Please refer to Registration of Organization as TEO Section of Page 43 and 44 of book.

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1 SECTION TAX EXEMPTED ORGANIZATIONS Question 1 (page 45) Please refer to Registration of Organization as TEO Section of Page 43 and 44 of book. Question 2 (page 45) Please refer to Income of TEO exempted from Tax Section of Page of book. Question 3 (page 45) As per Sec. 10 (g), the following income of an Exempt Organization is exempted from income tax, and no other: 1. Gift and Donation, 2. Any voluntary contribution received from any person by TEO, provided that: a. The voluntary contribution is directly related to the objective of TEO, and b. The person making such voluntary contribution does not obtain any consideration and does not expect any consideration against such contribution 3. Amount accrued by Nepal Rastra Bank as per its objective (The objective of Nepal Rastra Bank is prescribed in Section 4 of Nepal Rastra Bank Act, 2058) 4. Amount accrued by Securities Board of Nepal as per its objective (The objective of Securities Board of Nepal is prescribed in Preamble of Securities Act, 2063) In the given question, the trust formed by an ashram for old aged elders is TEO. Let us test the above conditions to identify whether the income is exempted for tax purpose or not. The conditions of (3) and (4) above are not tested as it is neither NRB nor SEBON. a. Donation from Members: Exempted as it satisfies condition (1) above b. The other income are: Sale of product Interest on Deposits Rent from Shop let out Ticket sale of cinema Profit from selling books to the public and students The above incomes are neither donation nor gift. Similarly, the incomes do not satisfy conditions (2) above as the incomes are not voluntary contribution at all since the contributor expects consideration against any contribution for the income as above. Thus, these incomes are not exempted for tax purpose. c. As per Sec. 21 of the Act, any expenditure incurred for generating exempted amounts are not deductible (refer page 90 of the book). Thus, let us test what expenditures are deductible to derive taxable income of the Ashram. Expenditure for maintenance of inmates: it does not generate any income, i.e. not a business expenses and does not satisfy all the conditions of Sec. 13 Power & heating: it does not generate any income, i.e. not a business expenses and does not satisfy all the conditions of Sec. 13 Cleaning & Sanitation: it does not generate any income, i.e. not a business expenses and does not satisfy all the conditions of Sec. 13 Trustees Salary: it does not generate any income, i.e. not a business expenses and does not satisfy all the conditions of Sec. 13

2 Administrative Salary: as per additional information, Rs. 125K out of Rs. 250K is expenditure for book shop, so the amount is deductible for tax purpose u/s 13 of the Act. It is assumed that the expenditure is considered while calculating profit from selling of books to the public and students as profit can only be derived after considering the expenses. Assuming the expenditure not considered for calculation of profit seems illogical. Administrative Salary: Out of 75K expenditure, Rs. 50K is utilized towards the selling of books, i.e. 50K is business expenditure and deductible u/s 13 of the Act.. It is assumed that the expenditure is considered while calculating profit from selling of books to the public and students as profit can only be derived after considering the expenses. Assuming the expenditure not considered for calculation of profit seems illogical. Calculation of Tax Liability- Considering above, the taxable income is: Particulars Sec. Refer W. N. Amount AMOUNT INCLUDED IN INCOME Donation Sale of Products ,000 Interest on Deposits Rent from Shop let outs ,000 Ticket sales for Cinema ,000 Selling of books to the public and students 7 2 & 4 60,000 A. TOTAL 510,000 Deductions Expenses for Maintenance of Inmates 5 - Power & heating 5 - Cleaning & Sanitation 5 - Trustees Salary 5 - Administrative Salary 5 - Administrative Expenses 5 - B. Total Deductions - ASSESSABLE INCOME FROM BUSINESS 510,000 TAXABLE INCOME 6 510,000 TAX 25% 7 127,500 Working Notes: 1. Donation is an exempt income as per Sec. 10 (g) of Income Tax Act. 2. The treatments are explained in point (b) above. 3. Interest on deposit is assumed to be obtained from resident banks and financial institution, hence considered final withholding as per Sec. 92. In case of alternative assumption, the amount is included while calculating assessable income from business. 4. It is assumed that all deductions as per Income Tax Act is considered while arriving at profit from selling of books to the public and students. 5. The treatments are explained in point (c) above 6. It is assumed that there no deductions u/s 12, 12A and 12B. 7. The trust is an entity as per the definition given in Sec. 2 of the Act, and attracting corporate tax rate of 25%. Question 4 (page 45) As per Sec. 10 (g) following amounts derived by an exempt organization (other than NRB & SEBON) is exempted from corporate income tax:

