Chapter 3 -Source of Income, Loss, Gain, and Payment
Unofficial & Unauthorized Translation of Income Tax Directives, 2066: CA Nirmal Shrestha
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Table of Contents
3.1 Person having income shall be imposed income tax as per the Income Tax Act, 2058. The main basis of tax will be residential status and source of Income. A resident person shall be taxed in his global income, and a non-resident person shall be taxed on income having a source in Nepal.
3.2 Basis of Imposition of Tax
3. Imposition of Tax
Income tax is hereby imposed on and realized from every person as follows for each income year:-
(a) A person, who has taxable income for the year;
(b) A foreign permanent establishment of a non-resident person situated in Nepal and has repatriated income for the year as mentioned in subsection (3) and (4) of section 68; and
(c) A person, who receives a final withholding payment during the year.
3.3 Income, Losses, Gains, and Payments having source in Nepal
3.3.1 Source of Income
67(1) A person’s income from any employment, business, or investment shall be treated as having a source in Nepal to the extent to which the amounts referred to in paragraph (a) exceed the amount referred to in paragraph (b) below;
(a) The amounts included in calculating that income that have a source in Nepal,
(b) The amounts deducted in calculating that income that have a source in Nepal.
Example 3.3.1: Suppose, Ram Prit Singh, a non-resident, rented a stall in Dashain Market in Bhrikuti Mandap in income year 2075/76 to sale spice. He sold Rs. 10 lakhs of spice in the market. He has purchased spice for Rs. 7 lakhs and paid rent of Rs. 1 lakh, total cost Rs. 8 lakhs. In this case, the income to be included in income of Ram Prit Singh will be Rs. 10 lakhs and deductible costs will be Rs. 8 lakhs. The amount to be included in income is more than amount allowed for deduction as expenses by Rs. 2 lakhs therefore Rs. 2 lakhs will be income of Ram Prit Singh having source in Nepal.
3.3.2 Source of Loss
67(2) A person’s loss from any business or investment shall be treated as having a source in Nepal to the extent to which the amounts referred to in paragraph (a) exceed the amounts referred to in paragraph (b) below:
(a) The amounts deducted in calculating income from that business or investment that have a source in Nepal,
(b) The amounts included in calculating that income that have a source in Nepal.
Example 3.3.2: Suppose, Mohamad Hussain, a resident of Lakhnau, has rented a stall in Bhrikuti Mandap in Dashain Market to sale goats in income year 2075/76. He has expended Rs. 5 lakhs to purchase goats to be sold in the market. He has paid rent of Rs. 50 thousand for the stall. Due to climate change, the 20 goats he has brought from Lakhnau were dead before selling them. He received Rs. 4 lakhs by selling remaining 80 goats in the market. In this case, income to be included in income of Mohamad Hussain is Rs. 4 lakhs and total deductible cost including purchases and rent is Rs. 5.5 lakhs thus, the amount to be deducted as expenses is more than the amount to be included in income by Rs. 1.5 lakhs resulting a loss. Therefore, his source of loss Rs. 1.5 lakhs is in Nepal.
