Taxation In NepalTU Board 2080
18. Given below is the trading, profit and loss account of a proprietorship organization: Particulars Amount Particulars Amount : : : : To Opening stock 25,000 By Sales 5,000,000 To Purchase…
15- Given below is the trading, profit and loss account of a proprietorship organization:
| Particulars | Amount | Particulars | Amount |
|---|---|---|---|
| To Opening stock | 25,000 | By Sales | 5,000,000 |
| To Purchase | 2,000,000 | By Closing stock | 300,000 |
| To Carriage on purchase | 25,000 | ||
| To Wages | 175,000 | ||
| To Gross profit c/d | 2,225,000 | ||
| 5,300,000 | 5,300,000 | ||
| To Office rent paid | 50,000 | By Gross profit b/d | 2,225,000 |
| To salary | 250,000 | By Sundry incomes | 50,000 |
| To General expenses | 65,000 | By Dividend received | 5,000 |
| To Legal expenses | 20,000 | By Refund of custom duty | 45,000 |
| To Staff welfare expenses | 125,000 | By Bad debt recovered | 40,000 |
| To Interest on bank loan | 130,000 | By Agriculture income | 10,000 |
| To Fine and penalties | 5,000 | By Rent from staff quarter | 25,000 |
| To Life insurance premium (own) | 30,000 | By Gain on non-chargeable business assets | 50,000 |
| To insurance premium of fixed assets | 15,000 | By Gain on foreign exchange | 25,000 |
| To Research and development cost | 50,000 | ||
| To Depreciation | 50,000 | ||
| To Membership renewal charges | 5,000 | ||
| To provision for tax | 10,000 | ||
| To Donation | 20,000 | ||
| To Advance tax paid | 20,000 | ||
| To Drawing | 30,000 | ||
| To Net profit | 1,600,000 | ||
| Total | 2,475,000 | Total | 2,475,000 |
Further information: a. Closing stock was undervalued by Rs. 10,000. b. Closing stock was valued Rs. 30,000 on last stock taking, however, it was not shown on the opening date. c. Legal expenses include Rs. 5,000 for income tax penalty. d. 60% of donation was given to a private hospital and rest was given to tax exempt organization. e. Seventy percent of bad debts recovered were allowed previously. f. Allowable repairs and depreciation were Rs. 30,000 and Rs. 40,000 respectively. g. Unabsorbed business loss of last year stood Rs. 50,000.
Required: a. Net (assessable) income from business. b. Statement of total taxable Income c. Tax liabilities [10+3+2]
Answer
a. Net (Assessable) Income from Business
Step 1: Compute Gross Income
Gross income is derived from the trading account:
- Sales: Rs. 5,000,000
- Sundry incomes: Rs. 50,000
- Dividend received: Rs. 5,000
- Refund of custom duty: Rs. 45,000
- Bad debt recovered: Rs. 40,000
- Agriculture income: Rs. 10,000
- Rent from staff quarter: Rs. 25,000
- Gain on non-chargeable business assets: Rs. 50,000
- Gain on foreign exchange: Rs. 25,000
Total Gross Income = Rs. 5,000,000 + Rs. 50,000 + Rs. 5,000 + Rs. 45,000 + Rs. 40,000 + Rs. 10,000 + Rs. 25,000 + Rs. 50,000 + Rs. 25,000 = Rs. 5,250,000
Step 2: Compute Cost of Goods Sold (COGS)
COGS is derived from the trading account:
- Opening stock: Rs. 25,000
- Purchase: Rs. 2,000,000
- Carriage on purchase: Rs. 25,000
- Closing stock (book value): Rs. 300,000
COGS (before adjustments) = Rs. 25,000 + Rs. 2,000,000 + Rs. 25,000 - Rs. 300,000 = Rs. 1,750,000
Adjustments to COGS
Closing stock undervaluation (Rs. 10,000):
- Since the stock was undervalued, the actual closing stock is Rs. 310,000 (Rs. 300,000 + Rs. 10,000).
- Adjustment: Increase COGS by Rs. 10,000 (since stock was understated, COGS was overstated).
- Adjusted COGS = Rs. 1,750,000 + Rs. 10,000 = Rs. 1,760,000
Unrecorded closing stock (Rs. 30,000):
- Since Rs. 30,000 of stock was not recorded, it was not deducted in COGS.
- Adjustment: Decrease COGS by Rs. 30,000 (since stock was missing, COGS was understated).
