Taxation of Hotels, Resorts and Restaurants in Nepal — Framework and Records

1.1 Introduction

The hotel, resort and restaurant industry occupies a distinct position within Nepal’s service and tourism economy. Unlike a conventional trading business, where transactions generally consist of purchases and sales of identifiable goods, a hospitality business normally provides a combination of accommodation, food and beverage services, recreation, transportation, event facilities and a range of supporting services. A single hotel may simultaneously operate guest rooms, restaurants, bars, banquet halls, conference facilities, spas, swimming pools, laundry services, airport transfers and other tourism-related facilities.

This diversity makes taxation of the hospitality sector comparatively complex.

A hotel cannot determine its tax liability merely by calculating a percentage of its annual accounting profit. Similarly, a restaurant cannot assume that all amounts collected from customers represent revenue, nor can management assume that every amount paid to a supplier is deductible for income-tax purposes or eligible for input VAT credit.

The tax consequences of a transaction depend upon its nature, the legal status of the supplier and recipient, the manner in which the transaction is recorded, and the specific provisions of Nepalese tax law applicable during the relevant fiscal year.

Taxation should therefore be regarded as an integral part of the accounting and management system of the business.

A properly structured hotel or restaurant accounting system should be capable of determining, from ordinary accounting records, the amount of taxable revenue, output VAT, allowable input VAT, tax-deductible expenditure, withholding tax, employee tax, Social Security Fund contribution, capital expenditure, tax depreciation and ultimately the taxable income of the enterprise.

This series examines those matters principally for Fiscal Year 2082/83 and Fiscal Year 2083/84.

The approach followed throughout the book is practical. The objective is not merely to state tax rates, but to explain how the relevant provisions affect actual management decisions and accounting transactions in a hotel, resort or restaurant.

1.2 Nature of Taxation in the Hospitality Sector

The tax obligations of a hospitality business arise from several different laws and should not be viewed as one single tax.

A hotel may simultaneously be responsible for:

• corporate income tax on its taxable profit;

• value added tax on taxable supplies;

• withholding tax on specified payments;

• salary tax deducted from employees;

• Social Security Fund contributions;

• Luxury Fee where the establishment falls within the prescribed category;

• excise and liquor-related obligations;

• customs and import-related taxes;

• local taxes and fees; and

• other industry-specific statutory payments.

Each of these operates independently.

For example, charging VAT on a hotel room does not discharge the hotel’s income-tax obligation. Similarly, deduction of TDS from a supplier does not constitute payment of the hotel’s own corporate income tax.

Management must therefore understand the nature of each tax separately.

1.3 Purpose of This Book

The purpose of this series is to provide an integrated taxation and accounting guide for hotels, resorts and restaurants operating in Nepal.

It is primarily intended for business owners, directors, general managers, finance managers, accountants, payroll personnel and persons responsible for financial administration.

The book addresses both the legal tax position and its accounting consequences.

Accordingly, whenever possible, the discussion follows four basic questions: What is the transaction?

How should it be recorded in the accounts?

What tax consequence arises?

What information should management maintain?

This approach is particularly important in hospitality businesses because many tax errors arise not from misunderstanding the tax rate but from incorrectly recording the underlying transaction.

For example, if a hotel records only the amount received from Booking.com as room revenue after deduction of commission, the accounting error may subsequently affect VAT, revenue reporting, commission expenditure and foreign-service tax treatment.

Similarly, if an employer records only the employee’s net salary paid into the bank, important information relating to gross remuneration, SSF contributions and salary TDS is lost.

This series therefore treats taxation and accounting as interconnected subjects.

1.4 Fiscal Years Covered

This series principally covers:

Fiscal Year 2082/83

From 1 Shrawan 2082 to the end of Ashadh 2083.

Fiscal Year 2083/84

From 1 Shrawan 2083 to the end of Ashadh 2084.

Where the law applicable in FY 2083/84 differs from FY 2082/83, the difference is discussed separately.

This distinction is essential.

Tax law is frequently amended through the annual Finance Act. A concession introduced in one fiscal year cannot be applied to an earlier year merely because it exists at the time the financial statements are prepared. Likewise, a provision applicable in an earlier year should not automatically be continued into a subsequent year without confirming that the law remains unchanged.

