Tax Exempt Person under Section 10(Ka)
Definition: Income Tax Act
Exempted Incomes under Section 10
Section 10(Ka)
Amounts derived by a person entitled to privileges under a bilateral or a multilateral treaty or agreement concluded between GON and a foreign country or an international organization.
Section 10(Kha)
Amounts derived by an individual from employment in the public service of the government of a foreign country. Provided that,
1. The individual is a resident person solely by reason of performing the employment or is a non-resident person; and
2. The amounts are payable from the public funds of the country;
Section 10(Ga)
Amounts derived from public fund of the foreign country by an individual who is not a citizen of Nepal as referred to in Section 10(Kha) or by a member of the immediate family of the individual.
Definition: Vienna Convention
Article 23
1.The sending State and the head of the mission shall be exempt from all national, regional or municipal dues and taxes in respect of the premises of the mission, whether owned or leased, other than such as represent payment for specific services rendered.
2.The exemption from taxation referred to in this article shall not apply to such dues and taxes payable under the law of the receiving State by persons contracting with the sending State or the head of the mission.
Article 28
The fees and charges levied by the mission in the course of its official duties shall be exempt from all dues and taxes.
Article 34
A diplomatic agent shall be exempt from all dues and taxes, personal or real, national, regional or municipal, except:
(a) Indirect taxes of a kind which are normally incorporated in the price of goods or services;
(b) Dues and taxes on private immovable property situated in the territory of the receiving State, unless he holds it on behalf of the sending State for the purposes of the mission;
(c) Estate, succession or inheritance duties levied by the receiving State, subject to the provisions of paragraph 4 of article 39;
(d) Dues and taxes on private income having its source in the receiving State and capital taxes on investments made in commercial undertakings in the receiving State;
(e) Charges levied for specific services rendered;
(f) Registration, court or record fees, mortgage dues and stamp duty, with respect to immovable property, subject to the provisions of article 23.
Article 36
1.The receiving State shall, in accordance with such laws and regulations as it may adopt, permit entry of and grant exemption from all customs duties, taxes, and related charges other than charges for storage, cartage and similar services, on:
(a) Articles for the official use of the mission;
(b) Articles for the personal use of a diplomatic agent or members of his family forming part of his household, including articles intended for his establishment.
2.The personal baggage of a diplomatic agent shall be exempt from inspection, unless there are serious grounds for presuming that it contains articles not covered by the exemptions mentioned in paragraph 1 of this article, or articles the import or export of which is prohibited by the law or controlled by the quarantine regulations of the receiving State. Such inspection shall be conducted only in the presence of the diplomatic agent or of his authorized representative.
Article 37
1.The members of the family of a diplomatic agent forming part of his household shall, if they are not nationals of the receiving State, enjoy the privileges and immunities specified in articles 29 to 36.
2.Members of the administrative and technical staff of the mission, together with members of their families forming part of their respective households, shall, if they are not nationals of or permanently resident in the receiving State, enjoy the privileges and immunities specified in articles 29 to 35, except that the immunity from civil and administrative jurisdiction of the receiving State specified in paragraph 1 of article 31 shall not extend to acts performed outside the course of their duties. They shall also enjoy the privileges specified in article 36, paragraph 1, in respect of articles imported at the time of first installation.
3.Members of the service staff of the mission who are not nationals of or permanently resident in the receiving State shall enjoy immunity in respect of acts performed in the course of their duties, exemption from dues and taxes on the emoluments they receive by reason of their employment and the exemption contained in article 33.
4.Private servants of members of the mission shall, if they are not nationals of or permanently resident in the receiving State, be exempt from dues and taxes on the emoluments they receive by reason of their employment. In other respects, they may enjoy privileges and immunities only to the extent admitted by the receiving State. However, the receiving State must exercise its jurisdiction over those persons in such a manner as not to interfere unduly with the performance of the functions of the mission.
Definition: Asian Development Bank
Article 56(2)
1. The Bank, its assets, property, income and its operations and transactions, shall be exempt from all taxation and from all customs duties. The Bank shall also be exempt from any obligation for the payment, withholding or collection of any tax or duty.
