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January, 2005 |
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Legal Side |
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Income Tax Problems: Created by Authorities BY Jagdish Agrawal The Income Tax Act, 2058 had initially posed
some problems for the taxpayers, tax consultants and tax officers especially
in their understanding of the provisions because of the language used in it.
Realising this, HMG came forward and amended many provisions of the Act
through Finance Ordinances. The Inland Revenue Department has also tried its
best to solve the problems through public circulars and advance rulings.
Many confusions and misunderstandings, however, still exist and require
immediate attention of the Department and persons responsible for tax
reform.
There are mainly two types of problems. One
type of problems are caused by the lack of appropriate provision in the Act
and another type, which is more troublesome, is the lack of authorised
interpretation of the provisions included in the Act. In this article I am
going to illustrate some of the problems, which require immediate attention. Service Fees The definition given in the Act for
‘service fees’ seems appropriate. In simple words, a consideration
received for supply of services (other than goods) is called service fees.
The same definition is given in the Value Added Tax Act, 2052. The Income
Tax Act, 2058 defines it more elaborately and calls it any payment for
service provided including commission, meeting fee, management fee, and
technical service fee. According to Section 7 (2) of the Act business income
comprises two major sources of incomes: service fees and an amount derived
from disposal of a trading stock. Under the given conditions, the services
provided even though they may be related to goods’ supply (like
transportation, risk cover, clearance, loading and unloading, etc.) are
covered by the definition of service fees. Supply of books is treated as disposal of a
trading stock, and there is no doubt about it. The supply of a feasibility
study report, an audit report, a project analysis etc. should be treated as
the supply of books, because the providers have used up their time and
efforts in preparing these and also provided their opinion in writing. We
cannot differentiate between the supply of ready-made garments and
tailor-made garments where the cloth and other materials are included in the
selling price of the garment. Books are like ready-made garments while the
feasibility study report, the audit report or the project report are similar
to tailor made garments. In practice adopted and enforced by IRD, supply of
books is treated as disposal of a trading stock, whereas supply of a
feasibility report, an audit report or a project study report is treated as
supply of services. A magazine is a collection of ideas, views,
interpretations, research results of different writers. When the writers
provide an article for publication, it is treated as service provided, but
when the collection is provided to readers it is called the supply of
trading stock. I am of the view that, for income tax purpose, supply of
written opinion, feasibility study and research results should be treated as
the disposal of a trading stock. Reference can be made to the International
Accounting Standard 2 (Inventories), which, under point number 16, has
provided a procedure of inventory valuation of a service provider. The IAS
says, ‘The inventory cost of a service provider consists primarily of the
labour and other costs of personnel directly engaged in providing the
service, including supervisory personnel, and attributable overheads. Labour
and other costs relating to sales and general administrative personnel are
not included but are recognised as expenses in the period in which they are
incurred.’ When a service is treated as inventory, sales value should also
be treated as amount received from disposal of trading stock. I again emphasise that the words used in the
definition of service fees under Section 2 (bi), viz. commission, meeting
fee, management fee, or technical fee, should only be treated as service
fees, for which TDS should be deducted as per the provision under Section
88. TDS on Commission Payable to a Share
Broker Section 88 clearly states that a payer of
service fees has to deduct TDS at the rate of 15 percent on the amount of
service fees. In case of share trading, an investor has to pay brokerage to
the broker for the transaction. Out of the commission received by a broker,
25 percent is to be paid to the Nepal Stock Exchange Ltd. (NEPSE). In the
first step, the investor is the brokerage payer and he/she should be
responsible for tax withholding when paying the broker. In the second step,
the broker is the payer and he/she should deduct tax at the time of payment
to the NEPSE. I don’t know why NEPSE is deducting tax at source for a
payment made by an investor to a broker. In my view it is clear that NEPSE
is deducting TDS without any authority from the Act and such an activity is
punishable. Section 126 (2) of Income Tax Act, 2058 has a provision that a
person who collects tax without clear authority from the Act shall be
punished with a fine ranging from Rs. 80,000 to Rs. 200,000. All NEPSE
brokers are companies. An amendment in Income Tax Act, 2058 by the Finance
Ordinance, 2061, has withdrawn the provision to deduct tax on payment of
service fee to a company from Shrawan 1, 2061, but NEPSE has overruled the
amendment and is still deducting such tax. TDS on Vehicles for Hire A person when owns a vehicle to hire out, he
has to pay income tax at a fixed amount annually. Any Section of the Act has
not authorised the Transport Department to collect income tax on behalf of
the government. None of the Sections 87, 88 or 89 has allowed the Transport
Department to deduct tax at source at the time of collecting the
registration or renewal charges for vehicles. This is a tax (but not a TDS)
to be paid by an owner of a vehicle for hire as per Section 94 and 99 along
with a tax return as per Section 95 and 96. Is it not an unauthorised
collection by the Transport Department? Is it not an offence under Section
126 (2)? TDS Certificates Section 92 and 93 clearly state that a tax
deducted at source under Section 87, 88 or 89 shall be treated as payment of
tax by the withholdee to the extent of tax deducted at source. There is one
small mistake in the Act (probably due to printing mistake) that the word
‘or’ is slipped from the end of sentence under Section 93 (2)(a) to the
sentence under Section 93 (2)(b). But, it makes no difference in the meaning
of the sentence. According to Section 93 (2)(b), in case of deemed deduction
of tax at source, the amount of tax shall be treated as the part of income
tax paid only when the amount of deemed deduction is deposited as to
Revenue. In other cases, the Act has no intention to impose a double
liability on the withholdee (one to pay the tax to the withholding agent in
the shape of TDS and again, to pay tax to the Department) in case the
withholding agent has either not deposited the amount to the Revenue or not
provided the withholdee with a TDS certificate as prescribed by the IRD. The
prescribed format has made the withholdee solely responsible for deposit of
the amount of TDS deducted by the withholding agent. The Act has made it
compulsory for the withholding agent to deposit the amount to Revenue and to
give the certificate to the withholdee, but in case the withholding agent
does not follow the same, IRD treats the withholdee as solely responsible
for making the payment. According to the Act, a simple certificate from the
withholding agent stating that it has deducted the tax from such a payment
to the withholdee shall be sufficient proof of payment of tax by the
withholdee. The Act is clear that the withholdee is no more responsible for
deposit of the withholding amount to Revenue except under the condition of
deemed deduction under Section 90 (3). There are so many provisions in the
Act to recover the withheld amount from the withheld agent. But, IRD has
adopted a way that is convenient to it though it is against the spirit of
the Act. A better procedure would be to allow an
income receiver to deposit the tax amount equal to TDS at any tax office
before receiving the income from the payer and give a photocopy of the
receipt of the tax payment to the income payer and receive the full amount
of money from the income payer. I don’t see any provision in the Act to
allow this. So, the IRD should publish a circular in this regard. IRD should
be satisfied with the payment of tax irrespective of whichever way it is
paid. (Agrawal is a practising Chartered Accountant) |
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