Throughout this series, the applicable fiscal year should therefore always be identified before determining the tax treatment.

1.5 Principal Laws Governing the Sector

The tax and payroll obligations of hotels, resorts and restaurants arise from several legislative sources.

The most important are discussed below.

1.5.1 Income Tax Act, 2058

The Income Tax Act, 2058 is the principal legislation governing income taxation in Nepal.

For the hospitality sector, it deals with matters including:

• taxation of business income;

• allowable expenditure;

• non-deductible expenditure;

• tax depreciation;

• business losses;

• tax concessions;

• taxation of employees;

• retirement contributions;

• withholding tax;

• advance tax;

• final withholding payments; and

• annual income-tax obligations.

Particular importance must be given to Section 11, which contains various tax concessions relevant to hotels, resorts and tourism-sector investments.

The employment-based concessions available to qualifying hotels and resorts are also dealt with under this section.

1.5.2 Income Tax Rules, 2059

The Income Tax Rules supplement the Income Tax Act and provide detailed procedures and valuation rules.

While the Act determines the substantive tax obligation, the Rules often provide the practical basis for implementation.

The Act and Rules should therefore be considered together.

1.5.3 Value Added Tax Act, 2052

VAT is one of the most significant recurring taxes for a hotel or restaurant.

The VAT Act determines, among other matters:

• who must register for VAT;

• which supplies are taxable;

• which supplies are exempt;

• the applicable VAT rate;

• input VAT entitlement;

• invoicing requirements;

• VAT on imported services; and

• VAT return and payment obligations.

In a typical hospitality business, VAT affects transactions daily rather than only at year-end.

Room sales, restaurant bills, bar sales, banquet charges and spa services normally generate VAT consequences at the time of supply.

1.5.4 Value Added Tax Rules, 2053

The VAT Rules contain important detailed requirements concerning invoices, input-tax credit, prescribed accounting records and restrictions on VAT credit.

For hotels and restaurants, the Rules become particularly important when dealing with such matters as:

• passenger vehicles;

• food and beverage purchases;

• alcoholic beverages;

• entertainment expenditure;

• capital assets;

• tax invoices; and

• compulsory VAT registration.

1.5.5 Finance Acts

Tax provisions in Nepal are regularly amended through annual Finance Acts.

For this series, particular attention is given to: Finance Act 2082, applicable principally to FY 2082/83; and

Finance Act 2083, relevant to FY 2083/84.

These Finance Acts affect tax rates, exemptions, concessions, employee taxation and other fiscal provisions.

Accordingly, any tax planning or calculation should first identify the relevant fiscal year.

1.6 Labour and Social Security Legislation

Employee taxation cannot be considered separately from employment law.

Hotels and restaurants are generally labour-intensive businesses and may employ a comparatively large workforce in rooms, housekeeping, restaurant, kitchen, banquet, security, engineering and administration.

The most important laws include the Labour Act, Labour Rules and the Contribution-Based Social Security legislation.

These affect matters such as:

• minimum remuneration;

• basic salary;

• allowances;

• working conditions;

• employee benefits;

• Social Security Fund registration;

• employee SSF contribution;

• employer SSF contribution; and

• payroll administration.

The interaction between SSF and income tax is particularly important.

SSF contribution affects both the employee’s net salary and the employee’s taxable income computation.

It also creates a separate cost for the employer.

These matters are discussed comprehensively in later chapters.

1.7 Tourism and Other Sector-Specific Laws

Hotels and resorts may also be governed by tourism legislation relating to registration, classification and operation.

The legal classification of an establishment may be important when determining whether the business qualifies for a particular income-tax concession.

A hotel claiming a concession available specifically to a hotel or resort should be able to demonstrate that the establishment is legally and operationally within the qualifying category.

Other legislation may also become relevant depending upon the nature of operations.

A hotel operating a bar must consider liquor and excise requirements.

A five-star hotel or qualifying luxury resort may be subject to a Luxury Fee.

A business importing equipment or consumables may have customs obligations.

Local governments may impose business-registration fees and other local charges.

Tax management in the hospitality sector therefore requires consideration of the complete nature of the business rather than merely its income-tax registration.

