Hotels, Resorts and Restaurants — Business Classification and Tax Status

2.1 Introduction

Before determining the income-tax rate, VAT liability or entitlement to any tax concession, it is necessary to establish the precise nature of the business.

The expressions hotel, resort, restaurant, bar, lodge, tourism industry and hospitality business are sometimes used interchangeably in commercial practice. They are not necessarily interchangeable for tax purposes.

A company may describe itself commercially as a “resort”, but that description alone does not establish its entitlement to an income-tax concession available to a resort. Likewise, a restaurant does not become entitled to a hotel concession merely because restaurants are generally regarded as part of Nepal's tourism industry.

The legal registration of the business, the activities actually carried on, the tourism classification of the establishment, its industry registration, the sources from which it earns income and the manner in which those activities are organised all become relevant.

For management, proper classification is therefore the starting point of tax planning.

The basic sequence should be:

Identify the legal person → identify the registered business → identify the actual activities → identify each revenue stream → determine the applicable tax status.

Only after this process should the applicable income-tax rate or concession be determined.

2.2 Legal Person and Business Activity Are Different Concepts

A distinction should first be made between the legal form of the taxpayer and the business carried on by that taxpayer.

A hospitality business may operate as:

• a private limited company;

• a public limited company;

• a partnership firm;

• a sole proprietorship;

• another recognised entity; or

• in limited circumstances, another institutional arrangement.

The applicable income-tax mechanism can differ depending upon the legal form.

For example, a resident company carrying on an ordinary business generally begins with the entity tax rate applicable under Schedule 1 of the Income Tax Act, whereas a proprietorship is taxed through the natural-person tax structure.

The business activity must then be considered separately.

A private limited company may operate:

• a hotel;

• a resort;

• a restaurant;

• a restaurant and bar;

• several hotels;

• a hotel together with another unrelated business.

The fact that all of these activities are undertaken by one company does not mean that every activity necessarily receives identical tax treatment.

2.3 General Entity Tax Rate

For a resident entity carrying on an ordinary business, the general corporate income-tax rate is 25%.

IRD's entity-rate structure distinguishes this general 25% category from specified businesses taxed at 30%, including entities carrying on transactions in liquor and beer. The annual Finance Act and Schedule 1 must therefore be considered where an establishment has material activities falling within one of the higher-rate categories.

For an ordinary hotel or resort, the 25% rate is the starting rate before applying an available Section 11 concession.

This is important because the commonly quoted 20% hotel tax rate is generally not a separate basic statutory rate.

It arises because a qualifying hotel or resort entity receives a 20% exemption from the tax otherwise leviable under Section 11(2ख).

Thus: Normal tax rate = 25%

Tax payable after 20% exemption: 25% × 80% = 20% effective rate

The detailed calculation and conditions are dealt with in the later chapters on tax concessions.

2.4 Tourism Act Classification

The Tourism Act, 2035 separately recognises hotels, lodges, restaurants, resorts and bars for tourism-sector registration.

Section 10 allows a hotel, lodge, restaurant, resort or bar satisfying the prescribed facilities to be registered at tourist standard. It also provides for classification of hotels according to the prescribed standards.

The Hotel, Lodge, Restaurant, Resort, Bar and Tourist Guide Rules, 2038 provide more detailed registration and classification requirements.

Under those Rules, hotels may be classified according to the facilities provided, including tourist-standard hotels and star classifications, while tourist resorts and other establishments are also subject to prescribed criteria.

This legal classification becomes particularly relevant where a tax or levy specifically refers to:

• hotel;

• resort;

• five-star hotel;

• luxury resort; or

• another tourism classification.

Management should therefore retain the classification certificate applicable during each fiscal year.

2.5 Tourist Classification Should Not Be Confused with Income-Tax Classification

Tourism registration and income-tax classification serve different purposes.

The Tourism Act regulates tourism establishments.

The Income Tax Act determines the tax treatment of income.

Therefore, the mere fact that an establishment is treated as a tourism business under tourism legislation does not automatically mean that every concession granted by the Income Tax Act to a “hotel” or “resort” applies to every tourism-sector business.

This distinction is particularly relevant to restaurants.

Various tourism policies and classifications recognise restaurants as part of the broader tourism industry. For example, tourism-industry classifications historically include tourist accommodation, hotels, resorts and restaurants among tourism-related activities.

