Tax in Business: What You Need to Know

Introduction to Tax

Tax is a compulsory payment made by individuals and businesses to the government, based on their income, profits, property, sales, or consumption of goods and services. Tax is one of the main sources of government revenue, which is used to fund public services and welfare programs, such as education, health, infrastructure, and defense. Tax also plays a role in regulating the economy, influencing the behavior of taxpayers, and redistributing wealth and income.

However, tax does not provide any direct benefit or return to the taxpayers, unlike fees or charges for specific services. Tax is imposed by law, and taxpayers have to comply with the legal procedures and rules regarding tax declaration, payment, and filing. Tax is also a personal responsibility, and taxpayers have to pay the correct amount of tax according to their tax liability and eligibility for deductions and exemptions.

Businesses have to comply with the tax laws and regulations of the countries or regions where they operate, and they have to pay the appropriate amount of tax on time. Businesses also have to keep track of their income, expenses, assets, liabilities, and transactions, and they have to maintain proper records and documents for tax purposes. Businesses can also take advantage of various tax incentives, deductions, exemptions, and credits that are available to them, and they can seek professional advice and assistance from tax experts and consultants. By doing so, businesses can optimize their tax efficiency and effectiveness, and they can contribute to the economic and social development of the society.

Taylor defines, "Taxes are compulsory payments to government without expectations of direct return or benefit to the taxpayer."

According to Bastable, "A tax is a compulsory contribution of the wealth of a person for the service of public welfare."

Types of Tax

There are different types of tax that businesses have to deal with, depending on their nature, size, location, and activities. Generally, tax can be classified into two categories: direct tax and indirect tax.

A. Direct Tax

Direct tax is a tax that is levied on the income or wealth of a person or an entity, such as a business. Direct tax is paid directly to the government by the taxpayer, and it cannot be shifted or passed on to another person. An individual feels the burden of direct tax. Some examples of direct tax are:

 
1. Income tax: This is a tax that is charged on the income earned by a person or a business from various sources, such as salary, wages, interest, dividends, rent, royalties, etc. Income tax rates vary depending on the level of income and the tax brackets applicable to the taxpayer.

 
2. Corporation tax: This is a tax that is levied on the profits or net income of a company or a corporation. Corporation tax rates differ depending on the type and size of the company, and the country or jurisdiction where it operates.

 
3. Property tax: This is a tax that is imposed on the ownership or possession of property, such as land, buildings, vehicles, etc. Property tax rates are usually based on the value or assessment of the property, and the location and use of the property.

 
4. Interest tax: This is a tax that is applied on the interest income received by a person or a business from deposits, loans, bonds, securities, etc. Interest tax rates may vary depending on the source and amount of interest income, and the tax treaty agreements between countries.

 
5. Rent tax: This is a tax that is charged on the rental income earned by a person or a business from leasing or renting out property, such as land, buildings, equipment, etc. Rent tax rates may depend on the type and duration of the lease or rental agreement, and the expenses incurred by the landlord or the tenant.

 
6. Capital gain tax: This is a tax that is levied on the profit or gain realized by a person or a business from selling or transferring an asset, such as property, shares, securities, etc. Capital gain tax rates may vary depending on the type and holding period of the asset, and the cost and expenses involved in the transaction.

B. Indirect Tax

Indirect tax is a tax that is imposed on the production, sale, or consumption of goods and services, rather than on the income or wealth of a person or an entity. Indirect tax is paid indirectly to the government by the taxpayer, and it can be shifted or passed on to another person, such as the consumer or the end-user. An individual does not feel the burden of indirect tax. Some examples of indirect tax are:

 
1. Value Added Tax (VAT): This is a tax that is added to the value of a good or a service at each stage of its production and distribution, from the raw material to the final product. VAT is collected by the seller or the provider of the good or the service, and it is paid by the buyer or the recipient of the good or the service. VAT rates vary depending on the type and category of the good or the service, and the country or region where it is sold or provided.

