Hospitality Businesses — Allowable and Non-allowable Expenditure

8.1 Introduction

Determination of taxable income does not end with identifying revenue. The second major component of the income-tax computation is the determination of which expenses may be deducted and which expenses must be added back for tax purposes.

For hotels, resorts and restaurants, this distinction can be particularly significant because the business generally incurs a large number of transactions across food and beverage operations, payroll, utilities, repairs, maintenance, commissions, software, marketing, travel, staff welfare, rent, professional services, financing and capital expenditure.

An expense may be perfectly valid for accounting purposes and yet require different treatment for income-tax purposes.

Likewise, an expense may be commercially necessary but become wholly or partly non-deductible because:

• it is capital in nature;

• it is personal rather than business-related;

• a statutory ceiling applies;

• required PAN information is absent;

• a prescribed banking requirement has not been followed;

• it relates to exempt or final-withholding income; or

• another specific limitation in the Income Tax Act applies.

The accounting department should therefore distinguish between:

Accounting Expense

and:

Tax-Deductible Expense

rather than assuming that every debit in the statement of profit or loss is deductible.

The general statutory foundation is Section 13 of the Income Tax Act, under which expenditure is deductible where it is incurred by the taxpayer during the income year in earning income from the business or investment, subject to the other provisions of the Act.

8.2 The Three Basic Tests for Deductibility

An ordinary business expense should generally satisfy three fundamental conditions.

The expenditure should be:

Incurred by the Taxpayer

The expense must belong to the person deriving the income.

A shareholder's personal expense does not become an expense of the hotel merely because the company pays the bill.

Incurred During the Relevant Income Year

Timing should follow the applicable tax-accounting principles.

For a company using accrual accounting, an amount may be recognised when the liability is incurred even though payment occurs later, subject to the specific rules of the Act.

Incurred in Earning Business or Investment Income

The expense must have a sufficient connection with the income-producing activity.

These principles should be regarded as the starting test.

Only after the general test is satisfied should management examine whether a special restriction, ceiling or prohibition applies.

8.3 Commercial Necessity Does Not Alone Determine Deductibility

An expense may appear commercially reasonable but still require a tax adjustment.

For example: A resort incurs NPR 2 million repairing an existing building.

The expense has an obvious business purpose, but Section 16 may restrict the amount immediately deductible as repairs.

A hotel purchases a new elevator.

The elevator is necessary for business, but its cost is capital expenditure and is recovered through depreciation rather than immediate deduction.

A restaurant pays a legitimate supplier in cash.

The purchase may be genuine, yet a cash-payment restriction can affect deductibility if the statutory threshold is exceeded.

The question is therefore not simply:

“Did the business really spend the money?”

The complete question is:

Was the expenditure incurred for the business, and does the Income Tax Act permit deduction of that amount in this income year?

8.4 Food and Beverage Cost

Food and beverage cost is one of the principal deductible expenditure categories of a hotel or restaurant.

Typical purchases include:

• rice and grains;

• vegetables;

• fruits;

• meat;

• poultry;

• fish;

• dairy products;

• bakery ingredients;

• cooking oil;

• spices;

• packaged foods;

• soft drinks;

• bottled water;

• tea and coffee;

• alcoholic beverages;

• minibar products.

The income-tax deduction should be based upon consumption or cost of sales, not simply gross purchases during the year.

The general relationship is:

Opening Inventory

• Purchases
  – Closing Inventory
  = Cost of Goods Consumed/Sold.

Accordingly, year-end stock should not be ignored.

8.5 Illustration — Restaurant Food Cost

Opening food stock:

NPR 500,000

Purchases during year:

NPR 12,000,000

Closing food stock:

NPR 800,000

Cost of food consumed:

NPR 500,000 + NPR 12,000,000 – NPR 800,000
= NPR 11,700,000

The deductible food cost is therefore NPR 11.7 million, subject to other tax requirements.

The NPR 800,000 closing inventory remains an asset and is carried into the following income year.

8.6 Direct Purchase From Farmers

Restaurants and resorts may purchase agricultural products directly from farmers or other natural persons who do not operate a commercial business.

This is relevant because Section 21 contains invoice/PAN restrictions but provides exceptions for prescribed direct purchases of agricultural, forest, animal or household goods from natural persons not carrying on commercial transactions. Current Section 21 guidance recognises such direct-purchase exceptions.

Management should distinguish between:

direct purchase from a genuine producer,

and:

purchase from an ordinary commercial trader or wholesaler.

The fact that the product is agricultural does not automatically make every supplier exempt from documentation requirements.

8.7 Alcohol Purchases

Alcohol purchased for resale through:

• bar;

• restaurant;

• banquet;

• minibar;

is generally part of the business's trading stock.

The expense is recognised through cost of sales rather than by immediately expensing all purchases.

Management should maintain separate records for:

• opening inventory;

• purchases;

• outlet transfers;

• sales;

• complimentary issues;

• breakage;

• wastage;

• closing inventory.

VAT and excise treatment of alcohol requires a separate analysis of the actual sale, licence and current tax provisions.

For income-tax purposes, the fundamental principle remains that only the cost attributable to goods sold or otherwise properly consumed by the business during the year should affect current taxable income.

8.8 Complimentary Food and Beverage

Hotels often provide complimentary food or beverages to:

• VIP guests;

• tour leaders;

• business partners;

• travel agents;

• marketing guests;

• staff.

The tax treatment depends on purpose.

Where the complimentary cost is genuinely incurred to promote or conduct the hotel business, it may form part of deductible business expenditure, subject to the general rules.

Where food or alcohol is consumed privately by:

• shareholder;

• director;

• family member;

• unrelated guest;

without a genuine business purpose, the expenditure may constitute personal or non-business expenditure and should not simply be treated as ordinary operating cost.

The PMS/POS system should therefore use specific complimentary codes rather than simply deleting the transaction.