However, Section 11(2ख) of the Income Tax Act specifically uses the terms:

special industry, hotel, resort and information technology industry

for the full-year operating concession.

The provision does not simply state “tourism industry”.

Accordingly, a stand-alone restaurant should not automatically claim the hotel/resort concession merely because it falls within the broader tourism sector.

2.6 Classification of a Hotel

For the purpose of management and accounting, a hotel can generally be understood as an establishment whose principal business includes providing commercial accommodation, whether or not food and beverage facilities are also provided.

Nepal's older Hotel Management and Liquor Sale Distribution (Control) Act contains a broad definition of hotel as a commercially operated establishment providing accommodation, with or without food, and for the purposes of that legislation also includes a restaurant.

However, that broad definition should not be mechanically transferred into the Income Tax Act.

Different statutes define expressions for their own purposes.

Therefore:

a restaurant being included in the term “hotel” for liquor-control legislation does not automatically make every restaurant a “hotel” for Section 11 income-tax concessions.

This is an important statutory interpretation principle for management.

2.7 Classification of a Resort

A resort generally combines accommodation with recreational, leisure, tourism or destination-oriented facilities.

A resort may include:

• guest rooms or cottages;

• restaurants;

• bar;

• swimming facilities;

• spa and wellness services;

• outdoor activities;

• adventure facilities;

• event facilities;

• conference services;

• destination weddings;

• transportation;

• tourism packages.

Where the business intends to claim a concession specifically available to a resort, management should retain evidence supporting its resort status.

The most persuasive records ordinarily include:

• tourism registration;

• relevant industry registration;

• classification certificate;

• approved business objectives;

• operating licence;

• commencement date; and

• actual operational records.

The tax position should be based on substance and legal status rather than the business name alone.

2.8 Classification of a Stand-Alone Restaurant

A stand-alone restaurant normally earns income principally from providing food and beverage services.

It may also provide:

• takeaway;

• home delivery;

• catering;

• banquet;

• event dining;

• bar service.

Where such a restaurant is operated independently and does not constitute a qualifying hotel or resort, the general entity rate should ordinarily be considered.

Accordingly, for a company:

Normal starting rate = 25%

subject to any separate provision applicable to the particular business.

The hotel/resort Section 11 concession should not be applied merely because the business is in the hospitality industry.

2.9 Restaurant Operated Inside a Hotel

The treatment is different where a restaurant is not a separate business entity but is an operating department of a hotel.

Consider the following situation.

Illustration 2.1 — Restaurant Operated by the Hotel Entity

Everest View Hotel Pvt. Ltd. operates:

• 80 rooms;

• one all-day restaurant;

• one specialty restaurant;

• bar;

• banquet;

• spa.

All operations are undertaken under the same company.

The customer pays Everest View Hotel Pvt. Ltd.

The staff are employees of Everest View Hotel Pvt. Ltd.

Restaurant inventories are owned by Everest View Hotel Pvt. Ltd.

Restaurant revenue is recorded in the books of Everest View Hotel Pvt. Ltd.

In substance, the restaurant is an operating department of the hotel.

Management should therefore prepare departmental accounts, but the legal entity remains the hotel company.

The restaurant department should not be treated as a separate taxpayer merely because management reports its profitability separately.

2.10 Separate Restaurant Company Located Inside a Hotel

Now consider a different arrangement.

Illustration 2.2 — Independently Operated Restaurant

Mountain Hotel Pvt. Ltd. owns and operates a hotel.

A separate company, Fine Dining Nepal Pvt. Ltd., leases space inside the hotel and independently operates the restaurant.

Fine Dining Nepal:

• employs its own staff;

• purchases its own inventory;

• issues its own customer invoices;

• maintains its own PAN/VAT registration;

• pays rent to Mountain Hotel;

• earns the restaurant revenue.

The restaurant is physically located inside the hotel, but it is not the hotel's restaurant business for income-tax purposes.

Fine Dining Nepal must determine its tax liability independently.

The fact that it operates from a hotel building does not transfer the hotel's Section 11 concession to the restaurant company.

2.11 Management Agreement Is Different from Business Ownership

Many hotels operate under management, franchise or brand agreements.

For example:

Nepal Hotel Owner Pvt. Ltd.

may own the building and hotel business, while:

International Hotel Management Ltd.

may provide management and brand services.

Management should identify who is actually supplying accommodation to the guest.

