Deposits required for appeal against Tax Assessments
In my previous blog here: Tax Assessments: everything about it we discussed the nature and process of the amended assessments under Income Tax Act 2058, Value Added Tax Act 2052, Excise Act 2058 and Customs Act 2064. Here is a short recap on the Taxpayer’s Remedy against a Tax Assessment Order.
Taxpayer after receiving the assessment order, if satisfied with the assessment order, will be required to deposit the taxes, interests, fines and penalties as per the assessment order and apply to the concerned Taxpayer Service Office for removing the record of dues of the tax order made on the taxpayer (लगतकट्टा).
However, where the taxpayer is not satisfied with the assessment order the remedy will be as follows:
Administrative Review at Revenue Department
Taxpayers who are dissatisfied with any decision which may be subjected to the amended assessment may apply to the Inland Revenue Department against that decision within 30 days from the date of receipt of the notice about the decision under (i) Section 115(1) of the Income Tax Act 2058, (ii) Section 31Ka(1) of the VAT Act, 2052, (iii) Section 19(1) of the Excise Act, 2058. The time limit may be extended for a period not more than 30 days under Section 115(3) if the application for the extension is applied within 7 days from the expiry of the initial 30 days.
Computation of Deposits for Disputed Amounts under Section (i) 115(6) of Income Tax Act 2058, or (ii) Section 31Ka(6) of the Value Added Tax Act 2052, or (iii) Section 19(5) of the Excise Act 2058:
1. Tax: 25% of the amount in dispute
2. Interest: 25% of the amount in dispute
3. Fines: 25% of the amount in dispute
4. Penalty: 25% of the amount in dispute
Inland Revenue Department may take action as follows on an application filed for administrative review:
a. To fully or partially accept or reject the matters mentioned in the application, and
b. To provide a written notice about the decision taken on the application to the concerned person.
Taxpayer after receiving the decision from administrative review, if satisfied with the decision being made, will be required to deposit the taxes, interests, fines and penalties as per the decision of administrative review and apply to the concerned Taxpayer Service Office for removing the record of dues of the tax order made on the taxpayer. Where the taxpayer is not satisfied with the administrative review decision, the remedy will be as follows:
Appeal at Revenue Tribunal
In case the IRD does not furnish to the applicant a notice about its decision on the application within 60 days from the date of application, the taxpayer may file an appeal to the Revenue Tribunal under (i) Section 115(8) Income Tax Act 2058, or (ii) Section 31Ka(5) VAT Act 2052, or (iii) Section 19(4) Excise Act, 2058.
Where the taxpayer is not satisfied with the decision from the administrative review, under (i) Section 115 of the Income Tax Act 2058, or (ii) Section 31Ka of the VAT Act 2052, or (iii) Section 19 of the Excise Act 2058, taxpayer may file an appeal to the Revenue Tribunal under the Revenue Tribunal Act, 2031.
Customs Act, 2064 doesn’t have the remedy for administrative review with the Department of Customs. So, the assessee dissatisfied with the decision under Customs Act, 2064 has to be taken to the Revenue Tribunal directly. But the dissatisfaction regarding the valuation of the goods may be taken to the Valuation Review Committee and dissatisfaction regarding the classification of the goods may be taken to the Director General of Department of Customs, before reaching to the Revenue Tribunal.
Computation of Deposits for Disputed Amounts under Section 9 of Revenue Tribunal Act, 2031:
1. Tax: 50% of the amount in dispute reduced by deposits made for administrative review for (100% for Excise and Customs)
2. Interest: 50% of the amount in dispute reduced by deposits made for administrative review (100% for Excise and Customs)
3. Fines: 50% of the amount in dispute reduced by deposits made for administrative review (100% for Excise and Customs)
4. Penalty: 100% of the amount in dispute reduced by deposits made for administrative review
Appeal at Supreme Court
Only if the Supreme Court grants leave to make appeal to it considering that the decision of the revenue tribunal will be reversed fully or partly because of a direct (clear) legal error on any of the following questions, an appeal shall lie in the Supreme Court against a judgment or final order of the tribunal: (a) Question of jurisdiction, (b) Question of having not examined the evidence that should have been examined or having examined the evidence that should not have been examined, (c) Question of violation of the procedural law that must be followed, (d) Question of serious legal error.
Tax Assessment Report
Under Income Tax Act 2058:
After the completion of the tax audit, tax officer issues notice for amended tax assessment (संशोधित कर निर्धारणको सूचना) under Section 101(6) of the Act. A note for receipt of the notice will be provided along with the notice while serving the notice. Such notice will provide a 15 days time limit for the submission of proof/evidence for defense on such amended assessment. The taxpayer will then submit the response letter within the time limit. The tax officer considers the submission of the response letter of the taxpayer and resolves issues, if any. The tax officer will provide the amended tax assessment order (संशोधित कर निर्धारणको आदेश) under Section 101 through a notice under Section 102 of the Act. A note for receipt of the notice will be provided along with the notice while serving the notice. Such notice will generally provide a 15 days time limit to deposit the taxes, interests, fees, fines and penalties at the concerned taxpayer service office. The basis for the decision made in the assessment will be provided through a separate decision sheet.
