“Educating the mind without educating the heart is no education at all.

Concept: -Auditing
Auditing is the independent examination of financial information of any entity, whether profit
oriented or not, and irrespective of its size or legal form, when such an examination is
conducted with a view to expressing an opinion thereon.
➢ An audit is an examination of accounting records to establish their reliability and the
reliability of statements drawn there from.”
➢ Auditing is independent examination of finance information of any entity with a view
to expressing an opinion thereon.”
➢ It can be done internally by employees of the organization, or externally by an outside
firm.
Concept: -Objectives of auditing
The objective of an audit is to form an independent opinion on the financial statements of the
audited entity. The opinion includes whether the financial statements show a true and fair view,
and have been properly prepared in accordance with accounting standards.

Its objectives are classified into two groups which are given below:

A. Primary Objectives of Audit

The main objectives of audit are known as primary objectives of audit. They are as follows:

• Examining the system of internal check.

• Checking arithmetical accuracy of books of accounts, verifying posting, costing,

balancing etc.

• Verifying the authenticity and validity of transactions.

• Checking the proper distinction of capital and revenue nature of transactions.

• Confirming the existence and value of assets and liabilities.

• Verifying whether all the statutory requirements are fulfilled or not.

• Proving true and fairness of operating results presented by income statement and
financial position presented by balance sheet.

B. Subsidiary Objectives of Audit

These are such objectives which are set up to help in attaining primary objectives. They are as
follows:

• Detection and prevention of errors.

• Detection and prevention of frauds

• Under or over valuation of stock

• To provide information to income tax authority.

Taxation in Nepal Prepared by: Ganesh Yadav

 “Educating the mind without educating the heart is no education at all.”

• To satisfy the provision of company Act.

• To have moral effect

Concept: Major Functions of Auditing

Auditing plays a crucial role in the financial and operational health of organizations. Auditing
ensures the reliability of financial statement on the basis of which the state of affairs may be
easily to understand. It is generally compulsory by the law of nation.

The followings are the major function of auditing.

1. Accuracy Verification:

o Ensures the accuracy and reliability of financial statements and records.

o Confirms that financial reports reflect a true and fair view of the company's
financial position.

2. Compliance Check:

o Assesses adherence to laws, regulations, and internal policies.

o Verifies compliance with accounting standards and legal requirements.

3. Fraud Detection:

o Identifies potentially fraudulent activities or irregularities in financial

transactions.

o Helps prevent and uncover financial mismanagement and embezzlement.

4. Internal Controls Evaluation:

o Evaluates the effectiveness of internal controls and risk management processes.

o Provides recommendations for improving internal control systems to safeguard

assets.

5. Operational Efficiency:

o Assesses the efficiency and effectiveness of operational processes.

o Suggests improvements to streamline operations and enhance productivity.

6. Financial Health Assessment:

o Analyzes financial data to assess the organization’s financial health and

stability.

o Provides insights into financial performance and areas for financial

improvement.

Taxation in Nepal Prepared by: Ganesh Yadav

 “Educating the mind without educating the heart is no education at all.”

7. Management Assurance:

o Provides assurance to management and stakeholders about the accuracy and

integrity of financial information.

o Supports informed decision-making by providing reliable data.

8. Investor Confidence:

o Enhances investor confidence by ensuring transparency and accountability in

financial reporting.

o Builds trust among shareholders and potential investors.

9. Regulatory Reporting:

o Ensures accurate and timely submission of financial reports to regulatory

bodies.

o Assists in meeting legal and regulatory reporting obligations.

10. Improvement Recommendations:

o Offers actionable recommendations for improving financial processes and

controls.

o Helps in addressing identified weaknesses and implementing best practices.

These functions collectively help in maintaining the integrity, reliability, and efficiency of an
organization's financial and operational systems.

Concept: -Advantages of auditing

Its advantages are as follows:

• Audit Helps to Detect and Prevent Errors and Frauds.
• Audit Helps to Maintain Account Regularly.
• Audit Helps to Get Compensation.
• Audit Helps to Obtain Loan.
• Audit Facilitates the Sale of Business.
• Audit Helps to Assess Tax.
• Audit Facilitates to Compare.
• Audit Helps to Adjust Account of Deceased Partner.
• Audit Helps to Present a Proof.
• Audit Provides Information About Profit or Loss.
• Audit Helps to Prepare Future Plan.
• Audit Helps to Increase Goodwill.
• Audit Helps to Amalgamate the Company

Taxation in Nepal Prepared by: Ganesh Yadav

 “Educating the mind without educating the heart is no education at all.”

Concept: Types of auditing

There are mainly two types of auditing

a. Internal auditing
b. External auditing

Concept: -Internal Audit:

Internal auditing is an independent, objective assurance and consulting activity designed to

add value and improve an organization's operations.

