Cracking Section 57 of Income Tax Act, 2058 on the grounds of Supreme Court’s Judgement on Nell’s tax case
Income Tax Act, 2058 of Nepal (hereinafter referred to as the “Act”) is undeniably an elaborate legislation, difficult to be understood by taxpayers. Section 57 (hereinafter referred to as the “Section”) of the Act just adds to that confusion introduced by the Act. The Section deals with the tax provisions in the event of change of ownership of the company. Section 57 (1) reads if the ownership of any entity changes by 50% or more in comparison to its ownership until before the last 3 years, the entity shall be deemed to have disposed of the property under its ownership or liability borne by it. The bases for calculation of change in 50% or more ownership of a company, provisioned under the subsection are:
- Shareholding of more than 1% of total shareholding of the company,
- If any shareholder with less that 1% of total shareholding of the company is related to any shareholder with more than 1% of total shareholding of the company, such shareholding shall be taken into account.
Furthermore, subsection (2) of the Section clarifies the activities not to be carried out upon the change of ownership.
The infamous Ncell’s case perfectly describes the confusion inscribed under this Section. The judgment given by the country’s apex court explains the change of ownership of the company under the section. In Ncell’s tax case, the Supreme court of Nepal minutely delves into the applicability of the Section.
Ncell’s tax case in itself is a convoluted one. Prior to inquiring into Ncell’s case, it is important to understand the shareholding graph of Ncell which, in all intent and purposes, shows that Ncell, was owned by Telia Sonera Company Sweden. It thereunder concludes that the companies in between Ncell and Telia Sonera Company Sweden including Reynold Holdings (with 80% shareholding of Ncell) are interposed companies formed with the purpose of evading tax. Thus, when Axiata Group bought Reynolds Holdings, although Ncell argued that Reynold Holdings still owned 80% shareholding of the company hinting there was no change in the ownership of the company, the court however established that there actually was a change in the ownership of Ncell thus making Ncell liable for payment of capital gains tax.
Having concluded that Reynold Holdings had no other vital economic interest other than Ncell, the court established that in removing Ncell from Reynold Holdings, there was no any economic standing of Reynold Holdings i.e. Reynold Holdings basically meant Ncell. In this scenario, when Reynold Holdings was bought by Axiata Group, it meant that 80% shareholding that previously belonged to Telia Sonera Sweden via Reynold Holdings was shifted to Axiata Group, thus enunciating the change in 80% ownership of the company, which deduces that there was a change in ownership of Ncell. Hence, it was established that Section is attracted in this case.
In addition to this major ground, upon the purchase of Reynold Holdings by Axiata Group, the control of the company and business transactions is vested to the representative nominated from the dependent directors of Axiata Group in place of Telia Sonera Sweden. Hereby, Ncell has submitted different income details before and after the purchase pursuant to section 57 (3) of the Act, which just adds to the footing for change in ownership of Ncell.