3 1. Gift and Donation, or 2. Any voluntary contribution received from any person by TEO, provided that: a. The voluntary contribution is directly related to the objective of TEO, and b. The person making such voluntary contribution does not obtain any consideration and does not expect any consideration against such contribution In case of any revenue and activities that does not satisfy any of the above conditions, the gain from such activities is taxable. In the given case, an NGO (exempt organization) was awarded a contract under free competition to provide computer education to street children. Testing the conditions as above, the amount derived by the NGO is not gift or donation, so condition (1) is not satisfied. Though the contribution received from INGO by the NGO is as per the objective of NGO (i.e. objective clause of NGO includes an object as providing facilities and vocational training to street children), which satisfied (a) of condition (2) above, but the person making contribution (i.e. INGO) expects consideration (i.e. providing computer education to street children) against such contribution, thereby condition 2 (b) is not satisfied. In view of above, both the above conditions are not satisfied, hence, any gain from such activity of an exempt organization is taxable. Readers should note that in case any contribution is received by exempt organization for any specific activities specified in its object clause, it is considered as expectation of consideration by the contributor. Question 5 (page 45) As per Sec. 10 (g) following amounts derived by an exempt organization (other than NRB & SEBON) is exempted from corporate income tax: 1. Gift and Donation, or 2. Any voluntary contribution received from any person by TEO, provided that: a. The voluntary contribution is directly related to the objective of TEO, and b. The person making such voluntary contribution does not obtain any consideration and does not expect any consideration against such contribution Let us test the above conditions for the given income to determine whether the amounts are exempted or not: Income Exemption Status Reason Membership fee Exempted As it satisfies condition (2) above. Since it s a contribution from member who does not expect any consideration in return. The amount can be freely utilized towards any objective of Nirdhan Sewa Samaj as per the decision of its executive committee Interest Not exempted As it is not gift or donation and it is investment return and as investment of amount in bank cannot be an objective of any organization, thus it can t satisfy condition (2) as well. Hence, it s taxable, i.e. not exempted Donation Exempted As donation is exempted amount Dividend Income Not exempted As it is not gift or donation and it is investment return and as investment of amount in shares cannot be an objective of any organization, thus it can t satisfy condition (2) as well. Hence, it s taxable, i.e. not exempted Net profit from Not exempted Although the object clause may contain the provision of running a