• It helps an organization accomplish its objectives by bringing a systematic, disciplined

approach to evaluate and improve the effectiveness of risk
management, control and governance processes.
• Internal auditing is a catalyst for improving an organization's governance, risk
management and management controls by providing insight and recommendations
based on analyses and assessments of data and business processes.
• internal auditing provides value to governing bodies and senior management as an
objective source of independent advice. Professionals called internal auditors are
employed by organizations to perform the internal auditing activity.
• internal auditors may have a variety of higher educational and professional
backgrounds.
• Internal audits evaluate a company’s internal controls, including its corporate
governance and accounting processes.

Concept: External Auditing

An external audit is an independent examination of an organization’s financial statements. An

external audit is a financial review that is conducted by a party not associated with the company
or department that is voluntarily or involuntarily under audit. External Audit is defined as the
audit of the financial records of the company in which independent auditors perform the task
of examining the validity of financial records of the company carefully in order to find out if
there is any misstatement in the records due to fraud, error or embezzlement and then reporting
the same to the stakeholders of the company.

To conduct a statutory audit, the external auditor must hold an ‘audit registration’ from a
recognized accountancy body.

The objective of an external audit report includes the determination of the completeness and
accuracy of the accounting records of the client, ensuring that the records of the clients are
prepared as per the accounting framework which applies to them, and ensuring that the
financial statements of the client present the true and fair results and the financial position.

Concept: -Statutory Audit

A statutory audit is a legally required review of the accuracy of a company's (or government's)
financial statements and records. The purpose of a statutory audit is the same as the purpose of
any other type of audit: to determine whether an organization is providing a fair and accurate

Taxation in Nepal Prepared by: Ganesh Yadav

 “Educating the mind without educating the heart is no education at all.”

representation of its financial position by examining information such as bank balances,

bookkeeping records and financial transactions.

• When Audit is made compulsory by law it is termed as statutory audit (statute-based

audit)

e.g. Companies, banking companies, trust, Co-operative societies etc where it is

required as per governing statute.

• Statute based audits will be performed by CA +COP holder (Qualification matters).

• Rights, duties of auditor & scope of audit is determined by statute /Act ,can’t be
restricted by client.

• It shall be conducted once in a year.

• The report should be in a prescribed format & shall be issued to shareholders.

Concept: -Internal Check

Internal check is a method of organizing the accounts system of a business concern or

a factory where the duties of different clerks are arranged in such a way that the work
of one person is automatically checked by another and thus the possibility of fraud, or
error or irregularity is minimized unless there is collusion between the clerks.
➢ This minimizes the possibilities of frauds and errors.
➢ These checks operate continuously as a part of routine system.
➢ Work of each person is made complementary to the work of another.
➢ Instituting of checks on day-to-day transactions.
Concept: -Objective of Internal Check
Following are the main objectives of Internal Check: -
i. To protect business from carelessness, inefficiency and fraud.
ii. To ensure and produce adequate and reliable accounting information.
iii. To keep moral pressure over staff.
iv. To minimize the chances of errors and frauds and to detect them easily on early
stage if it is committed.
v. To divide the work in such a way that no business transaction should be left
unrecorded.
vi. To fix the responsibility of every clerk according to the division of work.

Concept: Return of Income (VVI**)

An Income tax return (ITR) is a form used to file information about your income and tax to
the Income Tax Department. The tax liability of a taxpayer is calculated based on his or her

Taxation in Nepal Prepared by: Ganesh Yadav

 “Educating the mind without educating the heart is no education at all.”

income. In case the return shows that excess tax has been paid during a year, then the individual
will be eligible to receive a income tax refund from the Income Tax Department.

As per the income tax laws, the return must be filed every year by an individual or business
that earns any income during a financial year. The income could be in the form of a salary,
business profits, income from house property or earned through dividends, capital gains,
interests or other sources.

Tax returns have to be filed by an individual or a business before a specified date. If a taxpayer
fails to abide by the deadline, he or she has to pay a penalty.

As per the income tax Act 2058, every assesses who is liable to submit the tax return should
submit the same not later than 3 moths from the end of the income year. The income tax return
should be signed by the person or manager and be attached with necessary disclosures along
with a declaration that the return is complete, true and accurate.
A return of income shall be in the manner and form prescribed specifying the following;
• The person’s assessable income for the year from each employment, business and
investment and the source of that income;
• The person’s taxable income for the year and the tax payable with respect to that income
for the year;
• In the case of a foreign permanent establishment of a non-resident person situated in
Nepal, its repatriated income for the year and the tax payable with respect to that
income; and
• Any other information prescribed by the department.
Note: -Returns of income can be of two types;
a. Interim returns-Jeopardy Return [i.e., statement of estimated tax payable] and
b. Final returns of income/ Annual Tax Returns.
A person having assessable income during the year from a business or investment is
required to submit a statement of estimated tax payable by the end of poush and pay tax
for the year in three installments-by the end of poush, Chaitra and ashad [sec. 95]. Every
person [including those who pay tax in installment] is required to file a return not later
than three months after the end of each income year [sec.96]. however, on certain
circumstances, the department may require a person to file a return of income prior to
the date for filing a return.
Right of taxpayer (assessee)
A taxpayer is a person [an individual or an entity] whom the tax is imposed on and realized
from as per income tax act,2058. As per section 74 of the act, the taxpayer with respect of
paying tax is entitled to enjoy the following rights;
• Right to get respectful behavior.
• Right to receive tax related information as per prevailing laws.
• Right to get the opportunity of submitting proof in own favor in respect of tax matters.
• Right to appoint lawyers or auditors for defense and
• Right to secrecy in respect of tax matters and keep it inviolable.

