Banks challenge government’s tax provisions in Supreme Court

KATHMANDU: Sixteen commercial banks have jointly filed a petition in the Supreme Court opposing tax provisions introduced by the government in the current financial year’s Financial Act, targeting Further Public Offerings (FPO) and ‘bargain purchase gain’ in merger and acquisition processes. They assert that these provisions violate constitutional rights and disrupt the investment environment.

Under Article 133(1) of the Nepali Constitution, laws conflicting with constitutional provisions are declared invalid from the outset. Article 11(2) and (3) empower the banks to seek the annulment of the government’s taxation on FPOs, demanding appropriate remedies, including prohibitions and restrictions.

The banks have submitted two writs seeking the cancellation of taxes on FPOs and taxes on bargain purchase gains. Seven commercial banks have jointly requested the removal of FPO tax provisions, while fifteen commercial banks have united in demanding the removal of taxes imposed on ‘bargain purchase gains’ during mergers and acquisitions.

Among the twenty operational commercial banks, three government banks (National Commercial Bank, Krishi Bikas Bank, and Nepal Bank), along with Everest Bank, have refrained from legal action. However, Nepal Bank, despite being affected by the tax regulations, has not initiated legal proceedings against the government.

Sunil KC, President of Nepal Bankers Association and CEO of NMB Bank, explained that they had repeatedly urged relevant government agencies not to implement the tax measures on FPOs and Bargain Purchase Gains from the budget. However, since their requests were not heard, they were compelled to seek judicial intervention.

The Finance Act 080 imposes taxes on the premium received from FPOs and the profits generated during mergers or acquisitions (bargain purchase gains). The writ argues that this taxation is retroactive, unconstitutional, and beyond the government’s jurisdiction.

The banks contend that the new tax regime contradicts previous laws and defames judicial sovereign rights. They also assert that distributed bonus shares should not be considered as income for taxation purposes.

The writ points out that changes in shareholders have occurred after the issuance and distribution of capital from the premium received from FPOs. Imposing tax on capital distributed to previous shareholders directly affects the current shareholders.

Regarding the tax on ‘bargain purchase gains,’ the writ highlights the absence of specific provisions in the Income Tax Act to address mergers or acquisitions. It states that there is no provision for taxing income generated in such transactions.

The banks’ legal action emphasizes that the government’s actions are contrary to the existing law, and they demand the annulment of these tax provisions. They argue that the executive branch cannot unilaterally exercise judicial powers and must adhere to established legal processes.

The private sector, including banks, has strongly opposed the government’s introduction of these new taxes, asserting that they violate constitutional provisions and damage the investment environment. Despite meetings with government officials, the economic bill containing these provisions was passed. Consequently, the banks have resorted to legal action.

The banks argue that this tax system is outdated, contrary to national and international standards, and infringes upon constitutional rights. They cite guidelines and letters from the Internal Revenue Department that suggest no taxation on these transactions. The private sector asserts that such measures will discourage foreign investment, going against constitutional, legal, and international standards.

The Economic Act, as proposed by the government, includes provisions for tax exemptions for income related to mergers and acquisitions filed before November 080, demonstrating efforts to align with global practices.