8.9 Staff Meals

Staff meals are common in hospitality operations because employees frequently work shifts during meal periods.

Where staff meals form part of the ordinary employment arrangement and are provided in connection with the hotel or restaurant operation, the related business cost may generally be treated as employment-related expenditure, subject to the specific tax and employee-benefit provisions.

Management should distinguish:

• regular staff meals;

• executive entertainment;

• meals supplied to shareholders or family;

• promotional meals for third parties.

A separate staff-canteen or staff-meal cost centre is preferable to posting all meals into restaurant promotional expenses.

8.10 Salaries and Wages

Employee remuneration is generally a major deductible business cost where genuinely incurred for the business.

The expense may include:

• basic salary;

• dearness allowance;

• grade;

• overtime;

• festival allowance;

• performance incentives;

• bonus;

• other employment allowances;

• employer SSF contributions;

• other employee benefits.

The corresponding payroll must separately account for:

• salary TDS;

• employee SSF;

• employer SSF;

• other deductions.

Income-tax deductibility at employer level and taxation of the benefit at employee level are separate questions.

A payment can be deductible to the hotel while simultaneously forming taxable employment income of the employee.

8.11 Employee PAN Requirement

Section 21 contains a specific restriction regarding remuneration and wages where employee PAN requirements are not satisfied, subject to limited exceptions for prescribed small/casual payments.

Accordingly, permanent and regular employees should be registered properly in the payroll master with PAN information.

A hotel employing a large workforce should include PAN collection in the onboarding process rather than trying to correct missing data after fiscal year-end.

Current Section 21 also contains restrictions relating to invoices over the prescribed amount where PAN is not mentioned.

8.12 Banking Requirement for Remuneration

Where remuneration exceeds NPR 25,000 per person per month, current Section 21 requires payment through a banking channel for deduction purposes.

For management, the appropriate policy is straightforward:

Salary exceeding the statutory threshold should be paid through bank transfer or another legally recognised banking channel.

The payroll register, bank transfer and accounting entry should reconcile.

Cash salary payments should therefore be exceptional rather than routine.

8.13 Employer Social Security Fund Contribution

The employer portion of SSF contribution represents an additional employment cost.

Where the contribution is properly incurred in relation to employees of the business and in accordance with the applicable law, it should be recorded separately from the employee's contribution.

For example: Gross cash remuneration:

NPR 100,000

Employer SSF:

NPR 12,000

The employer's employment cost is:

NPR 112,000

before other benefits.

The employee's SSF deduction, however, is not an additional employer expense; it is an amount withheld from the employee and remitted to the Fund.

Determine the actual employer contribution using the applicable scheme, statutory rate and contribution base; the figures above illustrate only how an assumed employer contribution changes employment cost.

8.14 Bonus Expense

Employee bonus should be separately accounted for.

Where bonus is recognised and distributed in accordance with the relevant bonus legislation and tax provisions, the qualifying amount may be deductible.

Management should maintain a reconciliation showing:

Accounting Bonus Provision

versus:

Legally Payable Bonus

versus:

Amount Distributed

versus:

Balance, if any.

A provision created merely to reduce accounting profit without satisfying the relevant statutory requirements should not automatically be assumed deductible.

8.15 Staff Uniforms

Hospitality businesses often provide uniforms to:

• chefs;

• housekeeping employees;

• front-office staff;

• security;

• restaurant employees;

• engineering staff.

The Income Tax Act distinguishes work-specific clothing from ordinary personal clothing.

The Act treats clothing purchased for an individual as personal in nature except where the clothing is not suitable for use outside working time. It also limits education/training expenses of a personal nature, while allowing directly business-related non-degree/non-diploma training in the circumstances prescribed.

Accordingly:

Chef jackets, housekeeping uniforms and other occupation-specific uniforms are much more clearly business-related than ordinary suits or casual clothing that can readily be worn privately.

Management should maintain a separate uniform account.

8.16 Employee Training

Training directly connected with hotel operations can be an important deductible expense.

Examples include:

• food-safety training;

• PMS/POS training;

• barista training;

• chef technical training;

• housekeeping standards;

• health and safety;

• customer-service training;

• hotel software training.

The law distinguishes such business-related training from private education leading to a personal academic degree or diploma.

Accordingly, management should distinguish:

technical/business training,

from:

general personal education of an employee or shareholder.

8.17 Recruitment Expense

Ordinary recruitment costs may include:

• recruitment agency fee;

• advertisements;

• employee screening;

• interview travel where business-related;

• onboarding costs.

Where these expenses are genuinely incurred to recruit employees for the business, they generally fall within the ordinary Section 13 business-purpose framework.

Where a foreign employee is recruited, separate costs may arise for:

• visa;

• work permit;

• immigration;

• relocation.

These should be classified according to the actual employment arrangement.

8.18 Staff Accommodation

Hotels and resorts, particularly outside major urban areas, may provide staff accommodation.

From the employer's perspective, the cost may be a genuine employment expense.

However, management should separately examine whether the accommodation creates a taxable employment benefit for the employee under the remuneration provisions.

The employer deduction and employee valuation are distinct calculations.

8.19 Staff Transport

Transportation supplied to employees may arise because:

• shifts end late at night;

• the resort is in a remote location;

• staff accommodation is away from the property.

Genuine staff transport incurred for business and employment purposes may generally fall within the business-expense framework.

However, private commuting costs paid on behalf of an individual can attract different treatment under the rules defining personal expenditure.

Management should therefore document the operational purpose.

8.20 Electricity and Utilities

Utilities used in business operations are generally ordinary operating expenditure.

These may include:

• electricity;

• water;

• LPG;

• fuel;

• internet;

• telephone;

• waste disposal.

For income-tax purposes, the deductible expense is normally the cost attributable to the business.

For VAT purposes, the amount recognised as expense should generally exclude recoverable VAT.

Accordingly:

Expense = net cost

where VAT is fully recoverable.