Taxation in Nepal Prepared by: Ganesh Yadav

 “Educating the mind without educating the heart is no education at all.”

Besides these, the taxpayer can enjoy the following rights;

• Right to obtain clarification on personal [advance] rulings.
• Right to get refund of excess tax paid.
• Right to appeal to review the decision.
• Right to receive public circulars.
• Right to extend time to file return.
Duties of Taxpayer (assesse)
The act has not categorically specified the duties of taxpayers. However, to enjoy the right as
per the act, the taxpayer is required to fulfil following duties in accordance with the act;
• To register and get permanent account number [PAN].
• To follow/adopt accounting method prescribed by the government of Nepal.
• To maintain books of account and other document properly.
• To pay tax within stipulated time and place.
• To pay tax in installments or deduct tax at source.
• To file returns within stipulated time.
• To provide information to tax office.
• To attend tax office if he is ordered to do so.
• To accept evidence issued by tax office as notification of tax payable.
• Not to oppose tax officials in performing their duties, etc.

Concept: Income Tax Assessment (VVI***)

Every taxpayer has to furnish the details of his income to the Income-tax Department. These
details are to be furnished by filing up his return of income. Once the return of income is filed
by the taxpayer, the next step is processing the income return by the Income Tax Department.
The Income Tax Department examines the return of income for its correctness. The process of
examining the return of income by the Income Tax department is called “Assessment.
The process of collecting and reviewing the information filed by assesses in their income tax
returns is known as income tax assessment. At the end of each financial year, all persons and
entities required to file an income tax return by self-computing the amount of income earned
and pay the tax due. Hence, an income tax assessment would happen subsequent to the filing
of an income tax return.
As per income tax Act, 2058, There are mainly three types of income tax assessment
a. Self-assessment
b. Jeopardy assessment
c. Amended assessment
Concept: -Self-assessment (Section 99):
The assessee himself determines the income tax payable while filling the return of income.
Before filing the return of income assesse is supposed to find the whether he is liable to pay
any tax, for this this section has introduced in the income tax act 2058. This process is generally

Taxation in Nepal Prepared by: Ganesh Yadav

 “Educating the mind without educating the heart is no education at all.”

known as self-assessment. This is also known as preliminary assessment and referred to as a

summary assessment with ought calling the asseessee.
A tax payer has an obligation to submit tax returns on time. In case a person submits a tax
return including the information regarding the total tax payable during the year and the tax due
for payment on the date of submitting the return, it is believed that the income tax assessment
is complete. In legal terms the filling of an annual return is a self-assessment made by the tax
payer and is treated as assessed by the inland revenue officer (IRD) unless the conditions under;
➢ the total tax liabilities of the taxpayer during the year are equal to the amount of
withholding tax deducted by withholding agents on payments to it and amount
of advance tax paid by it
➢ the deemed tax assessment shows that is on more tax payable for the year by
the taxpayer.
➢ It is considered as effective system of tax assessment due to following reasons
• Accuracy
• Efficiency
• Timeliness
• Transparency
• Compliance and voluntarily disclosures
Concept: Jeopardy Assessment (Section 100)
Jeopardy assessment is the process of determining tax liability of taxpayers by IRD in the
following conditions:
➢ The person becomes bankrupt, is wound up or going into liquidation
➢ The person is about to leave Nepal independently.
➢ The person is about to leave the business or
➢ The IRD otherwise considers it appropriate.
Under any one of the above conditions the IRD may serve a notice to the taxpayer to submit
a tax return for the specified period for the year within specified days. In the case of a taxpayer
who submits it in either case, the income tax assessment is supposed to be made as self-
assessment.
Concept: Amended Assessment (Section 101)
The IRD may amend self-assessment and jeopardy tax assessment or this section so as to adjust
the assessment person’s liability to tax in such a manner as, according to the IRD s best
judgment, is consistent with the intention of this Act.
The IRD may amend an assessment as money times as in thinks appropriate for best judgment.
The IRD shall be required to make an assessment within the period of four years after the
following data.
➢ in the case of self-assessment, the due date for filling the return,
➢ in the case of jeopardy assessment, the date on which the notice of assessment
is served on the person assessment tax payable according to tax law.
While amending an assessment under this section, the department shall be required to grant
opportunity in writing to produce proof, if any in own favors with respect of the assessment
specifying the basis that led to the amendment and giving a time limit of 15 days.

