Business Concessions: ITA v. IEA

How does business concession work?

Each business requires seperate computation

Section 7(1) of Income Tax Act, 2058 states that the profits and benefits made by any person in any year from any business shall be the income of that business of that person in that income year.

Here, an important note should be given to how Income Tax Act has intended the computation regarding the income earned from a business should be made. It has indicated that the each identifiable business is subject to seperate computation for the tax purpose. This is also true because concessions, reductions and deductions provided by Income Tax Act is mostly business specific, rather than being entity/person specific. An entity may have multiple businesses and each business is required to be considered seperately for the purpose of computation of income. 

Are business concessions under Section 11 of the Act business specific?

This is one serious red flag in the application of Section 11 of the Income Tax Act, 2058. The provisions in Section 11 providing concession is worded like: (i) “the person shall be exempt from tax” or (ii) “the industry shall be exempt from tax” or (iii) “the business shall be exempt from tax” and this is random. This is relevant because the exemption of tax on person and on industry/business is vastly different things. This could probably be an unintentional error in the law, as the heading for the Section 11 clearly states “Business exemptions and facilities”. However, there aren’t any notices or case laws to this effect. 

How does one avail business concessions under Section 11?

Relevant Provisions

Provisions under Section 11 are related to business concessions but these provisions are general expections to how Section 11 applies: 

  • Section 11(4): If any person carries on transactions qualifying for different tax exemption facilities pursuant to this Section, income shall be computed to obtain such facility as if that income were derived by separate persons.
  • Section 11(5): A person who is in a position to have more than one exemption in respect of the same income pursuant this Section shall enjoy only one exemption chosen by him.
  • Section 11(2Kha)(Ga): A person having enjoyed the facility under Section 11(2Kha) shall also be entitled to such exemption and facility if the person is eligible to enjoy another tax exemption facility under Section 11.
  • Section 11(3Gna)(Ga): Manufacturing industry gets concession of further 25% on income earned from exporting manufactured goods derived after the concession under Section 11(3Gna)(Ka) and Section 11(3Gna)(Kha). 

How to Apply?

So how does one test is an entity is eligible to avail business concession under Section 11 and how to determine to what extent in the entitlement? The process is as follows: 

  1. Compute the income of each business seperately.
    Implied by Section 7
  2. If any business as identified in 1 above, is a manufacturing or intellectual property sales, seperate it into export-sales  and internal-sales, as applicable. 
    Implied by Section 11(3Gna)(Ga) and Section 11(3Jha)
  3. After the appropriation of the income according to the businesses has been made as per 1 and 2 above, see what concession is each business identified in 1 above (emphasis added), is eligible under Section 11. 
  4. Section 11 has provided business concessions on the following businesses:
    • Agriculture
      • Sustenance Agriculture under Section 11(1)
      • Tea Industry under Section 11(3Dha)
      • Dairy Industry under Section 11(3Dha)
    • Garment Industry under Section 11(3Dha)
    • Cooperative under Section 11(2)
    • IT Industry
      • IT Industry under Section 11(3)(Ka)
      • IT Industry in technology / biotech park under Section 11(3Ga)
    • Special Industry under Section 11(2Kha), Section 11(3)(Ka), Section 11(3)(Kha) and Section 11(3)(Ga)
    •  SEZ Industry under Section 11(3Ka)
    • Mineral and Fuel Industry under Section 11(3Kha)
    • Alternative Energy under Section 11(3Gha)
    • Intellectual Property Sales/Transfer under Section 11(3Jha) and Section 11(3Wyan)
    • Trollies under Section 11(3Cha)
    • Airlines under Section 11(3Ta)
    • Listed Entities under Section 11(3Chha)
    • Public Entities under Section 11(3)(Ana)
    • Distillery and Brewery under Section 11(3Ja)
    • Tourism Industry under Section 11(3Ta)
    • Health Industry under Section 11(3Ana)
    • Small Industry under Section 11(3ta)
    • BOOT Projects under Section 11(3tha)
    • Projects of National Importance under Section 11Kha
  5. One business may qualify for multiple concessions under Section 11. So choose only one most beneficial provision. 
    Implied by Section 11(5)
  6. Special Industry may avail benefit under Section 11(2Kha) and yet another benefit under Section 11 in addition. 
    Implied by Section 11(2Kha)(Ga)
  7. Export-sales of manufacturing business is eligible to avail benefit under Section 11(3Gna)(Ga) in addition to benefit under Section 11(3Gna)(Ka) and Section 11(3Gna)(Ka).
    Implied by Section 11(3Gna)(Ga)
    If the manufacturing business is also a special industry benefit under Section 11(2Kha) is also applicable. No need to be confused here. 

