Rules. (December 2013)(10 Marks)
Answer
Following provisions are mentioned regarding the conditions, procedures for and effect of
cancellation under Value Added Act/Rules.
Section 11 (1) and (1ka) mentions the following conditions for cancellation of registration;
(a) In the case of body corporate, if the body corporate is closed down, sold or transferred or if the
body corporate otherwise ceases to exist
(b) In the case of an individual ownership, if the owner dies
(c) In the case of a partnership firm, if it is dissolved or any of the partners expires
(d) If a registered person ceases to be engaged in taxable transactions
(e) In case the registered person submits zero tax return continuously for one year or it has not
submitted tax return till the date
(f) If registered mistakenly
In case, the person is voluntarily registered, cancellation of registration can only be done after at
least one year period has elapsed after registration.
In case the condition for de-registration is triggered and the person is willing to deregister, an
application might be filed within 30 days of such de-registration event along with the VAT returns
till such date and any VAT due.
If the tax payer has any input tax credit claimed stocks or capital assets on date of such application,
such assets are considered to be as disposed for VAT purchase. VAT should be paid for such
deemed disposed items on basis of their market value.
In case a person has applied for cancellation of its registration number has to produce its records
and documents for audit within fifteen day of the application to the tax office. The tax officer shall
audit the records and documents and within three months of the application submitted may allow or
reject the cancellation. ,
Once the application for cancellation of registration is submitted as per sub-rule (1) of rule 12, tax
return shall have to be submitted until the notice of cancellation or within three months.
It shall be the responsibility of concerned tax officer to give notice to the person submitted the
application for cancellation of registration, about the cancellation, within three months of
submission of application.
Question No 7:
What are conditions for compulsory registration under the Value Added Tax Act, 2052 and Rules
2053? (June 2014)(10 Marls)

115 of 162
IT and VAT
CAP II Examination
Answer
Section 9 and 10 of the VAT act, 2052 and rules 6 and 7 of the VAT rules state the provisions for
compulsory registration for any person. As per the provisions, any person should register
compulsorily in VAT in the following conditions:
i) The person having more than 2 million taxable transactions of goods during the previous
twelve months as per section 9 and rules 6(1)
ii) The person having more than one million taxable transactions of service or combine taxable
transaction of goods and services during the previous twelve months as per section 9 and rules
6(1),
iii) The person who wishing to engage in taxable transaction under section 10 (1)
iv) The person's annual transaction, as per estimation may exceed the threshold of Rs. 2 millions as
per rules 7(1)
v) The person's transaction exceed the threshold of Rs. 2 millions as per rules 7(2)
vi) The person who has conducted their business in a metropolis, sub-metropolis or a municipality,
and is dealing in prescribed goods and services as per section 10 (2). The prescribed goods and
services are hardware, sanitary, furniture, fixture, furnishing, automobiles, motor parts,
electronics, marble, educational consultancy, discotheque, health club, catering service,
party place business, parking service, dry cleaners using machinery equipment,
restaurant with bar, and colour lab.
vii) At the time of inspection by the tax officer, in case the stock of taxable goods available with
the person exceeds the limit, based on the nature of the goods, prescribed by the department as
per rules 7(5)(a)
viii) In case a person's telephone expenses and house rent exceed Rs. 1 lakh during a year as per
rules 7(5)(b) or
ix) In case the business place is in the area specified by the department for different roads or
different market areas.
Question No 8:

116 of 162
IT and VAT
CAP II Examination
Chapter 10:
Taxable value, tax collections and offsets, refund of tax

117 of 162
IT and VAT
CAP II Examination
Question No 1
Elaborate the provisions relating the market value and its determination. (June 2010)(5 Marks)
Answer
Section 13 reading along with the Rule 22 will clarify the provision relating the market value and its
determination.
The market value of goods or services shall be determined as the consideration in money which the
supply of these goods or services would generally be agreed on if the transaction were made under
similar circumstances between persons who are unrelated and the supply freely offered.
While determining the market value as per above provision, the tax officer shall determine the
market value by studying the transactions and value of other vendors registered in regard to the
transaction of the same nature.
In cases where the market value of any goods or services cannot be determined as set forth as
prescribed in the Act, the Director General shall determine the value on the basis also of the
information received in that regard by him from the registered persons of the same nature.
Question No 2:
Mention the provisions regarding collection of tax by custom authorities. (June 2010)(5 Marks)
Answer
Section 28 of the Act has prescribed the authorities of the custom officer as per the Act to collect
the tax. Following are the provisions:
Unless otherwise prescribed by the Ministry of Finance, Government of Nepal, Custom Officer will
collect the tax on imports as per the Value Added Tax Act.
1 Ka) When goods produced or prepared in Nepal, after completing the customs procedures for
export or after reaching the foreign land, rejected by the party or due to any other reason such goods
are re-imported to the country with the aim to export again within 3 months, then value added tax
payable at the time of returning the goods may be allowed to be paid as deposit and when the goods
is exported such deposit can be refunded. Custom office should be providing the details to the
Inland Revenue Department.
2) In case of goods being imported the custom officer can exercise the authority from this and the
prevailing Customs Act for collection of tax.
Question No 3:
What are the conditions for refund of VAT to the foreign tourist? Answer citing the provisions of
the Act. (June 2010)(5 Marks)
Answer
Section 25 Ka provides for the refund of VAT to the foreign tourists. Following are the conditions:
1. The tourist should have purchased at least Rs 15,000 worth of goods which are taxable,
2. The tourist should be returning from the air route.
118 of 162
IT and VAT
CAP II Examination
3. 3% of such refund shall be deducted as service charge.
Question No 4:
A company dealing with computer parts sold the goods worth Rs. 25 lacs in the month of Baisakh
2067. It has imported the computer parts on which input VAT has been paid as per the cost
fixed/determined by Custom Offices on CIF basis with details below:
Cost declared by importer Rs. 200,000
Revised cost fixed by Custom Officer Rs. 250,000
(based on prevailing international price)
Transportation Rs. 25,000
Insurance Rs. 5,000
Import Duty @ 6%
Besides, the credit balance up to Chaitra 2066 is Rs. 20,500. In addition, it has omitted to adjust
input tax credit on the purchase of Rs. 30,000 pertaining to the month of Chaitra 2066.
Compute the Input and Output VAT. (June 2010)(10 Marks)
Answer
Computation of Net VAT Payable.
Credit balance up to Chaitra '066 Rs. 20,500
Input Tax (working note) Rs. 38,584
Adjustment for omitted Input tax credit Rs. 3,900
Total Input Tax to be credited (A) Rs. 62,984
Total sales in Baisakh '067 Rs. 25,00,000
Output VAT on sales of Rs. 25 lac (B) Rs. 3,25,000
Tax payable (Net output VAT) (A-B) Rs. 2,62,016
Working note:
Computation of Input VAT amount on import of computer parts.
Cost of computers Rs. 2,50,000
Transportations Rs. 25,000
Insurance Rs, 5,000
Total Rs. 2,80,000
Import duty @ 6% Rs. 16,800
Total cost for VAT purpose Rs. 2,96,800
Input VAT amount = 13% on Rs. 2,96,800
= Rs. 38,584
Question No 5:
ABC Export House has a credit of Rs. 200,000 in the first month representing 30% of its total sales
during that month. However, it has a credit of Rs. 600,000 representing 60% of its total sales in the
following month.
How does ABC Export House claim refund if it does not always have exports over 50% of total
sales? (June 2010)(5 Marks)
Answer
119 of 162
IT and VAT
CAP II Examination
In the case of given question, the exporter will not be entitled to a refund as the sales reported in
first month did not amount to 50% of its total sales. The credit of Rs. 2,00,000 will be carried
forward in the following month for refund.
Since its credit amount represents 60% of the total sales in the following month, ABC Export House
is entitled to claim the full refund of Rs. 6 lac plus Rs. 2 lac from the preceding months. [U/s 39(5)
of VAT Rule]
Question No 6:
Ginger Cellular Ltd., a cellular mobile Phone Set producing domestic enterprise, is engaged in
producing and selling of cellular mobile phone sets. As a tax expert, Ginger Ltd. seeks your advice
on the refund of VAT paid on purchase of its raw materials. Give your opinion on this.
Answer
As per clause 20 of Schedule 1 of the VAT Act, sixty percent of the VAT paid on purchases of
mobile sets by importer or 60% of the VAT paid on raw materials for producing mobile sets, shall
be refunded by the Inland Revenue Department on producing evidence that the mobile sets are sold.
The procedure of the refund shall be as prescribed by Inland Revenue Department.
In the case given, Ginger cellular is a cellular mobile set producing company, so 60% of VAT paid
it on purchase of raw materials shall be refunded by IRD if it can produce the evidence that the
produced mobiles are sold.
Question No 7
Ms. Amita is a proprietor of a VAT registered firm. For the month of Shrawan 2067, she has
collected VAT of Rs. 200,000 which she has to deposit within 25th Bhadra. But on Bhadra 10,2067,
she has delivered a baby boy due to that she could not deposit the VAT amount within Bhadra 25.
The tax officer wants to levy additional fee of 10% per annum on her. She has submitted an
application to Director General IRD on Bhadra 26, 2067 for waiver of additional fee levied by the
tax officer as the non payment of VAT was due to the circumstances beyond her control. Can DG
waive that additional fee levy imposed by the tax officer? Give your opinion.
Answer
As per rule 35 of the VAT Rules, In case a woman required to pay tax delivers a child; up to thirty
five days of the date of delivery is considered as circumstances beyond the control. Further, as per
Rule 36 of VAT Rules, For the remission of the additional charges pursuant to sub-section (4) of
Section 19 of the Act, an application shall be submitted to the Director General within thirty days of the
expiry of time-limit prescribed for payment of tax. In case an application is not submitted within the
time-limit referred, the waiver of additional charges shall not be granted.
In this case, she has made an application within the limit mentioned in Rule 36. So applying the
provision of section 19(4) of the Act which states " If a taxpayer applies to the Director General for
the exemption of the additional charges levied due to non payment of VAT within time stating the
reason that the failure to make a timely payment was caused by extraordinary circumstances beyond
the taxpayer's control, the Director General may, if he finds the reason reasonable, exempt such
charges.
The Director General after the necessary verification of the matter can waive the additional fee
levied.

120 of 162
IT and VAT
CAP II Examination
Question No 8
Fat Limited has following transactions during the month of Baisakh, 2067, find the amount of VAT
credit available for the month of Jestha:
Amount (Rs.)
Opening Credit available 12,000
Purchases net of VAT 10,00,000
Salary for the month 1,50,000
Electricity expenses 10,000
Telephone expenses with VAT 13,560
Fuel expenses with VAT 28,250
Purchase of car with VAT 11,30,000
Purchase of office supplies net of VAT 1,50,000
Total sales for the month 15,00,000
All the sales of the company were VAT applicable. Out of office supplies Rs. 20,000 purchased by
taking abbreviated tax invoice. In purchases, Rs. 375,000 is import of raw material and customs
office has valued these goods Rs. 450,000. Fuel expenses consists expenses for petrol used for
office vehicle. (December 2010)(6 Marks)
Answer
Calculation of VAT Credit Available for Jestha, 2067
Amount (Rs.)
VAT collected in Sales 195,000
VAT Credit on Input:
VAT paid on purchases 139,750
VAT paid on telephone expenses 1,560
VAT credit available on car 52,000
VAT paid on office Supplies 16,900 210,210
Net VAT Credit for the month 15,210
Add: Opening credit available 12,000
Opening VAT credit available for the month of Jestha 27,210
Note:
1. VAT paid on purchases:
Local purchase (1,000,000-3,75,000)*13% 81,250
Import (450,000*13%) 58,500
Total VAT paid on purchases 139,750
2. Credit available on Car purchase

Total VAT paid 130,000
40% credit available 52,000
3. Credit available on VAT paid on Office Supplies