Taxation in Nepal Prepared by: Ganesh Yadav

 “Educating the mind without educating the heart is no education at all.”

Concept: Tax Collection (VVI***)

The system of raising of taxes through different mediums like voluntarily, recovery or
forcefully is known as Tax Collection. As per the provisions of income tax Act, The tax can be
collected through the following methods
a. Installment Method
b. Withholding/Advance Tax Methods
c. Collection along with self-Assessment
d. Presumptive Taxation
e. Recovery or Forced Collection
Installment Method: -
A system of collection of taxation where the assessee (taxpayers) is required to pay their tax
obligations(liability) in the installment basis is known as installment method of tax collection.
A major portion of taxes from business sector is collected through installment method.
Under this method, the installment in advance is to be paid by taxpayer within the end of the
period prescribed by the Act. A person who has or will have assessable income in any income
from business or investment has to pay tax in three installments as below:
1st Installment: 40% of estimated tax amount to be paid(By end of Poush)
1st Installment: 70% of estimated tax amount to be paid(By end of Chaitra)
1st Installment: 100% of estimated tax amount to be paid(By end of Asad)
However, when the total amount of estimated tax is less than Rs 5000, the amount of
installments shall not be required to pay.
Advance Tax Method:
A system of taxation where payer withhold tax at source while making the payment to the
payee is known as Advance Tax Method of collection of tax. It is also known as Tax Deduction
at Source (TDS).
Under this method, the person who distribute the income is responsible to deduct tax at sources.
A resident person who is required to deduct tax at source at the time of payment of employment,
investment return, services and contract should deduct tax at source. The person who deduct
tax is known as withholding agent. The withholding agent must deposit the withholding amount
within 25th from withhold with supporting documents.
Collection along with self-assessment (Covered above)
Presumptive Taxation:
The tax which is charged on the basis of flat system is known as presumptive Taxation. It is
suitable for small taxpayer’s. If taxpayers have income exclusively from business having
source in Nepal, have not claimed medical tax credit and advance tax paid, income and annual
turnover do not exceed Rs 3 lakhs and Rs 30 Lakhs respectively, they are imposed a fixed
amount depending on the area where business is conducted. The annual amount of tax is as
below
Areas Tax Amount (Annually in Rs.)
Metropolis or Sub-metropolis 7500
Municipalities 4000

Taxation in Nepal Prepared by: Ganesh Yadav

 “Educating the mind without educating the heart is no education at all.”

Others Places 2500

Recovery/Forced Collection:
The government may collect the delinquent taxes from the defaulters by different ways such as
revery of tax from person owing money to tax debtors, recovery from agent of non-resident,
recovery issuing department order/notices/circulars etc
Concept: Permanent Account Number (PAN)
A unique code provided to each taxpayer is known as permanent account number (PAN). It
provides an identify for the taxpayer to the tax office. It can not be transferred from one
taxpayer to [Link] is generally 9 digits number issued by the income tax department to
Nepali taxpayers. Department generally issued two types of PAN.
• Personal PAN
• Business PAN
Concept: Tax Auditing
An independent audit of books of accounts conducted for ensuring compliance with the
provisions of Income Tax Act is known as Tax Auditing. It is generally audits of the accounts
of the taxapayer’s by a professional auditor to fulfill the requirement of income tax Act while
filling the tax return. The examination of tax return by the tax authority to verify the
accurateness of incomes and deductions as per rules a also part of tax audit.
The main objectives of Tax Auditing are:
The main objectives of tax auditing are as below
• Promote voluntary compliance.
• Detect non-compliant taxpayers.
• Gather information on the “health” of the tax system (including patterns of taxpayers’ compliance
behavior).
• Gather intelligence.
• Educate taxpayers to identify improvement and record keeping.
• Combat evasion and avoidance

The followings are the major types of tax audit:

• Field Audit
• Office Audit
• Corresponding Audit
• Financial Audit
• Construction Audit

Penal Provisions:
As per income tax act,2058, provision of penal can be categories into three parts
a. Fees: - Noncompliance in documents

Taxation in Nepal Prepared by: Ganesh Yadav

 “Educating the mind without educating the heart is no education at all.”

b. Interest: - Nonpayment of Tax

c. Fine and penalty: - Criminal Offences
a. Fees under income tax Act, 2058 are as under:
Sections Heading Fines
117(1)(Ka) Not filling of advance income tax NPR 2000 per return
return under section95(1)
117(1)(Kha) Not filling of details of tax 1.5% per annum from the date of
deducted at source under filling to be made to the date of filling
section95(ka)(5) made or part of the month
117(1)(Ga) Not filling of income tax return
For the person mentioned in section
under section 96(1) 96(4)(4): NPR 100 per person
For the person other than above
person:
• 0.1% of sale income and other
disallowed expenses
• NPR 100 per month,
whichever is higher
117(2) Fails to maintain proper • 0.1% of sale income and other
documentation for an income disallowed expenses
year as required by Section 81 • Flat amount NPR 1000,
whichever is higher
117(3) Withholding Tax Return under 1.5% p.a. of amount of tax to be
Section 90(1) not filed by tax withheld.
withholding agent
119(Ka) Violation of any rules of the Act Fine of minimum NPR 5000 up to
(Residuary section) maximum NPR 30000
120 Filling false or incorrect • When such statement is filed
statement unintesionally-50% of unpaid
tax amount
• When such statement is filed
intesionally-100% of unpaid
tax amount

