March 30, 2020
Permitted Expenses for Income Tax Act 2002.
The Federal Government and State Governments have established funds to be utilize for action against COVID-19. Section 12(3) of ITA provides that if expenses are incurred by person for certain activities prescribed or donation is provided for such prescribed activities then Nepal Government can allow full or partial deduction of such expenses for the purpose of calculating income tax of such persons by publishing in the official gazette. The Government has through its decision dated March 29, 2019 announced that contribution made to the COVID Fund can be deducted as expenses. It appears from the wording of the decisions that full deductions will be allowed. The official gazette has not yet been published and expected to be issued soon which is also expected to clarify the scope of deduction.
Corporate Social Responsibility (“CSR”) Utilization
The Central Bank has also made key policy announcement dated March 29, 2020 and has also clarified that contribution made to the COVID Fund shall be regarded as utilization of the corporate social responsibility fund. As a background, the Central Bank requires banks and financial institutions to allocate at least one percent (1%) of net profit and deposit the same in a separate CSR fund. The area of utilization has been categorized as follows; (a) utilization for social projects such as direct and indirect utilization in programs related to education, health, disaster management etc., (b) direct grant expenditure, (c) 17 areas recognized by sustainable development goals, (d) spending on child day care centre for employee of BFIs.
The Circular has restricted for utilization of CSR fund for branding purpose but it can use its name as "reference". The BFIs shall not restrict its utilization of funds targeting a specific geographical area and subject matter. The utilization must not be made so as to acquire personal or political gain in any manner. The Circular further requires, the BFIs to implement internal procedure for implementation of CSR fund. The BFI requires to disclose spending on CSR fund in its annual financial statement.
The Industrial Enterprise Act 2020 (“IEA”) also requires (i) medium industries and large industries and (ii) cottage industries and small industries having annual turnover more than NPR 150,000,000 in order to allocate at least 1% of the annual net profit (the “CSR Fund”) to be utilized towards corporate social responsibility. The CSR Fund is to be utilized in the areas that has been prescribed. The areas that are prescribed under Rule 37 of the Industrial Enterprise Regulation, 2019 (2076) covers, amongst others, (a) control of natural calamities like flood, landslide, earthquake, fire and rescue related activities, and (b) health related activities including distribution of medicines or health related equipment to community health institutions, enhancement of health related awareness and carrying out of health camp. IEA allows to treat spending on CSR requirement as expenditure for the purpose of income tax.
The definition of the natural calamity appears to be narrow. The issue of whether the contribution from CSR Fund to COVID Fund can be classified as utilization of the CSR Fund is not clear. It appears that such contribution should fall within the scope of activities covering health. The Central Bank has already provided this clarification and the same approach should be followed for the CSR Fund under the Industrial Enterprise Act 2020.
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