Total Office supplies Net of VAT 150,000
Less: Purchesed by taking Abbreviated Tax invoice 20,000
Credit available on office supplies purchase 130,000
121 of 162
IT and VAT
CAP II Examination
VAT Credit on office supplies (13% of Rs. 130,000) Rs. 16,900
4. VAT credit cannot be claimed in the purchases of petrol.
Question No 9:
A dealer manufactured goods worth Rs. 10 million which were exempt under schedule I of VAT
Act out of the goods purchased partly VAT exempt and partly goods liable to VAT. VAT exempt
goods amounting to Rs. 7 million were used for the production of goods which were exported. The
Dealer claims that all the exports were zero rated and he should get full credit for VAT on exempted
goods. Consider his claim and to set off the VAT paid by him on the inputs.
Answer
No Vat is collectible on the sale of the goods whether those goods are sold locally or exported if
those goods are exempt under schedule I. Since the goods are listed in schedule I, according to
section 5(3) of VAT Act, the exports of those goods are not entitled to zero tax facility under
schedule II.
As per Section 5(3), no deduction or refund is applicable with regard to VAT paid on goods used
for VAT exempt transaction. Hence, the dealer can not claim any input VAT paid on the purchases
against his export sale also in this case.
Question No 10:
Sharma & Sharma Co. has been a self employed VAT registered trader since 2064 B.S, and is in the
process of completing the VAT return for the month ended 31 Baisakh 2068. The following
information is relevant to the completion of the VAT return;
i) Sales invoices totaling Rs. 44,00,000 (excluding VAT) were issued to VAT registered
customers in respect of VAT sales. The firm offers a 5% discount for prompt payment.
ii) Sales invoices totaling Rs. 16,92,000 were issued to customers that were not registered for
VAT. Of this figure, Rs. 51,700 was in respect of zero-rated VAT sales.
iii) During the month of Baisakh 068, goods amounted to Rs. 11,20,000 were purchased. Of this
figure, Rs. 80,000 was used for Mr. Sharma‟s private purpose.
iv) On 15 Baisakh 068, a Toyota Hilux vehicle was purchased for Rs. 24,00,000. The cost is
inclusive of VAT.
v) During the month ended 31 Baisakh 068, Rs. 40,000 was spent on mobile telephone calls, of
which 30% relates to private calls.
vi) On 17 Baisakh 068, an office equipment was purchased for Rs. 6,00,000. The purchase was
partly financed by a bank loan of Rs. 5,00,000.
Unless stated otherwise, all of the figures are exclusive of VAT.
Calculate the amount of VAT payable by Sharma & Sharma Co. for the month ended 31 Baisakh
2068. (June 2011)(10 Marks)
Answer
Statement of VAT Return for the month ended 31 Baisakh 2068:

122 of 162
IT and VAT
CAP II Examination
Sales (Rs. 44,00,000 * 13%) Rs. 5,72,000

Sales (Rs. 16,92,000 – Rs. 51,700 = Rs. 16,40,300* 13%) Rs. 2,13,239
Sales (Rs. 51,700 * 0%) Rs. 0______
Total output VAT (A) Rs. 7,85,239
Goods Purchased (Rs. 11,20,000 - Rs. 80,000) * 13% Rs. 1,35,200

Vehicle (Rs. 24,00,000 * 40% * 13/113) Rs. 1,10,442
Mobile expenses (Rs. 40,000 * 70%) * 13% Rs. 3,640
Office Equipment Purchase (Rs. 6,00,000 * 13%) Rs. 78,000_
Total Input VAT (B) Rs. 3,27,282
Net VAT payable (A-B) Rs. 4,57,957
Question No 11
XYZ Pvt. Ltd. imports/purchases the taxable raw materials such as Iron Ingots and Steel Plates to
manufacture them into different furniture items as well as agriculture tools.
Details of total imports excluding Input VAT are as follows:
Cost of Iron Ingots declared by XYZ Pvt. Ltd. Rs. 3,00,000
Revised cost fixed by Customs Officer Rs. 3,50,000
Freight Rs. 50,000
Insurance Rs. 5,000
Import Duty @ 6%
In addition, it has also purchased following raw materials:
Steel plates (exclusive of VAT) Rs. 1,00,000
Woods (exclusive of VAT) Rs. 35,000
The products manufactured out of the above raw materials are sold out with the details as given
below:
Agriculture tools (VAT exempt items) Rs. 2,50,000
Furniture Rs. 3,00,000
Find the ratio between taxable and non taxable sales and calculate the amount of Input VAT that
XYZ Pvt. Ltd. is entitled to claim under sec 17 (3) of VAT Act. (June 2011)(10 Marks)
Answer
Computation of Input VAT amount on import:
Rs. 3,50,000
Freight Rs. 50,000
Insurance Rs. 5,000
Total Rs. 4,05,000
Import Duty Rs. 24,300
Total cost for VAT purpose Rs. 4,29,300
Input VAT on import = 13% of Rs. 4,29,300

= Rs. 55,809
Computation of Input VAT amount on local purchase:

123 of 162
IT and VAT
CAP II Examination
Steel plates Rs. 1,00,000

Woods Rs. 35,000
Total cost Rs. 1,35,000
Input VAT = 13% of Rs. 1,35,000

= Rs. 17,550
Total input VAT:

Input VAT on Import = Rs. 55,809
Input VAT on local purchase = Rs. 17,550
Total = Rs. 73,359
Computation of sales:
Taxable sales (Furniture) Rs. 3,00,000
VAT Exempted sales (Agriculture tools) Rs. 2,50,000
Total sales Rs. 5,50,000
Ratio between taxable and non-taxable sales is 54.546:45.454 say 55:45.

Therefore, XYZ Pvt. Ltd. is entitled to claim only for 55% or Rs. 40,347.45 out of total Input VAT
of Rs. 73,359.
Note: Total amount of VAT paid on raw materials could be setoff against the sales of finished
products if the finished product is taxable item. In the question, it is not given that the raw materials
purchased are used only for taxable item or non-taxable item. Thus, the VAT paid on raw materials
is proportionately on the basis of sales of taxable and non-taxable sales.
Question No 12
How is the taxable value for second hand or used goods computed? Similarly how the taxable value
for wood of national forest, private and community forest is computed? (June 2011)(5 Marks)
Answer
As per Rule 33 of VAT Rules, taxable value for dealers in secondhand or used materials is the
difference of Sales amount and Purchase Amount (including VAT). In case the purchase price of
every item of used goods exceeds Rs.10,000, separate records of buying or selling shall be
maintained. As per rule 19, in case of registered person dealing in second hand or used goods is not
required to issue tax invoice if the selling price is less than the purchase price and the cost of the
material is less than Rs.10,000. It means if used goods sold in loss (purchase price + additional
cost+ VAT paid on purchase – selling amount without VAT), then the taxable amount is nil and tax
invoice need not to be issued. In case a registered person is observed by Tax Officer that it has not
maintained the prescribed records satisfactorily, Tax Officer may impose VAT on the total selling
price of the goods sold by such tax payer, and the tax officer may issue a written order requiring
him to pay such tax along with the next tax return.
As per section 12ka, in case the wood from a national forest is being sold, tax shall be levied on the
amount on which royalty is being calculated or the amount of the auction, whichever is higher. The
amount considered for such calculation shall be on the basis of the earlier of these happenings:
auction of wood of the national forest, issue of delivery order or issue of an order to cut the wood.
124 of 162
IT and VAT
CAP II Examination
Similarly, wood of a private area, private forest and community forest, in case it is sold for business,
although royalty is not charged on such sales, for tax purpose, it is determined on the basis given for
the wood of national forest.
Question No 13:
Describe the procedure of Administrative Review in Value Added Tax. (June 2011)(5 Marks)
Answer
As per section 31(ka) of the Act, in case a taxpayer is not satisfied with any decision on tax
assessment made by a tax officer, it can file an application to IRD for an administrative review,
within thirty days of the receipt of the notice of the decision.
In case the taxpayer is not able to submit an application within the specified days, it can apply to
IRD for extension of the time, specifying the valid reasons for the delay, within seven days from the
expiry of the time. IRD may extend the time for a period not exceeding 30 days from the expiry of
the time.
In case IRD, on scrutiny of the application and the documents submitted by the taxpayer, thinks that
the application is allowable, after noting the fact in a file, it may order a reassessment by the same
tax officer or by any other tax officer.
IRD, up to possible, has to decide on the application within 60 days of the date of application
received.
In case IRD fails to decide on the application within sixty days, the taxpayer may appeal to the
Revenue Tribunal supposing that IRD has given its verdict against the taxpayer. [0.5]
A person who applies for departmental review has to deposit 100% of the undisputed amount and
1/3 of the disputed amount before the application is submitted.
Question No 14:
What are the penalties mentioned in section 29 of the act on the following infringements:
i) Registration as mentioned in section 10(1) and (2) related infringement.
ii) An unregistered person issuing an invoice or documents showing collection of tax.
iii) On obstruction in inspection by a tax officer.
iv) On infringement of the VAT act and the rules.
To erase and edit the data in software of approved computer Billing System. (June 2011)(5 Marks)
Answer
Non registration within the time period mentioned attracts penalty Rs.10,000 for each tax period.
ii. If an unregistered person issues an invoices or documents showing collection of tax, then 100%
of the tax collected shall be the applicable penalty.
iii. If obstruction is caused in inspection by a tax officer, then Rs.5,000 for each time shall be
applicable as penalty.
iv. On infringement of the VAT Act and the Rules, then Rs.1000 for each time shall be the
applicable penalty.

125 of 162
IT and VAT
CAP II Examination
v. If the tax payer has erased and edit the data in software of approved billing system, then Rs. 5
Lac will be the applicable penalty.
Question No 15:
M/s XYZ Drinkers Ltd. has sold a kind of drink to non VAT registered party for Rs.10,000. As per
the retail price published by the same company under the direction of IRD, the retail price is Rs.
12,000. The company has collected VAT from the party on the amount of Rs.10,000 as it says it has
given trade discount to the party and the trade discount can be deducted to arrive at the transaction
value. But the assessing officer insists to collect VAT on the published price. As an expert, give
your opinion on this. (June 2011)(5 Marks)
Answer
As general rules, the taxable value of an item is net of discount allowed in invoice. But, as per
section 14(7) of VAT Act, in case a registered person sales a notified item to a non-registered
person, then the taxable value shall be the retail published price. If discount is to be given that
should be given after charging VAT.
Here notified items means the items for which IRD has notified that a producer of the items is
required to publish its retail price.
Hence the contention of the assessing officer is correct.
Question No 16:
Provisions relating to excess VAT credit under section 24 of VAT Act, 2052. (December 2011)(5
Marks)
Answer
Section 24 of the VAT Act, 2052 prescribes the following provisions relating to excess VAT credit:
1. A registered person can deduct the amount of VAT paid on input as per section 17 of the Act,
from the VAT collected on sales in that month, in case the VAT collected is excess of the paid
VAT.
2. VAT credit remaining in one month can be carried forward to next month and set off with the
amount of VAT payable in that month.
3. The tax payer can apply for the refund of VAT credit if there is excess amount of VAT credit
for continuous period of six months.
4. If the tax payer has exported 40% or more of his total sales of that month, then he can apply for
the refund of tax immediately in next month.
5. The tax officer shall refund the amount of tax as per the application of tax payer if he found the
amount is refundable to the tax payer. If the amount not refunded within the prescribed time
then the amount shall be refunded with interest.
After claiming the refund of tax, the tax payer cannot set off the amount with the amount of VAT
payable in the next month.
Question NO 17:
Sharma & co, a registered person dealing in second hand vehicles has purchased a secondhand
motorcycle for NPR 10,000 plus chargeable VAT on it. The following expenses are incurred for
repair of the motorcycle to make it saleable;
126 of 162
IT and VAT
CAP II Examination
Particulars Amount (NPR) VAT (NPR)

Spare Parts 4,000 520
Labor Charges 2,000 0
The person sells the motorcycle for NPR 20,000. Calculate the taxable value of the motorcycle as
per VAT Act, 2052. (December 2011)(5 Marks)
Answer
Rule 33 of VAT, Rules, 2053 states that a person who is dealing in used or second hand materials
has to determine the taxable value as per this rule. The taxable value is the selling value of the
goods less purchase price including VAT.
Accordingly;
Selling price NPR 20,000
Less: Purchase price and other expenses plus VAT NPR 17,820
(NPR 10,000+1,300+4,520+2,000)
Taxable Value NPR 2,180
So, in case of a registered person dealing in used or second hand materials is not required to collect
VAT on selling price but it has to collect VAT on the difference the selling price and the expenses
incurred for purchase and repair of it including VAT.
Question No 18:
Tax Accountant of Subhashree & Co. contends that the terms “Zero VAT” and “No VAT” have the
same meaning. As a Tax Expert, express your opinion within the framework of VAT Act, 2052.
Answer
All the transactions of goods and services are taxable, but transactions of those goods and services
which are included in Schedule 1 of the VAT Act, 2052 (called negative list of goods and services)
are exempted from tax. This is also called no VAT items.
Out of the goods or services, which are subject to VAT and are transacted as per Schedule 2 of the
Act, the rate of VAT shall be charged by zero percentage.
In both the conditions of no VAT and zero VAT, VAT is not collected. But, there are fundamental
differences in the concepts behind each of them. The concepts of no VAT and Zero VAT are
described hereunder:
No VAT
Those goods and services, which are necessary for the people and those that are generally provided
by the government, are included in the “No VAT Schedule”. Exemptions primarily are proposed
from three types of reasoning; they are: for basic life necessities or services or on social welfare
grounds and reducing complexities in administration.
Where a supply of a commodity or services is exempt from VAT, the input tax is not deductible or
shall not be refunded.

