Chapter 1- Introduction “Income Tax Act”

1.1

The concept of Income Tax was first introduced in 2017 BS in Nepal. The Income Tax Act, 2031 was implemented in Nepal from 2031 BS before the implementation of the Income Tax Act, 2058. The Income Tax Act 2031 was implemented before the Income Tax Act 2058 was introduced on the basis of the indistinctive feature of the tax law.  At that time, while assessing the income tax of any person, the basis had to be taken of provisions in the Finance Act of the concerned year, Industrial Enterprise Act, Labour Act, Bonus Act, and dozens of other acts and rules under those acts in addition to Income Tax Act. The provisions relating to tax exemption were also available in various acts so effective implementation was also difficult.

The current revenue policy assumes that the revenue shall be mobilized by expanding the scope not by increasing the tax rate. Based on this assumption, any person’s income received either from work or from a mixture of works and capital, or from the flow of sources or assets shall be included in the pure view of the Income Tax Act, 2058.

In the previous Income Tax Act, any person was not required to pay income tax in the year of their income but they had to pay tax according to the assessment done by the tax office on the basis of the income tax return submitted by the taxpayer. The Income Tax Act, 2058 has included the principle of paying tax at the time of its earning i.e. Pay As You Earn (PAYE). Provisions are made to have a tax assessment of the person and tax payment on such income at the same time. Because of this, no tax liability will be pending on the part of the taxpayer, and tax revenue will also be collected on time by the Government. Specifically, in various types of income of natural persons, tax shall be deducted at the time of payment at source and will be deposited in the form of tax deduction at source. In many cases, the tax deduction at source on payment of many types of income of natural person shall be the final tax so they need not visit the tax office for depositing tax. Thus, frequent visits to the tax office are not required to pay taxes so time is saved the cost of tax payment is also reduced, and also cost of collecting revenue is reduced for the government.

1.2

The concept of Income Tax was first introduced in 2017 BS in Nepal. The Income Tax Act, 2031 was implemented in Nepal from 2031 BS before the implementation of the Income Tax Act, 2058. The Income Tax Act 2031 was implemented before the Income Tax Act 2058 was introduced on the basis of the indistinctive feature of the tax law.  At that time, while assessing the income tax of any person, the basis had to be taken of provisions in the Finance Act of the concerned year, Industrial Enterprise Act, Labour Act, Bonus Act, and dozens of other acts and rules under those acts in addition to Income Tax Act. The provisions relating to tax exemption were also available in various acts so effective implementation was also difficult.

The current revenue policy assumes that the revenue shall be mobilized by expanding the scope not by increasing the tax rate. Based on this assumption, any person’s income received either from work or from a mixture of works and capital, or from the flow of sources or assets shall be included in the purview of the Income Tax Act, 2058.

In the previous Income Tax Act, any person was not required to pay income tax in the year of their income but they had to pay tax according to the assessment done by the tax office on the basis of the income tax return submitted by the taxpayer. The Income Tax Act, 2058 has included the principle of paying tax at the time of its earning i.e. Pay As You Earn (PAYE). Provisions are made to have a tax assessment of the person and tax payment on such income at the same time. Because of this, no tax liability will be pending on the part of the taxpayer, and tax revenue will also be collected on time by the Government. Specifically, in various types of income of natural persons, tax shall be deducted at the time of payment at source and will be deposited in the form of tax deduction at source. In many cases, the tax deduction at source on payment of many types of income of natural person shall be the final tax so they need not visit the tax office for depositing tax. Thus, frequent visits to the tax office are not required to pay taxes so time is saved the cost of tax payment is also reduced, and also cost of collecting revenue is reduced for the government.

1.3 Provision Relating to Priority

The act of collecting income tax is judicial. While proceeding with actions and taking decisions in relation to income tax collection, a basis shall be taken for the judicial convention relating to law and tax. The proceedings and decisions relating to tax are considered semi-judicial acts. Thus, the tax officer involved in that purpose must make decisions after identifying the reality of the law with judicial thoughts. Otherwise, the decisions, acts, and proceedings of the tax officer shall be void. Therefore, the right use of the Income Tax law is essential. As per this view, a few primary information are presented here.

