Hotels and Resorts — Basic Income Tax Concessions

4.1 Introduction

One of the most important changes affecting the taxation of Nepal's hospitality sector from Fiscal Year 2082/83 was the express inclusion of hotels and resorts within the concession provided by Section 11(2ख) of the Income Tax Act, 2058.

Before this amendment, the provision principally referred to special industries. Finance Act 2082 amended Section 11(2ख) by inserting hotel, resort and information technology industry after the reference to special industry. The same amendment also inserted hotels and resorts into the employment-based concession under Section 11(3). The legislative amendment is expressly reflected in the Finance Bill/Act materials.

As a result, a qualifying hotel or resort that remains fully operational throughout the income year can obtain a reduction in the income tax otherwise payable.

For a company subject to the ordinary 25% corporate income-tax rate, this results in an effective tax rate of:

20% of taxable income

before considering any additional concession that may be available under Section 11.

This guide explains the basic concession itself. Employment-based concessions, major tourism-investment incentives and other additional concessions are examined separately in later chapters.

4.2 Nature of the Concession

The most important point to understand is that Section 11(2ख) does not prescribe a separate 20% corporate tax rate for hotels and resorts.

The ordinary corporate tax is first calculated under Schedule 1.

For an ordinary resident company:

Taxable Income × 25% = Tax Otherwise Payable

Section 11(2ख) then grants an entity a:

20% exemption from that tax

Accordingly:

25% × 80% = 20% effective tax rate

This distinction is important because the amount of concession depends upon the tax that would otherwise be applicable to the qualifying income.

It should therefore be described accurately as:

20% exemption from income tax otherwise payable

rather than:

20% statutory tax rate.

IRD's current FY 2083/84 materials continue to publish Section 11 concessions separately from the basic entity tax rates, reflecting this structure.

4.3 Basic Statutory Requirement

Section 11(2ख), as amended for the hospitality sector, applies where the qualifying activity is:

fully operated throughout the income year.

For an entity qualifying under the provision, the tax otherwise payable on the relevant income is reduced by 20%.

Three matters therefore need to be established:

1. the taxpayer is carrying on a qualifying hotel or resort activity;

2. the income under consideration arises from that qualifying activity; and

3. the hotel or resort has been fully operational throughout the relevant income year.

The concession should not be applied merely because the taxpayer's name contains the word “Hotel” or “Resort”.

The legal classification and actual activity discussed in Chapter 2 remain fundamental.

4.4 Fiscal Year From Which the Hotel/Resort Concession Applies

The inclusion of hotels and resorts in Section 11(2ख) was introduced through the fiscal amendments applicable from FY 2082/83.

Accordingly, the relevant position for this series is:

The amendment inserting “hotel, resort and information technology industry” into Section 11(2ख) is directly reflected in the Finance Act legislative materials.

This timing is significant.

A hotel preparing comparative financial information should not retrospectively apply the FY 2082/83 concession to an earlier fiscal year merely because the financial statements were finalised after the amendment.

4.5 Ordinary Company — Effective 20% Rate

Consider a hotel company having taxable income of NPR 10,000,000.

Illustration 4.1 — Basic Hotel Concession

Taxable income:

NPR 10,000,000

Normal corporate tax @25%:

NPR 2,500,000

Section 11(2ख) exemption: 20% of NPR 2,500,000

NPR 500,000

Tax payable:

NPR 2,500,000 – NPR 500,000
= NPR 2,000,000

Effective tax rate:

NPR 2,000,000 ÷ NPR 10,000,000
= 20%

The concession therefore saves:

NPR 500,000

in this example.

4.6 The Concession Is Calculated on Tax, Not Income

A common computational mistake is to reduce taxable income by 20%.

That is incorrect.

Assume taxable income is NPR 10 million.

Incorrect treatment would be: Taxable income:

NPR 10,000,000

Less 20%: NPR 2,000,000

Revised taxable income: NPR 8,000,000

Tax @25%: NPR 2,000,000

Although this happens to produce the same numerical result where the underlying tax rate is exactly 25%, the conceptual treatment is wrong.

The statutory treatment is: Taxable income:

NPR 10,000,000

Tax @25%: NPR 2,500,000

Less 20% of tax: NPR 500,000

Tax payable: NPR 2,000,000.