What is Special Industry

Meaning of Special Industry

Section 11 of Income Tax Act has defined Special Industry as: 
Explanation (c): For purposes of this Section 11 “Special industry” means a production based industry, industry based on agriculture and forest products and mineral industry as classified in Section 17(2) of the Industrial Enterprises Act, 2076 (2019) other than any industry producing cigarette, bidi, cigar, tobacco, khaini, gutkha, pan masala, other goods of the same nature involving tobacco as the principal raw materials, liquors, beer and products of similar kind.

स्पष्टीकरण (ग): यस दफाको प्रयोजनका लागि “विशेष उद्योग” भन्नाले चुरोट, बिँडी, सिगार, खानेसूर्ति, खैनी, गुट्का, पान मसला, मुख्य कच्चा पदार्थ सूर्ति भएको सोही प्रकृतिका अन्य उत्पादनहरू, मदिरा, वियर तथा यस्तै प्रकारका वस्तु उत्पादन गर्ने उद्योग बाहेक औद्योगिक व्यवसाय ऐन, २०७६ को दफा १७ को उपदफा (२) मा वर्गीकरण गरिएका उत्पादनमूलक, कृषि तथा वन पैदावरमा आधारित उद्योग र खनिज उद्योग सम्झनु पर्छ ।

Interestingly, the definition of Special Industry doesn’t include Energy Industries “उर्जामुलक उद्योग”. It only includes production based or agriculture/forest based industry excepting industry producing cigarette, bidi, cigar, tobacco, khaini, gutkha, pan masala, other goods of the same nature involving tobacco as the principal raw materials, liquors, beer and products of similar kind. 

Meaning of Production Based Industry

दफा १७(२)(ख) उत्पादनमूलक उद्योग: कच्चा पदार्थ, सहायक कच्चा पदार्थ वा अर्धप्रशोधित कच्चा पदार्थको प्रयोग वा प्रशोधन गरि मालवस्तु उत्पादन गर्ने उद्योगहरु, 

Meaning of Agriculture/Forest Based Industry

दफा १७(२)(ग) कृषि तथा वन पैदावारमा आधारित उद्योग: कृषि वा वन पैदावारमा आधारित कच्चा पदार्थबाट कुनै वस्तु उत्पादन गर्ने वा कृषि वा वन पैदावारसंग सम्बन्धित अनुसूची-४ मा उल्लेखित उद्योगहरु

