(a) What is tax assessment? Briefly describe the self assessment of tax. [8] (b) "Tax is the compulsory contribution from a person to government". Explain. [7]

(a) What is Tax Assessment? Briefly Describe the Self-Assessment of Tax

Meaning of Tax Assessment

Tax assessment is the process by which the tax authorities determine the tax liability of a taxpayer based on their income, assets, transactions, or other taxable events. It involves calculating the amount of tax payable by an individual, business, or entity in accordance with the applicable tax laws and regulations.

In Nepal, tax assessment is primarily governed by the Income Tax Act, 2058 (2002), the Value Added Tax Act, 2062 (2009), and other relevant tax statutes. The assessment process ensures that taxpayers comply with their legal obligations while preventing tax evasion and underreporting.

Types of Tax Assessment

Tax assessment can be broadly classified into the following types:

1. Self-Assessment

   • The taxpayer himself/herself calculates and pays the tax based on their income and applicable tax rates.
   • Common in income tax and VAT systems where taxpayers file returns and compute their own liability.

2. Assessment by Tax Authorities (Regular Assessment)

   • The tax department examines the taxpayer’s records and determines the tax liability.
   • Used when taxpayers fail to file returns or when discrepancies are found.

3. Best Judgment Assessment

   • Applied when a taxpayer fails to file a return or provides incomplete information.
   • The tax officer estimates the tax liability based on available data.

4. Reassessment

   • Conducted if the tax department finds errors or omissions in a previously assessed return.
   • Can be initiated within a specified period (e.g., 6 years under Nepal’s Income Tax Act).

5. Revised Assessment

   • Made when the taxpayer voluntarily corrects errors in a previously filed return.
   • Often results in additional tax payment or refund if overpaid.

6. Provisional Assessment

   • Used for taxpayers with uncertain income (e.g., businesses with fluctuating revenues).
   • A preliminary assessment is made, and adjustments are made later based on final accounts.

7. Final Assessment

   • The conclusive assessment after considering all adjustments, appeals, and revisions.

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Self-Assessment of Tax

Self-assessment is a system where taxpayers are responsible for calculating, filing, and paying their own taxes based on their financial records. This method promotes transparency, reduces administrative burden on tax authorities, and encourages voluntary compliance.

Features of Self-Assessment in Nepal

1. Taxpayer’s Responsibility

   • The taxpayer must maintain accurate records of income, expenses, and transactions.
   • Must file returns within the prescribed deadline (e.g., Ashad 30 for income tax in Nepal).

2. Use of Tax Forms

   • Taxpayers fill out prescribed forms (e.g., Form 2 for income tax, Form 10 for VAT).
   • The Income Tax Department (ITD) provides guidelines and software (e.g., e-Filing Portal) to assist taxpayers.

3. Payment of Tax

   • After calculating the tax liability, the taxpayer pays the tax through authorized channels (e.g., Ebanking, bank counters, or tax payment centers).
   • Payment receipts must be retained for audit purposes.

4. Verification by Tax Authorities

   • While taxpayers compute their own tax, the tax department may conduct audits, inspections, or random checks to verify accuracy.
   • Discrepancies may lead to penalties or reassessment.

5. Penalties for Non-Compliance

   • Late filing attracts penalties (e.g., 1% per month on unpaid tax under the Income Tax Act).
   • Underreporting or fraudulent returns may result in heavy fines or imprisonment.

Advantages of Self-Assessment

• Reduces Tax Evasion: Taxpayers are more likely to declare accurate income when they compute their own tax.
• Efficiency: Minimizes the workload of tax authorities, allowing them to focus on high-risk cases.
• Transparency: Encourages accountability and reduces corruption in tax administration.
• Convenience: Taxpayers can file returns online, reducing physical paperwork.

Disadvantages of Self-Assessment

• Complexity for Small Taxpayers: Individuals with limited accounting knowledge may find it difficult to compute taxes accurately.
• Risk of Errors: Mistakes in calculations can lead to underpayment or overpayment of taxes.
• Dependence on Honesty: Some taxpayers may underreport income to avoid taxes, leading to compliance issues.

