Deciphering the Debate: Double Taxation or Not? Sections 57 and 95'A' of the Income Tax Act
The issue of whether the provisions of Section 57 and 95'A' of the Income Tax Act constitute double taxation has become a topic of debate among tax authorities, chartered accountants, and legal practitioners. When 50 percent or more of a company's shares are bought and sold, resulting in a change in control, taxes are imposed under both Section 57 and Section 95'A' based on capital gains from the sale of shares. To determine whether this constitutes double taxation, it is important to examine the details outlined in these two clauses.
Under Section 57 of the Act, if there is a 50% or more change in ownership of an entity within a three-year period, a 25% tax is levied on the profit deemed to be a 'change in control' of the company. This tax is applicable when all the assets and liabilities of the company are sold at market value on the date of the change in control. Section 57 imposes a tax of 25% on the difference between the current market value and the initial investment in the company. The company is responsible for paying this tax.
Similarly, Section 95'A', specifically sub-section 2 (b), states that advance tax should be withheld on profits received from the interest of entities not listed in the Securities Board of Nepal (SEBON). The tax rates for resident natural persons, resident entities, and others are 10%, 15%, and 25% respectively. This section imposes a tax on the profit earned from the sale of shares. For example, if shares of a company are bought for Rs. 100 and sold for Rs. 150, this tax is charged on the profit of Rs. 50. The person or company selling the shares is responsible for paying this tax.
Therefore, when less than 50 percent of a company's shares are bought and sold, only the tax under Section 95'A' is applicable, and Section 57 is not invoked. This distinction has not been disputed thus far. However, when 50 percent or more shares of a company are bought and sold, the tax offices under the Inland Revenue Department (IRD) collect tax at a rate of 25% according to Section 57 and up to 25% from the seller based on subjective evaluation under Section 95'A'. Some companies subject to this form of taxation have raised concerns about being taxed twice, although no public statements have been made.
Advocate Mahesh Thapa, an expert in tax law, has been quoted as saying that tax authorities have been observed to levy both taxes on the company, which should have been divided between the company and the seller as per Section 57 and Section 95'A', respectively. This practice is deemed incorrect. Thapa also notes that tax offices often consider the taxes under both sections and determine the higher tax amount. This approach is also incorrect according to Thapa. Furthermore, it has been observed that tax assessments are based not only on the sale price of the company's shares but also on an estimated value of the business, which Thapa asserts is erroneous.
The issue of double taxation has been prominently raised in a recent dispute between Ncell and the government, as highlighted in the decision of the arbitration committee of the International Centre for Settlement of Investment Disputes (ICSID). The Big Taxpayer Office assessed capital gains tax to TeliaSonera Company and Ncell under Section 95'A'. Ncell received a tax payment certificate stating that it had paid the determined capital gains tax. However, the Big Taxpayer Office later determined a new tax of Rs. 57 Arba under Section 57, resulting in Ncell claiming double taxation. The Supreme Court issued an interim order in favor of Ncell, acknowledging the potential burden of double taxation. The court stated that if the capital gains tax was already collected under Section 95'A', imposing additional tax under Section 57 would indeed constitute double taxation. Previously, the Supreme Court had ruled that Ncell should be subject to capital gains tax under Section 57 and not Section 95'A'. The Supreme Court is currently reviewing the case, and it is anticipated that the court will provide further clarity on the compatibility of Sections 57 and 95'A'.
In a separate case filed by Dwarikanath Dhungel and others, it was argued in the Supreme Court that Ncell should pay tax liability as per Section 95'A'. However, the Supreme Court's decision primarily revolved around Article 57. The court stated that in cases of change of ownership resulting in the transfer of property, Ncell cannot be exempted from paying tax on the natural gains of the property, as outlined in Section 57(1) of the Income Tax Act.
While contesting the case, Ncell claimed that it should not be taxed under Section 95'A'. However, the company did not argue against the applicability of Section 57 in the purchase and sale of shares. Instead, the Supreme Court considered separate income statements submitted before and after the change of ownership, which led to the interpretation that Ncell should be subject to tax under Section 57. A government representative stated that the Supreme Court made this interpretation because Section 57 is a standard provision in international practice, and Ncell cannot escape taxation under this section.
Now let's examine why Section 95'A' might be considered weak. Section 95'A' is the section that imposes tax on capital gains. According to the Big Taxpayer Office, when Ncell shares are sold, a 25% tax is levied on TeliaSonera, with 10% to be paid by Telia and 15% by Ncell. However, it is argued that Telia, as a non-resident of Nepal, may not be obligated to pay taxes in Nepal. Section 6 of the Income Tax Act states that non-residents are subject to taxation in Nepal only on income sourced from employment, business, or investment in Nepal. Section 67 of the Act does not consider shares held by non-residents in Nepal as a source of income in Nepal. This is why the Supreme Court's decision is seen as wise, as it aligns with the interpretation that taxes should not be imposed on Telia as a non-resident.
Chartered Accountant Shesh mani Dahal, a tax law expert, argues that imposing taxes under both sections is legally permissible but judicially incorrect. He notes that the Income Tax Act allows for separate taxation under Section 57 and Section 95'A'. However, taxing the taxpayer twice in the same transaction through two taxes of the same nature, as prescribed by both sections, may be legally acceptable but lacks fairness.
In conclusion, the debate revolves around the imposition of taxes under Section 57 and Section 95'A' of the Income Tax Act. While the legality of imposing taxes under both sections exists, concerns of double taxation have been raised. The Supreme Court's interpretation and ongoing review of the issue will likely shed further light on the compatibility of Sections 57 and 95'A' in the context of Nepal's Income Tax Act and international law.
(Disclaimer: The article has been translated while retaining factual information and legal technicalities.)
(Translated by Aashish Chaudhary)