Where VAT is non-creditable, the VAT component normally forms part of the relevant cost.

8.21 FY 2083/84 Electricity VAT

From FY 2083/84, electricity VAT requires separate accounting consideration under the new electricity VAT regime.

This affects the VAT component, not the basic income-tax principle that electricity used for hotel or restaurant operations is a business expense.

Where electricity VAT is recoverable:

electricity expense should be recorded net of recoverable VAT.

Where it is not recoverable:

the non-creditable VAT forms part of cost.

Check the electricity supply, the current VAT provisions and input-credit eligibility before deciding which VAT amount is recoverable.

8.22 Rent of Hotel or Restaurant Premises

Where a hotel or restaurant operates from leased premises, rent is generally a deductible business expense where incurred in earning income.

However, management must also consider:

• withholding tax;

• local rent tax where applicable;

• lease incentives;

• deposits;

• advance rent;

• capital improvements;

• accounting-standard treatment.

A refundable rental deposit should not be charged immediately to expense.

Advance rent covering future periods should likewise be recognised in the appropriate period under accrual accounting.

8.23 Rent Versus Leasehold Improvement

Assume a restaurant leases a property and spends:

NPR 10 million

constructing a permanent interior, kitchen infrastructure and major electrical works.

It would be inappropriate to classify the entire amount as “rent expense” merely because the work is undertaken on a leased property.

The substance may represent a leasehold improvement or other capital expenditure.

Ordinary rent and capital improvement must therefore be separately accounted for.

8.24 Repair and Maintenance

Hotels generally incur significant maintenance expenditure because buildings, rooms, kitchens and mechanical systems require constant upkeep.

Section 16 contains a specific limitation on repair and maintenance expenditure related to depreciable assets owned and used to earn income.

Under the current provision, the deductible amount is limited to 7% of the depreciation base of the relevant asset pool, with the qualifying excess becoming part of the pool for tax depreciation purposes. This restriction is separate from the question whether the expenditure is genuinely a repair.

Management should therefore perform two tests:

Test 1: Is this actually a repair?

and if yes:

Test 2: Is the amount within the Section 16 deductible limit?

8.25 Illustration — Repair Limitation

Assume the relevant year-end tax depreciation base of a building class is:

NPR 100 million.

Repair and maintenance expenditure relating to the class:

NPR 10 million.

Section 16 limit:

NPR 100 million × 7%
= NPR 7 million.

Current deduction:

NPR 7 million.

Excess:

NPR 3 million.

The excess is not simply lost; it is dealt with under the tax-depreciation mechanism prescribed by the Act.

The accounting records should therefore retain the full NPR 10 million repair expense while the tax computation makes the required adjustment.

8.26 Routine Repairs Versus Capital Renovation

A transaction must genuinely be a repair before the 7% rule is considered.

Examples more likely to represent ordinary repair include:

• repainting;

• replacing broken locks;

• minor plumbing;

• repairing existing equipment;

• replacing a damaged window;

• routine servicing.

Examples more likely to be capital include:

• constructing a new wing;

• adding a floor;

• installing a new elevator;

• completely redesigning and expanding a commercial kitchen;

• installing a new central HVAC system;

• major structural renovation creating additional capacity.

Management should not classify an enduring improvement as “repair” merely because the supplier's invoice uses that word.

8.27 Repairs on Rented Property

Where the hotel does not own the underlying asset, the treatment requires separate consideration.

Ordinary maintenance of leased premises may fall within the general deduction rules.

However, substantial improvements may create an enduring leasehold asset.

Management should examine:

• lease term;

• nature of the work;

• ownership of the improvement;

• useful life;

• contractual obligations.

A dedicated Leasehold Improvement account is preferable for major projects.

8.28 Laundry Expense

Hotels may operate:

• internal laundry;

• outsourced laundry;

• both.

For outsourced laundry, the service cost is generally an operating expense, subject to:

• valid invoice;

• PAN;

• VAT treatment;

• TDS where applicable.

For internal laundry, management should identify:

• staff cost;

• detergents;

• utilities;

• machinery depreciation;

• repairs.

This provides a more accurate rooms-department cost than combining everything under “miscellaneous expense”.

8.29 Cleaning and Housekeeping

Common deductible costs include:

• cleaning chemicals;

• housekeeping supplies;

• pest control;

• outsourced cleaners;

• waste services.

Where reusable items have a longer useful life or are material capital assets, they should be classified accordingly.

Consumable housekeeping items, however, generally form ordinary operating expenditure.

8.30 Linen, Crockery, Cutlery and Small Operating Equipment

Hospitality businesses purchase:

• linen;

• towels;

• glassware;

• crockery;

• cutlery;

• kitchen utensils;

• small appliances.

The accounting treatment depends upon:

• cost;

• useful life;

• materiality;

• replacement frequency.

Items with an enduring useful life may require capitalisation, while consumable or frequently replaced operating supplies may appropriately be expensed.

Management should establish a consistent capitalization policy rather than decide item-by-item without a framework.

8.31 OTA and Booking Commissions

Commission paid to online travel agencies may be deductible where incurred to generate room bookings.

Examples include:

• Booking.com;

• Agoda;

• Expedia;

• other reservation platforms.

The correct accounting should ordinarily recognise:

gross room revenue

and:

commission expense

separately, where the hotel is principal supplier.

For a foreign platform, deductibility should also be considered together with:

• non-resident withholding tax;

• imported-service VAT;

• contractual documentation;

• foreign-exchange rules.

The fact that the commission is directly netted from settlement does not remove these obligations.

8.32 Travel Agent Commission

Local and foreign travel agents may receive:

• booking commission;

• volume incentive;

• sales commission;

• marketing support.

These expenses can be genuine selling costs where properly supported.

Management should distinguish commission from:

• discount given directly to customer;

• rebate;

• free room;

• promotional payment.

