Income From Business - Nepal

Taxable Income and computation of tax from Business

(Income tax act 2058, nepal)

Important Sections:

Section – 2 ka. ja.,

section -  7 – Charging section

section 22 – method of accounting

section 31 – characterization of compensation payments

section 13 to section 20 - Deductions allowed

section 12 – donations

section 21 – Deduction not allowed

section 59 – loss provision (For Bank)

Section 71 - Foreign Tax Credit

Business entity prepares its annual financial statements. The profit and loss account is a statement which shows profit earned or losses incurred by any entity for a financial year. Similarly balance sheet shows its financial position at the end of that financial year.

Generally Financial Reports are prepared in accordance with GAAP, Accounting Standards, Company Laws etc. 

For computation of Income Tax of the entity, at first Taxable Income is to be computed. Prescribed Income Tax Rates are applied to find the Income Tax.

So, what is taxable income?

For business entity, taxable income is computed by applying laws and procedures prescribed in the Income Tax Act, 2058. Section 7 is the charging section for computation of Income from Business. This section explains what are to be included in business income. Similarly, Section 13 to 19 explains the expenses that can be deducted for the income. Section 20 talks about the losses that can be set off against the income. Section 21 explains the expenses that are not deductible as per Income Tax Act.

Net Income (Profit) = Gross Income - Allowable Expenses 

Example: For ABC Private Limited

Sales Income - 500,000/-

Expenses 

- Cost of Sales - 200,000/-

- Salary 150,000/-

- Telephone 30,000/-

- Electricity 50,000/-

- Interest 70,000/-

Net Income = Nil

Tax = Nil (since no income/profit)

While vouching the documents, Income Tax Officer found that telephone is also used for personal purpose by Director of the company 50% i,e,. Rs. 15,000/- and Electricity expenses also included of home expenses of the Director 20% i,e,. Rs. 10,000/-

Therefore the expenses deductible would be Rs. 475,000/- only. Income would be Rs. 25,000/- (Rs. 500,000-475,000). Applying Normal Tax Rate for the company i,e,. 25%.

Income Tax = 25,000 X 25% = Rs. 6,250/-