If the Nepalese hotel owner remains the principal supplier and the foreign manager earns a management fee, the hotel revenue belongs to the hotel entity and the management fee is a separate expense.

If the contractual arrangement is fundamentally different, the accounting treatment may differ.

Accordingly, management agreements should be reviewed for:

• principal versus agent relationship;

• hotel revenue ownership;

• management fee;

• incentive fee;

• marketing fee;

• reservation fee;

• royalty;

• brand fee;

• reimbursement;

• foreign withholding tax;

• imported-service VAT; and

• transfer-pricing implications where the parties are associated.

These matters are considered in later chapters.

2.12 Business Name Does Not Determine Tax Status

A common management error is to assume that the name appearing on the signboard determines tax treatment.

For example: “Paradise Eco Resort”

may commercially call itself a resort.

However, if its legal and regulatory records describe the operation differently, management should determine whether the statutory conditions for treatment as a resort are actually satisfied.

Conversely, a legally classified resort does not lose its status merely because its trade name omits the word “resort”.

The appropriate approach is:

Legal registration + regulatory classification + actual activity

rather than:

commercial name alone.

2.13 Tourism Registration and Tax File

Where hotel/resort concessions are material, management should maintain a permanent Tax Classification File.

This should include, as applicable:

• company registration certificate;

• memorandum and articles/objective clauses;

• industry registration certificate;

• tourism registration;

• hotel/resort classification certificate;

• star classification certificate;

• PAN/VAT registration;

• local business registration;

• liquor licence;

• excise licence;

• commencement-of-operation evidence;

• major regulatory renewals.

These records are not maintained merely for external inspection.

They allow management and the accounts department to know exactly which tax treatment should be programmed into the accounting system.

2.14 Star Classification

Star classification becomes particularly important for hotels because certain taxes depend directly upon the classification.

Tourism Rules provide for hotel classification according to prescribed standards.

For income-tax purposes, the basic hotel/resort concession is not restricted only to five-star hotels.

A qualifying hotel need not necessarily be five-star merely to access the ordinary hotel concession.

However, star classification becomes particularly significant for the Luxury Fee.

2.15 Five-Star and Above Hotels

Five-star and higher-category hotels have an additional tax characteristic.

Nepal imposes a Luxury Fee on services supplied for consumption in Nepal by five-star and higher-star hotels.

Retain the hotel’s Department of Tourism classification and check it against the category named in Finance Act 2083 and the current applicable Luxury Fee procedure. A commercial description on a booking site is not proof of statutory star classification.

For FY 2083/84, IRD's invoice notice continues to refer to services supplied by five-star and above hotels and luxury resorts for consumption in Nepal.

Accordingly, the tourism classification has a direct accounting consequence.

Management of a five-star hotel must configure its billing system not merely for VAT but also for the applicable Luxury Fee.

The detailed computation is discussed in the Luxury Fee chapter.

2.16 Luxury Resort Classification

The expression “luxury resort” should also not be self-declared merely for commercial purposes.

Retain the relevant Department of Tourism classification and match the resort to the prescribed Luxury Fee category. Check the current procedure for the applicable definition and documentary requirements rather than relying on the resort’s advertising description.

Accordingly, management should distinguish between:

a resort that commercially describes itself as luxurious

and

a resort that falls within the prescribed legal classification for Luxury Fee purposes.

This distinction can determine whether the 2% levy must be collected from customers.

2.17 Ordinary Hotel Versus Five-Star Hotel

For management purposes, it is useful to separate two questions.

Question 1 — Income Tax

Is the entity a qualifying hotel/resort for Section 11?

Question 2 — Luxury Fee

Is the hotel five-star or above, or is the resort legally within the luxury-resort category?

These are different tests.

A three-star hotel may qualify for an income-tax concession available to a hotel but not be subject to the Luxury Fee applicable to a five-star establishment.

Therefore:

Income-tax classification ≠ Luxury Fee classification.

2.18 Hotel Operating Several Restaurants

A hotel may operate several F&B outlets.

For example:

• coffee shop;

• all-day dining;

• specialty restaurant;

• rooftop restaurant;

• bar;

• poolside restaurant;

• banquet kitchen;

• room service.

Management should maintain separate revenue and cost centres for these operations even though they form part of one hotel business.

A recommended hierarchy is: Hotel Entity

→ Rooms Division
→ Food & Beverage Division
→ Restaurant A
→ Restaurant B
→ Bar
→ Banquet
→ Room Service
→ Minibar

This structure facilitates management reporting without incorrectly creating separate tax entities.