The distinction becomes important where:

• another basic tax rate applies;

• different categories of income exist;

• another Section 11 concession is applied;

• tax credits or other tax computations are involved.

Management accounts should therefore preserve the proper sequence.

4.7 Effective Rate Is Not Always Necessarily 20%

The familiar effective rate of 20% arises because:

General entity rate = 25%

and

Section 11(2ख) exemption = 20% of tax.

If the tax otherwise applicable to a particular qualifying amount were different, the resulting effective rate would also be different.

For example, purely as a mathematical illustration: If tax otherwise payable were calculated at 30%:

30% × 80% = 24%

This is relevant because Chapter 2 identified the separate 30% statutory category applicable to entities carrying on specified businesses including liquor and beer transactions.

The correct tax treatment of an integrated hotel's liquor activity must therefore be established before applying the concession indiscriminately to total income.

The important principle is:

Section 11(2ख) reduces tax otherwise payable; it does not replace the underlying tax classification.

4.8 Income of the Hotel or Resort

The concession relates to income from the qualifying hotel or resort business.

A company may also earn income unrelated to the qualifying activity.

For example, a hotel company may earn:

• hotel operating income;

• rent from a separate commercial building;

• investment income;

• profit from another unrelated business.

It should not automatically apply the hotel concession to every rupee of taxable income merely because the company happens to own a hotel.

Section 11 contains a segregation principle requiring income from activities enjoying different concessions to be calculated separately as if the income were derived by separate persons.

Management should therefore be capable of determining the taxable income attributable to the qualifying hotel/resort business.

4.9 Illustration — Hotel Plus Unrelated Rental Activity

Suppose Hotel ABC Pvt. Ltd. has: Hotel taxable income:

NPR 20,000,000

Taxable income from an unrelated commercial property:

NPR 5,000,000

Total taxable income:

NPR 25,000,000

If the rental activity does not independently qualify for the Section 11(2ख) concession, management should not simply calculate: NPR 25,000,000 × 20%.

Instead, the relevant income streams must be considered separately.

Hotel income

NPR 20,000,000 × 25%

= NPR 5,000,000

Less Section 11(2ख) concession 20%

= NPR 1,000,000

Hotel tax:

NPR 4,000,000

Other taxable income

NPR 5,000,000 × applicable ordinary tax treatment assuming 25%:

NPR 1,250,000

Total:

NPR 5,250,000

rather than NPR 5,000,000.

This illustrates why segment accounting is important even where only one company exists.

4.10 Integrated Hotel Revenue

The need to segregate qualifying income should not be confused with ordinary departmental accounting inside an integrated hotel.

A hotel may operate:

• rooms;

• restaurant;

• banquet;

• spa;

• laundry;

• conference facilities;

• recreation.

Where these constitute integrated operating departments of the qualifying hotel entity, the fact that separate departmental accounts are maintained does not automatically transform each department into a separate taxpayer.

The relevant question is whether the income forms part of the qualifying hotel/resort activity.

This must be distinguished from genuinely separate activities such as:

• unrelated property rental;

• standalone trading activity;

• separate liquor wholesale business;

• investment portfolio.

Management should therefore maintain sufficient segment information to support the classification.

4.11 “Fully Operational Throughout the Income Year”

The phrase “fully operational throughout the income year” is one of the most important conditions of the basic concession.

The wording is materially different from simply requiring that:

the company existed throughout the year.

A company may have been incorporated for the entire fiscal year but may only have commenced hotel operations during the year.

Similarly, a hotel may legally remain registered throughout the year but cease actual operations for a substantial period.

The statutory condition therefore requires attention to actual operation.

4.12 Newly Established Hotel — First Year

Consider a company incorporated in 2081 that constructs a hotel and commences commercial operation on:

1 Kartik 2082.

The hotel operates successfully from Kartik through Ashadh.

Nevertheless, the hotel was not fully operational from the beginning of FY 2082/83.

On a straightforward reading of Section 11(2ख), the condition of full operation throughout that income year is not satisfied.

Accordingly, the prudent treatment is not to claim the basic Section 11(2ख) concession for that partial commencement year solely on the basis of this provision.

Illustration 4.2 — Partial First Year

Commercial operation begins:

1 Kartik 2082

Taxable income FY 2082/83:

NPR 8,000,000

Unless another specific concession independently applies, the Section 11(2ख) full-year concession should not simply be applied as though the hotel had operated from 1 Shrawan.

