Kathmandu, September 3

Commercial banks have sought Nepal Rastra Bank (NRB)’s favour to apply the traditional method in tax calculation.

Following the execution of the new accounting and reporting standards — Nepal Financial Reporting Standards (NFRS) — banks started publishing financial statements that complied with the NFRS rules from the fourth quarter of the last fiscal. Due to lack of loan-loss provisioning in the new accounting and reporting method, the profits made by banks witnessed a sudden growth from the last quarter of the previous fiscal.

Along with the surge in profits due to the new accounting and reporting system, banks are worried about how the tax administration will calculate their corporate income tax. Banks need to submit 30 per cent of their operating profit as corporate income tax (CIT). However, if the tax administration calculates the tax based on NFRS method, the banking sector will have to pay an additional Rs eight to nine billion in CIT in this fiscal. Apart from the CIT, banks also collect withholding taxes.

The banking sector has been contributing a total of around Rs 50 billion to Rs 52 billion every year, according to Gyanendra Prasad Dhungana, president of Nepal Bankers’ Association — the umbrella network of domestic commercial banks.

As per the provision of income tax, NRB has the authority to prescribe the tax collection method. Banks are scared of having to pay more taxes and have thus sought the central bank’s favour for an interim arrangement in tax calculation as per the traditional method, under which banks will calculate the operating profit based on the loan-loss provision. As per NFRS, banks cannot provision on loans if debt servicing is regular.

However, central bank rule has made it mandatory for banks to set aside one per cent of loans as loan-loss provisioning while floating loans and provisioning is raised based on the performance of repayment of interest and principal and strength of collateral.

NRB has urged the Institute of Chartered Accountants of Nepal (ICAN) — the accounting sector regulatory body — and Nepal Accounting Standard Board (NASB) for giving continuity to the loan-loss provision citing asset impairment provision of the NFRS can take a longer time for its execution.

NRB has developed the regulatory reserve from the difference of the profit as per NFRS and traditional regulatory requirement balance sheets. As per central bank officials, the regulatory reserve will be added to the core capital of the banks after the interim provision of regulatory reserve ends.

Bishnu Nepal, director general of the Inland Revenue Department (IRD) under the Ministry of Finance, said that the government will slap taxes as per the provision of the Income Tax Act.

It is reported that the Ministry of Finance has asked NRB, ICAN and NASB for appropriate suggestions to slap corporate income tax. Banks have to submit 40 per cent of their annual income tax estimation of this fiscal by mid-January.