 
2. Custom duty: This is a tax that is imposed on the import or export of goods across the national or regional borders. Custom duty is collected by the customs authorities at the point of entry or exit of the goods, and it is paid by the importer or the exporter of the goods. Custom duty rates depend on the type and value of the goods, and the trade agreements and policies between countries or regions.

 
3. Excise duty: This is a tax that is levied on the production or manufacture of specific goods, such as alcohol, tobacco, fuel, etc. Excise duty is collected by the producer or the manufacturer of the goods, and it is paid by the consumer or the user of the goods. Excise duty rates are usually based on the quantity or volume of the goods, and the social and environmental impact of the goods.

 
4. Sales tax: This is a tax that is charged on the sale of goods or services within a country or a state. Sales tax is collected by the seller or the provider of the goods or services, and it is paid by the buyer or the recipient of the goods or services. Sales tax rates vary depending on the type and category of the goods or services, and the location and jurisdiction of the sale or the provision.

 
5. Goods and Service tax (GST): This is a tax that is applied on the supply of goods and services within a country or a region. GST is collected by the supplier of the goods and services, and it is paid by the consumer or the user of the goods and services. GST rates are usually uniform across the country or the region, and it replaces multiple taxes, such as VAT, custom duty, excise duty, sales tax, etc.

Difference between Direct tax and Indirect Tax

Basis	Direct Tax	Indirect Tax
Definition	A tax that is levied on the income or wealth of a person or an entity, and paid directly to the government by the taxpayer.	A tax that is imposed on the production, sale, or consumption of goods and services, and paid indirectly to the government by the taxpayer via intermediary.
Burden	The burden of direct tax cannot be shifted or passed on to another person or group.	The burden of indirect tax can be shifted or passed on to another person or group, such as the consumer or the end-user.
Progressivity	Direct tax is usually progressive, meaning that the tax rate increases as the income or wealth of the taxpayer increases.	Indirect tax is usually regressive, meaning that the tax rate decreases as the income or wealth of the taxpayer increases.
Administration	Direct tax is relatively difficult and costly to administer, as it requires proper identification, assessment, and collection of tax from the taxpayers.	Indirect tax is relatively easy and cheap to administer, as it is collected at the point of sale or consumption of goods and services.
Evasion	Direct tax is more prone to evasion, as taxpayers may under-report or conceal their income or wealth, or use illegal means to avoid paying tax.	Indirect tax is less prone to evasion, as taxpayers cannot avoid paying tax by purchasing or consuming goods and services.
Inflation	Direct tax helps in curbing inflation, as it reduces the disposable income and purchasing power of the taxpayers.	Indirect tax may cause inflation, as it increases the prices and costs of goods and services.
Equity	Direct tax is more equitable, as it is based on the ability to pay principle, and it reduces the income and wealth inequality in the society.	Indirect tax is less equitable, as it is based on the benefit principle, and it affects the poor and the rich equally.

Features of Tax

1. Compulsory Payment: Tax is not a voluntary or optional contribution, but a mandatory and enforceable obligation that taxpayers have to fulfill. Taxpayers cannot refuse or evade paying tax, and they may face penalties or legal actions if they fail to do so.

 
2. Source of government revenue: Tax is one of the main ways that the government collects money to finance its expenditures and activities. Tax revenue is used to fund public services and welfare programs, such as education, health, infrastructure, and defense.

 
3. Used in Public Welfare: Tax is not used for the personal benefit or profit of the government or the taxpayers, but for the common good and interest of the society. Tax is used to provide public goods and services that benefit everyone, such as roads, parks, schools, hospitals, etc.

 
4. No direct benefit: Tax does not provide any specific or tangible return or reward to the taxpayers, unlike fees or charges for specific services. Taxpayers do not receive any direct or proportional benefit from paying tax, and they may not benefit from all the public goods and services that tax revenue is used for.