अनुसूची–४: कृषि तथा वन पैदावारमा आधारित उद्योग
१. फलफुल  खेती वा फलफुल प्रशोधन,
२. खाद्यवस्तुको उत्पादन र प्रशोधन तथा भण्डारण,
३. पशुपालन, पंक्षीपालन (अष्ट्रिच समेत), पशुपंक्षी प्रजनन, चल्रला काड्ने व्यवसाय र मासु उत्पादन तथा प्रशोधन,
४. दूध उत्पादन तथा दुग्ध पदार्थ प्रशोधन उद्योग (दूधका परिकार उत्पादन समेत),
५. मत्स्यपालन, माछाभुरा उत्पादन, प्रशोधन एवं प्याकेजिंग,
६. कृषि उपज प्रमुख कच्चापदार्थ हुने पशुपक्षीको दाना उत्पादन उद्योग,
७. रेशम खेती तथा रेशम प्रशोधन,
८. चिया बगान, चिया प्रशोधन,
९. कफी खेती, कफी प्रशोधन,
१०. जडिबुटी खेती, जडिबुटी प्रशोधन,
११. तरकारी बीउ बिजन उत्पादन,
१२. तरकारी खेती, तरकारी प्रशोधन,
१३. हरित गृह स्थापना र सञ्चालन,
१४. मौरीपालन (मौरी प्रजनन, मह उत्पादन र प्रशोधन),
१५. पुष्प खेती, पुष्प प्रशोधन (माला बनाउने, सजावट गर्ने, गुच्छा बनाउने र बीउ बिजन उत्पादन समेत),
१६. नर्सरी व्यवसाय, वनस्पति उद्धान स्थापना, संरक्षण तथा व्यवस्थापन, वनस्पति प्रजन व्यवसाय (टिसु कल्चर समेत),
१७. रबर खेती, रबरको प्रारम्भिक प्रशोधन र सञ्चालन,
१८. शीत भण्डार, कृषि बजार संचालन तथा व्यवस्थापन,
१९. सामुदायिक, कबुलियति, साझेदारी र निजी वनको स्थापना र व्यवस्थापन, अन्य गैर कास्ठाजन्य वन पैदावार, 
२०. नगदेबालीको व्यावसायिक खेती तथा प्रशोधन (जस्तैः ऊखु, कपास, सनपाट, सजिवन, स्वीट सरघम, स्टेभिया रेवौडिएन, सुर्ती, जुट, अलैंची, अदुवा, केशर, तेलहन र यस्तै मसलावाली, दलहन आदि तथा तिनको ब्यु उत्पादन),
२१. वेत, बाँस खेती र वेत बाँस तथा अन्जय प्न्यराकृतिक रेशाजन्य उत्पादनहरु,
२२. बीउबिजन प्रशोधन,
२३. स:मिल, फर्निचर लगायतका कास्ठ उद्योग
२४. पार्केटिंग, सिजनिंग, त्रितमेन्ट प्लान्ट, पलाईउड, कम्पोजिट, बोर्ड जस्ता कास्ठाजन्य उद्योग
२५. कागज, रेजिन लगायत अन्य गैर काष्ठजन्य वन पैदावारमा आधारित उद्योग, 
२६. च्याउ, नयाँ प्रविधिद्वारा बिरुवा उत्पादन गर्ने उद्योग (तिसु कल्चर), एग्रोफरेस्ट
२७. कपास खेति, कपास र कपासको ब्यु उत्पादन तथा प्रशोधन गर्ने ।

Income Tax Act v/s Industrial Enterprises Act

Protected by Stabilization Clause

Stabilization clause are the clauses that protects a party to a contract from the adverse application of normative authority of other party, when the other party is a State. State do have full control over the affairs of state and the other party may seek protection regarding any changes in legal and political risks caused by the prerogative excercise of the State’s power. 

Stabilization Clause might be of several types
(A) Stabilization Clause agreed with the State within an Agreement
Through such agreements the other parties seek mainly (i) Contractual Equality (ii) Prevention of Unilateral Modifications in contract or laws (iii) Freeze legislations at the time of contract (iv) Seek Economic Status Quo with the State
Developing nations agree to such terms to encourage and attract investments and import technology and knowledge into the State. 
Eg. Stabilization Clause in Project Development Agreements

(B) Stabilization Protection introduced in new laws to protect the interest/benefits prevailing in the previous laws
Such Protection are: Protection against expropriation/nationalization, Continuity of benefits benefits/previliges provided under the previous laws, Any disadvantageous changes in law shall not apply to person availing benefits under previous laws, Extension of Time Limits, Compensation of Losses, etc. 
Eg.  We can observe Stabilization Protection in (i) Section 33 of Industrial Enterprise Act 2020, (ii) Section 34 of Foreign Investment and Technology Transfer Act 2019, (iii) Section 45 of Public Private Partnership and Investment Act 2019

So where the Stabilization Clause exists in Agreement with State or where the State introduces new law provding protection to benefits availed under the prevailing laws, the person can seek releif through such provisions. 
Relevant Case Laws: 
1. Eastern Sugar Mills v/s Government of Nepal
2. Birgunj Khadya Udhyog Pvt Ltd v/s His Majesty’s Government of Nepal
3. Nepal Liquors Limited v/s Ministry of Finance
4. Todi Hojiyari Industries v/s His Majesty’s Government of Nepal
5. Libyan American Oil Company v/s Libya
6. Pournami Oil Mills v/s State Of Kerala
7. Satish Sabharwal v/s State Of Maharashtra

