Chapter – 2: Income Tax Terminologies and Explanation

 Unofficial & Unauthorized Translation of Income Tax Directives, 2066: CA Nirmal Shrestha

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The translated text in this material and any others made available herein does not amount to advice on a particular matter and should not be taken as such. No reliance should be placed on the content as the basis for any investment or other decisions or in connection with any advice given to third parties. Please refer to original issue of the Department or consult your appropriate professional adviser as necessary. Translator expressly disclaim all liability to any person in respect of any losses or other claims, whether direct, indirect, incidental, or consequential or otherwise arising in relation to the use of such materials.

2.1 Various major words of the Act are defined in this chapter from section 2(a) to section 2(an).

2.2 Definitions and Explanation of Income Tax Words of the Act

2 (a) Withholding agent

Withholding agent means a person required to withhold tax under Chapter 17 at the time of payment for employment, investment return, service fees, or contract.

2 (b) Officer

Officer means Director General, Deputy Director General, Chief Tax Administrator, Director, Chief Tax Officer, Tax Officer, or other Officer of the Department as mentioned in section 72.

2 (c) Final withholding payment

Final withholding payment means a payment of Dividend, Rent, Gains, Interest, and payment made to a non-resident person to be made after withholding final tax as mentioned in section 92.

2 (d) Retirement fund

Retirement fund means any entity established and maintained solely for the purposes of accepting and investing retirement fund contributions in order to provide retirement fund payments to individuals who are beneficiaries of the entity or a dependent of such an individual.

2 (e) Retirement payment

Retirement payment means a payment to-

(i)        An individual in the event of the individual’s retirement; or

(ii)       A dependent of an individual in the event of the individual’s death.

2 (f) Retirement contribution

Retirement contribution means a payment made to a retirement fund for the provision or future provision of retirement payments.

2 (g) Incapacitated Individual

Incapacitated Individual means an individual who, by reason of mental or physical illness, is incapable of managing their affairs.

2 (h) Income

Income means a person’s income from any employment, business, or investment or windfall gain and the total of that income as calculated in accordance with this Act.

2 (h1) Windfall gain

Windfall gain means lottery, gift, award, reward, winnings or other any type of windfall gain received.

2 (i) Income-year

Income-year means the period from the start of Shrawan of a year to the end of Ashad of the following year.

2 (j) Gift

Gift means a payment that is without consideration or a payment with consideration to the extent the market value of the payment exceeds the market value of the consideration.

2 (k) Debt obligation

Debt obligation means the obligation corresponding to a debt claim.

2 (l) Debt claim

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.

2(m) Company

Company means a company established under the company laws for the time being in force and the following institutions shall also be treated as a company for tax purposes: 

(1)    Corporate body established under the laws for the time being in force;

(2)    Any unincorporated association, committee, institution, society, or group of persons other than a partnership or a proprietorship firm (whether or not registered) or a trust;

(3)    A partnership firm (whether or not registered under the laws for the time being in force) that has 20 or more partners, a retirement fund, a cooperative, a unit trust, or a joint venture;

(4)    Foreign company; and

(5)    Any foreign institution prescribed by the Director-General.

2 (n) Tax

Tax means income tax imposed under this act and includes the following payments: –

(1)    Expenses incurred in the process of creating charges and performing an auction of the property of tax creditor by the department as mentioned in section 104(8)(a);

(2)    Amount payable by a withholding agent or withholdee under section 90, or amount payable by an installment payer under section 94, or amount payable by withholding agent under section 95A. And amount assessed under sections 99, 100, and 101;

(3)    Amount payable to the Department in respect of a tax liability of a third party under sections 107(2), 108(3) or (4), 109(1), and 110(1);

(4)    Amount payable by way of interest and penalties under Chapter 22; and

(5)    Amount payable by way of fines in order of the department as per section 129.

2 (o) Withholdee

Withholdee means a person receiving or entitled to receive a payment for employment, investment return, service fees and contract from which tax is required to be withheld under Chapter 17.

2(p) Assessment

Assessment means an assessment of tax to be made under this Act and it includes an assessment of interest and penalty made under section 122 of this Act.

Provided that the term does not include an assessment that has been replaced with an amended assessment under section 101.

The Act has provision for three types of tax assessment:

1. Self-Assessment under section 99, which means tax assessment done by person having tax liability itself.
2. Provision of Jeopardy Assessment under section 100 for any income year or portion of any income year before the date, the taxpayer is allowed to submit the income tax return.
3. There is a provision that in order to assess the tax liability as per the objectives of this Act, department can do amended assessment for self-assessment under section 99 and jeopardy assessment under section 100.