From FY 2083/84, if the hotel remains fully operational throughout the year, the condition becomes capable of being satisfied.

4.13 Commencement Date Must Be Defined Properly

Management should formally establish the date on which the hotel commenced commercial operation.

Possible dates in a hotel project may include:

• company registration date;

• industry registration date;

• tourism registration date;

• completion of construction;

• soft opening;

• trial opening;

• first guest stay;

• formal inauguration;

• full commercial opening.

These dates may differ.

For tax purposes, the relevant date should be determined by actual commercial operations and the statutory provision concerned.

Management should therefore retain evidence such as:

• opening approvals;

• first tax invoices;

• PMS records;

• first occupancy reports;

• regulatory correspondence;

• board/management decisions;

• tourism registration;

• commencement certificates where applicable.

The date should not be selected retrospectively merely to obtain a tax benefit.

4.14 Soft Opening

Hotels frequently conduct a soft opening before the formal inauguration.

During a soft opening, the hotel may:

• accept paying guests;

• operate some rooms;

• operate selected restaurants;

• test systems;

• keep some facilities closed.

Whether this represents full commercial operation depends on the actual facts.

If the hotel is actively earning revenue but substantial components of the business remain under construction or unavailable, management should not automatically equate the first paying guest with “full operation throughout the year” for Section 11(2ख).

The distinction between:

commencement of some commercial activity

and

full operation

must be considered carefully.

4.15 Seasonal Operations

Some resorts may be naturally seasonal.

Examples include:

• mountain resorts;

• high-altitude accommodation;

• establishments affected by monsoon access;

• tourism properties designed around a particular season.

The wording of Section 11(2ख) nevertheless refers to full operation throughout the income year.

There is no general rule that merely being a “seasonal tourism business” automatically satisfies that wording.

Where seasonal closure is material, management should obtain a specific legal/tax analysis of the facts before claiming the basic concession.

The book therefore adopts a conservative principle:

A planned period of complete non-operation should not automatically be treated as satisfying the full-year condition.

4.16 Temporary Closure for Renovation

Hotels frequently close rooms, floors or even entire properties for refurbishment.

A distinction should be made between:

• partial closure of some rooms;

• closure of one restaurant;

• short interruption for maintenance;

• substantial suspension of all hotel operations.

For example, closing 20 rooms out of 100 for refurbishment while the remaining hotel continues operating does not necessarily mean the hotel itself has ceased operation.

A complete closure for several months requires much greater consideration.

Management should document:

• period of closure;

• facilities remaining operational;

• booking activity;

• reason;

• renovation programme;

• revenue during the period;

• reopening date.

The law does not provide a simple mathematical “number of days” test for every such situation; substance therefore matters.

4.17 Temporary Closure Due to Force Majeure

A hotel may temporarily close because of:

• natural disaster;

• government order;

• infrastructure failure;

• security conditions;

• another event beyond management's control.

Whether a statutory concession requiring full operation remains available in such circumstances should not be assumed.

Where the tax amount is material, management should consider obtaining clarification or professional advice based on the specific event and any relief notified by Government.

The fact that the closure was involuntary does not necessarily rewrite the statutory wording.

4.18 Full-Year Operation and Employee Concession Are Separate Tests

Management should distinguish between:

Section 11(2ख)

which requires the qualifying hotel/resort to be fully operational throughout the income year;

and

Section 11(3)(क)

which measures qualifying direct employment of Nepalese citizens throughout the year.

The two conditions are related in practice but legally distinct.

A hotel may satisfy the full-operation condition yet fail to maintain the minimum number of qualifying employees for the additional employment concession.

Conversely, having 100 employees does not cure failure to satisfy the basic full-operation test.

Each concession must be established independently.

4.19 Basic Concession Versus Employment Concession

The Section 11 structure permits the basic Section 11(2ख) concession to be combined with one additional concession selected under Section 11 where the same income would otherwise qualify for more than one relief.

Section 11(5) provides, in substance, that where the same income could enjoy more than one Section 11 concession, the taxpayer may obtain the Section 11(2ख) benefit plus one other concession of its choice.

This is extremely important.

The basic hotel concession is therefore not necessarily the end of the calculation.