1.8 Classification of Hospitality Businesses

The first step in determining tax treatment is to identify the nature of the business.

A commercial name alone does not determine the tax position.

An establishment may describe itself as a resort, lodge, hotel, restaurant, retreat or guesthouse, but the relevant tax treatment depends upon its legal and operational status.

For the purpose of this series, hospitality businesses are broadly classified as follows.

1.8.1 Hotel

A hotel principally provides accommodation and may operate several supporting departments.

These may include:

• rooms;

• restaurant;

• bar;

• banquet;

• conference facilities;

• spa;

• swimming pool;

• laundry;

• transportation; and

• recreation facilities.

Where these activities are operated by one legal entity as part of an integrated hotel operation, their overall taxation must be examined in that context.

1.8.2 Resort

A resort normally provides accommodation together with recreation, food and beverage facilities and other tourism-related services.

Resorts may also operate:

• destination events;

• wellness facilities;

• outdoor activities;

• adventure services;

• conference facilities;

• transport services; and

• tourism packages.

For income-tax purposes, a qualifying resort may be entitled to concessions that do not automatically extend to a stand-alone restaurant.

1.8.3 Restaurant

A stand-alone restaurant generally operates as an ordinary business unless another specific statutory provision applies.

It may operate:

• food service;

• non-alcoholic beverage service;

• bar;

• catering;

• takeaway;

• delivery; and

• banquet services.

A restaurant should not claim a hotel or resort tax concession merely because it forms part of the broader hospitality or tourism industry.

1.9 Integrated Hotel Operations

A major practical issue arises where a hotel operates several revenue-generating departments.

Consider the following example.

Illustration 1.1 — Integrated Hotel Operation

Himalaya Hotel Pvt. Ltd. operates:

• 100 rooms;

• two restaurants;

• one bar;

• banquet facilities;

• spa and wellness centre;

• laundry;

• airport transfer services; and

• a swimming pool.

The business is legally operated as one hotel under one company.

In such a case, management should maintain separate departmental accounting records even though the activities are operated by the same entity.

The purpose is not merely tax compliance.

Separate departmental accounts allow management to determine:

• revenue by department;

• direct cost by department;

• gross contribution;

• employee cost;

• inventory consumption;

• VAT liability; and

• operating profitability.

This becomes particularly useful when considering tax concessions and determining whether a particular activity is ancillary to the hotel or constitutes a materially separate business.

1.10 Departmental Accounting

Hospitality accounting should ordinarily be organised by revenue centre and cost centre.

A single income account called “Hotel Sales” is rarely sufficient for management purposes.

At minimum, revenue should normally be separated into:

Rooms Revenue

This may include room charges, extra beds, early check-in, late checkout, day use and room upgrades.

Food Revenue

Restaurant, room service, banquet food and other food-related sales should be separately identifiable.

Beverage Revenue

Non-alcoholic beverages should ordinarily be distinguishable from alcoholic beverages.

Bar Revenue

Beer, wine, spirits and other alcohol sales should be separately recorded because additional licensing and tax considerations may arise.

Banquet and Event Revenue

Hall charges, food, beverage, decoration-related service charges and conference packages should be separately identifiable.

Other Operating Revenue

This may include spa, laundry, gym, swimming, transportation, travel-desk income and other ancillary services.

This classification significantly improves both tax accounting and management decision-making.

1.11 Revenue and Tax Collected Are Different

One of the fundamental principles of hospitality accounting is that tax collected from a customer does not normally constitute revenue of the business.

Consider the following example.

Illustration 1.2 — Room Revenue and VAT

Room charge before VAT: NPR 10,000

VAT at 13%: NPR 1,300

Total customer invoice: NPR 11,300

The hotel has earned revenue of: NPR 10,000

The remaining: NPR 1,300 represents VAT collected for payment to Government.

The accounting system should therefore distinguish between: Room Revenue — NPR 10,000 and

Output VAT Payable — NPR 1,300

Recording NPR 11,300 entirely as hotel revenue would overstate both revenue and expense when VAT is subsequently paid.

The same principle applies to other statutory charges collected on behalf of Government.