2. No tax shall be levied on or in respect of salaries and emoluments paid by the Bank to Directors, alternates, officers or employees of the Bank, including experts performing missions for the Bank, except where a member deposits with its instrument of ratification or acceptance a declaration that such member retains for itself and its political subdivisions the right to tax salaries and emoluments paid by the Bank to citizens or nationals of such member.
3. No tax of any kind shall be levied on any obligation or security issued by the Bank, including any dividend or interest thereon, by whomsoever held:
(i) which discriminates against such obligation or security solely because it is issued by the Bank; or
(ii) if the sole jurisdictional basis for such taxation is the place or currency in which it is issued, made payable or paid, or the location of any office or place of business maintained by the Bank.
4. No tax of any kind shall be levied on any obligation or security guaranteed by the Bank, including any dividend or interest thereon, by whomsoever held:
(i) which discriminates against such obligation or security solely because it is guaranteed by the Bank; or
(ii) if the sole jurisdictional basis for such taxation is the location of any office or place of business maintained by the Bank.
Definition: Donor Institutions: SDC
Article 13 of G2G agreement (Specific to a Project)
1.GoN shall exempt from import duties, VAT, fees and any other taxes levied by GoN, on all goods. In case of VAT, the GoN shall exempt it if the materials are imported and shall refund if the materials are imported and shall refund it if the materials and services are procured locally. Required payments for local taxes imposed by local bodies shall be reimbursed by the GoN contributions.
2.No funds provided by the FDFA shall be used directly or indirectly for the payment of any taxes, duties and fees levied in Nepal.
(this general exemption can be interpreted in the same manner as illustrated in USAID exemption in next slide)
Definition: Donor Institutions: USAID
Section B4 of G2G for USAID Foreign Assistance Programs (Not Specific to a Project)
(a) General Exemption. The Agreement and the assistance thereunder are free from any taxes imposed under laws in effect in the territory of the Grantee.
(b) Except as provided otherwise in this provision, the General Exemption in subsection (a) applies to, but is not limited to (1) any activity, contract, grant or other implementing agreement financed by USAID under this Agreement; (2) any transaction or supplies, equipment, materials, property or other goods (hereinafter collectively “goods”) under (1) above; (3) any contractor, grantee, or other organization carrying out activities financed by USAID under this Agreement; (4) any employee of such organizations; and (5) any individual contractor or grantee carrying out activities financed by USAID under this Agreement.
(c) Except as provided otherwise in this provision, the General Exemption in subsection (a) applies to, but is not limited to, the following taxes:
(1) Exemption 1. Customs duties, tariffs, import taxes, or other levies on the importation, use and re-exportation of goods or the personal belongings and effects (including personally-owned automobiles) for the personal use of non-national individuals or their family members. Exemption 1 includes, but is not limited to, all charges based on the value of such imported goods, but does not include service charges directly related to services performed to transfer goods or cargo.
(2) Exemption 2. Taxes on the income, profits or property of all (i) nonnational organizations of any type, (ii) non-national employees of national and non-national organizations, or (iii) non-national individual contractors and grantees. Exemption 2 includes income and social security taxes of all types and all taxes on the property, personal or real, owned by such non-national organizations or persons. The term “national” refers to organizations established under the laws of the Grantee and citizens of the Grantee, other than permanent resident aliens in the United States.
(3) Exemption 3. Taxes levied on the last transaction for the purchase of goods or services financed by USAID under this Agreement, including sales taxes, value-added taxes (VAT), or taxes on purchases or rentals of real or personal property. The term “last transaction” refers to the last transaction by which the goods or services were purchased for use in the activities financed by USAID under this Agreement.
(d) If a tax has been levied and paid contrary to the provisions of an exemption, USAID may, in its discretion, (1) require the Grantee to refund to USAID or to others as USAID may direct the amount of such tax with funds other than those provided under the Agreement, or (2) offset the amount of such tax from amounts to be disbursed under this or any other agreement between the Parties.
(e) In the event of a disagreement about the application of an exemption, the Parties agree to promptly meet and resolve such matters, guided by the principle that the assistance furnished by USAID is free from direct taxation, so that all of the assistance furnished by USAID will contribute directly to the economic development of the country of the Grantee.