The tax, VAT and TDS consequences can differ.

8.33 Advertising and Marketing

Common hospitality marketing expenditure includes:

• digital advertising;

• website promotion;

• social-media advertising;

• travel-fair participation;

• printed materials;

• destination promotion;

• photography;

• influencer campaigns;

• agency fees;

• online listing fees.

Where genuinely incurred to generate business, these generally fall within Section 13.

However, management should distinguish:

advertising expenditure with identifiable promotional consideration

from:

donation or sponsorship without adequate commercial return.

8.34 Sponsorship

A sponsorship payment may be deductible as marketing expenditure where the hotel receives measurable commercial benefit such as:

• branding;

• advertising rights;

• naming rights;

• promotional exposure.

For example: A hotel pays NPR 500,000 to sponsor a tourism conference and receives:

• logo placement;

• advertising;

• exhibition rights;

• room-booking promotion.

This differs from an unconditional charitable contribution of NPR 500,000.

The underlying agreement should be retained.

8.35 Donation

Donation is subject to its own statutory rules and should not automatically be treated as ordinary marketing expenditure.

For FY 2082/83, qualifying approved donations are generally subject to the lower of the statutory monetary ceiling and 5% of adjusted taxable income.

For FY 2083/84, the monetary ceiling increases to NPR 300,000, while the 5% adjusted-taxable-income limitation continues. The prior ceiling was NPR 100,000.

Management should maintain separate accounts for:

• advertising;

• sponsorship;

• donation;

• CSR.

They should not all be grouped into “promotion”.

8.36 Corporate Social Responsibility — FY 2083/84

FY 2083/84 introduces a specific deduction for qualifying Corporate Social Responsibility expenditure incurred in accordance with prevailing law.

The deductible amount is limited to 1% of total taxable income.

Accordingly, management should not assume:

every community donation = deductible CSR.

The expenditure must satisfy the applicable CSR law and the tax provision.

For FY 2082/83, this specific new deduction did not exist in the same form.

8.37 Practical Difference Between Marketing, Donation and CSR

Consider three payments.

Payment A

Hotel pays a tourism website for digital advertising.

This is ordinary marketing.

Payment B

Hotel gives an approved charity an unconditional donation.

This falls under the donation provisions.

Payment C

Hotel undertakes an expenditure required and qualifying as CSR under applicable law.

From FY 2083/84, the specific CSR deduction may apply subject to the 1% limit.

The same accounting label should not be used for all three.

8.38 Professional Fees

Hotels regularly pay:

• accountants;

• lawyers;

• architects;

• engineers;

• consultants;

• IT professionals;

• valuation experts;

• designers.

Where the professional service relates to ordinary business operations, the fee may be deductible.

Where the service relates directly to acquiring or constructing a capital asset, the amount may instead form part of the capital cost.

For example: Annual legal retainer:

operating expense.

Architect's fee for construction of a new hotel wing:

ordinarily capital-project cost.

Substance determines classification.

8.39 Management Fees

A hotel may pay management fees to:

• domestic hotel manager;

• foreign hotel chain;

• parent company.

Deductibility depends upon the service genuinely being provided for the hotel business.

For related-party arrangements, the amount should also be commercially supportable.

Foreign management fees require further consideration of:

• TDS;

• DTAA;

• reverse VAT;

• foreign-exchange approval;

• transfer pricing.

A management agreement should clearly describe the service and fee basis.

8.40 Franchise and Brand Fees

International hotel brands may charge:

• royalty;

• franchise fee;

• reservation fee;

• marketing fee;

• system fee.

These may be deductible over the appropriate period where incurred to earn hotel income, subject to classification and the applicable tax rules.

A one-time payment acquiring an enduring intangible right may require capital treatment rather than immediate deduction.

Management should therefore distinguish:

recurring service/royalty fee

from:

acquisition of an intangible asset.

8.41 Software and Technology

Hospitality businesses use:

• PMS;

• POS;

• accounting software;

• payroll software;

• booking engines;

• CRM;

• channel managers;

• cloud systems.

Monthly or annual subscriptions ordinarily have a different character from outright acquisition of a long-term software right.

Subscription:

typically operating expense.

Purchased enduring licence:

may constitute an intangible depreciable asset.

Foreign software additionally raises imported-service VAT and non-resident tax questions.

8.42 Bank Charges and Merchant Fees

Hotels increasingly receive payments through:

• cards;

• online gateways;

• digital wallets;

• international payment platforms.

Bank and merchant charges incurred in collecting business revenue are ordinarily connected with the business.

Management should separately record:

• bank charges;

• merchant-discount rate;

• foreign-card charges;

• payment-gateway fee.

Net bank settlement should not cause the associated expense to disappear from the accounts.

8.43 Interest Expense

Interest may be deductible where the debt is connected with generating business income.

Typical hotel borrowings include:

• working-capital loan;

• term loan;

• construction finance;

• equipment loan;

• vehicle finance;

• shareholder loan.

The loan use should be traceable.

Interest relating to personal or non-business use should not be included merely because the borrowing is in the company's name.

The Income Tax Act separately provides the interest-deduction framework under Section 14.

8.44 Construction-Period Interest

Interest incurred while a hotel or major asset is under construction may have capital implications.

Management should separately track:

• pre-operation borrowing cost;

• post-commencement interest;

• interest attributable to operational assets.

This is important for both financial reporting and tax.

The accounting department should not combine all borrowing cost into one “interest expense” ledger where a major project is under construction.

8.45 Related-Party Interest

Loans from:

• shareholders;

• parent companies;

• related foreign entities;

require additional analysis.

Management should consider:

• commercial rate;

• use of funds;

• interest limitation;

• withholding tax;

• transfer pricing;

• foreign-exchange compliance.

The existence of a signed loan agreement does not by itself guarantee full deduction if another statutory restriction applies.

