Non Deductible Expenses for Tax Purposes in Nepal (Genuine)

Non Deductible Expenses for Tax Purposes in Nepal

What are Non Deductible expenses for tax purposes in Nepal?

Non deductible expenses for Tax purposes in Nepal are the expenses and purchases made during the course of the business which are not deductible while calculating net taxable income of a business. In other words, these are the expenses which are not charged to the Profit or Loss account for Tax purposes. Generally, it includes such expenses which are not related to revenue generation of the business.

Fundamental Concept on Non Deductible Expenses for tax purpose in Nepal.

Any Expenses made by the entity is deductible if it compulsorily fulfils all 3 criteria stated below. Failure to fulfil any one of the criteria makes the expense a non deductible expense for tax purpose in Nepal.

Criteria 1 : The expenses shall be incurred during the Income Year.

Meaning: The expense MUST BE incurred to generate income for the income year for which the assessable income is being calculated)

Criteria 2 : The Expenses shall be incurred BY THE PERSON.

Meaning: The expenditure of a person cannot be deducted by another person. The person bearing the expense shall deduct the expense.

Criteria 3 : The expenditure shall be incurred in production of Income from business.

Non Deductible Expenses for Tax Purposes in Nepal
Non deductible expenses for tax purpose in Nepal.

Meaning: Expense only related to the income generation are allowed for deduction, any other expenses are not deductible)

Example 1 on Non deductible expenses for Tax purposes in Nepal.

In a Fiscal year 2077.78, ABC Pvt. Ltd. made a cash payment of Rs 30 lakhs to the laborers of its manufacturing plant. It had a gross profit of Rs 50 lakhs and deducted Rs 30 lakhs as wages expense are arrived at net profit if Rs 20 lakhs. It calculated its tax liability of 5 lakhs (i.e. 25% of net income).

However, as per income tax act, any payments exceeding Rs 50,000/- made in terms of cash were considered unethical ( such payments may not be related to the operation of business) and were not allowed to be deducted for tax purposes. So, tax authorities revised the net income of the company to be Rs 50 lakhs ( no deduction of expenses) and tax of Rs 12.5 lakhs is levied.

Example 2 on Non deductible expenses for Tax purposes in Nepal.

Srijan Singh is the owner of a single shareholder company ABC Pvt. Ltd. The company imports mobile phones and sells them to the retailers. During the New Year 2079, Srijan Singh visited Bali, Indonesia with the family as a refreshment and new year celebration trip. The total expenses made for the tour was Rs 10 lakhs of which 2 lakhs was for flight fee and commuting/ transportation.

He claimed those expenses to be made for the operation of the business and filed tax return claiming those expenses. During the subsequent investigation by the tax authorities, it was found that the trip expenses were not related with the operation of business. So, tax authorities revised the tax liability and charged further fines and penalties for deliberatively understating tax liability.

What kinds of Expenses are Non deductible expenses for Tax purposes in Nepal?

Provision for expenses not deducible expenses are stated within the Section 21 of Income Tax Act 2058. Expenses not deductible for tax purposes are as follows:-

1. Personal Expenses or Expenses of Domestic Nature. ( Clarification clause of Section 21)

Personal Expense or Expenses of Domestic Nature includes following expenses:-

1.a  Interest expenses on the loan amount utilized for personal purposes out of total business loan.

Example : Ramesh took a business loan of Rs 20 lakhs but only utilized Rs 10 lakhs for the business. He used the other remaining Rs 10 lakhs for  purchasing a Benelli bike for personal use. The rate of interest was 10% pa. In such case, only 50% of total interest expense can deducted from the business income for tax purposes.

1.b Expenses related to residency, lodging, entertainment or any other leisure activities. ( Refer to Example 2 for more understanding.)

Expenses related to the cost of commuting/ transportation other than the cost of commuting/transportation made in relation of business or investment. ( Refer to Example 2 for more understanding)

1.c Expenses made for the purchase of clothing items such that the clothes can be used for general purposes too.

Example : On the occasion of International Women’s Day, BNC Medical College provided 2 sets of clothes ( classical sari & Nursing Suit) to the nurses of the hospital. The total cost of the clothes was Rs 10 lakhs of which 6 lakhs was related to the purchase of sari. In this case, BNC Medical College can only deduct Rs 4 lakhs of expenses from its assessable income. Remaining 6 lakhs of clothing should be included as clothing allowance to the salary sheet of the nurses.