Registration
Modus Operandi
Projects (eg. PAANI) entitled to privileges of tax exemption under bilateral (DFID/USAID/SDC) multilateral (ADB/IMF) treaty are treated as separate person under Section 2(KaGna)(7): “Any institution or entity established under treaty/agreement”.
Such projects are executed by an implementing partner (“eg. DAI”) who may be commercial or nonprofit entities. The income of such implementing partner derived from running the project, received from the Donor (“DFID”) are exempted by Section 10(Ka) of the Act and the tax exemption granted under the project agreement.
The income derived by Impementing Partner from Donor Fund for services rendered to implement the program, is income sourced in Nepal as per Section 67 of the Act, irrespective of the place of payment. Further to this, the service provided by Implementing Partner in Nepal would trigger the establishment of PE of Implementing Partner in Nepal, as per Income Tax Act 2058 and the establishment of Implementing Partner’s Branch Office in Nepal as per Companies Act 2063.
The invoice raised by Implementing Partner’s Nepal Branch to Donor Fund is export of service from Nepal, since the benefit of the service is being received by Donor Fund in foreign country, even though service is being provided in Nepal. Hence zero-rated VAT invoice would be raised for the service provided. Any amount received from the Donor Fund for the Project by Implementing Partner’s Nepal Branch would be held by it in the capacity of an agent and no invoice is required to be issued for this for tax purposes.
Liability for filing of Income Tax Returns
As per Section 97 of the Act Person who do not have any taxes payable under Section 3(a) of the Act are not required to submit Income Tax Return. Section 3(a) of the Act deals with the person having taxable income under the Act. As per Section 5 of the Act Taxable Income is the total assessable income reduced by the reductions available under the Act. Section 6 of the Act states that Assessable Income is the income from business of the person. Section 7(3) of the act states that the amounts exempted under Section 10 are not included in calculating the income from business. The project agreement provides that the assistance thereunder received from the DFID are free from any taxes imposed under laws in effect in the territory of Nepal and such amounts are exempted by Section 10(Ka) of the Act. Hence, such project and implementing partner solely carrying out exempted projects, will not have any taxable income and taxes payable under the Act and would not be required to submit the Income Tax Return.
However, the definition of tax includes withholding taxes, fines and penalties as well so if we go by the definition of the income tax, rather than its contextual meaning in Section 97, there maybe a need to submit Income Tax Return. Further to this, the form for submitting the details of exempted income has been scheduled for filing the Income Tax Return in IRD Portal.
So, there is a liability for submission of Income Tax Return.
Liability for filing of Withholding Tax Returns
Even entities exempted for tax by Section 10 of the Act are (except for ADB/IMF etc. where Nepal has not reserved its right to obligate ADB/IMF to withhold taxes on payment, wherever applicable) are required to withhold taxes under Section 87, Section 88, Section 88Ka, Section 89 of the Act are required to withhold taxes.
The amount of taxes withheld are required to be deposited and withholding return to be filed within 25th of the following month as per Section 90 of the Act.
So, there is a liability for submission of withholding taxes.
Tax Exempt Organization under Section 2(dha)
Definition
Section 2(dha): Exempt organization means the following entities:
1.Following entities registered with the IRD as an tax exempt organization:
a)A social, religious, educational, or a charitable organization of a public character established without having a profit motive; or
b)An amateur sporting association formed for the purpose of promoting social or sporting facilities not involving the acquisition of gain by the association or members
2.A political party registered with the Election Commission
However, the entity that provides benefits to any person from the assets of the entity except for when it is a function as per its objectives or it is a payment for assets or services rendered to the entity by such person, shall not be provided tax exemption under this section.
Frequently Asked Questions
Q: What kind of entities can apply to IRD for registration as Tax Exempt Organization?
A: These non profit entities of public character can be apply for registration as tax exempt organization:
a) Social Organization
(e.g. Maiti Nepal, National Trust for Nature Conservation, Rural Construction Nepal, Shakti Samuha)
b) Religious Organization
(e.g. Art of Living, Isha Foundation)
c) Educational Organization
(e.g. BlinkNow Foundation, Biotechnology Society of Nepal, Kanchan Nepal, Martin Chautari, OLE Nepal, Nepal Mathematics Society)
d) Charitable Organization
(e.g. Ravi Lamichhane Foundation, Help Nepal Network, Dhurmus Suntali Foundation)
e) Amateur Sporting Organization (sporting without remuneration)
(e.g. Jawalakhel Amateur Youth Club)
Q: What kind of entities are exempt under Section 2(dha) but not required to apply to IRD for registration as Tax Exempt Organization?