8.46 Insurance

Business insurance may include:

• property insurance;

• fire insurance;

• machinery insurance;

• business interruption;

• vehicle insurance;

• public liability;

• employee-related insurance.

Premiums genuinely connected with the business may generally qualify as ordinary expenditure, subject to any specific rules.

Prepaid insurance covering future accounting periods should be allocated appropriately.

8.47 Licence and Renewal Fees

Hotels and restaurants may incur recurring fees for:

• tourism registration;

• local business registration;

• liquor licence;

• food-related licence;

• fire or operational compliance;

• other regulatory renewals.

Recurring annual licence charges are generally different from penalties imposed for breach of law.

The expense account should therefore distinguish:

Licence and Renewal Fees

from:

Penalties and Fines.

8.48 Fines and Penalties

Section 21 denies deduction for income tax payable under the Act and fines or similar charges imposed for breach of law.

Examples may include:

• regulatory fine;

• statutory penalty;

• late-compliance penalty.

Such amounts should not be buried inside the corresponding expense account.

For example: Liquor licence renewal fee:

regulatory operating cost.

Fine for violation of liquor rules:

separate non-deductible penalty.

8.49 Income Tax Expense

Corporate income tax is not a deductible expense in computing taxable income.

Accordingly, the accounting tax provision recorded in the financial statements must be added back in the income-tax computation.

Example: Accounting profit after charging current income tax:

should not be used directly as taxable income.

Tax computations normally begin from:

profit before income tax.

8.50 Provincial and Local Taxes

The statutory framework provides that qualifying taxes paid to Provincial Government and Local Levels may be deductible as business expenses, even though federal income tax itself is not deductible.

Management should therefore distinguish:

• income tax;

• local business tax;

• municipal tax;

• other local/provincial levies.

They should not be combined under a single “tax expense” account.

8.51 Entertainment Expenditure

Entertainment should be reviewed according to its business purpose.

For example: Hotel entertains an international travel agent to negotiate a genuine contract.

This may have a business character.

Shareholder hosts a private family celebration at hotel expense.

This is fundamentally different.

The law specifically treats private food, lodging and entertainment expenditure of a natural person as personal expenditure.

Management should therefore create distinct codes for:

• business entertainment;

• promotional complimentary;

• staff welfare;

• owner/director private consumption.

8.52 Travel Expense

Business travel may include:

• sales visits;

• tourism fairs;

• supplier meetings;

• hotel-management meetings;

• training.

Where the travel is genuinely undertaken for business, the expenditure may fall within the general deduction rule.

Private holiday costs should not be mixed with business travel.

Where one trip has both business and personal components, the cost should be reasonably separated.

8.53 Vehicle Expense

Business vehicle costs may include:

• fuel;

• maintenance;

• insurance;

• driver salary;

• tax and registration.

The business-use portion may form ordinary expenditure.

Private use by owners, directors or employees may require adjustment or employee-benefit treatment.

Input VAT on a passenger vehicle must be assessed separately under the applicable vehicle-credit restriction and actual business use.

8.54 Foreign Travel

Foreign travel should be supported by a clear business purpose.

Examples include:

• international tourism fairs;

• hotel-brand meetings;

• supplier negotiations;

• professional training.

Management should retain:

• travel approval;

• itinerary;

• conference or meeting documentation;

• expense details.

This is a management-accounting discipline as much as a tax matter.

8.55 Pre-Opening Expenses

New hotels incur costs before opening.

Common expenses include:

• recruitment;

• pre-opening staff salaries;

• training;

• marketing;

• temporary office costs;

• trial operation.

The tax treatment depends upon the nature and timing of the expense.

Ordinary revenue-type expenditure associated with commencement of business should be distinguished from expenditures forming part of the construction or acquisition of capital assets.

For example: Pre-opening advertising:

revenue character.

Hotel-building architectural design:

capital character.

Kitchen equipment:

capital asset.

8.56 Capital Expenditure Is Not Immediately Deductible

Section 21 generally prevents ordinary immediate deduction of capital expenditure except where another provision specifically allows it.

For hotels, capital expenditure commonly includes:

• building;

• major renovation;

• plant;

• kitchen equipment;

• air-conditioning;

• elevators;

• furniture;

• generators;

• vehicles;

• long-term software rights.

The cost is ordinarily recovered through tax depreciation or another specific mechanism.

8.57 Capital Versus Revenue — Practical Test

Management should consider whether the expenditure:

• creates a new asset;

• substantially enhances an existing asset;

• increases capacity;

• extends useful life materially;

• creates an enduring benefit.

If yes, capital treatment becomes more likely.

If the expenditure merely restores an asset to its existing operating condition, repair treatment becomes more likely.

No single label on an invoice determines the result.

8.58 Example — Room Refurbishment

A hotel spends NPR 30 million refurbishing 50 rooms.

The project includes:

• repainting;

• new carpet;

• new furniture;

• upgraded bathrooms;

• additional electrical systems.

Management should separate components rather than charge the entire NPR 30 million to repairs.

Possible treatment: Repainting:

repair/maintenance.

New furniture:

capital asset.

Major bathroom upgrade:

potentially capital improvement.

Electrical expansion:

potentially capital.

Component-level project accounting therefore improves tax treatment.

8.59 Depreciation Instead of Immediate Expense

Where expenditure is capital, the benefit is generally obtained through Schedule 2 depreciation.

Where the hotel or resort satisfies the statutory accelerated-depreciation conditions, assess that relief separately using its tax asset pools and the applicable law.

The decision between:

repair,

and:

capital asset

therefore affects the timing of the tax deduction rather than necessarily eliminating the deduction permanently.

8.60 Bad Debts

Hotels may have receivables from:

• corporate guests;

• travel agencies;

• airlines;

• event companies;

• tour operators.

Section 25 permits adjustment where an accrual-basis receivable previously recognised becomes genuinely irrecoverable and is written off after appropriate recovery measures. The statute specifically requires the taxpayer in ordinary cases to be reasonably satisfied, after proper measures, that the debt cannot be recovered.