(p1) Turnover

Turnover means total amount of transaction for an income year equivalent to a sum of all amounts to be included in calculating income from employment, business or investment for the year under Section 7, 8 or 9.

2 (q) Non-resident person

Non-resident person means a person who is not a resident person.

2 (r) Non-business chargeable asset

Non-business chargeable asset means securities or an interest in an entity as well as land and buildings but excludes the following assets-

(1)    Business assets, depreciable assets, or trading stock;

(2)    A private residence of an individual that has been-

• (a)    Owned continuously for ten years or more; and
• (b)    Lived in by the individual continuously or intermittently for a total of ten years or more;

Clarification: For the purpose of this clause “Private Residence” means building and land area occupied by building and its surroundings or a ropanee of land whichever is lower.

(3)    An interest of a beneficiary in a retirement fund,

(4)    Land and a private residence of an individual that is disposed of for less than Rs. 10,00,000; or

(4)    Non-business assets of an individual that is disposed of by way of any type of transfer other than sales and purchase made within three generations.

Period:

Area:

Limit of Amount:

Generation:

Limit of Amount:

Generation:

2 (s) Exempt organisation

Exempt organization means the following entities:

(1) The following entities are registered with the Department as an exempt organizations:

• (a)    A social, religious, educational, or charitable organization of a public character established without having a profit motive,
• (b)    An amateur sporting association formed to promote social or sporting facilities not involving the distribution of gain by such entity or their members,

(2)    A political party registered with the Election Commission,

However, the tax exemption shall not be availed under this clause if any person is benefitted by the assets of such organization or amount received by such organization except where an exempt organization has performed as per their objectives or has made payment to any person in consideration of assets or service provided;

2(t) Trust

Trust means an arrangement under which a trustee holds assets, but does not include a partnership, a corporate body, or an entity of the type referred to in sub-paragraph (3) of paragraph (m).

2(u) Trustee

Trustee means an individual or trust or corporate body holding assets in a fiduciary capacity, whether held alone or jointly with other individuals or trust or corporate bodies and includes the following persons-

• (1)    Any executor or administrator of a deceased individual’s estate;
• (2)    Any liquidator, receiver, or trustee; 
• (3)    Any person having, either in a private or official capacity, the possession, direction, control, or management of the assets of an incapacitated person; 
• (4)    Any person who manages assets under a private foundation or other similar arrangement; and
• (5)    Any person in a similar position to a person mentioned in sub-paragraphs (1), (2), (3) and (4).

2(v) Long-term contract

A long-term contract means such a contract, the term of which exceeds 12 months, as mentioned in section 26.

2(w) Relative

Relative means a spouse, children (including adopted children), parent, grandparent, sibling, brother-in-law, sister in laws, father-in-law, and mother-in-law, aunt, uncle, nephew, niece, grandson, granddaughter of an individual.

2(x) Entity

Entity means the following institutions or organisations-

1. A partnership, trust, or company;
2. A rural municipality, municipality or district coordination committee;
3. Government of Nepal, State Government or Local Government;
4. A foreign government or a political subdivision of the foreign government, or a public international organisation established under the treaty; and
5. A permanent establishment of an individual or an entity referred to in subparagraphs (1), (2), (3) and (4) that is not situated in the country in which the individual or entity is resident.

2(y) Interest in an Entity

Interest in an entity means a right, including a contingent right, to participate in the income or capital of an entity.

2(z) Disposal

Disposal means disposal of an asset or liability including sale or transfer as mentioned in section 40.

2(aa) Underlying ownership

Underlying ownership means the following ownership: –

1. In relation to an entity, an ownership created on the 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; or
2. In relation to an asset owned by an entity, ownership of the asset is determined on the basis of proportion to the ownership held by the persons having underlying ownership of the entity.

2(ab) Lease

Lease means a temporary right of one person in respect of an asset of another person, other than money, and includes a license, option, rental agreement, royalty agreement, or tenancy.

2(ac) Individual

Individual means a natural person and the term denotes, for the purpose of this Act, any proprietorship firm whether registered or unregistered owned by the person, if any, and a couple making an election as a single natural person under section 50.

2(ad) Natural resource payment

Natural resource payment means amounts of any of the following payments:-

1. Payment for the right to take water, minerals, or other living or non-living resource from the land; or
2. Amount as calculated on the basis of the quantity or value of a living or non-living natural resource and minerals taken in whole or part from the land.

