Tax controversy in the Industrial Enterprise Act

KATHMANDU: The government has amended the Industrial Enterprises Act to invite more investment in the manufacturing and production sector. There are more facilities being provided including tax exemption to the industries through the amendment of the law.
The act was amended to ease the investment climate in the country. The government organized the Investment Summit to attract domestic and foreign investors in the manufacturing industries after amending the act.
However, a provision related to the rate of income tax has given rise to a dispute between the government and private sector. Article 24 of the amended act has a provision of income tax exemption which states, ‘the manufacturing industries will get 20 percent exemption on the rate of income tax and additional five per cent exemption will be provided if they export the production.’
But the tax authority has refused to provide the tax exemption facility to the taxpayers. The tax offices have been imposing 20 per cent income tax on the manufacturing industries as per the provision of the law. The income tax rate for other sectors is 25 per cent of the total income.
Inland tax offices are calculating the income tax by exempting the 20 per cent from the 25 per cent to the manufacturing industries which means they have to pay 20 per cent income tax to the government.
According to the provision of the Income Tax Act, manufacturing industries need to pay 20 per cent income tax. The private sector has lobbied for 20 per cent exemption from the total 20 per cent tax rate. Or, they have sought 16 per cent income tax rather than the 20 per cent imposed by the government.
Representatives of the private sector have often said that ‘they have to get subsidy from the government as per the provision of the Income Tax Act.’
“The government has given additional subsidy to the manufacturing industries which means they are paying 20 per cent income tax and additional facility should be given to the newly established companies,” said Pashupati Muraraka, immediate past president of the Federation of Nepalese Chambers of Commerce and Industry.
He also added, “In the income tax act, there is a provision of paying 20 per cent tax by the manufacturing industries and we lobbied for getting 20 per cent subsidy (only 16 per cent) as per the provision of the Industrial Enterprise Act.’
Former chief of the Large Taxpayer’s Office, Jhalakram Adhikari, argues that this is a policy issue rather than tax rate. “Some of the taxpayers have filed a case in the court against the tax office,” Adhikari said, “The court will resolve the dispute.”
Policy change ends the dispute
The years-long debate between the government and private sector regarding the tax rate for the manufacturing industries has come to an end. The Ministry of Finance has changed the provision related to the tax rate for manufacturing industries by amending the Finance Act 2077.
‘Manufacturing industries will get the subsidy according to the provision of the Industrial Enterprises Act 2076,’ the Finance Act mentions, which means, the manufacturing industries will get 20 per cent tax exemption (from the 25 per cent) facility.
“This year the dispute has come to an end after the amendment of the Finance Act,” Muraraka said, “I think this issue will not crop up in the future, however, some cases that were registered last year are not settled yet.”