A: Political Party Registered with Election Commission
Q: What is the meaning of public character of non profit organization?
A: It means
1.The information on the receipts/sources of fund, payments/utilization of fund are public
2.The activities and the progress of the organization are made public to access
3.The programs of the organization are public programs and are not only intended to benefit the members of the organization
Q: What is the difference between non-profit and not-for-profit organization? Does Income Tax Act recognize not-for-profit organization as exempt organization?
A: Both entities do not distribute their profits.
Non profit entities are those which work with a charitable motive. (e.g. in previous slide)
Not-for-profit organization work for solely fulfilling the organizational objective and hence they may not be of public character doing social/religious/educational/charitable activities. (e.g. Clubs, Unions, Associations)
Income tax Act doesn’t recognize not-for-profit organization that do not have public character or doesn’t do social/ religious/ educational/ charitable activities, as exempt organization.
Registration as Exempt Organization
Rule 3(1): An entity deserving the status as an exempt organization under Section 2(dha) of the Act shall require to furnish an application with the IRD attaching the following details therewith:
a. In case of the organizations required to be registered by the prevailing laws, a copy of the certificate of registration, and
b. A copy of its charter of establishment, and
c. A copy of the certificate of PAN if acquired, and
d. A copy of Audit Report if acquired.
Rule 3(2): IRD shall make necessary inquiry on the application made under Rule 3(1) and register the entity as a tax exempted and provide an exemption certificate.
Rule 3(3): IRD may determine the organization as not required to be registered as tax exempt entity falling under the tax exempted entities listed in Section 2(dha).
Rule 27(1): A person may apply with the Department for a certificate stating that the person is exempt from tax under the Act.
Rule 27(2): Upon receipt of an application under Rule 27(1), the Department shall issue a tax exemption certificate to the extent to which the person is exempt from tax under the Act.
Q: What documents are required for the obtaining tax exemption certificate?
A: These documents are usually required by the tax office for obtaining tax exemption certificate:
a) Recommendation Certificate from District Coordination Committee,
b) Recommendation letter from Social Welfare Council,
c) Registration Certificates as necessitated by the prevailing laws,
d) PAN Certificate,
e) Bidhan (Constitution/Charter of the Organization),
f) Minutes and Articles of the Organization,
g) Letter of Account Opening from the Company,
h) Letter of Company,
i) Previous Financial Statements (as applicable)
Renewal of Tax Exemption Certificate
Rule 5Ka(1): The entity registered under Rule 3(2) and the entity entitled to enjoy tax exemption shall renew its tax exemption certificate within 6 months of the end of the income year.
Rule 5Ka(2): The entity required to renew its certificate under Rule 5(1) shall submit an application to the concerned tax officer along with Audited Financial Statement of previous income year, Certificate of TDS withheld & deposited.
Rule 5Ka(3): Tax officer shall renew the tax exemption certificate if it is appropriate, after the scrutiny on the application submitted under Rule 5Ka(3).
Rule 5Ka(4): If the tax exemption certificate received is not in the format prescribed by IRD, then new tax exemption certificate shall be issued instead.
Rule 5Ka(5): The entity cannot enjoy the facility of tax exemption unless the exemption certificate under Rule 5(1) is renewed.
Q: What if there is delay in renewal of the Tax Exemption Certificate?
A: During FY 71/72 to FY 74/75 (4 Income Years), Rule 5 had provided that the time limit for the renewal of the tax exemption certificate was 3 months within the end of the income year and Section 117(Gha) had provided that the fine @0.1% pa on the amount of receipts of the organization would be levied for delay in renewing the tax exemption status. Meaning the entity eligible for tax exemption could apply for renewal by depositing the applicable fines.
Now these both provision doesn’t exist, meaning in delay of renewal of exemption status would led to the entity not being recognized in tax exempt status for the period between the end of previous income year to the date it reapplies for renewal of the status.