2(ae) Market value

The market value of an asset and service denotes the normal buying and selling price for the asset or services in the ordinary course of a business amongst unrelated parties.

2(af) Rent

Rent means all payments including premiums made under a lease of a tangible asset including house rent. 

Provided that, the term does not include a natural resource payment or house rent received by an individual except a proprietorship firm.

2(ag) Payment

Payment means-

1. The transfer by one person of money or an asset to another person or the transfer by another person of a liability to one person;
2. 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;
3. The provision by one person of services to another person; and
4. The use, or availability for use, of an asset owned by one person to another person.

2(ah) Distribution of Profits

Distribution of Profits means distribution of profits including capitalization of profit as mentioned in section 53.

2(ai) Unit trust

Unit trust means an arrangement under which a trustee holds assets for the benefit of at least 20 persons and the entitlement of the persons to participate in the income or capital of the arrangement is divided into units such that the entitlements are determined by the number of units held.

2(aj) Employment

Employment includes past, present, or prospective employment.

Employment

Examples of Past Employment

Examples of Future Employment

2(ak) Royalty

Royalty means any payment made under a lease of an intangible asset and includes any payment made for the following purpose:-

1. The use of, or the right to use, a copyright, patent, design, model, plan, secret formula or process, or trademark;
2. The supply of know-how;
3. The use of, or right to use, a cinematography film, video tape, sound recording, or any other like medium and the use of or provide industrial, commercial, or scientific experience;
4. The supply of assistance ancillary to a matter referred to in paragraphs (1), (2) or (3); or
5. A total or partial forbearance with respect to a matter referred to in paragraphs (1), (2), (3) or (4). Provided that, the term does not include a natural resource payment.

2(al) Investment

Investment means an act of holding or investing one or more assets, but excludes the following:-

1. The act of holding assets for personal use by the person owning the asset, or
2. Employment or business.
   • Provided that, the act of holding non-business chargeable asset is treated as an investment.

2(am) Investment insurance

Investment insurance means insurance of any of the following classes:

1. Insurance where the event covered is the death of an individual who is the insured or an associate of the insured;
2. 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;
   • 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;
3. Insurance under which an amount or series of amounts is to become payable to the insured in the future;
4. Reinsurance of insurance referred to under subparagraphs (1), (2), or (3); and
5. Reinsurance of reinsurance referred to under subparagraph (4).

2(an) Dividend

Dividend means a distribution from an entity.

2(ao) Resident person

Resident person with respect to an income-year means-

• (1)    In the case of an individual, an individual-
  • (a)     Whose normal place of abode is in Nepal;
  • (b)    Who is present in Nepal for 183 days or more in the 365 consecutive days, or
  • (c)     Who is an employee or an official of Government of Nepal posted abroad at any time during the income year;
• (2)    Any partnership;
• (3)    In the case of a trust, a trust that-
  • (a)     Is established in Nepal;
  • (b)    Has a trustee that is a resident person for the income-year; or
  • (c)     Is controlled directly or through one or more interposed entities by a person or persons one of whom is a resident person for the income-year;
• (4)    In the case of a company, a company that-
  • (a)     Is incorporated under the laws of Nepal; or
  • (b)    Has its effective management in Nepal during the income year;
• (4A)  Nepal Government or State Government
• (5)    A rural municipality, municipality or district coordination committee;
• (6)    In case of a foreign government or a political sub-division of the foreign government, such an entity-
  • (a)     If it is established under the laws of Nepal, or
  • (b)    Has its effective management in Nepal during the income year; and
• (7)    Any institution or entity established under a treaty; and
• (8)    A foreign permanent establishment of a non-resident person situated in Nepal.

2(ap) Person

Person means an individual (natural person) or an entity.

2(aq) Manager

Manager in relation to an entity means any person who participates in making managerial decisions on behalf of the entity and includes a trustee of a trust and the owner of a foreign permanent establishment.

2(ar) Business

Business means an industry, a trade, a profession, or the like business transaction with a differing nature and includes a past, present, or prospective business of a similar nature.

Provided that, the term does not include employment.

2(as) Interest

Interest means the following payments or gains:-

• (1)    A payment made or incurred under a debt obligation that is not a repayment of capital;
• (2)    Any gain realised by way of a discount in debt obligation, discount, premium, swap payment, or similar payment under a debt obligation; and
• (3)    The portion which is treated as interest in the payments made to a person under an annuity or by a person acquiring an asset under an instalment sale or the use of an asset under a finance lease under section 32.

