Tax Benefits available to Cooperatives and how to use these benefits. Genuine

tax benefit to cooperatives

Introduction

Cooperatives are the backbone of socioeconomic development. Tax Authorities understand the value of cooperatives and thus have framed Tax Laws in a way to promote Cooperation and economic Development aim of Cooperatives. These are the tax benefits available to cooperatives.

1.Tax Exempt Cooperatives. No need to pay any Income Taxes.

Agriculture Cooperatives Cooperatives registered as per Cooperatives Act 2074 and involved in Agricultural and Forestry produce such as Silk, Fruits production and processing, animal husbandry, dairy industry, poultry farming, fish farming, tea plantation and processing, coffee plantation and processing, medicinal herbs production and processing, production of seeds (other vegetative propagative parts too) of vegetables,  bee farming and honey production, rubber farming, agroforestry industries, are Tax Exempt Cooperatives. These Cooperatives are not required to pay Income Taxes on the Income generated from the above business activities.

Cooperative Supplying Agricultural Products Cooperatives registered as per Cooperatives Act 2074 and involved in the supply of Agricultural Seeds, Animal feeds, Insecticides, Chemical Manures, Agricultural Machineries (hand-held machineries only) are also Tax Exempt Cooperatives.

Rural Cooperatives Cooperatives registered and operating within the VDC are Tax Exempt Cooperatives. Despite of any business they perform, no tax is levied on its Income.

tax benefits available to cooperatives

2. Additional Depreciation benefit. Can claim more depreciation than usual.

Income Tax Act has provided extra depreciation benefits to the Cooperatives. Cooperatives can claim an additional 1/3 depreciation on top of usual depreciation. This additional depreciation is termed as Accelerated Depreciation (more details here). Applicable Depreciation Rate for Cooperatives are as follows:

Asset PoolDepreciation Rate for CooperativesDepreciation rate for Others
A6.67%5%
B33.33%25%
C26.67%20
D20%15
additional depreciation for cooperatives

3.  Considerate Tax Rate. Lower tax Rate for Cooperatives.

Income Tax Rate for cooperatives is comparatively lower than the Tax rate for Other Entities. Tax Rate of a Private Company ranges from 25% to 30% whereas the Tax Rate of Cooperatives ranges from 5% to 15% based on the area of operation. As Cooperatives play an important role in the socio-economic development of a nation, they are levied a lower rate of Interest. The tax rate of Cooperatives is as follows:

Location of CooperativesTax Rate
Operating in Municipality5%
Operating in Sub-Metro7.5%
Operating in Metro10%
tax rate for cooperatives

 The tax rate for Cooperatives were updated and increased to 7.5% 10% and 15% respectively by Finance Act 2079.80. However, this was again reversed back to its original tax rate after amendments of Bhadra 2079.

4.  Tax Deductible Fund

  • General Reserve: – Cooperatives are compulsorily required to create a General Reserve Fund of 25% of current year Net profit. It also includes any proceeds received from the sale of Non-Current Assets. Amount in this reserve is not distributable to its shareholders. Cooperatives are not required to pay taxes on the funds transferred from Net profit to this General Reserve Fund.
  • Capital Redemption Reserve Fund: – Similar to the General Reserve, cooperatives are required to create a Capital Redemption Reserve Fund of 18.75% of Net profit. This fund is distributable to the shareholders based on their Saving and Loan Performances. Cooperatives are not required to pay taxes on the funds transferred from Net profit to this Capital Redemption Reserve Fund.
  • Cooperative Development Fund: –  Like the above fund, cooperatives have to create a Cooperative Development Fund of 0.00375% of Net Profit. Amount Deposited in this fund is transferred to the Cooperative and Poverty Alleviation Ministry. As above, no tax is required to be paid on the funds transferred from Net profit to this Cooperative Development Fund.

NOTE: – As of now, Cooperatives are not able to get the Tax Benefits as stated in the above Funds. These tax benefits are provided by Cooperatives Act 2074 rather than the Income Tax Act. As Income Tax Act has higher authority for Tax regulations, Tax authorities are constantly disapproving Tax deductions of above Funds.

A mutual agreement between the Revenue Department and Cooperatives Department may be done to resolve these issues.

5. Similar Tax Benefits as of Specialized Industry

Cooperatives working in Specialized Industry can get all the tax benefits available such Specialized Industries. Section 12 of Income Tax Act has provisions for tax benefits for specialized industries. We have a different post on tax benefits available to such industries. Click here to have a look at it.

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