127 of 162
IT and VAT
CAP II Examination
Zero VAT
Schedule 2 of the Act has prescribed certain circumstances such as export etc, under which the tax
shall be charged at a zero rate. If a transaction of goods or service is zero-rated the input tax or tax
paid on purchases is creditable or refundable. This means, the taxpayer not only does not pay tax on
the value of his exports, it will be fully compensated for the tax it pays on inputs and, therefore, is
truly exempt from VAT.
Hence the contention of the Tax Accountant is incorrect.
Question No 19:
Satellite Telecom Pvt. Ltd., a telecom operator company in Nepal, seeks your advice whether it can
take credit of the VAT paid in the following transactions.
i) VAT paid Rs. 18,000 for the purchase of petrol to be used for vehicle operation.
ii) VAT paid at Birgunj Customs Office Rs. 1,000,000 while importing the telecom equipments
from China.
iii) The company deposited VAT amount Rs. 175,000 in Inland Revenue Office on the service
charges payable to satellite bandwidth provider and want to take VAT credit of this whole
amount.
iv) The company purchases beverage in the occasion of annual day and paid VAT Rs. 10,000 on
this bill.
v) VAT paid Rs. 13,000 for the purchase of petrol to be used for the operation of generators as
BTS sites. ( June 2012)(5 Marks)
Answer
i. The Company cannot claim any VAT credit on the purchase of petrol as per Rule 41.
ii. The company can claim Rs. 10,00,000 as VAT credit which was paid at Birgunj Customs
Office.
iii. It is the case of reverse charging payment and the company can claim VAT Credit of Rs.
1,75,000 in this case.
iv. As per Rule 41, VAT credit cannot be claimed on the purchases of beverages. Therefore, VAT
credit is not allowed in this case.
v. The Company can claim VAT Credit of Rs. 13,000 in this case as the petrol was used for the
operation of generator at BTS sites.
Question No 20:
Mercantile Limited is providing service in the field of information technology and its sales in the
month of Chaitra 2067 was Rs. 5 million. Out of total sales Rs. 3 million was export. The company
has got some service from Star Inc. registered and working in USA. Cost paid for the services was
Rs. 2 million and the company paid Rs. 260,000 in IRO as reverse charging payment. Total
purchases for the month of Chaitra were Rs. 1 million and it has also incurred the following
expenditures:
- Telephone charges Rs. 10,000
- Petrol for vehicle Rs. 5,000
- Printing and stationery Rs. 5,000

128 of 162
IT and VAT
CAP II Examination
The company has taken VAT bill for all the above purchases. You are required to calculate the
actual amount of VAT payable by Mercantile Limited for the month of Chaitra 2067. ( June
2012)(5 Marks)
Answer
Calculation of local sales:
Total Sales 50,00,000

Less: Export sale 30,00,000
Local sales 20,00,000
Calculation of VAT payable for the month of Chaitra, 2067

VAT payable on local sales 2,60,000
VAT credit on purchases:
VAT deposited in IRO 2,60,000
Local purchases 1,30,000
Telephone charges 1,300
Printing and stationery 650 3,91,950
Net VAT Credit for the month of Chaitra 2067 1,31,950
Note:
1. No VAT is applicable on export sale.
2. Mercantile Limited can take a VAT credit on the reverse charging payment of VAT.
As per rule 41 of VAT Regulation, VAT credit cannot be taken on the purchase of petrol used for
vehicles.
Question No 21:
In the course of VAT refund audit of M/S Wipro Ltd., an export-oriented undertaking, the tax
officer issued notice under section 20 of the Value Added Tax Act, 2052 and Rule 29 of the Value
Added Tax Regulation, 2053 disallowing certain input tax credit on the ground that it is unrelated to
the business. What are the remedies available to the company? Advice. ( June 2012)(5 Marks)
Answer
Ms. Wipro Ltd., has to collect the grounds taken by the Tax officer for disallowing the expenses,
and think over it whether these are acceptable to it or not. In the case of tax payer thinks that the
grounds taken by the tax officer are not valid and the decision is not acceptable to it, it can file an
application to IRD for administrative review over the decision under section 31ka of the Act.
The application should be submitted within 30 days of the final assessment order received by it. In
case the company is unable to file the application within the period, it can apply for extension of the
time for further 30 days. But the application should be submitted within 7 days of the expiry of the
time.
Before submitting the application for administrative review, it has to deposit a sum of 100% of the
undisputed amount and one third of the disputed amount.
129 of 162
IT and VAT
CAP II Examination
The burden of proof that any expenditure is unrelated to business is on to the tax officer under
section 20(3) of Value Added Tax Act, 2052.
In case the decision of the IRD is also not in favor of the company, it can appeal against the
decision in Revenue Tribunal adopting a procedure and within the time limit as prescribed by
Revenue Tribunal Act.
Question No 22:
Cosmos Pvt. Ltd. having registered office in Jawalakhel, Lalitpur transferred some goods costing
Rs. 1,000,000 to its branch in Bangladesh. In the same month, branch in Bangladesh transferred
some goods costing Rs. 500,000 to its head office in Nepal. Gross Profit margin of head office is
20% and branch is 25%. The profit of branch is consolidated at the end of each financial year. Find
the VAT impact on the above transactions. ( June 2012)(5 Marks)
Answer
For the purpose of VAT, the transactions of head office and branches within Nepal are settled by
way of stock transfer, therefore there will not be any VAT impact.
In the case of stock transferred to foreign branch or vice versa, it is taken as VAT attractive
transaction and valuation is to be done at market price as per section 12 of Value Added Tax Act,
2052.
In the given case, the following will be the VAT impact:
Stock transferred to Bangladesh branch is VAT attractive and VAT has to be collected at 0% (being
export) on the market price of Rs. 12,00,000. So, output will be Rs. 12,00,000 and output tax will be
nil.
Stock transferred from Bangladesh branch is import for head office. VAT needs to be paid at
customs office at 13% on market price of Rs. 6,25,000 plus customs duties, if any. VAT paid at
customs office will be allowed as input tax credit.
Question No 23
Mention the penalties prescribed under Value Added Tax Act, 2052 on the following infringements:
i) Failure to issue a tax invoice and in case of transportation of goods out of the area specified by
Inland Revenue Department, worth more than Rs. 10,000 without accompanied with a tax
invoice.
ii) Registration as mentioned in section 10(1) and (2) related infringement.
iii) Failure to display the tax board as per VAT Act/Rules.
iv) An unregistered person issuing an invoice or documents showing collection of tax.
v) Tax officer finding that a taxpayer has reduced tax liability by making infringement of any
provisions of this act or rules there-under. ( June 2012)(5 Marks)
Answer
The detailed provisions related to penalties are mentioned in section 29 of Value Added Tax Act,
2062.

130 of 162
IT and VAT
CAP II Examination
i. In case a taxpayer fails to issue the tax invoice and in case of transportation of goods out of the
area specified by Inland Revenue Department, worth more than Rs. 10,000 without
accompanied with a tax invoice, tax payer is liable for penalty of Rs. 5,000 for each time as per
section 29(1)(ga)
ii. In case a taxpayer fails to make the registration as prescribed under section10(1) and (2), he
shall be liable for penalty of Rs. 10,000 for each tax period as per section 29(1)(ka)
iii. In case a taxpayer fails to display the tax board as per VAT act/rules, he shall be liable for
penalty of Rs. 2,000 per week and Rs. 1,000 for displayed at another place than prescribed as
per section 29(10)(kha1)
iv. In case an unregistered person issuing an invoice or documents showing collection of tax, he
shall be liable for penalty of 100% of tax payable as per section 29(1)(gha)
As per section 15(2), the tax officer should assess the tax and collect the amount from the
taxpayer in addition to the fine as mentioned above.
v. In case a tax officer finds that a taxpayer has reduced tax liability by making infringement of
any provisions of this act or rules there-under, the tax officer may charge, following a procedure
set by Inland Revenue Department, a penalty up to 25% of the tax payable [section 29(ka1)]
Section 29(2) is also applicable in this case and the tax officer may charge a fine of 100% of the tax
evaded amount.
Question No 24:
Mr. Cristiano Messi, a foreign tourist, visited Nepal for a month and is now returning to his home
country Japan. He has purchased many goods in Nepal and paid VAT on such purchase. He seeks
your advice on refund of VAT on paid by him on purchase and expenses/costs associated with such
refund. ( June 2012)(5 Marks)
Answer
U/S 25 ka of VAT Act 2052, a foreign tourist who has paid VAT on purchase can claim for refund
of such VAT amount. However, for such refund , following conditions must have been fulfilled-
i. He must have purchased taxable goods of more than Rs. 15,000.
ii. He must be returning via air. Refund facility is not available for foreign tourist returning by road.
iii. The purchased goods must have been taken out of country by the foreign tourist.
Mr. Cristiano Messi can claim for refund for VAT purchased by fulfilling abovementioned
conditions U/s 25 Ka. Service charge at the rate of 3% on amount refunded shall be deducted by
the department at the time of refund.
Question No 25:
EFG Ltd. has given a contract to Garibdas construction, a party not registered in VAT, for
construction of a Shopping Complex built exclusively for commercial purposes. The cost of the
shopping complex is Rs.55 lacs. By mentioning the relevant provision of the act and rules, comment
on the taxability of the transaction. (December 2012)(4 Marks)
Answer

131 of 162
IT and VAT
CAP II Examination
As per section 8(3) of the act, any person registered or not in Nepal engaged in constructing
commercial buildings, apartments, shopping malls or similar having value more than Rs.5 Million
need to pay VAT on construction cost, if not paid to registered person.
Further , Rule 6(kha) of the VAT Rules states that any person who, for commercial purposes, is
constructing Building, Apartment, Shopping Complex or similar as directed by the IRD amounting
more than Rs.5 Million has to get it constructed only from VAT registered person
In the referred case, since EFG Ltd. got the construction of a shopping complex for commercial
purposes from non VAT registered party, hence as per section 8(3) of the act, EFG Ltd. has to
deposit the VAT on transaction value i.e. 13% of Rs.55 Lacs = Rs. 7.15 Lacs to the Inland Revenue.
With regard to taxability of Garibdas Construction, since the amount of transaction has exceeded
minimum slab, it has to get registered itself in VAT.
Question No 26:
M/s Kiran Distributors is engaged in the wholesale business of various types of noodles. The firm is
registered in VAT. The firm has taken a loan of Rs. 10 lacs from M/s Saraswati Bank for
purchasing a delivery van. Bank has paid the total amount for the purchase of Van but has kept the
ownership of van in the name of the bank till the loan is fully repaid by Kiran Distributors. Kiran
has to pay Rs. 25,000 per month towards the principal and interest to the Bank as part of their loan
agreement. Rs. 130,000 was paid as VAT during the purchase of van. By mentioning the relevant
provision of the Act, can Kiran Distributors claim the input tax credit? (December 2012)(4 Marks)
Answer
As per section 17(5ka) of the act, if a tax payer has purchased or imported capital goods under a
loan agreement within a financial lease, then input tax paid can be claimed by the concerned tax
payer.
In finance lease, all the benefits and risks are to be borne by the lessee, only legal passing of the title
happens after the stipulated date mentioned in the agreement. In this case, although the legal title
still vests with the bank, but the firm can take the input tax credit as per section 17(5ka).
Question No 27
ABC Ltd, a foreign party got a contract from an organization in Nepal. Before the start of the work,
they have registered themselves with VAT. As a tax professional, they enquire you on the provision
for payment of VAT as per the VAT Act. Advice ABC Ltd. (December 2012)(4 Marks)
Answer
Section 19 of the VAT Act states about the payment of value added tax as following:
1) A taxpayer shall have to pay the tax for each month within twenty five days of the close of the
month.
2) If a taxpayer does not pay the tax within the time limit specified under (1), an extra charge of ten
percent per annum shall be imposed on the tax due.
3) If a taxpayer applies to the Director General for the exemption of the additional charges provided
by (2) stating the reason that the failure to make a timely payment was caused by extraordinary
circumstances beyond the taxpayer's control, the Director General may, if he finds the reason
reasonable, exempt such charges.
4) The charges pursuant to (2) and and the interest pursuant to Section 26, shall be charged from the
date on which the tax first became due.

