Ican Journal December 2012

December 2012
Vol. 15 No. 2
(Quarterly Journal of The Institute of Chartered Accountants of Nepal)
Chairman
Vice-Chairman
Member
Member
Member
Member
Member
Member
Member
Secretary
Mr. Binaya Paudel
Editorial Support
President's Message
ACCOUNTING
Editorial Board
CA. Madhu Bir Pande
CA. Mahesh Kumar Guragain
CA. Jagannath Upadhyay
CA. Kiran Subedi
CA. Anjuli Shrestha
CA. Hem Kumar Kafle
CA. Roshan Pokhrel
RA. Murari Bhattarai
RA. Sankar Gyawali
Mr. Binod Neupane
Editorial
Economic Capital-with Reference to Financial Service

Industry in Nepal
- CA. Yuba Raj Pandeya
AUDITING
Audit of Saving & Credit Cooperative: Some Issues
- CA. Hem Kumar Kafle
BANKING
The Institute of Chartered Accountants of Nepal

Babar Mahal, P O Box 5289, Kathmandu, Nepal
Tel. No. 4269130, 4258569, Fax: 977-1-4258568
E-mail: ican@ntc.net.np
Website: www.ican.org.np
Merger of BFIs in Nepal: Due Dilingence & Documentation

- CA. Ramesh Dhital
12
ECONOMY
Commodity Futures Exchange Limited Variety in
Commodity Derivative Markets
Branch Offices:
Biratnagar: Tel: 021- 471395
Fax: 021- 471395, E-mail: icanbrt@ican.org.np
Butwal: Tel: 071-543629, E-mail: icanbtl@ican.org.np
Birgunj: Tel: 051-522660, E-mail: icanbrj@ican.org.np
- Mr. Abhishek Gautam
Designed & Printed By

Print and Art Service, Putalisadak,Ktm.
Tel: 4244419, 4239154
- Mr. Kamal Regmi
Globalization: Support and Discontent

- Mr. Gyan Mani Adhikari
Underground Economy
Nepals Distressed Macroeconomy
- Mr. Tula Raj Basyal
Subscription Rates
Annual Subscription
16
19
22
25
INFORMATION TECHNOLOGY
Electronic Banking & ICT Risk Management in BFIs- Mr.
30
Debesh P. Lohani
MANAGEMENT
Silence, Suffering, & Survival
- CA. A.R. Bhattarai
News
54
Education & Examination News
58
Members News
60
35
13 Behaviors from the Speed of Trust by Stephen M.R.

Covey
- CA. Nalini Bajracharya
37
Governance of NGOs & INGOs in Nepal
- CA. Kaushlendra Jha
40
TAXATION
International News
62
Deductibility of TAX at Source in Nepal Undr DTAA

- CA. N.K. Swami
48
Having resolutely upheld a very demanding tradition of excellence to make accountancy

profession an integral part of the national economy, The Institute of Chartered Accountants
of Nepal (ICAN), having its motto "Purity of mind and clarity of wisdom" has completed
its 15 years of glorious existence and is celebrating its 16th Anniversary on 30th January
2013. In span of 15 years, ICAN has been able to produce Chartered Accountants as
multi-dimensional professionals offering complete business solutions much beyond their
core domain of accounting and auditing.
The Institute of Chartered Accountants of Nepal (ICAN) and the accountancy profession
have indeed come a long way, but still there are miles to go. With the enormous rise in
expectation from the economic sectors, government and public at large, there are many
challenges to be met, many frontiers to be conquered and histories to be made. Newer
and newer opportunities are emerging, particularly in domains of 'IFRS', 'ERP control',
'e-Commerce', 'International taxation', 'risk management', 'corporate governance' etc
'Corporate Governance' (CG), which has attained increase importance in the wake of the
global financial crisis and corporate scams, can contribute to financial market integrity
and economic efficiency. An effective corporate governance not only enthuses confidence
in the investors and capital market but also works as tool for economic prosperity.
Accounting profession has a vital role to play in the whole gamut of corporate governance.
With still many challenges ahead, on the occasion of its 16th anniversary let's wish the
Institute of Chartered Accountants of Nepal (ICAN), all the best to develop and produce
multi-dimensional Professional Accountants, who are not only the backbone of financial
system but also conscience keepers of economy and who can provide enlightened valueadded services to the society with a futuristic vision towards economic development of
the nation.
Warm Regards
The Editorial Board

The Institute of Chartered Accountants of Nepal (ICAN)
President's
Message
President's Message
Dear Friends,
ive months have passed since the elected sixth council has taken over. Being
the president of the first term of this council I understand my responsibility
to work and establish a solid foundation to show the path for the future so
that mission laid by the Institute is accomplished.
As we all know accounting profession all around the world is facing new challenges vis-vis value addition and its contribution to society and economy. We professional
accountants need to rise above our level to achieve the competency and show our
commitment by adhering to appropriate practices in order to meet the expectation of
society and country.
ICAN aspires to stand on equal alongside all other international accounting bodies and
therefore committed to adopt a robust education and training module as well as strong
working standards and ethics for its members.
I also believe that Government has to accommodate ICAN and its members at all relevant
national policy making levels so that thoughts and values of ICAN are represented and
skills and knowledge of our members along with their independence and expertise are
used to the fullest extent for the interest of the nation. I have raised this issue at all
government levels whenever I got the opportunity. I once again urge the government
to consider this with highest priority and make us an avid partner in nation building.
I would now like to take you through some of the important activities which have
taken place in these 5 months.
Education
One of my top priority after taking over as the president has been reform and development
in education. Our students deserve best education and training to compete and become
the best professionals in the country.
In order to expand the facilities to its students for the coaching/preparation classes,
ICAN has decided to enhance the accreditation process by providing accreditation
to new coaching institutes and colleges. We believe that accessibility of CA education
should not be limited to the capital only. Students from all parts of the
country should have opportunity to undergo CA education and as a
national accounting body we have responsibility to provide them such
opportunities. Considering this we have made arrangement for the
students registration and examination preparation classes from the
branches. Students will also be able to write their exams from branches
outside Kathmandu.
An independent career counselling unit has been established to guide
the students regarding CA education and professional career.
Branch Network Expansion/Upgrade
We feel that the activities of the branches have not met the expectation
and objectives with which these branches have been established. There
is urgent need to upgrade the existing branches with more space and
facilities in order to provide better services to our members and students.
We also need to expand our branch network. I am pleased to announce
all arrangement to open a branch at Pokhara has been made and the
branch will be operative very soon.
Effort for starting Branch Audit
The issue of branch audit of banks has been pending for some time now
though ICAN through its council resolution has already made branch
audit mandatory for certain category of branches. We believe that all
stakeholders including ICAN,NRB and various bankers associations
should come together to formulate a regulation in order to start the
branch audit in banking sector as early as possible.
A significant development has taken place in this regard. With the joint
initiative of ICAN and NRB, a task force comprising of ICAN
representative as co-ordinator, NRB representatives and representatives
from Bankers Associations has been formed to finalise the modalities
and procedures for the conduct of branch audit of banks. I am pleased
to announce that NRB has agreed to issue directives regarding the
branch audit after the modalities and procedures are finalised by the
Task Force.
important to maintain relationship with various accounting bodies

across the globe to share the national and international experience and
to upgrade our skill and knowledge.
As a continuation of our active participation in international forum,
we have been nominated as a member in Public Sector Financial
Management (PSFM) Committee of CAPA. I am also pleased to inform
that ICAN will be hosting third PSFM committee meeting along with
CAPA conference on PSFM on March 7 and March 8 ,2013. The
CAPA meeting and conference will be a step forward towards ICANs
international recognition.
We also attended IFAC council meeting at Cape Town , South Africa
held in November 2012. At IFAC, we raised the concerns of small
accounting bodies like ours and their expectation from IFAC. We
have strong views that small accounting body like ICAN should get
due values of their membership from IFAC.
As an active member of SAFA , we are in constant interaction with
other accounting bodies of SAFA and trying to take best advantage
of the experience of other accounting bodies in SAFA region,
As professionals we should always thrive for excellence through which
our individuality are valued and respected. A famous ancient quote by
great Greek Philosopher and Scientist Aristotle We do not act rightly
because we have virtue or excellence, but we rather have those because
we have acted rightly is worth recalling even now as the important
things for us to do things rightly.
Lastly, I request all my professional colleagues and ICAN members to
come forward and share the responsibilities in whatever capacity so
that we can make our institute a great professional institution with
highest standard.
Best Wishes
Effort for Mutual Recognition with ICAI

A serious effort has been initiated to work towards the mutual recognition
with the Institute of Chartered Accountants of India (ICAI). Our
council has already approved to go ahead with the process of Mutual
Recognition with ICAI. ICAN has already lodged a formal request
with detailed action plans with ICAI. Three round of discussion at
presidential level have already been held on this and things are moving
positively.
International Membership and Relations
ICAN always has given high priority to international membership and
relation. We believe that in this era of global networking it's very
CA. Madhu Bir Pande

President
accounting
'Economic Capital'- with Reference to

Financial Service Industry in Nepal
(Accountants see figures with reason, not just the figures)
What is Capital?
"The best business is the one

that grows slowly, re-quires
minimum capital for growth
and then earns lot of money.
Think of Consultancy
Business."
The term 'Capital' originated in the

economical studies form ancient times.
In the broadest sense, capital is a factor
of production, used to produce goods
or services, which are not significantly
consumed in the production process
(definition form economics viewpoint).
In financial sense the capital is
interpreted as the equity in the
company's balance sheet (more preferred definition specially for
accounting professionals).
Once Warren Buffet Said "The worst
sort of business is the one that grows
rapidly, requires significant capital for
growth, and then earns little or no money.
Think Airlines."
The words of Mr. Buffet can be
modified now as "The best business is
the one that grows slowly, re-quires
minimum capital for growth and then
earns lot of money. Think of Consultancy
Business."
Here I refer the words of Warren Buffet
to make the capital more clear that the
capital is seed we apply on the
business to harvest handsome product.
Everybody wants more and more
output form least possible input, that's
why in economics there is one
principle called 'Optimum utilization
of Resources.'
CA. Yuba Raj Pandeya
Approaches to Capital for

Financial Service Industries
The approach to capital in financial
service industry is worth to be
discussed in two distinguished areas
BASEL Approach (Banks) & Solvency
Approach (Insurance).
BASEL Approach
Basel is the City of Switzerland, from
where the term BASEL approach to
capital got arisen in banking industry.
The global banking industry realized
the need for specific parameters for
calculation of Mini-mum or Buffer
capital for conducting the banking
business. The BASEL approach,
although not applied by the US, is the
most accepted global benchmark for
the banking capital. Now the BASEL
approach reached to BASEL III form
first time introduced BASEL I.
BASEL I approach to capital is more
appropriately called accounting capital
& BASEL II/ III as Economic Capital
or Risk Based Capital (RBC) because
the later approaches are developed by
considering the op-erational & market
risks along with credit risk .
The BASEL II/ III drive the banks to
strengthen their risk management
practices and have great emphasis on
disclosure. The supervision of banks
CA. Pandeya is Member of ICAN
The Nepal Chartered Accountant
December 2012
accounting
to ensure the banks have sufficient capital to meet specific
needs is approach of BASEL II/ III.
Solvency Approach
Current Solvency Frame Work
As per Insolvency Act, 2063 (Section 2(b)) of Nepal, 'Being

insolvent' means a state of being unable, or appearing to
be unable, to pay any or all of the debts due and payable
to or payable in the future to creditors or a situation
where the amount of liabilities of a company exceeds the
value of the assets.
Thus from above definition we can conclude that solvency
or being solvent is the state of being able to pay all
liabilities or the amount of assets exceeds the amount of
liabilities.
The solvency approach to capital for insurers is basically
derived from above definition of Solvent/ be-ing solvent.
The insurance business is business for protection from
losses, and Law of Large Numbers is applied in insurance
business.
The premium collected form policyholders is not the
revenue of the insurance company/ or cannot be
recognised as revenue without addressing the special
technicality of insurance business.
If we consider about the legal aspect of insurance business,
it is a special type of contract . The insur-ance company
has entered into contract with the policyholder to
indemnify in case of loss, if the loss meets the stipulated
conditions mentioned in the policy. The large numbers
of commitments made by insurance company to the
policyholders at large, if viewed straightly is not a
business, but social ser-vice . But you must side by side
remember the Law of Large Numbers (thanks to
Statisticians), due to which the insurance business has
developed as one of the most influencing business in the
financial service and most contributing business to make
Warren Buffet the most rich person in the Earth.
Solvency II
Balance Sheet
Statutory Balance Sheet
To understand the solvency approach lets first understand

the term 'solvent' and 'being solvent'.
Proposed Solvency II Frame Work
December 2012
Asset
Implicit
Prudence
in
Liability
Free
Surplus
Technical
Reserves
&
Assets
Asset
Explicit
Prudence
margin
in
Liability
Free
Surplus
Minimum
Solvency
I
Capital
Requirement
&
Solvency
Capital
Requirement
Minimum
Capital
Re-
Solvency
Capital
Requirement
quirement
Risk
Margin
in
Reserves
Best
Estimate
Reserves
Market
Consistent
Valuation
Move form Accounting to Economic Capital

Capital adequacy is the most discussed topic in the
financial service industry creating headache to An-gela
Merkel to Ben Bernanke and form Mario Draghi to
Dr. Yubraj Khatiwada , after the Global Economic
Slowdown of 2007/08 and thereafter. The global recession
observed during these past 4-5 years originated from US
and spread through EU and other Economic Don's of
the world are affecting the developing countries including
Nepal.
Its high time to rethink about the capital approach from
economic viewpoint. From above definitions we have
grasped the basic difference between economic and
accounting capital, and why economic capital has become
more important for financial service industries.
I think all of you are interested in watching Discovery
Channel (the most favourite TV channel for me), where
there is one program called Breaking Point. In that
program the presenter try to break different things (such
as bus, truck, rubber, rope etc ) to find out the breaking
point and make the product more break resistant so that
the product becomes more safe, luxurious & advanced.
The concept of economic capital can be interlinked with
that program, where economists, accountants, actuaries,
and risk professionals try to understand the nature of
accounting
business and quantify the amount of minimum capital
so that the business can stand erect in case of business
tsunamis.
Nepalese financial service industry is in its childhood
state and is far from deep research in capital adequacy
of the industry. We are just following what others develop
in the most haphazard way without any further local
modification, without considering the future impact. We
lack the ability to understand what globally is going on,
and again we lack ability to understand what is happening

here in Nepal. In terms of figures the regulators such as
Nepal Rastra Bank and Beema Samiti has prescribed
minimum capital for the financial service industries.
We need very deep study and research before
determining the minimum capital for the financial service
industries, and we being Accounting professionals try
to see the figures with the reason , not just the figures.
Please don't forget to watch the program Breaking Point
on Discovery Channel.
December 2012
auditing
Audit of Saving & Credit Cooperative:

Some Issues
ICAN's Guidance note on

Cooperatives is not applicable
for the Saving and Credit
Cooperatives. Format of the
financial statements has not
applicable for the Saving and
Credit Cooperatives; however,
same has not mentioned in the
Guidance Note leading to
confusion for the applicability
of the Guidance Note.
Background
Auditing
Saving & Credit Cooperative should

register as per the Cooperative Act,
2048 for the enhancement of financial
and social needs of the Cooperative
members in the Cooperative
Registrar's office. At present,
regulation of the Coperative being
major issues since some of the big
Coperatives has liquidity crisis and
unable to pay the depositor's amount
on time. Consequently, public faith
over the saving and credit cooperative
has decreased and people have
gradually withdrawn their amount
and invested in low interest income
gerenating bank and financial
institutions. Some of the accounting,
audit, taxation, and administrative
issues observed during the audit of
Saving and Credit Cooperatives is
presented below:
Section 37 of the Cooperative Act,

2048 states that within three months
of the expiry of fiscal year, every
Cooperative should audit its financial
statements by the Registrar's or
registered auditor approved by the
Registrar. Similarly, Section 37 (5) of
the Act states if the report submitted
by the auditor has not ratified by the
General Assembly; another auditor
should appoint for the audit purpose.
Accounting
Section 33 of the Cooperative Act, 2048
states every Cooperatives should
maintain its account as prescribed. Till
date regulatory authority for
Cooperatives has not prescribed
format for maintenance of books of
account and format of the financial
statements for Saving and Credit
Cooperatives.
CA. Hem Kumar Kafle
CA. Kafle is Member of ICAN
December 2012
I think above Section 37(5) is

contradictory with the independence
of the auditor; how can General
Assembly can disqualify report
submitted by an independent auditor.
If the majority shareholder want to
disqualify the audit report due to
some other reasons or argument with
auditor; how can it appoint another
auditor? Who will accept such audit
if his/her counterpart professionals
disqualified from the General
Assembly on the ground of
disqualified auditor? What is the
status of the incoming auditor? What
will be the guarantee that new
auditor's report will not disqualified
as that of the previous auditor? How
long it goes if it continues for
appointment and disqaulification of
auditors?
auditing
ICAN's Guidance Note for Co-operatives
ICAN's Guidance note on Cooperatives is not applicable
for the Saving and Credit Cooperatives. Format of the
financial statements has not applicable for the Saving
and Credit Cooperatives; however, same has not
mentioned in the Guidance Note leading to confusion
for the applicability of the Guidance Note. It will be better
if the clarification/ notice publish by the ICAN
mentioning Guidance Note is not applicable for Saving
& Credit Cooperatives.
Regulatory Issues
Competent qualified human resources capacity of the
Division cooperative is too minimum comparing with
that of rapid establishment of the saving and credit
Cooperative and its complexities. Consequently, they
have to hire qualified human resources from the Nepal
Rastra Bank (NRB); however, question also arises does
NRB has supervised its licensed institutions throughly?
If NRB has supervising its licensed institutions regularly,
problems facing by the financial institutions should come
at the earliest because contemporary issues are not the
cuirrent issues; however, they are the compilation of the
previous problems. At present problems have disclosed
only, it has arisen already.
Regualtion of Cooperative should not only based on
prescribed format. Issues, problems of each and every
cooperatives should be mention on the investigation/on
site report visited by the inspection officer of the
Cooperative. Areas of liquidity crisis, default borrowers,
major credit concentration sectors, corporate governance
and internal control mechanism of saving and credit
Cooperatives should also mention on investigation/ on
site inspection report; otherwise regulation/ on site visit
of the cooperative becomes only for formality.
Applicability of the Company Act, 2063

Almost all Saving and Credit Cooperatives uses word
"Limited" at the end of its name. For example"MNO
Saving & Credit Cooperative Limited.". Company Act,
2063 Section 10 prescribes every public company shall
mention "limited" to its name as the last word. This may
create confusion that Cooperative are registered under
Company Act, 2063; however, it should be clear that
Section 47 of Cooperative Act, 2048 states that Company
Act do not prevail for the Cooperatives registered under
the Cooperative Act. Similarly, Section 8(2) of the

Cooperative Act, 2048 states, Cooperatives registered
under the Act should compulsorily mention "Cooperatives"
and "Limited" in its name.
Issues of Loan Loss Provision

Income Tax Act, 2058 Section 60(2) allows loan loss
provision for licensed institutions by Nepal Rastra Bank
which transacts in financial transactions; however,
Cooperative Bylaws 2068 clause 30 states that
Cooperatives should make loan loss provision for good
loan 1% (unmatured), doubtful loan 35% (Matured upto
one year) and bad loan 100% (Matured for more than
one year).
Cooperatives are in confusion whether to comply with
Cooperatives Bylaws or not. If they provide loan loss
provision; Income Tax Act, 2058 do not allow the expenses
claimed since they are not the licensed institutions by
Nepal Rastra Bank. If they provide loan loss provision;
profitabilty of the cooperative will decrease and tax
liabilty of the Cooperative will increase since loan loss
provision expenses are not deductible expenses for the
Cooperatives leading to violation of the Bylaws issued
by the Cooperative Registrar's Office.
Issues of Depreciation
Schedule 2, sub clause 3, of Income Tax Act, 2058 allows
additional one third depreciation than the rate prescribed
for the respective block for Saving and Credit
Cooperatives; however, most of the Saving and Credit
Cooperatives are unaware of the clause provision and
do not allow additional one third depreciation.
Consequently, they are depriving to take tax benefits
provided by the Income Tax Act, 2058.
Provision for Staff Bonus

Bonus Act, 2030 is applicable for those entities "where
ten or more persons are working on the date of
commencement of Bonus Act or on any other date of
twelve months period prior to such date". Staff bonus is
deductible business expenses as per Income Tax Act,
2058 since business earns its profit by using sweat of the
its workers and employees. That's why this is business
related personnel expenditure; however, most of the
Saving and Credit Cooperatives appropriates staff bonus
through profit and loss appropriation account instead
December 2012
auditing
of charging of expenses to its income statement. This will
create deficit to the employee as well as cooperatives as
under:
whether deposit to the Social Welfare Fund (as required

by Section 13 of the Bonus Act, 2030) should be made or
not has not clearly mentioned anywhere.
a) Loss to the Employee: Bonus amount will be after

Provision for Income Tax as well as appropriation
to General Reserve Fund (25% of the Net Surplus).
Appropriation of Profit
b) Loss to the Cooperatives: Cooperatives should pay

additional 20% income tax for the deductible staff
bonus expenses.
This can be elaborated by the following examples:
If a Cooperative earn profit after considering all its
activities is Rs. 1,120,000
Section 27 of the Cooperatives Act, 2048 states that amount

should be distributed to other reserves after distributing
at least 25% of Net Surplus to General Reserve Fund.
Except Gerenral Reserves, other reserves can also be
distributed as dividend or bonus.
However, it is not clear upto which state 25% of net
surplus should be appropriated to General Reserve Fund
from the net surplus earned during the year unlike bank
and financial institutions, they should distribute to the
general reserve fund untill the reserve amount reaches
the double the paid up capital.
Similarly, other reserve funds to be created by the different
Saving and Credit Cooperatives are almost same. They
create Cooperative Education Fund, Cooperative
Development Fund, Dividend Equalization Fund, Staff
Bonus Fund, Capital Redemption Fund, Loss Recovery
Fund etc. Most of the fund created by Saving and Credit
Cooperatives has not utilized for the stated purpose.
More than 90% amount distributed for other free reserves
has been distributed for shareholder's dividend as well
as staff bonus.
*Applicable tax rate for Cooperatives doing transactions in Metropolitian city,

municipality and adjourned VDCs.
From the above table it is clear that Provision for staff

bonus of the employee will increase by Rs. 34,618.18
(Rs.101,818.18 less Rs. 67,200).
Corporate tax will be save by Rs. 20,363.64 (Rs. 224,000
less Rs.203,636.36) that means 20% of provision for staff
bonus (20% of 101,818.18); however, distributable profit
to the shareholder will be reduced. To adopt alternative
practice, amendment in Bylaws of the Cooperatives
should be approved from the General Assembly as well
as by Registrar's office.
In addition to above, if staff bonus has distributed after
appropriation of profit (by not implying Bonus Act, 2030);
10 The Nepal Chartered Accountant
December 2012
The remaining amount to be utilized for the education

and development has also distributed by the shareholders
instead of utilization of such fund for the coopeerative
education and awareness, to promote small and cottage
Cooperatives etc. The reason for not utilization of such
fund is also by the facilities provided by the Cooperatives
Act, 2048 since reserves are freely distributable except
General Reserve.
Government of Nepal should be aware of utilization of
such fund amount and make mandatory provision for
distribution of certain net surplus in Coperative education
fund as well as Cooperative development fund.
Report of Account Committee

As required by the Cooperative Bylaws, 2068 report of
Account Committee should also present in the Gerenal
Meeting of the Cooperatives; however, most of the
Coperatives do not present Account Committee's report
in the General Meeting.
auditing
Income Tax Rate
Co-operative Bylaws, 2068
Saving and Credit Cooperatives which are registered in

municipality, metropolitan city and their adjorned VDCs
should pay tax @ 20% on taxable profit; however, if the
Cooperative's corporate office/ head office found to be
in the VDC and branch office found to be in municipality,
metropolitan city and their adjorned VDCs; there is doubt
of tax rate to be applied. In practice, some Saving and
Credit Coopeatives apply tax rate @ 20% and some of
the saving and Credit Coopeatives do not impose tax on
profitability of the those Savings and Credit Cooperatives
registered in VDC and doing transactions in municipality,
metropolitan city and their adjorned VDCs
Regulator say: to control the rapid growth of the

Cooperatives and to establish corporate goverance in the
Cooperatives.
Co-operative Business persons say: Intention of the
regulator is to restrict their boundry and to conduct their
business by binding their hands and legs.
December 2012
11
banking
Merger of BFIs in Neapl: Due Diligence

and Documentation
Merger of BFIs in Nepal:
Due Diligence and
Documentation
The costs of buying a business

with unexpected difficulties
cannot be assumed and needs
to be thought in-depth.
Accordingly, the background
check system and evaluation of
robustness of control aspects got
place in such transactions. Such
assurance mechanism is called
Due Diligence.
CA. Ramesh Dhital
Merger is an aspect of corporate

strategy, corporate finance and
management dealing with the buying,
selling, dividing and combining of
different companies and similar
entities that can help an enterprise
grow rapidly in its sector or location
of origin, or a new field or new
location, without creating a subsidiary,
other child entity or using a joint
venture. Merger and acquisition of
Banking and Financial Institution
(BFIs) has grown sharply in recent
years in Nepal. Nepalese economy
witnessed the increased merger in
recent days few of which are:-
Infrastructure Development Bank

& Swostik Finance
9.
Annapurna Finance
Suryadarshan Finance
&
10. Pashupati Development Bank &

Udyam Development Bank
Need for Merger

Various international studies show
the following for eagerness of mergers
and acquisitions:
To create and exploit synergies
To increase market share
To protect markets by weakening

or eliminating rivals
To acquire products and/or

technologies
To strengthen the core business

by expanding in areas of greatest
competence
1.
NIC Bank Limited and Bank of

Asia Nepal Limited
2.
Himchuli Development Bank &

Birgunj Finance
To gain footholds in other

countries or continents
3.
Kasthamandap Development
Bank & Shikhar Finance
To achieve critical mass or

competitive size
4.
Business Development Bank &

Universal Finance
5.
Nepal Bangladesh Bank & NepalSri Lanka Merchant Bank
Particularly in Nepalese scenario,

merger of BFIs is assessed mainly due
to the following:
6.
Machhapuchchhre Bank &

Standard Finance
7.
Global Bank & IME Financial

Institution & Lord Buddha
Finance
CA. Dhital is Member of ICAN
8.
December 2012
Increased competition led to the

increased cost while their profits
slumped which would be
unsustainable in the long run
Minimizing
competition
unhealthy
banking
Unfavorable environment for increasing the fresh

capital and issuing rights shares and issuing bonus
shares will not be enough to raise the capital to the
required level in case of finance companies (NRB
directed to increase the capital to Rs 200 million by
mid-July 2013)
Due Diligence
The costs of buying a business with unexpected difficulties
cannot be assumed and needs to be thought in-depth.
Accordingly, the background check system and
evaluation of robustness of control aspects got place in
such transactions. Such assurance mechanism is called
Due Diligence. Thus, due diligence assists to take
precautions that are supposed to be taken by entities in
some context. Due diligence is both for the Buyer and
the Seller.
Due diligence Audit is necessary to limit reliance placed
on counterparts financial status, real worth of the business
and robustness of the operating procedure. The
competency and experience of consultants plays key role
on the result of the due diligence.
Documentation
As defined by Nepal Standard on Auditing (NSA) - 230,
Documentation refers to the material (working papers)
prepared by and for, or obtained and retained by the
auditor in connection with the performance of the audit.
Working papers may be in the form of data stored on
paper, film, electronic media or other media.
However, the purpose of NSA 230 Nepal Standard on
Auditing (NSA) is to establish standards and provide
guidance regarding documentation in the context of the
audit of financial statements. The documentation
requirement of Due Diligence is not specifically covered
by NSA 230.
Nepal Standard on Quality Control (NSQC) 1 on Quality
Control for Firms that Perform Audits and Reviews of
Historical Financial Information, and Other Assurance
and Related Service Engagement suggests that firm
should devise adequate system of documentation to meet
the purpose of engagement.
Documentation of following assists the Firms to achieve
the quality control objectives:
December 2012
13
banking
December 2012
banking
December 2012
15
economy
Commodity Futures Exchange Limited