2.19 Bar Operation Requires Separate Attention

A hotel or restaurant that sells alcoholic beverages has a significantly more complex tax profile.

The sale of alcohol may create:

• liquor-licence obligations;

• excise-related requirements;

• separate inventory-control requirements;

• VAT consequences;

• possible income-tax-rate issues.

Under Schedule 1 of the Income Tax Act, an entity carrying on transactions in liquor and beer falls within the statutory 30% entity-rate category, whereas the general-business entity rate is 25%.

This wording requires careful consideration for hotels and restaurants with bar operations.

2.20 The 30% Liquor and Beer Issue

This issue should not be ignored in hospitality-sector tax planning.

Suppose a hotel earns:

Room revenue — NPR 100 million
Food revenue — NPR 40 million
Alcohol revenue — NPR 10 million

The hotel is clearly carrying on hotel operations, but it is also making transactions in liquor and beer.

The statute separately identifies entities carrying on liquor and beer transactions within the 30% category.

Management should therefore not automatically assume that the existence of the bar is irrelevant to the entity-rate determination.

Equally, it would be inappropriate to state without analysing the facts that every hotel selling a bottle of beer automatically loses ordinary hotel treatment.

The appropriate treatment requires consideration of:

• exact statutory wording for the relevant year;

• nature and materiality of the liquor activity;

• whether the activity constitutes a separate business;

• manner in which IRD treats integrated hotel operations;

• available administrative interpretation or advance ruling; and

• interaction with Section 11 hotel concessions.

For a hotel or restaurant with material liquor sales, the tax rate should therefore be determined expressly and documented rather than assumed.

2.21 Separate Bar Company

Where a bar is operated through a separate company, classification becomes much clearer.

Illustration 2.3 — Separate Bar Entity

Hotel Nepal Pvt. Ltd. operates accommodation and restaurant facilities.

Nightlife Pvt. Ltd., a separate company, leases part of the hotel premises and operates the bar.

Hotel Nepal and Nightlife have separate:

• legal registrations;

• PANs;

• VAT registrations;

• bank accounts;

• employees;

• inventories;

• invoices.

In this case, the bar company's tax treatment is determined separately from the hotel's tax treatment.

Any rent, commission or service charge between the entities must also be accounted for independently.

Where the entities are associated persons, transfer-pricing provisions may become relevant.

2.22 Bar Operated as a Department

Where the bar is merely a department of the hotel, management should nevertheless maintain separate accounts.

At minimum, the following should be separately measurable:

• alcohol purchases;

• opening stock;

• issues from store;

• sales;

• complimentary consumption;

• breakage;

• wastage;

• closing stock;

• gross profit.

This serves both tax management and operational management.

The bar should not be absorbed into a generic “restaurant sales” account where alcohol sales are material.

2.23 VAT Registration: General Principle

Income-tax registration and VAT registration are separate matters, even though Nepal uses the same PAN framework.

IRD explains that a person already holding PAN does not obtain a second PAN for VAT; instead, the taxpayer is additionally registered for VAT under the same PAN where VAT registration is required.

For management, the important distinction is:

PAN registration does not by itself mean the business is VAT registered.

A business must separately determine whether VAT registration is compulsory or voluntary.

2.24 VAT Registration by Turnover

A taxable service or mixed business must consider the statutory VAT-registration threshold applicable during the relevant period.

Hotels, resorts and restaurants usually provide services or mixed supplies and must therefore consider the service/mixed-business threshold.

However, management should not stop its analysis at the turnover threshold.

Certain hospitality-related businesses can fall within the compulsory-registration categories regardless of the normal threshold.

This is particularly important for restaurants with bars, catering operations, party palaces, health clubs and massage businesses.

2.25 Restaurant with Bar and Compulsory VAT Registration

Section 10 of the VAT Act identifies specified transactions for which registration is required independently of the ordinary small-business turnover analysis.

Older IRD guidance identifies activity- and location-specific compulsory-registration categories. Confirm the currently operative notification for the actual restaurant, bar or event business; the older English translation is not sufficient to establish today’s geographical scope.

Accordingly, a restaurant with a bar should not conclude:

“Our turnover is below the normal VAT threshold, therefore VAT registration is unnecessary.”

Its activity and location must first be considered.

Management should identify compulsory registration before commencing the activity, rather than only after the turnover threshold has been exceeded.