132 of 162
IT and VAT
CAP II Examination
5) If a tax officer makes tax assessment under section 20 and finds that the amount of tax to be
collected from the tax payer in a tax period is less than the amount he is entitled for refund, then
extra charge and interest shall not collected in that tax period.
6) Tax can be paid through the Good for Payment Cheque issued by the Bank. In such a case, the day tax office
receives the good for payment cheque, it is deemed that the tax is collected.
Interest shall not be collected on Interest, Extra charge and penalties.
Question No 28
State the provisions on Value Added Tax (VAT) refund under Value Added Tax Act, 2052.
December 2012)(5 Marks)
Answer
Following are the provisions related to Value Added Tax (VAT) refund under Value Added Tax
Act, 2052;
1. According to Section 24(3), if a registered person has continues credit of VAT for six months,
credit is eligible for VAT refund. In case any registered person has export during the month at least
40% of total sales in that month, the credit is eligible for VAT refund as per section 24(4)
2. According to section 25, VAT paid by following person or paid for following event may be
refunded, upon request for refund within 3 years from the date of transaction on which the claim for
refund is based;
i. Diplomat, privileged on a reciprocal basis from Ministry of Foreign Affairs, person engaged
in Regional or International Organization or missions having diplomatic privileges. This
refund shall not be allowed for diplomats for purchase of goods or services at a time for less
than Rs. 1,500 as per section 15 (1ka).
ii. Institution or VAT paid such institution on which Ministry of Finance, has granted the
privileges of tax exemption
iii. Tax exemption project by Ministry of Finance under bilateral and multilateral agreement
iv. Any tax collected by mistake.
3. Foreign tourist visiting in Nepal, if purchase and take away from Nepal via air transport shall get
refund VAT on those assets, if the cost paid is higher than Rs. 15,000. A service charge of 3% of
refund is charged on refund (section 25 ka).
Question No 29:
The Z Pvt. Ltd. has booked following expenses of imported electronic goods in the ledger.
Cost of material as per invoice Rs. 200,000
Bank charges of L/C Rs. 15,000
Insurance Rs. 5,000
Calcutta port clearing expense Rs. 20,000
Freight up to custom point Rs. 14,000
Fright from custom point to Kathmandu Rs. 7,000
Other tax paid at custom including local development tax Rs. 2,500
Nepal custom expenses including 1 % custom duty Rs. 30,000
Discount receivable Rs. 12,000
Further information:
Discount amount has not been deducted in invoices. The above cost is the gross purchase.

133 of 162
IT and VAT
CAP II Examination
1. Explain the taxable value in case of imported goods with reference to the provisions of the
Value Added Tax Act, 2052.
2. Compute the Value Added Tax payable at custom point as per above information.
3. Assume that the company has 20 % gross profit. What would be its sales price and VAT
amount? (June 2013)(8 Marks)
Answer
As per section 12(5) of VAT act, 2052, the taxable value for any imported goods shall be its
customs value including transportation, insurance, freight, commissions of agents and other persons,
plus customs duties, countervailing duties plus any other taxes if levied on imports, except the value
added tax. As per the provision, all expenditures upto the custom point is related to determine the
taxable value of imported goods.
Calculation of taxable value and VAT payable at custom point:

Insurance Rs. 5,000
Freight up to custom point Rs. 14000
Total cost upto custom point Rs. 239,000
Other tax paid at custom Rs. 2,500
1 % custom duty (1 % of Rs. 239,000.00) Rs. 23,90
Total taxable value at custom point Rs. 243,890
VAT payable at custom point Rs. 31,705.70
Note:
 Bank charge is processing cost, so it is not included in the cost at custom point.
 Fright from custom point to Kathmandu is not included at custom point.
 Custom duty is included in the taxable value but not included other custom expenses. Other
expenses are incurred in Nepal
 Discount receivable is not deducted because the company has not received at the time of purchase.
i) Calculation of sales price and vat amount

Bank charges Rs. 15,000
Insurance Rs. 5,000
Freight up to custom point Rs. 14000
Fright from custom point to Kathmandu Rs. 7,000
Other tax paid at custom Rs. 2,500
Nepal custom expenses Rs. 30,000
Discount receivable (Rs. 12,000)
Cost of the goods Rs. 281,500
Gross profit (25 % of Rs.281,500) Rs. 70,375
Sales price Rs. 351,875
VAT receivable on sales price Rs. 45,744
134 of 162
IT and VAT
CAP II Examination
Question No 30:
Gramin Krishi Sewa Pvt. Ltd. sales vegetables and fruits. During the month of Baishakh 2070
following sales and purchase made. Compute the net Value Added Tax payable under the Value
Added Tax Act, 2052.
Items Purchase (Rs.) Sales (Rs.)
Green Tea 50,000 57,500
Barley 40,000 48,000
Garlic 30,000 37,500
Black Tea 80,000 100,000
Bhakti Fish 150,000 175,000
Millet 45,000 49,500
Paneer 70,000 78,400
Curd 60,000 64,375
Telephone Bill 5,000
Stationery Purchase 20,000 (June 2013)(8 Marks)
Answer
Here, output is mixed, vat exempted and vat attractive both. First, we have to segregate the items in
two parts:
Items Purchase (Rs.) Sales (Rs.)

Vat attractive
i. Garlic 30,000 37,500
ii. Black tea 80,000 1,00,000
iii. Bhakti Fish 1,50,000 1,75,000
iv. Paneer 70,000 78,400
Total 3,30,000 3,90,900
Vat exempted
i. Green Tea 50,000 57,500
ii. Barley 40,000 48,000
iii. Millet 45,000 49,500
iv. Curd 60,000 64,375
Total 1,95,000 2,19,375
Grand Total 5,25,000 6,10,275
Vat attractive ratio= Vat attractive sales/Total Sales

= 3,90,900/6,10,275x100
= 64.05%
Input vat credit on Telephone bill = Rs. 5,000 X 13% X 64%
=Rs. 416
Input vat credit on Stationery Bill = Rs. 20,000 X 13% X 64%

=Rs.1,664
Purchase of Garlic,Black tea, Bhakti fish and Paneer are Vat attracted items. Full vat is allowed for
input tax credit.
135 of 162
IT and VAT
CAP II Examination
Output tax is Rs. 50,817 ( 3,90,900 X 13%)

Input tax credit is Rs.44,980 ( 3,30,000 X 13% + 416 + 1,664)
Net Vat payable = Rs. 5,837
Question No 31
EFG Garment Pvt. Ltd. had the following transaction in the month of Shrawan 2070. Calculate the
VAT payable/receivable from the information below.
Local sale 50,00,000
Export sale 1,00,00,000
Purchase of clothes, Stitching, Packing Materials,
loose tools for machineries 81,00,000
Special packing for export 4,00,000
Payment of consultancy charges abroad 5,00,000
Purchase of bus for staff transportation 20,00,000
Purchase of motorcycle of hire purchase 4,00,000
Telephone expenses 76,000
Purchase of diesel for generator 80,000
Purchase of diesel for bus 24,000
Purchase of petrol for motorcycle 30,000
Purchase of computers 90,000
Purchase of soft drinks 12,000
Opening VAT receivable for the month was Rs. 91,560. Diesel for bus for Rs. 16,000 and soft
drinks for Rs. 6,000 was purchased through abbreviated tax invoice. Items above are exclusive of
VAT. (December 2013)(10 Marks)
Answer
Calculation of VAT payable/receivable for the month of Shrawan 2070 for EFG Garment Pvt.
Ltd.
Particulars Amount (Rs) VAT (Rs) Remarks

Local Sale 5,000,000 650,000 Full
Export Sale 10,000,000 0 0% for export
Total output VAT 15,000,000 650,000
Purchase of clothes, Stitching, Packing
Materials, loose tools for machineries 8,100,000 1,053,000 Full
Special packing for export 400,000 52,000 Full
reverse charging,
assuming the VAT is
Payment of consultancy charges abroad 500,000 65,000 already paid.
Purchase of bus for staff transportation 2,000,000 104,000 only 40% allowed
Purchase of motorcycle of hire purchase 400,000 52,000 Full
136 of 162
IT and VAT
CAP II Examination
Telephone expenses 76,000

9,880 Full
Purchase of diesel for generator 80,000
10,400 Full
Abbreviated Tax Invoice
Purchase of diesel for bus 24,000 1,040 not allowed
Purchase of petrol for motorcycle 30,000 0 Not allowed Rule 41
Purchase of computers 90,000 11,700 Full
Purchase of soft drinks 12,000 0 Not allowed Rule 41
Total Input tax credit 1,359,020
Calculation of VAT Payable/Receivable for the month of Shrawan 2070
Opening VAT Receivable 91,560
Add: input VAT 1,359,020
Less: output VAT 650,000
Net Receivable 800,580
Question No 32:
AMP Wire Industries Pvt. Ltd. purchased the following in the month of Kartik 2070.
Particulars VAT Paid (Rs.)
Used photocopy machine 1,30,000
Brand new Fax machine 2,600
Used generator set 3,90,000
Import of Brand new generator set 5,20,000
Required:
Calculate the VAT amount to be claimed for offset. (December 2013)(5 Marks)
Answer
AMP Wire Industries (P) Ltd can offset the following VAT paid on purchase.

Used Photocopy Machines 130000
Brand new Fax Machines 2600
Used Generator set 390000
Import of Brand new Generator set 520000
1042600
As per section 17(1) of the Value Added Tax Act 2052, registered person may offset VAT
paid/payable on import or purchase of goods or services related to its business from the VAT
collected.
As per section 17 (2) & Rule 41 (1) & (2) VAT paid on certain goods & services can‟t be offset.
Here, the items purchased by AMP Wire Industries (P) Ltd are not in the list of section 17 (2) &
Rule 41 (1) & (2). Hence, the VAT paid on such items can be offset.
Question No 33:
137 of 162
IT and VAT
CAP II Examination
"Supertech Infosys Pvt. Ltd." deals in computer & related IT technology business. In the course of
its business, it received service from "Key Technology Corp., Japan. Key against which,
Technology Corp. raised bill of Rs. 21.60 lakhs. Management of Supertech is confused as to
whether VAT shall be charged on same.
Advise him as regards to VAT applicable on same and net payment to be send. Specify the
provision of VAT Act, 2052 in this regards. (Ignore other taxes, if applicable).
Answer
As per section 8 (2) of Vat Act, 2052, "Any registered / unregistered person receiving service within
Nepal from unregistered person outside Nepal, need to determine and collect Vat on taxable Value
as per provisions of this Act.
Bill raised by key consultant is for NRS 21,60,000.Thus, Taxable Value for the VAT is NRS.
21,60,000.
Thus, following VAT need to be charged:

Particulars Taxable value Rate Amount Remarks
VAT 21,60,000 13% 280,800 As per Section 8 (2) of Vat Act.
The amount to be paid to Key Technology Corporation shall be Rs. 21.60 Lakhs which remains
unchanged with the value of service.
Thus, VAT of Rs 280,800 need to be charged on the above service, and deposited to VAT office.
The paid VAT can be claimed for set-off under Reverse Charging System.
Question No 34:
Swasthya Flour Mill Pvt. Ltd. is a Maida producing industry. It is a complete manufacturing unit,
and does not involve in local/import purchase of Maida. For fiscal year 2069/70, it had following
VAT transactions:
Particulars VAT Amount (Rs.)
A. VAT collected on sales
i. From VAT registered party. 15,00,000
ii. From Non-VAT registered party. 2,00,000
B. VAT paid on purchase. 13,00,000

What amount of VAT refunds is Swasthya Flour Mill Pvt. Ltd. facilitated?
Healthy Oil Industries is manufacturing Mustard Oil. During shortage, the industry also, imports oil
and sell it to its customers to maintain its market. The VAT accounts of Healthy Oil Industries.
Showed the following data for fiscal year 2069/70.
Particulars Trading of Mustard Manufacturing
Oil (import of Mustard Oil
purchase and sales)
A. VAT collected on sales
138 of 162
IT and VAT
CAP II Examination
i From VAT registered party 17,00,000 18,00,000
ii From Non-VAT registered 6,00,000 1,90,000

party
B. VAT paid on purchase 15,00,000 14,00,000
Calculate the VAT amount which Healthy Oil Industries is facilitated to get refund from Inland
Revenue Department. (December 2013)(6 Marks)
Answer
Schedule 1 of VAT Act 2052, prescribes the following provision with respect to VAT refund to
Maida industries:
25% of VAT Amount after deducting VAT paid on Purchase/Import from VAT collected on Sales
of own produced maida shall be refunded as prescribed by IRD.
Thus, Swasthya Flour Mill Pvt. Ltd, producing Maida shall have following Vat refund:
Particulars VAT Amount
Vat collected on Sales
From VAT Registered Party 15,00,000
From VAT Unregistered Party 2,00,000
Total VAT Collected 17,00,000
Less:
VAT Paid on Purchase 13,00,000
Net VAT Amount 4,00,000
Net Amount for VAT Refund (25%) 1,00,000
As per Schedule 1 of VAT Act 2052, 50% of VAT collected on sale of own produced mustard oil
by domestic mustard oil industry, if sold to VAT registered person shall be refunded as prescribed
by IRD. Healthy oil industries cannot enjoy VAT refund on Trading of Mustard oil.On its
Manufacturing sales, it can have following VAT refund:
VAT collected From Sales to VAT registered party(Of manufactured Mustard Oil)
= 18,00,000.
VAT Refund ( 50% of it) = 900,000.
Thus, Healthy Oil Industries can claim against 900,000 VAT Refund.
Question No 35:
JivanJyoti Gases Industries Pvt. Ltd. is engaged in manufacturing of Oxygen & Nitrogen Gases.
The transactions of the industry for the month of Kartik, 2070 is as follows:
Sales Details (Excluding VAT)