2(at) Trading stock

Trading stock means assets owned by a person that are sold or intended to be sold in the ordinary course of a business conducted by the person, work in progress on such assets, and inventories of materials to be incorporated into such assets.

Provided that, the term does not include a foreign currency asset.

2(au) Business asset

Business asset means an asset to the extent to which it is used in a business.

Provided that the term does not include trading stock or a depreciable asset of a business.

2(av) Distribution

Distribution means the distribution of an entity as mentioned in section 53.

2(av1) Electronic medium

Electronic medium means computer, fax, email, internet, electronic cash machine, fiscal printer, and the term also includes other prescribed media approved by the Department.

2(aw) Repatriated Income

Repatriated Income means repatriable income sent through a bank to a foreign country by a foreign permanent establishment of a non-resident person referred to in section 68 or an amount of payment made through any other means.

2(ax) Foreign income tax

Foreign income tax means income tax imposed by a foreign country, as mentioned in section 69(8), and includes a final withholding tax imposed by a foreign country.

2(ay) Foreign permanent establishment

Foreign permanent establishment means an entity of the type referred to in subparagraph (5) of paragraph (x).

2(az) Department

Department means the Inland Revenue Department.

2(ba) Foreign currency asset

Foreign currency asset means assets that are denominated in a currency other than Rupees.

2(bb) Permanent establishment

Permanent establishment means a place where a person wholly or partly carries on a business, and includes the following places:-

• (1)    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;
• (2)    A place where a person has, is using, or is installing substantial equipment or substantial machinery;
• (3)    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
• (4)    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.

Service PE

2(bc) Asset

Asset means a tangible or intangible asset and includes currency, goodwill, technical know-how, property, an owner’s interest in a foreign branch, a right to income or future income, and a part of an asset.

Assets Type	Trading Stock [Section 2(at)]	Depreciable Assets [Section 2(bk)]	Business Assets [Section 2(au)]	Non-Business Chargeable Assets [Section 2(r)]	Other Assets
					Related only with natural person so not affected in income tax
Treatment in disposal	Amount received shall be included in income [section 7(2)(b)]   Cost of trading stock allowed for deduction [section 15]	Income in excess of depreciation basis as per section 4(2)(a) of schedule 2 shall be included in income under section 7(2)(d) and 9(2)(c)	Net gain shall be included in income [section 7(2)(c)]   Net loss shall not be allowed for deduction from business income but can be carried forward [section 36(2)]	Net gains will be included in income [section 9(2)(b)]   Net loss shall not be allowed except for set off in capital gain and can be carried forward.

2(bd) Associated Persons

Associated Persons means two or more persons or a group of such persons where one may reasonably be expected to act in accordance with the intentions of the other and includes-

• (1)    An individual and a relative of the individual or an individual and a partner of the individual;
• (2)    A foreign permanent establishment and its owner; and
• (3)    An entity and a person who, either alone or together with an associate or associates controls or may benefit from 50 percent or more of the rights to income, capital, or voting power of the entity, as the case requires, either directly or through one or more interposed entities; or a person who is an associate of such person.
  • Provided that the term does not include the following persons –
    • (1)    Employee, and
    • (2)    Persons prescribed by the department as not being associate persons.

2(bd1) Adjusted taxable income

Adjusted taxable income means the amount of taxable income of a person for an income year as calculated by ignoring reductions referred to in Section 12 and deductions referred to in sections 14(2), 17, or 18.

2(be) Partnership

Partnership means a firm, whether or not registered as per prevailing law, that has fewer than 20 partners.

Provided that the term does not include a proprietorship firm (whether or not registered) or a joint venture.

2(bf) General insurance

General insurance means any insurance that is not investment insurance.

2(bg) Normal interest rate

Normal interest rate in relation to an income year means 15 percent per annum.

2(bh) Approved retirement fund

Approved retirement fund means a retirement fund that is approved by the Department under sub-section (1) of section 63 of this Act.

2(bi) Service fee

Service fee means any fee paid to a person based on market values, for services rendered by the person, and includes a commission or a meeting, management, or technical service fee.

2(bj) Shareholder

Shareholder means a person who is a beneficiary of a company.

2(bk) Depreciable asset

Depreciable asset means an asset to the extent to which it is used in the production of income from a business or investment and that is likely to lose value because of wear and tear, obsolescence, or the passing of time.

Provided that the term does not include trading stock.

2(bl) Beneficiary

Beneficiary means a person who has an interest as specified in Clause (x) in an entity.

2(bm) Prescribed or as prescribed

Prescribed or as prescribed means prescribed or as prescribed in the Rules made under this Act.