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Chapter 6- Assessable Income & Source of Income

Question 1 (page 42)


a. As per Sec. 6, nonresident person is required to pay tax only on such income that has source in Nepal. As
per Sec. 67 (6) (d), rental income is deemed having source in Nepal in case the income generated from
asset located in Nepal. As per clarification clause of Sec. 67, Asset located in Nepal includes land and
building within the state of Nepal.
Therefore, Ms. Sharmas rental income from house located at Pokhara is deemed having source in Nepal.
Though Ms. Sharma is nonresident, she is obliged to pay tax in Nepal as per Sec. 6. Receipt of income
from outside the country does not relieve her from paying tax in Nepal.
Assuming Mr. Nick Brown is also nonresident, Ms. Sharma is required to pay tax on rental income in Nepal
at 25% although she receives the income in USA. She is required to file income tax return in Nepal in this
case.
If Mr. Brown is resident of Nepal and is not using property for business, Ms. Sharma is required to pay tax
on rental income in Nepal at 25% although she receives the income in USA. She is required to file income
tax return in Nepal in this case.
If Mr. Brown is resident of Nepal and using the property for business purpose, Mr. Brown withholds tax at
10% at the time of payment to Ms. Sharma, which becomes final withholding (as paid to nonresident), and
thus Ms. Sharma will not be required to pay any additional tax in Nepal. Had she not any other income in
Nepal, she will be relieved from submission of tax return as well.
b. As per Sec. 6, nonresident person is required to pay tax only on such income that has source in Nepal. As
per Sec. 67 (6) (i), for any service to have source in Nepal, it shall satisfy any of the following two
conditions:
Where the payment for the service is made by Government of Nepal, regardless of where the situs
of service is- the service is deemed having source in Nepal; and
Where the payment for service is made by persons other than GON, the situs of service shall be in
Nepal; i.e. service shall be provided within the territory of Nepal.
In the case provided in the question, Barrister of UK has appeared in a case here in Nepal. In such case,
she derives income from the service provided within the territory of Nepal. Regardless of person making
the payment, the service fee received by her is having source in Nepal and she is required to pay tax in
Nepal.
In case the payer is resident, it makes payment of service fee after withholding tax at 15% (assuming she
is not registered for VAT in Nepal) which is final withholding as per Sec. 92; and she is relieved from
submission of tax return.
In case the payer is nonresident, she is required to pay tax at 25% as per Schedule 1 of the Act after filing
an income tax return.
c. In case of interest, the interest is deemed having source in Nepal in case the interest is paid by a resident
person as per Sec. 67 (6) (b).
In this case, Trishakti Cable is resident of Nepal, thus, interest to Bank of Baroda is deemed having source
in Nepal.
As per Sec. 88 (1), a resident person shall withhold tax at 15% while making payment of interest having
source in Nepal; and as per Sec. 92 any payments attracting withholding taxes are final withholding. Thus,
Bank of Baroda is levied tax on interest derived by it from Nepalese resident on final withholding basis.
(Calculate the tax yourself)
Question 2 (pg. 42)
a. Refer to answer (C) above; i.e. as interest is paid by resident- it is deemed having source in Nepal.
b. Refer to answer (b) above. Employment is service for the purpose of taxation. The provisions for providing
services are attractive to determine the source of payment of employment.
As employment is provided in Nepal, the payment is deemed having source in Nepal.
Since the employer is foreign company, the employee himself/herself shall make payment of tax in Nepal
by filing income tax return.
c. Refer to answer (a) above.
As the storage tank is located/situated in India, the asset is deemed to be situated in India. This implies the
rental payment is deemed having source in India

Chapter 6- Assessable Income & Source of Income

Instructions
The readers are assumed to read the following chapters as well to understand the answers solved above.
Sec. 6 is dealt in Chapter 6 of this Book.
Withholding taxes (i.e. Sec. 87-93) are dealt in Chapter 8 of this book.
Schedule 1 is dealt in Chapter 9 of this book.