OPINION (Spotlight Weekly)

Making Income Tax System More Equitable

By RUP KHADKA

Income tax can be levied on the basis of the performance of either the previous or the current year. Traditionally, income tax used to be levied on the basis of the income generated in the previous year, while the modern practice is to levy it on a current-year basis. In some countries, some sources of income subject to withholding are taxed on a current-year basis while other sources are taxed on a previous-year basis.

Until recently, Nepal used to levy income tax mainly based on the previous year. For example, business and other sources of income were subject to taxes on the basis of income generated in the previous year. A taxpayer is required to submit an income tax statement after the end of the income year and pay the dues after the tax officer makes an assessment. However, on a few sources of income, such as wages and salaries, which were subject to the withholding of tax, dues were levied on the current-year basis. Such a mixed system of levying taxes generates inequity in the tax system, since those who are subject to tax on the current year basis are discriminated against. That is why there has been an emphasis on the use of the current-year basis on all types of incomes. Taxation under the current-year basis puts all types of taxpayers on an equal footing. This enhances equity in the system.

The current-year basis is also desirable for several other reasons. For example, as the tax is collected at the time when income is earned, it prevents a fall in revenue in real terms because of inflation. Further, the current-year basis is also convenient for taxpayers, as they have to pay tax when they earn. Furthermore, since taxpayers are required to pay tax on their income in three instalments, it minimizes the tendency to make deliberate delays in payment. This stands in contrast to the previous-year basis where total tax has to be paid at one time. The current-year basis fits more than the previous-year basis with the withholding system, which is one of the important aspects of the income tax system.

In 1998/99, Nepal adopted the current-year basis through the annual Finance Act. The draft Income Tax Act 2001 adopts the current-year basis as well. Under this system, taxpayers are required to pay income tax in three instalments based on the latest tax returns or the estimated income of the current year, whichever is higher as follows:

Date Payable	Amount Payable
By the end of Poush	40 per cent of the estimated tax of the extent to which it is in excess of the tax paid.
By the end of Chaitra	70 per cent of the estimated tax to the extent to which it is in excess of the tax paid.
By the end of Ashad	100 percent of the estimated tax to the extent to which it is in excess of the tax paid.

Advance tax is deductible from the payable tax at the time of the submission of the returns. Any balance of taxes owed or refundable would be determined at the time of filing a self-assessment return. In addition, any penalties or interest owed as a result of underpayment of instalment taxes would be assessed and be payable at the time of the filing of self-assessment. If the advance tax exceeds the payable tax, the tax is refunded within six months from the date of the tax assessment. If the tax cannot be refunded in time, the government will pay an interest of 15 percent on such amount.

Every person who is an instalment payer for an income-year shall file with the concerned tax office by the date for payment of the first tax instalment for the year a statement specifying (a) the person's estimate of the assessable income to be derived for the year from each employment, business, and investment and the source of that income; (b) the person's taxable income to be derived for the year and the tax to become payable with respect to that income calculated without reduction for any medical tax credit; (c) in the case of a foreign permanent establishment of a non-resident person situated in Nepal, the foreign permanent establishment's repatriated income for the year and the tax to become payable with respect to that income and (d) any other information that the Tax Department prescribes.

An instalment payer's estimate shall remain in force for the whole of the income-year unless the person files a revised estimate to the tax office together with a statement of reasons for the revision. A revised estimate filed by a person shall be used only in calculating instalments payable for the income-year after the date the revised estimate is filed with the department.

The department may specify that an instalment payer or classes of instalment payers are not required to submit an estimate. For example, it would be desirable to exclude small payments or payments where individuals already have most of their income covered by withholding, where employment income subject to withholding is at least 75 percent of income, instalment tax is less than Rs. 1,000 or where the business had a turnover of under Rs. 1 million per year.

Where an instalment payer fails to file an estimate for an income year, the tax office is not satisfied with the estimate or revised estimate filed, or an instalment payer is not required to submit an estimate, the tax office shall: (a) make an estimate of the person's estimated tax payable for the year, which may be based on tax payable for the previous income year: and (b) serve on the instalment payer a written notice stating the tax administration's estimated tax payable, the manner in which it is calculated, and, where the person has filed an estimate, the reasons why the tax office is not satisfied with the person's estimate.

Where the tax office serves an instalment payer with a notice then the estimated tax payable by the person for the year shall be the amount estimated by the tax office.