 
5. Legal procedures: Tax is imposed and regulated by law, and taxpayers have to follow the legal procedures and rules regarding tax declaration, payment, and filing. Taxpayers have to comply with the tax laws and regulations of the countries or regions where they operate, and they have to report their income, expenses, assets, liabilities, and transactions to the tax authorities.

 
6. Personal responsibility: Tax is a personal responsibility, and taxpayers have to pay the correct amount of tax according to their tax liability and eligibility for deductions and exemptions. Taxpayers have to calculate and pay their own tax, and they have to keep track of their records and documents for tax purposes. Taxpayers are also responsible for any errors or mistakes in their tax declaration or payment, and they may have to rectify them or face consequences.

PAN (Permanent Account Number)

PAN, or Permanent Account Number, is a unique identification number issued by the Inland Revenue Department (IRD) of Nepal to individuals and entities that are engaged in any kind of economic activity. PAN is mandatory for all taxpayers, whether they are salaried employees, self-employed professionals, business owners, or investors. PAN is also required for various transactions, such as opening a bank account, applying for a loan, registering a vehicle, or filing a tax return.

PAN helps the IRD to keep track of the income, expenses, assets, liabilities, and transactions of the taxpayers, and to ensure that they pay the correct amount of tax on time. PAN also helps the taxpayers to claim various tax benefits, such as deductions, exemptions, credits, and refunds. PAN also facilitates the implementation of the Tax Deducted at Source (TDS) system, where the payer of income deducts a certain percentage of tax from the payment and deposits it to the IRD on behalf of the payee.

The process of PAN registration is simple and easy, and it can be done online or offline. Here are the steps to follow for PAN registration in Nepal:

Steps/ Procedures for PAN Registration in Nepal

1. Submission of Application: The first step is to submit an application for PAN registration to the IRD. You can do this online through the IRD website, or offline by visiting the nearest IRD office. You need to fill up the PAN registration form, which is available in both Nepali and English languages. You need to provide your personal and contact details, such as name, address, phone number, email, etc. You also need to select the type of PAN you are applying for, such as individual, firm, company, etc. You also need to mention the source and nature of your income, such as salary, business, investment, etc.

 
2. Verification of Documents: The next step is to verify your documents that support your application. You need to submit the copies of your documents, such as citizenship certificate, passport, driving license, voter ID card, etc. You also need to submit the copies of your income-related documents, such as salary slip, bank statement, audit report, etc. You need to submit these documents online through the IRD website, or offline by visiting the nearest IRD office.

 
3. Entering information into computer system: The third step is to enter your information into the computer system of the IRD. The IRD officials will check and verify your application and documents, and enter your information into the database. They will also assign you a unique PAN, which consists of 10 alphanumeric characters. The first two characters represent the type of PAN, the next five characters represent the serial number, and the last three characters represent the check digit.

 
4. Corroborate information: The fourth step is to corroborate your information with the IRD. The IRD officials will cross-check and confirm your information with the relevant sources, such as banks, employers, tax authorities, etc. They will also verify your tax compliance status, and ensure that you have no pending tax dues or liabilities. They will also update your PAN details in the IRD system, and link your PAN with your other identification numbers.

 
5. Print the certificate: The fifth step is to print your PAN certificate. The IRD officials will print your PAN certificate, which contains your name, address, PAN, and QR code. The PAN certificate is a valid proof of your identity and tax registration, and it can be used for various purposes, such as opening a bank account, applying for a loan, registering a vehicle, or filing a tax return.

 
6. Register, Stamp and issue the certificate: The final step is to register, stamp and issue your PAN certificate. The IRD officials will register your PAN certificate in the IRD records, and stamp it with the IRD seal and signature. They will also issue your PAN certificate to you, either online through the IRD website, or offline by visiting the nearest IRD office. You need to collect your PAN certificate within 15 days of your application, otherwise it will be cancelled.

(External link) Online PAN registration process in Nepal