1.12 Gross Revenue and Booking Platform Commission

Hotels frequently receive bookings through online travel agencies such as Booking.com, Agoda and Expedia.

Management must distinguish between the gross value of accommodation supplied and commission charged by the platform.

Illustration 1.3 — Booking Platform

Room sold to customer: NPR 20,000

OTA commission: NPR 3,000

Amount received by hotel: NPR 17,000

Where the hotel remains the principal supplier of accommodation, the appropriate accounting treatment would ordinarily recognise: Room Revenue — NPR 20,000

OTA Commission Expense — NPR 3,000

Net Receivable/Bank — NPR 17,000

The mere fact that only NPR 17,000 is deposited into the hotel's bank account does not necessarily mean that room revenue is NPR 17,000.

Failure to record gross revenue may distort:

• occupancy revenue;

• average room rate;

• VAT;

• commission expense;

• taxable income; and

• management reporting.

The taxation of foreign OTA commission is dealt with separately later in this series.

1.13 Accounting Profit and Taxable Income

Accounting profit is not necessarily the same as taxable income.

This distinction is central to income-tax accounting.

The financial statements are prepared in accordance with the applicable accounting framework. The income-tax return, however, is prepared in accordance with the Income Tax Act.

Accordingly, certain accounting expenses may not be deductible for tax purposes, while certain tax deductions may differ from accounting expenses.

A simplified tax reconciliation may therefore appear as follows: Accounting Profit Before Tax

Add:

• non-deductible expenditure;

• accounting depreciation;

• capital expenditure incorrectly charged to expense;

• other tax adjustments.

Less:

• tax depreciation;

• allowable tax deductions;

• brought-forward losses where available;

• other permitted adjustments.

This produces: Taxable Income

The applicable income-tax rate and any relevant concessions are then applied to taxable income.

Therefore, management should not estimate corporate tax merely by multiplying accounting profit by 25%.

1.14 Capital Expenditure and Revenue Expenditure

Hotels and resorts regularly incur substantial expenditure on refurbishment and improvement.

Examples include:

• guest-room renovation;

• kitchen replacement;

• flooring;

• sanitary upgrades;

• furniture replacement;

• air-conditioning;

• elevators;

• landscaping;

• swimming pools;

• banquet halls;

• electrical systems.

Management must determine whether expenditure represents: ordinary repair and maintenance, or capital expenditure creating or improving an asset.

The distinction affects both accounting profit and taxable income.

Ordinary repair expenditure may generally be recognised as an expense, subject to the Income Tax Act.

Capital expenditure, on the other hand, is normally capitalised and recovered through depreciation or another permitted tax mechanism.

For substantial projects, management should use a separate capital-work-in-progress ledger until the project is completed and the nature of expenditure is determined.

1.15 Input VAT and Cost

Where VAT paid on a purchase is recoverable, it should generally be recorded separately from the cost of the asset or expense.

Illustration 1.4 — Purchase of Kitchen Equipment

Equipment cost: NPR 1,000,000

VAT: NPR 130,000

Total invoice: NPR 1,130,000

If the full NPR 130,000 is legally recoverable: Kitchen Equipment = NPR 1,000,000

Input VAT = NPR 130,000

If VAT is not legally recoverable, however, the non-creditable amount generally becomes part of the relevant cost or expense.

This distinction is important for both financial reporting and income-tax calculations.

1.16 Payroll as an Accounting and Tax System

Payroll should not be treated simply as an amount transferred to employees each month.

A proper payroll system should separately record:

• basic remuneration;

• dearness allowance;

• grade;

• overtime;

• festival allowance;

• bonus;

• other allowances;

• taxable benefits;

• employee SSF;

• employer SSF;

• salary TDS;

• employee advances;

• deductions; and

• net salary.

This information serves several purposes simultaneously.

It determines:

• the employee’s gross remuneration;

• the employer’s total labour cost;

• SSF contributions;

• taxable employment income;

• salary TDS;

• net salary payable; and

• departmental employment cost.

This becomes particularly important for hotels and resorts that may qualify for employment-based income-tax concessions.

1.17 Employee and Employer SSF

Employee SSF and employer SSF are economically and accounting-wise different.

