- s.119 interest on social security tax struck out, in NPR
- 43,532
- Amount the tax office added to taxable income, in NPR
- 8,85,961
- Fiscal year assessed
- 2067/68
- Date of the decision
- 2078 Saun 18
Most finance teams read the interest lines in an amended assessment the way they read a utility bill. The principal is argued over; the interest is assumed to follow automatically, and nobody checks how it was built. That habit is expensive. An assessment can carry more than one interest charge, each under a different section, each for a different default, and the arithmetic behind them is often assembled by hand.
The question this decision answers is narrow but common in large-taxpayer files. If tax that should have been deposited on time was late, and the assessor has already counted it in the interest for short instalments, can the assessor also charge interest on it as tax paid late? The Supreme Court said no.
The case in outline
The appellant was the Large Taxpayers' Office, Harihar Bhawan, Lalitpur, acting through its chief tax administrator. The respondent was Indushankar Chini Udyog Ltd of Hariaun, Sarlahi, acting through the chairman of its board. A joint bench of Justice Deepkumar Karki and Justice Kumar Regmi decided the appeal in case no. 183262 on 2078 Saun 18. It is reported at printed pages 58 to 60 of the Institute of Chartered Accountants of Nepal's collection of Supreme Court decisions on the VAT, Income Tax, Customs and Excise Acts.
The company filed its return for fiscal year 2067/68 on 2068/09/26, declaring taxable income of NPR 4,41,99,144. The Large Taxpayers' Office did not accept the return. It added NPR 8,85,961 to taxable income in an amended assessment decided on 2069/08/10 (p.58, para 2; p.59).
As part of that assessment the office found that the company, as employer, had withheld social security tax under sections 87 and 88 of the Income Tax Act and deposited it late. For that it charged interest under s.119 of NPR 43,532 (p.59, para 4).
The company sought administrative review. The Inland Revenue Department upheld the assessment on 2069/11/20. On appeal, the Revenue Tribunal, Kathmandu, decided on 2072/8/21 that the assessment stood except for one item: the s.119 interest on social security tax, which it reversed. The tax office appealed to the Supreme Court on that single point (p.59, para 2).
What the Court decided
The Court framed the issue simply: is interest payable for social security tax deposited late, and was the Tribunal right to remove it (p.59, para 3)?
It then set the two sections side by side. As the Court described them:
Section 118 charges interest where a person who must pay tax in instalments under s.94 pays less than the instalment requires. It is tied to the three instalments of the year.
Section 119 charges interest where tax is not paid by the date fixed for it, on the unpaid amount, for the period it stays unpaid. The Court described it as applying to tax on any kind of income that is not paid on time, other than the instalment case covered by s.118.
On the facts, the tax office had included the social security tax when it computed s.118 interest on short instalments. It had then charged s.119 interest on that same social security tax for being deposited late. The Court said the two provisions "are not provisions attracted at once for the same subject" (p.60, para 4, our translation). Once interest had been charged on the social security tax under s.118, charging it again under s.119 was not justified.
Paragraph 5 repeats the point: the office had charged both s.118 and s.119 interest on the same amount, and that was not proper. The Tribunal's decision deleting the s.119 interest was upheld and the tax office's appeal failed (p.60, paras 5 and 6).
What the decision does not decide
A decision is only as useful as an honest reading of its limits. This one is short, and several questions a practitioner would ask are not answered in it.
It did not decide that social security tax belongs in the instalment calculation. The tax office had put it there, and the Court took that as the starting point. Whether tax an employer withholds from staff salaries is part of the employer's own s.94 instalments was not argued or decided.
It did not remove the s.118 interest. The Tribunal and the Court dealt only with the s.119 line. The company still bore the s.118 charge as computed.
It did not examine rates, months or the arithmetic of either charge.
It did not address the fee for late withholding returns under s.117(3), or the rule in s.119(3) about withholding agents.
It concerns fiscal year 2067/68. We have not reviewed the current text of the Income Tax Act, and some provisions may have been amended since.
The printed judgment also contains one obvious misprint: para 2 on p.58 refers to "section 199" where the context, and the continuation on p.59, make clear that s.119 is meant.
How the Income Tax Directive sequences the two sections
The Inland Revenue Department's Income Tax Directive, 2066 explains the interest provisions in chapter 29. It is useful here because it shows the two sections working one after the other, not on top of each other.