Variety in Commodity Derivative Markets
The Nepalese commodities

markets are only after hard and
soft commodities. In which
exchanges are directly or
indirectly promoting the
speculation in the market. The
commodities markets are not
having enough maturity,
knowledge and distinct
knowledge to reach out of the
box. Nepalese market does not
need agriculture or spot
contract to be traded.
Mr. Abhishek Gautam
In Nepal, commodity derivatives

market started in the year 2006 A.D
with the aspect to promote the
speculative business in its financial
market. When the commodity market
started in Nepal, Commodity and
Metal Exchange (COMEN) used to
have its monopoly but now it is perfect
competition i.e. bottle to neck
competition. Commodities market is
always after the hard commodities or
soft commodities. Commodity market
is always exploring themselves with
those commodities. Commodity
market is hot cake which is still baking
in oven but now is the time to regulate
this market by any government
agency, the one with enough
knowledge to drive the thrust of the
world economy.
The commodities are either traded
Over the Counter or an exchange.
However, contracts traded on the
commodity exchange are no longer
limited to traditional commodities and
standardized contracts have come to
be traded on an ever increasing range
of products in hard and soft
commodities. Nepalese commodities
market is highly waiting for the
products like electricity, freight futures,
weather derivatives, emission trading
and currency trading along with the
regulation the market.
While designing commodity contracts
like weather or freight contracts, it
requires a delivery of the underlying
Mr. Gautam is General Manager, Commodity Futures Exchange Limitd
December 2012
commodity or instrument if not then

they are required to be cash settled on
the basis of a specified cash price series
or index. The underlying commodities
are unique in themselves and can
differ from each other in term of:
a. Production pattern-seasonal or
continuous
b. Shelf life perishable or storable
c. Availability
d. Transportability
e. Market-domestic or global
f. Underlying cash markets competitive and transparent
While designing contracts

the following factor should
be considered:
1. Accountability: The market
authorities has to be accountable
with statutory and or selfregulatory standard and thus
should hold the power to address
and vary the provision of the
existing contracts that produces
manipulative or disorderly
conditions.
2. Economic utility: The contracts
should closely mirror the
operation of the relevant cash
market so as to meet the risk
management needs of potential
user and promote price discovery
of the underlying commodity.
3. Correlation with cash market: For
economy
physically deliverable contracts, there is a provision
which can lead to the convergence of cash and futures
market at expiry. Thus, at expiry, the price of a futures
contract must be the same as the value of the
underlying cash commodity adjusted for the cost
linked with making or taking the delivery.
4. Settlement and delivery reliability: Whether
settlement in cash or by physical delivery, settlement
procedures should reflect the underlying cash market
to promote reliable pricing relationships and
cash/futures price convergence, and to ensure that
the contract is readily susceptible to manipulation,
in case of contracts with delivery of the underlying
product care is taken about deliverable supplies and
locations, quality or grade of the deliverable
commodity' inspection and certification procedures,
size of delivery unit, adequacy of delivery points and
facilities and the delivery process.
5. Responsiveness: While designing contracts in term
of size;commodity grade, delivery conditions etc.
must be considered in the views of potential contract
user in order to enhance economic utility and
commercial viability of the contracts.
The Nepalese commodities markets are only after hard
and soft commodities. In which exchanges are directly
or indirectly promoting the speculation in the market.
The commodities markets are not having enough
maturity, knowledge and distinct knowledge to reach
out of the box. Nepalese market does not need agriculture
or spot contract to be traded. Market stakeholders just
want to hedge their risk. There are varieties of
commodities which can help the market player like
hedger, arbitrageurs and speculator. Some of the products
are as follows
1. Weather derivative: This financial instrument can be
used by farmers, organizations or individuals as part
of their risk management strategy, to reduce the risk
associated with adverse or unexpected weather
conditions. This derivatives help business lower the
risk of fall in income due to adverse weather
conditions. Farmers can use weather derivative to
hedge against the poor harvest caused by drought
or frost, while entertainment parks may want to
insure against low ticket due to rainy weekendduring
peak seasons. Weather derivatives are financial
instruments that seem like an insurance policy but
are more like an option. Weather derivative are
unique in that there is no physical underlying asset

since the underlying asset is any is temperature
measured in degrees Celsius or Fahrenheit, rainfall
measured in centimeters or snowfalls measured in
inches.
2. Freight Derivatives: This financial instrument is used
by organization and individual as part of their risk
management strategy to counter the negative
economic effects of freight rate alterations that harm
the financial prospect of a company. Freight derivative
are financial contracts between two party settle upon
an agreed future price for carrying commodities at
sea. The freight derivative are an instrument to hedge
exposure to freight market risk , through the purchase
and sale of a freight rate also contract rate along a
name voyage route also called the contract route.
These sorts of contracts are traded in Baltic exchange,
international maritime exchange which are cleared
through Norwegian futures and options clearing
house.
3. Electricity Derivative: Electricity futures are one type
of energy derivatives. They can be options, futures
or swap agreements among others. The value of a
derivative will vary based on the changes in the price
of the underlying energy product. Electricity is a
commodity characteristics by:
a.
b.
c.
d.
e.
Seasonally of demand
High volatility of prices
Non elasticity of demand
Limited transportability
Non-storability
Electricity derivative were visualized as hedging

instrument for supplier and users of electricity in the
United States, where electricity suppliers charge the
consumers a variable tariff; the per unit rate depending
on weather, which determines the levels of electricity
consumption., a need was felt for derivatives because
consumer preferred paying a fixed rate. To meet this
requirement of both the parties an intermediary structured
an arrangement with the electricity supplier to collect a
fixed amount from each consumer based in an average
energy consumption pattern in the past.
4.
Catastrophe Derivative: Insurers are exposed to
the risk of natural and man-made catastrophes and
need to effectively insurerthemselves by fixing their
projected catastrophic loss ratios irrespective of the
magnitude and frequency of catastrophes. They
December 2012
17
economy
have been able to protect themselves against such
losses by opting for reinsurance. Whenever a
primary insurer has exposure to excessive
underwriting risk, it can pass on some of this risk
to reinsurers. Reinsurance agreement can be on a
pro-rata agreement wherein the primary insurer
gives a portion of its premium income to a reinsurer
and the reinsurer agrees to pay roughly the same
portion of the former losses. They can also be on
excess of loss basis wherein the reinsured agrees to
pay all losses incurred by the primary insurer in
excess of a certain amount in exchange for a flat
premium from the latter. Catastrophes represent a
major source of risk for the property casualty
underwriters. This is catastrophe risk. The
catastrophe derivative market was developed in
response to the need of insurance, reinsurance and
other financial companies to manage their bottom
line exposure to major seasonal weather event or
natural disaster. This type of derivative is traded in
New York Mercantile Exchange, Chicago Mercantile
Exchange and Insurance Future Exchange.
5.
6.
Carbon derivative: This is a financial derivative

contract with carbon dioxide emissions as the
underlying asset. Since carbon credit is produced
bythe reduction of Carbon dioxide emission, the
carbon derivative derivestheirvalue from these
reductions. Member firm that doesnot have
allowance to cover their emissions must either make
reduction or buy neither firm spare credit. Member
with extra allowances can choose to either sell them
orstock them for futures use, this is what the basis
for the functioning of carbon derivative market, and
market forces derive the prices of carbon credits.
The exchanges which are making this trade available
are multi commodity exchange, Chicago climate
exchange.
Currency Derivative: The increased level of cross
border trade and investment related cash flow have
brought about a new dimension of risk which is the
currency risk. This risk plays major role in the
economics of cross border transaction as companies
find margin being eaten away by unexpected
currency rate fluctuations, with highly volatile
exchange rate situation. Globally, managing the
currency risk has assumed great
significance;commodity importer exporter
andtraderhave an inherent need to trade in currency
derivatives.Exporter way wish to lock in the rate at
December 2012
which they sell the rupeewhileimporter maywish

to do same to buy a as a future date to eliminate the
change of exchange rate of rupee which is achievable
through currency derivatives. Currency forwards,
currency future and currency options are most
widely used currency derivative products.
7.
Property Derivative: Property investing is one of

the most rewarding from of investing over the long
term. However the traditionally physical purchase
of property has its limitation. For one, liquidity
being subject to supply and demand is an issue of
concern in property investing. Secondly, transaction
takes a long time and involves charges. Thirdly
owning physical property calls for maintenance of
the property. These are the reasons why many
investors despite having high performance
capabilities in property investment, investors are
not able to invest in this sector. Property derivatives
are contracts that allow buyer and seller too take a
hypothetical position on a direct property
investment, without the associated inconvenience
or expense. They are of value to refer like builder
which may want to hedge the profitability of a
development or an investment fundmanager who
need to invest cash to portfolioperformance
enhancement and speculator trying to user leverage
position to profitfrom property investment.
All innovations adding to the underlying variety

forcontract traded on commodity exchangegive rise to
the need of faultless regulation in Nepal. Regulation
becomes particularly significant in the private ownership
and market oriented system. It ensures necessary check
and balances in the system and guarantee a fail-safe and
growth oriented control in term of
a.
Setting up and management of the exchange
b.
Putting in place a clearing house to promote trade

between participations without any counter party
risk
c.
Designing contract with effective and realistic term

and condition
Excessively tough and continuous regulation for long

period of time can impair the entrepreneurial spirit of
exchange. Thus the regulation should be targeted to
strengthen their position that the regulator can take on
the mantle of a facilitator to bring the varieties of
commodities in Derivative Market of Nepal.
economy
Globalization: Support and Discontent
Globalization in real sense is the

process of freeing the economy
from government control to link
domestic economy with the rest
of world. The main drivers of
globalization are market, cost,
government and competition.
Though, it has many advantages
and disadvantages; it is being
center of discussion for each and
every country of the world
including developing and
developed as well.
Globalization is the process of

integration between national
economies and rest of the world. It is
facilitated by the factors like
multinational corporations,
information technology, international
and regional institutions such as Word
Bank, IMF, WTO, EU, ASEAN,
SAARC, etc. These factors are
motivated to promote the globalization
process because of technological
development, wider trade and
investment and the changing
production, organizational and
marketing strategies promoted by
them. According to World Bank,
"Globalization is trade flows, investment
flows and financial flows and extend to
flows of technology, information and
services across national boundaries."
Globalization is a process that
promotes:
(i)
Economic
interdependence between the
countries in the world, (ii) Integration
of national economies into one global
economy, (iii) Free movement of
products across borders, (iv) Free flow
of capital, labour, management and
technology across borders
internationally.
There are different forms

of globalization.
Mr. Gyan Mani Adhikari
1. Economic globalization. As an
economic philosophy, globalization
means integration with the world
economy. Economic globalization

is global interlinkages of markets
in goods, services, capital and
finance. It is possible through the
policy liberalization privatization
and deregularations.
2. Political globalization. In political
terms, globalization means
integration of global community
in terms of ideas, norms and
values. There is exchange of views
and experience between nations
regarding the establishment of
legal system, sustainable
development pattern of
governance and so on. Thus,
political globalization is many
nations joining hands through
union or regional grouping which
aims at a macro-political
framework for development.
3. Environmental globalization. It
aims at protection of globalization
economy. It aims at addressing the
problems of global of biodiversity
and growing pollution. It also deals
with international laws to protect
world environment.
4. Cultural globalization. It is
assimilation of cultural values in
exchanging of ideas for mutual
understanding peaceful
coexistence and learning from each
other. It can be made possible
through media, tourism,
communication, technologies and
consumption patterns.
Mr. Adhikari is Lecturer, Patan Multiple Campus
December 2012
19
economy
Drivers of Globalization:
Prof George Yib has classified Globalization drivers into

four groups: (a) Market drivers (b) Government drivers
(c) Cost drivers (d) Competitive drivers (e) Others.
Market drivers
Per capita income converging among industrialized nations
Convergence of lifestyles and tastes
Organizations beginning to behave as global customers
Increasing travel creating global consumers
Growth of global and regional channels
Establishment of world brands
Push to develop global advertising.
Cost drivers
Counting push for economies of scale
Accelerating technological innovation
Advances in transportation
Emergence of newly industrialized countries with productive capability and low
labour costs Increasing cost of product development relative to market life
Government drivers
Reduction of tariff barriers
Reduction of non-tariff barriers
Creation of blocs
Decline in role of governments as producers and customers
Privatisation in previously state-dominated economies
Shift to open market economies from closed communist systems in Eastern Europe
Increasing participation of China and India in the global economy
Competitive drivers
Continuing increases in the level of world trade
Increased ownership of corporation by foreign acquirors
Rise of new competitors intent upon becoming global competitors
Growth of global networks making countries interdependent in particular industries
More companies becoming globally centred rather than nationally centred
Increased formation of global strategic alliances
Other drivers
Revolution in information and communication
Globalization of financial markets
Improvements in business travel
Source: George Yip, Total Global Strategy (Prentice Hall, 1995)
December 2012
economy
Market drivers. Market drivers focus on the extent to
which markets throughout the world are becoming
similar. The more similar consumers are in respect to
income and taste the more significant globalization market
drivers will become.
Cost drivers. Cost drivers present the business with the
potential to reorganise its operations globally and reduce
costs as a consequence. Global economies of scale, and
transportation and distribution issues will be significant.
Government drivers. Governments often play a key role
in driving the process of globalization, especially when
they are positively welcoming to trade and inward
investment.
Global political agreements, such as those made at the
WTO covering world trade and related issues, not only
directly affect the operation of markets, but also help
establish global rules and protocols.
Competition drivers. As competitiveness builds, whether
in the domestic market or overseas, business will be
forced to consider how to maintain their competitive
position. This often involves embracing a global business
strategy, which invariably contributes towards
globalization. Global business networks and cross-border
strategic alliances are key reflections of this growing
competitive global process.
What is clear is that globalization is driven forward by
a wide variety of conditions. Such conditions will vary
from industry to industry, reflecting why certain
industries are more global than others.
Advantages (or Support)

1.
Most of the developing countries like Nepal are

suffered from the problems of unemployment and
underemployment. MNCs as the main agent of
globalization create local employment and career
opportunities. They also help in professionalization
of management and development of human
resources.
2.
Globalization through reduction in tariff and nontariff barrier helps to increase the scope of market
for the product.
3.
Globalization promotes the FDI and helps to solve

the problems of resource gap, trade gap, revenueexpenditure gap and debt burden in developing
countries.
Globalization is the precondition for fostering
4.
competition around the globe, which helps for better

utilization of resources.
5.
Consumers through globalization get benefit by way

of qualitative and modern products produced in
global business environment at a cheap price.
6.
Globalization helps to transfer the foreign capital,

technology and management which help to accelerate
the growth of economy.
Disadvantages (or Discontents)

1.
It may tend to promote social evils such as child sex

abuse, prostitution, women trafficking, international
terrorism, etc. This strikes hard traditional social and
cultural value systems of developing countries.
2.
Industries based on labour intensive technique in

developing countries suffer adversely.
3.
Globalization promotes large scale business with the

use of modern technology which ultimately displaces
traditional art and culture, indigenous technology,
SMEs, etc.
4.
Globalization may tend to result capital flight from

developing countries as a form of dividens, royalty
payments, technological services, etc. to developed
countries.
5.
Globalization may indulge in political corruption to

seek favour of the politicians and government
officials.
6.
Globalization may result in overutilization of natural

resources in order to cater to the high consumption
needs in the developed countries.
7.
Globalization may tend to increase foreign

dependency.
Concluding Remarks:
Globalization in real sense is the process of freeing the
economy from government control to link domestic
economy with the rest of world. The main drivers of
globalization are market, cost, government and
competition. Though, it has many advantages and
disadvantages; it is being center of discussion for each
and every country of the world including developing
and developed as well. If it can be practiced well it may
create favorable condition for economic growth and
development of a country.
December 2012
21
economy
Underground Economy
Abstract:
The underground economy

consists of such activities as
illegal drugs dealing,
smuggling, prostitution, money
laundering, unlicensed money
lending, illegal gambling, and
other illegal activities. Beside
these illegal practices,
underground economy also
includes income generated
through legitimate cash-based
or non cash-based activities such
as online trade and bartering
services
The word underground economy, its

causes and its role in developing
countries is being center of discussion
for every economic agent. Many
research works and articles related to
this topic have shown that
underground economy only relates
with illegal economic activities and its
evil. Despite its numerous studies and
works, there is no single phrase to
express what in fact underground
economy is. The meaning and concept
of underground economy differs
according to the different purposes of
study. This paper tries to clarify the
meaning of underground economy
and its factors of determine. This paper
also attempts to reduce controversial
paradigm about different
understandings of underground
economy.
Key words: Underground
economy, Black economy,