Note: The assessment under Income Tax Act can be made for the taxpayer’s income taxes and withholding taxes. It is in practice in Nepal to issue a separate tax assessment notice and order for Income Taxes and Withholding Taxes, although there isn’t any specific requirement for doing so under the Act. Since the tax assessment under withholding taxes is generally factual and usually there are not many differences in opinion between taxpayer and assessing officer, this makes it easy for the taxpayer to contest the assessment against Income Taxes only.
Under Value Added Tax Act 2052:
After the completion of the tax audit, tax officer will issue notice for amended tax assessment (प्रारम्भिक कर निर्धारण आदेश) under Rule 29(1) of Act. A note for receipt of the notice will be provided along with the notice while serving the notice. Such notice will provide a 15 days time limit for the submission of proof/evidence for defense on such amended assessment. The taxpayer will submit the response letter within the time limit. The tax officer will consider the submission of the response letter of the taxpayer and resolve issues if any. The tax officer will provide the amended tax assessment order (संशोधित कर निर्धारणको आदेश) under Section 20(1) and Rule 29(3) through a notice under Section 36 of the Act. A note for receipt of the notice will be provided along with the notice while serving the notice. Such notice will generally provide a 15 days time limit to deposit the taxes, interests, fees, fines and penalties at the concerned taxpayer service office. The basis for the decision made in the assessment will be provided through a separate decision sheet.
Under Excise Act 2058:
After the completion of the tax audit, tax officer will issue notice for amended tax assessment (अन्त: शुल्क निर्धारण आदेशको सूचना) under Section 10Gha(2) of the Act. A note for receipt of the notice will be provided along with the notice while serving the notice. Such notice will provide a 15 days time limit for the submission of proof/evidence for defense on such amended assessment. Then the taxpayer will submit the response letter within the time limit. The tax officer will consider the submission of the response letter of the taxpayer and resolve issues if any. The tax officer will provide the amended tax assessment order (अन्त: शुल्क निर्धारण आदेश) under Section 10Gha through a notice under Rule 6Ka(2) of the Act. A note for receipt of the notice will be provided along with the notice while serving the notice. Such notice will generally provide a 15 days time limit to deposit the taxes, interests, fees, fines and penalties at the concerned taxpayer service office. The basis for the decision made in the assessment will be provided through a separate decision sheet.
Contents of Tax Assessment Report
Taxes (कर)
- Under the Income Tax Act, assessment may lead to recognition of additional incomes or disallowance of the expenses. This will lead to the increase in the liability for income taxes for the particular income year.
- Under the Income Tax Act, assessment may lead to requiring application of withholding taxes on the transactions of the taxpayer. This will lead to the increase in the liability of the withholding taxes for the particular income year.
- Under the Value Added Tax, assessment may lead to recognition of additional incomes or disallowance of the expenses. This will lead to the increase in the liability for value added taxes for the particular income year.
- Under the Excise Act, assessment may lead to recognition of additional incomes or disallowance of the expenses. This will lead to the increase in the liability for value added taxes for the particular income year.
Interest (ब्याज)
- Under the Income Tax Act, for assessment on Income Tax, interests as provided by the Act may be applicable. It is quite common to see assessment of interests under Section 118 and Section 119. Section 118 is the interest applicable for delay in payment of installment taxes and Section 119 is the interest applicable for delay in payment of taxes.
Note: Interest under Section 119 is calculated from the due date to the date of the assessment, well exceeding the period of the particular income year. - Under the Income Tax Act, for assessment on Withholding Tax, interests as provided by the Act may be applicable. It is quite common to see assessment of interests under Section 119. Section 119 is the interest applicable for delay in payment of taxes.
Note: Interest under Section 119 is calculated from the due date to the date of the assessment, well exceeding the period of the particular income year. - Under the VAT Act, interests as provided by the Act may be applicable. It is quite common to see assessment of interests under Section 26(2) of the Act.
Note: Interest under Section 26(2) is calculated from the date of the due date to the date of the assessment, well exceeding the period of the particular tax period.
Fines (थप दस्तुर/शुल्क)
- Under the Income Tax Act, for assessment on Income Tax, fines as provided by the Act may be applicable. It is quite common to see assessment of fines under Section 117 and Section 119Ka. Section 117 is the fines applicable for non-filer of the income tax and estimated tax returns. Section 119Ka is the fines applicable for failing to comply with the Act and Rules.
- Under the VAT Act, fines as provided by the Act may be applicable. It is quite common to see assessment of fines under Section 19(2) of the Act. Fines under Section 19(2) are applicable on the failure to deposit the Value Added Tax when due.
- Under the Excise Act, fines as provided by the Act may be applicable. It is quite common to see assessment of fines under Section 4Kha(2) of the Act. Fines under Section 4Kha(2) are applicable on the failure to deposit the Excise Duty when due.