Not Protected by Stabilization Clause

When the State doesn’t agree to the Stabilization Clause, the other party can only expect that the contidions of the agreement will change in good faith. The other party can only expect that the laws and political scenaro will change in good faith and any new introduction of the law will introduce stabilization provisions for the protection of the interest of the other party. Other arrangements could be to:

(A) Political Risk Insurance
Political risk insurance provides financial protection to investors, financial institutions, and businesses that face the possibility of losing money because of political events. It protects against the possibility that a government will take some action that causes the insured to experience a large financial loss. Political risk insurance can cover many possibilities, such as expropriation (e.g., government confiscation of property), political violence (e.g., acts of civil unrest or insurrection), the inability to convert local currency and repatriate it, sovereign debt default, and even acts of terrorism and war.

(B) Enter into Bilateral Investment Treaties
A bilateral investment treaty (BIT) is an agreement establishing the terms and conditions for private investment by nationals and companies of one state in another state. BITs are established through trade pacts. Most BITs grant investments—made by an investor of one Contracting State in the territory of the other—a number of guarantees, which typically include fair and equitable treatment, protection from expropriation, free transfer of means and full protection and security. The distinctive feature of many BITs is that they allow for an alternative dispute resolution mechanism, whereby an investor whose rights under the BIT have been violated could have recourse to international arbitration, often under the auspices of the International Centre for Settlement of Investment Disputes (ICSID), rather than suing the host State in its own courts. This process is called investor-state dispute settlement (ISDS).

Conflict between Income Tax Act, 2058 and Industrial Enterprise Act, 2076

The Conflict

आयकर ऐन २०५८, दफा १४२: कर सम्बन्धी व्यवस्था यसै ऐन बमोजिम हुने
प्रचलित कानूनमा जुनसुकै कुरा लेखिएको भए तापनि सालबसाली लागू हुने आर्थिक ऐनले यस ऐनमा संशोधन गरी कर लगाउने, निर्धारण गर्ने, बढाउने, घटाउने, छुट दिने वा मिनाहा दिने सम्बन्धी व्यवस्था गरेकोमा बाहेक अन्य कुनै पनि ऐनले यस ऐन बमोजिमका करका व्यवस्थाहरूमा कुनै पनि संशोधन, परिवर्तन वा कर सम्बन्धी अन्य व्यवस्थाहरू गर्न सक्ने छैन । 

औद्योगिक व्यवसाय ऐन २०७६, दफा ६६: यसै ऐन बमोजिम हुने
यस ऐनमा लेखिएको कुरामा यसै ऐन बमोजिम र अन्यमा प्रचलित कानुन बमोजिम हुनेछ । 

Clearly both laws believe they are fully correct. Will legal maxims help us here?

Test A: The maxim “generalia specialibus non derogant”
Means that, for the purposes of interpretation of two statutes in apparent conflict, the provisions of a general statute must yield to those of a special one. 
It is fair to assume that both laws are specific to provide business concessions to investors and no particular Act can be said to be more special than the general one. So is Industrial Enterprise Act a “generalia” and Income Tax Act “specialibus”? No

Test B: The maxim “repugnantiam doctrinam”
The doctrine of repugnancy describes the situation where a state or territory law is rendered invalid for being inconsistent with paramount law. Paramount law emanates from the original source of State or territory legislative power. This is “Constitution of Nepal, 2072” in Nepal. Is either of the Act inconsistent with the paramount law? No. 

What now? We need to follow Harmonious Interpretation and consider the legislator’s intent. 

Harmonious Interpretation in by Supreme Court in Eastern Sugar Mills v/s Government of Nepal

Neutralized Excerpt from: Eastern Sugar Mills v/s Government of Nepal

देशको आर्थिक विकास गर्न, नागरिकहरूका जीवनस्तर उठाउन र शान्ति सुरक्षा कायमगरी सामान्य प्रशासन सञ्चालन गर्ने आदि व्यापक कार्यको लागि रकमको आवश्यक पर्दछ । राज्यले यही Taxation Power अन्तर्गत प्रत्येक वर्ष विधायिकाको सहमतिले व्यक्तिगत एवं Corporate कर भन्सार महसूल आदि असूल गर्दछ । आयकर ऐन यही कर असूल सम्बन्धी कर प्रशासनको लागि बनेको हो । उक्त कुराहरू आयकर ऐनको प्रस्तावनाबाट स्पष्ट हुन्छ । 