The Directive says interest arises in two situations: where instalments are paid short of the estimated tax, and where tax is paid less than the liability, not paid, or paid late (Income Tax Directive 2066, para 29.3, printed p.614). For s.118, it explains that interest runs from each instalment date until the date the return is due under s.99(1), or, where no self-assessment was made, until the notice of the first amended assessment (printed p.614). Where an instalment paid is less than 90 percent of what was required, interest is charged on the shortfall at the normal rate, which the Directive states as 15 percent, and part of a month counts as a month (printed p.615).
For s.119, the Directive says interest runs on the amount left unpaid after the date by which tax had to be paid, for each month and part month, at the normal rate (para 29.3.2, printed p.616).
Its own worked example makes the sequence plain. A company with a tax liability of NPR 2,50,000 for fiscal year 2080/81 had paid NPR 1,90,000 through the year and paid the remaining NPR 60,000 with its return on 2081 Magh 9. The Directive computes s.118 interest of NPR 4,968.75 on the instalment shortfalls. It then computes s.119 interest of NPR 3,000 on the NPR 60,000 that was still unpaid at the end of Asoj 2081, for four months (Example 29.3.2, printed p.617). That figure checks: 60,000 at 15 percent a year for four months is NPR 3,000.
Both charges arise in the same year for the same company, and the Directive treats that as normal. The difference is that they bite on different things: s.118 on instalment shortfalls up to the return due date, s.119 on the balance that remained unpaid after it. That is consistent with Indushankar. The Court did not say a taxpayer can never face both sections in a year. It said the same amount cannot be charged under both for the same default.
The withholding angle: where social security tax really sits
Social security tax in this case was tax the company withheld from employees' pay. The Directive describes the obligation of a withholding agent separately. Under s.90(4), as the Directive explains it, tax withheld must be deposited within 25 days of the end of the month. A withholding agent who deposits late bears interest at 15 percent for the period of delay, part months counted as months, and under s.119(3) cannot recover that interest from the person whose tax was withheld (printed p.617).
There is also a fee, separate from interest, for not filing the monthly withholding return on time. Under s.117(3), as the Directive explains it, the fee is 2.5 percent a year of the tax required to be withheld, for each month or part month until the return is filed. The Directive's example: NPR 20,000 withheld in Shrawan 2080, return due on Bhadra 25, filed on Asoj 3, two months late, fee NPR 83.33 (Example 29.2.4, printed p.610).
So for late-deposited withholding tax, the natural charge is s.119 interest, plus the s.117(3) fee where the return was also late. The s.118 instalment regime is designed for a person's own tax on business or investment income. The tax office in Indushankar charged the social security tax under both, and the Court cut one away.
Illustrative example
The following figures are invented to show the arithmetic. They are not from the case.
A Kathmandu manufacturer withholds social security tax of NPR 50,000 every month, NPR 6,00,000 for the year. Through a payroll handover, each month's deposit goes in two months late, and the monthly withholding return is filed late by the same two months.
Interest on late deposit, on the Directive's 15 percent rate: 50,000 × 15% × 2/12 = NPR 1,250 a month, NPR 15,000 for the year.
Fee for late withholding returns under s.117(3), at 2.5 percent a year: 50,000 × 2.5% × 2/12 = NPR 208.33 a month, about NPR 2,500 for the year.
Now suppose the amended assessment also folds the NPR 6,00,000 into the company's instalment base and charges s.118 interest on short instalments, while keeping a separate s.119 line for the same late deposits. On Indushankar, that second layer is exactly what cannot stand: the same social security tax is being charged interest twice for being paid late.
What the company should not assume is that it walks away with no interest. In Indushankar it was the s.119 line that was removed, because s.118 interest had already been charged on the same amount. The decision gives a taxpayer a strong argument against duplication. It does not give a free pass on the delay.
What changes the answer
The decision turns on identity: the same amount, the same default. Several facts can change the outcome.
Different amounts. If the s.118 charge relates to the company's own income tax instalments and the s.119 charge relates only to withheld tax, there is no overlap, and both can stand.
Different periods. The Directive applies s.118 up to the return due date and s.119 after it. Interest on a balance unpaid after the due date is not a duplicate of interest on an instalment shortfall before it.
Fee versus interest. A fee under s.117 is a different charge from interest under s.118 or s.119. The decision did not discuss fees.
The base itself. If social security tax was wrongly included in the s.118 base, the better challenge may be to the s.118 computation, not the s.119 line. The decision did not address this.
Current law. The case concerns 2067/68. Check the Act and the current rate before relying on the figures.
How to read the interest lines in your own assessment
A practical review takes less than an hour and is worth doing before the review application deadline.
List every interest and fee line in the assessment and note the section cited for each.
For each line, write down the base amount and the period. If the assessment does not show them, ask for the working.