4 running a school school, but the contribution from parents, i.e. school fee cannot be free from expectation of consideration from the contributor, that denies the satisfaction of condition (1) and (2) both specified above. Conclusion: Hence, in view of above, since the interest on deposit received by Nirdhan Sewa Samaj is not exempted (i.e. taxable); it cannot get the refund of tax withheld by agents. Legal provisions regarding filing of income tax return: When TEO has taxable income, it is not relieved from submission of income tax return, and hence filing of return is must. But in case when TEO has no any taxable income, it is not required to submit income tax return u/s 97 (1) (a) of the Act, and requires to submit annual audited financial statements within three months of the end of Income Year. Renewal of Tax Exemption Certificate by TEO There is no requirement as to the renewal of tax exemption certificate by TEO. Once audited financials are submitted, it is deemed that exemption status is automatically renewed. Failure to submit audited financials lead to revocation of exemption status until the audited financials is submitted. Question 6 (page 45) Definition of TEO: Refer to Page 43 of the book. Applicability of Sec. 87, 88, 88A and 89 for TEO a. From the angle of TEO being payer: The tax exempt organization is a resident entity; hence it is required to withhold tax on payments attracting withholding taxes u/s 87, 88, 88A and 89 of the Act. Obtaining the status of TEO exempts TEO from tax on specified incomes, but does not exempt the liability to withhold tax. b. From the angle of TEO being Receiver: In case of TEO being a Receiver: Sec. 87 is not applicable as TEO cannot be an employee and cannot generate employment income The resident payer shall withhold tax on payments attracting WHT u/s 88 and 89 of the Act so far as the amounts are not exempted u/s 10 of the Tax, and when the withholding of tax is relieved as per Sec. 88 (4) The resident payer shall withhold tax in case it needs to pay windfall gain to TEO. Question 7 (page 45) In case the amounts so generated are exempted u/s 10 (g), i.e. the income satisfies any of the conditions specified therein; there shall be no tax liability. However, in case the gain is from such income which are not exempted u/s 10 (g), the tax liability shall be Rs. 125,000 (i.e. 25% of Rs. 500,000) as in the case of normal entity.

5 SECTION EXEMPTED AMOUNTS Question 1 (page 47) As per Sec. 10 (b), income derived by a natural person deputed by foreign country in Nepal from employment of a public service of a foreign government is not taxable in Nepal, in case both the following conditions are satisfied: a. The individual is resident in Nepal only because of his/her employment Nepal or is a nonresident of Nepal, and b. The payment of income is made from the public fund of foreign government. In the given case, there is no doubt that Mr. Suresh s income is paid from public fund of UK Government; hence condition (b) above is satisfied. With regard to the satisfaction of condition (a) above, we need to evaluate the following: Mr. Suresh, after doing his graduation in Nepal migrated to UK to further his study and for permanent source of income, He was appointed by British Government in its service, and In the year 2068/69, he has been in Nepal with a group to make a study almost for whole year In view of above fact, had he not been an employee of UK Government and had UK government not deputed him in Nepal to make the study; he would not have been resident of Nepal. Hence, he is resident of Nepal because of his/her employment only; thus, satisfying condition (a). In light of above, Mr. Suresh is deriving exempted amounts u/s 10 (b) of the Act. Question 2 (page 47) Residential Status of Mr. Clinton for 20X1/X2 A natural person is resident in Nepal, in case s/he satisfies any of the following three conditions: a. His/her habitual (normal) place of abode is in Nepal, b. S/he resides in Nepal for 183 days or more during any period of consecutive 365 days, or c. S/he is deputed by GON in foreign country Since Mr. Clinton is residing in Nepal for more than 183 days during IY 20X1/X2 (since Ashwin 20X1 for 9 months), he is resident for the income year. Calculation of taxable income of Mr. Clinton Calculation of Assessable Income from Employment Particulars Sec. Notes Amount Salary Dearness allowance Foreign Allowance Assessable Income from Employment Nil Calculation of Assessable Income from Business Particulars Sec. Notes Amount Net profit from Handicraft business in Nepal 3 375,000

