The Institute of Chartered Accountants of Nepal

Suggested Answers of Income Tax and VAT

CAP II Examination- December 2012

1. Answer the following with reference to the Indian Income Tax Act, 1961:

a) Is there any income not chargeable to tax in case of Electoral Trust? Are there any conditions to be satisfied? Explain. 2

b) Mr. Phil comes to India for the first time on September 1, 2011. On September 15, 2011, he joins a company on monthly
salary of Rs. 90,000, as a part-time consultant (duty hours: 6.30 pm to 9.30 pm). Prior to September 15, 2011, Mr. Phil does
not have any source of income. On October 9, 2011, he starts a trading business in computer hardware after obtaining
approval of his employer. For the previous year March 31, 2012, he has the following income:
Salary from the part-time employment: Rs. 585,000; income from the business of trading in computer hardware in India: Rs.
1 million; and foreign income from the same business: $ 50,000. Find out the residential status of Mr. Phil for the assessment
year 2012-13. 6

c) Mr. Jury, a foreign citizen, is residing in India since 2004. While completing his assessment for the assessment year 2010-
11, on February 14, 2011, the Assessing Officer comes to know that Mr. Jury will leave India on April 12, 2012 with no
intention of returning. Is there any provision wherein Assessing Officer can make assessment in assessment year 2010-11? 2

Answer:
a) Voluntary contribution received by an electoral trust is treated as income under section 2(24)(iia). By virtue of section 13B,
donation received by an electoral trust will not be chargeable to tax if the following conditions are satisfied;

i. The electoral trust is approved by the Central Board of Direct Taxes in accordance with the scheme made by the Central
Government.
ii. The electoral trust will have to distribute to political parties 95 percent of the aggregate donations received by it during the
previous year along with the surplus, if any, brought forward from any earlier years. For this purpose, a political party means
a political party registered under section 29A of the Representation of the People Act, 1951.

iii. The electoral trust functions in accordance with the rules made in this regard by the Central Government.

b) As per section 6(1), an individual is said to be resident in India in any previous year, if he satisfies at least one of the
following conditions (basic conditions)-
i. He is in India in the previous year for a period of 182 days or more.
ii. He is in India for a period of 60 days or more during the previous year and 365 days or more during 4 years immediately
preceeding previous year.
Further, as per section 6 (6), a resident individual is treated as “resident and ordinarily resident” in India if he satisfies the
following two conditions (additional conditions)-
i. He has been resident in India in at least 2 out of 10 previous years immediately preceeding the relevant previous year
ii. He has been in India for a period of 730 days or more during 7 years immediately preceeding the relevant previous year.

For the assessment year 2012-13, Mr. Phil has the following sources of income in India:
Sources of Income Previous Year Number of days when Mr. Phil
was in India
Salary Income September 15, 2011 to March 31, 2012 199 days
Business Income October 9, 2012 to March 31, 2012 175 days

For the first source on income, Mr. Phil becomes resident in India by satisfying one of the basic conditions. As he comes to
India for the first time in 2011, he is unable to satisfy any of the additional conditions. Thus, he is a resident but not ordinary
resident in India for the first previous year.
For the second source of income, Mr. Phil is a non-resident, as he satisfies none of the basic conditions.
It may be noted that he is non-resident in India for the business income and resident but not ordinarily resident for the salary
income. In view of section 6(5), if a person is resident in India for one of the sources of income, he will be deemed to be
resident in India for all other sources of income in the same assessment year. In respect of the assessment year 2012-13, Mr.
Phil will, therefore, be regarded as resident but not ordinarily resident for all sources of income.
 Suggested Answers – Income Tax and VAT
CAP II Examination – December 2012
c) Section 174 prescribes that if it appears to the Assessing Officer that an individual may leave India during the current
assessment year or shortly thereafter with no intention of returning to India, the total income of such individual up to the
probable date of his departure from India shall be chargeable to tax in that assessment year.

Mr. Jury has intention of leaving India only on April 12, 2012 which is not shortly after then the current assessment year as
prescribed by section 174. Hence, in assessment year 2010-11, the assessing officer can make assessment of previous year
2009-10. The assessing officer can assess the income of assessment year 2011-12/2012-13 (For the period April 01, 2012-
April 12, 2012) in assessment year 2011-12 as per section 174.