The employee contribution is deducted from the employee's remuneration.

It therefore represents an amount withheld from the employee and payable to SSF.

The employer contribution, however, represents an additional cost borne by the employer.

Accordingly, payroll accounting should separately identify: Employee SSF Payable and

Employer SSF Expense / Employer SSF Payable

They should not simply be combined into one unspecified salary expense.

The detailed SSF rules are discussed in a separate chapter.

1.18 Withholding Tax Accounting

Hotels and restaurants make many payments that may be subject to withholding tax.

These may include payments for:

• consultancy;

• professional services;

• rent;

• maintenance;

• security;

• vehicle hire;

• commission;

• advertising;

• contract work;

• foreign services; and

• interest.

Withholding tax is normally deducted from the amount payable to the recipient and deposited with Government.

Illustration 1.5 — Service Invoice

Service fee: NPR 100,000

VAT: NPR 13,000

Assumed applicable TDS for this illustration: NPR 1,500

The accounting may broadly identify: Service Expense — NPR 100,000

Input VAT — NPR 13,000

Supplier Payable — NPR 111,500

TDS Payable — NPR 1,500

The appropriate rate depends upon the nature of payment and tax status of the recipient.

A separate chapter later in this series deals comprehensively with withholding tax.

1.19 Recommended Tax Accounts

For sound tax management, tax balances should not be combined into a single generic ledger.

Separate accounts should normally be maintained for:

VAT

• Input VAT;

• Output VAT;

• VAT Payable;

• VAT Credit Carried Forward;

• Non-creditable VAT.

Income Tax

• Advance Income Tax;

• Income Tax Expense;

• Income Tax Payable;

• TDS Receivable.

Withholding Tax

• Salary TDS Payable;

• Supplier TDS Payable;

• Rent TDS Payable;

• Foreign Payment TDS Payable.

Social Security

• Employee SSF Payable;

• Employer SSF Expense;

• Employer SSF Payable.

Other Taxes

• Luxury Fee Payable;

• Excise-related liabilities;

• applicable local tax liabilities.

This segregation provides management with a clear view of each tax obligation.

1.20 Role of the Accounting System

The correct tax treatment should ideally be determined when a transaction is recorded rather than reconstructed after the fiscal year ends.

For example, the accounting or POS system should distinguish:

• taxable sales;

• exempt transactions;

• creditable input VAT;

• non-creditable VAT;

• capital purchases;

• TDS categories;

• SSF deductions;

• Luxury Fee where applicable.

A properly configured system significantly reduces the risk of errors and makes monthly tax management considerably easier.

1.21 Monthly Tax Management

Taxation should form part of the normal monthly closing process.

At the end of each month, management should be able to determine at least:

• gross hotel revenue;

• department-wise revenue;

• output VAT;

• allowable input VAT;

• VAT payable or credit;

• gross payroll;

• employee SSF;

• employer SSF;

• salary TDS;

• supplier TDS;

• major capital expenditure;

• advance tax position; and

• estimated annual taxable income.

For hotels claiming employment-based concessions, management should also monitor the qualifying employee count during the year.

This converts tax management from a year-end compliance exercise into an ongoing financial-management function.

1.22 Management Tax Information

A monthly management tax summary can provide valuable information.

A typical summary may include:

• revenue excluding VAT;

• output VAT;

• input VAT;

• VAT payable;

• salary expense;

• employer SSF;

• employee SSF;

• salary TDS;

• other TDS;

• capital expenditure;

• advance income tax;

• estimated taxable profit;

• estimated effective income-tax rate; and

• qualifying employee count.

Such information is particularly important where the business is approaching an employment threshold that may affect its income-tax concession.

1.23 Management Decisions With Tax Consequences

Tax considerations should be incorporated into major business decisions.

Examples include:

• construction of a new hotel;

• expansion of room capacity;

• major renovation;

• increase in employee numbers;

• outsourcing staff;

• introduction of a bar;

• acquisition of vehicles;

• entry into a hotel-management or franchise arrangement;

• foreign consultancy;

• foreign booking platforms;

• capitalisation of accumulated profits;

• conversion from private to public company;

• listing of shares; and

• significant new tourism investment.