6 Assessable Income from Business 375,000 Calculation of Taxable Income Assessable Income from Business 375,000 Assessable Income from Employment - Assessable Income from Investment - Assessable Income from Windfall gain - TOTAL ASSESSABLE INCOME 375,000 LESS: ALLOWABLE DEDUCTIONS a. Contribution to ARF - b. Donation u/s 12B - c. Donation u/s 12 (1) and 12 (2) 18,750 Lower of following: Actual 50,000 5% of Adjusted taxable income (5% of 375,000 less (a) less (b)) 18,750 Max. 100,000 TAXABLE INCOME 356,250 Working Notes 1. Since Mr. Clinton is an employee of US Embassy in Nepal; he is resident in Nepal only as a result of his employment of US government and salary derived by him is paid from public fund of US government; thus, the amount is exempted u/s 10 (b). 2. As the dearness allowance and foreign allowance is paid to Mr. Clinton who is resident of Nepal only as a result of employment of US government and the amount derived by him is paid from public fund of US Government; the amount is exempted u/s 10 (b) and 10 (c) of the Act. 3. It is assumed that the net profit is derived after considering the deductions under Income Tax. 4. The gain of Rs. 150K from winning the game in Nepal is final withholding u/s 92 as it is windfall gain. 5. Renewal and subscription fee does not satisfy the conditions of Sec. 13 as it is not for business purpose, hence not deductible for tax purpose. 6. Golf expense is incurred for other purpose than generating income from business, hence, not deductible for tax purpose. 7. There shall be no assessable income from windfall gain so far as the windfall gain is having source in Nepal for both resident and nonresident person since it is final withholding payment. In case the windfall is having source outside Nepal, it shall form part of assessable income from windfall gain for resident persons only since nonresidents are not required to pay tax on income other than those having source in Nepal. 8. In absence of clear interpretation about the way to calculate adjusted taxable income for the purpose to determine limit for donation, the ATI is calculated after deducting contribution to ARF, expenditure u/s 12 A and 12B from total assessable income. 9. Tax deduction at source in Nepal is considered to determine the payable amount as tax after calculation of tax liability, hence, not considered here as the question requires calculation of taxable income only. Question 3 (page 47) a. Since Mr. Khadka Bahadur Gurung is not a Nepali national, he is not entitled to facility u/s 10 (h) of Income Tax Act on any of his income though he receives pension income after serving UK army. It is assumed that Mr. Gurung has not obtained Nepalese citizenship after his retirement from UK Army. b. Since Mr. Gurung resides in Nepal for whole of income year, he is resident of Nepal.

7 c. The question is silent about the nationality of Mrs. Mala Gurung; though she has not obtained any exempted amount. d. Since Mrs. Gurung resides in Nepal for a complete income year, she is resident of Nepal. e. The provisions of Sec. 50 to opt Couple for tax assessment are designed for the benefit of taxpayer, when one of the spouses is not generating income. It is normal for a rational taxpayer to plan tax is such a way that it pays minimum tax. Hence, couple assessment of Mr. and Mrs. Gurung is not warranted. Based on the above two facts, the calculation of Income of Mr. Gurung and Mrs. Gurung are calculated hereunder: Solution- Part (a) of question A. Calculation of Tax Liability of Mr. Gurung Assessable Income from Employment (WN1) 400,000 Assessable Income from Business (WN2) 300,000 Assessable Income from Investment - Assessable Income from Windfall gain - TOTAL ASSESSABLE INCOME 700,000 Less: Allowable Deductions: a. Contribution to Approved Retirement Fund - b. Expenditure u/s 12B - c. Donation u/s 12 (3) - d. Donation u/s 12 (1) and 12 (2) - TAXABLE INCOME 700,000 Less: Allowable Reductions a. Reductions for residing in Remote Area - b. Reductions for Foreign Allowance - c. Reductions in case of disability - d. Reductions of Pension Income (62,500) Lower of following: Pension Income 400,000 25% of Basic Exemption Limit (WN3) 62,500 e. Reductions for payment of Investment Insurance Premium - f. Reductions for payment of Health Insurance Premium to resident entity - BALANCE TAXABLE INCOME 637,500 Tax Liability 1 st Rs. 250,000 (WN4) - Next Rs. 100,000 15% 15,000 Balance Rs. 287,500 25% 71,875 TAX LIABILITY BEFORE TAX CREDITS 86,875 Less: Tax Credits - a. Medical tax credit - b. Female tax credit (Not eligible) c. Foreign Tax Credit (WN5) - TAX LIABILITY 86,875 Working Notes: 1. Pension income derived by him is the only income from employment, and hence detailed statement of assessable income from employment is not produced. Pension income is related to past employment; and as per cash basis- the amount is included in income.