Nitrogen
Oxygen
Sold to Date Gases
Gases(inRs.)
(inRs.)
Teaching Hospital 2070.07.02 50,000 -

139 of 162
IT and VAT
CAP II Examination
Ram Metal Works 2070.07.05 40,000 25,000

B & B Hospital 2070.07.10 55,000 -
Ghorahi Cement Industries 2070.07.14 125,000 250,000
Sine Hydro Corporation 2070.07.25 150,000 30,000
Total Sales for the month 420,000 305,000
Purchase Details(Excluding
VAT)
Amount
Particulars
( inRs.)
Diesel purchase for Generator
Running 90,000
Telephone Chagres 18,000
Purchase of Vehicle for General
Manager 2,250,000
The Industries also paid the consultancy fee amounting to IRS 50,000 to Sigma Consultancy, New
Delhi, India.
VAT receivable as per Ashwin, 2070 VAT Return is NRS 28,000.
You are requested to compute the VAT collected on Sales, VAT Paid on Purchase and Net VAT
payable/receivable for the Kartik end 2070. (June 2014)(10 Marls)
Answer
As per Schedule 1 relating to section 5 (3) of Value Added Tax Act, 2052, Oxygen Gas used for the
Medical Treatment is exempt from VAT. In this case, Oxygen gas sold to Hospitals will be non
taxable.
As per Section 41 of Value Added Tax Rules, 2053 only 40% of VAT Paid on purchase of
Automobiles eligible for claim as input VAT.
As per section 8(2) of Value Added Tax Act, any resident or non-resident person imports services
from unregistered person residing outside Nepal, shall have to collect VAT on the taxable value of
the services. This is known as Reverse Charge system of VAT. Therefore, in this case, consultancy
fee paid to Sigma Consultancy, New Delhi, India amounting to IRS 50,000 is Vatable& the person
paying the same should collect VAT.
Based on the above background information, the computation of VAT is done as under:
i) Vat Collected on Sales
Sold to Taxable Non Taxable
Teaching Hospital - 50,000
Ram Metal Works 65,000 -
B & B Hospital - 55,000
Ghorahi Cement Industries 375,000 -
Sine Hydro Coorporation 180,000 -
Base Amount 620,000 105,000
VAT @ 13% 80,600 -

140 of 162
IT and VAT
CAP II Examination
ii) VAT paid on purchase

Purchase
VAT
Particulars Amount
Diesel purchase for Generator
Running 90,000 11,700
Telephone Chagres 18,000 2,340
Purchase of Vehicle for General (Only 40% is eligible for
Manager 2,250,000 292,500 input VAT)
Consultancy Fee (IRS 50,000) 80,000 10,400
Total VAT Paid on Purchase 3,16,940
Computation of Net VAT Payable/Receivable for the Kartik, 2070
As the company has transaction both taxable & Non-taxable. Therefore, the total VAT paid on
purchase can be claimed only to the extent of proportionate basis of sales of taxable items.
a) Sales Proportionate
Sales
Particulars Amount Proportionate
Taxable Sales 620,000 85.52%
Non Taxable Sales 105,000 14.48%
Total 725,000 100.00%
b) Input VAT
Particulars Amount
Total Vat Paid on Purchase 3,16,940
Less: 60% of VAT on Purchase of Vehicle 1,75,,500
Balance 1,41,440
Less: Non Taxable Portion (14.48%) 20,480
Net Amount for Input VAT 1,20,959
c) Net VAT Payable/Receivable:

Particulars Amount
VAT Collected on Sales 80,600
Eligible Input VAT 1,20,959
Net Receivable for the month 40,359
Opening Receivable 28,000
Net Vat Receivable for the Kartik, 2070 68,359
Question No 36:
National Mobile Hub without being registered under VAT Act is dealing in retail of various
branded mobile sets at NLIC, Kamalpokhari. During the F/Y 2069-70, the firm returned its file to
the IRO on 2070.06.25 with the following Income Statement:
Income Statement for F/Y 2069/70

141 of 162
IT and VAT
CAP II Examination
Expenses Amount (Rs.) Income Amount (Rs.)

Opening Stock 175,870 Sales 1,787,654
Purchases 1,576,543 Closing Stock 545,387
Gross Profit C/D 580,628
2,333,041 2,333,041
Gross Profit
Salary 91,000 B/D 580,628
Showroom Rent 108,000
Telephone Charges 18,000
Printing & Stationery 5,075
Local Conveyance 2,400
Miscellaneous Expenses 1,556
Net Profit Before Tax 354,597
580,628 580,628
The Tax Officer made an assessment on 2070.08.15 demanding a sum of Rs. 445,778 as VAT along
with interest and penalty and also ordered to register the firm under VAT. The proprietor of
National Mobile Hub was surprised by the assessment order and rushed to you. He explained you
that though his firm not able to sale the goods above the threshold limit fixed under VAT Act, 2052,
the IRD assessed the VAT. He feels that the VAT should not be applicable on him. Is the contention
of the proprietor of the firm is correct? (June 2014)(5 Marls)
Answer
Under Rule 7 (5) of Value Added Tax Rules, 2053, there are certain proxy criteria for determining
the threshhold limit of any taxpayer. Under that provision, if any taxpayer paying rent & telephone
bill above Rs. 100,000in a year then he is mandatorily liable to VAT registration. In the given case
of National Mobile Hub, though the firm is not transaction of purchases& sales in excess of Rs.
20,00,000, the threshold limit fixed by the act, is still liable to compulsorily VAT registration as the
total rent & telephone charges is above Rs. 100,000 in F/Y 2069-70. Therefore, the contention of
the proprietor is not correct.
Further, the company is trading electronic goods, it should compulsory registered on VAT.
Question No 37:
MNP Pvt. Ltd. is a company voluntarily registered to VAT on 1stShrawan, 2067. Details of his
transactions are as follows:
Fiscal Year (FY) 2068/69 Amount (Rs.)
Shrawan- Kartik 550,000
Mangsir- Falgun 500,000
Chaitra- Ashadh 930,000
1,980,000
Fiscal Year 2069/70
Shrawan- Kartik 400,000
Mangsir- Falgun 680,000
Chaitra- Ashadh 590,000
1,670,000

142 of 162
IT and VAT
CAP II Examination
The companyis submitting VAT return on four monthly basis, since heitis voluntarily registered and
the turnover of any F/Y doesn't exceed Rs. 20 lakhs, its claiming that it need not have to submit its
VAT return on monthly basis. Comment on the company's contention with reference to Value
Added Tax Act/Rules. (June 2014)(5 Marls)
Answer
As per Value Added Rule, No. 26, if the turnover with last 12 months is within 20 lakhs to 1 crore,
VAT return should be filed on every two months on Shrawan, Ashwin, MArg, Magh, Chaitra and
Jesth”
As per Rule 26(3) of the Value Added Tax Rules 2053, taxpayer registered voluntarily as per
section 9 of the act and having taxable transaction of not more than Rs. 2 million during previous
twelve months, shall submit tax return to concerned tax officer within 25th of Shrawan, Mangsir
and Chaitra.
Further as per Rule 7(1), in case any person has reason to presume that his annual transaction shall
exceed Rs. 2 million, he shall submit an application setting out such conditions, to the concerned tax
officer in the format set out in schedule 1 for registration of the transaction.
The turnover of company does not exceed Rs.20 lacs in any fiscal year, but to calculate the limit of
Rs.20 lacs, turnover of past 12 months shall be taken into consideration.
Turnover of company of the past 12 months for the period ended on Falgun 2069, exceeds Rs.20
lacs as below:
Particulars Amount(Rs.)
Chaitra – Ashad 2069 930,000
Shrawan-Kartik 2069 400,000
Mangsir-Falgun 2069 680,000
2,010,000
Hence, M/s MNP Pvt. Ltd. has to submit monthly VAT return.
Question No 38:
Input Tax Credit (ITC) under sec. 17 of Value Added Tax (VAT) Act, 2052.
Answer
The following provisions are mentioned for tax offset in section 17 of the VAT Act, 2052:
(1) A registered person can offset the amount of tax he has collected against the tax he had paid or
due in importing or receiving goods or services related to his own taxable transactions.
(2) Notwithstanding anything contained in Subsection (1), it may be provided that no deduction or
only a partial deduction may be granted in the case of the prescribed goods that can be used for
personal purpose or for business purpose or for both purposes.
(3) If the entire portions of goods or services transacted in a month were not used for taxable
transactions the tax previously paid on the goods or services shall be offset as prescribed for the
portion that was solely used for taxable transaction of the goods or services.
(4) If goods or services for which offset privileges pursuant to this section have been allowed cease
to be used for taxable taxation before the end of its useful life, as may be prescribed, such
goods or services shall be treated as sold at the immediate market value and tax shall be
collected.

143 of 162
IT and VAT
CAP II Examination
(5) Notwithstanding anything contained in sub-section (1), offset privileges to be provided for a
registered person who deals with the used goods shall be as prescribed.
(5a) The concerned taxpayer shall be allowed to deduct the tax paid on the capital goods that were
imported or purchased by entering into a loan agreement under financial lease subject to Sub-
section (2).
5b) The concerned taxpayer shall be allowed to deduct tax paid pursuant to Sub-section (2) of
Section 8, Section 12A and Sub-section (3) of Section 15.
(6) The offset privileges under this Act shall be provided only when a claim is substantiated by
documents as prescribed.
(7) The provision of offset on tax paid or payable on goods, which has remained unused at the time
of the registration and is for use in making taxable transactions, shall be as prescribed.
(8) Notwithstanding anything contained elsewhere in this Section, the name of a taxpayer who
does not submit the tax returns for Six months consecutively shall be made public, and if there
is any amount due for tax deduction by such a taxpayer, such amount may be suspended and
his or her registration may also be suspended…
Question No 39:
M/s RK Trading Private Limited is a Value Added Tax Registered company. It is engaged in the
business of importing wines & liquor and selling in local market. The company is in confusion to
take tax credit on procurement of wines and liquor as per Value Added Tax Act/Rules, Advise.
What will be your answer if the company does not have such primary business?
Answer
Rule 41(1) of Value Added Tax Rules, 2053 prescribes the following provision.
For the purpose of section 17 of the act, tax credit shall not be allowed in respect of the following
goods or services;
Alcohol or alcohol mixed beverages such as liquor, beer.
Rule 41(3) prescribes the following provision:
For a registered person, who carries on a business of those goods mentioned in sub- rule (1) and (2)
of Rule 41 as the principal business, there shall be no restriction for the tax credit in accordance
with the procedures mentioned in these rules.
The principal business of M/s RK Trading Private Limited is of importing wines & liquor and
selling in local market and tax credit is allowed. If the company's primary business is not of
importing wines and liquor and selling in local market, input tax credit shall not be available as
prescribed under rule 41(1).
Question No 40:
Discuss the amount to be included in Taxable Value as per section 12 of Value Added Tax Act,
2052. (December 2014)(5 Marks)
Answer
Section 12 of Value Added Tax Act, 2052 of the act lists the amount to be included in Taxable
value.