2.
a) Anubhav & Co. has taken on rent the premises from Buddhi Shree & Co for the operation of its business which pays
monthly rent of Rs. 100,000. Anubhav & Co. is deducting withholding tax at the rate of 10% amounting to Rs. 10,000 per
month and making payment amounting to Rs. 90,000 per month to Buddhi Shree & Co. While submitting Income Tax
Return, tax liability of Buddhi Shree & Co, to be payable during Income Year 2068/69 came to Rs. 200,000. Answer the
following question mentioning the relevant provision of Income Tax Act, 2058.
i) What is the amount of tax to be deposited?
ii) Will your answer be different if tax liability of Buddhi Shree & Co comes to Rs. 100,000 instead of Rs. 200,000?
iii) What is the implication if Buddhi Shree & Co had not adjusted the amount of withholding tax paid through Anubhav &
Co. while submitting income tax return? 8

b) Mr. ‘Z’ a Canadian citizen is deputed by the Canadian government to work on a Canadian aided project and he stays in
Nepal for 94 days. He receives his salary in Canada and he is provided a free accommodation and a daily allowance of Rs.
2,000 to meet his boarding and other expenses.

i) Examine the liability to tax under Income Tax Act, 2058.

ii) Will your answer be different if Mr. ‘Z’ comes to Nepal under the services of a private contractor instead of the Canadian
government in the above case? 4

c) The status of property, plant and equipments and repair and improvement Expenditure XYZ & Co. during Income Year
2068/69 is as follows;
Block of Assets Repair and Improvement Expenditure (Rs.) Depreciation basis (Rs.)
Building Block 2,000,000 100,000,000
Computer Block 100,000 800,000
Automobile Block 1,600,000 16,000,000
Total 3,700,000 116,800,000
Answer the followings mentioning the relevant provisions of Income Tax Act, 2058;

i) Can repair and improvement expenditure of Rs. 37, 00,000 be claimed under Income Tax Act, 2058. If not, compute the
amount of repair and improvement expenditure that can be claimed by XYZ & Co. during Income Year 2068/69.
ii) What is the implication of the amount of repair and improvement expenditure, if any, which cannot be claimed during
Income Year 2068/69? 8

Answer:
a) Section 93 (2) and (3) of Income Tax Act, 2058 prescribes the followings;
1) In case tax has been deducted from payments other than those not subject to final tax deduction, the person whose tax has
been deducted shall be deemed to have paid tax as follows:
(a) The tax amount deducted from payments under Section 87, 88 or 89.
b) The tax amount under Sub-Section (3) of Section 90, or the tax amount which is to be deemed to have been deducted
from payments, deposited, if any, at the Department by the advance tax deducting person or the person whose tax is
deducted.

2) The person whose tax is deducted under Sub-Section (2) may make a claim for its adjustment only with the amount of tax
payable by him in the income year in which the payment has been made.
Accordingly,
i. The amount of tax liability to be deposited by Buddhi Shree & Co, while submitting income tax return is Rs.80,000 after
adjusting the withholding tax deducted and paid through Anubhav & Co (Rs. 10,000*12 as TDS on rent).
ii. In this case, Buddhi Shree & Co can make a claim for the carry forward in next year or claim for the refund under section
113 of the Act, for the amount which is in excess of amount paid as withholding tax (i.e. Rs. 20,000).

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 Suggested Answers – Income Tax and VAT
CAP II Examination – December 2012
iii. If Buddhi Shree & Co had not adjusted the amount of withholding tax paid through Anubhav & Co. during Income Year
2068/69 it cannot claim for the adjustment in forthcoming year. It can claim for the excess tax paid as refund under section
113 of the Act.

b)
i. The income derived by a natural person from the employment of public service of foreign country is exempted under
section 10 of Income Tax Act, 2058. Following conditions shall have to be satisfied in order to get the exemption;
a. Such natural person is resident or non-resident of Nepal because of employment only; and
b. Such payments shall be made from the public fund of foreign county.
Hence Mr. ‘Z’ satisfies the above conditions, his salary and allowances are exempt from income tax in Nepal.
The place of receiving the salary of allowances is immaterial for the tax purpose.