121 Assisting intentionally to 100% of unpaid tax amount

taxpayer

b. Interest under income tax act 2058

Sections Headings Interest

118 Advance tax deposited less than 15% p.a. on underpaid amount of tax
90% of actual income tax to be is imposed for each month and part of
deposited the month from the date of due until
the date of tax payable on assessment
119 Tax not deposited when General interest rate 15% p.a. for each
submitting income tax returns month and parts of the months on the
under section 96 amount of tax outstanding.

Taxation in Nepal Prepared by: Ganesh Yadav

 “Educating the mind without educating the heart is no education at all.”

c. Penalty under income tax act 2058

Sections Headings Interest

123 Person not depositing income tax *Penalty of minimum NPR 5000 to
maximum NPR 30,000 OR
*Imprisonment of minimum 1 months
to maximum 3 months OR Both
124 Person who submits the false or *Penalty of minimum NPR 40,000 to
incorrect statements maximum NPR 160,000 OR
*Imprisonment of minimum 6 months
to maximum 2 years OR Both

Example 1: Mr. Nepal a trader submitted his income return on stipulated time along with
computed income tax of Rs. 30000. In the investigation of Income tax officer, an income of Rs
100,000 is found concealed. However, it is proved that Mr. Nepal has no intension to hide such
income and happened simply because of his mistake. Calculate the fess imposable to Mr.
Nepal.
Solution:
As per section 120 of income tax act, 2058, if taxpayer made false or misleading statement
without knowingly then he/she is liable to pay fees equal to 50% of underpaid tax amount.
Total taxable income (Concealed income) =Rs 100000
Tax liability=100,000X20%=20,000
Therefore, fees payable to Mr. Nepal=Rs20,000X50%
=Rs 10,000
Example 2: Mr. Shrestha a trader submitted his income return on stipulated time along with
computed income tax of Rs. 30000. In the investigation of Income tax officer, an income of Rs
100,000 is found concealed. However, it is proved that Mr. Shrestha has intension to hide such
income. Calculate the fess imposable to Mr. Shrestha.
Solution:
As per section 120 of income tax act, 2058, if taxpayer made false or misleading statement so
knowingly then he/she is liable to pay fees equal to 100% of underpaid tax amount.
Total taxable income (Concealed income) =Rs 100000
Tax liability=100,000X20%=20,000
Therefore, fees payable to Mr. Shrestha=Rs20,000X100%
=Rs 20,000
Example 3: After an investigation by IRO, Mr. Rahul Shakya was found to have aided Mr.
Umesh Shrestha to commit an offence by which the latter’s tax liability was underpaid by Rs.
56,000. You are required to calculate fee chargeable to Mr. Rahul.
Solution:

Taxation in Nepal Prepared by: Ganesh Yadav

 “Educating the mind without educating the heart is no education at all.”

According to section 121 of ITA 2058, the person who aids another person to commit an
offence is held liable to pay 100% of underpaid tax fees.
Fees chargeable to Mr. Rahul=100% of Underpaid Tax Fees
= 100%X Rs. 56,000=Rs 56,000
Hence, Mr. Rahul should pay fee equal to Rs. 56,000 for aiding Mr. Umesh to commit an
offence that reduced the latter’s tax liability by Rs. 56,000.
Example:4
A withholding agent failed to file statement of withhold tax on due dates (i.e. within 25th days
of next month) for Magh and Chaitra 2078 amounting to Rs 4,50,000 and Rs 5,00,000
respectively. He paid the withhold tax of Magh on Chaitra 25th 2078 and of Chaitra on 2nd
Jestha 2079.
Required: Fees payable by withholding agent.
Solution:
According to section 117(1) (Kha) of ITA 2058, a withholding agent failing to file statement
of income within the due date (i.e. within 25th days of next month) is held to pay fees equal to
1.5% per annum of withhold tax amount for the delayed days(i.e for each months and part of
months).
Fees imposable for the delay in payment of withheld tax of Magh 2078
=Rs 4,50,000X1.5%X1/12=Rs 562.50
Fees imposable for the delay in payment of withheld tax of Chaitra 2078
=Rs 500,000X1.5%X2/12=Rs 1250.00
Hence, Total fees payable by withholding agent=Rs 562.50+Rs 1250=Rs1812.50

Example:5
PQR Company limited, having assessable income Rs 800,000 during F.Y. 2078/79, failed to
maintain the proper documents as required by section 81 of the Act.
Solution:
According to section 117(2) of ITA 2058, the following fess imposable for not maintain proper
documents required by the Act.
• 0.1% of sale income and other disallowed expenses
=0.1%X800,000=Rs. 8000
• Flat amount NPR 1000, whichever is higher
Hence, Chargeable amount of fess is Rs 8000

Example:6

Taxation in Nepal Prepared by: Ganesh Yadav

 “Educating the mind without educating the heart is no education at all.”

