Tax Planning and Audit Information
Taxes are, in general, compulsory contribution of wealth levied upon persons, natural or corporate. In order to defray the expenses incurred in conferring a common benefit upon the residents of the state. In a simple language, we can understand as any person (individuals, married couples or the business entities) whoever earns taxable income. Income such as salary, commission, interest on deposit, rent income or profit from business or investment within a financial year. All this income using sources of the country are liable to pay taxes on their income on proportionate basis. Such taxes are the major sources of income for Nepal Government and are used in providing facilities to the citizen of Nepal.
Tax Evasion and Tax Avoidance
The only difference between tax evasion and tax avoidance is that tax avoidance is legal and tax evasion is illegal. Tax avoidance schemes are generally termed as “Tax Planning”. However, Tax Planning divide into two forms. “Tax mitigation” relates to the international tax reduction mechanism that tax law grants. “Tax avoidance” relates to the reduction in tax through the study of loopholes within tax law. Both are equally legal, but on consideration, avoidance is immoral.
Tax evasion is illegal. It involves reducing one’s tax liability in a way that is not following the tax legislation. For example, tax evasion deliberately omits some investment income from a tax return. In order not to pay tax on that source of income, or overstating expenses to reduce the tax liability.
Benefits of Tax Planning and Audit information
Income Tax Act, 2058 has made certain provisions to exempt tax on certain income and to promote business, employment, etc. Thus, if Tax planning and Audit information is correct government provide various business exemptions, concessions and facilities to the person. The nature of business plays big part on Tax Planning.
Such explanation in details are below:
In case manufacturing industries export their products, they are in entitlement to concession at 25% on applicable tax rate on such income for the income year.
In case any industry involvement in exploration and extraction of petroleum products and natural gases commences its commercial operation within 2075 B.S Chaitra end, such industry will be in entitlement to 100% exemption of income tax for first SEVEN years from the date of commencement of operation and 50% exemption in income tax for THREE subsequent 3 years.
In case of a person who has obtained license to produce, transmit or distribute hydroelectricity; if commences its commercial operation in relation to production, transmission or distribution of electricity with 2080 B.S Chaitra end:
- Such person shall be in entitlement to 100% exemptions of income tax for first 10 years of commercial operation, and
- The exemption of income tax shall be in restriction to 50% of applicable tax rate for subsequent 5 years after the expiry of first ten years as in number (a) above.
A person is in entitlement to concessions in tax rate at 40% of applicable tax rate in case:
- The person constructs and operates roads, bridge, airport, or tunnel way; or
- The person operates tram or trolley bus.
Tourism Industries and Airlines Operator:
In case a new company is establish with capital investment of more than NRs. 2 Billion in sector of tourism industry or company operating international flights, such industry or company is entitle to 100% exemption of income tax for the first five years of its commercial operation and 50% exemptions for next three years thereafter. For existing such industry or airlines company, if such company or airlines company increase their capital investment to Nepalese Rupees Two Billion along with enhancement of installing capacity by at least 25%, such industry or airlines company are entitle to 100% exemption of income tax for first five years of its commercial operation and 50% exemptions for next three years thereafter on income generate from the operation of increase capacity.
Information Technology Industries:
If any information technology industry provides direct employment to 300 or more Nepalese national during the whole Income Year, the effective tax rate for income of such industry will be reduce to 90% of applicable tax rate. The industries working in software development, statistical processing, cyber café, digital mapping after being establish in Technology Park, Biotech Park and Information Technology Park prescribe by the Government of Nepal by publishing notification in Nepal gazette are entitle to tax concession of 50% on applicable tax rate.
To classify as special industry, an industry shall produce goods by utilizing or processing raw materials, semi-process materials, by products or waste products or any other goods, and it shall not be the industry producing goods of negative list as explain in preceding paragraph. Applicable tax rate for special industry for income year 2072/73 is 20%. Various concessions are given to special industries on the basis of direct employment, on the basis of location of operation of special industry and on the basis of capital investment.
- For New Industry: In case a new special industry is establish in Nepal with capital investment of more than Nepalese Rupees One Billion providing direct employment to 500 persons during the whole income year, such industry is in entitlement to exemption from income tax for a period of 5 years from the date of commercial operation and 50% of income tax of such industry is in exemption in next three income years.
- For Existing Industry: In case the existing special industry increases its production capacity by at least 25% increasing its capital investment to Nepalese Rupees One Billion providing direct employment to at least 500 individuals during the whole year, such first five years and then 50% exemption of tax for next three income years on income generating from the increase in capacity.
Industry Established at Special Economic Zone
- In case the industry is at Special Economic Zone (SEZ) at Himali districts. Or at any hilly districts that Nepal government issue. The industry shall avail a 100% tax exemption for ten years from the commencement of the business of the industry. After expiry of the 10 years, such industry is entitled to a tax concession of 50% of the applicable tax rate for all income years.
- Any industry that establish at any other specific economic zone need to avail 100% tax exemption for 5 years. From the commencement of the business of the industry. After 5 years, such industry is entitled to a tax concession of 50% of the applicable tax rate for all income years.
- The industries establish at any Special Economic Zone shall avail tax exemption. On distribution of dividend for 5 years from the commencement of the business. The industries entitle to exemption of 50% of applicable tax rate for a maximum period of 3 years. After expiry of first 5 years on such zone satisfies both the following conditions. The dividend tax is applicable on distribution of profit may get exemption. First, the industry at SEZ needs to be special industry, or industry related to tourism sector or related to agricultural sector. Secondly, the distribution need to be capitalization of profit for capacity enhancement.
All the above-mentioned provisions are the concession provided as per Income Tax Act, 2058. Therefore, any person or business entrepreneur who can adopt one of these tax planning options will definitely either receive the respective tax concession or enjoy tax benefit and also have right audit information.