For example:

Basic hotel concession
plus
Employment concession

can produce a lower effective rate where all requirements are met.

But management should not indiscriminately stack every Section 11 incentive on the same income.

4.20 Illustration — Basic Plus Employment Concession

Assume: Taxable qualifying hotel income:

NPR 10,000,000

Ordinary tax @25%:

NPR 2,500,000

Basic Section 11(2ख) concession: 20% exemption:

NPR 500,000

Tax after basic concession:

NPR 2,000,000

Assume the hotel also satisfies the 100-employee concession requiring payment of 90% of the tax otherwise remaining under the applicable employment provision.

Tax:

NPR 2,000,000 × 90%
= NPR 1,800,000

Effective rate:

18%

This is why the commonly quoted hotel rates may be:

• 20%;

• 18%;

• 16%;

• 15%;

• 14%;

depending upon employment conditions.

The employment thresholds are considered comprehensively in the next chapter.

4.21 One Additional Concession — Management Choice

A hotel may potentially satisfy several concessions.

For example, it may be:

• a qualifying hotel under Section 11(2ख);

• employing more than 300 persons;

• listed on the securities market;

• potentially eligible under another tourism-related concession.

Section 11(5) means management should not simply multiply all concessions together.

Instead, it should determine which one additional concession, in addition to the Section 11(2ख) relief, gives the best lawful result for the relevant income.

The practical exercise is therefore:

Calculate Option A

Basic concession + employment concession.

Calculate Option B

Basic concession + listed-company concession.

Calculate Option C

Basic concession + other independently available concession.

Then select the legally permitted and financially optimal treatment.

This process will be examined in detail in the chapter on interaction and optimisation of concessions.

4.22 Separate Income Where Different Concessions Apply

Section 11 also requires separate computation where a taxpayer undertakes different activities entitled to different concessions.

Conceptually, those activities should be treated as though separate persons earned the respective income for the purpose of calculating the concession.

This makes departmental and segment accounting essential.

A hotel group should not:

1. combine all revenue and expenditure;

2. calculate one aggregate profit;

3. apply whichever concession produces the lowest tax.

Instead, qualifying income must be identified appropriately.

4.23 Allocation of Common Costs

Where a company earns both qualifying and non-qualifying income, certain expenses may relate to both.

Examples include:

• finance department salaries;

• directors' remuneration;

• head-office rent;

• common software;

• audit fee;

• legal costs;

• group marketing;

• shared utilities.

These common costs should be allocated on a reasonable and consistent basis.

Possible allocation bases may include:

• revenue;

• direct labour;

• floor area;

• asset use;

• employee count;

• actual service usage.

No single allocation basis is universally appropriate.

Management should select a method that reasonably reflects the economic use of the expense and apply it consistently.

4.24 Example — Allocation of Common Administration Cost

Assume a company operates: Qualifying hotel operation revenue:

NPR 80 million

Separate non-qualifying commercial rental revenue:

NPR 20 million

Common head-office cost:

NPR 5 million

If revenue is a reasonable allocation base: Hotel share:

80%

Allocated hotel expense:

NPR 4 million

Other activity:

20%

Allocated expense:

NPR 1 million

The tax computation can then determine qualifying and non-qualifying income separately.

If revenue is not a reasonable driver of the cost, another documented basis should be selected.

4.25 Tax Concession Should Be Reflected in Current Tax Provision

The Section 11 concession affects the current income-tax liability of the period.

Accordingly, where management prepares periodic financial statements, the estimated current tax provision should reflect the concession when management has a reasonable basis to conclude that the conditions will be satisfied.

For example: Estimated annual taxable income:

NPR 50 million

Company expects to satisfy only the basic hotel concession.

Estimated income tax:

NPR 50 million × 25% × 80%
= NPR 10 million

rather than:

NPR 12.5 million.

However, if eligibility is uncertain because of a major period of closure, management should not automatically assume the concession in the tax forecast without considering that uncertainty.

4.26 Management Tax Budget

The basic concession should also be incorporated into the annual budget.

A useful management tax bridge is:

This gives management a more realistic measure of:

• profit after tax;

• cash requirement;

• return on investment;

• distributable profit.

4.27 Concession and Advance Tax

A hotel should also consider the concession when calculating its estimated advance income-tax liability.