Miss. Nepal runs a business of her own. In the income year 2076/77, her estimated tax liability
was Rs [Link] to her personal reason, she could not submit the return of income under
section 95(1) within the stipulated time. As per the ITA 2058, she was liable to deposit 40%
and 70% of estimated tax as advance tax for the first and second installments along with return
of income within Poush end and Chaitra end ,2076 respectively.
Required: Fees chargeable to Miss Nepal for failure to submit return of income.
Solution:
According to section 117(1)(Ka) of ITA 2058, if the taxpayers fails to submits the tax returns
under section 95(1) within the stipulated time, then he/she liable to pay a fees of Rs 2000 per
returns.
Here, Miss Nepal failed to submit returns of 1st and 2nd installments, so fees chargeable to her
is Rs 2000X2=Rs 4000.
Example:7
Guras Company Ltd. failed to submit returns of income for F/Y 2078/79 within stipulated time
i.e., within 3 months from fiscal year end (Ashwin end 2079) and submitted returns of income
on Mangsir end 2079. The company’s assessable income was Rs. 700,000. The company had
still to deduct allowable expenses (rent) Rs.50,000 and to include one item of taxable
income(commission) Rs.100,000.
You are required to compute fees chargeable to the company for failure to file returns of income
for F/Y 2078/79.
Solution:
According to section 117(1)(Ga) of ITA 2058, a taxpayer failing to file returns of income within
the stipulated time (i.e., Ashwin end of next F/Y) is held to pay fees equal to 0.1% of assessable
income after including any other taxable incomes and before deducting any other allowable
expenses or Rs.100 per month, whichever is higher.
• 0.1% of Rs.800,000(i.e., 700,000 + Rs.100,000) =Rs.800 or
• Rs.100 per month *2=Rs.200, whichever is higher,
Hence Rs. 800 is the imposable fee to the company.
Example:8
A manufacturing company has total taxable income Rs. 6000,000 during the income year
2072/73. He was estimated total tax liability during the year and paid on installment in due
date. The amount of installment paid as follows;
1st installment up to Poush end =Rs. 400,000
2nd installment up to Chaitra end = Rs.300,000
3rd installment up to Ashad end = Rs. 300,000
Required: Interest paid by the company for under estimation of installment of liability.
Solution:
Tax liability = 25% of Rs.60,00,000 = Rs.15,00,000

Taxation in Nepal Prepared by: Ganesh Yadav

 “Educating the mind without educating the heart is no education at all.”

90% of tax liability =90% of 15,00,000 = Rs. 13,50,000

First installment (Interest from Poush to Aswin, i.e. 9 months)
40% of Rs. 13,50,000 =Rs. 5,40,000
Interest = (Rs. 5,40,000 - Rs. 4,00,000) *15% * 9/12 = Rs. 15,750
Second installment (Interest from Baishakh to Aswin, i.e.6 months)
30% of Rs. 13,50,000 = Rs. 4,05,000
Interest = (Rs. 4,05,000-Rs. 3,00,000) * 15% * 6/12 = Rs. 7,875
Third installment (Interest from Shrawan to Aswin, i.e. 3 months)
30% of Rs. 13,50,000 = Rs. 4,05,000
Interest = (Rs. 4,05,000 – Rs. 3,00,000) * 15% *3/12 = Rs. 3,937.5
Total interest = Rs. 15,750 + Rs. 7,875+ Rs. 3,937.5 = Rs. 27,562.5

Example:9
A special nature goods producing manufacturing company provided the following information
during the previous income year.
• Total taxable income Rs. 8000,000
• The estimated tax liability paid in following installment
• First installment Rs. 550,000 on Poush end.
• Second installment Rs. 350,000 on Chaitra end.
• Third installment Rs. 400,000 on Ashad end.
Required: Amount of interest charge for delay payment of tax.
Solution:
Tax liability = 20% of Rs.80,00,000 = Rs.16,00,000
90% of tax liability = 90% of 16,00,000 = Rs.14,40,000
First installment (Interest from Poush to Aswin, i.e.9 months)
40% of Rs.14,40,000 = Rs.5,76,000
Interest = (Rs. 5,76,000 – Rs.5,50,000) * 15% * 9/12 = Rs. 2,925
Second installment (Interest from Baisakh to Aswin, i.e.6 months)
30% of Rs.14,40,000 = Rs. 4,32,000
Interest = (Rs. 4,32,000 – Rs. 3,50,000) * 15% *6/12 = Rs. 3,025

Taxation in Nepal Prepared by: Ganesh Yadav

 “Educating the mind without educating the heart is no education at all.”