Shadow economy
Introduction:
Mr. Kamal Regmi
Underground economy or black

economy refers to the part of economic
activities like jobs, services and
business transactions are conducted
by the word of mouth without any
written proof to avoid scrutiny by
government and its officials.
Underground economy is as old as
Mr. Regmi is Assistant Lecturer, Shanker Dev Campus
December 2012
government itself. Generally it is

linked with taxation, licensing and
other social security contributions.
Each year there are enormous
numbers of cash transactions in the
market without the government's
observes and regulations. This
phenomenon was known as the
"underground economy" and "shadow
economy". Most societies use various
measures in the form of punishment,
prosecution, economic growth, and
education in an attempt to choke back
these underground or shadow
economy activities (Schneider and
Dell'Anno, 2006).
As noted by Smith and Christou
(2009), this marginalized category of
underground or shadow economy
activities represent an economically
active market. Majority of researchers
have drawn a general recognition that
underground economy and crime are
collaborated. However, it is argued
that underground economy should
not be associated with illegality. There
is still a great deal of legitimate
occupations and business transactions
contributing to the underground
economy with their income generated
but not reported accordingly to the
government concerned.
According to Frey and Schneider
(2000), the most accurate and highly
referred definition relates
underground economy to officially
measured national income generated
by those non-reporting productive or
economy
value-added activities that is supposedly to be calculated
in the Gross National Product (GNP). In 1993, System of
National Accounts (SNA) has worked out a good
benchmark for the definition of the Underground
Economy which is "the value-added activities that the
official statistics do not register although they should"
(Bovi and Dell' Anno, 2009).
According to Sennholz (2003), Underground

activities can be grouped into four main
categories:
1.
Economic activity yielding income that is not

reported to the tax authorities.
2.
Economic production that violates one or several

other mandates, such as compulsory government
licensing and rate making, inspection and label laws,
labor laws, government regulations of agriculture,
export and import controls, government control over
money and banking, governmental control of energy
production and distribution, and countless others.
Violators may or may not evade taxes, but they all
work illegally, hiding from swarms of government
inspectors.
3.
Productive activity by transfer beneficiaries who

draw Social Security benefits or receive public
assistance. Their freedom to work is severely
restricted.
4.
Productive activity by illegal aliens without residence

status. They may pay income taxes and other taxes,
but must remain underground for fear of deportation.
The underground economy consists of such activities as

illegal drugs dealing, smuggling, prostitution, money
laundering, unlicensed money lending, illegal gambling,
and other illegal activities. Beside these illegal practices,
underground economy also includes income generated
through legitimate cash-based or non cash-based activities
such as online trade and bartering services (Schneider
and Enste, 2000).
Without understanding the characteristics and
determinants of it, underground economy can't be
understood. Most researchers and experts view
underground economy from different perspectives, either
positively or negatively, with high degree of diversity.
It is important to examine the characteristics and
determinants of underground economy because:

1. A need for standardize definition with unambiguous
understanding of Underground Economy
2. Avoid errors in categorizing the Underground
Economy Activities.
3. Identify areas of focus for better controlling the growth
of Underground Economy.
Summary of Hidden Economy:
Components of Underground Economy:

There are so many components to define and understand
underground economy. According to Sennholz
(2003), the main components are as follows:
1. Hiding From Tax Collectors
1. Circumventing Regulations and Licensing
Requirements
2. Reaping Transfer benefits While Working in the
Underground
3. Made by Illegal aliens
4. Underground employment etc.
Factors contribute to the Increase of

Underground Economy :
The continuous growth in underground economy has
revealed the reactions of enterprise and individual
binding with the underground economy (Kanniainen,
December 2012
23
economy
Pkknen and Schneider, 2004). According to Marinov
(2008), the socioeconomic reasons for people to choose
the "quit" option (decision to go underground) is generally
influenced by the government policy in terms of tax and
regulation measures. Furthermore, the phenomena of
hidden economy is also influenced by others
socioeconomic factors such as disaccustomed of market
traditions; disappointment toward the government;
exceeding taxes burden and security expenses; limited
and low quality of public sector services; corrupted, slow,
and closed legislative system; deficiency of administrative
capacity and competence of the governments. Schneider
(2009) has compiled and differentiated three types of
causes of the shadow economy as follows:
a) The burden of direct and indirect taxation, both actual
and perceived. The tax burden is the most
influencing factor among others causes. Schneider's
study demonstrates that the rising burden of
taxation is the contributor to the strongest incentive
for the increase of shadow economy.
b) The burden of regulation as proxy for all other
government activities. Entrepreneurs and large
business may face extortionate demand from the
government bureaucracy or suffer in this hostile
environment. The usual course for surviving in
current state is to go underground. Increases in the
pressure of regulation give a strong incentive to go
underground. Besides, governments or official
institutions cannot guarantee absolute fair
regulations for business communities, so people
might search for other options that include the
practice of underground economy.
c) The tax morality .It refers to the willingness of
individual to pay the right tax at the right time.
Perceived fairness in taxation regulations, public's
December 2012
attitude toward the government, and the public

religious and cultural characteristics determine the
tax morality either positively or negatively.
Governments that respect the preferences of the
publics or democracy would gain more supports
from its citizens than a "bad" government, thus
increasing the motivation to pay taxes. The tax
morality would be affected if the government
playing the Leviathan policy. A declining tax
morality tends to increase the size of shadow
economy (Torgler, Schneider and Schalteggar, 2009).
Conclusion:
Underground economy is a complex phenomenon and
people would hold different perspectives to view the
underground activities. A summary has been drawn
from various definitions of underground economy, most
literature review postulates a common set of features
which are government observation, regulation, and
taxation. These are the most major reasons for
entrepreneurs or large businesses to go underground.
So this paper draws a definition on underground
economy as economic activities, whether legal or illegal,
that escapes from government observation, regulation,
and taxation.
However, definitions from other authors also best define
the nature of underground economy due to their research
purposes and perspectives. The underground economy
can be defined from the viewpoints of economists,
criminology, social behaviour or the Politian perspectives.
Each professional field perceives underground economy
based on their studies background, experience, and
understanding on these particular subject matters.
economy
Nepal's Distressed Macroeconomy
Introduction
Nepal's unsatisfactory
economic developments
outcomes could be attributed
to the lack of responsible role
of the politicians in power in
managing the economic affairs
of the nation including making
the
macroeconomic
management sound and
sustainable.
The
macroeconomic framework
and implementation
arrangements have been weak
and inadequate.
Mr. Tula Raj Basyal
With low levels of output,

employment, capital formation, and
productivity, Nepal sharply features
the traits of an under-developed
economy. Not only are the outcomes
of past development efforts
unsatisfactory but that no worthwhile
initiatives toward economic
development could comprise the
priority of the government in the
recent years. Politicians in power have
ignored the need for expediting the
economic development process and
satisfied themselves with the smaller
performance levels of the economy, as
reflected in the low standards of living
of the people in general. Equally
disappointing is the deterioration in
the relative performance of Nepal
among the developing economies. For
an instance, among the 27 economies
of developing Asia, the per capita
incomes of Afghanistan and Nepal in
2012 were at the bottom, US$ 620 and
US$ 626 respectively. Myanmar's per
capita income since 2008 exceeded that
of Afghanistan and Nepal, making the
latter two as the poorest ones. The
other three countries with per capita
incomes lower than US$ 1,000 in 2012
are Bangladesh (US$ 791), Myanmar
(US$ 849), and Cambodia (US$ 934).
In 1990, the per capita incomes of
Vietnam (US$ 98) and Cambodia (US$
105) were lower than Nepal's (US$
204). However, in 2012, the per capita
income of Vietnam rose to US$ 1,523

and that of Cambodia US$ 934, as just
mentioned (World Economic Outlook
Database, IMF, October 2012). Thus,
during the 22 years (1990-2012), the
per capita income growth in the
current US dollars averaged annually
at 13.3 percent in Vietnam and 10.4
percent in Cambodia in comparison
to such a growth of only 5.2 percent
in Nepal.
Nepal's politicians in power have
neglected the concerns and challenges
facing the economy because the
economic agenda has not comprised
their essential plank for getting elected
to power. Building appropriate
policies and sound regulatory regime
along with ensuring their effective
implementation to improve the
conditions of the economy and people
in general has remained subservient
to their short-term political gains of
personal nature. Therefore, Nepal's
unsatisfactory economic developments
outcomes could be attributed to the
lack of responsible role of the
politicians in power in managing the
economic affairs of the nation
including making the macroeconomic
management sound and sustainable.
The macroeconomic framework and
implementation arrangements have
been weak and inadequate. Reduced
commitment, credibility, competence,
and coordination regarding
macroeconomic policies along with
the various problems and challenges
(Mr. Basyal is the former Executive Director, Nepal Rastra Bank, and former Senior Economic Advisor, Government of Nepal, Ministry of Finance.)
December 2012
25
economy
confronting the economy weakened the efficacy and
effectiveness of macroeconomic policy measures. The
economy has been suffering from the long-term
development constraints and structural rigidities as well
as the short-term macroeconomic imbalances, related
policy uncertainties, implementational difficulties, and
supply-side shocks. Due to less priority accorded to the
significant concerns and issues surrounding the economy,
its structure is weak; and the economic problems and
development challenges continue to remain complex and
daunting more than ever before, necessitating massive
efforts and innovative measures for the mitigation of
such constraints and challenges at the earliest possible.
Especially during the ongoing spell of long political
transition, the economy experienced frequent slowdowns,
sharp imbalances, and even high uncertainties while no
clear symptoms of progress have so far emerged for
steering the economic agenda at the centre-stage of
national policy-making and policy implementation. Risks
and vulnerabilities in the macroeconomy have not only
risen but also become more challenging and increasingly
complicated. As a result, investment climate has
worsened, economic growth has slowed, inflation has
risen, the external sector has witnessed unprecedented
uncertainties, actual capital expenditure has remained
far short of the planned expenditure, absorptive capacity
for the foreign aid has not expanded as envisaged, and
the broad objectives underlying the development plans
and policies have remained unattained.
Currency Crunch as the Distinct Example

of Monetary Mismanagement
At various times during the last four years or so, the
economy has witnessed severe problems not due to the
under-developed stage of the economy or the structural
problems that the economy is being entrenched for years
but simply because of the dereliction of normal duty
toward the economy on the part of the politicians in
power. One such example of mismanagement with
adverse monetary and economic implications has been
the currency note crunch and the associated liquidity
crisis to the extent of even the depositors being deprived
of encashing their cheques or denied their ATM
withdrawals. Such an unprecedented episode occurred
for the failure of the politicians in power to appoint in
time the governor of the central bank who is legally
authorized to make signature in the currency notes.
December 2012
Politicians in power delayed the appointment as they

wanted to place their personal favourite in the post. They
did not consider it worthwhile even to think about the
extent of inconvenience, damage, instability, and loss of
confidence that the people, financial system, and the
economy in general would suffer due to the currency
note shortages that would be associated with such
procrastination in the appointment of the note-signing
authority. The note-printing itself being a time-taking
process, not filling such a vital post in time evidenced
the extent to which the politicians in power could traverse
to manipulate the public responsibility for optimizing
their personal gains. It also demonstrated the height of
carelessness in reciprocating their duty toward the good
of the economy and the public.
Economic Indicators
As the obvious fallout of the irresponsible and
unaccountable management process of the
macroeconomy, achieving an accelerated economic
growth trajectory in a sound, stable, efficient, and
sustainable framework remained a mere dream. Contrary
to the earlier expectations that the economy would move
ahead expediently as soon as the peace process advanced,
the available indicators point out that the macroeconomy
is facing increasing uncertainties, imbalances, underperformance, and unfavorable outlook, as mentioned
before. The new rulers could not live up to their
expectations and terribly lost their credibility as they
miserably failed in their opportunity for improving the
conditions of the economy and the people in general. A
comparison of the gross domestic product (GDP) growth
and total government resources mobilized as well as the
expenditure incurred between the two four-year periods,
namely, 2004/05-2007/08 and 2008/09-2011/12,
evidenced that the resources were massively wasted or
misused during the latter period. Total government
resources (revenue, domestic loan, and foreign grants
and loans) as percent of GDP averaged 21.8 during
2008/09-2011/12 as compared to such an average of 17.8
during 2004/05-2007/08, indicating 4.0 percentage points
increment in such ratio during the latter period. The total
government expenditure as percent of GDP also marked
the average increment of 4.1 percentage points during
the latter period over the previous period, with these
ratios at 18.2 percent during the former period and 22.3
percent during the latter period. However, despite such
large increments in the domestic and foreign resources
economy
available as well as the expenditures incurred during the
latter period, the average GDP growth during these two
periods remained almost at the same 4 percent levels
The GDP growth percent rather fell from 6.1 in 2007/08
to 4.5 in 2008/09, 4.8 in 2009/10, 3.9 in 2010/11, and 4.6
in 2011/12. The capital market as an indicator of the
conditions of long-term investment climate in the
economy witnessed a sharp decline, with the average
annual growth rate of the NEPSE falling from 44.3 percent
during 2004/05-2007/08 to such a decline of 20.2 percent
during 2008/09-2011/12. As the indicator of the
unfriendly investment climate, the private sector gross
fixed capital formation (GFCF) as percent of GDP
decreased from an average of 17.6 during 2004/052007/08 to 16.5 during 2008/09-2011/12 (Economic
Survey, 2011/12, Ministry of Finance.) The high inflation
rate almost at the double digit for the last 4-5 years has
evidenced the lack of efforts at stabilizing the prices and
improving the outlook for macroeconomic stability along
with its sustainability built on the enhanced competitive
strength of the economy.
Along with the higher inflation that has persisted so
long, the other effect of the macroeconomic imbalance
could be observed in the reduced manufacturing
output/GDP ratio and the falling export/import ratio.
The manufacturing sector as percent of GDP declined
from an average of 7.6 during 2004/05-2007/08 to 6.4
during 2008/09-2011/12. The merchandise export as
percent of GDP also fell from an average of 8.7 during
2004/05-2007/09 to 5.4 during 2008/09-2011/12. With
the import as percent of GDP averaging 26.5 and 29.7
respectively during these two periods, the merchandise
trade deficit as the average percent of GDP rose from
17.8 during 2004/05-2007/08 to 24.3 during 2008/092011/12. The export/import ratio fell from an average
of 32.8 percent during 2004/05-2007/08 to an average of
18.1 percent during 2008/09-2011/12. With such a
galloping trade deficit, the remittance remained a
significant source for financing the deficit. Though the
remittances have contributed to a surplus in the balance
of payments (BOP), there are significant risks and
uncertainties in the external sector, as evidenced by the
aforesaid rising trend of trade deficits along with the
BOP deficits incurred during the 12 months of 2009/10
and 11 months of 2010/11 in a row.
.
Development Challenges and Concerns