नेपालमा २०४६ को जनआन्दोलन पश्चात् राजनीतिक व्यवस्थाको साथ साथै आर्थिक व्यवस्थामा पनि उदारीकरण सुरु भयो । २०४७ सालको नेपाल अधिराज्यको संविधानले खुला अर्थ नीति अख्त्यार गरी बैदेशिक लगानी भित्र्याई देशको पूर्ण औद्योगिकरणको कामना गरी सोलाई कार्यरुप दिन सोहीबमोजिमको औद्योगिक तथा वाणिज्य नीतिहरू पनि जारी गरी सोलाई मूर्तरुप दिन औद्योगिक व्यवसाय ऐन र श्रम ऐन समेत जारी भए । सरकारले मात्र आर्थिक विकास गर्न सक्दैन । यसको लागि निजी उद्यमीको पूँजी एवं विदेशी पूँजी तथा प्रविधी आवश्यक पर्दछ । त्यसैले आजको विश्वमा बैदेशिक लगानी आवश्यक हुन्छ । देशमा बैदेशिक लगानी भित्र्याउनुका साथसाथै स्वदेशी निजी लगानीलाई समेत देश विकासमा आकर्षण गर्न विभिन्न सुविधा, उद्योग स्थापनामा सरलीकरण, विभिन्न कर छूट, लगानीको सुरक्षित फिर्ता, राष्ट्रियकरण नगर्ने ग्यारेन्टी जस्ता राज्यको तर्फबाट कानूनबाट Commitment गरिनुपर्दछ तव स्वदेशी एवं विदेशी लगानी सम्भव हुन्छ । देशको अर्थतन्त्रको विकासकोलागि निजी स्वदेशी एवं विदेशी लगानीको वातावरण बढी सुविधाजनक, सरल र उत्साहजनक बनाई उत्पादकत्व बढाई औद्योगिक व्यवसाय फस्टाउने व्यवस्था गर्न औद्योगिक व्यवसाय ऐन बनेको ऐनको प्रस्तावनाबाट देखिन्छ । देशको अर्थतन्त्रको समुचित विकासको लागि औद्योगिक लगानीको वातावरणलाई बढी सुविधाजनक, सरल र उत्साहबर्धक बनाई उत्पादकत्वमा अभिबृद्धि गरी प्रतिस्पर्धात्मक ढङ्गबाट औद्योगिक व्यवसायहरू फस्टाउने व्यवस्था गर्न भनि ऐनको समस्त व्यवस्था हेर्दा देशको औद्योगिकीकरणका लागि उद्योग स्थापनामा सरलीकरणका अतिरिक्त निश्चित खालका उद्योगलाई निश्चित खालका छूट, सुविधा उपलब्ध गराई देशमा वढीभन्दा बढी उद्योगहरूको स्थापना होस् भन्ने चाहेको देखिन्छ । ऐनको उद्देश्य बढीभन्दा बढी उद्योगहरू स्थापना भै रोजगार प्रबर्धन गरी देशको आर्थिक उन्नति होस् भनी विभिन्न प्रावधानहरू गरेको पाइन्छ । 

यी दुइ कानूनको अर्थ, मर्म, भावना र उद्देश्य बुझेर व्याख्या र प्रयोग गर्नुपर्छ । पहिला पहिला राज्यको काम केवल कर भन्सार असूल गर्ने र अपराधीलाई पक्राउ गरी Due Process र Fair trial को कार्यविधि नपुर्‍याई कार्यपालिका तर्फका कर्मचारीलाई नै न्यायधीशको पदमा नियुक्ती गरी सजाय गर्ने काममा सीमित थियो तर आजको राज्यको लक्ष्य द्रूततर आर्थिक विकास गरी जनताको जीवनस्तर उठाउनेतर्फ लक्षित छ । उदार अर्थतन्त्र हुने प्रजातन्त्रिक व्यवस्थामा सरकारको भूमिका Regulator मा सीमित रहन्छ । सरकारले जनताको जीउ धनको सुरक्षा गर्नुका अतिरिक्त अत्यावश्यकिय सेवा र राष्ट्रिय सुरक्षामा असर पर्ने कुरा बाहेक अन्य काममा Regulator बाहेक अन्य भूमिका हुँदैन । राज्यले उपयुक्त नीति बनाई निजी क्षेत्रलाई लगानी गर्ने गरी उद्योगपति मैत्री अर्थात Investor र Industry Friendly औद्योगिक वातावरण सिर्जना गर्दछ । औद्योगिक व्यवसाय ऐन यिनै कुराहरूको उपज हो ।