Condition for Exemption: Contents of Exemption Certificate
Along with the details of the entity, its objectives, area of operation and details of renewals, these statement are explicitly mentioned in the tax exemption certificate:
1.Entity will no longer be eligible for tax exemption if it carries out any activities other than those mentioned in its registration certificate.
2.Only the incomes mentioned in Section 10(Chha) derived by the entity are exempted from tax:
a) Donation/Gifts
b) Contributions that directly relate to the organization’s function, which is made to such organization without expecting any consideration in return
3.Entity is liable to withhold taxes under Chapter 17
4.Since the tax exempt entity is supposed to be not-for-profit entity as per Section 2(dha), it shall not be treated as exempt entity, if it provides benefits to any person in following circumstances when:
a) It is not for the function as per its objectives or
b) It is a payment other than payment for assets/services received by it
Exempted income of Tax Exempt Entity
Following income derived by the tax exempt entity are exempted:
1. Donations from individual donors or foundations
2. Sponsorship from corporations and Government funding
3. Consideration received from programs, services or merchandise sales to generate funds for organization. However,
a)Such activities should be declared in its charter
b)The funds generated should be used to further meet the organization’s objective
c)Such activities should not be commercially competitive to activities of similar kind made by non tax exempt entities
VATable activities of tax exempted entity
An entity that receives donation/gift/contributions for its activities is not required to be registered in VAT because donation/gift/contribution is not the supply of goods/services as per the VAT Act.
However, there may be some tax except organization, such as research/educational organizations (eg. Nepal Mathematics Society) that generates its funds from delivering its research/observations/stats to other entities, with or without receiving any consideration in return. As such activities are VATable transaction as per the VAT Act, such entities will need to be registered for VAT purposes as well.
What incomes of exempt entity are exempted? Conflict between Act and Directive
What is in Income Tax Act 2058?
Section 10(Chha) Tax Exempt Amount: Amounts derived by an exempt organization by way of
1. Gift; or
2. Other contributions that directly relate to the organization’s function referred to in paragraph Section 2(dha)(1), whether or not the contribution is made in return for consideration provided by the organization,
What is in Income Tax Directive 2073 & Red Book of Tax (BhavaNath) & every tax exemption certificate?
Section 10(Chha): Amounts derived by an exempt organization by way of
1. Gift; or
2. Other contributions that directly relate to the organization’s function referred to in paragraph Section 2(dha)(1), which is made to such organization without expecting any consideration in return,
Q: So is the conflict between Act and Directive a typo/error in Act?
A: It probably is not. It only clarifies that the contribution made by other entities to tax exempt entities, may or may not be with expectation of consideration in return. There may be expectation for consideration from tax exempted entity for contribution provided by other entities. As explained in example Nepal Mathematics Society earlier.
However, there has been some interpretations that it is in fact a typo and Association of Chartered Accountant of Nepal (ACAN) has now submitted a recommendation for the correction of the typo in “Budget Recommendation 2077.” Some tax experts also seem to be of the view that it is a typo in the Act.
Withholding tax on payments to Tax Exempt Organization
Q: How to determine if the payment being made to tax exempt entity attracts the applicability of withholding taxes under Chapter 17 of the Act?
A: No tax withholding is applicable on amount derived by tax exempt entity if the amount is:
1. Donation/Gifts दान/उपहार, or
2. Contributions योगदान that is directly related to the organization’s function
(whether or not it is made in return for any consideration प्रतिफल)
3. Relates to a transaction that normally is commercially motivated
[Bikas Aayojana Sewa Kendra v. Ministry of Finance]
[Siddhartha Bank Limited v. Large Tax Payers Office]
Q: How does a tax exempted organization determine if the amount derived by it is actually tax exempted?
A: The tax exempted entity should confirm each of the following in relation to the amount derived to determine that it is a tax exempted amount:
1. It should be an amount exempted under Section 10(Chha)
2. It should not be an amount derived from competition with other person doing taxable transaction.
Like discussed in previous slide, if anyone derives amount after deduction of withholding tax under Chapter 17 of the Act and amount such derived are actually tax exempted then, tax exempt organizations shall claim such excess taxes, later for refund as per the prevalent laws.