144 of 162
IT and VAT
CAP II Examination
Section 12(1)
Except otherwise provided in this act, where only cash is the consideration, the taxable value shall
be the price the supplier receives from the recipient of supply.
Section 12(2)
The following amounts shall be included in the taxable value:
(a) The amount of all expenditures related to transportation and distribution, which was borne by a
supplier in connection with the transaction, and the amount of profit.
(b) Amount of excise duties, ownership fee and all other tax amount other than a tax imposed under
is act.
Clarification – For the purpose of this section, “other tax amount” means duties, charges and fees
prescribed by the annual Finance Act.
Section 12(3)
Taxable value shall not include the amount of discount, commission or other similar commercial
rebates granted in the value of supplying goods or service.
Section 12(4)
The taxable value of any goods or service exchanged or bartered shall be equal to the market value
of the goods or services so exchanged or bartered.
Section 12(5)
Except otherwise provided in this act, while determining the taxable value of any imported goods
all amounts of transportation, insurance, freight, commission of agents and other persons, customs
duties, countervailing duties plus any taxes if levied on imports other than value added taxes, shall
be added.
Section 12(6)
Where the value of any goods or services is found to be lower than the prevailing market value, the
taxable value of such goods or services shall be equal to the market value.
Section 12(7)
The taxable value of goods or services supplied for partial consideration shall be equal to the market
value.
Section 12(8)
A deposit, given in respect of goods or services, shall not be treated as taxable value unless the
supplier adjusts the deposit as consideration for the supply as prescribed.
Question No 41
Ilam Tea Pvt. Ltd. is a tea processing and producing industry, located in Ilam. It sells the tea within
Nepal. It has following transaction in the month of Bhadra, 2071.
Particulars Transactions Amount (Rs.)
Sales:-
VAT registered party 20,00,000
VAT Non-registered party 5,00,000
145 of 162
IT and VAT
CAP II Examination
Purchase:-
Wages and others that are VAT exempt 12,00,000
Compute the VAT amount payable/receivable by the Tea Industry with reference to the VAT Act,
2052 for the Month. Assume no VAT on opening. (December 2014)(5 Marks)
Answer
Schedule 1 of VAT Act, 2052 has provided refund facility for Tea Industry. As per the provisions,
50 % of collected VAT amount on the sales to VAT registrants shall be refunded as specified by the
Inland Revenue Department to the tea producing and processing industry of Nepal.
The Ilam Tea Industry has collected VAT Amount in the Month of Bhadra, 2071 as follows:
Particulars Transactions Amount VAT collected Rs.

Rs.
Sales
VAT registered party 20,00,000.00 2,60,000.00
VAT Non-registered party 5,00,000.00 65,000.00
VAT Payable 3,25,000.00
The industry should pay VAT amount of Rs. 3,25,000.00 on Aswin, 2071 for the month of Bhadra,
2071. It can apply for refund amounting of Rs. 1,30,000.00 (50 % of Rs. 2,60,000.00). If the Inland
Revenue Department permits the Tea Industry for the adjustment of refundable amount on the
payable amount, it shall pay the VAT amount accordingly. So, at the end of Bhadra, 2071, VAT
payable amount is Rs. 3,25,000.00 and VAT receivable amount is Rs. 1,30,000.00
Question No 42:
Apar International Pvt. Ltd. is a Recondition House involved in Purchase/Sale of Used Vehicle,
Motorcycle, TV and Refrigerator. The company purchases the used/old Vehicle, Motorcycle, TV
and Refrigerator and Sale those goods to the consumer by repairing and improving the same.
Company purchased from Mr. Ram residing in Satungal at Rs. 20 lakhs and after repairing the same
sold to Ms. Sunita at Rs. 25 lakhs Apar Ltd. seeks your advise as how much VAT shall he collect on
such sales amount. (December 2014)(5 Marks)
Answer
Section 17(5) of the VAT Act, 2052 read with Rule 33 of VAT Rules 2053 provides that, in case of
person dealing with used assets, VAT shall be determined on the difference amount between sale
value and purchase value only.
In the given case, on the basis of above provision, VAT shall be levied on Rs. 5 lacs only and
accordingly VAT amount will be Rs. 65,000.(being 13% of Rs. 500,000).
Question No 43:
Saurav Publication prints the various books and sells to the wholesaler. The Company itself has
constructed a building for its Publication House. The cost of construction was as follows:
Labour charges Rs. 30,00,000

146 of 162
IT and VAT
CAP II Examination
All Material (Cement, rod etc) purchase cost Rs. 5,50,000 inclusive VAT.
State the VAT Implications on this case, if applicable with references to VAT Act, 2052 and rules,
2053. (December 2014)(5 Marks)
Answer
Saurav Publication is engaged in VAT exempt transaction as per Group 7 of Schedule 1 of the VAT
Act, 2052.
If it has constructed a building for less than Rs. 50 lakh, it is not attracted u/s 8(3) which states that
even though the construction of a building or apartment or shopping complex and similar other
structure as specified by the Department, of which value is more than Rs. 50 lakhs, and which is
built for business purpose is procured from a person who is not registered, tax shall be assessed and
collected from a person who has ownership in that structure as if such construction were procured
from a registered person.
Rule 6 (Kha) is also not attracted as it mentions that any person who is constructing building,
apartment, shopping complex or similar structure as specified by the Department for business
purpose amounting more than Rs. 50 lakhs, he has to get it constructed only from VAT registered
person.
Thus, VAT paid on purchase of the materials are not eligible for credit u/s 17 and will be capitalized
in the cost of the building.
Question No 44:
Cycle Tyre Co. Ltd. of Biratnagar imports raw materials from India for manufacturing of BLAST
brand of bicycle wheels. It sales its product both in Nepal and India. During Magh, finance
controller of the company resigned and the company has not paid any amount of VAT nor has filed
monthly VAT return for Magh and Falgun and you are appointed as finance officer of the company
during Chaitra.
The details of VAT related transaction of company are:
Month Magh Falgun
Particulars Taxable VAT Taxable VAT
Opening VAT credit 20,000
Domestic-purchase raw materials 21,000 2,730 30,000 3,900
Import of raw materials 280,000 36,400 400,000 52,000
Raw materials consumed out of
domestic purchased 18,900 2,457 27,000 3,510
Raw materials consumed out of
imports 252,000 32,760 360,000 46,800
Diesel consumed 22,400 2,912 32,000 4,160
Diesel purchased 63,000 8,190 90,000 11,700
Payment to labour contractor for
supply of workers 36,400 4,732 52,000 6,760
Consumables used from stock 14,000 1,820 20,000 2,600
R&D service procured from 300,000

147 of 162
IT and VAT
CAP II Examination
Germany (Unregistered)
Value of finished goods produced 900,000 1,200,000
Sales domestic 810,000 345,600
Sales export - 734,400
Required:
Prepare a memo to be forwarded to the Board of Directors of the company referring the relevant
provisions of VAT Act, amount indicating VAT payable, refund receivable and amount of VAT
credit available for each month. (June 2014)(10 Marks)
Answer
Computation of vat payable, vat credit available & amount of vat refundable
Month Magh Falgun
Particulars VAT VAT
I. Input VAT
Opening Balance of VAT credit 20,000 5,752
Domestic-Purchase Raw materials 2,730 3,900
Import of Raw Materials 36,400 52,000
Raw Materials Consumed out of Domestic
Purchased not relevant not relevant
Raw Materials Consumed out of Imports not relevant not relevant
Diesel Consumed not relevant not relevant
Diesel Purchased 8,190 11,700
Payment to labor contractor for supply of
workers 4,732 6,760
Consumables used from stock not relevant not relevant
VAT to be assessed and paid under
section 8 (2) for service imported from Reverse
Germany charge 39,000
Total input VAT 111,052 80,112
II. Output VAT

Value of Finished goods produced not relevant - -
Sales Domestic 105,300 44,928
Sales Export (Schedule 2- @ zero %) not relevant -
Total Output VAT 105,300 44,928
VAT credit/(payable) 5,752 -
VAT Refundable - 35,184
VAT Payable u/s 8(2) 39,000
VAT Refundable NIL
VAT credit carried forward 5,752
As a newly appointed finance officer, I have computed the required vat payable, vat credit
available & amount of vat refundable as per above calculation sheet for the kind attention of board:

148 of 162
IT and VAT
CAP II Examination
The company has no vat payable for both the months. The company is eligible to set of VAT
paid on purchase with vat collected under section 17 of VAT Act. After setting off VAT to be paid
on sales, the company is eligible to carry forward VAT credit of 5,752 for the month of Magh.
Under section 24(4) a VAT refund can be claimed if an export sale of any particular month exceeds
40% of its total sales. The export sales of company exceed 40% for the month of Falgun hence it is
eligible to claim refund under section 24 (4) of VAT Act.
Question No 45:
OLIZ Trading Pvt. Ltd. trades in various vatable goods. The company sold goods on credit for 60
days whereas creditors provide credit facility for 50 days. The company‟s receivables on account of
taxable goods sold is Rs. 3,390,000 for the month of Kartik 2071. Input Tax credit of previous
month is Rs. 21,000.
Details of taxable purchase of the company in the month of Kartik are as follows:
i.
Total payable to computer for the Taxable purchase of the trading goods
Rs. 2,260,000
ii. Total payable for computer and printer purchased Rs. 67, 800
iii. Payable made for motorcycle purchased Rs. 226,000
iv. Payable made to Hotel Rs. 24, 860 for dinner party organized for party
meeting.
Find out the VAT amount paid on purchases and collected on sales. Also, workout amount of
allowable input Tax credit and VAT payable. (June 2014)(10 Marks)
Answer
Receivable (sale inclusive of VAT) Rs. 33,90,000

Sales (excluding VAT) 30,00,000
VAT on sale 3,90,000
VAT paid on purchases

Total Purchase VAT Paid Allowable
(with VAT) VAT credit
Raw materials Rs. 22,60,000 Rs. 2,60,000 Rs. 2,60,000
Computer 67,800 7,800 7,800
Motor cycle 2,26,000 26,000 26,000
Hotel Bill 24,860 2,860 -
Total 25,78,660 2,96,660 2,93,800
Calculation of VAT Payable

VAT collected on sales Rs. 3,90,000
Allowable VAT credit (2,93,800)
Input tax credit b/f from previous month (21,000)
Total VAT Payable (net) 75,200
Notes:

149 of 162
IT and VAT
CAP II Examination
1. Since under VAT Rule 41, Motorcycle is not covered under the definition of automobiles, 100%
tax credit is allowable to be deducted.
2. 100% tax credit is allowed in computer.
In the case of entertainment expenses and Hotel bill, Input tax credit is not allowed as per the VAT
Rule 41.
Question No 46:
Nepali Rice Mill Industries purchases the rice in the husk (Dhan) to produce the rice. The Chitawan
based mill sales its packed rice to the local markets. The company has the following transactions
from Bhadra 2071 to Chaitra 2071.
Sales Rs. 3,000,000
Dhan purchase Rs. 2,000,000
Machinery purchase Rs. 2,500,000 (Net of VAT)
Factory construction Rs. 5,500,000 (Payment to the Contractor)
State the relevant provisions for VAT implications on this case with references to the VAT Act,
2052 and VAT Rules, 2053. (June 2014)(5 Marks)
Answer
Rice is the VAT exempt goods as per the schedule 1 of the VAT Act, 2052. Any person, who
carries out the transactions of goods or services mentioned in schedule 1, shall not be required to be
registered as per section 10(3). Input tax credit is allowed only to the VAT registered person as per
section 17. So, VAT paid on machinery is added only on the cost.
Further, section 8(3) of VAT Act, 2052 states that even though the construction of a building or
apartment or shopping complex and similar other structure as specified by the Department, of which
value is more than Rs. 50 lakhs, and which is built for business purpose is procured from a person
who is not registered, tax shall be assessed and collected from a person who has ownership in that
structure as if such construction were procured from a registered person.
As per the rule 6(Kha), any person who is constructing building, apartment, shopping complex or
similar structure as specified by the Department for business purpose amounting more than Rs. 50
lakhs, he has to get it constructed only VAT registered person. As per these provisions, the Mill
should made contract with VAT registered contractor to construct the Factory building. If it has
paid to non-registered contractor, it has to pay VAT amount, however it is not registered in VAT
and it cannot claim for credit.
Question No 47:
Nepal Philanthropic Society is a “Company not Distributing Profit” registered under the Company
Act, 2063. The source of fund of this company comes from membership fees, donation from the
member groups and other outsiders. The company deals with various goods other than those
mentioned in schedule 1 to VAT Act 2052. Annual turnover of this company ranges from Rs. 50
lakh to 75 lakh every year.
Though profits earned by the company are not for the distribution amongst its members, more than
50% of its profits are utilized towards activities related to the Corporate Social Responsibilities
(CSR) every year.