3.3.3 Source of Income
67(3) Amounts included in calculating income shall be treated as having a source in Nepal where they consist of –
(a) Net gains referred to in section 7(2)(c) or 9(2)(b) to the extent that the net gains consist of gains from the disposal of assets or liabilities with a source in Nepal as reduced by losses from the disposal of assets or liabilities with a source in Nepal;
Example 3.3.3: Suppose, Brasil Drill Limited is tunnel construction company in Brasil. The company has done contract with Nepali company generating hydro power to construct a tunnel in Trishuli river. The Brasil Drill Limited has purchased 10 bighas of land in Mugling for Rs. 10 crore to keep machineries and construction materials in order to complete construction work of tunnel. The company has obtained loan of 5 lakhs dollars from GHI Bank England to purchase machineries and tools. The company completed its tunnel construction work in income year 2064/65 and also paid a loan of USD 5 lakhs to GHI Bank in the same year. The dollar exchange rate was Rs. 60 per USD when loan was taken but while making payment of the loan in income year 2064/65, the exchange rate was Rs. 70 per USD. As the construction has been completed and business use of the land purchased to keep machineries and construction materials was also finished, it has been sold in IY 2064/65. The company has received Rs. 15 crore by selling that property. In this case, Brasil Drill Limited has gained from sale of the land and incurred loss in the settlement of the foreign currency loan taken for the business. In this example, Brazil Limited has gained Rs. 5 crore from the sale of the land. The company has to pay Rs. 3.50 crore in settlement of the foreign currency loan of USD 5 lakhs due to deflation of Nepalese currency, and the loan value was Rs. 3 crore as accounted at the time of incurring the loan liability. In this case, the company has to bear the loss of Rs. 50 lakhs in disposing of the loan liability. Brasil Limited company, while deducting the loss of Rs. 50 lakhs incurred in disposing off the loan liability from the gain of Rs. 5 crore derived from disposing of land, the net gain will be Rs. 4.50 crore as per the provision of section 67(3). The source of this Rs. 4.5 crore gain will be in Nepal.
Example 3.3.4: Suppose Mr. Ricky is a resident of Netherland. He has developed software useful for the banking business. He provided that software to Exim Bank in Nepal in consideration of Rs. 1 crore royalty per year. He purchased a share of Rs. 1 crore of the same bank from the proceeds of the royalty received in IY 2062/63. Mr. Ricky has sold that shares for Rs. 1.5 crore in IY 2064/65 resulting a gain Rs. 50 lakhs. Mr. Ricky is a natural person and gain received from disposal of shares will be his gain from disposal of the non-business chargeable assets as per para. (b) Of section 9(2). The gain from the disposal of that shares will be income having source in Nepal.
67(3) (b) Gains and amounts included in calculating income referred to in section 7(2)(d) or section 9(2)(c) where a domestic asset or domestic liability is involved,
Example 3.3.5: Suppose, Brasil Drill Limited has done contract with Nepali company generating hydro power to construct a tunnel in Trishuli river. The company completed its tunnel construction work in income year 2064/65. As the construction has been completed the company has sold machineries and tools used in the construction for Rs. 6 crore in the local market. The machineries and tools used in construction has been categorized in pool under para. (d) of section 1 of Annexure 1 of the Act and the opening depreciation base of that pool in IY 2064/65 is Rs. 5 crore. In this case, the gain (balancing charge) from the disposal of that pool will be Rs. 1 crore. The gain (balancing charge) from disposal of assets will be the gain of that company to be included in income having source in Nepal.
67(3) (c) Subject to paragraphs (a) and (b), payments that have a source in Nepal.
Example 3.3.6: Suppose, Brazil Drill Limited has done a contract with a Nepali company generating hydro power to construct a tunnel in Trishuli River. The company has done insurance of machinery used in tunnel construction with Insurance Company in Brazil. During construction, the machineries costing Rs. 1 crore was damaged in accident and was useless and Insurance company in Brazil has compensated for the same. The compensation received from Insurance company in Brazil for the risk taken in Nepal will be the amount having source in Nepal.
67(4) A gain or loss from the disposal of an asset or liability shall be treated as having a source in Nepal where a domestic asset or domestic liability is involved.
Example 3.3.7: Suppose, Kalpa Lab Pvt. Ltd. is a manufacturer of medicine in Nepal. Mr. Lee of Singapore has provided a loan to the company Rs. 1 crore in IY 2063/64 at the interest rate of 10% per annum. The loan given by Mr. Lee in Nepal will be the assets of Mr. Lee having source in Nepal. In IY 2064/65, the financial condition of Kalpa Lab Pvt. Ltd has been deteriorated and thus decided to go for liquidation stating its inability to continue manufacturing of medicines so appointed liquidator to dispose all its assets and liabilities and proceed for liquidation. As it is not sufficient to pay all its liabilities from the proceeds of sale of the company’s assets, the liquidator, on a preferential basis paid Rs. 50 lakhs loan of Mr. Lee out of Rs. 1 crore. The assets (loan) of Mr. Lee having source in Nepal will be disposed off after payment of Rs. 50 lakhs to him. Thus, the loss of Rs. 50 lakhs incurred on disposal of assets (loan) under section 37 of the Act will be the loss having source in Nepal.