- Final Adjusted COGS = Rs. 1,760,000 - Rs. 30,000 = Rs. 1,730,000
Step 3: Compute Gross Profit (Adjusted)
Gross profit is calculated as: Gross Profit (Adjusted) = Gross Income - Adjusted COGS = Rs. 5,250,000 - Rs. 1,730,000 = Rs. 3,520,000
Step 4: Compute Total Deductions (Before Adjustments)
From the profit and loss account, the following expenses are deductible (subject to adjustments):
- Office rent paid: Rs. 50,000
- Salary: Rs. 250,000
- General expenses: Rs. 65,000
- Legal expenses (net of penalty): Rs. 20,000 - Rs. 5,000 (penalty) = Rs. 15,000
- Staff welfare expenses: Rs. 125,000
- Interest on bank loan: Rs. 130,000
- Fine and penalties: Rs. 5,000 (non-deductible)
- Life insurance premium (own): Rs. 30,000 (non-deductible)
- Insurance premium of fixed assets: Rs. 15,000 (deductible)
- Research and development cost: Rs. 50,000
- Depreciation (allowed): Rs. 40,000 (instead of Rs. 50,000)
- Membership renewal charges: Rs. 5,000
- Provision for tax: Rs. 10,000 (non-deductible)
- Donation (40% deductible): Rs. 20,000 × 40% = Rs. 8,000
- Advance tax paid: Rs. 20,000 (deductible)
- Drawing: Rs. 30,000 (non-deductible)
Total Deductions (Before Adjustments) = Rs. 50,000 + Rs. 250,000 + Rs. 65,000 + Rs. 15,000 + Rs. 125,000 + Rs. 130,000 + Rs. 15,000 + Rs. 50,000 + Rs. 40,000 + Rs. 5,000 + Rs. 8,000 + Rs. 20,000 = Rs. 773,000
Step 5: Adjustments to Deductions
- Legal expenses (penalty): Rs. 5,000 (non-deductible) → Already excluded.
- Depreciation: Only Rs. 40,000 is allowed (instead of Rs. 50,000).
- Adjustment: Rs. 10,000 excess depreciation is disallowed.
- Repairs: Only Rs. 30,000 is allowed (instead of Rs. 50,000 implied in general expenses).
- Adjustment: Rs. 20,000 excess repairs are disallowed.
- Bad debt recovered (70% disallowed):
- Rs. 40,000 recovered, but 70% (Rs. 28,000) was previously allowed as a deduction.
- Adjustment: Rs. 28,000 is added back to income (since it was deducted earlier).
- Donation (60% non-deductible):
- Rs. 20,000 total donation, 60% (Rs. 12,000) to private hospital (non-deductible).
- Adjustment: Rs. 12,000 is disallowed.
Total Adjustments to Deductions:
- Disallowed expenses: Rs. 10,000 (depreciation) + Rs. 20,000 (repairs) + Rs. 12,000 (donation) = Rs. 42,000
- Add-back (bad debt recovered): Rs. 28,000
Net Adjustment to Deductions = Rs. 42,000 - Rs. 28,000 = Rs. 14,000
Final Adjusted Deductions = Rs. 773,000 + Rs. 14,000 = Rs. 787,000
Step 6: Compute Net Income from Business
Net Income (Before Unabsorbed Loss) = Adjusted Gross Profit - Adjusted Deductions = Rs. 3,520,000 - Rs. 787,000 = Rs. 2,733,000
Unabsorbed Business Loss (Last Year) = Rs. 50,000 (given) Since this is a loss from the previous year, it can be set off against current income. Net Assessable Income from Business = Rs. 2,733,000 - Rs. 50,000 = Rs. 2,683,000
b. Statement of Total Taxable Income
| Particulars | Amount (Rs.) |
|---|---|
| 1. Net Income from Business | 2,683,000 |
| 2. Other Income (Exempt) | |
| - Agriculture Income | 10,000 |
| - Gain on Non-Chargeable Assets | 50,000 |
| - Gain on Foreign Exchange | 25,000 |
| - Rent from Staff Quarter | 25,000 |
| Total Exempt Income | 110,000 |
| 3. Total Taxable Income | 2,683,000 - 110,000 = 2,573,000 |
Note:
- Agriculture income, gains on non-chargeable assets, and gains on foreign exchange are exempt under Nepal Income Tax Act.
- Rent from staff quarters is also exempt if it qualifies as a fringe benefit.
c. Tax Liabilities
Step 1: Compute Taxable Income
From part (b), Total Taxable Income = Rs. 2,573,000
Step 2: Apply Tax Slabs (FY 2080/81)
Tax rates for individuals in Nepal (as per Income Tax Act, 2058):
| Income Slab (Rs.) | Tax Rate (%) |
|---|---|
| Up to 400,000 | 0 |
| 400,001 to 800,000 | 10 |
| 800,001 to 1,200,000 | 20 |
| 1,200,001 to 1,600,000 | 25 |
| Above 1,600,000 | 32 |
Tax Calculation:
- First Rs. 400,000: Rs. 0
- Next Rs. 400,000 (400,001 to 800,000): Rs. 400,000 × 10% = Rs. 40,000
- Next Rs. 400,000 (800,001 to 1,200,000): Rs. 400,000 × 20% = Rs. 80,000
- Next Rs. 400,000 (1,200,001 to 1,600,000): Rs. 400,000 × 25% = Rs. 100,000
- Remaining Rs. 973,000 (1,600,001 to 2,573,000): Rs. 973,000 × 32% = Rs. 311,360
Total Tax Before Deductions = Rs. 0 + Rs. 40,000 + Rs. 80,000 + Rs. 100,000 + Rs. 311,360 = Rs. 531,360
Step 3: Adjust for Advance Tax Paid
- Advance tax paid: Rs. 20,000 (already deducted in P&L account).
- Net Tax Liability = Total Tax - Advance Tax Paid = Rs. 531,360 - Rs. 20,000 = Rs. 511,360
Step 4: Surtax (if applicable)
For individuals, surtax is not applicable on business income. However, if the taxpayer is a company or has other income, surtax would apply. Here, we assume this is a proprietorship, so no surtax.
Final Tax Liability
Total Tax Payable = Rs. 511,360
Summary of Adjustments and Final Figures
Discussion
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