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Income Tax Problems: Created by Authorities-II
BY Jagdish Agrawal
More details on income tax, VAT and customs duty problems caused by wrong interpretations of the law by the tax authorities are provided below:
TDS on Capital Gain from Disposal of Shares:
The Nepal Stock Exchange is deducting 10% of the deemed gain from share transactions. It is doing this without any valid ground or any authority from the Income Tax Act, 2058 or any valid calculation of capital gain or any adjustment of loss from disposal of other shares during the year but purely on assumption. It is in the form of tax deducted at source.
Let us study the respective provision in the Act. According to Section 36 of the Act, taxable gain from disposal of business assets during the year is calculated after deduction of losses from the disposal of business assets during the year. It means individual gains on disposal of shares are never considered for taxable profit in case there are more than one transaction in this regard during a single accounting year. Section 37 says that individual gain (or profit from disposal of shares) should be calculated by deducting the total income from the total outgoings with regard to the share. But Section 40(5) specifically states that in case the shares are purchased before the commencement of the Act, the market price as on the date of commencement of the Act (19th Chaitra, 2058) shall be deemed as total outgoings for the shares. But NEPSE is continuously considering the market price as on Shrawan 1, 2058 as the indexed price for the shares, and it is without any ground. The rate of 10% is applicable to an individual only but NEPSE has totally disregarded the rule and applies the rate for a corporate also. The Sections effective for TDS are 87, 88 and 89, in which not a single word is mentioned with regard to tax to be deducted from the capital gain from shares. Considering each pro and con in this regard the deduction of TDS is unauthorised. But, “who will bell the cat?”
Meaning of Service Fee:
The term “Service fee” is defined by Section 2 (b)(i) as any amount received for providing service according to the market rate and includes commission, meeting fee, management fee, technical fee, etc.
According to Section 88, a person has to deduct tax at source (called TDS) on payment of service fee at the rate of 15% of the payment.
But in practice, for income tax purpose, the service fee is classified into three parts: service fee for which TDS is not being deducted, service fee for which TDS is being deducted at 1.5% and service fee for which TDS is being deducted at 15%. None of the Act, rules, public circulars and advance rulings have ever clarified the reason for such classification.
The Inland Revenue Department has never asked the payer to deduct TDS on payment for transport services, advertisement services, printing charges, cold storage services, training fees, etc. Whereas an advance ruling has authorised the payer to deduct TDS at 1.5% on payment for security services. For the rest of the services, the payers are deducting TDS at the rate of 15%.
Moreover, IRD has framed an ideology that discounts given on sales are service fees and are subject to TDS at the rate of 15%. Discounts, as is universally accepted, are reduction in the selling price. This is a business promotion idea, whereby the seller provides various incentives to the buyer so that they purchase the goods and pay the consideration in time. So, treating it as a service provided by the buyer to the seller is completely baseless. The claims settled by the seller for quality, shortages, expiry date, breakage during transportation, etc. should also be treated as reduction of selling price. Treating them as service fee paid to the buyer is baseless.
To avoid the prevailing ambiguity in this regard, IRD should come forward with suitable and practicable clarification.
When the Selling Price is less than the Cost Price:
It is a general concept that businesses should run for profit. In case the goods are being sold for less than the cost price, there is a loss incurred during such a transaction. During regular business transactions, sometimes, such a situation may arise when a person has to sell goods for the consideration less than cost price. As it is an abnormal situation, the person has to keep evidences to prove the circumstances.
Some of the prevailing and common circumstances in which the selling price may be less than the cost price are given hereunder:
l when the international market prices of the goods are rapidly decreasing, a person, to avoid further loss, has to clear his stock at any available price;
l when goods are imported from India under DRP, the Indian Government charges excise duty on published price minus a certain percentage of discount (it is as per their rules). According to the Customs Duty Act, the customs offices are charging customs at the same rate as declared by the Indian excise office. But sometimes the invoice price is lower than the excise declared price. The businessman has to sell the goods at a price which is lower than that declared at the customs office. Under such a situation, the selling price, which seems to be lower than the cost price, are higher than the cost price but lower than the custom declared price. VAT officers always reject such pleas of the businessmen that the custom declared price is not the cost price for the same good. They never accept the invoice raised by the supplier, the price list with terms and conditions made available by the supplier to the dealer in Nepal, copy of documents of remittances to the supplier, documents proving the selling price in Nepal, etc.
Some multinational business houses enter the national market through dealers or agents. They issue invoices for the Nepalis party on the retail-selling price and allow them discounts in different tires. The multinational company bears all the expenses including customs and other duties, transportation to the retailers’ godowns and commission payable to the retailer as well. The goods are declared at the customs on the retail price and paid customs duty and VAT on the retail price. The sales are being conducted in retail price minus each tire discount. It seems that the sales is being made at lower than the cost price but actually it is higher than the cost price but lower than the custom declared price. Generally, such adjustments are being made to maintain a single retail price throughout the country or a part of the country. Such businesses are always facing reassessment problem, which is purely created by VAT officers, and they have to pay penalties for no wrongdoing. If we consider revenue as a whole, they are contributing excess amount as custom duty, special duty and local development duty by paying the duties on the retail price.
Businesses always face such problems like: date expiry, leakage, breakage, damages, rusting, out of fashion, change of taste, etc. All these problems compel the person to sell his goods at a price much lower than the cost price and sometimes at throw-away prices.
IRD should recognise such situations as common in a business in order to avoid unnecessary litigation and hurdles.
(Agrawal is a practising Chartered Accountant)
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