KATHMANDU: There is a trend among companies to show a higher portion of loans compared to equity as they can then show lower profits by deducting interest payments as expenses and pay less income tax, the Office of the Auditor General (OAG) said in its 52nd annual report.
As per the Income Tax Act, companies can treat interest as expenditure. The bigger the loan, the more they can deduct as interest expenditure and show a lower profit.According to the report, the portion of debt was found to be as much as 768 times higher than equity. A Birgunj-based company dealing in containers has been found to have maintained such an equity-debt ratio.
The report has made a list of 11 companies that surprisingly have a higher debt ratio compared to equity. One Bharatpur-based company had a loan portion 238 times higher than equity.“Many countries have fixed the debt-equity ratio by creating a provision that breaching it would not be acceptable for tax purposes. Nepal’s tax laws do not specify such a ratio, according to the report.
The OAG complained that although it had pointed to the need to create a legal provision regarding the debt-equity ratio in the previous year’s report, the necessary efforts were not made to discourage the trend of paying less taxes by showing higher interest payments.
Joint secretary at the Finance Ministry Laxman Aryal said that the OAG report might have rightly pointed out the undesirable tendency and that there was a need for greater scrutiny into instances where the debt ratio is unusually high compared to equity. “We have to be more careful when financing has come from abroad as loans because this may lead to capital flight in the guise of interest payment,” said Aryal who heads the revenue department at the ministry.
Recently, big scale inflow of foreign debt to businessman Ajay Sumari’s unregistered company here became a hot topic in the media as the company registered in the British Virgin Islands where the money originated was revealed to be his own company.Suspecting that the funds had been transferred to Nepal for money laundering purposes, Nepal Rastra Bank blocked the release of around Rs3 billion from two Nepali banks.
According to Aryal, if the loans have been taken from Nepali banks, companies should not cut tax deducted at source (TDS) but it should be imposed on interest for financing that has come from abroad.