Advance tax is intended to approximate the final annual income-tax liability.

Accordingly, if the hotel clearly qualifies for the Section 11 concession, the projected tax should generally incorporate the available relief rather than calculate advance tax as though the company will ultimately pay the full 25%.

However, management should be cautious where:

• employee count is uncertain;

• full-year operation is uncertain;

• a specific additional concession remains subject to conditions.

The advance-tax forecast should be revised as facts change during the year.

4.28 Additional One-Third Depreciation

The inclusion of hotels and resorts within Section 11(2ख) has another important consequence.

Schedule 2 of the Income Tax Act grants an additional one-third of the normal depreciation rate for assets in Classes A, B, C and D to entities covered by specified provisions including Section 11(2ख). Current Schedule 2 references expressly include entities under Section 11(2ख).

Because hotels and resorts were brought into Section 11(2ख) from FY 2082/83, qualifying hotel/resort entities can consequently access the accelerated depreciation mechanism under the Schedule, subject to the applicable conditions.

This is a separate benefit from the 20% tax exemption.

4.29 Effective Accelerated Depreciation Rates

The ordinary rates for Classes A–D are:

Where the additional one-third depreciation rate applies, the effective rates become approximately:

This accelerated depreciation can materially reduce taxable income in asset-intensive hotels.

4.30 Illustration — Accelerated Depreciation

Suppose a qualifying hotel has a Class B depreciation base of:

NPR 30,000,000.

Ordinary depreciation at 25%:

NPR 7,500,000

Accelerated hotel rate:

approximately 33.33%

Tax depreciation:

approximately NPR 10,000,000.

Additional current-year tax deduction:

approximately NPR 2,500,000.

If the hotel is effectively taxed at 20%, the additional timing benefit in current tax is approximately:

NPR 500,000

before considering other tax effects.

This illustrates why the Section 11 amendment has significance beyond the headline tax rate.

4.31 Accelerated Depreciation Is a Timing Benefit

Management should understand the economic nature of accelerated depreciation.

It generally accelerates the timing of the tax deduction.

It does not necessarily increase the total depreciable cost that can ultimately be deducted over the life of the asset.

A higher deduction in earlier years reduces the tax pool more quickly.

Therefore, future depreciation may be lower.

The benefit is primarily:

earlier tax deduction and improved tax cash flow.

For capital-intensive hospitality businesses, the time value of this acceleration can nevertheless be significant.

4.32 Concession and Accounting Depreciation

Accelerated tax depreciation does not mean that the hotel must use the same higher depreciation rate in its financial statements.

The financial statements continue to apply the relevant accounting depreciation policy.

Accordingly:

Accounting depreciation

and:

Tax depreciation

should remain separate calculations.

For example: Accounting depreciation:

NPR 8 million

Tax depreciation after accelerated rate:

NPR 12 million

The tax computation would ordinarily:

add back NPR 8 million accounting depreciation

and:

deduct NPR 12 million tax depreciation.

The resulting temporary difference may also affect deferred tax where the applicable accounting framework requires it.

4.33 Hotel Under a Full Tax Holiday

A hotel or tourism project may independently qualify for a complete tax holiday under another Section 11 tourism-investment provision.

In a year in which the qualifying income is fully exempt from income tax, the basic 20% concession has no additional cash-tax effect because:

20% reduction of zero tax = zero additional saving.

This is why management should determine which Section 11 concession is economically relevant rather than mechanically listing every possible concession.

The larger investment concessions are examined in a later chapter.

4.34 Basic Concession and Tax Loss

Where the qualifying hotel has a tax loss, no current income tax is payable.

Therefore, there is no current tax from which the 20% concession can be deducted.

Illustration 4.3 — Loss Year

Taxable result before concession:

Tax loss NPR 10 million.

Current corporate tax:

Nil.

Section 11(2ख) tax saving in that year:

Nil.

The significance of the hotel concession arises when taxable income generates tax otherwise payable.

Loss carry-forward treatment remains governed by Section 20 and related provisions.

4.35 Concession Does Not Alter Revenue or Expenses

The tax concession should not be recorded by reducing hotel revenue or operating expenses.

It operates in the income-tax computation.

Accordingly, management should not create entries such as:

Dr. Income Tax Concession Expense
Cr. Room Revenue

or reduce the taxable revenue ledger.