Third installment (Interest from Shrawan to Aswin i.e. 3 months)

30% of Rs.14,40,000 = Rs. 3,32,000
Interest = (Rs. 3,32,000 – Rs.4,00,000) *15% * 3/12 =Rs.1,200
Total interest = Rs. 2,925 + Rs.3,025+ Rs.1,200 = Rs.7,150

“Wisdom is not a product of schooling but of the lifelong attempt to acquire it.”
― Albert Einstein

“Education is the most powerful weapon which you can use to change the world.”
― Nelson Mandela

Chapter-1: Conceptual Foundation

Concept: Taxation

Taxation is the system by which a government takes money from people

and organizations and spends it on things such as education, health, and defense.

“A compulsory contribution from a person to the government without any direct benefits is
known as Taxation”.

➢ The followings are the main features of taxation

▪ Tax is generally payable with money.
▪ Tax is levied on person or property.
▪ Tax is levied as per the prevailing law of the country.
▪ Tax payers do not get corresponding benefits.
▪ Tax is spent for common interest of people.
▪ Tax is enforced contribution.
▪ Tax is proportionate in character.
▪ Tax is commonly required to be paid at regular intervals.
▪ Tax is levied by governments of its agencies.

Taxation in Nepal Prepared by: Ganesh Yadav

 “Educating the mind without educating the heart is no education at all.”

Concept: objective of taxation

The primary purpose of taxation is to raise revenue to meet huge public expenditure. Most
governmental activities must be financed by taxation.

➢ The followings are the main objectives of taxation.

a. To raise revenues
b. To regulate the economy.
c. To boost up the economy.
d. To reduce unemployment problems
e. To remove provincial disparities
f. To redistributing wealth for the common good.
g. To prevent concentration of wealth
➢ Following are the main objectives of ITA 2058;
• Covering all income generating activities within tax net.
• Widening the tax base.
• Integrating all scattered provisions regarding income tax within one Act.
• Making flexible and revenue productive tax system.
• Developing taxpayer friendly taxation system by making it clear and transparent.
• To make tax system compatible to modern economy.
• Reducing the scope of discretionary interpretation of tax authorities by ensuring
simplicity, uniformity and transparency.
• Separating the area of administrative and judicial responsibilities.
• Integrating Nepalese tax system with the tax system of foreign countries.
• Making tax payers more responsible through the self-assessment system.

#classification of taxation

Taxation can be classified into two categories on the basis of burden of payments of tax.

• Direct tax

• Indirect tax.

Concept: Direct taxation.

Direct taxation is a type of tax which is paid for by an individual directly to the
government. A taxpayer, for example, pays direct taxes to the government for different

Taxation in Nepal Prepared by: Ganesh Yadav

 “Educating the mind without educating the heart is no education at all.”

purposes, including real property tax, personal property tax, income tax or taxes on
assets.

Direct Taxes are the taxes that are levied on the income of individuals or
organizations. They include Income tax, corporate tax, wealth tax and inheritance tax.

➢ The followings are the main advantages of direct taxation

i. It is easy to determine direct taxes.

ii. Direct taxes tend to be progressive – people in the higher income group
pay a greater percentage than poorer people.

iii. Direct taxes are easy to collect.

iv. Direct taxes are important to the government’s economic policy.

If the government is fighting inflation it can impose, for example, high levels
of income tax to restrict consumer demand.

v. Raising civic consciousness: if a person paying his tax, he feels conscious

of his rights.

vi. Productive: the direct tax yields large revenue to the government.

➢ The followings are the main disadvantages of direct taxation.

a. Inconvenient: it gives mental pinch to the taxpayers hence it is inconvenience

for the taxpayers.

b. Uneconomical: since the government has to collect tax individually hence it is

uneconomical.

c. Discourage saving and investments: if the taxes are too heavy, they
discourage saving and investments.

d. Evadable: -since the taxpayers may submit the false returns to the tax office
hence evade tax easily.

e. Arbitrary: the rates of tax is depends upon the mood of the parliament
(finance minister)

Concept: indirect taxation:

“A tax imposed on one person but paid partly or wholly by another is known as indirect
taxation. “Indirect taxes are taxes that are added onto the final price for goods or

Taxation in Nepal Prepared by: Ganesh Yadav

 “Educating the mind without educating the heart is no education at all.”

services. Indirect taxes also are sometimes called sin or expenditure taxes. They are added to
the final cost of a variety of products and services that people purchase every day.

The followings are the main advantages of indirect taxation.

(i) The Poor Can Contribute:

They are the only means of reaching the poor. It is a sound principle that every, individual
should pay something, however little, to the State. The poor are always exempted from
paying direct taxes. They can be reached only through indirect taxation.