ii. If Mr. ‘Z’ comes to Nepal under the services of a private contractor instead of the Canadian government, the salary
received in Canada and the allowances received in Nepal combined together shall be taxable in Nepal.
The private contractor (employer) has to deduct withholding taxes from his salary as per section 87. In case the contractor
does not withhold the tax at source and does not deposit the same to revenue department, the contractor and Mr. ‘Z’ are
responsible to pay the tax jointly or severally. As his total stay in Nepal is of 94 days only, he is non-resident in Nepal for the
Income Year and he has to pay tax at the rate of 25% on the taxable salary without allowing for initial deductions.

c) Section 16 of Income Tax Act, 2058 prescribes the following provisions;

1) Expenses incurred during and Income Year on repair and improvement of an asset owned and used depreciable asset in
order to generate income, is allowed to be deducted from taxable income.

2) Expenses on repair and improvement regarding a block of owned and used assets during an Income Year in excess of 7%
of the depreciable basis of the respective block at the end of Income Year, cannot be deducted during the Income Year.
3) The portion of the expenses disallowed during the year is allowed to be capitalized to the carrying amount of the
respective block of the assets,
Accordingly,
i. The entire amount of repair and improvement of Rs. 37,00,000 cannot be claimed. The amount of repair and improvement
that can be claimed under section 16 of Income Tax Act, 2058 can be computed as below;
Block of Assets Dep basis (Rs.) 7% of Dep basis (Rs.) Actual Repair and Improv Exp (Rs.) Claimable Expenses (Rs.)
Building Block 100,000,000 7,000,000 2,000,000 2,000,000
Computer Block 800,000 56,000 100,000 56,000
Automobile Block 16,000,000 1,120,000 1,600,000 1,120,000
Total 116,800,000 8,176,000 3,700,000 3,176,000

ii. The following is the implication of the amount which is in excess of the limit prescribed under section 16(2).
Block of Assets Claimable Expenses (Rs.) Amount in excess of limit (Rs.) Implications of the amount in excess of the limit
Building Block 20,00,000 - As the entire expense is claimable, no implication
Computer Block 56,000 44,000 The excess amount shall be included in the
opening depreciation basis of the following IY.
Automobile Block 11,20,00,0 4,80,000 The excess amount shall be included in the
opening depreciation basis of the following IY.
Total 31,76,00,000 524,000

3.
a) Mr. Ram had purchased a Land on 2063.10.01 for Rs.1 Crore. On 2066.05.06, he divorced his wife Mrs. Seeta. As part of
his divorce settlement, he transferred the land to his ex- wife Seeta on 2066.05.10. At the time of transfer, the market value of
the land was Rs. 1 Crore 40 Lacs. During the transfer, Mrs. Seeta incurred Rs. 10,000 towards registration and other legal
charges. Mr. Ram had informed the details of the transfer of land to ex-wife and elected the application of section 43 in
writing to Inland Revenue Office. Mrs. Seeta has sold the land on 2066.10.05 for Rs. 1 Crore 50 Lacs. By mentioning the
relevant provision of section 43, calculate the gain or loss on disposal of the land in the hands of both Mr. Ram and Mrs.
Seeta. If they do not elect the application of this section, how the incomings and outgoings are calculated? 7

b) Mr. Z , retired person from Nepal Government on Ist Sharwan, 2068 after 30 years of Service. After retirement, he joined
Kathmandu Bank at Kathmandu on the same day, .i.e. Sharwan, 2068 and remained in service till Ashad end 2069.
Information about his income are as follows:
S.N. Particulars Nepal government Kathmandu bank
1. Salary Rs. 3,00,000 Per month
2. House rent allowance Rs. 20,000 Per month
3. Other allowance Rs. 10,000 Per month
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 Suggested Answers – Income Tax and VAT
CAP II Examination – December 2012
4. PF contribution Additional 10 % of basic salary & grade
5. Pension received Rs. 144,000 during the year ----------------

Other information:
• He has been provided a vehicle for personal as well as official use by the Kathmandu bank.
• Both employers have deducted 10 % of salary for provident fund and deposited 20 % to the approved retirement fund.
• He had received all retirement payment in Ashad 2068.
• He has not been provided Dashai allowances during the period.
• His wife does not have any income in this Income year and they declared they are couple.