Management should distinguish:

provision for doubtful debt

from:

actual tax-recognised bad-debt write-off.

8.61 Bad-Debt Register

A useful management register should contain:

• customer;

• invoice number;

• invoice date;

• amount;

• revenue year;

• recovery action;

• amount written off;

• approval;

• subsequent recovery.

This prevents old receivables from remaining indefinitely in the accounts and supports consistent tax treatment.

8.62 Recovery of Bad Debt

Where an amount previously written off and recognised for tax purposes is subsequently recovered, an appropriate tax adjustment is required under Section 25.

The receipt should therefore not be posted directly against an arbitrary balance-sheet account without considering the earlier tax treatment.

8.63 Provisions

Accounting provisions may include:

• doubtful debt;

• future repairs;

• employee claims;

• legal claims;

• refurbishment;

• inventory obsolescence.

A financial-statement provision does not automatically create a tax deduction.

The expense must satisfy the applicable tax requirements.

Management should therefore maintain a tax-adjustment schedule of accounting provisions that are not currently deductible.

8.64 Inventory Write-Off

Food and beverage stock may be written off because of:

• expiry;

• spoilage;

• breakage;

• contamination.

Where genuine business loss occurs, management should maintain supporting operational records.

Recommended documents include:

• wastage report;

• expiry report;

• disposal approval;

• stock adjustment.

A management-approved stock system is preferable to making a large unexplained year-end journal entry.

8.65 Theft and Loss

Hotels may experience theft or loss of:

• inventory;

• equipment;

• cash.

The tax treatment depends on the nature of the loss, insurance recovery and the relevant provisions of the Act.

Management should separately account for:

gross loss,

and:

insurance or other recovery.

The net accounting treatment should not obscure the original event.

8.66 Cash Payments — FY 2082/83

Cash-payment rules are particularly relevant for restaurants, which frequently purchase food and supplies in cash.

For FY 2082/83, the earlier Section 21 rule generally restricted deduction for cash payments exceeding NPR 50,000 per transaction for taxpayers within the specified turnover condition, subject to statutory exceptions. IRD guidance reflects the older NPR 50,000 threshold.

Management should therefore review FY 2082/83 separately rather than applying the newer FY 2083/84 threshold retrospectively.

8.67 Cash Payments — FY 2083/84

Finance Act 2083 tightened the cash-payment restriction.

For FY 2083/84, the relevant per-transaction threshold is NPR 25,000 under the amended Section 21 framework. Current FY 2083/84 tax references reflect the NPR 25,000 rule.

Accordingly, the practical management policy should be:

Ordinary business payments above NPR 25,000 should be made through banking or electronic channels unless a specific statutory exception clearly applies.

8.68 Cash Payment Is a Deduction Issue, Not an Accounting Validity Issue

Suppose the restaurant genuinely buys NPR 40,000 of goods and pays cash in FY 2083/84 where no exception applies.

Accounting expense:

still genuine.

Tax treatment:

deduction may be restricted.

Accordingly, management should not delete or misstate the accounting transaction.

Instead:

record the expense correctly

and:

make the necessary tax adjustment.

8.69 Banking Policy

A hospitality business should adopt an internal policy requiring:

• supplier payments above the statutory tax threshold through banking channels;

• payroll through banks where legally required;

• exceptions to be documented.

Digital payment methods improve both tax compliance and treasury control.

8.70 Supplier PAN

Current Section 21 restricts expense supported by an invoice above NPR 2,000 where PAN is not mentioned, subject to specific exceptions.

The supplier master should therefore contain:

• legal name;

• PAN;

• VAT number where applicable;

• bank details;

• supplier category.

Purchase staff should verify PAN before approving a recurring commercial supplier.

8.71 Small Agricultural Purchases

The statutory exception for purchases from natural persons directly supplying agricultural, forest, animal or household goods should be used only where the facts genuinely fit the exception.

For example: Direct purchase of vegetables from a farmer:

may qualify for the specific exception.

Purchase from an urban wholesale vegetable company:

commercial supplier rules apply.

Supplier classification should not be based merely on the type of product.

8.72 TDS and Expense Recognition

Withholding tax is a payment-compliance obligation.

Where a payment is subject to TDS, the hotel should deduct and deposit the tax according to the Act.

IRD explains that withholding arises at payment or expense recognition as prescribed and that failure to deduct can result in recovery of tax, interest and applicable fees.

Management should therefore not assume that a valid expense eliminates the TDS obligation.

Likewise, TDS should be booked separately from the expense.

8.73 Illustration — Service Fee

Consulting fee:

NPR 100,000

VAT:

NPR 13,000

TDS:

NPR 1,500

Accounting: Professional Expense:

NPR 100,000

Input VAT:

NPR 13,000

TDS Payable:

NPR 1,500

Supplier Payable:

NPR 111,500.

The expense is not NPR 98,500 merely because TDS is deducted from the supplier.

8.74 Foreign Service Expense

Hotels frequently purchase foreign services including:

• software;

• booking platforms;

• hotel management;

• marketing;

• technical support;

• consulting.

Deductibility should be considered together with:

• business purpose;

• contract;

• non-resident withholding;

• reverse VAT;

• DTAA;

• foreign-exchange requirements.

A foreign invoice should not simply be posted into expense and paid without tax classification.

8.75 Foreign Exchange Difference

Exchange gains and losses can arise on:

• foreign payables;

• OTA receivables;

• foreign loans.

Under accrual accounting, exchange-rate differences require tax adjustment when the actual payment or receipt differs from the amount previously recognised.

Management should therefore maintain currency and settlement information in the accounting system.

8.76 Expense Related to Exempt or Final-Withholding Income

Section 21 restricts deduction of expenses incurred in deriving exempt income or amounts subject to final withholding, to the extent prescribed. IRD's guidance expressly identifies such costs among non-deductible amounts.