In an economic environment of low output and spiralling
prices, the people unemployed or lacking reasonable

employment opportunities, those living on limited
production and income in the remote and inaccessible
areas, having fixed income earnings, deprived of
reasonable social safety nets, and supporting large families
on meagre incomes are affected adversely. Since even
the available opportunities and incomes are not uniformly
distributed across the population and the inflationary
spiral could hurt the different population groups
differently, enormous levels of inconvenience, instability,
and unfavourable expectations must have been generated
across all sections of society and important sectors and
segments of the economy, leading to higher consumption
or lower saving, swollen trade deficits, reduced GFCF,
increased level of the real exchange rate (RER) of the
Nepalese currency especially due to the failure to maintain
prices at levels aligned with the prices of Nepal's trading
partners, increased risks of capital flight, decreased capital
expenditure despite sharp rise in the total expenditure
of the government, decreased employment opportunities,
slackening export and onset of the de-industrialization
process, massive policy distortions and uncertainties,
and fast erosion of the comparative position of the
economy. Reduced GFCF as percent of GDP slowed
economic growth and employment generation. Because
of such unfriendly environment for attracting investment,
rising economic growth, and generating employment at
home, Nepalese youths are forced to seek low-paid
foreign jobs, industries are being closed, investors are
exiting from the investment scene, and the dependence
on remittances and foreign assistance is widening
unprecedentedly. Expectations about the outlook of the
economy have ceased to be optimistic.
Nepal's weak economic growth and development
performance demonstrates serious development
constraints and challenges the effective solutions of which
could be forthcoming only through the application of
the highest priority and urgent actions in the critical
areas of the macroeconomic management, especially
through focusing on innovative policymaking, increasing
confidence in the economy, fostering private sector
development, improving implementation of the programs
and activities in the public sector, and ensuring the propoor growth and inclusive development. The gross
domestic saving (GDS) as percent of the GDP has
remained below 10 percent which means that the
production and the productivity levels of the economy
need to be raised in order to attain a higher GDP level
December 2012
27
economy
so as to improve the GDS and make the development
financing sound and sustainable over the longer-term.
Though the progress made in the mobilization of
resources through revenue and foreign grants and the
building of the fiscal prudence could be regarded as a
welcome step on the public finance front, the resources
could not be deployed into the capital outlays to the
extent envisaged, hence affecting, in particular, the growth
scenario, as mentioned earlier. In addition to the
mobilization of the domestic and foreign resources, what
is equally important is ensuring their optimal utilization
so as to improve the performance and outlook of the
economy on a sustainable basis. Making investmentfriendly environment and encouraging more resources
to be devoted to the growth of the export, industry,
infrastructure and other productive uses would be
essential.
Suggested Measures
The suggested measures comprise the development of
pragmatic economic vision, determination to steer the
economy ahead, and adoption of strong framework to
ensure the implementation of sound policies and
programs. Reducing excess expenditure of recurrent
nature, prioritizing and increasing the capital expenditure,
fostering macroeconomic stability, allocating more
resources toward productive investments, building an
investment-friendly environment, ensuring the orderly
growth of the capital market as the means for mobilizing
long-term investments, and strengthening external sector
competitiveness remain crucial. In an age of globalization
where the level of international competitiveness of the
economy determines the success of the national economic
management endeavors, the political circles and other
stakeholders should realize that no country has attained
the economic development goals and become
economically strong by undermining the fundamentals
concerning the functioning and management of the
country's economy. The development vision that focuses
on broad-based and inclusive growth should remain
effective in the implementation side as well.
Prioritizing the economy and building the foundation
for appropriate economic management would be essential
for attaining a higher level of sustained economic growth
and contributing substantially to the goals of economic
development. To repeat, keeping the economy and the
economic development agenda at the centre-stage of the
December 2012
national economic policymaking and putting in place an

appropriate implementation strategy constitute the urgent
need of the nation. This necessitates that the period of
political transition be shortened to the extent possible
by building national consensus on the prominent issues
that the nation is currently confronted with. At the same
time, the economic development process should be
energized and expedited and people's living standards
raised on a sustainable basis through fully and favorably
tapping the strengths and opportunities available in the
country.
Making the fiscal management sound and sustainable
remains an essential element for fostering economic
growth and improving the macroeconomic scenario.
Such a framework would provide a reliable basis for
making the public expenditure planning and
management effective besides contributing to the foreign
aid harmonization and effectiveness. In the present
situation, the country demands development activities
to be scaled up and sustained to meet the growing need
for basic social services and facilities besides accelerating
the economic growth. Low levels of development
activities have remained the basic challenges of public
spending. Therefore, the composition and quality of
government expenditure need to be raised so as to
accelerate economic growth, promote inclusive
development, and foster poverty reduction on a sustained
basis. To bridge the resource gap, especially in those
programs that are geared toward poverty reduction,
social services, and rural infrastructure development, a
significant budgetary support from the development
partners would remain pivotal. The other important
areas requiring development partners' critical support
relate to program implementation, institutionalization
and capacity building, data-base management,
enhancement of implementation capacity, and
strengthening the monitoring and evaluation framework
(both physical and financial) for achieving better outcomes
from the government efforts toward the development
initiatives. In view of almost a double-digit inflation
increasing uncertainty and reducing productive longterm investment, monetary policy needs to be geared
toward attaining the inflation target as specified in the
government budget. The exchange rate should not be
misaligned as that would lead to enhanced trade deficit
due to the reduced competitiveness of the economy.
Ensuring the price stability as per the target and even
adjusting the nominal exchange rate as an important
economy
step in turning the RER neutral would become essential
for making the external sector strong and the overall
macroeconomy stable on a sustained basis.
The ability of Nepal's public sector for forecasting
economic aggregates as a part of the planning, policymaking, and budgeting process remains weak. The large
deviations between the projected economic aggregates
and their actual outcomes reflect the abundance of adhocism and subjectivity in the projection of the economic
aggregates. In such an environment of insufficient
preparations and inadequacies in the field of economic
management, economic growth would shrink and
development outcomes become narrowe1r, negatively
affecting the goal of economic development besides
undermining the process of planning, policy-making,
and budgeting. So, capacity enhancement for scientific
projections as well as the capability for regular monitoring
and evaluation of the implementation process, .especially
among the prominent economic policy-making bodies
like the National Planning Commission, Ministry of
Finance, and Nepal Rastra Bank needs to be substantially
enhanced so that significant developments in the economy

are closely monitored and assessed and appropriate
corrective actions undertaken in time. Lack of attention
to managing the macroeconomy and ignoring the
implementation aspect of the macroeconomic policy
framework would weaken the fundamentals of the
economy besides increasing risks and vulnerabilities to
the economy as a whole. In such an environment, the
goal of expediting economic development including
speeding up the pace of socio-economic transformation
would remain a mere wish. In the process, the
macroeconomy would experience severe imbalance and
instability and the economic development outcomes
would remain highly unsatisfactory and inadequate. The
need of the hour, therefore, is making the macroeconomy
sound and sustained through implementing measures
for improving the fundamentals of the economy without
any compromise or lapse. In the absence of such an
arrangement, the macroeconomy would suffer further
distress and, in such an environment, the economic
development goals would be hardly attained.
December 2012
29
information technology
Electronic Banking and ICT Risk Maagement

in BFIs
Background
Risk is the net negative impact

of the exercise of a vulnerability,
considering both the probability
and the impact of occurrence.
Risk management is the process
of identifying risk, assessing risk,
and taking steps to reduce risk
to an acceptable level.
Mr. Debesh P. Lohani
The use of Information and

Communication Technology (ICT) by
financial sector has changed the way
they do their business. Now there is
hardly any sphere of human activity
that is untouched by ICT, and in a
number of establishments and
institutions of public and government
service including banking and
financial sector, it is playing a very
crucial role. ICT is greatly contributing
to the development of the banking
industry. In fact ICT has made the
banking sector more competitive and
public-friendly than ever before. In
this digital era, as banks use automated
ICT systems to process their
information for better support of their
missions, risk management plays a
critical role in protecting an
organization's information assets, and
therefore its mission, from ICT-related
risk. The ICT risk management is the
application of risk management to ICT
context in order to manage ICT risk.
Risk is defined as "The possibility of
suffering harm or loss; danger." Even
if we're not familiar with the formal
definition, most of us have an innate
sense of risk. "Risk management is the
process of identifying vulnerabilities
and threats to the information
resources used by an organization in
achieving business objectives, and
deciding what countermeasures, if
any, to take in reducing risk to an
Mr. Lohani is PhD. Scholar and a Free Lance IS Security Consultant.
December 2012
acceptable level, based on the value

of the information resource to the
organization. The business risk
associated with the use, ownership,
operation, involvement, influence and
adoption of ICT within an enterprise
ICT risk management can be
considered a component of a wider
enterprise risk management system.
It is also the analysis of possible loss.
The profession or technique of
determining, minimizing, and
preventing accidental loss in a
business by taking safety measures
and buying insurance is a step towards
mitigating loss due to risk factors. In
Nepal banking, telecom, and insurance
industries are the major industries that
are using such assets for their daily
business. From the early Morris
worms and Monkey.B viruses to
modern hacker tools like BackOrifice
and Metasploit, ICT security
professionals must always be on the
lookout for the latest threat to their
networks. Many different approaches
to risk assessment have been
developed. An effective risk
management process is an important
component of a successful ICT security
program.
ICT in BFIs
The evolution of electronic banking
(e-Banking) started with the use of
automated teller machines (ATMs)
and has included telephone banking,
direct bill payment, electronic fund
transfer and online banking. According to some, the
future direction of e-banking is the acceptance of mobile
telephone (WAP-enabled) banking and branchless
banking using Electronic Fund Transfer Point of Sale
(EFTPOS) technology. However, it has been forecast by
many that online banking will continue to be the most
popular method for future electronic financial
transactions. Electronic funds transfer (EFT), refers to
the computer-based systems used to perform financial
transaction electronically. The term is used for a number
of different concepts including electronic payments and
cardholder-initiated transactions, where a cardholder
makes use of a payment card such as a credit card or
debit card. Card-based EFT transactions are often covered
by the ISO 8583 series of standards. The Internet
distribution channel can add value to banking franchises
in a number of ways, depending on whether it is used
to augment physical branches (click?and?mortar banks)
or in place of physical branches (Internet?only banks).
The strategic core of the click?and?mortar banking model
is to route standardized, low?value?added transactions
through the inexpensive Internet channel, while routing
specialized, high?value?added transactions through the
more expensive branch channel.
In past few years, there has been an increasing trend
towards acceptance of technology for service
dissemination. Online banking is poised to change the
nature of banking in developing countries. Nepal has
large young consumers who are technology savvy and
prefer the Internet or ATMs for transactions. This may
be considered a driving factor influencing the acceptance
of online banking. The diffusion of new technologies
with user-friendly service models is expected to improve
the banking services. The adoption of Internet-based
models for transactions has led to 'virtualization ', and
affects the bank and consumer relationships.
Risk Associated with Electronic Banking

As we already know Risk is the net negative impact of
the exercise of a vulnerability, considering both the
probability and the impact of occurrence. Risk
management is the process of identifying risk, assessing
risk, and taking steps to reduce risk to an acceptable
level.The principal goal of an organization's risk
management process should be to protect the organization
and its ability to perform their mission, not just its ICT
assets. Therefore, the risk management process should
not be treated primarily as a technical function carried

out by the ICT experts who operate and manage the ICT
system, but as an essential management function of the
organization. Some of the risks associated with the
electronic banking are as follows:
Strategic Risk
Business risks
Transaction/operations risk
Credit risk
Liquidity, interest rate, price/market risks
Reputational risks
Security risks
Strategic Risk - Poor e-banking planning and

investment decisions can increase a financial
institution's strategic risk. On strategic risk E-banking
is relatively new and, as a result, there can be a lack
of understanding among senior management about
its potential and implications. Banks should respond
to these risks by having a clear strategy driven from
the top and should ensure that this strategy takes
account of the effects of e-banking, wherever relevant.
Such a strategy should be clearly disseminated across
the business, and supported by a clear business plan
with an effective means of monitoring performance
against it.
Business risks - Given the newness of e-banking,

nobody knows much about whether e-banking
customers will have different characteristics from the
traditional banking customers. They may well have
different characteristics. Furthermore as it is difficult
to predict customer volumes and the stickiness of edeposits (things which could lead either to rapid
flows in or out of the bank) it could be very difficult
to manage liquidity.
Transaction/operations risk - Transaction/Operations

risk arises from fraud, processing errors, system
disruptions, or other unanticipated events resulting
in the institution's inability to deliver products or
services. This risk exists in each product and service
offered. In most instances, e-banking activities will
increase the complexity of the institution's activities
and the quantity of its transaction/operations risk,
especially if the institution is offering innovative
services that have not been standardized. Since
customers expect e-banking services to be available
24 hours a day, 7 days a week, financial institutions
December 2012
31
should ensure their e-banking infrastructures contain

sufficient capacity and redundancy to ensure reliable
service availability.
Credit risk - Generally, a financial institution's credit
risk is not increased by the mere fact that a loan is
originated through an e-banking channel. However,
management should consider additional precautions
when originating and approving loans electronically,
including assuring management information systems
effectively track the performance of portfolios
originated through e-banking channels.
Liquidity, interest rate, price/market risks - Funding

and investment-related risks could increase with an
institution's e-banking initiatives depending on the
volatility and pricing of the acquired deposits. The
Internet provides institutions with the ability to market
their products and services. Internet-based advertising
programs can effectively match yield-focused
investors with potentially high-yielding deposits. An
institution can control this potential volatility and
expanded geographic reach through its deposit
contract and account opening practices, which might
involve face-to-face meetings or the exchange of paper
correspondence.
Reputational risks - This is considerably heightened

for banks using the Internet. For example the Internet
allows for the rapid dissemination of information
which means that any incident, either good or bad,
is common knowledge within a short span of time.
The speed of the Internet considerably cuts the optimal
response times for both banks and regulators to any
incident. Any problems encountered by one firm in
this new environment may affect the business of
another, as it may affect confidence in the Internet as
a whole. Overall, the Internet puts an emphasis on
reputational risks. Banks need to be sure that
customers' rights and information needs are
adequately safeguarded and provided for.
Security risks - Security is one of the most discussed

issues around e-banking. E-banking increases security
risks, potentially exposing hitherto isolated systems
to open and risky environments. Security breaches
essentially fall into three categories;
breaches with serious criminal intent like fraud,

theft of commercially sensitive or financial
information,
December 2012
breaches by 'casual hackers' by defacement of

web sites or 'denial of service' - causing web
sites to crash, and
flaws in systems design and/or set up leading

to security breaches such as genuine users seeing
/ being able to transact on other users' accounts.
All of these threats have potentially serious financial,

legal and reputational implications. The most sensitive
computer systems, such as those used for high value
payments or those storing highly confidential information,
tend to be the most comprehensively secured. One could
therefore imply that the greater the potential loss to a
bank the less likely it is to occur, and in general this is
the case. However, while banks tend to have reasonable
perimeter security, there is sometimes insufficient
segregation between internal systems and poor internal
security. It may be that someone could breach the lighter
security around a low value system. It is easy to over
emphasize the security risks in e-banking. It must be
remembered that the Internet could remove some errors
introduced by manual processing. This reduces risks to
the integrity of transaction data. As e-banking advances,
focusing general attention on security risks, there could
be large security gains. Financial institutions need as a
minimum to have:
a strategic approach to information security, building

best practice security controls into systems and
networks as they are developed
a proactive approach to information security,

involving active testing of system security controls
(e.g. penetration testing), rapid response to new
threats and vulnerabilities and regular review of
market place developments
sufficient staff with information security expertise
active use of system based security management and

monitoring tools
strong business information security controls.
Risk Management in Electronic Banking