Calculate the assessable income, taxable income and tax amount of Mr.Z for the income year. 6

c) Mr. Ram had purchased a Land situated at Bhaktapur on 2062.05.01 for Rs. 50 lacs.During the extension of Arniko
Highway, Nepal Government took possession of the land with a notice of compulsory acquisition on 2066.05.07. As
compensation, Nepal Government has given a sum of Rs. 80 Lacs to Mr. Ram. Mr. Ram purchased another land
approximately 2 Kms. away on 2067.04.05 for Rs. 60 Lacs. Mr. Ram has requested in writing to Inland Revenue Office for
the application of section 46 of the act. Compute the gain or loss on disposal of land in the hands of Mr. Ram by mentioning
the relevant provisions of the Act. Will the amount of gain or loss differ if he has not elected for application of this section? 7

Answer:
a) As per section 43 of the Act, in case a property is transferred due to a divorce settlement or to one's husband, wife, ex-
husband or ex-wife and election has been done for the application of this section, then:
- The net outgoings incurred by the transferor will be treated as if they have been received from the transfer and
- The same amount will be treated as net outgoings for the transferee.
Since election has been done for the application of section 43, gain or loss is calculated as follows:

In the hands of Mr. Ram

Incomings Rs. 1 Crore.
Less: Outgoings Rs. 1 Crore
Gain or Loss Nil
The transferor experiences neither a gain nor loss from the disposal of the property.

In the hands of Mrs. Seeta

Incomings Rs.1,50,00,000
Less:
Outgoings:
Cost of the transferred asset1,00,00,000
Registration and legal charge 10,000 Rs.1,00,10,000
Gain from disposal of land Rs. 49,90,000
If they do not elect the application of this section, then the market value of the property or the actual outgoings, whichever is
higher are treated as incomings for the transferor and outgoings for the transferee.

Thus, if they do not elect sec 43 to be applicable in this case the gain shall be calculated as under:
In the hands of Mr. Ram
Incomings Rs. 14,000,000
Less: Outgoings Rs. 10,000,000
Gain or Loss Rs. 4,000,000
The transferor experiences Rs. 40 lakhs as gain from the disposal of the property.
In the hands of Mrs. Seeta
Incomings Rs.15,000,000
Less:
Outgoings:
Deemed Cost of the transferred asset14,000,000
Registration and legal charge 10,000 Rs.14,010,000
Gain from disposal of land Rs. 990,000

b) Calculation of Assessable Income, taxable income and tax

Particulars Rs.
Salary 3,600,000

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 Suggested Answers – Income Tax and VAT
CAP II Examination – December 2012
House rent Allowance 240,000
Other allowance 120,000
Addition on Provident fund 360,000
Vehicle facilities (0.5 % of Salary) 18,000
Pension 144,000
Assessable Income 4,482,000
Less: Contribution to Provident fund 300,000
Whichever is lower
Actual contribution Rs. 720,000
One third of Assessable income Rs. 1,494,000
Upper limit as per section 63 Rs. 300,000

Taxable Income 4,182,000

Less Exemption on pension (25% of basic exemption limit) 50,000

Taxable Income after exemption 4,132,000

Tax calculation

Slab Tax Rate Tax Rs.

200,000 1% 2,000
100,000 15% 15,000
38,32,000 25% 9,580,000
Additional tax (see note) 168,200
Total annual tax for Mr. Z 1,143,200

Note:
Taxable income 4,182,000
Less: 2,500,000
Taxable income over
than Rs. 2,500,000 1,682,000
40% of tax @25% 168,200

c) Section 46 of the Act envisages the circumstances when a person has to dispose of an asset or liability due to orders issued
by government or due to changes in legal decisions or when a person has to dispose of an asset or a liability due to forceful
conditions. The conditions applicable for availing this section are as under:
a. There must be a case of involuntary disposal of an asset or a liability.
b. The asset or liability is exchanged for another same kind of asset or liability within one year of the disposal.
c. The person requests in writing for application of this section for the disposal with replacement.

