Detailed Discussion on Changes in the Income Tax Act and VAT Following the Financial Year 81-82 Budget
Changes in VAT
- Registration Requirement for Non-Resident Persons:
- Irrespective of other provisions in the Act, any non-resident person providing electronic services or offline air transport services (not embarking in Nepal) amounting to more than 30 lakhs within the previous 12 months in Nepal must register for VAT.
- The threshold limit for registration has been raised to 30 lakhs for services and composite supply (both goods and services), while the threshold for goods remains at 50 lakhs.
Changes in Income Tax
- Section 11(3tha) - Tax Exemption for IT Industry:
- A 100% tax exemption is granted to information technology industries for the distribution of dividends on share capital issued through the capitalization of profits aimed at increasing capacity.
- Previously, this concession was available only to special industries and the tourism industry.
- This exemption incentivizes IT companies to reinvest their profits back into the business, thereby expanding capacity, fostering innovation, and enhancing market competitiveness.
- Section 21 - Salary Payments:
- Salary payments exceeding 25,000 must be made through banking channels to be deductible.
- Employers must ensure compliance by maintaining proper documentation and ensuring all transactions are traceable and verifiable.
- This requirement may increase the administrative burden for businesses, particularly small and medium-sized enterprises, as they must adapt to ensure all high-value salary payments comply.
- Non-compliance will result in the disallowance of salary payments exceeding 25,000 as deductions when calculating taxable income, potentially leading to higher taxable income and increased tax liabilities.
- This measure aims to reduce large cash transactions, thereby combating the circulation of unaccounted money and addressing the informal economy.
- Section 57(1) - Change in Control Due to Shareholding:
- Section 57 is not applicable if there is a change in control due to a change in shareholding, provided the existing shareholders retain their original shareholding and the change results from the introduction of additional capital by new shareholders.
- This allows startups to raise additional capital by issuing new shares to new investors without worrying about the implications of Section 57, which typically addresses changes in control and related tax consequences.
- Section 81ka - Business Income Deposits:
- Money received from business activities must not be deposited into a personal account.
- Keeping business income in business accounts ensures compliance with legal and tax regulations. Mixing personal and business finances can lead to complications with tax authorities, including potential audits and penalties for improper accounting practices.
- Section 81 - Reduced TDS on Interest:
- The tax deducted at source (TDS) on interest to be paid by banking and financial institutions (BFIs) to foreign BFIs on loans taken as per NRB regulations is reduced to 5%.
- According to the budget speech by the Honorable Finance Minister, this reduction aims to attract more foreign investment.
- Section 94 - Installment Tax on Non-Business Chargeable Assets:
- No installment tax is required on the gain from the disposal of non-business chargeable assets (NBCA) as per Section 95ka.