150 of 162
IT and VAT
CAP II Examination
The members of the company when approached by IRD staffs for VAT registration contended that
the company need not be registered in VAT. As you are the tax consultant of the entity you are
required to comment this statement by the company. (June 2014)(5 Marks)
Answer
The criteria for the requirement of a company to be registered under VAT Act are not dependent on
whether Company distributed its profits or not.
If a company fulfills following two conditions, then it needs to be registered under VAT Act.
1) If such Company/entity deals with goods/services that are VAT attractive, and are not exempted as
per schedule 1 of the VAT Act.
2) The transaction of such company exceeds the threshold provided under the Act i.e. annual business
transactions crosses present taxable limit of 20 lakh.
In the case of our question, both above criteria are attracted; Nepal Philanthropic society is required
to be registered under the VAT Act.
Therefore, the statements of the company that it need not be registered under VAT Act do not hold
true.
Question No 48:
Mr. Krishna K.C is a proprietor of KKC & Co. which is a VAT registered firm. Due to the
occurrence of destructive Earthquake on Baisakh 12, 2072, Mr. K.C could not deposit VAT amount
of Rs. 10 lakh collected by the goods sold by his firm for the month of Chaitra 2071.
IRD vide public notice has extended the VAT submission date from 2072/01/25 to 2072/02/07.
Finally, Mr. K.C has been successful to deposit the said VAT amount on Jestha 08, 2072.
The Tax officer intends to levy additional fee of 10% p.a. due to failure to pay VAT even within the
extended time of 2072/02/07. Since the failure to pay VAT was due to the circumstances beyond his
control, suggest Mr. K.C to obtain waiver from paying such extra charges on total VAT amount
due. (June 2014)(5 Marks)
Answer
It is apparent that the failure to deposit VAT of Rs. 10 lakh to the concern IRO has been caused by
extra ordinary circumstances beyond Mr. K.C‟s control. He even failed to deposit the said VAT
amount within the time extension granted by IRO office i.e. 2072/02/07.
As per Sec 19(4) of VAT Act to be read with VAT rule 35, such earthquake of Baisakh 12, 2072 is
deemed to be circumstances beyond the control.
Under such situation, up to 30 days (in the case of the question, it is up to 11th Jestha, 2072) form
the date of occurrence of earthquake (i.e. 12-01-2072) is considered as circumstances beyond Mr.
K.C‟s control.
Pursuant to Sec 19(4) to be read with Rule 36 of VAT rule, under such situation, MR. K.C has to
submit an application to the Director General within 30 days time limit as mentioned above
requesting for waiver of the additional charges levied due to nonpayment of VAT within
2072/02/07.Also, in the application, he has to mention that such failure to make timely payment was
caused by extra ordinary circumstances beyond Mr. K.C‟s control.

151 of 162
IT and VAT
CAP II Examination
The Director General after necessary verification of the matter, and if finds reasonable ground there,
can waive such additional fee that intended to be levied. In case, such application is not submitted
within the time limit of 30 days as aforesaid, the waiver of such additional charges will not be
granted.
Question No 49:
Liza enterprise, a dealer of Toyota cars in Nepal, imported 5 cars for the Value @ US $ 50,000 on
12 Jestha, 2072. The payment was made through the Maya Bank Ltd. on exchange rate of 1 US$ =
Rs. 103.60. Others information are as follows:
 Transportation cost upto Calcutta, India : @ US $ 2,000 (Payment made to transporter @ Rs.
102.40 per US $)
 Marine insurance paid to Nepal Insurance Company Ltd. Rs. 33,900
 Transportation cost from Calcutta to Birgunj Custom Office IRs. 24,000
 Driver's salary for the transportation from Birgunj to Kathmandu @ Rs. 6,000
 Petrol cost from Birgunj to Kathmandu Rs. 9,040 with tax invoice
 The custom duty is 80 %, ignore the excise duty and other taxes, duties
 The company sells the cars adding 12 % on above cost.
 Opening VAT account: Rs. 34,000 payable and it has no opening stocks.
 The exchange rate published by Nepal Rastra bank on the day of clearing the cars at custom:
Buying rate is Rs. 102.40 per US $ and selling rate is Rs. 103.00 per US$
You are required to calculate the VAT payable/receivable on the following situations: (Ignore
Import Service Fee):
i) The Enterprise has used a car for own business and sold the remaining cars during the month.
ii) The Enterprise sold 4 cars and one remains in stock. Round up the fraction.
Answer
i) Used a car for the business and sold 4 cars
Opening VAT Rs. 0 (Opening payable VAT paid during the month)
Output VAT for 4 cars (WN 2) Rs. 56,51,048 (14,12,762*4)
Input VAT for 4 cars (WN 1 & 2) Rs. 50,29,980 {(12,56,507+780+208)*4}
Input VAT for a car Rs. 5,02,915 {(12,56,507+780)*40%}
VAT Payable (Output-input) Rs. 1,18,153
Note
VAT credit on petrol purchase is not available for the car used in business and 40 % credit is allowed
for VAT paid on purchase of car as per Rule 41 of Value Added Tax Rules, 2053.
ii) Sold 4 cars and remains one in stock
Opening VAT Rs. 0 (Opening payable VAT paid during the month)
Output VAT for 4 cars (WN 2) Rs. 56,51,048 (14,12,72*4)
Input VAT for 5 cars (WN 1 & 2) Rs. 62,87,475 {(12,56,507+780+208)*5}
VAT receivable (Input-Output) Rs. 6,36,427
Working Notes (WN)

WN 1
152 of 162
IT and VAT
CAP II Examination
Calculation of per unit VAT paid at Custom

Imported cost 51,50,000 (50,000*103)
Insurance 6,000 (33,900/5=6,780/1.13)
Transportation upto Calcutta 2,06,000 (2000*103)
Transportation Calcutta to custom 7,687(24,000/5= 4,800*1.6015)
Transaction value 53,69,687
Custom duty @ 80 % 42,95,750
Taxable value 96,65,437
VAT @ 13 % 12,56,507
WN 2
Calculation of per unit cost, sales price and VAT
Particulars Amount (Rs). VAT (Rs.)
Imported cost 51,80,000 (50,000*103.60)
Insurance 6,000 (33,900/5=6,780/1.13) 780
Transportation upto Calcutta 2,06,000 (2000*103)
Transportation Calcutta to custom 7,687 (24,000/5= 4,800*1.6015)
Custom Duty and VAT (WN 1) 42,95,750 12,56,507
Driver's salary 6,000
Petrol cost 1,600 (9,040/5=1,808/1.13) 208
Total Cost 97,03,037 12,57,495
Profit addition 11,64,365 (12 % on 97,03,037)
Selling price per unit 1,08,67,40 14,12,762
Question No 50:
M/S Prakarti Limited is a VAT registered company and registered with company Registrar's Office
in Nepal. The company is producing equal number of both vat exempted & vat attractive goods on
each day of production. The company has following transaction during the month of Baishakh,
2072:
Opening VAT credit Rs. 125,000
Sales:
Vat exempted sales Rs. 4,000,000
Vat attractive sales Rs. 6,000,000
The company exports 59 % of vat attractive and vat exempted sales
Purchases of raw materials Rs. 6,000,000
Other office expenses incurred Rs. 450,000
Cost of soft drinks for office party Rs. 200,000
Purchase of car Rs. 2,500,000
Purchase of two wheeler Rs. 225,000
Purchase of petrol for car & two wheeler Rs. 185,000
The given purchases & expenses are excluding applicable vat. Other office expenses include one
invoice of Rs. 100,000 pertaining to the period of Chaitra 2070.
153 of 162
IT and VAT
CAP II Examination
Required:
i) Compute the VAT payable on sales, VAT paid on purchase & expenses incurred by the company
and VAT credit available to the company.
ii) Compute VAT refundable if any under the provision of VAT Act, 2052.
Answer
. Statements showing VAT payable
a. (i) VAT Payable for the month of Baishak 2072 VAT payable (Rs.)
VAT exempt
i) VAT exempted sales (Rs. 4,000,000) under Schedule-1 -
ii) VAT attractive Sales:
- VAT attractive sales-Export vat @ 0 % levied - (59 % of
Rs. 6,000,000) 3,540,000* 0 % -
- VAT attractive sales-Local vat @ 13 % levied - (41% of
Rs. 6,000,000) 2,460,000/100*13 319,800
Total VAT Payable 319,800
a. (ii) . Statements showing VAT paid on purchases & expenses incurred:
Particulars VAT Paid (Rs.)
Purchases of raw materials Rs. 6,000,000 6,000,000/100*13= 780,000 780,000
Other office expenses incurred Rs. 450,000 450,000/100*13=58,500 58,500
Cost of soft drinks for office party Rs. 200,000 200,000/100*13=26,000 26,000
Purchase of car Rs. 2,500,000 2,500,000/100*13=325,000 325,000
Purchase of two wheelers Rs. 225,000 225,000/100*13=29,250 29,250
Purchase of petrol for car & two wheelers Rs.
185,000 185000/100*13=24,050 24,050
Total VAT paid on purchases & expenses 1,242,800
a. (iii). Statement showing VAT credit available to the company:

Particulars VAT credit available (Rs.)
Opening VAT credit 125,000
Purchases of raw materials 780,000/100*.60 468,000
{(450000-100000)/100*13}
Other office expenses incurred *0.60 27,300
Cost of soft drinks for office party (No credit under Rule 41) -
Purchase of car (325,000/100*60) * 0.40 78,000
Purchase of two wheeler 29,250/100*60 17,550
Purchase of petrol for car & two wheeler (No credit under Rule -41) -
Total VAT credit available for set off 715,850
Working Notes
i. VAT paid for consumption of beverages and motor spirit as per rule-41
154 of 162
IT and VAT
CAP II Examination
ii. VAT paid on four wheelers only 40 % of the taxable amount available for input Tax credit
(ITC).
iii. VAT credit cannot be taken on invoice raised before 12 month from the date of invoice
issued.
b. Statements showing VAT payable/(refundable) available to the company

i. Total VAT payable on sales 319,800
ii. Total VAT credit available 715,850
Net VAT payable/(Refundable) (396,050)
As per Section 24(4) of Value Added Tax Act, 2052, notwithstanding anything mentioned in sub-
section (2) or (3), a registered person whose export sale for a month is 40 percent or more of the
person‟s total sale for a month, the person may file an application for refund of excess amount that
remains after adjustment against any amount payable by the person, that is to be adjusted under
section 17 following the procedures mentioned in the preceding part of this section.
Since company export sales during the month of Baishak 2072 is more than 40 % of total sales, the
company is eligible to apply for refund of Rs. 396,050 during the month of Jestha 2072.
Working Note
VAT attractive Sales x 100
Proportionate VAT attractive sales =
Total Sales
= Rs. 6,000,000 x 100
Rs. 10,000,000
= 60 %
Question No 51:
Mr. John entered to Nepal via Birgunj with his family on 1st Aswin 2072 and visited so many places
in Nepal. The detail of few expenses incurred in Nepal by Mr. John & his family members are as
follows:
Amount paid to tour operator for family tour package amounted to Rs. 339,000 including Rs.
39,000 applicable VAT.
i) Mr. John purchase one laptop costing Rs. 100,000 and paid applicable VAT on it.
ii) Mr. John Paid to Hotel in Kathmandu for cost of lodging, foods & other services Rs. 226,000
including Rs. 26,000 VAT.
iii) Mr. John with his family visited orphanage home in Kathmandu and donated a fridge costing
Rs. 50,000 and paid applicable VAT on it.
At the time of departure from Tribhuvan International Airport, Kathmandu, Mr. John submitted all
vat invoices to the counter of IRD and Mr. John is carrying the laptop purchased in Nepal along
with all his other belongings.
Advise Mr. John how much VAT refund he will get. (December 2015)(5 Marks)
Answer
155 of 162
IT and VAT
CAP II Examination
As per section 25ka, if a foreign tourist visiting Nepal and returning by air purchases taxable goods
of more than twenty five thousand rupees and takes them with him or her, the tax paid on such
goods shall be refunded in accordance with the procedures specified by the Department. But service
charge of 3% shall be deducted on such amount.
Mr. John will not get refund of VAT paid on goods & services consumed in Nepal. Accordingly,
the amounts paid to tour operator, hotel and donation of fridge to orphanage home are not eligible to
get refund.
However, Mr. John is leaving by air from internal airport and posses laptop costing more than
twenty five thousand rupees is eligible to claim refund. Mr. John had paid Rs. 13,000 VAT on
purchase of laptop, so Mr. John will get only Rs. 12,610 (i.e. Rs. 13,000 less 3% on Rs. 13,000)
which is after deducting applicable service charges of 3%.
Question No 52:
PQR Pvt. Ltd., a company registered under VAT and submitting the return on monthly basis. It has
submitted the tax return on Jestha 25, 2072 for the month of Baisakh 2072. Also, the amount of tax
was Rs. 100,000 and it has paid via 'Account Payee' Cheque dated Jestha 25, 2072. The Cheque got
cleared on Jestha 26, 2072. Is it considered as payment of tax within due date as pet Act/Rules?
Will your answer be the same if the company paid via 'Account Payee' Cheque guaranteed by bank
(good for payment Cheque) and the Cheque got cleared on Jestha 27, 2072?
Answer
As per Section 19(1) of Value Added Tax Act, 2052, a taxpayer shall have to pay the tax for each
tax period within twenty five days of the end of the tax period.
Accordingly,
PQR Pvt. Ltd. paid the tax on Jestha 25, 2072 which is within the due date and is in compliance of
Section 19(1). But the payment via "Account Payee" cheque cannot be considered as the payment
under Act/Rules. The cheque got cleared on Jestha 26, 2072 which is beyond the due date. Hence,
this shall be considered as non-payment of tax on due date and the taxpayer is liable for interest,
penalty and additional charges as per act. [ 2 mark for this conclusion]
In case, tax is paid within the time-limit as mentioned under Section 19(1) by a cheque guaranteed
by a bank (good for payment cheque), it shall be deemed to be paid on the date of receipt by the
Office of such cheque guaranteed by the bank (good for payment cheque) as per Section 19(7).
Hence, the company has paid the amount on Jestha 25, 2072 via "Account Payee" cheque
guaranteed by bank (good for payment cheque) it shall be considered as payment within due date
even if the cheque got realized after two days i.e. on Jestha 27, 2072.
Question No 53:
Horizon Pvt. Ltd. located at Chitawan, has following taxable sales and purchases without VAT in
2072. Can the Pvt. Ltd. claim the refund in Kartik return? If yes, how much?
Month Sales (Rs.) Purchase (Rs.)
Baishakh 400,000 600,000
Jestha 300,000 400,000
Ashadh 500,000 550,000
Shrawan 600,000 700,000
156 of 162
IT and VAT
CAP II Examination
Bhadra 400,000 450,000