1.3.1 Condition of Conflict of Law:

In some cases, the laws will be conflicting in themselves. The law denotes the Constitution, Act, Rule, Sub-rule, Regulation, Order, notice, circular, etc. Therefore, the wording of the law depicts the feelings of complexity and diversity. Few of the laws will be strong and few will be weak. The supreme law is the Constitution, then Acts, and then Rules in order. If two laws conflict, the supreme one will be strong and will be applicable. But when similar laws conflict, the decisions shall be taken based on matters like which law is more specifically connected with the subject or parties, or which one is earlier, and which one is later. For example, if the constitution and the act conflict, the provision of the constitution will be applicable, and if the act and rule conflict, the provision of the act will be applicable, and if the act conflicts with another act, then the act formulated for the related subject will be applicable.

1.3.2

If the provision of the Double Taxation Avoidance Agreement conflicts with the provision of the act, then the provision of the act will be applicable.

1.3.3

There will be two types of law – forceful and willful. The use and practices of forceful law will be mandatory, and the concerned authority will be independent in using or not using willful law. If will/shall is written in any law, then it will be forceful, and if may is written, then the user will be independent to use the law; he can use the law if he confirms or deems it necessary.

1.3.4

One should be careful when using the intellect. The law gives the officer ample opportunities to use their intellect. While using their intellect, one should not do it randomly but should do so lawfully. The basis and cause shall be disclosed while using the law. The decisions taken without any justification or cause shall be void.

1.3.5

Under the principle of explanation of law, the singular represents the plural and the plural represents the singular.

1.3.6 Precedent:

The principles produced by the Supreme Court will be treated as law. Thus, the officer shall comply with that. However, the principles produced by the Revenue Tribunal may not be mandatory to comply with. However, the Revenue Tribunal takes decisions by mutual discussions under a competitive system on the basis of the principle of law and justice; therefore, suggestions, confirmations, or provisions of law and principles produced by the Revenue Tribunal will be good for the department to comply with. The recognized principle of the law plays a vital role in the judicial process. The constitution of law has a provision that while making legal decisions, they must be based on the principle of law. Thus, in the process of any decisions or any proceedings, if the question of principles of law arises, then it shall be considered if it seems appropriate and useful.

1.3.7 Natural Law of Justice:

In the process of making legal decisions, the principle of law will be considered vital. It has two main sub-principles – the principle of bias and the principle of hearing. The tax assessment orders issued against the natural law of justice shall be void. In tax assessments, the principle of hearing shall be compulsorily complied.

1.3.8 Public Circular:

In order to simplify the tax administration and guide tax officers and taxpayers by bringing consistency in Income Tax Act implementation, the Inland Revenue Department issues a public circular. Such circulars are in written form, and they explain the Income Tax Act and rules as necessary.

The Public Circular if it conflicts with the Act, shall be void to the extent of such conflicts. Similarly, the public circulars issued until the date of issuing this directive if they conflict with this directive, then the public circular issued earlier shall be assumed to be repealed.

1.3.9 Advance Ruling:

This is the new provision in the Income Tax Act, 2058. An advance ruling is also issued by the department. Taxpayers can apply to the department to eradicate any confusion that arises or to avoid the confusion with respect to the applicability of the provisions of income tax law, and if applicable, to what extent it will apply to a particular taxpayer. The Department provides its views to such a taxpayer through an advance ruling. If the advance ruling is issued by the department to any taxpayer, the department will be obliged to act accordingly in respect of that taxpayer until such advance ruling is effective.

If a public circular and an advance ruling conflict, the advance ruling will apply to the taxpayer to whom such advance ruling is issued. Advance rulings issued by the Department till the date of issue of this Directive, if they conflict with this Directive, then such advance ruling will be applicable to that particular taxpayer until another advance ruling is issued to that taxpayer. It means until the Department informs about the cancellation of the advance ruling personally, such advance ruling shall not be considered void.

1.4 Short Title, Extent and Commencement

• 1.1 This Directive shall be called “Income Tax Directive, 2066 (Third Amendment, 2077)
• 1.2 This Directive comes into force immediately.
• 1.3 The Commencement and Amendment of Income Tax Act 2058
  • This Act was implemented on 19^th Chaitra 2058. Till the date of issue of this Directive, the following amendments in the Income Tax Act, 2058. These amendments in the Income Tax Act shall apply to those periods for which the Finance Act will be applicable.

Finance Act or Ordinances issued for the amendment of the Income Tax Act, 2058

Amendments in Income Tax Rule, 2059