2.26 Catering and Party Palace

A business adding catering, banqueting or party-palace activity should recheck mandatory registration separately from the ordinary turnover threshold. Identify the current notification, covered activity and location before concluding whether that additional activity requires registration.

This is particularly relevant because many restaurants gradually expand into:

• outside catering;

• wedding catering;

• corporate catering;

• party halls;

• banquet facilities.

Management should therefore revisit VAT registration whenever the nature of operations changes.

A business that originally operated only a small restaurant may subsequently enter a category for which a different registration rule applies.

2.27 Health Club and Massage Operations

Hotels and resorts frequently operate:

• gym;

• health club;

• massage;

• spa.

Health-club and massage-therapy operations require a separate mandatory-registration check under the applicable activity and location notification.

Therefore, where these facilities are operated separately or through another entity, their registration status should be considered independently.

Where they are merely departments of an already VAT-registered hotel, the accounting system should capture the relevant taxable revenue under the hotel's VAT registration.

2.28 One Legal Entity with Several Branches

A hotel company may operate more than one property.

For example: Kathmandu Hotel Pvt. Ltd. may operate:

• Kathmandu property;

• Pokhara property;

• Chitwan resort.

The company remains one legal taxpayer where all businesses are operated by the same entity, but branch/location accounting should be separately maintained.

Management should therefore use:

• property codes;

• branch codes;

• departmental codes;

• separate stock locations;

• separate cost centres.

This enables the business to determine property-level profitability while preserving entity-level tax reporting.

2.29 Separate Companies Within a Hotel Group

A hospitality group may instead operate:

• Hotel A Pvt. Ltd.;

• Resort B Pvt. Ltd.;

• Restaurant C Pvt. Ltd.;

• Management Company D Pvt. Ltd.

Each company is a separate taxpayer.

Management should therefore avoid consolidating tax liabilities merely because the companies share common ownership.

Transactions between group companies may include:

• rent;

• management fee;

• staff recharge;

• common marketing expense;

• shared IT costs;

• procurement recharge;

• loans;

• guarantees.

These require separate accounting and may create:

• VAT;

• TDS;

• income tax;

• transfer-pricing;

• related-party disclosure consequences.

2.30 Shared Employees Between Group Companies

Hospitality groups frequently use central finance, HR, sales or IT teams.

Where an employee is legally employed by one company but provides services to several group companies, management should determine:

• which entity bears the salary;

• whether cost is recharged;

• whether the recharge is a taxable service;

• whether VAT arises;

• whether TDS applies;

• which employer deposits SSF;

• which entity counts the employee for an employment-based income-tax concession.

The same employee should not automatically be counted as a full qualifying employee of several hotel companies merely because the employee assists all of them.

The employment relationship and statutory requirements must be considered.

2.31 Outsourcing Does Not Necessarily Create Direct Employment

Hotels often outsource:

• housekeeping;

• security;

• gardening;

• transportation;

• laundry;

• temporary banquet staff.

From a management perspective, outsourcing may reduce direct payroll administration.

However, it can also affect the hotel's entitlement to employment-based income-tax concessions.

Where Section 11 requires direct employment of Nepalese citizens throughout the year, personnel employed by an independent outsourcing company should not automatically be treated as direct employees of the hotel.

This distinction becomes financially important where the hotel is close to the:

• 100;

• 300;

• 500; or

• 1,000 employee threshold.

The detailed employment-concession rules are considered in Chapter 5.

2.32 Seasonal Hotel and Full-Year Operation

Certain hotels and resorts may operate seasonally.

For example:

• mountain resort;

• seasonal trekking lodge;

• monsoon-sensitive resort.

This creates a specific income-tax question because Section 11(2ख) refers to a qualifying hotel or resort in full operation throughout the income year. The current Section 11 text retains that full-year requirement.

Management should therefore distinguish between:

legally existing throughout the year

and

fully operating throughout the year.

They are not necessarily the same.

A resort that intentionally closes for several months may require separate consideration before the basic Section 11 concession is claimed.

2.33 Newly Commenced Hotel

The same issue arises in the first year.

Illustration 2.4 — New Hotel

A hotel commences commercial operation on 1 Magh 2082.

It operates for the remainder of FY 2082/83.

Regardless of when the entity was incorporated, the hotel did not operate throughout the entire income year.