The concession affects:

Income Tax Expense / Current Tax Liability

rather than operational turnover.

4.36 Accounting Presentation of Current Tax

Assume: Taxable income:

NPR 20,000,000

Ordinary tax:

NPR 5,000,000

Section 11(2ख) exemption:

NPR 1,000,000

Current tax payable:

NPR 4,000,000.

The current-tax provision should reflect the tax liability after the available statutory concession, subject to the applicable financial-reporting framework.

The tax reconciliation may separately explain the impact of concessionary taxation.

4.37 Investment Income of the Hotel

A hotel may earn interest on:

• fixed deposits;

• call accounts;

• investments.

Such income should not automatically be assumed to represent qualifying hotel income merely because the funds originated from hotel operations.

The legal nature of the income and applicable Section 11 segregation rules should be considered.

Similarly, disposal gains and rental income from non-hotel assets may require separate treatment.

This is another reason for maintaining distinct general-ledger accounts for:

• hotel operating income;

• finance income;

• investment income;

• rental income;

• asset-disposal gains.

4.38 Foreign Currency Income

The fact that room revenue is received in foreign currency does not create a separate hotel tax concession.

A hotel may receive payments in:

• Nepalese rupees;

• US dollars;

• other convertible currency.

The Section 11(2ख) concession arises because the taxpayer is a qualifying hotel/resort and satisfies the statutory conditions, not because the guest is foreign or payment is received in foreign currency.

Any separate export or foreign-currency concession must be tested under its own statutory wording.

4.39 Domestic and Foreign Guests

Similarly, there is no separate basic Section 11(2ख) rate for:

• Nepalese guests;

• Indian guests;

• other foreign tourists.

The basic hotel concession relates to the hotel's qualifying business income.

The nationality of the customer does not, by itself, determine the basic income-tax rate.

Other taxes or foreign-exchange requirements may of course differ.

4.40 Franchise Hotel

A hotel operating under an international franchise can still be a Nepalese hotel taxpayer.

The payment of:

• royalty;

• management fee;

• reservation fee;

• brand fee;

to a foreign company does not by itself remove the Nepalese hotel from the basic concession.

However, such payments affect taxable income only to the extent they are properly deductible, and may separately create:

• TDS;

• reverse VAT;

• transfer-pricing;

• foreign-exchange consequences.

These matters do not change the conceptual calculation of the Section 11(2ख) concession.

4.41 Leased Hotel Property

A hotel does not necessarily have to own the land and building in order to carry on a hotel business.

A company may:

• own the building;

• lease the building;

• operate under a management arrangement.

For purposes of the basic concession, the central issue is the qualifying hotel/resort business and statutory conditions rather than mere title to the building.

However, the contractual structure may substantially affect:

• depreciation;

• repair deductions;

• lease accounting;

• withholding tax;

• VAT.

Ownership and operation should therefore be distinguished.

4.42 Change of Hotel Operator

A property may change operating company during the year.

For example: Hotel Property Owner Pvt. Ltd. leases the hotel to Operator A until Poush.

Operator B operates from Magh onwards.

Each taxpayer must determine its own Section 11 eligibility.

The fact that the physical hotel itself operated throughout the year does not necessarily mean that each separate operator satisfies the requirement of having qualifying hotel income from a hotel fully operated by that taxpayer throughout the relevant year.

The tax concession belongs to the taxpayer on its qualifying income, not to the building itself.

4.43 Multiple Hotels Under One Company

A single company may operate:

• Hotel Kathmandu;

• Resort Pokhara;

• Hotel Chitwan.

The Section 11 treatment should be considered with reference to the actual qualifying income and operation of the respective activities.

If one property commenced part-way through the year while two others operated throughout the year, management should not automatically assume that the same treatment applies to all three properties merely because they belong to one company.

Property-level accounting is therefore highly desirable.

4.44 Illustration — Existing Hotel and New Property

ABC Hotels Pvt. Ltd. operates Hotel A throughout FY 2083/84.

It opens Hotel B on 1 Magh 2083.

Assume taxable income before common-cost allocations is: Hotel A:

NPR 30 million

Hotel B:

NPR 5 million

The full-year condition is clearly different for the two operations.