67(5) Amounts deducted in calculating income shall be treated as having a source in Nepal where they consist of-
(a) Allowances referred to in section 15(1) to the extent to which they relate to assets situated in Nepal;
(b) Expenses referred to in section 16(1) and allowances referred to in section 19 to the extent to which they are incurred with respect to or relate to assets situated in Nepal; and
(c) Subject to paragraphs (a) and (b), payments that have a source in Nepal.
Example 3.3.8: Suppose, Brasil Drill Limited of Brazil is involved in tunnel construction work of Hydropower Project in Trishuli river. The company has incurred Rs. 10 crore for construction materials used in tunnel construction in IY 2064/65. Similarly, the depreciation of machineries and tools used in construction is Rs. 1 crore. Additional Rs. 50 lakhs has been incurred in repair and improvement of machineries and tools. Thus, the consumption of construction materials Rs. 10 crore, depreciation Rs. 1 crore and repair & improvement expenses of Rs. 50 lakhs will be expenses having source in Nepal.
3.3.4 Source of Payment
In order to assume income having source in Nepal, two basis are taken in section 67(6) of the Act:
Basis 1: Residency Based Payments – Interest, Dividend, Annual Instalments, Gain from Investment Insurance, Retirement Payments and Civil Service
Basis 2: Except disposal of assets or liabilities, other payments made based on the Location of Payment basis, except those based on residency, ascertaining all types of income or expenses. (Sections 7, 8, 9, and 13)
67(6) The following payments shall be treated as having a source in Nepal:
(a) Dividends paid by a resident entity;
(b) Interest paid by a resident person;
(c) Natural resource payments made in respect of or calculated by reference to natural resources taken from land situated in Nepal;
(d) Rent paid for the use of an asset situated in Nepal;
(e) Royalties arising from the use of, right to use, or forbearance from using an asset situated in Nepal;
Example 3.3.9: Suppose a Nepali movie producer provides rights to show the movie produced in Nepal to any person; thus, the royalty received by the producer in providing such rights will be the income having its source in Nepal.
Example 3.3.10: Suppose in example 3.3.9, if the producer receives any payment in a term that the show will not be given to anyone except him, then such payment will be the income having its source in Nepal.
67(f) Premiums for general insurance paid to and proceeds from general insurance paid by a person in respect of the insurance of any risk in Nepal,
Example 3.3.11: Suppose the insurance company in India has insured the risk of the factory in Nepal. The source of the insurance premium paid by that factory to the Indian Insurance company will be in Nepal.
67(g) Payments received in Nepal, other than as a result of transshipment by a person who conducts a business of a land, sea, or air transport operator or charterer from-
(1) The carriage of passengers who embark, or
(2) Mail, livestock, or other movable tangible assets that are embarked,
67(h) Payments received by a person who conducts a business of transmitting messages by cable, radio, optical fiber, or satellite communication in respect of the transmission of messages by apparatus established in Nepal, whether or not such messages originate in Nepal;
Example 3.3.12: Suppose, the cricket playing in Africa is shown live by Star Africa channel of Africa. In order to present live show of the cricket match shown by Star Africa Channel to Nepalese audience in Nepal, the right has been provided to Fly Cable TV in Nepal. The payment will be given to Star African Channel by Fly Cable TV for providing right of live show via use of system installed in Nepal. The source of such payment will be assumed to be in Nepal.