Accordingly, management should not automatically assume that the ordinary full-year Section 11(2ख) concession applies to that first partial year.

The commencement date should be formally documented because it may also determine the beginning of other time-bound tax incentives.

2.34 Temporary Closure

A distinction may also arise between:

• temporary interruption;

• seasonal closure;

• closure for major renovation;

• complete cessation.

For example, a hotel may close for two months for renovation but remain commercially active through reservations and other operations.

Whether such circumstances satisfy a statutory “full operation throughout the year” condition should be considered on the actual facts.

Management should therefore record:

• closure dates;

• reason for closure;

• board/management decisions;

• renovation period;

• reopening date;

• continued business activities.

Tax eligibility should not depend upon an undocumented assumption.

2.35 Tourism Industry Versus Hotel/Resort Concession

Some tax incentives refer specifically to:

hotel and resort

while other incentives refer more broadly to:

tourism industry other than casino.

This distinction is extremely important.

A restaurant may not qualify for a concession worded specifically for “hotel and resort” but could potentially fall within a broader tourism-industry provision if the particular statutory definition and conditions are satisfied.

For example, Section 11 contains major-investment incentives for a special industry or tourism industry other than casino meeting prescribed investment and employment conditions. Current FY 2083/84 tax guidance reflects this broader tourism-industry wording.

Accordingly, management must read the exact language of each concession.

It is incorrect to ask simply:

“Is tourism exempt?”

The correct question is:

“Does this particular taxpayer satisfy the definition and conditions of this particular Section 11 concession?”

2.36 Classification of Banquet Operations

A banquet operation may exist in several forms.

It may be:

1. a department of a hotel;

2. part of a restaurant;

3. a stand-alone banquet business;

4. a party palace;

5. an event/catering company.

The accounting treatment should reflect the actual structure.

Where a hotel supplies:

hall + food + beverage + accommodation

as one package, the hotel remains the supplier of the package unless contractual facts indicate otherwise.

Where a separate event company merely rents the hotel hall, the hotel's revenue may instead be:

hall rent/service revenue,

while the event company earns the customer-facing event revenue.

The VAT and TDS consequences can therefore differ substantially.

2.37 Classification of Catering Operations

Catering may similarly be:

• an incidental activity of a restaurant;

• an F&B division of a hotel;

• a stand-alone catering business.

A hotel that provides outside catering should maintain a separate catering revenue code.

This allows management to determine:

• sales;

• food cost;

• staff cost;

• transport cost;

• VAT;

• profitability.

It also assists in distinguishing catering revenue from banquet revenue generated within the hotel premises.

2.38 Classification of Spa and Wellness Operations

A hotel spa may be:

• operated directly by the hotel;

• operated by a separate subsidiary;

• outsourced to a third-party operator.

The tax accounting should follow the legal arrangement.

Where the hotel directly operates the spa:

spa sales are hotel revenue.

Where a third party operates the spa and pays fixed rent:

rent is hotel revenue; spa sales belong to the operator.

Where the arrangement is based on revenue sharing:

the contract must be reviewed to determine whether the hotel is principal, agent, landlord or joint operator.

The commercial label “revenue share” by itself is not sufficient.

2.39 Classification of Airport Transfer and Tourist Transport

A hotel may provide airport pickup:

• free as part of room package;

• for a separate charge;

• using its own vehicle;

• through an outsourced transport company.

These structures have different accounting implications.

If the hotel purchases transport from an external operator and resells it as part of a package, management must determine whether the hotel is acting as principal or agent.

If the transport operator invoices the guest directly, the hotel may merely receive commission.

If the hotel operates tourist vehicles as a separate activity, check the applicable licensing requirements and current mandatory VAT-registration notification for that activity and location.

2.40 Classification of Room Packages

Hotels increasingly sell bundled products such as:

Room + Breakfast

Room + Dinner

Room + Spa

Room + Airport Transfer

Wedding Package

Conference Package

All-Inclusive Resort Package

The commercial package may have one selling price, but management should still identify the economic components internally.

This is necessary for:

• departmental revenue allocation;

• F&B profitability;

• cost control;

• VAT analysis;

• commission calculations;

• management reporting.

The appropriate tax treatment of packages is dealt with in a separate chapter.

2.41 Principal Versus Agent

One of the most important classification questions in hospitality accounting is whether the business acts as principal or agent.

Consider a hotel travel desk selling sightseeing tours.