Section 46 further states that the total incomings for the transferred assets shall be the sum of the following amounts:
- The net outgoings for the assets up to the disposal of the asset and
- In case the amount received from involuntary acquisition exceeds the amount paid or payable for the replaced asset, the
excess of the amount.
In the given case,
1. Compensation received from Government Rs.8,000,000
2. Cost of the Replaced asset Rs. 6,000,000
3. Excess of 1-2 Rs. 2,000,000
4. Net Outgoings for the asset before disposal Rs. 5,000,000
5. Total Incomings (3+4) Rs. 7,000,000
6. Total Outgoings Rs. 5,000,000
7. Gain from Disposal Rs. 2,000,000

If he has not selected for application of this section, then the gain is calculated as under:
Incomings Rs. 8,000,000
Less:
Outgoings Rs. 5,000,000
Gain from disposal Rs. 3,000,000

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 Suggested Answers – Income Tax and VAT
CAP II Examination – December 2012
4. ABC Ltd. has entered into a construction contract with PQR Ltd. with a term of 3 years. The contract price and the total
estimated cost are Rs.60 Billion and Rs. 40 Billion respectively in Year1 of the contract, cost amounting to Rs. 10 Billion
was incurred and up to year 2 Rs.25 Billion has been expensed. Calculate the income of ABC Ltd. to be included in the
concerned head of income with respect to long term contract in Year 1 and Year 2 by also showing the calculation of
Cumulative Inclusions and Cumulative Deductions.
Briefly explain on Long Term Contract, Excluded Contract and Deferred Return. (5+5=10)

Answer:
Year 1
Percentage of completion of the contract = 10 Billion/40 Billion =25%.
Cumulative inclusion is derived by multiplying total estimative cumulative inclusions up to the completion by percentage of
contract completed.
Rs. 60 Billion * 25% = Rs. 15 Billion.
Cumulative Deductions is derived by multiplying total estimated deductions up to completion by percentage of contract
completed.
Rs. 40 Billion * 25% = Rs. 10 Billion.
Amount to be included as income in Year 1 = Rs. 15 Billion – Rs. 10 Billion
= Rs. 5 Billion.
Year 2
Percentage of completion of contract = 25/ 40 = 62.5%.
Cumulative inclusions = Rs.60 Billion * 62.5% = Rs. 37.5 Billion
Cumulative Deductions = Rs. 40 Billion * 62.5% = Rs. 25 Billion
Amount to be included in year 2 as income = Rs. 37.5 – Rs.25-Rs.5 = Rs. 7.5 Billion.

Long Term Contract – As per section 26(1) of the act, a long term contract is a contract for production, installation,
construction or the services related to them, which runs for more than twelve months. To establish a long term contract under
this section, there should be a deferred return as a condition of the contract and the contract should not be an excluded
contract.
Excluded Contract – As per Rule 11 of the Income Tax Rules, Excluded contract is any contract created by reason of an
interest in an entity or by obtaining a membership in a retirement fund or any contract of investment insurance. Excluded
contract is not taken as a long term contract.
Deferred Return - As per Rule 10 of the Income Tax Rules, a contract shall be called as deferred return contract if any party
to a contract does not declare the information related to the estimated profit and estimated loss for the period of every six
months starting from the commencement of the contract as required by IRD.

5.
a) EFG Ltd. has given a contract to Garibdas construction, a party not registered in VAT, for construction of a Shopping
Complex built exclusively for commercial purposes. The cost of the shopping complex is Rs.55 lacs. By mentioning the
relevant provision of the act and rules, comment on the taxability of the transaction. 4

b) Moonlight Traders is engaged in the business of selling Television sets on installment basis. As per the policy and
contract agreement, forty percent of the Price of the Television Rs. 20,000, i.e. Rs. 8,000 has to be paid as upfront payment in
cash and thereafter monthly installment of Rs.1000 along with interest 1% per month has to be paid at the end of the month.
Mr. Ram Binod has purchased a television set by paying Rs. 8000 in cash on 2066.09.07. Installment of Magh and Falgun
has been paid on Falgun 05, 2066. By mentioning the relevant provision, determine the time of supply for Magh and Falgun
Month installments. 4