Management should therefore maintain separate property-level computations instead of simply combining NPR 35 million and applying the concession without analysis.

Common costs should then be allocated reasonably.

4.45 Conversion of Restaurant into Hotel

Suppose a company previously operated only a restaurant but later develops accommodation and obtains hotel registration.

The company should document the date from which the qualifying hotel business genuinely commenced.

Restaurant income earned before that date should not be retrospectively described as hotel income solely to obtain a concession.

Where the hotel begins part-way through the income year, the full-year operation condition must also be considered.

4.46 Conversion or Reclassification of Hotel

A hotel may change from:

• tourist standard to star hotel;

• lower star to five-star;

• resort to luxury-resort classification.

For the basic Section 11(2ख) concession, ordinary hotel/resort qualification is the relevant starting point.

The change to five-star classification is more directly relevant to Luxury Fee.

Management should maintain classification certificates and their effective dates because different taxes may depend on different classifications.

4.47 Restructuring Should Not Be Driven Solely by the Concession

Management may consider:

• separating restaurant operations;

• separating bar operations;

• creating a property-owning company;

• creating an operating company.

Tax can be one factor in such decisions, but restructuring solely to obtain a lower rate can create other consequences involving:

• VAT;

• TDS;

• transfer pricing;

• rent;

• financing;

• legal licences;

• SSF;

• regulatory approvals;

• anti-avoidance principles.

The Section 11 concession should therefore be incorporated into genuine commercial structuring rather than treated in isolation.

4.48 Management Records for the Basic Concession

A hotel or resort intending to claim the Section 11(2ख) concession should maintain a permanent concession file.

The file should contain, as relevant:

Legal Status

• company registration;

• constitutional documents;

• PAN;

• VAT registration.

Hotel/Resort Status

• tourism registration;

• industry registration;

• hotel/resort classification;

• star classification where relevant;

• annual renewals.

Operation

• commercial commencement evidence;

• PMS reports;

• occupancy reports;

• monthly sales;

• tax invoices;

• management reports.

Full-Year Operation

• monthly room availability;

• operating calendar;

• closure information;

• renovation periods;

• evidence of continued operations.

Income Computation

• property-wise revenue;

• department-wise revenue;

• qualifying and non-qualifying income;

• common-cost allocation.

Tax Computation

• taxable income;

• ordinary tax;

• Section 11(2ख) exemption;

• additional concession selected;

• advance-tax reconciliation.

Depreciation

• fixed-asset tax pools;

• ordinary rates;

• accelerated rates;

• addition dates;

• disposal schedule.

This file should be updated during the year rather than reconstructed at return-filing time.

4.49 Suggested Ledger and Management Coding

Where the hotel has non-qualifying activities, the accounting system should allow the following coding: Property Code

H 01 — Kathmandu Hotel
H 02 — Pokhara Resort

Activity Code

ROOM — Accommodation
FNB — Food and Beverage
BAN — Banquet
SPA — Spa
OTH-H — Other Hotel Activity
RENT — Non-Hotel Rental
INV — Investment

Tax-Concession Code

S 11-2 B — Basic hotel/resort concession
S 11-EMP — Employment concession
NONQUAL — Non-qualifying activity

The exact codes are a management choice, but the accounting system should be capable of producing the data needed for the tax computation.

4.50 Monthly Monitoring of Full-Year Condition

The finance department should not first consider the “full operation” requirement after Ashadh end.

A simple monthly schedule can be maintained:

Where the hotel is closed, management should record why and for how long.

This provides a contemporaneous basis for determining concession eligibility.

4.51 Estimated Effective Tax Rate for Management Reporting

For management reporting, the estimated effective rate should be based upon the concession that management reasonably expects to qualify for.

For example:

Basic concession only

20%

Basic concession + 100 employee concession

18%

Basic concession + 300 employee concession

16%

Basic concession + 500 employee concession

15%

Basic concession + 1,000 employee concession

14%

Further reduction can arise under the diversity condition addressed in Chapter 5.

Management should revise the expected rate when employee numbers or eligibility conditions change.

4.52 FY 2082/83 Versus FY 2083/84

The basic hotel/resort concession is substantially continuous across the two fiscal years covered by this series.

IRD separately lists the FY 2083/84 entity rates and Section 11 concessions as current fiscal-year materials.