Risk management is the process that allows IT managers
to balance the operational and economic costs of
protective measures and achieve gains in mission
capability by protecting the IT systems and data that
support their organizations' missions. Minimizing
negative impact on an organization and need for sound
basis in decision making are the fundamental reasons
organizations implement a risk management process for
their ICT systems. Risk management encompasses three
processes:
o
o
o
risk assessment,
risk mitigation, and
evaluation and assessment
Risk assessment - Risk assessment is the first process

in the risk management methodology. Organizations
use risk assessment to determine the extent of the
potential threat and the risk associated with an ICT
system. The boundaries of the ICT system are
identified, along with the resources and the
information that constitute the system. Characterizing
an ICT system establishes the scope of the risk
assessment effort, delineates the operational
authorization boundaries, and provides information
like hardware, software, system connectivity, and
responsible division or support personnel, essential
to defining the risk. A threat is the potential for a
particular threat-source to successfully exercise a
particular vulnerability.
A threat-source does not present a risk when there is no

vulnerability that can be exercised. The assessment team
should identify at the outset the objective of the
assessment project, department, or functional area to be
assessed, the responsibilities of the members of the team,
the personnel to be interviewed, the standards to be used,
documentation to be reviewed, and operations to be
observed. A vulnerability is a weakness which a threat
will exploit to attack the assets. Vulnerabilities can be
identified by addressing physical security, environment,
system security, communications security, personnel
security, plans, policies, procedures, management, and
support, in data collection process. Security controls
encompass the use of technical and nontechnical methods.
Technical controls are safeguards that are incorporated
into computer hardware, software, or firmware.
Nontechnical controls are management and operational
controls, such as security policies; operational procedures;
and personnel, physical, and environmental security.
To derive an overall likelihood rating that indicates the

probability a potential vulnerability may be exercised
within the construct of the associated threat environment.
Risk impact assessment is the process of assessing the
probabilities and consequences of risk events if they are
realized. The results of this assessment are then used to
prioritize risks to establish a most-to-least-critical
December 2012
33
importance ranking. Ranking risks in terms of their
criticality or importance provides insights to the project's
management on where resources may be needed to
manage or mitigate the realization of high
probability/high consequence risk events. A technique
to analyze data includes preparing a list of assets and
showing corresponding threats, type of loss, and
vulnerability. Analysis of this data should include an
assessment of the possible frequency of the potential loss.
A risk assessment report is a management report that
helps senior management, the mission owners, make
decisions on policy, procedural, budget, and system
operational and management changes. Unlike an audit
or investigation report, which looks for wrongdoing, a
risk assessment report should not be presented in an
accusatory manner but as a systematic and analytical
approach to assessing risk so that senior management
will understand the risks and allocate resources to reduce
and correct potential losses.
Risk mitigation - Risk mitigation is a systematic

methodology used by senior management to reduce
mission risk. Risk mitigation planning is the process
of developing options and actions to enhance
opportunities and reduce threats to project
objectives. Risk mitigation implementation is the
process of executing risk mitigation actions. Risk
mitigation progress monitoring includes tracking
identified risks, identifying new risks, and
evaluating risk process effectiveness. Risk mitigation
involves prioritizing, evaluating, and implementing
the appropriate risk-reducing controls
recommended from the risk assessment process.
Risk mitigation can be achieved through any of the
following risk mitigation options:
Risk Assumption: To accept the potential risk

and continue operating the IT system or to
implement controls to lower the risk to an
acceptable level
December 2012
Risk Avoidance: To avoid the risk by

eliminating the risk cause and/or consequence
(e.g., omit certain functions of the system or
shut down the system when risks are identified)
Risk Limitation: To limit the risk by

implementing controls that minimize the
adverse impact of a threat's exercising a
vulnerability (e.g., use of supporting,
preventive, detective controls)
Risk Planning: To manage risk by developing

a risk mitigation plan that prioritizes,
implements, and maintains controls
Research and Acknowledgment: To lower the

risk of loss by acknowledging the vulnerability
or flaw and researching controls to correct the
vulnerability
Risk Transference: To transfer the risk by using

other options to compensate for the loss, such
as purchasing insurance.
Evaluation and assessment - The evaluation and

assessment involves reporting of the entire process
of risk assessment and mitigation process. It
emphasizes the good practice and need for an
ongoing risk evaluation and assessment and the
factors that will lead to a successful risk management
program. A type of report to make depends on the
audience to whom it is submitted. Typically, a
simple report that is easy to read, and supported
by detailed analysis, is more easily understood by
individuals who may not be familiar with the
organization. The report should include findings;
a list of assets, threats, and vulnerabilities; a risk
determination, recommended safeguards, and a
cost benefit analysis.
management
Silence, Suffering, & Survival
The people, who have no

respect to the ethics of labor,
are prone to jump into the
protest bandh wagon without
understanding its impact on
national and social life; and
the organizers claim victory
taking irresponsibility for
granted.
CA. A.R. Bhattarai
While we tear ourselves apart about

diversity which should enrich us
collectively, they strip us clean. They
say it is always darkest before dawn
- the dark started few years back and
carried into this year but the dawn is
ready to break - but only if we - with
the glory of all our diversity -confront
the common enemy:- "poverty,
unemployment and inflation". And
when we do so, it should be clear to
many that we can and must unite
against a most common and consistent
enemy.
The average number of hours not
worked because of strikes, bandhs or
lockouts has increased overall during
this year. Strikes, bandhs and lockouts
tend to reduce earnings and affect the
economic and social well-being of the
workers and families involved. They
can also affect other workers indirectly
through layoffs. It will affect daily
wage earner and their dependent to
live without meal. There are other propeople modes of protest. Bandh is not
a solution. It can stall an act but it
cannot stop a decision.
There is need to deter bandhs while
allowing other forms of protest.
Imposing heavy penalties or fines on
people who willfully destroy
infrastructure, target people or disrupt
public services, disturb the common
public, attack on private properties,
creating economic losses and doing
more unwanted activities. This is not
the way of expressing the protest. Not

for any good reason!
If Nepal is free of those frequent daily
bandhs, its economic growth could
surpass that of emerging economy. It
is possible that the cumulative loss
caused by all those bandhs could
outweigh Nepal's GDP. Bandhs do
not help people or the economy of the
country. It is high time that Nepal the nation-in-rise - must formulate a
stringent anti-bandh legislation to shut
down such anti-national activities of
all organizations - political or nonpolitical -making them responsible to
pay for economic loss of the nation.
To exercise democratic rights and
privileges, a bandh should not be a
weapon for political parties to promote
economic chaos. Economy is the
backbone of standard of living directly
related to people's life. Politics is a
grocery-shopping venture of some
vested interest to harness profitable
mileage to grab the power-grid locally,
regionally and nationally.
The people, who have no respect to
the ethics of labor, are prone to jump
into the protest bandh wagon without
understanding its impact on national
and social life; and the organizers
claim victory taking irresponsibility
for granted.
Everyone is talking about democracy
and change, but we seldom talk about
economy and development. The key
to stability and democracy is
CA. Bhattarai is CEO, Commerz and Trust Bank Nepal Ltd.
December 2012
35
management
development or economic reform. That is the central
problem facing the country, and there is still a big question
mark hanging over it. Nether political future nor is the
economic future entirely clear.
Every young boy in Nepal is trying his best to look for
a job. Most of them live with less than $10 a week. They
rarely get regular money because they do not have
permanent work. Their dependents have to go without
lunch for many days. They are also living without water,
fuel and electricity. These are the basic needs for a family
and they are living without it. They feel sorry for
themselves and there is nothing they can do as they don't
have any resources to migrate to foreign country like
UK/USA etc. This is the story of people living in remote
Nepal.
Now back in urban city like Kathmandu, we do not have
supplies of water so didn't have drinking water and
could not go to the bathroom without difficulty. We have
to stay in our home/apartments/office even without
electricity for more than 15 hours a day. Even ambulance
drivers have been struggling to get hold of fuel.
Emergencies are halted in the name of Bandh. We are
deprived from critical basic need of daily survival:
Electricity, Water, Fuel, and Communication. But we are
committed to our Nation and will work for the prosperity
of our fellow citizens.
December 2012
Government must also be ready to create the necessary

environment, build the capabilities and invest the
resources that will be needed to achieve the double digit
growth. Democratic governance, respect for human rights
and empowerment of people are essential elements for
development. Authorities are drawing up a new foreign
investment plan but the most important thing is that the
foreign investment climate be transparent and predictable.
This means that we have many problems to solve. All
the systems/policies we had used for many years need
to be changed. Practical problems confront by
businessmen as well as common citizens are: power
outage, fuel shortage, frequent Bandh, bad roads etc.
Nepal has fallen decades behind its neighbors.
Visionary, accountable leadership supported by citizens
who know their rights and obligations and are vital for
the nation's transformation. Reconciliation is essential to
rebuild trust and confidence. Leaders must decide to go
beyond short-term considerations and adopt a long-term
perspective to manage the development process.
Informed by past mistakes, by the challenges of the
present, and inspired by the possibilities of a better future,
the people of Nepal now must take collective pledge to
create a new way forward for the development of their
country.
management
13 Behaviors from the Speed of Trust by

Stephen M.R. Covey
On an intellectual level that trust

is one thing that helps build an
individual, team, family,
organization, nation and
economy throughout the world
and nothing is as fast as the
speed of trust.
Trust is confidence, confidence
in the integrity and ability of a
person. To build trust we
should first building the trust
in ourselves. A person who does
not trust himself cannot build
trust in other.
Let me start with a question, how

many times have you felt that the other
person does not trust you enough to
give you work of responsibility at
work, home or anywhere else? How
many times have you worked really
hard but have not got the appreciation
/ return that you deserve?
A couple of week back I came across
a book named "The Speed of Trust"
written by Stephen M. R. Covey. The
strength of the book lies in its
abundance of real life application.
While going through this book, I learnt
on an intellectual level that trust is one
thing that helps build an individual,
team, family, organization, nation and
economy throughout the world and
nothing is as fast as the speed of trust.
Trust is confidence, confidence in the
integrity and ability of a person. To
build trust we should first building
the trust in ourselves. A person who
does not trust himself cannot build
trust in other. To build trust in
ourselves we should increase /
improve the following:
a) Integrity i.e. honesty and
congruency / walking the talk.
b) Good intent i.e. you are not trying
to deceive anyone / mutual benefit
CA. Nalini Bajracharya
c) Excellent credentials i.e. you have

the expertise, knowledge, skill and
capability in your area of expertise
/ means to produce results and
d) A good track record- To build trust

it is important that we meet what
we are expected to do.
In every relationship of ours-personal
or professional what we do has a far
greater impact than anything that we
say. Today, I would like to share with
you the 13 behaviors of the highly
trusted people as read in the book
written by Stephen M. R. Covey.
Behavior 1: Talk Straight

This means tell the truth and leave
the right impression. This can be done
by communicating so clearly that you
cannot be misunderstood. The
opposite of talking straight is
withholding information, flattery,
spinning, manipulative conversation,
speaking the truth but leaving wrong
impression. These diminish trust in
us and ultimately our professional
and personal life is affected.
To improve the ability to talk straight
identifies the reason that keeps you
from talking straight. Become aware
of your conversation by asking
yourself during the conversation if
you are talking straight, if you are
spinning or your point is being
misunderstood to your benefit only
and learn to get to your point quickly.
The discipline of talking straight helps
create precision of language, an
economy of words and a lack of spin.
CA. Bajracharya is Member of ICAN
December 2012
37
management
Behavior 2: Demonstrate Respect
Behavior 4: Right Wrong
To demonstrate respect does not only mean show

fundamental respect for people but also behave in ways
that demonstrate care and concern for the other person
or people at large. This behavior in based on the principle
of respect, fairness, kindness, love and civility. It is
recognizing the importance of each human being as a
part of a human family. The opposite of demonstrate
respect is fake respect or concern, or, to show respect for
some and not for all. The Waiter rule applies here, it is
said that a person's respect for the other person can be
known by the way he treats a waiter at a restaurant.
To improve this behavior, you may use the waiter rule
to yourself and see how you treat people at work and at
home and focus on improving what you do not like. Do
the acts that show that you respect the other person.
Never take existing relationship for granted and focus
on the new ones. The existing relationships need more
nurturing than a new relationship.
Right Wrong does not mean just apologizing. It means

doing what you can to correct the mistake and a little
more. It means acknowledging your mistakes gives
freedom to others to do the same, which is extremely
ennobling and enabling for a culture, both at work and
at home. In business, this includes service recoveries or
rectifying the mistakes made the customers /clients in
such a manner that the customers are not only satisfied
but it also develops greater loyalty to the company. The
opposite of right wrong is cover up or trying to hide the
mistake rather than repairing it.
Behavior 3: Create Transparency
Showing Loyalty means to treat people the same way

behind their back the way you treat them as if they were
present. This not only builds trust with the person to
whom you are loyal but also with others who are around
you. One way to show loyalty is to give credit to others
and acknowledge them for their part in bringing about
results.
Creating Transparency means being open; it's about

being real and genuine and telling the truth is such a
way that people can verify. It's about being honest, open
and authentic. The opposite of create transparency is
pretending, seeming rather than being, making things
appear different than they really are. This may confuse
people and create distrust in us / our organization. More
high trust organizations in the global economy are
recognizing transparency as most valuable. Many
companies create transparency with their own employees
by going to what is known as Open Book Managementopening up their financial statements for the entire
company to see. By being open you tell people that there
is nothing to hide.
To improve this behavior, periodically ask yourself if
you are withholding any information, at office and at
home, which should be shared. If you are then consider
the tax you are paying and the dividend you are getting
by hiding or sharing the information. Consider what
difference it would make to your organizations and their
stakeholders and clients, if you were more transparent
in respect of the successes and failures, strength and
weaknesses, administration / management and financial
situation of the organization.
To improve this behavior, pay attention to your response

when you make a mistake and work on behaving yourself
into a person who has the humility and the courage to
right wrong. Forgive quickly whenever a person wrongs
you.
Behavior 5: Show Loyalty
To improve this behavior, don't bad mouth others behind

their back, give credit generously, never talk about family
members or team members in a negative way.
Behavior 6: Deliver Results

Delivering results is also an integral part of one's
credibility and a very powerful tool to build trust. The
opposite is performing poorly or failing to deliver results
or delivering activity instead of results. Benefit of this
behavior is high as those who deliver gain the flexibility
and choices. To deliver results one should take time to
define result and then deliver those results.
To improve this behavior, it is important that one
understands the expectation or the result needed, make
sure the commitment to deliver result is realistic and
don't make excuses for not delivering.
Behavior 7: Get Better

Get better is based on the principle of continuous
December 2012
management
improvement, learning and change. When people see you
as learning, growing and renewing person or organization,
they develop confidence in your ability to succeed in a
rapidly changing environment and the trust on you or your
organization is high.
To improve this behavior, seek and effectively utilize the
feedback for quality improvement, learn from your mistakes
and develop feedback system, both formal and informal.
Behavior 8: Confront Reality
Behavior 11: Listen First

Listen means not only listen but genuinely try to understand
the other person's thoughts, feelings, experience and point
of view. The opposite of listening is spending the listening
time on framing the answers to what the other person is
saying. Listen first helps you to get the insight and
understanding you wouldn't have had which help you take
better decisions, show respect and the impact on trust is
amazing.
Confronting realty is about having the ability to face the

tough issues. It is based on the principle of courage,
responsibility, awareness and respect. Confronting reality
builds a relationship where there is open interactions and
fast achievement.
To improve this behavior, acknowledge the tough issues
and consider the consequences of not confronting the reality.
To improve this behavior, understand the emotion with

which the other person is speaking, generally a person
speaks with high emotions because he or she does not yet
feels understood and a person will not ask for an advice
until he or she feels understood. During your conversation
stop and ask yourself if you have really listened to the other
person? If not, then really focus on understanding the other
person's point of view before sharing your own.
Behavior 9: Clarify Expectations
Behavior 12: Keep Commitments
This is based on the principle of clarity, responsibility and

accountability. It is about sharing the vision and agreement
about what is to be done upfront. It is about defining what
is expected of the other person or a project. In business, a
clearly defined project and agreement can be a boon to the
achievement of the results where every person involved
knows what is expected of them.
To improve this behavior, learn to quantify everything,
what results? By whom? By when? At what cost?, etc. ,
understand that it's wise to understand that out of the three
variables- quality, speed and cost only two is achievable at
one time and however difficult it may be it's much better
to define the expectations upfront than be disappointed
later on.
This is the biggest and the quickest way of building trust.