c) M/s Kiran Distributors is engaged in the wholesale business of various types of noodles. The firm is registered in VAT.
The firm has taken a loan of Rs. 10 lacs from M/s Saraswati Bank for purchasing a delivery van. Bank has paid the total
amount for the purchase of Van but has kept the ownership of van in the name of the bank till the loan is fully repaid by
Kiran Distributors. Kiran has to pay Rs. 25,000 per month towards the principal and interest to the Bank as part of their loan
agreement. Rs. 130,000 was paid as VAT during the purchase of van. By mentioning the relevant provision of the Act, can
Kiran Distributors claim the input tax credit? 4

d) ABC Ltd, a foreign party got a contract from an organization in Nepal. Before the start of the work, they have registered
themselves with VAT. As a tax professional, they enquire you on the provision for payment of VAT as per the VAT Act.
Advice ABC Ltd. 4

e) What is Debit / Credit Note? 4

Answer:

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 Suggested Answers – Income Tax and VAT
CAP II Examination – December 2012
a) As per section 8(3) of the act, any person registered or not in Nepal engaged in constructing commercial buildings,
apartments, shopping malls or similar having value more than Rs.5 Million need to pay VAT on construction cost, if not paid
to registered person.
Further , Rule 6(kha) of the VAT Rules states that any person who, for commercial purposes, is constructing Building,
Apartment, Shopping Complex or similar as directed by the IRD amounting more than Rs.5 Million has to get it constructed
only from VAT registered person

In the referred case, since EFG Ltd. got the construction of a shopping complex for commercial purposes from non VAT
registered party, hence as per section 8(3) of the act, EFG Ltd. has to deposit the VAT on transaction value i.e. 13% of Rs.55
Lacs = Rs. 7.15 Lacs to the Inland Revenue. With regard to taxability of Garibdas Construction, since the amount of
transaction has exceeded minimum slab, it has to get registered itself in VAT.

b) As per section 6(3)(kha) of the VAT Act, in the case of contractual provision for paying the value of goods or services
partially in more than one day on an installment basis, earliest of due date as per the contract or actual payment date shall be
considered as Time of Supply.
In the month of Magh 2066, due date is Magh end but actual payment date is Falgun 05, hence in this case, time of supply is
Magh End.
For the month of Falgun 2066, due date is Falgun end but actual payment date is Falgun 05, hence in this case, time of supply
is Falgun 05.

c) As per section 17(5ka) of the act, if a tax payer has purchased or imported capital goods under a loan agreement within a
financial lease, then input tax paid can be claimed by the concerned tax payer.

In finance lease, all the benefits and risks are to be borne by the lessee, only legal passing of the title happens after the
stipulated date mentioned in the agreement. In this case, although the legal title still vests with the bank, but the firm can take
the input tax credit as per section 17(5ka).

d) Section 19 of the VAT Act states about the payment of value added tax as following:
1) A taxpayer shall have to pay the tax for each month within twenty five days of the close of the month.
2) If a taxpayer does not pay the tax within the time limit specified under (1), an extra charge of ten percent per annum shall
be imposed on the tax due.
3) If a taxpayer applies to the Director General for the exemption of the additional charges provided by (2) stating the reason
that the failure to make a timely payment was caused by extraordinary circumstances beyond the taxpayer's control, the
Director General may, if he finds the reason reasonable, exempt such charges.
4) The charges pursuant to (2) and and the interest pursuant to Section 26, shall be charged from the date on which the tax
first became due.
5) If a tax officer makes tax assessment under section 20 and finds that the amount of tax to be collected from the tax payer
in a tax period is less than the amount he is entitled for refund, then extra charge and interest shall not collected in that tax
period.
6) Tax can be paid through the Good for Payment Cheque issued by the Bank. In such a case, the day tax office receives the
good for payment cheque, it is deemed that the tax is collected.
7) Interest shall not be collected on Interest, Extra charge and penalties.