If the hotel purchases the tour from an operator for NPR 8,000 and sells it to the guest for NPR 10,000 as its own service, the accounting may differ from a situation where the hotel merely collects NPR 10,000 on behalf of the tour operator and earns NPR 1,000 commission.

In the first case, gross transaction value may constitute hotel revenue.

In the second, only the commission may constitute hotel revenue.

The legal contract and actual responsibilities should determine the treatment.

The same issue appears in:

• transport;

• tour packages;

• ticketing;

• spa concessions;

• event management;

• OTA transactions.

2.42 Foreign Franchise and Hotel Brand

A locally owned hotel may operate under an international brand.

The existence of a foreign brand does not by itself make hotel revenue foreign income or revenue of the foreign brand.

Management should identify the exact contractual payments such as:

• franchise fee;

• royalty;

• management fee;

• reservation fee;

• marketing contribution;

• technical service fee.

Each may have a distinct Nepal tax treatment.

Foreign payments are dealt with later in this series.

2.43 Local Government Registration

In addition to federal tax and tourism registrations, hospitality businesses generally need to consider relevant local registrations and municipal charges.

The exact requirements can depend upon:

• municipality;

• location;

• nature of establishment;

• property use;

• signboards;

• local business classification.

These local obligations should be recorded separately from federal income tax and VAT.

Management should therefore avoid posting all registration and licence payments into one account without identifying the authority and period to which the payment relates.

2.44 Liquor Licence and Business Classification

Where alcohol is sold, management should separately maintain the applicable liquor/excise licence.

IRD confirms that liquor transactions require compliance with both the relevant excise and liquor-law provisions.

The licence should correspond with the actual nature and location of the business.

For example, a hotel operating a bar should not assume that ordinary hotel registration automatically authorises liquor sales.

The accounting system should also separately record licence fees and renewals.

2.45 Same Premises, Different Taxpayers

It is possible for several taxpayers to operate from the same hospitality premises.

For example: ABC Hotel Pvt. Ltd. — rooms

ABC Food Pvt. Ltd. — restaurant

ABC Wellness Pvt. Ltd. — spa

XYZ Casino Ltd. — casino

Each entity may have separate:

• PAN;

• VAT;

• employees;

• assets;

• licences;

• revenue;

• tax rates.

Management should ensure that customer billing clearly identifies the actual supplier.

Amounts should not be interchangeably collected or booked between group companies merely because they operate from the same building.

2.46 One Taxpayer, Multiple Activities

The reverse situation is also common.

One entity may earn revenue from:

• hotel;

• restaurant;

• alcohol;

• property rental;

• investment;

• transport;

• management services.

This creates the need for activity-wise accounting.

Even where one annual income-tax return is filed, management should be able to determine income attributable to each activity.

This becomes particularly important where:

• different tax rates may apply;

• only one activity qualifies for a concession;

• VAT treatment differs;

• separate regulatory licences apply.

2.47 Segment Accounting for Tax Management

For an entity conducting several activities, the general ledger should allow the following model:

Segment A — Qualifying Hotel Business

Rooms
Hotel restaurant
Hotel banquet
Hotel spa
Other hotel services

Segment B — Liquor/Bar

Alcohol sales
Alcohol cost

Segment C — Property Rental

Rental income
Property expenses

Segment D — Other Business

Other revenue
Direct cost

Common expenditure can then be allocated on an appropriate and consistently applied basis.

This allows management to determine the effect of tax concessions accurately rather than applying one rate indiscriminately to total accounting profit.

2.48 Classification Before Pricing

Tax classification should also be considered when setting customer prices.

For example, management of a five-star hotel should know before setting room tariffs that the transaction may involve:

• taxable service value;

• VAT;

• Luxury Fee.

A restaurant with a bar should know its VAT-registration position before printing menu prices.

A banquet business should know whether its advertised package is VAT-inclusive.

Tax classification therefore affects commercial pricing, not merely year-end accounts.

2.49 Classification Before Configuring POS and PMS

The property-management system and POS should be configured only after the legal tax classification is established.

Typical revenue codes should identify:

• room;

• restaurant food;

• non-alcoholic beverage;

• alcohol;

• banquet;

• spa;

• laundry;

• transport;

• other taxable service;

• Luxury Fee where applicable.

Incorrect system configuration can cause thousands of transactions to be recorded incorrectly before the finance department detects the issue.

2.50 Practical Classification Matrix

For management purposes, the following matrix summarises the starting position.