नेपाल एक सार्वभौम राष्ट्र हो । कानून बनाउने काममा नेपालको व्यवस्थापिका सार्वभौम हो । नेपालको व्यवस्थापिकाले आवश्यकताअनुसार संविधानविपरीत नहुने गरी जुनसुकै कानून बनाउन र भइ रहेको कानून संशोधन पनि गर्न सक्छ । यसमा विवाद हुँदैन । तर नेपाल कानूनी शासनप्रति समर्पित राष्ट्र भएको कारण आफ्नै नागरिक र स्वदेशी एवं विदेशूी लगानीकर्ताप्रति यसको केही commitment हरू छन् जसले गर्दा आफ्नो पहिलाको commitment कम गर्न सक्दैन । राज्य विवन्धित हुन्छ । 

कुनै ऐनको कुनै प्रावधानको व्याख्या गर्दा सँगसँगै क्रियाशील अर्को ऐनको कुनै प्रावधानको प्रतिकूल अर्थ गरी व्याख्या गर्नु हुँदैन । यसरी कुनै ऐनमा अस्थित्वमा रहेको कुनै प्रावधान संविधानसँग नबाझिए सम्म त्यस्ता प्राब्धानको प्रभावकारितामा कुनै कमि आउन सक्तैन । यस्ता कानूनलाई जीवन्त कानूनको रुपमा प्रयोग गर्नुपर्दछ । अन्य ऐनको कुनै प्रावधानको प्रयोगमा कुनै द्विविधा उत्पन्न भएमा दुवै कानूनको Harmonious Interpretation गर्नु पर्दछ । विधायिकाले सबै कानूनको प्रभावकारिताको अपेक्षा गरी कानून निर्माण गरेको हुन्छ ।

So what is the meaning of Section 142 of Income Tax Act, 2058 or Section 66 of Industrial Enterprise Act, 2076?

Again refering neutralized Excerpt from: Eastern Sugar Mills v/s Government of Nepal

आयकर ऐनको दफा १४२ को व्यवस्था भविष्यमा गरिने करका दर परिवर्तन सम्बन्धमा हो । 

What does this mean? Does this mean that the Section 142 is simply trying to gather all tax benefits and provisions into a single tax law to prevent scattered tax provisions? This was a serious issue back in the time of Income Tax Act, 2031. Section 142 could simply mean to gather all tax provisions into one in practical and rational manner? If this was the only intent behind Section 142 of Income Tax Act, or Section 66 of Industrial Enterprise Act, then the harmonious interpretation provided in Eastern Sugar Mills should be totally valid. The provisions of business concessions under Industrial Enterprises Act is intended to provide business concessions and benefits to investors and businessmen and thus is very much specific to its objective and Section 142 of Income Tax Act should not be adversely interpreted to the contrary of the objective of such business concessions/facilities. 

कुनै ऐनको कुनै प्रावधानको व्याख्या गर्दा सँगसँगै क्रियाशील अर्को ऐनको कुनै प्रावधानको प्रतिकूल अर्थ गरी व्याख्या गर्नु हुँदैन । यसरी कुनै ऐनमा अस्थित्वमा रहेको कुनै प्रावधान संविधानसँग नबाझिए सम्म त्यस्ता प्राब्धानको प्रभावकारितामा कुनै कमि आउन सक्तैन । यस्ता कानूनलाई जीवन्त कानूनको रुपमा प्रयोग गर्नुपर्दछ । अन्य ऐनको कुनै प्रावधानको प्रयोगमा कुनै द्विविधा उत्पन्न भएमा दुवै कानूनको Harmonious Interpretation गर्नु पर्दछ । विधायिकाले सबै कानूनको प्रभावकारिताको अपेक्षा गरी कानून निर्माण गरेको हुन्छ ।