FEATURES NEWS THE RISING NEPAL (DAILY)

By Rup Khadka

INCOME tax is assessed under different methods-official assessment, committee assessment, and self-assessment system. Traditionally, income tax is assessed under the official assessment system, where taxpayers are required to summit their tax returns to the tax offices and tax officials are required to make an assessment of taxable income. Tax assessment needs to be completed within a year immediately following the year in which the return is received. However, on application to the Director General of the Tax Department a tax officer may be allowed an extension up to four years from the date of submission of the return.

Practice

A tax officer is supposed to assess income tax liability on the basis of the books maintained by a taxpayer. However, when a tax officer does not accept a return as correct or no return has been filed, he is empowered to assess the taxpayer’s income on his best judgement basis. Under this system a tax officer can assess tax on the basis of the information available to him including information on liabilities, assets and sources of income collected by him, any confidential report submitted by a tax inspector, any information available from the records maintained in the tax office or on the basis of the tax paid by similar taxpayers in the same line of business. Before such an assessment is made, the tax officer must inform the taxpayers in writing of the basis of his assessment and give him seven days to make any representations or produce evidence concerning his income.

The common practice among the tax officials is to asses income tax on best judgement basis by applying presumptive rate of profits for the determination of taxable income. Losses are generally not accepted. In such cases income tax is not different from turnover tax. Traders calculate tax to be paid and pass on it to the consumers in the form of higher prices.

Income tax law also makes provision for the assessment by a committee representing various organisations, including tax offices, and local chamber of commerce and industry with respect to the small taxpayers having an annual income below certain level. For example, the threshold was Rs. 800,000 in 1999/2000. While it was administratively convenient to assess small taxpayers in this way, this system suffered from several limitations. For example, although a tax officer was the principal member of the committee, the other members had say and the assessments were generally made by compromise. In such cases tax assessment could be affected by other non-economic factors. Further, this system became unnecessary in the context of the increasing use of the presumptive system for small taxpayers. As a result, the committee assessment system was abolished in 2000/01.

Income tax law also has made provision for the self-assessment since the early 1990s. Under this system, a taxpayer himself assesses his tax liability. In principle, income tax is supposed to be assessed largely by the taxpayers themselves.

In 1991/92 public limited companies and firms were required to self-assess their tax liabilities. Similarly, industrial, trade, occupational, and professional firms, which had their accounts audited by recognised auditors, were also required to make self-assessment. Every one subject to self-assessment was required to their records audited (statutory audit as well as tax audit). But most traders did not maintain records required for an effective implementation of this type of tax. So many could not comply with it. It was changed in the fiscal year 1995/96 when tax auditing was not made mandatory for those whose annual turnover was below Rs. 1.5 million.

The Self-assessment system has not been implemented yet in a proper way due, among other things, to the lack of preparation. Further the system demands many documents and the process is rather lengthy. There is a tendency among the business community to understate their income and in response to it, tax officers do not accept the self-assessment returns when self-assessed tax for this year is less than last year’s tax. This means that self-assessment is more in name than in practice. In most cases, taxpayers do not report their income correctly and tax officers using their best judgement make assessment.

The draft income tax act 2001 focuses on the self-assessment system. Under this law, every assessment will be treated as self-assessment. Where a person files a return of income for an income-year, an assessment is treated as made on the due date for filing the return of (a) the tax payable by the person for the year and (b) in the amount shown in the return; and the amount of that tax still to be paid for the year being the amount shown in the return.

The draft income tax act 2001 also makes provision for the jeopardy assessments under such special circumstances as when: the person becomes bankrupt, is wound up, or goes into liquidation; the person is about to leave Nepal indefinitely; the person is otherwise about to cease activity in Nepal; or the Department otherwise considers it appropriate.

The draft income tax act also empowers tax offocials to make amended assessments to adjust the assessed person’s liability to tax in such manner as, according to the Department’s best judgement, is consistent with the intention of this Act within a period of four years after the due date for filing the return.

While amending an assessment, the Department shall be required to grant an opportunity in writing to produce proof, if any, in own favour with respect of the assessment, specifying the basis that led to the amendment and giving a time limit of 7 days.

Assessment

Where the Department makes an assessment, the Department shall be required to serve a written notice of the assessment on the person stating: the tax payable by the person and the tax still to be paid on the assessment for the income-year or period to which the assessment relates; the manner in which the assessment is calculated; the reasons why the Department has made the assessment; the date on which the tax still to be paid on the assessment is payable; and the time, place, and manner of objecting to the assessment.

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