This table provides the starting classification only. Detailed eligibility must be determined under the relevant statutory provisions.

2.51 Management Classification Checklist

Before calculating the annual income tax of a hotel, resort or restaurant, management should be able to answer the following questions: What legal entity earns the revenue?

What activities are registered under that entity?

Is the establishment legally registered/classified as a hotel or resort?

What was the classification during the relevant fiscal year?

When did commercial operation commence?

Was the hotel/resort fully operational throughout the year?

Does it operate a bar or sell liquor and beer?

Are liquor sales material?

Is any restaurant operated through a separate entity?

Does the business operate catering, party-palace, spa or massage activities?

Is VAT registration compulsory irrespective of turnover?

Is the hotel five-star or above?

Is the resort classified as a luxury resort?

Are any activities outsourced?

Are there group-company transactions?

Are foreign management or franchise arrangements involved?

Does the business operate more than one property?

If management cannot answer these questions from existing records, tax-rate determination should not yet be considered final.

2.52 Accounting Policy Recommendation

The accounting policy manual of a hospitality entity should contain a section titled:

Business and Revenue Classification

The policy should identify:

• legal entity;

• properties;

• branches;

• operating departments;

• revenue centres;

• cost centres;

• VAT status;

• liquor status;

• Luxury Fee status;

• related entities.

This classification should then be reflected consistently in:

• PMS;

• POS;

• general ledger;

• payroll;

• inventory;

• management reporting.

2.53 Annual Review of Classification

Classification should not be treated as permanent.

It should be reviewed whenever there is a material change, such as:

• new star classification;

• conversion to luxury resort;

• opening of bar;

• commencement of catering;

• establishment of spa;

• new property;

• change in legal entity;

• outsourcing of restaurant;

• commencement of international brand agreement;

• major expansion;

• change in tourism registration.

The annual Finance Act may also change the tax consequences of an existing classification.

Accordingly, management should perform a classification review at the beginning of every fiscal year.

2.54 FY 2082/83 and FY 2083/84

For the two fiscal years covered by this series, the basic classification principles described above remain relevant.

The important rate framework is that an ordinary entity starts from the general 25% rate, while entities carrying on specified activities including liquor and beer transactions are included in the 30% category. Hotel and resort entities may then qualify for the specific Section 11 concessions where the statutory requirements are satisfied.

For FY 2083/84, IRD has separately published the applicable entity rates and Section 11 concessions, confirming that year-specific tax schedules should be used rather than relying solely on older rate charts.

The detailed computation of these rates is addressed in the following chapters.

2.55 Management Perspective

From a management perspective, classification should be completed before any of the following decisions are made:

• annual tax budgeting;

• room-rate setting;

• menu pricing;

• bar pricing;

• major investment;

• staff outsourcing;

• entity restructuring;

• opening an additional outlet;

• commencement of catering;

• introduction of spa services;

• adoption of a foreign brand;

• dividend planning.

The classification determines the tax framework within which these decisions operate.

A business that first determines its classification after the fiscal year has ended has lost the opportunity to manage many of the relevant tax consequences.

2.56 Conclusion

The taxation of a hospitality business begins with identifying what the business actually is.

A hotel, resort, restaurant, bar and party palace may all operate within the same general hospitality industry, but they do not necessarily have the same income-tax rate, VAT-registration requirement, statutory concession or regulatory obligation.

Similarly, activities occurring within the same building do not necessarily belong to the same taxpayer, while several different departments may form part of one integrated hotel business.

Management should therefore establish the legal and operational structure of the business before applying tax rates or concessions.

The central principles are:

Tax treatment follows the taxpayer and the actual activity, not merely the commercial name.

A restaurant is not automatically a hotel for income-tax concession purposes.

A hotel restaurant operated by the hotel entity should be distinguished from an independently operated restaurant.

Liquor and beer operations require separate consideration because of the statutory 30% entity-rate category and excise/liquor requirements.

VAT registration must consider both turnover and compulsory-registration categories.

Five-star and luxury-resort classification has direct Luxury Fee consequences.

Once the business has been correctly classified, the next step is to determine how its taxable business income is calculated.

The following chapter therefore deals with Corporate Income Tax — Determination of Business Income and Taxable Income, including the distinction between accounting profit and taxable profit, recognition of income, deductible expenditure, disallowances and the basic income-tax computation before applying hotel/resort concessions.