Self-Assessment Process in Nepal (Step-by-Step)

1. Determine Taxable Income

   • Identify all sources of income (salary, business, rent, capital gains, etc.).
   • Deduct allowable expenses (e.g., business costs, donations, interest on loans).

2. Apply Applicable Tax Rates

   • For individuals, progressive tax rates apply (e.g., 1%–30% under the Income Tax Act).
   • For companies, a flat corporate tax rate (e.g., 25% for domestic companies) applies.

3. Compute Tax Liability

   • Multiply taxable income by the applicable rate.
   • Subtract any tax credits (e.g., VAT input tax, donations to approved NGOs).

4. File Tax Return

   • Submit Form 2 (Income Tax) or Form 10 (VAT) through the e-Filing Portal or offline.
   • Attach supporting documents (e.g., bank statements, invoices, audit reports).

5. Pay Tax

   • Use Ebanking, bank counters, or tax payment centers to settle the tax liability.
   • Retain payment receipts for future reference.

6. Retain Records

   • Keep financial records for at least 6 years (as per Nepal’s tax laws) in case of an audit.

Example of Self-Assessment Calculation (Income Tax)

Assume Mr. Ram Prasad earns:

• Salary Income: NPR 1,200,000
• Business Income: NPR 800,000
• Donations to Approved NGOs: NPR 50,000

Step 1: Calculate Gross Income $$\text{Gross Income}=\text{Salary}+\text{Business Income}=1,200,000+800,000=\text{NPR }2,000,000$$

Step 2: Deduct Allowable Expenses

• Donation Deduction: NPR 50,000 (100% deductible)
• Business Expenses: Assume NPR 300,000 (standard deduction for small businesses)

$$\text{Total Deductions}=50,000+300,000=\text{NPR }350,000$$

Step 3: Compute Taxable Income $$\text{Taxable Income}=\text{Gross Income}-\text{Deductions}=2,000,000-350,000=\text{NPR }1,650,000$$

Step 4: Apply Tax Slabs (Progressive Rates for Individuals)

Step 5: File Return and Pay Tax

• Mr. Ram Prasad files Form 2 and pays NPR 185,000 via Ebanking.

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(b) "Tax is the compulsory contribution from a person to government". Explain.

The statement "Tax is the compulsory contribution from a person to government" is a fundamental definition of taxation. To understand this fully, we must analyze its components: compulsory nature, contribution, and the recipient (government). This definition is derived from Adam Smith’s principles of taxation and is widely accepted in modern tax systems, including Nepal’s.

1. Compulsory Nature of Tax

The term "compulsory" means that tax is not voluntary—it is a legal obligation imposed by the state on its citizens or entities (individuals, businesses, organizations) without any direct quid pro quo (immediate benefit in return).

Key Features of Compulsory Taxation

• Legal Enforcement: Tax laws (e.g., Income Tax Act, VAT Act) mandate payment. Non-payment leads to penalties, fines, or legal action.
• No Choice: Unlike donations or voluntary payments, taxpayers cannot refuse to pay tax without facing consequences.
• Sanctioned by Law: Governments use police, courts, and tax authorities to enforce tax collection.

Example in Nepal

• Under the Income Tax Act, 2058, individuals must file returns and pay tax by Ashad 30 (usually July).
• Failure to pay results in interest (1% per month) and penalties (up to 200% of tax evaded).

2. Contribution to Government Revenue

The phrase "contribution from a person" indicates that tax is a financial resource provided by individuals, businesses, or entities to fund government activities.

Sources of Tax Contribution

• Individuals: Income tax, wealth tax, property tax.
• Businesses: Corporate tax, VAT, excise duty.
• Consumers: Sales tax, customs duty.

