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Unit 1: Basic Concept LH 2
Concept and meaning of Tax
Objectives of Tax
Types of taxes in Nepal
Cannons/Principles of Taxation
Historical of Income Tax in Nepal
Meaning of Tax
Tax is a compulsory levy from individuals, households and firms to central or local government. It
is simply a liability to pay an amount to the government. It is a compulsory contribution from
the taxpayers. Tax is computed and paid as prescribed in the law.
Prof Seligman: “A compulsory contribution from a person to the government to defray the
expenses incurred in the common interest of all without reference to special benefit conferred.”
Prof Shirras defined tax “A compulsory contribution to public authorities to meet the general
expenses of the government which have been incurred for the public good and without
reference to special benefits”
Objectives of Tax
1. Direct Tax
A direct tax is a tax paid by a person on whom it is legally imposed. In direct tax,
the person paying ad bearing tax is the same. It is the tax on income and
property. Eg income tax, property tax, vehicle tax, interest tax, expenditure tax
etc.
Merits
1. It is equitable as it is imposed on person as per the propery or income
2. Time, procedure and amount of tax to be paid is known with certainty
3. It is elastic. The government can change the tax rate with the change in the level
of property and income
4. It enhances the consciousness of the citizens.
Demerits
1. It gives mental pinch to the taxpayer as they have to curtail their income to pay
to the government.
2. Taxpayer feel inconvenience as the government imposes tax progressively
3. Tendency to evade tax may increase to avoid tax burden
4. It is expensive for the government to collect tax individually
2. Indirect Tax
An indirect tax is a tax imposed on one person but partly or wholly paid
by another. In indirect tax, the person paying and bearing the tax is
different. It is the tax on consumption or expenditure.
Merits
1. It is convenient as the taxpayer does not have to pay a lump sum
amount for tax
2. There is mass participation. Each and every person getting goods or
services has to pay tax
3. There is less chance of tax evasion as the taxpayers pay the tax
collected from consumers.
4. The government can check on the consumption of harmful goods by
imposing higher taxes
Demerits
1. It is uncertain. As demand fluctuates, tax will also fluctuates
2. It is regretful as the tax burden to the rich and the poor is same.
3. It has bad effect on consumption, production and employment .
4. Most of the taxes are included in the price of goods and services. As a
result, taxpayer do not know how much tax they are paying to the
government.
Canons of Taxation
1. Canon of Equality or Equity
Tax should be imposed on the basis of tax paying capacity of the individuals
Burden of tax should be fair.
Thus, rich people must be charged higher taxes than poor
The higher the income , higher the tax
2. Canon of Certainty
Taxpayer should be certain regarding the time of payment, amount to be paid, method
of payment, place of payment, authority to whom tax is to be paid
It creates confidence in the contributor of the tax
3. Canon of convenience
Tax should be collected in such a way that it provides maximum convenience to the
taxpayers
The authorities should always keep this point in view that the taxpayers suffer the least
inconvenience in payment of tax. For eg land tax should be collected at the harvest time
4. Canon of economy
It states that the collection expenses of tax should be less than the amount of tax
collected so that a surplus to public revenue is generated
The amount that goes from the taxpayers should not differ greatly with the amount that
actually goes to government treasury.
5. Canon of productivity
Fund raised through taxes should be utilized by the government in productive
sector of the economy so that the taxpayers can see the utilization of their hard
earning
According to this principle, it is better to impose a few productive taxes than
to go in for a large number of unproductive taxes.
6. Canon of elasticity
Tax should be imposed in such a way that the amount to be collected can be
increased or decreased from time to time
The government can easily changes the tax rate as per the need of the country.
7. Canon of Diversity
Tax should not depend only one source of income
Government should imposed taxes on various sources
8. Canon of Simplicity
Tax should be simple and understable to general public
There should be no administrative hassles
The tax payment procedure should not be too lengthy.
9. Canon of Neutrality
Tax should be balancing, it mean to say that
the tax must not have any inflationary or
deflationary effect on the economy
The government should impose heavy taxes on
harmful products and less tax on basic goods
10. Canon of Coordination
It states that there should be coordination
among various taxes raised in the country
Taxpayers should not be imposed taxes of
similar nature by various tax authorities (i.e
central and local level)
Historical Development of Income Tax Laws in Nepal
Although, the taxes were collected in various form in ancient era, the
history of tax is not very old in Nepal.
The idea of introducing income tax in Nepal originated in the early 1950s
when a multi- party democratic political system was introduced.
In 1951. The finance minister in his budget speech declared the intention
of the government to levy as income tax.
Attempts were made to introduce income tax in subsequent years in 1954,
an income tax with Rs. 10000 basis allowance and progress tax ranging
from 5 to 25% was proposed.
Due to political instability it could not be introduced until 2057(2000).
The first elected government in 1959 finally introduced Business profit and
salaries tax Acts, 1960 in Nepal.
At that time, income tax was levied only on business profit and salaries.
After about three years experience of income tax, the government replaced
the prevailing tax Act by income tax Act 1962.
The coverage was extended in Act. In 1974, income tax Act,
19749(2031) was enacted.
The Act remunerated income source into five groups, a) agriculture, b)
industry trade, profession or occupation, c) remuneration, d) house and
compound rent, e) other sources.
However, agriculture income was kept outside the income tax net except
few years through the finance Acts.
To enhance revenue mobilization through effective revenue collection
procedure for the economic development of the nation and to amend and
integrate the laws relating to income tax, the parliament of Nepal enacted
income tax Act, 2002 (2058).
This act has replaced Income tax Act, 1974 (2031), which was amended
for eight times and existed for a period of 28 years.
The Government of Nepal framed income tax rules 2059 in 2059 to help
clarifying the Act.
Nepal is adopting various strict policies to collect income tax.
Features of Income Tax Act 2058
All tax related matters within one act
Broad tax base
Deduction of related expenses
Block base depreciation
Introduction of capital gain tax
Liberal provision relating to set off and carry
forward loss
Tax on dividend
Method of stock valuation
Provision of medical tax credit
Provision of international taxation
Residential status
Self tax assessment system
UNIT 2
DEFINITION OF BASIC TERMS