Accordingly, where a hotel company has both:

• taxable hotel business income; and

• exempt/finally taxed investment income,

related expenses should not automatically be charged entirely against the taxable hotel business.

8.77 Personal Expenses

Section 21 specifically denies domestic and personal expenses.

Examples requiring care include:

• owner's family accommodation;

• personal travel;

• home expenses;

• personal clothing;

• private entertainment;

• personal education.

The business account should not be used as a substitute for the owner's personal account.

Where a legitimate employee/director benefit exists, it should be classified and taxed accordingly rather than hidden as operating expenditure.

8.78 Shareholder Use of Hotel Facilities

Suppose a shareholder uses a suite for 30 days without charge for personal purposes.

Management should separately identify the transaction rather than recording the room as ordinary business occupancy.

Possible consequences may involve:

• non-business expense;

• employee/director benefit;

• distribution;

• VAT deemed-supply considerations.

The correct treatment depends upon the facts.

8.79 Profit Distribution

Dividend and other distributions of profit are not deductible business expenses.

Section 21 specifically identifies distribution of profits by an entity as non-deductible.

Accordingly:

Dividend ≠ salary
Dividend ≠ management fee
Dividend ≠ operating expense.

Management should maintain a clear distinction between returns on ownership and expenses incurred to operate the business.

8.80 Share-Issue and Debenture-Issue Costs — FY 2083/84

Finance Act 2083 removes qualifying share and debenture issue costs from the specified capital-expenditure definition. Apply the remaining deduction conditions before claiming a particular financing cost.

Accordingly, a hotel raising equity or debt during FY 2083/84 should not simply carry forward the older treatment without considering the amendment.

This difference should be specifically considered in expansion financing.

8.81 Feasibility and Project Development Cost

Feasibility studies can arise:

• before acquisition;

• before expansion;

• for new property development.

Their treatment depends on whether they form part of capital project development or represent ordinary recurring business analysis.

Management should use a separate project-development ledger rather than charging all feasibility work automatically to professional expense.

8.82 Board and Management Expenses

Board-related expenses may include:

• meeting fees;

• travel;

• meeting venue;

• board materials.

The nature and tax treatment depend upon the actual payment.

Meeting allowance may also carry TDS consequences.

Board expenses should not be combined with ordinary payroll if they represent a separate type of payment.

8.83 Security Expense

Security can be:

• directly employed;

• outsourced.

Direct employees generate payroll and SSF cost.

Outsourced security generates service expense, VAT where applicable and TDS considerations.

Both can be legitimate operating costs, but their accounting and tax mechanics differ.

8.84 Outsourced Housekeeping

The same distinction applies to housekeeping.

Direct model:

salary + employer SSF + employment obligations.

Outsourced model:

service fee + VAT + TDS.

The commercial cost comparison should include all components rather than comparing only gross invoices.

8.85 Repairs Through Contractors

A major maintenance contractor may provide both:

• service;

• materials.

The expense may involve:

• repair classification;

• capitalisation of some components;

• VAT;

• TDS;

• retention.

Management should require project coding for substantial repairs.

8.86 Small Tools and Consumables

Common operating items include:

• bulbs;

• minor tools;

• cleaning equipment;

• kitchen consumables.

A consistent materiality policy should determine whether they are:

• expensed immediately; or

• capitalised.

Tax law should then be applied to the accounting classification.

8.87 Telephone and Internet

Telecommunications used for business are ordinarily operating costs.

Where a company also pays for private use of owners or employees, the private element should be evaluated separately.

The invoice should also be considered for input VAT where applicable.

8.88 Printing and Stationery

Ordinary printing, stationery, menus and office supplies generally fall within operating expenditure.

However, significant branding installations, permanent signage or similar enduring assets may require capitalisation.

8.89 Website Development

Website costs can vary substantially.

Routine:

• hosting;

• domain renewal;

• maintenance;

generally have recurring operating character.

Major proprietary digital platform development may create an enduring intangible asset.

Management should classify based on the nature of the expenditure.

8.90 Complimentary Rooms for Marketing

Providing free accommodation to:

• travel journalist;

• tour operator;

• influencer;

• corporate buyer;

may represent marketing expenditure where a genuine promotional objective exists.

Management should document:

• guest;

• purpose;

• approval;

• expected commercial benefit.

The room should not simply be marked “house use” without explanation.

VAT consequences are considered separately.

8.91 House Use Rooms

Rooms used by:

• hotel manager;

• visiting employee;

• owner;

• director;

should be separately classified.

A room occupied by a hotel manager because the role requires residence at the property is different from private family accommodation of a shareholder.

Management coding should preserve this distinction.

8.92 Discounts and Rebates

A discount reduces revenue where it genuinely modifies the sale price.

A rebate or commission paid after the sale may instead represent an expense.

The contractual substance should determine treatment.

For example: Published room rate:

NPR 20,000

Negotiated corporate rate:

NPR 16,000.

Revenue is ordinarily based on the actual contractual selling price, not NPR 20,000 plus NPR 4,000 “discount expense”.

8.93 Credit-Card Commission

If the guest pays NPR 100,000 and the bank remits NPR 97,500 after a 2.5% merchant fee: Revenue:

NPR 100,000.

Merchant fee:

NPR 2,500.

Bank:

NPR 97,500.

Recording NPR 97,500 as sales understates revenue and hides the expense.

8.94 Insurance Recovery

Where the hotel incurs a loss and later receives insurance compensation, management should account for:

• loss;

• insurance receivable;

• actual recovery.

Tax treatment should reflect the underlying expense or asset and recovery rather than simply netting both amounts without analysis.

8.95 Foreign Income Tax

Foreign income tax is subject to the specific tax-credit rules rather than automatically being treated as a deductible business expense.

Section 21's broader non-deduction rules must therefore be considered together with any available foreign-tax credit mechanism.