8 2. Agricultural income is exempted only when it is not derived from conducting business from land except that as per Sec. 12 (d) and 12 (e) of Land Act, As the amount is derived from business since he hired land for cultivation and sells the produce, the amount is taxable. 3. As said earlier above, the assessment is individual assessment. 4. Effective from IY 2072/73, the social security tax on pension income is waived. Since there is no any other employment income besides pension, there is no 1% tax. 5. In absence of information as to tax paid in UK for pension income, it is assumed that there is no any tax paid by Mr. Gurung in UK. B. Calculation of Tax Liability of Mr. Gurung Assessable Income from Employment (WN1) 500,000 Assessable Income from Business - Assessable Income from Investment - Assessable Income from Windfall gain - TOTAL ASSESSABLE INCOME 500,000 Less: Allowable Deductions: a. Contribution to Approved Retirement Fund - b. Expenditure u/s 12B - c. Donation u/s 12 (3) - d. Donation u/s 12 (1) and 12 (2) - TAXABLE INCOME 500,000 Less: Allowable Reductions a. Reductions for residing in Remote Area - b. Reductions for Foreign Allowance - c. Reductions in case of disability - d. Reductions of Pension Income (62,500) Lower of following: Pension Income 300,000 25% of Basic Exemption Limit (WN2) 62,500 e. Reductions for payment of Investment Insurance Premium - f. Reductions for payment of Health Insurance Premium to resident entity - BALANCE TAXABLE INCOME 437,500 Tax Liability 1 st Rs. 200,000 (WN3) 1% 2,000 Rs. 50,000 - Next Rs. 100,000 15% 15,000 Balance Rs. 87,500 25% 21,875 TAX LIABILITY BEFORE TAX CREDITS 38,875 Less: Tax Credits - a. Medical tax credit - b. Female tax credit (Not eligible) - c. Foreign Tax Credit (WN4) - TAX LIABILITY 38,875 Working Notes: 1. The Pension income and salary income derived by her forms part of assessable income from employment, and hence detailed statement of assessable income from employment is not produced. Pension income is related to past employment; and as per cash basis- the amount is included in income. 2. As said earlier above, the assessment is individual assessment.

9 3. Effective from IY 2072/73, the social security tax on pension income is waived. Since there is other employment income of Rs. 200,000 besides pension, social security tax of 1% tax is levied on such income. 4. In absence of information as to tax paid in Hongkong for pension income, it is assumed that there is no any tax paid by Mr. Gurung in UK. Solution- Part (b) of Question There will be no difference as pension income derived by a Nepali national from public fund of foreign government is exempted only when the pension is received as a result of retirement serving to army or police force of such foreign country. Since, Mrs. Gurung did not serve army or police service, the answer would be same. Question 4 (page 47) As per Sec. 10 (g) (d), any amount derived by SEBON as per its objective is exempted for tax purpose. Hence, any amount derived by SEBON as per its objective is not taxable at all. Question 5 (page 47) As per Sec. 10 (b), income derived by a natural person deputed by foreign country in Nepal from employment of a public service of a foreign government is not taxable in Nepal (i.e. exempted), in case both the following conditions are satisfied: a. The individual is resident in Nepal only because of his/her employment Nepal or is a nonresident of Nepal, and b. The payment of income is made from the public fund of foreign government. In the given case, Mr. Z is a Canadian national and deputed by Canadian government to work on Canadian aided project. He satisfies Condition (a) above. Since he is paid in Canada for the service in Nepal, the condition as to the payment to be made from public fund of foreign government is also met. Similarly, as per Sec. 10 (c); any amount derived from public fund of foreign government by natural person or his/her close relative as a result of his/her service to such government and satisfying the conditions as to (a) and (b) above is exempted from tax. Solution to part (a) of Question As explained above, the salary, free accommodation and daily allowance received by Mr. Z in Canada is exempted from tax as he satisfies both the conditions specified above. Solution to part (b) of Question Yes, in case of his employment to private contractor; the condition as to the payment of amounts from public fund of foreign government is not satisfied, failure of which makes the amount taxable in Nepal. Since he is nonresident of Nepal as he stays for only 94 days in Nepal, the salary, free accommodation and daily allowance would be taxable at the rate 25%.