Chapter 5 · Part 5 — Business Income Tax

Business Income Tax

From accounting profit to taxable income, and the cash-transaction rule that now disallows more.

5 of 14 · 8 min

How a business arrives at taxable income, which expenses the Act allows, and the changes the Finance Act 2083 made to both.

From accounting profit to taxable income

╔═══════════════════════════════════════════════════════════════════╗
║   ACCOUNTING PROFIT ≠ TAXABLE INCOME                              ║
║                                                                   ║
║   Accounting profit follows NFRS/NAS.                             ║
║   Taxable income follows the Income Tax Act 2058.                 ║
║   The gap between them is why deferred tax exists.                ║
╚═══════════════════════════════════════════════════════════════════╝

ACCOUNTING PROFIT (per the financial statements)
         │
         ├── ADD BACK  disallowed expenses
         │             • cash transactions above Rs 25,000
         │             • fines and penalties
         │             • donations above the Section 12 cap
         │             • CSR above the 1% cap
         │             • provisions not yet deductible
         │             • personal / non-business expenditure
         │
         ├── DEDUCT    allowable items not in accounting profit
         │             • tax depreciation in excess of book
         │             • share and debenture issue costs (NEW)
         │            • allowable loss carry-forward [R]
         │
         ├── REMOVE    exempt income (Part 4)
         │
         ▼
   TAXABLE INCOME
         │
         × applicable rate [R]
         ▼
   TAX LIABILITY
         │
         ├── LESS  TDS suffered (Part 6)
         ├── LESS  advance tax paid (Part 6)
         ▼
   TAX PAYABLE / REFUNDABLE

The cash transaction rule — Section 21(2)

The single change most likely to cost an ordinary business money this year.

╔═══════════════════════════════════════════════════════════════════╗
║   DISALLOWED CASH TRANSACTION THRESHOLD                           ║
║        Rs 50,000  →  Rs 25,000   per transaction                  ║
╚═══════════════════════════════════════════════════════════════════╝

How it bites.

A trading business pays these in cash during the year:

Payment                    Amount      Above Rs 25,000?   Deductible?
────────────────────────────────────────────────────────────────────
Supplier A                 22,000            No               Yes
Supplier B                 30,000            YES              NO
Transport contractor       45,000            YES              NO
Casual labour (each)        8,000            No               Yes
Equipment repair           26,500            YES              NO
                                                           ─────────
Total disallowed                                            101,500

Tax cost at a 25% rate [R]  =  101,500 × 25%  =  Rs 25,375

⇒ The business already spent Rs 101,500. It now also loses
  Rs 25,375 of tax relief on money genuinely spent.

Share and debenture issue costs — now deductible

Section 21(3) NO LONGER treats share and debenture issue costs
as capital expenditure.

⇒ They are DEDUCTIBLE.

What this covers, and what it is worth.

Typical costs of a public issue:
   • Merchant banker / issue management fees
   • Registrar to the securities fees
   • Underwriting commission
   • Prospectus printing and publication
   • SEBON and NEPSE listing fees
   • Legal and audit costs of the issue

ILLUSTRATIVE — a company raises Rs 500,000,000 by rights issue
with issue costs of Rs 12,000,000.

   BEFORE:  capital expenditure → no deduction
   NOW:     deductible → tax saved 12,000,000 × 25% [R]
                                 = Rs 3,000,000

⇒ The effective cost of raising the capital falls by Rs 3 million.

Donations and CSR — the interaction

Covered at Part 4.4; restated here because it is a business computation.

┌──────────────────────────────────────────────────────────────────────┐
│  DONATION (Section 12)                                               │
│     Lower of  Rs 300,000  or  5% of ADJUSTED taxable income          │
├──────────────────────────────────────────────────────────────────────┤
│  CSR (Section 12Gha)                                                 │
│     Up to 1% of TAXABLE income                                       │
│     Deducted in computing TAXABLE income                             │
│     NOT deducted in computing ADJUSTED TAXABLE income                │
└──────────────────────────────────────────────────────────────────────┘

⇒ Two separate ceilings on two separate bases. Compute them
  independently; do not net them.

Loss provisioning for lenders

NRB-licensed HIRE-PURCHASE COMPANIES may deduct loan-loss
provisions up to 5% of outstanding loans, written-off loans
and non-banking assets — the treatment already available to
banks and financial institutions.