4.53 Practical Illustration — Basic Concession and Accelerated Depreciation

The following illustration assumes that separately prepared and reviewed pool workings produce total ordinary depreciation of NPR 8,000,000 and legally allowable depreciation of NPR 10,000,000 after the applicable accelerated-rate treatment. It is not a uniform one-third uplift of the entire NPR 8,000,000: that arithmetic alone would produce NPR 10,666,666.67. Any mix of qualifying and other pools must explain the NPR 10,000,000 result.

Assume a qualifying hotel has the following preliminary tax computation:

Accounting profit:

NPR 40,000,000

Add accounting depreciation:

NPR 10,000,000

Tax profit before tax depreciation:

NPR 50,000,000

Ordinary tax depreciation would have been:

NPR 8,000,000

But qualifying accelerated tax depreciation is:

NPR 10,000,000

Taxable income:

NPR 40,000,000

Tax @25%:

NPR 10,000,000

Section 11(2ख) exemption @20% of tax:

NPR 2,000,000

Tax payable:

NPR 8,000,000

Effective tax:

20% of taxable income

The hotel obtains two different benefits:

1. accelerated depreciation reduces taxable income; and

2. Section 11(2ख) reduces the tax calculated on that taxable income.

These should not be confused as one concession.

4.54 What Management Should Not Do

Management should avoid the following practices:

Applying 20% directly to accounting profit

Taxable income must first be computed under the Income Tax Act.

Applying the concession to every income stream

Only qualifying income should receive the relevant concession.

Claiming the concession in a partial first year without considering the full-year condition

Commercial commencement matters.

Assuming a commercial “resort” name is sufficient

Legal and operational classification should support the claim.

Stacking every available concession

Section 11 limits how multiple concessions may be combined.

Ignoring accelerated depreciation

The Schedule 2 consequence can be financially significant.

Treating the concession as a revenue reduction

It is an income-tax calculation.

Waiting until year-end to assess eligibility

The relevant conditions should be monitored throughout the year.

4.55 Management Planning Opportunity

The Section 11(2ख) amendment materially changes the economics of a qualifying hotel or resort.

A hotel that would otherwise pay tax at 25% may reduce its ordinary effective rate to 20%.

Where further qualifying employment relief applies, the effective rate may decline further.

At the same time, accelerated tax depreciation can reduce taxable income during asset-intensive years.

This means tax planning should form part of:

• annual budgeting;

• expansion decisions;

• capital-expenditure planning;

• employee planning;

• property-level profitability analysis;

• advance-tax forecasting.

The concession should therefore be regarded as a management variable rather than merely a figure entered into the annual tax return.

4.56 Conclusion

From FY 2082/83, hotels and resorts obtained an important place within Nepal's Section 11 business-concession framework.

For an ordinary company taxed at 25%, the basic Section 11(2ख) concession reduces the tax otherwise payable by 20%, resulting in an effective tax rate of 20% on qualifying taxable income, provided the statutory conditions are satisfied.

The concession should, however, be applied carefully.

It is subject to the requirement that the qualifying hotel or resort be fully operational throughout the income year. It attaches to qualifying income rather than automatically to every activity of the company. Different qualifying and non-qualifying activities may therefore require separate computations.

The provision also interacts with the wider Section 11 regime. The basic concession may be supplemented by one other permissible concession, making employment levels, investment status and other qualifying conditions financially important.

In addition, because entities under Section 11(2ख) fall within the relevant Schedule 2 accelerated-depreciation framework, the amendment can produce a further cash-flow benefit through an additional one-third of the ordinary depreciation rate for Classes A–D.

The basic calculation can therefore be expressed as:

Determine qualifying taxable income

then:

Apply the ordinary applicable tax rate

then:

Reduce that tax by the Section 11(2ख) basic concession

then, where permitted:

Apply the selected additional Section 11 concession

The most important additional concession for an operating hotel or resort is ordinarily the employment-based concession.

The following chapter therefore examines Employment-Based Income-Tax Concessions for Hotels and Resorts, including the 100, 300, 500 and 1,000 employee thresholds, the requirement for direct employment of Nepalese citizens throughout the year, the additional women/Dalit/persons-with-disabilities concession, treatment of staff turnover, outsourced personnel, part-time and seasonal workers, and the management accounting needed to preserve eligibility.