Purpose of Contribution

Tax revenue is used for:

• Public Services: Education, healthcare, infrastructure (roads, bridges).
• Defense and Security: Army, police, disaster management.
• Social Welfare: Pensions, subsidies, poverty alleviation.
• Economic Development: Industrial incentives, agriculture support.

Example: Nepal’s Tax Revenue Allocation

3. Government as the Recipient

The phrase "to government" specifies that tax is collected by public authorities (central, provincial, or local governments) and not by private entities.

Levels of Government in Nepal

1. Federal Government (Central)

   • Collects income tax, VAT, customs duty, corporate tax.
   • Allocates funds to provinces and local bodies.

2. Provincial Governments

   • Collect provincial taxes (e.g., entertainment tax, vehicle tax).
   • Funds provincial-level projects (e.g., hospitals, roads).

3. Local Governments (Municipalities, Rural Municipalities)

   • Collect municipal taxes (e.g., property tax, water tax).
   • Used for local development (schools, parks, waste management).

Tax Administration in Nepal

• Inland Revenue Department (IRD): Manages income tax, VAT, excise.
• Customs Department: Handles import/export duties.
• Local Bodies: Collect municipal taxes.

4. Legal and Economic Justification

The definition aligns with Adam Smith’s four maxims of taxation:

1. Equity (Fairness): Taxes should be proportional to income (progressive taxation).
2. Certainty: Taxpayers should know when and how much to pay.
3. Convenience: Tax should be collected at a suitable time (e.g., salary deduction).
4. Economy: Collection costs should be minimal.

Example: Equity in Nepal’s Tax System

• Progressive Income Tax: Higher earners pay a larger percentage (e.g., 1% for low income, 30% for high income).
• VAT: Applied uniformly (13%) but affects high-income groups more due to consumption patterns.

5. Tax vs. Other Contributions

To clarify why tax is distinct from other payments to the government, let’s compare it with fees, fines, and donations:

6. Criticisms and Limitations of the Definition

While the definition is widely accepted, some economists argue that it is incomplete because:

• Taxes can be indirect (e.g., VAT is paid by consumers but shifted to businesses).
• Some taxes are not purely "contributions" (e.g., sin taxes on alcohol/tobacco may discourage harmful behavior).
• Taxes can be regressive (e.g., flat-rate sales tax affects low-income groups more).

Example: VAT in Nepal

• Legal Definition: VAT is a compulsory tax on goods and services.
• Economic Impact: While it funds government revenue, it is regressive because poor people spend a larger portion of their income on essential goods (food, medicine).

7. Tax in the Context of Nepal’s Constitution and Laws

The Constitution of Nepal (2015) and tax laws emphasize:

• Article 22(1): "Every citizen shall have the right to participate in the management of public affairs."
• Article 22(2): "Taxes shall be levied and collected in accordance with law."
• Income Tax Act, 2058: Mandates tax filing and payment.

Case Study: Tax Evasion in Nepal

• Problem: Many taxpayers underreport income to avoid taxes.
• Government Response:
  • Stronger audits by the IRD.
  • Whistleblower rewards for reporting tax evasion.
  • Digitalization (e-Filing, PAN linking) to track transactions.

8. International Perspective

The definition aligns with Article 3 of the UN Model Tax Convention, which states:

"A tax is a pecuniary burden laid upon individuals or property for the support of the government."

Comparison with Other Countries

9. Conclusion

The statement "Tax is the compulsory contribution from a person to government" encapsulates the legal, economic, and administrative aspects of taxation. In Nepal, this principle is enforced through:

• Mandatory tax laws (Income Tax Act, VAT Act).
• Enforcement by tax authorities (IRD, Customs).
• Use of revenue for public welfare (health, education, infrastructure).

While the definition is broad and inclusive, modern tax systems (like Nepal’s) also incorporate equity, efficiency, and behavioral incentives (e.g., subsidies, tax holidays) to balance revenue collection with social goals. The compulsory nature ensures that taxes fund essential government functions, but transparency and fairness are equally important to maintain public trust.