Group and restructuring provisions

Section 57 — change in ownership

Section 57 normally restricts the carry-forward of losses and other attributes when ownership of an entity changes substantially. The Finance Act 2083 adds three cases where Section 57 does not apply:

┌──────────────────────────────────────────────────────────────────────┐
│ (a) A STARTUP adds new shareholders or partners, while existing      │
│     owners keep their capital intact.                                │
│     → so raising a funding round does not destroy the startup's      │
│       tax attributes                                                 │
├──────────────────────────────────────────────────────────────────────┤
│ (b) An interest in an entity passes BY LAW to a LEGAL HEIR when      │
│     the holder dies.                                                 │
│     → death is not a tax-avoidance event                             │
├──────────────────────────────────────────────────────────────────────┤
│ (c) A resident entity's ownership changes because its RESIDENT       │
│     HOLDING COMPANY's shareholding changes.                          │
│     → a change two levels up does not cascade down                   │
└──────────────────────────────────────────────────────────────────────┘

Section 47Ka repealed

Section 47Ka, which covered mergers of banks, financial institutions and insurers, is repealed. [R] Confirm what now governs such mergers before relying on any prior treatment — a repeal without a stated replacement is exactly the situation in which you should take advice rather than assume continuity.

Sector measures relevant to business

Measure	Effect
Cinema halls outside metropolitan and sub-metropolitan areas	10-year tax exemption from commercial operation
Agricultural business redefined	Now covers crops, horticulture, livestock, aquaculture, apiculture
IT sector sweat equity	Employees need not include it in taxable income (Section 8)
Microbreweries	To be registered as liquor industries from FY 2083/84; monthly excise pre-payment based on prescribed yield rate for installed capacity (Part 9)
Special Economic Zones	To be developed into "Special Economic Administration Zones" with single-window decisions on tax, customs and investment
Startups	Early-stage grants, concessional loans and co-investment; Section 57 relief above
Business revival loans	Extended to firms operating below capacity due to capital shortages

Formula summary for a business computation

┌─────────────────────────────────────────────────────────────────────────┐
│ TAXABLE INCOME                                                          │
│                                                                         │
│   = Accounting profit before tax                                        │
│   + Disallowed expenses                                                 │
│   − Additional allowable deductions                                     │
│   − Exempt income                                                       │
│   − Allowable brought-forward losses [R]                                 │
└─────────────────────────────────────────────────────────────────────────┘

┌─────────────────────────────────────────────────────────────────────────┐
│ DONATION LIMIT (Section 12)                                             │
│   = MIN( Rs 300,000 , 5% × Adjusted taxable income )                    │
└─────────────────────────────────────────────────────────────────────────┘

┌─────────────────────────────────────────────────────────────────────────┐
│ CSR LIMIT (Section 12Gha)                                               │
│   = 1% × Taxable income                                                 │
│   Deducted in taxable income; NOT in adjusted taxable income            │
└─────────────────────────────────────────────────────────────────────────┘

┌─────────────────────────────────────────────────────────────────────────┐
│ CASH DISALLOWANCE (Section 21(2))                                       │
│   Any single transaction paid in cash > Rs 25,000 → fully disallowed    │
└─────────────────────────────────────────────────────────────────────────┘

┌─────────────────────────────────────────────────────────────────────────┐
│ LENDER PROVISION (BFIs and NRB-licensed hire-purchase)                  │
│   Deductible provision ≤ 5% × (outstanding loans + written-off loans    │
│                                 + non-banking assets)                   │
└─────────────────────────────────────────────────────────────────────────┘

Common mistakes

MYTH  "Accounting profit is taxable income."
FACT  They differ by design. Build a three-column reconciliation.

MYTH  "The cash rule applies per supplier per year."
FACT  PER TRANSACTION. Above Rs 25,000, disallowed.

MYTH  "Issue costs are capital, so never deductible."
FACT  Changed. Section 21(3) no longer treats them as capital.

MYTH  "Taking investment always kills a startup's losses."
FACT  Section 57 now has a startup carve-out where existing owners
      keep their capital intact.

MYTH  "Section 47Ka still governs bank mergers."
FACT  Repealed. [R] Confirm the current position.

MYTH  "Donations and CSR come off the same ceiling."
FACT  Separate limits on separate bases.

Part 5 — Revision table

Item	FY 2083/84 position
Cash transaction disallowance	Above Rs 25,000 per transaction (was Rs 50,000)
Share/debenture issue costs	Deductible — Section 21(3) no longer treats as capital
Donation limit	Lower of Rs 300,000 or 5% of adjusted taxable income
CSR limit	1% of taxable income; excluded from adjusted taxable income
Hire-purchase loss provision	Up to 5%, as for BFIs
Section 57 exceptions	Startup funding with capital intact · legal heir on death · resident holding company shareholding change
Section 47Ka (BFI/insurer mergers)	Repealed [R]
Cinema halls (non-metro)	10-year exemption
Agricultural business	Now includes aquaculture and apiculture
IT sweat equity	Excluded from employee taxable income
Verify	ird.gov.np + Finance Act 2083

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