A tax concession can sometimes materially change the financial result of an investment decision.

Management should therefore evaluate tax consequences before implementation rather than after the transaction has been completed.

1.24 Importance of Employment Planning

For hotels and resorts, employee numbers can directly affect corporate income-tax liability.

This is unusual compared with an ordinary business.

Subject to the statutory conditions, hotels and resorts employing specified numbers of Nepalese employees throughout the year may qualify for additional income-tax concessions.

Management should therefore monitor:

• total qualifying employees;

• employment commencement date;

• continuity of employment;

• nationality;

• employee composition; and

• SSF/payroll records.

This does not mean that management should employ unnecessary staff simply to obtain a tax benefit.

It means that where the operational workforce already satisfies or approaches a statutory threshold, management should understand the tax consequence and ensure that the necessary records are maintained.

The employment concession is examined comprehensively in a later chapter.

1.25 Employee, Contractor and Outsourced Personnel

Not every person working inside a hotel should automatically be treated as an employee for all tax purposes.

A hospitality business may engage:

• permanent employees;

• fixed-term employees;

• part-time employees;

• seasonal workers;

• casual workers;

• outsourced housekeeping personnel;

• outsourced security personnel;

• consultants;

• independent contractors; and

• foreign employees.

Their tax, SSF and employment-concession treatment may differ.

Management should therefore determine the actual legal relationship rather than relying only on the title used in an agreement.

A genuine employee should not be labelled a consultant merely to avoid payroll obligations.

Conversely, an independent contractor should not automatically be counted as a direct employee for the purpose of an employment-based tax concession.

1.26 Relationship Between VAT and Income Tax

VAT and income tax serve different purposes.

VAT applies primarily to taxable supplies.

Income tax applies to taxable income.

A business may therefore have substantial VAT liability even when it has an accounting loss.

Conversely, a business may have taxable income even where the net VAT payable is small because it has significant input-tax credits.

For this reason, management should never use VAT payments as an indicator of profitability.

1.27 Relationship Between SSF and Salary Tax

SSF contributions and salary tax are also distinct.

Employee SSF reduces the employee's cash payment and may qualify as part of the retirement contribution deduction for income-tax purposes.

Employer SSF creates an additional employment cost and also interacts with employment-income computation.

Salary TDS is then calculated after determining the employee's assessable income and allowable deductions.

Accordingly: Gross Salary – Employee SSF is not necessarily equal to: Taxable Salary.

A complete annual tax computation is required.

1.28 The Management Principle Followed in This Book

Every major topic in the following chapters will be discussed from three perspectives.

The legal position

What does the applicable tax or employment law provide?

The accounting treatment

How should the transaction be recorded?

The management implication

What should management consider when pricing, employing staff, investing, contracting, purchasing or structuring the transaction?

This approach is intended to make the book useful not merely as a reference text but as a practical management tool.

1.29 Structure of the Book

The remaining chapters will develop the subject progressively.

The initial chapters will deal with business classification, corporate income tax and hotel/resort concessions.

The next part will address employee taxation, SSF and payroll management.

Thereafter, withholding tax and VAT will be examined in detail.

Specialised chapters will then cover:

• room and accommodation taxation;

• food and beverage;

• bar and alcohol;

• banquet and catering;

• package transactions;

• input VAT;

• complimentary services;

• advances and cancellations;

• online booking platforms;

• foreign payments;

• Luxury Fee;

• capital expenditure;

• accounting entries; and

• annual tax management.

Comparative tables for FY 2082/83 and FY 2083/84 and practical computation examples will be provided where they assist understanding.

1.30 Conclusion

Tax management in the hospitality sector begins with proper accounting.

A hotel, resort or restaurant that correctly classifies its revenue, expenditure, employees, inventory, taxes and capital expenditure is able to determine its tax position efficiently.

Where transactions are incorrectly recorded at source, however, the tax position becomes difficult to reconstruct later.

Management should therefore ensure that taxation is integrated with:

• pricing;

• billing;

• purchasing;

• payroll;

• inventory;

• capital expenditure;

• departmental accounting; and

• monthly financial reporting.

The chapters that follow build upon this principle and examine each area of hotel, resort and restaurant taxation in detail.