e) As per Rule 20 of the VAT Rules, a debit note/credit note is a document issued by a registered person owing to a change
in the value of the goods or services supplied by him previously.
The debit or credit note must include the following contents:
(a) Serial Number,
(b) Date of issue,
(c) Name, address and registration number of the supplier,
(d) Recipient's name, address, and registration number if he is a registered person,
(e) Number and date of the tax invoice connected with the transaction,
(f) Particulars of the goods or services and reason of credit or debit,
(g) Amount credited or debited,
(h) Tax amount credited or debited.
A registered taxpayer shall maintain a monthly record of credit or debit notes referred to in sub-rule (1)

6. Write on the following:

a) A lawyer practicing in Nepal has provided consultancy services to the Legal Firm situated in United Kingdom. The legal
firm situated in United Kingdom has used such services for the release of persons in USA. Where is place of supply of
services as per Value Added Tax Act/Rules? 5
b) There are some cases where Value Added Tax (VAT) paid on purchase is not allowed- no credit, even if output of
registered person is VAT attractive. Mention those cases as prescribed under Value Added Tax/Rules. 5
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 Suggested Answers – Income Tax and VAT
CAP II Examination – December 2012
c) State the provisions on Value Added Tax (VAT) refund under Value Added Tax Act, 2052. 5
d) What are the records that are to be maintained by the tax payer as per rule 23 of VAT rules, 2053? 5

Answer:
a) Section 6 of Value Added Tax Act, 2052 deals with time and place of supply of goods or services.
1. For the purpose of assessment and collection of tax under this Act, the determination of the fact whether the supply of any
goods or services has taken place within or outside Nepal shall be as prescribed.
Further, as per rule 16 of Value Added Rules, 2053, the place of supply of a service shall be the place where the benefit of
that service is received.
In the case given in question, the lawyer in Nepal has provided service to Legal Firm in United Kingdom, the Legal Firm of
United Kingdom in turn has used such services and the payment of such services has been made from United Kingdom to
Nepal, and hence the place of supply is United Kingdom.

b) For the purpose of section 17 of Value Added Tax Act, 2052 following are the goods or services wherein VAT paid on
purchase is not allowed-no credit, as per rule 41 of Value Added Rules, 2053.
i. Consumption of drinkable items (soft drinks, water juice or similar)
ii. Liquor items (beer, wine, whiskey or similar)
iii. Petrol for vehicles used for human transport
iv. Expenses on Entertainment

c) Following are the provisions related to Value Added Tax (VAT) refund under Value Added Tax Act, 2052;
1. According to Section 24(3), if a registered person has continues credit of VAT for six months, credit is eligible for VAT
refund. In case any registered person has export during the month at least 40% of total sales in that month, the credit is
eligible for VAT refund as per section 24(4).
2. According to section 25, VAT paid by following person or paid for following event may be refunded, upon request for
refund within 3 years from the date of transaction on which the claim for refund is based;
i. Diplomat, privileged on a reciprocal basis from Ministry of Foreign Affairs, person engaged in Regional or International
Organization or missions having diplomatic privileges. This refund shall not be allowed for diplomats for purchase of goods
or services at a time for less than Rs. 1,500 as per section 15 (1ka).
ii. Institution or VAT paid such institution on which Ministry of Finance, has granted the privileges of tax exemption
iii. Tax exemption project by Ministry of Finance under bilateral and multilateral agreement
iv. Any tax collected by mistake.

3. Foreign tourist visiting in Nepal, if purchase and take away from Nepal via air transport shall get refund VAT on those
assets, if the cost paid is higher than Rs. 15,000. A service charge of 3% of refund is charged on refund (section 25 ka).

d) As per rule 23 of VAT rules, a registered person shall for the purpose of the Act and these Rules maintain records of the
following information, documents and details:-
• Information as per Schedule -7.
• Records relating to trade, accounts, cash receipts and payments.
• Tax invoices and abbreviated tax invoices issued.
• Tax invoices and abbreviated tax invoices received.
• All documents relating to his imports and exports,
• All debit and credit notes.
• Books of purchases and sales as per Schedules 8 and 9.

The Institute of Chartered Accountants of Nepal

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