Map each base to a source: the company's own tax, withheld salary tax, withheld tax on other payments, or VAT.
Look for the same amount appearing under two sections for overlapping periods. That is the Indushankar pattern.
Check the period boundaries against the return due date and the date of the amended assessment notice.
Recompute using the rate and part-month rule the Directive states, and compare.
Raise the duplication specifically in the review application, citing case no. 183262 and the printed pages. A general complaint that interest is excessive rarely gets anywhere.
Documents to keep
Payroll registers showing social security tax and salary tax withheld each month.
Bank deposit vouchers and the dates each deposit cleared.
Monthly withholding returns with filing acknowledgements.
The company's instalment computations and challans for each s.94 instalment.
The working behind any interest the tax office has charged.
Without the deposit dates, an argument about duplication becomes an argument about who has the better spreadsheet, and the tax office usually wins those.
Our view
In our view the decision is right on the point it decides, and finance teams should use it. Interest is compensation for the time money was late. Charging two interest amounts on the same rupee for the same delay compensates the revenue twice. The Court's reasoning on the two sections is clear, and the Directive's own example supports the idea that they operate in sequence on different amounts.
We would go further than the decision does on one point, and we label this as our judgement. Withheld social security tax is the employer's liability as a withholding agent, not its own tax on business income. We think it sits more naturally under the s.90 deposit rule and s.119 than inside the s.94 instalment computation. If that is right, the tidier outcome in a case like Indushankar would have been to keep the s.119 interest and take the social security tax out of the s.118 base. The Court was not asked to decide that, and we would not promise a client that a tax office will accept it.
What is usually got wrong is not the law but the reading. Finance teams accept interest lines without asking for the working, and then try to argue about them only at the Tribunal. The first thing we would do with any amended assessment is ask for the computation of each interest and fee line, then lay the bases side by side. Where the same amount appears twice, the review application should say so, cite this decision, and quantify the duplicate.
The best protection is still the dull one: deposit withheld tax within the deadline, file the monthly return on time, and keep the vouchers.
Frequently asked
What did the Supreme Court decide?
That once social security tax had been included in the s.118 interest on short instalments, s.119 interest could not also be charged on the same social security tax. It upheld the Tribunal's deletion of NPR 43,532 of s.119 interest.
Does this mean late tax never attracts both s.118 and s.119?
No. The Directive's own example charges both in the same year, on different amounts and for different periods. The decision rules out charging both on the same amount for the same default.
Which charge was removed?
The s.119 interest. The company still bore the s.118 interest as computed.
Is social security tax part of an employer's advance tax instalments?
The decision did not decide this. The tax office had included it, and the Court took that as given. In our view withheld tax sits more naturally under the withholding rules, but this is unsettled.
What rate applies?
The Income Tax Directive states the normal rate as 15 percent a year, with part of a month counted as a month. Check whether that rate is current before relying on it.
Can the employer pass the interest on to employees?
Not under s.119(3) as the Directive explains it: a withholding agent who misses the s.90(4) deposit deadline cannot recover the interest from the person whose tax was withheld.
Is the late-return fee also interest?
No. The s.117(3) fee for late withholding returns is a separate charge. The decision did not discuss fees, and we have not read a decision on whether a fee and interest can be charged together for the same month.
How do I raise this in a review?
Identify the duplicated amount and periods, recompute, and cite LTO v. Indushankar Chini Udyog Ltd, case no. 183262, decided 2078 Saun 18, reported at printed pp.58 to 60 of the ICAN collection.
Does the decision apply to VAT interest?
It concerned the Income Tax Act only. VAT has its own interest provisions, which this decision did not consider.
Sources and limits
Large Taxpayers' Office, Harihar Bhawan, Lalitpur v. Indushankar Chini Udyog Ltd, Hariaun, Sarlahi, Supreme Court of Nepal, joint bench of Justice Deepkumar Karki and Justice Kumar Regmi, case no. 183262, decided 2078 Saun 18, reported at printed pp.58 to 60 of the Institute of Chartered Accountants of Nepal's collection of Supreme Court decisions on the VAT, Income Tax, Customs and Excise Acts (2079/2080). Every statement about the decision was read from the published page images, and the rupee figures and dates from enlarged images. Quotations are our translation.
Income Tax Directive, 2066 (Inland Revenue Department), chapter 29, printed pp.608 to 618, read from page images.
We did not review the Income Tax Act, 2058 itself. Sections 87, 88, 90, 94, 117, 118 and 119 are described as the judgment and the Directive state them. For more on the instalment schedule itself, see our guide to advance tax instalments.
General information only, not advice.