67(i) Payments, including service fees, of a type not mentioned in paragraphs (g) or (h) for or attributable to employment exercised, service rendered, or a forbearance from exercising employment or rendering service-
(1) In Nepal, regardless of the place of payment; or
(2) Where the payer is the Government of Nepal, irrespective of the place of employment;
Example 3.3.13: Suppose, IMGD company of Netherland has operated training program to enhance skill of employee working in Tax Administration in Nepal. This program has been funded financially by Danish Government. The company has provided training in Nepal and has managed to receive the payment of training fee in Netherland. As training has been provided in Nepal, the payment received by IMGD as training fee will be the payment having source in Nepal.
Example 3.3.1: Nepal Government has established residential embassy in France. The person deployed in such embassy will be paid remuneration by Nepal Government. Although, the person are deployed in embassy in France, the payment is provided by Nepal Government thus, the source of such payment will assumed to be in Nepal.
67(j) Amounts of annuities, proceeds of investment insurance, and retirement payments not falling within paragraph (i) paid by a resident person and any premium or other payment to a resident person to secure such amounts;
Example 3.3.15: Suppose a person retired from employment. He has been contributing to Citizen Investment Trust during his service. The Citizen Investment Trust has made a payment on his retirement. In this case, the source of payment done by Citizen Investment Trust is assumed to be in Nepal. To assure the retirement payment of the employee, the contribution made by the employer in Citizen Investment Trust (resident) in his service period is the payment having its source in Nepal.
67(k) Gifts to the extent received in respect of business or investment conducted with domestic assets; and
Example 3.3.16: Suppose, Fukuda & co., a Japanese company, has an investment in Pushpa Vatika in Kathmandu. Various research on trees and plants is being undertaken in that Pushpa Vatika. Fukada & Co. has been awarded with gifts of 10 lakhs Japanese Yen in Japan from the Botanical Association for its valuable contribution made in research done on trees and plants in Nepal. The source of such gifts received by a company in respect of business in Nepal will be assumed to be in Nepal.
67(l) The following payments other than those referred in paragraphs (a) to (k)-
(1) In respect of the disposal of assets in Nepal or the incurring of a liability in Nepal; or
(2) Made in respect of activity conducted in Nepal.
Example 3.3.17: Suppose, Fukada & Co. in example 3.3.16 sold a share investment of Pushpa Vatika to another Japanese Company. The source of shares sold by Fukuda & co. will be Nepal, and the gain from the sale of such shares computed under section 36 will be in Nepal.
3.4 Income not having a Source in Nepal
67(7) Any income, loss, amount, gain, or payment that is not treated by the above sub-sections as having a source in Nepal shall be treated as having a foreign source and, for the purposes of determining in which foreign country the income, loss, amount, or payment is sourced, the rules in the above sub-sections shall apply as though references in this Act to Nepal were a reference to a particular foreign country.
Example 3.4.1: Suppose Diwakar Thapa is a Nepali citizen residing in Canada and doing business there. He is earning from businesses from various other countries, including Canada, except Nepal, then a source of such income will not be in Nepal.
Clarification:- For the purpose of section 67:
(a) “Asset in Nepal” means land or buildings situated in Nepal as well as an asset of a resident person other than land or a building situated in a foreign country or an interest in an entity that is a controlled foreign entity within the meaning in section 69 where the person is an associate of the entity.
(b) “Liability in Nepal” means a liability of a resident person.
Example 3.4.2: Suppose Golden Investment Inc., USA, has invested USD 1 lakh in Sunakhari Pvt. Ltd., a resident company, in the form of a loan. The source of interest to be paid by Sunakhari Pvt. Ltd. to Golden Investment Inc. will be assumed to be in Nepal.
Example 3.4.3: Suppose Diwakar Thapa, a Nepali citizen, is residing in Canada and doing business there. He has taken a personal loan of Rs. 1 crore from a bank in Nepal. As he could not repay the loan he had taken, the bank provided a rebate of Rs.10 lakhs in the recovery process and settled his loan. Diwakar disposed of his Rs. 1 crore liability in Nepal for Rs. 90 lakhs, saving (gain) Rs. 10 lakhs, and the source of such gain will be assumed to be in Nepal.
