The Supreme Court (SC) on Monday directed the Large Taxpayers’ Office (LTO), Inland Revenue Department (IRD) and Finance Ministry to furnish details on their decision to determine capital gains tax on the sale of Ncell shares by Niraj Gobinda Shrestha to another domestic investor. 

Justice Deepak Raj Joshi issued the show cause notice in response to a writ petition filed by Shrestha seeking an interim order against the tax determination process initiated by the LTO. Shrestha filed the petition on Sunday after the LTO started an investigation after he transferred 20 percent of his shares to another domestic investor. 

Although the issue of capital gains tax evasion during the transfer of 80 percent of Ncell stock by Swedish-Finnish company Telia to Malaysian-based telecom giant Axiata had made headlines immediately after the deal, the Office of the Auditor General (OAG) was the first government agency to point out possible tax evasion during the transfer of 20 percent of the shares. Five months later, the LTO initiated the investigation to determine the actual capital gains tax Shrestha would have to pay.     

The OAG report said that the domestic owner of the shares had tried to evade capital gains tax by under-reporting their price. Shrestha sold his 20 percent stake in Ncell to another Nepali citizen for Rs11.57 billion and deposited Rs2.83 billion as capital gains tax at the LTO. However, the OAG disagreed with the valuation and posted arrears amounting to Rs6.15 billion in the name of LTO. 

“Considering that 80 percent of the shares were valued at Rs144 billion, the price at which 20 percent of the shares have been sold seems to have been under-reported,” stated the OAG’s annual report unveiled in April. In a record deal struck in April 2015, Malaysia’s Axiata bought Reynolds Holding, which held a majority stake in Ncell, from the Swedish-Finnish company Telia at an enterprise value of $1.03 billion (approximately Rs103 billion). 

Reynolds Holding was Telia’s wholly-owned subsidiary, registered in Saint Kitts and Nevis, a tax haven. The tax authority has estimated that Telia is liable to pay Rs35.91 billion in capital gains tax in Nepal, citing that the law has made it clear that 25 percent of the profit made from a buyout deal must be deposited in the form of capital gains tax.

Since Telia did not deposit the tax amount at the time of the sale, the taxman here holds the right to impose a fine equivalent to 50 percent of the tax amount. On top of this, the taxman can also levy 15 percent interest on the outstanding amount. Based on this, Telia will have to pay Rs18.06 billion in fine and around Rs6.73 billion in interest