Penalties (जरिवाना)
- Under the Income Tax Act, for assessment on Income Tax, penalties as provided by the Act may be applicable. It is quite common to see assessment of penalties under Section 120. As per the decision made in famous Ncell Case: Principles underpinning the Ncell Case, the the burden to prove the fraud under Section 120 lies with the assessing office and the basis for penalty under Section 120 can be applied only if the tax officer is able to prove through the facts and documents that: (a) the company has either knowingly, negligently or fraudulently submitted false or misleading statement on any matter, or (b) the company has not submitted the documents on its reach.
- Under the VAT Act, penalties as provided by the Act may be applicable. It is quite common to see assessment of fines under Section 29(1Ka) of the Act. Penalties under Section 29(1Ka) are applicable on the failure to comply with the Act and Rules.
- Under the Excise Act, penalties as provided by the Act may be applicable. It is quite common to see assessment of penalties under Section 16(1) and Section 16(2) of the Act. Fines under Section 16(1) and Section 16(2) are applicable when excise duty due to be deposited are evaded, hidden, or cheated.
How to keep an inventory of the contents of Tax Assessment?
- List all the issues of the assessment order in an order
- Compute the “Tax” impact of each issues of the assessment order
- Allocate the “Interest” (e.g. u/s 118 and 119) to each of the issue proportionately
- Allocate the “Fines” under (e.g. u/s 117 and 119Ka) to each of the issue proportionately if they cannot be identified to each issue
- Allocate the “Penalties” under (e.g. u/s 120) to each of the issue proportionately if they cannot be identified to each issue
Calculations for deposits for Income Tax Assessment
Where no topics of assessment of income year are contested by taxpayer
- Deposit the amount of “Interest”, “Fines” and “Penalties” as per the assessment for the FY, or write off the amount with current period advance taxes
Practical Problem: Writing off option may only be available if the revised closing tax credit for assessment FY exists - Recompute the amount of closing “Tax” Credit for the assessment FY
Revised TC for the FY = Pre-assessment TC for the FY – Additional Taxes due to Assessment (Taxes only; Not interest, Fines and Penalties) - Recompute the “Interest”, “Fines” and “Penalties” for the future FYs based on the revised TC computed in Step 2
- Deposit the amount of “Interest”, “Fines” and “Penalties” as per the assessment for the future FYs based on the computations in Step 3
- Deposit the amount of Additional Taxes due to Assessment for the FY, or write off the amount with the current period advance taxes
Practical Problem: Writing off option may only be available if the revised closing tax credit for assessment FY exists
Where all/selected topics of assessment are contested by taxpayer
- Deposit the amount of Undisputed “Interest”, Undisputed “Fines” and Undisputed “Penalties” as per the assessment for the FY, or write off the amount with current period advance taxes
Practical Problem: Writing off option may only be available if the revised closing tax credit for assessment FY exists - Recompute the amount of closing “Tax” Credit for the assessment FY
Revised TC for the FY = Pre-assessment TC for the FY – Additional Undisputed Taxes due to Assessment (Undisputed Taxes only; Not Undisputed Interest, Undisputed Fines and Undisputed Penalties) - Recompute the “Interest”, “Fines” and “Penalties” for the future FYs based on the revised TC computed in Step 2
- Deposit the amount of “Interest”, “Fines” and “Penalties” as per the assessment for the future FYs based on the computations in Step 3
- Deposit the amount of Additional Undisputed Taxes due to Assessment for the FY, or write off the amount with the current period advance taxes
Practical Problem: Writing off option may only be available if the revised closing tax credit for assessment FY exists - For Disputed “Taxes”, Disputed “Interest”, Disputed “Fines” and Disputed “Penalties” one of the following option may be taken:
- Approach One: Irrespective to the amount of tax credit available for the income year, deposit the required deposit % on the disputed amounts
- Approach Two: Adjust the disputed amount as per the assessment order against the unutilized tax credits available for the particular assessment FY
Note: However, when approach two is adopted, the taxpayer needs to recompute the tax credit carry forward, taxes and interest payables for subsequent income years and deposit/adjust them accordingly. So, this might lead to a situation where the taxpayer might have to deposit additional interest and taxes in subsequent income years due to decreased tax credit carry forward. This could lead to a situation where taxpayers will deposit additional interest u/s 118 and 119 on the amount of interest and fines as well, as in the later years the interests are calculated based on adjusted tax credits carried forward. It will take until the case is decided at tribunal or supreme court to have such duplicate interests corrected.
But the Revenue Tribunal since recently, has not been entertaining approach two as it is not guaranteed that the taxpayer will also be subject to reassessment for the subsequent income year and there is a chance that the required recomputation and depositing the accruing interest, fines and penalties for future income year (as discussed above) will not not be made by the taxpayer, leading to the situation where taxpayer gets away with not depositing the required deposit for the appeal.
Secondly, this approach is more costly to the taxpayer from the time value of money perspective, as the taxpayer will be paying interests over the assessed interest, for until the assessment is actually settled in the favor of the taxpayer. So only the taxpayers with increasing tax credits over the years, with no interest accruing in the future income years, and having correct recomputation of interest made till the last active income year, may choose the second approach method, which will be more beneficial than to spend the cash outright at the time of assessment.
Very helpful content.