For international hotel groups, this should be kept separate from foreign service withholding tax paid on behalf of suppliers.

8.96 Year-Wise Key Differences

For expenditure management, the most important differences between the two fiscal years include:

IRD confirms that Finance Act 2083 is the applicable annual amendment for FY 2083/84, while the currently consolidated Income Tax Act on the IRD site incorporates Finance Act 2082 amendments.

8.97 Suggested Expense Coding

For management purposes, the chart of accounts should separate at least:

Cost of Sales

• food;

• beverage;

• alcohol;

• minibar.

Employee Costs

• salary;

• employer SSF;

• bonus;

• training;

• uniforms;

• staff welfare.

Operating Costs

• utilities;

• laundry;

• cleaning;

• maintenance;

• security;

• software;

• marketing;

• OTA commission;

• professional fee;

• rent.

Financing

• bank interest;

• related-party interest;

• bank charges.

Tax-Sensitive Expense Accounts

• donation;

• CSR;

• entertainment;

• penalties;

• non-creditable VAT;

• personal/director expenses;

• cash-payment disallowance;

• provision expense.

Capital Projects

• building;

• renovation CWIP;

• furniture;

• equipment;

• software/intangible;

• vehicles.

This structure reduces the need to analyse one large “general expenses” account at year-end.

8.98 Monthly Tax Review of Expenses

The finance department should perform a monthly review focusing on matters that cannot easily be corrected after year-end.

The monthly process should identify:

• cash payments above the statutory threshold;

• salary above the banking threshold paid in cash;

• supplier invoices without PAN;

• expenses requiring TDS;

• capital purchases incorrectly posted to expense;

• significant repairs;

• foreign payments;

• personal/owner expenditure;

• donation and CSR payments.

This is a management-closing function, not merely a year-end tax exercise.

8.99 Management Report on Tax-Sensitive Expenditure

A useful monthly report may show:

This allows corrective action before fiscal year-end.

8.100 Accounting Profit to Tax-Deductible Expense Reconciliation

At year-end, management should reconcile:

Total Expenses per Financial Statements

less/add:

• non-deductible personal expenditure;

• penalties;

• income-tax expense;

• excess cash-payment disallowance;

• invoice/PAN disallowance;

• capital expenditure;

• provisions not yet deductible;

• accounting depreciation;

• restricted repairs;

• expenses attributable to exempt/finally taxed income;

plus/deduct:

• tax depreciation;

• permitted special deductions;

• bad-debt adjustments;

• other statutory amounts.

The result forms part of taxable-income computation.

8.101 Illustration — Expense Adjustment

Assume accounting expenses include: General operating expense:

NPR 80 million

within which: Penalty:

NPR 200,000

Personal director expense:

NPR 300,000

Capital furniture charged to expense:

NPR 1,000,000

Disallowed cash payment:

NPR 100,000

Accounting depreciation:

NPR 5,000,000

Tax depreciation separately available:

NPR 6,000,000.

Tax adjustment: Add back:

Penalty:

200,000

Personal expense:

300,000

Capital furniture:

1,000,000

Cash disallowance:

100,000

Accounting depreciation:

5,000,000

Total add-back:

NPR 6,600,000.

Deduct tax depreciation:

NPR 6,000,000.

Net increase to taxable profit:

NPR 600,000

before other adjustments.

This demonstrates why accounting expenditure cannot simply be copied into the income-tax return.

8.102 Management Perspective

The objective of expense management should not be to maximise the amount charged to the profit and loss account.

The objective should be to:

record the transaction correctly;

capture every legally allowable deduction;

avoid losing deductions through preventable compliance failures;

and:

distinguish operating cost from capital investment.

This is particularly important in hospitality because many avoidable tax costs arise not from aggressive tax positions but from basic operational issues such as:

• cash purchases;

• missing PAN;

• poor expense coding;

• mixing personal expenses;

• failure to distinguish repair from capital expenditure;

• failure to identify foreign-service taxes.

These are management-system issues and can be substantially reduced through a well-designed accounting process.

8.103 Key Principles

For practical purposes, management should remember the following principles.

First, an expense must have a genuine business connection.

Second, accounting recognition does not guarantee income-tax deduction.

Third, capital expenditure should not be claimed as an ordinary operating expense.

Fourth, recoverable VAT should generally not form part of the income-tax expense.

Fifth, inventory purchases become cost according to consumption and closing stock.

Sixth, employee expenses require proper payroll, PAN, banking and SSF treatment.

Seventh, cash-payment restrictions should be built into payment approval procedures.

Eighth, supplier PAN should be obtained when the vendor is created.

Ninth, foreign expenses should be classified before payment because TDS and reverse VAT may arise.

Tenth, donation, sponsorship and CSR are different categories.

Eleventh, fines, federal income tax and personal expenditure should not be treated as ordinary deductible business cost.

Twelfth, major renovation should be analysed component by component.

8.104 Conclusion

The deduction side of the income-tax computation is as important as the applicable tax rate.

Even where a hotel correctly determines its applicable income-tax rate and any qualifying concession, failure to capture legally allowable expenditure can increase the tax paid.

Conversely, recording unsupported personal expenses, large cash payments or capital expenditure as deductible operating cost can materially understate taxable income.

A strong hospitality accounting system should therefore identify the tax character of expenditure at the time the transaction is recorded.

The essential sequence is:

Identify the expenditure

then:

determine whether it relates to the business

then:

determine whether a specific limitation applies

then:

determine whether it is revenue or capital

then:

apply PAN, banking, TDS and other procedural requirements

and finally:

record the correct accounting and tax treatment.

For a major capital project, prepare a component-level working covering buildings, leasehold improvements, furniture, kitchen equipment, HVAC, generators, lifts, vehicles, computers and software. Apply the relevant tax-depreciation class, addition timing, disposal and repair rules to each supported amount.