Aswin 800,000 700,000
Kartik 700,000 500,000 (December 2015)(5 Marks)
Answer
Calculation of Output/input VAT and Credit/Debit amount
Monthly Cumulative
Output
Month Sales Rs. Purchase Rs. Input Tax Rs. Tax Credit Tax Credit
Tax Rs.
Rs. Rs.
Baishak 400,000 600,000 52,000 78,000 (26,000) (26,000)
Jestha 300,000 400,000 39,000 52,000 (13,000) (39,000)
Ashad 500,000 550,000 65,000 71,500 (6,500) (45,500)
Shrawan 600,000 700,000 78,000 91,000 (13,000) (58,500)
Bhadra 400,000 450,000 52,000 58,500 (6,500) (65,000)
Aswin 800,000 700,000 104,000 91,000 13,000 (52,000)
Kartik 700,000 500,000 91,000 65,000 26,000 (26,000)
As per Section 24(3) of Value Added Tax Act, 2052 a registered person may file an application to a
tax officer for a lump sum refund, as prescribed, for an excess remaining amount that remains after
taking tax credit for a consecutive period of six months under this section.
For Kartik VAT return, last continuous six is Jestha, there is continuous credit of Rs. 26,000 since
Baishak. Company can claim a refund of Rs. 26,000 in Kartik.

157 of 162
IT and VAT
CAP II Examination
Chapter 10:
Accounts and Records

158 of 162
IT and VAT
CAP II Examination
Question No 1
What are the types of accounts and records to be kept by a taxpayer under VAT Act, 2052? What
are their contents? (June 2010)(5 Marks)
Answer
A taxpayer must keep the following accounts and records:
1. a purchase book
2. a sales book, and
3. a VAT account.
Purchase and sales books include:
1. the invoice number
2. the invoice date
3. the supplier's name and PAN/VAT in the purchase book
4. the customer's name and PAN/VAT in the sales book
5. the taxable value, and
6. the amount of VAT.
Businesses which sell both taxable and exempt goods will need to complete additional columns of
information to separate exempt sales and the purchases related to them.
Question No 2
What are the records to be maintained by registered dealer dealing in used or second hand
materials? (December 2010)(5 Marks)
Answer
As per Rule 33 of the VAT Rules, a registered person who is dealing in used or secondhand goods
has to maintain the purchase register and sales register containing the following information:
Related to Purchases:
 Date of Purchase
 Particulars giving full information of the goods
 Buying price excluding tax
 Rate of tax
 Amount of tax
 Total amount paid.
Related to Sales:
 Date of sale
 Selling price excluding tax
 Difference between the buying price and the selling price
 Rate of tax
 Amount of tax
 Total amount received
In case the buying price of every item of used goods exceeds Rs. 10,000, separate records of buying
or selling shall be maintained.
Failure to maintain the above records satisfactorily may attract the tax officer imposing VAT on the
total selling price of the goods sold by such taxpayer and the tax officer may issue a written order
requiring him to pay such tax along with the next tax return.

159 of 162
IT and VAT
CAP II Examination
Question No 3
Discuss the provision of Debit and Credit Note in VAT Rules. (December 2010)(5 Marks)
Answer
When a person issues an invoice for supply of goods or services, but after the invoice is issued it is
required to change the value as mentioned in the invoice due to any reason, the person has to issue
debit note or credit note for such changes in value of the goods.
Rule 20 of VAT Rules has not prescribed any format for debit and credit note but the debit or credit
note must include the following information:
 Serial Number of the debit or credit note
 Date of issue
 Name, address and registration number of supplier
 Recipient's name, address and registration number if he is a registered person.
 Number and date of the tax invoice connected with the transaction.
 particulars of the goods or services and reason of issuing the credit or debit note
 Amount debited or credited.
 Tax Amount debited or credited.
The tax payer has to keep a copy of such debit or credit note received or issued. The taxpayer has to
maintain a register for recording monthly details of debit note or credit note received or issued
during the month.
Question No 4
What are the records that are to be maintained by the tax payer as per rule 23 of VAT rules, 2053?
(December 2012)(5Marks)
Answer
As per rule 23 of VAT rules, a registered person shall for the purpose of the Act and these Rules
maintain records of the following information, documents and details:-
 Information as per Schedule -7.
 Records relating to trade, accounts, cash receipts and payments.
 Tax invoices and abbreviated tax invoices issued.
 Tax invoices and abbreviated tax invoices received.
 All documents relating to his imports and exports,
 All debit and credit notes.
Books of purchases and sales as per Schedules 8 and 9.
Question No 5:
What are the records to be maintained by a registered person dealing in used or second hand
materials? How the tax is assessed in such case? Answer with reference to the Value Added Tax
Rules, 2053. (June 2013)(5 Marks)
Answer
As per rule 33 of Value Added Tax Rules, 2053, following are the provisions regarding records to
be maintained, for a registered person dealing in used or second had goods.
1) A registered person who is dealing in used or secondhand goods has to maintain purchase
register and sales register containing the following particulars:
Relating to purchases:
i. Date of purchase
160 of 162
IT and VAT
CAP II Examination
ii. Particulars giving full information of the goods

iii. Buying price excluding tax
iv. Rate of tax
v. Amount of tax
vi. Total amount paid
Relating to Sales:
i. Date of sale
ii. Selling price excluding tax
iii. Difference between the buying price and selling price
iv. Rate of tax
v. Amount of tax
vi. Total amount received.
(2) In case the buying price of every item of used goods exceeds Rs. 10,000, separate records of
buying or selling shall be maintained.
(3) In case a registered person is found not to have satisfactorily maintained the records as
prescribed above, tax officer may impose VAT on the total selling price of the goods
sold by such taxpayer, and the tax officer may issue a written order requiring him to pay such
tax along with the next tax return.
Question No 6:
What shall be the fine and penalty chargeable under the following situations as per VAT Act, 2052?
i) Late payment of VAT amount.
ii) Tax plate not kept/misplaced.
Answer
i. Late payment of VAT amount.
Additional fee:
On late payment of VAT amount to Inland Revenue, additional fee of 10% annually shall be
imposed on payable VAT amount (Section 19 (2)).
Interest
On late payment of VAT amount to Inland Revenue, 15% annual interest shall be imposed in such
outstanding amount. (Section 26).
ii. Tax plate not kept/misplaced.

As per section 29(1) if tax plate is not kept, penalty @ 2000 per week shall be charged and if it is
not kept at prescribed place, penalty @ 1000 shall be imposed.
Question No 7

161 of 162
IT and VAT
CAP II Examination
Finance Manager of ABC Hardware is worrying about the price adjustment with it's supplier. He
had heard that he can do the price adjustment through the use of Debit/Credit Note. You are
requested to advise him regarding the content of Debit/Credit Note as per VAT Rules. (December
2014)(5 Marks)
Answer
As per Rule 20(1) of the Vat Rules, 2053 a person registered under VAT can adjust the price
difference on Sale of goods or services by issuing. Debit Note or Credit Note. As per the said Rule,
the following are the content of Debit/Credit Note:
a. Serial Number
b. Date of Issue
c. Name, Address and PAN Number of Supplier
d. Name, Address and PAN Number (if he is registered) of Receiver
e. Invoice No. and Date of Concerned Transaction
f. Detail of Product or Service and Reason of Debit or Credit
g. Amount of Debit or Credit
Vat Debit or Credit amount.
Question No 8:
As per the provisions of Value Added Tax Act, the tax officer has to complete the assessment
within 4 years from date of submission of VAT return. A VAT Registrant destroyed the VAT
records on expiry of above-mentioned period. On inspection, the tax officer imposed a fine under
section 29 stating the reason that the company did not produced the record for his inspection. The
company wants to apply for administrative review and seeks your advice in this regard. Please give
your advice. (December 2015)(5 Marks)
Answer
Section 20(4) of Value Added Tax Act 2052 provides for the assessment by tax officer within the
prescribed time limit of four years from the date of filing of the tax return. However, the
maintenance of VAT records has been provided in Rule 23 of VAT Rules, 2053. As per Rule 23(7)
of Value Added Tax Rules, 2053 a registered person must keep safely the records kept under this
rule for six years.
This is the responsibility of the taxpayer to maintain the records for the period mentioned in the Act.
The taxpayer in the question destroyed the records before the time limit the tax officer has rightly
imposed penalty under the Act. The Tax officer is correct in his action and there is no meaning in
filing for administrative review.

162 of 162

Scanner CAP II Income Tax VAT

Uploaded by

Copyright:

Available Formats

Scanner CAP II Income Tax VAT

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Scanner CAP II Income Tax VAT

Uploaded by

Copyright:

Available Formats

The Institute of Chartered Accountants of Nepal

Income Tax and Value Added Tax

The Institute of Chartered Accountants of Nepal

b. Debt Claim (June 2013)(2 Marks)

c. Exempt Organization (June 2013)(2 Marks)

As per sec 2(Dhna), "Exempt organization" means the following entities:

Underlying Ownership (June 2013)(2 Marks)

Payment (June 2013)(2 Marks)

Trustee (December 2013)(2.5 Marks)

The Institute of Chartered Accountants of Nepal

Royalty (December 2013)(2.5 Marks)

Permanent Establishment (December 2013)(2.5 Marks)

Investment Insurance (December 2013)(2.5 Marks)

The Institute of Chartered Accountants of Nepal

Company (June 2014)(2 Marks)

Lease(June 2014)(2 Marks)

Investment(June 2014)(2 Marks)

Interest(June 2014)(2 Marks)

Receiver(June 2014)(2 Marks)

"Payment" (June 2014)(2 Marks)

"Business Asset'", "Depreciable Asset" and "Trading Stock"(June 2014)(3 Marks)

The Institute of Chartered Accountants of Nepal

Right of Tax payer. (December 2014)(2 Marks)

Permanent establishment (December 2015)(5 Marks)

The Institute of Chartered Accountants of Nepal

Residential status of an individual(December 2015)(5 Marks)

The Institute of Chartered Accountants of Nepal

The Institute of Chartered Accountants of Nepal

The Institute of Chartered Accountants of Nepal

The Institute of Chartered Accountants of Nepal

The Institute of Chartered Accountants of Nepal

Income 1,200,000 1,800,000 in the ratio of 2:3

The Institute of Chartered Accountants of Nepal

b. A political party registered with the election commission.

The Institute of Chartered Accountants of Nepal

Computation of taxable income

The Institute of Chartered Accountants of Nepal

ii. Income from Employment:

iii. Computation of Taxable income of Mr. Clinton:

The Institute of Chartered Accountants of Nepal

i. Actual donation Rs. 50,000.

Calculation of Taxable Income under Condition II:

The Institute of Chartered Accountants of Nepal

Note: It is assumed that there is no absorbed addition during the year.

The Institute of Chartered Accountants of Nepal

Pollution control expenses

The Institute of Chartered Accountants of Nepal

Total tax liability (working note) Rs. 3,15,000

Assessable income earned in Nepal Rs. 5,00,000

Total taxable income Rs. 15,00,000

Tax liability computation: (India)

Therefore, average tax rate= 3,15,000/15,00,000 * 100 = 21%

Salary (Rs. 1,50,000 *12) Rs. 18,00,000

Amount to be quantified = Rs. 18,75,000 * 0.5/100 = Rs. 9,375

Car will be quantified as:

Total taxable business income of Mr. A is

Mr. Ram Mr. Shyam Total

The Institute of Chartered Accountants of Nepal

Calculation of Tax Liability for the year 2066/67

Telephone Expenditure (2,0001250%) 12,000