(ii) Convenient:
They are convenient to both the tax-prayer and the State. I he tax-payers do not feel the
burden much partly because an indirect tax is paid in small amounts and partly because it is
paid only when making purchases.

(iii) Broad-based:
Indirect taxes can be spread over a wide range. As indirect taxes can be spread widely, they
are more beneficial and suitable.

(iv) Easy Collection:

Collection takes place automatically when goods are bought and sold. A dealer collects the
tax when he charges a price.

(v) Non-evadable:
They cannot be evaded, as they are a part of the price. They can be evaded only when the
taxed article is not consumed.

(vi) Equitable:
When imposed on luxury or goods consumed by the rich, they are equitable.

(vii) Check Harmful Consumption:

By being imposed on harmful products, they can check consumption of harmful
commodities. That is why tobacco, wine and other intoxicants are taxed.

The followings are the main disadvantages of indirect taxation.

(i) Regressive:
Indirect taxes are not equitable. Whether a rich man buys a commodity or a poor man, the
price in the market is the same for all. The tax is wrapped in the price. Hence, rich and poor
pay the same amount, which is obviously unfair. They are thus; regressive.

Taxation in Nepal Prepared by: Ganesh Yadav

 “Educating the mind without educating the heart is no education at all.”

(ii) Uncertain:
Unless indirect taxes are imposed on necessaries, we cannot be sure of the revenue yield. The
tax will raise the price and contract the demand. When the thing is not purchased, the
question of the tax payment does not arise.

(iii) Raising Prices Unduly:

They cause the price of an article to rise b; more than the tax. A fraction of the money unit
cannot be calculated, so ever middleman tends to charge more than the tax. This process is
cumulative.

(iv) Uneconomical:
The cost of collection is quite heavy. Every source o production has to be guarded. Large
administrative staff is required to administer such taxes. This turns out to be a costly affair.

(v) No Civic Consciousness:

These taxes do not develop civic consciousness, because many times the tax-payer does not
even know that he is paying tax. The tax is concealed in the price.

(vi) Harmful to Industries:

They discourage industries if raw materials are taxed. This will raise the cost of production
and impair their competitive capacity.

Concept: Canons of taxation.

The rules and principles upon which a good taxation system should be built is known as canons
of taxation. The canons of taxation were first presented by Adam Smith in his famous book
“The Wealth of Nations”

Adam Smith originally presented only 4 canons of taxation, which are also commonly referred
to as the ‘Main Canons of Taxation’ or ‘Adam Smith’s Canons of Taxation.

Adam Smith originally presented the four canons of taxation and rest are developed later.
These 7 canons of taxation are:
1. Canon of Equality
2. Canon of Certainty
3. Canon of Convenience
4. Canon of Economy
5. Canon of Productivity
6. Canon of Elasticity

Taxation in Nepal Prepared by: Ganesh Yadav

 “Educating the mind without educating the heart is no education at all.”

7. Canon of Simplicity

1. Canon of equality:

The word equality here does not mean that everyone should pay the exact, equal
amount of tax. What equality really means here is that the rich people should pay
more taxes and the poor pay less. This is because the amount of tax should be in
proportion to the abilities of the taxpayer. It is one of the fundamental concepts to
bring social equality in the country.

2. Canon of certainty: -

The tax payers should be well-aware of the purpose, amount and manner of the tax
payment. Everything should be made clear, simple and absolutely certain for the
benefit of the taxpayer.

3. Canon of convenience:

The canon of convenience states that Amount, manner, modes of payments should
easy, convenient and taxpayer-friendly. The time and manner of payment must be
convenient for the tax payer so that he is able to pay his taxes in due time. If the time
and manner of the payment is not convenient, then it may lead to tax evasion and
corruption.

4. Canon of economy:

The whole purpose of collecting taxes is to generate revenue for the company. This
revenue, in turn, is spent on public welfare projects. The canon of economy – keeping
in view the above-mentioned purpose – states that the cost of collecting taxes should
be as minimum as possible.

5. Canon of productivity:

These canons states that the fund raised through taxes should be utilized by
government in productive sector of economy. By virtue of the canon of productivity,
it is better to have fewer taxes with large revenues, rather than more taxes with lesser
amounts of revenue.

6. Canon of elasticity:

Taxation in Nepal Prepared by: Ganesh Yadav

 “Educating the mind without educating the heart is no education at all.”

An ideal system of taxation should consist of those types of taxes that can easily be
adjusted. Taxes, which can be increased or decreased, according to the demand of the
revenue, are considered ideal for the system. The government can easily change the
tax rates as per need of the country.

7. Canon of simplicity:

The system of taxation should be made as simple as possible. The entire process
should be simple, non-technical and straightforward.

“Wisdom is not a product of schooling but of the lifelong attempt to acquire it.”
― Albert Einstein

“Education is the most powerful weapon which you can use to change the world.”
― Nelson Mandela

(Best of Luck)

Taxation in Nepal Prepared by: Ganesh Yadav