1.d Expenses for training/ educating employees other than the training/ educating related to the business or investment and it does not lead to any academic degree or diploma.

Example: Employees of CG Group Nepal were provided Marketing Training in Delhi at a cost of Rs 5 lakhs. Since, this training is related to the business of CG Group and it doesn’t lead to any academic degree, this expense can be deducted for tax purposes. However, it the Employees were provided a free 3 year CTEVT diploma on Computer, then the expense would not have been allowed for deduction as the education leads to academic degree/ diploma.

Other non deductible expenses

2. Income Tax paid as per Income Tax Act 2058 is also a non-deductible amount.

Amount of Tax paid as per Income Tax Act 2058 in any year is not allowed for deductions from the assessable income.

3. Any form of fees, fines or penalties paid to Government of any nation, local bodies for the breach of any law, rule, or regulation.

Disallowed tax of fine

Example :- XYZ Pvt. Ltd. paid a fine of Rs 3 lakhs for the breach of Quality Control during the manufacture of Apple Juice as per Food & Drug Administration Act. This amount can not be deducted from assessable income for Tax purposes.

However, taxes paid to Province government or Local level government are allowed for deduction.

4. Expenses made for claiming Income Tax Exemption as per Section 10 are not deductible for tax purposes in Nepal. Similarly, expenses made in relation to Final Withholding Payment are also not deductible for tax purposes.

Example: Mr. Raju made an expense of Rs 70,000/- for withdrawing a dividend of Rs 3 lakhs received from different companies of his demised father DMAT account. Since dividend to natural person is a final withholding payment, he can not deduct the expense of Rs 70,000/- from his assessable income.

5. Payment of salary or wages to the employees or workers with unregistered PAN number except the payment of unusual onetime wages upto Rs 3,000/-.

Example: XYZ Pvt. Ltd. used Indian Labourers without PAN for his manufacturing industry. All expenses made to these labourers are not allowed for deductions. However, due to short circuit in the transformer, XYZ called 5 electricians and were paid Rs 2,500/- each for the repair. These electricians did not have any PPAN. Since the expense was unusual and below the threshold limit of Rs 3,000/, it can be deducted from assessable income of the company.

6. Expense exceeding Rs 2,000/- without an invoice stating PAN number of the seller is not deductible for tax purposes. Estimate bills of above Rs 2,000/- are disallowed expense for tax.

Ram, a clerk in an office purchased some A4 paper for the office and provided an estimate bill of Rs 5,000/-. He was asked by the Manager to fetch a proper PAN bill because bill without PAN number exceeding Rs 2,000/- is not allowed for deductions.

NOTE:- in case the purchase is made from non-business natural person for purchase of agricultural, forestry, livestock or other household items then though there is no issuance of PAN bills, the expense will be allowed for tax purposes.

7. Distribution/ Dividend are not deductible for tax purposes.

Out of its Net profit of Rs 3 crores, XYZ Pvt. Ltd. provided a cash dividend of Rs 30 lakhs to its shareholders and filed tax return assuming taxable profit of Rs 2.7 crores. However, tax authorities reassessed the tax liability on net profit of Rs 3 crores because dividends can not be deducted from the assessable income to arrive to taxable income.

8. Payments exceeding Rs 50,000/- made in Cash.

Payment in any other form other than LC, account payee cheque, draft, money transfer, telegraphic transfer, money order, hundi, or other forms of money transfer not involving Financial institutions are the forms of cash payment.

In case any person with the annual turnover exceeding Rs 20 lakhs makes a one time payment of Rs exceeding Rs 50,000/- then such payments are not allowed for deduction. ( Refer to Example 1 in the introduction)

However, following cash payments exceeding Rs 50,000/- are allowed for deductions:-

  • Payments made to Nepal Government, constitutional bodies, corporations having the ownership of Nepal, Banks and other Financial Institutions.
  • Payment to farmers or primary agricultural product producer.
  • Payment of Retirement Contribution or Retirement Payment.
  • Payments made to the place where there is no any Banking facilities. A place with no availability of any Banking services within the 10 KM radius area is the area of no any banking facilities.
  • Payments made on the day of closure of Banking Services or when there is unavoidable compulsion for cash payment.
  • Payment made to the bank account of Payee.

Summary

Lets Summarize the points covered in this post in a flowchart format for easy reference.

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