Thus, it is vital to be careful with the commitments you
make. Keep commitments is based on the principle of
integrity, performance, courage and humility. Keeping
commitment to yourself is the key to success in making
and keeping commitments to others.
Behavior 10: Practice Accountability

This means hold yourself accountable and then hold others
accountable. It means take responsibilities for your act and
encourage others to take responsibility / accountability for
their acts and do not blame others. Accountability builds
extraordinary trust in the culture when people feel secure
in the knowledge that everyone will be held responsible to
certain level.
To build this behavior, do not blame others, make your
direct reports accountable to their actions, look for ways of
creating an environment of accountability at your office
and your home.
To improve this behavior, remember, even if you have to

disappoint someone, it's far better to do it upfront than to
overpromise and under deliver and make commitments
carefully and keep them.
Behavior 13: Extend Trust

All the above 12 behaviors were to become a trusted person;
this behavior is to become a trusted leader. Extending trust
is one of the best ways of creating trust when it's not there.
People tend to not trust the person who does not trust them.
Trust can be extended by demonstrating the propensity to
trust. Learn how to appropriately extend trust to others
based on the situation, risk and credibility of the other
person involved.
I hope on reading this article, it helps you understand the
importance of trust in your life at work and home and
improve yourself and live a better and quality life. For
better understanding of the 13 behaviors please read the
book, it is filled with practical and real life examples the
will help you understand the importance of trust and its
effect on others.
December 2012
49
management
Governance of NGOs and INGOs in Nepal
The development sectors are being

ignored and not tightened the
governance policy because of its
influence and impression among
society that the organisation have
involved only in giving and social
development but not profit
making activities
CA. Kaushlendra Jha
Meaning of NGOs/INGOs
An NGO (Non-governmental
organization) is a legally
constituted organization created
by natural or legal persons that
operates independently from any
government. Whereas INGOs is
defined as "any international
organization that is not founded
by an international treaty"
Origin of NGO in Nepal

Origin of an NGO/Social welfare
organisation in Nepal is found to
be backed origin of society itself.
In the begging days it was named
and worked as Guthi, parma,
dhikur even before unification
of Nepal in the year 1769 the
numbers was believed is as much
as number of society and
tole/communities were present
in Nepal.
But the establishment of today's
NGO was not easy to form/run
in Nepal in till 1950 and then after
a democratic movement since 1951
was an evident of movement and
development of an NGOs even
very difficult to operate and
establish because of permission
was required from prime minister
for establishment till 1961 and
then very low growth in the
period of party less political
system till 1990.
CA. Jha is Member of ICAN
December 2012
Current number of NGOs is

believed to be 85,000 and INGOs
are believed to be 270 in numbers
operating in Nepal. There are total
estimated number of house are
47.67 lacs in Nepal as per census
of 2011 which means the number
of houses per NGOs are 56. These
data speaks the truth of
impact/output of NGOs in Nepal.
Out of 270 INGOs probably 207
areregistered/affiliated/contrac
ted with SWC and 150 are only
actively functions but some of the
INGOs are just working at the
residence/room of the country
directors itself due having their
own interest/constraints.
Brief background of NGOs (NonGovernmental Organisation) CSOs
(Civil Society organisation) INGOs
(International Non-Governmental
Organisation):
Even though the government of Nepal
has created the Social Welfare Council
(SWC), a central coordinating agency
for NGOs, there still is a lack of
operational networking and
communication among the NGOs.
Corporate governance is applied in
the corporate sectors are of much
issues of discussion and
implementation but the
NGOs/INGOs governance and
reporting systems are still required to
be developed at national and
international level. There are no any
management
international/global reporting systems and standards
are exists and even in development mode to consolidate
the issues at Social development sectors.
We have currently seen that the development of Aid
Management Platform (AMPs) at the government level
by different country for the reporting and consolidation
of INGOs funding and program but will this development
be the solutions of governance? Of course not, as I believe,
this will be the mere reporting and informative details
which may not be proved as governance at NGOs/INGOs
level.
The development sectors are being ignored and not
tightened the governance policy because of its influence
and impression among society that the organisation have
involved only in giving and social development but not
profit making activities.
In most of the countries the government ignored these
sectors the reasons that any government does not receive
any tax/revenue and least affected at direct level and
but what I think that the collected revenue from profit
making corporate organisations are being utilised revert
back for development of the economy and society which
are being directly done through social
sectors/development organisation.
What I feels that the governance policy may be required
at more tightened or at same level of stake/interest in
the government.
I have seen many development sectors are working at
the level of more than many corporate sectors and its
executives & staffs are getting more remuneration and
facilities than the corporate gets in the profit making
organisation. Although the organisation are involved in
the process of poverty alleviation, social/metal/spiritual/
human right areas/activities but hardly least numbers
of the organisation and its staffs are concerned with any
of self development/spirituality etc or any Organisations
hardly talk of this.
What I have evident since longs time if the donor agency

stops its donations the organisations gets closed and
stops its program towards social upliftment and
empowerment.
Organisations' vision and mission is to empower the
society/rural development but the orgasnaition is itself
looking helpless towards its own empowerment.
Orphanage remains orphanage all time, oldage care home
remains old ages care home.
Root cause of its position: Lack of

Internal control and Governance
Before writing on internal control and governance of
NGOs/INGOs, I would like to list some of vital
stakeholders of NGOs/INGOs which may be taken are:
Who are stake holders? The stakeholders are those of
having any interest in any capacity from outside or inside
of an organisation NGOs/INGOs like:
Beneficiary/Group of society: The existence of
NGOs/INGOs happens to be because of beneficiary
without which the existence can't even imagine to exist.
Government of Donor country: Bilateral/Multilateral
and cultural relations with the beneficiary country.
Government of beneficiary country:
Bilateral/Multilateral and cultural relations with the
donor country.
Employees of NGOs and partners NGOS: Well paid as
per talent and interest to work in development sectors;
Management of an Orgasnaition: Accountability to all
stakeholders and good governance in operation for
achieving its objectives:
Sustainability of NGOs/INGOs is an
emergence of burning issues:
Board and Advisory Member: Boards are much

concerned with vision and strategy of the organisations
whereas advisory boards are not use to be under
governance/accountability catch but the face value and
for far sighted vision /suggestion for success of the
organisations. They are stakeholders because of their
face value and credibility attached with the organisations.
In spite of existence of NGOs/INGOs since longs but its

sustainability remains always a challenges and the
organisation thinks and believes that its sustainability
depends on donations/charity and donor agency.
Trustees/originator of NGOs: The persons of strong

vision/mission/desires to work towards development
of nations and having negligible interest in any monetary
consideration or returns from operation of an NGOs but
December 2012
41
management
stick/more concerned with their face value and impact
of workings/programs of an NGOs.
Vendors of Goods and Services: Having concerned with
timely delivery and returns of consideration against
supply of Good and Services. Other interests are the
impact/output of an NGOs working in their areas and
country being the citizens and member of the country.
Consultants and Auditor: Concerned with the
professional ethics and responsibility as well as the
development of the nations.
External Environments:
Since beginning, NGOs have been able to claim their
good intentions and sounds values provided a sufficient
basis for accountability however, increasingly such claims
are being questioned. This is in part a response to NGOs
growing visibility as key actors in the governance of
social and economic affairs. It is also in part a response
to challenges they have mounted against the
accountability and legitimacy of government actions and
the corporate sector.
What I think that an "NGOs which seeks a virtue out of
highlighting the failures of governments, business and
other institutions should be subjected to the same degree
of scrutiny that everyone else faces. They too need to be
accountable for their activities. NGOs are also
strengthening their accountability so as to increase their
legitimacy among policy makers and thus the
effectiveness of their work. Calls for greater NGO
accountability are also emerging from within civil society
itself.
Traditionally and stills NGO are seems accountable to
the donor agency/their principal agency as principal
agent relationship model where a principle delegates
authority to an agent to act in their interests and ensures
accountability via economic and legal incentives and
sanctions
However, this understanding is limiting, as it only affords
those with formal authority over an organisation the
right to hold it to account.
Within the context of the non-profit sector, such an
understanding leads NGOs to focus on their
accountability relationships with donors, governments
and their board of governors, to the neglect of other
stakeholders such as their beneficiaries. Moreover, it
December 2012
propagates the minimalist view that NGO accountability

is principally about how money is spent and what the
fund-raising/administration ratio is the stakeholder
approach to NGO accountability:
NGO accountability is better understood through the
stakeholder approach. This transfers the right to
accountability from exclusively those that have authority
over an organisation to anyone that has been affected by
the organisation's policies. This makes accountability a
far more inclusive and open concept.
The stakeholder view also recognises that accountability
is more than an end-stage activity. To ensure that an
NGO is responsible for its actions all stakeholders need
to be involved at every stage of the decision-making
process. Passing judgement after a decision is made
limits the extent to which an NGO can be held to account.
Accountability needs to be an ongoing

process.
The strength and clarity of these different accountability
relationships is not equal. They vary greatly in relation
to the relative power a stakeholders has over an NGO.
The lists of government laws and regulations prevail in
Nepal which attracts NGOs and INGOs are as follows:
The National Directorate Act (1961) (Rastriya Nirdeshan
Ain 2018): This aims to ensure that professional
organizations and groups use their strength for their
development, as well as nation building, with preapproval
and consent from the government. CSOs registered under
this Act include the Nepal Bar Association, Nepal Press
Council, Teachers Union of Nepal, Nepal Federation of
Journalist Associations and the NGO Federation of Nepal.
Unless formed by the government itself, any group
wishing to register under this Act must apply and receive
approval from the Cabinet through the relevant line
ministry or based on law. For instance, the formation of
a single Teachers Union was envisioned in the Education
Act.
The Association Registration Act (1977): This is the
primary framework law for CSOs in Nepal. Registration
under the Association Registration Act is required for
an organization to function legally. Under the Act, an
"association" means an association, institution, club,
circle, council, study centre etc. established for the purpose
of developing and extending social, religious, literary,
management
cultural, scientific, educational, intellectual, philosophical,
physical, economical, vocational and philanthropic
activities, and also includes friendship associations.
The Social Welfare Act (1992): This act governs the
provision of "social welfare" activity and "social service"
activity. To receive foreign funding and implement
programs with foreign support, local CSOs must receive
advance approval from the Social Welfare Council (SWC).
The Local Self-Governance Act (1999): encourages local
government engagement with CSOs in development
work. The Act envisions that local governments will
facilitate NGOs in the identification, formulation,
approval, operation, supervision, and evaluation of the
development program. The Act also encourages the
private sector to participate in local self-governance to
provide basic services for sustainable development.
The Company Act (2006) (paragraph 19, articles 166 and
167): provides the legal basis to register not for- profit
business organizations and consultancy companies.
Registration requires at least five citizens coming together
to promote any profession, business, intellectual,
educational, social, charity or welfare activities, with a
non-profit intent.
Income tax Act:

Nepalese tax law recognizes a category of tax-exempt
organizations which includes political parties and CSOs
who request this status. For CSOs that have received a
tax-exemption certificate from the Department of Internal
Revenue, income from grants, donations, and investments
is not taxed. The certificate remains valid so long as the
CSO carries out the public benefit purposes mentioned
in the organization's by-laws and does not carry out
income generating activities.
Governance can be well understood from

two perspectives:
Internal Governance / Control

External Governance / Control
Internal Governance and Control: When the system and

operations are runs as per the well established standards
operating procedures (SOPs) for reaching to its goal, the
organisations are said to have strong internal control
and its internal governance is in place. Why governance
is needed is to report and bring the massage to the

stakeholders/users its functions effectiveness towards
its goal and objectives; But what I believe is that the
internal control systems influences from external control
and the stakeholders who has much influenced with the
organisation and the organisations operates in a manner
to manage the influential stakeholders or the stakeholders
who has enough dominance on the operational and
strategically affairs of the organisations.
External Governance / Control: When the system and
operations are runs as per the good governance and
having internal control so that the requirement of
reporting and implementation as per the external
requirement can be met, the External governance/control
can be said to be in place. External governances are the
compliance of all laws and regulations attracted to the
organisations.
But seeing the position of numbers of CSOs increasing
since beginning is alarming and the impact and
effectiveness is less which can be seen / experienced
from the environment and situations prevails in the
country.
Factors to be considered in internal

control/governance of the organisations
Vision and Missions are not clear: During our

primary and secondary level of research, we have
found that the most of the regional level NGOs do
not have any vision and mission clearly defined or
stated. It is believed that the founder of a NGOs
carrying the perception that the donation shall come
in the name of development which is nothing but
their own business. They simply understand and
carrying the perception that foreigners or foreign
country are so rich and they donates in the name
NGOs working. The founder of the NGOs might not
be financially independent and even well educated
but they talk of working of development projects for
social development. We have encounter that most
of regional NGOs founded as their career after not
finding the JOBs and career building anywhere in
any field of corporate.
The only vision and mission are cleared in their mind

that either donation from the government with political
nexus or some foreign country/donor agency shall come
December 2012
43
management
They lacs felexibity in their model of operation and
working style and the reasons its gets not successful
with less impact to the required sections.
up with ready donation package.
Family owned NGOs: In Nepal current

model/structure of an NGOs is mainly registered
under Association Registration Act, 1976 .The
Association Registration Act is the primary legal
framework for CSOs in Nepal. It was first
promulgated in 1976 and has since has been
amended. However, CSOs in Nepal are not satisfied
with its ?controlling legacy. As per the act, at least
seven members are required to get registered an
NGOs and the reasons we have analysed and
reviewed very closely some of the NGOs and found
that they are family owned NGOs/organisation
either members from own family or relatives in all
seven members.
The model and implementation are donor driven

approach, the NGOs believes the real stakeholders
are donor agencies but not the beneficiary/needy
class of society. INGOs are getting and collecting the
funds from one section of strong class of
people/corporate donor agencies to transfers the
facility and helping to the needy/weaker sections
of people.
The Local NGOs thinks and believe that they are
answerable only/in priority to donor agency/vehicle
agency but not to the other stakeholders.
I believe that the INGOs must be working as a
vehicle/bridge between weaker sections and strong
section of people but not the host/house of donor
agency.
Lack of capacity building within organisation:

Regional level/Grassroots level NGOs lacs the
capacity building in terms of Internal Control
procedures, conflict of interest, skilled resource
person, Information technology communication
(ICT).While interviewing some of the NGOs, we
have found that all of the members of NGOs are
even not passed college and just having nexus with
political figure and running NGOs.
Weak access/reach to INGOs and National level
Authority: Due to not having any capacity building
and information, awareness activities around world
and economy, they are not able to have access to
INGOs and international donor agencies, the reasons
these types of CSOs/NGOs are either unattended
or not even operational in true sense.
But what we have found that the beneficiary class

of people gets less what ought to pass through this
vehicle. The resource of INGOs gets benefits and
perks more than the corporate class of people. The
jobs and career has become very luxurious than in
corporate, people of good career oriented chose the
INGOs sectors rather people of interest having in
social development sectors.
No one window policy at national level: The

registering authority like DAO (District
administration office) under Ministry of home affairs
are getting registration of CSOs/NGOs and renewal
but not playing any active role in promotion,
monitoring and control of any CSOs. The reasons
we believe that lack of national level
policy/laws/regulations , resources and
infrastructures: There are not having any centralised
level of control and monitoring to these NGOs but
only required to be gets registered/ affiliation with
Social welfare council under social welfare act by
the NGOs who is either getting foreign funds or
working in association with INGOs.
Need/emergence of Social Audit: The importance

of advocacy program and social awareness program
through involvement of social audit cannot be
denied.Beneficry class of people/weaker sections
people are not aware that all these things are
What we have found that the international

NGO/donor agencies are unable to tap even genuine
grass root NGOs and just having
associated/partnered with having either upper level
nexus or connection with their comfort; the reasons
there are big level Gap between local NGOs and
International NGOs.
Donor driven environment and operation Model:

During our research period, we have also found that
most of the INGOs are operating at their global
model of operation, They replicate the same model
in another country but the reality is that the model
which get success in one country may not be suitable
for another country due to having different level of
cultures, national policy, requirement and necessity.
December 2012
management
influenced and driven somewhere with the
Government itself. What I believe that the role should
be limited to facilitation and governance but
somewhere its mission in so many LDCs and the
working NGOs/INGOs feels hindrances rather than
facilitation.
happening for them. The final impact of these are to

be seen the impact on them only. The requirement
of social audit is utmost needed in the Nepal.
Reporting requirement and audit is mere formality:

any NGOs working in Nepal are required to take
PAN/VAT number and then gets tax exemption
certificate. What I believe that the caretaker of
Government policy making thinks that NGOs are
tax exempted so need not to regulate with strong
monitoring methodologies.
Lack of SOPs ( Standards operating Procedures) at

all level of operations: Most of the NGOs and even
INGOs working in Nepal do not have fixed
guidelines/manuals/Standards operating
procedures and any reporting requirement other
than at donor level and some formality at
Government authority. The organisations are much
concerned with answerability towards donors but
not to the beneficiary class and the beneficiary are
much concerned with their own objectives and
constraint with their governance and stakeholders.
Lack of awareness among beneficiary: Most often

the beneficiary class use to be always of the class of
people of not having knowledge/awareness of these
whole pictures of working and environment of the
NGOs and INGOs. They are not aware of that all
this films runs/gets super duper hit because of their
poor/lack of education/un empowered and helpless
status. Even there are so many NGOs which are
working in the areas of advocacy but again these
organisations do comes under the question of
governance.
Lack of welfare approach/factors in an

organisations: The people working in the
organisation prefer to work in these kind of
organisations specially in INGOs because of the pay
scale and facility in these sectors are high in
comparisons of corporate sectors generally in the
least developed country (LDCs) or developing
country. They are least concerned with the
welfare/social service approach and interest.
The Real massage/purpose of an NGOs/CSOs is
missed: The name of the these organisations and
definition suggests that these are non-governmental
organisations but what we have found that again
these are the organisations which are mostly
BIG Gap Between Grass root NGOs and INGOs:

Although the INGOs in Nepal are not allowed to
work directly/implement its projects at grass root
level but they are allowed and directed to work
through Grass root NGOs. We have found that so
many INGOs have started and established their own
local level NGOs with the help of the one or two
local connected people and they implement/runs
the projects at their own comfort and style. The
reasons is not only the question of governance but
the grass root level NGOs are not equipped with
the basic level of requirement like
Resource/skills/capacity/reach or access to reach
and connect with these INGOs or any foreign agency
for getting into the partnership or association. The
reasons big GAP exists and the objectives are missing
at holistic level.
Absence of experts on related field and operation

within organisation: what we have found that most
of the NGOs/INGOs working in all field of
development like rural entrepreneurship but none
of the resources have any exposures/qualification
in the areas; working in the health sectors but not
having any resources are doctors or from health
sectors, working in advocacy but even missing the
attraction and motivational part the advocacy and
the reasons impact are less, bla bla ....what it gives
the massage that the organisations are not getting
their impact assessment/post implementation review
from the independent agency/consultant but again
its missed the governance level even if it's being
done.
Absence of Sectors specific NGOs at Grassroots level:

what sectors specific NGOs are required at which
grass root are the decision/assessment/comfort of
the NGOs/INGOs itself but not of the Government.
There are not any detailed assessment/policy and
guidelines/case studies and prioritised sectors of
the functioning of the NGOs/INGOs.
Absence of need based model at implementation

level: The INGOs through local NGOs or any
December 2012
45
management
multilateral agencies through government agency
work with their own model of working which gets
success at one place/country and always try to
replicate the same model from one country to another.
There are lot depends on the requirement/assessment
of the locals/society/community where which
models fits into. So the ned based models are always
missing and the significance and output of the
projects gets diluted in helm of failure.
Absence of centralised control and monitoring:

Currently most of the NGOs in practice are gets
registered at district level administration office and
for association and getting foreign funds at central
level authority SWC .These authority are there to do
registration and renewal of the organisation and not
any governance/monitoring and control/ other
facilitations. The centralised monitoring and control
from all concerned authority like registration
authority, Income tax authority, Nepal Rastra Bank,
Ministry of foreign affairs, Ministry of home affairs
for foreign funds, compulsory Internal audit for all
INGOs from the certified professional from Institute
like Institute of charted accountants of Nepal (ICAN)
may be devised.
Matter of conflict of interest exists at some level:

we have encountered so many INGOs working with
their own connected local/connected people or
NGOs are family owned or the group NGOs are
linked and working with their understanding that
management of one become the management of
others or vice versa. staffs are recruited most often
are from relatives and most connected. There are no
difference between board level and management
level.
Current situations or the impacts of an INGOs can be

understood from the data that the most of underdeveloped
district/areas where people are below poverty line or an averages
poverty of Nepal is 31% where as those districts covered by
Mid-Western and Far-Western regions, poverty are believed
to be of 41-45%.
In spite of strong and long presence and work of these

INGOs in the most poor districts of Nepal but the poverty
alleviation does not seems to be happened there. What
have experienced the main reasons/factors are those
dealt above.
The highest concentration of poor rural people is found
in the Mid-Western and Far-Western regions. While the
overall poverty rate for Nepal is 31 per cent, this figure
increases to 45 per cent in the Mid-Western region and
41 per cent in the Far-Western region.
Solution lies ahead:

One window policy at centralised level then monitoring
December 2012
management
and regulations at regional level; Capacity building plan
at all concerned level of organisation and at authority
level. Strong regulatory authority with required
infrastructures and resources at centre as well as district
level may be established. There must be the re-structuring
of laws and regulations of NGOs at centre and regional
level. The donor agency may be emphasised of capacity
building program of grass root NGOs. The NGOs which
are not working and idle may be reviewed and either
revived or closed with strict regulations. Focusing on
regulatory reporting from INGOs restrained the inflow
and attention/interest of INGOs towards entry and
working in Nepal; rather Government may focus in the
areas of strong governance at operational and

management level of all NGOs and INGOs.
Internal governance and control with strong and well tested
SOPs may be in place to achieve the real objectives of the
development sectors organisations. Working towards
International standards for Implementation and reporting
(ISIR) may be initiated through LDCs (Least developed
countries) like IFRS and IPSASs for corporate and Public
sectors respectively.
December 2012
47
taxation
Deductibility of TAX at Source in Nepal

Under DTAA
1. INTRODUCTION:
Another concept is where

there is DTAA and the
provision of local Income Tax
Act, they should be interpreted
to give effect to the DTAA, if
that is beneficial to the tax
payer
CA. N.K. Swami
The Supreme Court in its judgement

of the case of Probiotech Industries
Pvt. Ltd. vs. Large Taxpayers' Office case
no. 8544 decided on 2067/3/17
reported in Baishakh 2068 of Nepal
Kanoon Patrika, Page 145 has laid
down that once payment is made as
service charge from Nepal, it is liable
for deduction of tax at source under
sec.88 of Nepal Income Tax Act,
irrespective of whether it is taxable in
Nepal or not. Even though the Double
Taxation Avoidance Agreement
between India and Nepal (hereinafter
referred to as DTAA) was quoted
during the hearing, but it appears that
the Supreme Court did not go into the
details of the DTAA.
1.2 With due respect to the Supreme
court, it is regrettable that the
Supreme Court did not take a
holistic view of the matter while
deciding the case but appears to
have been moved by the loss of
revenue to the Nepal Government
rather than the international
principles and practice in similar
matters, especially when the Nepal
Government is inviting investors
to invest in Nepal and also trying
to promote exports. This article is
written only to analyse the
concepts and principles for intercountry transactions.
CA. Swami is Member of ICAN
December 2012
1.3 The brief matter as indicated in

the dispute in the case of
Probiotech Industries Pvt. Ltd. vs.
Large Taxpayers' Office was that
Probiotech Industries Pvt. Ltd.
has paid commission of Rs.
1,36,15,515.20 to Omega Ventures
Pvt. Ltd. of Kolkata, an Indian
business unit during 2060/61 and
had not deducted tax in Nepal
on the same and Large Taxpayers'
Office (LTO) issued a notice to
deposit the tax of Rs. 20,42,327.28
at 15% on the same. The company
opposed the demand and
brought the matter by an
application to the Supreme Court
against the demand of the LTO.
This is the only fact available from
the case report.
1.4 Similar was the case of Vodafone
in India, which can be explained
in simple terms as follows.
Vodafone of England paid to
Hutchinson-Essar of Hongkong
to purchase the shares in various
companies in Mauritius held by
Hutchinson and its associates,
which together had a controlling
interest in the Indian telephone
company. The question was
whether the gain on the sale of
such shares by Hutchinson is
liable to tax in India, and if so,
Vodafone has failed to deduct tax
on the same and pay to Indian
taxation
tax authorities. Indian tax authorities averred that
since the main intention of such transfer of shares is
to obtain a controlling interest in the Indian company
holding the licence to offer telecom services in India,
it is a sale of capital assets in India and should be
taxed in India. The Bombay High Court, on a writ
application filed by Vodafone, held that it is a transfer
of India based capital asset and accordingly is liable
to capital gains tax in India and that Vodafone should
have deducted tax on the same and paid to the
Government of India.[2010:329:ITR:126(bom)]
Vodafone went in appeal to the Supreme Court of
India which held that the transaction basically
involved the transfer of shares in Mauritian
companies and Mauritius has a DTAA with India
wherein it has been provided that any capital gain
arising from the transfer of shares held in Indian
company by Mauritian company is not liable to tax
in India and whereas the shares transferred under
the case is that of Mauritian companies and hence
any net gain involved is not taxable in India. Since
it is not taxable in India, then there is no question
of deduction of tax on the same and Vodafone was
not liable to deduct and pay tax to the Indian
authorities. [2012:17 Taxmann.com202:SC]
2.1 The basic concept of tax deduction is that the amount
paid should be liable to tax in the hands of the
recipient in Nepal before any liability to deduct tax
can arise. If it is not liable to tax in Nepal, then no
tax deduction is applicable to the same. This is the
universal concept adopted throughout the world.
The supreme court thus failed first to examine
whether the recipient of the commission was liable
to tax in Nepal or not and then only to decide whether
it is liable for deduction of tax at source in Nepal.
2.2 Sec. 67(6)(jha) clearly provides that the source for
payment of fees for services will be considered as
having source in Nepal, only if the services were
rendered in Nepal, eventhough payments may be
made any where. Thus rendering of services in Nepal
is the main criteria for taxability of income in Nepal.
In the case of non-residents, only income having
source in Nepal is taxable in Nepal. In this case

Omega Ventures Pvt. Ltd. of Kolkata was rendering
its services in India only, did not have any permanent
establishment in Nepal and thus not a resident of
Nepal. Therefore its source of income was in India
and not in Nepal and thus not liable to tax in Nepal
by the plain provision in Sec.67 of the Income Tax
Act, which was also overlooked by the court and
this provision was not brought to the attention of
the court by either of the counsels and thus the court
was misled in this aspect of the question also. Even
when the income is service fee, once it is not earned
in Nepal by a non-resident in Nepal it is not liable
to tax n Nepal and hence not liable for deduction of
tax at source in Nepal.
2.2 If Sections 87 and 88 are to be applied without regard
to the above concept, then all payments listed in
Section 10 will be liable to deduction of tax under
67(6)(jha)and the recipient should seek refund of the
tax stating that his income is not liable to tax. Thus
the salary paid by the Government on the condition
that it is not liable to tax and the salary paid by
diplomatic institutions and international institutions
in Nepal should be liable to tax deduction under
Section 87 when the amounts are paid to persons
residing in Nepal for working in Nepal and when
payments are made to charitable institutions for
services rendered for service fee, tax should be
deducted under sec.88 according to sec.67(6) and
they should claim refund, if we go according to the
tenor of the decision of the Supreme Court of Nepal
in this case.
2.3 Another concept is where there is DTAA and the
provision of local Income Tax Act, they should be
interpreted to give effect to the DTAA, if that is
beneficial to the tax payer.
3.1 To clarify the position in similar cases to that dealt
with by the Supreme Court, the Central Board of
Direct Taxes of India has given the following
notification no. 786 dated 7.2.2000 with regard to the
brokerage/commission paid to non-residents agent.
December 2012
49
taxation
1168. Clarification regarding taxability of export commission
payable to non-resident agents rendering services abroad
1. In their Audit Report for 1997-98 [D.P. No. 79(I.T.)] the
Comptroller & Auditor General (C & A G) Raised an objection
that the Assessing Officer in computing the profits and gains of
business or profession, in a case in Mumbai charge, had wrongly
allowed a deduction in respect of a payment to a non-resident
where tax had not been deducted at source. The nature of the
payment in this case was export commission and charges payable
for services rendered outside India. In the view of C & A.G. the
expenditure should have been disallowed in accordance with
the provisions of section 40(a)(i) of the I.T. Act, 1961. It has come
to the notice of the Board that a similar view, on the same set of
facts has been taken by some Assessing Officers in other charges.
2. The deduction of tax at source under section 195 would arise if
the payment of commission to the non-resident agent is chargeable
to tax in India. In this regard attention to CBDT Circular No. 23
dated 23rd July, 1969 is drawn where the taxability of 'Foreign
Agents of Indian Exporters' was considered along with certain
other specific situations. It had been clarified then that where
the non-resident agent operates outside the country, no part of
his income arises in India. Further, since the payment is usually
remitted directly abroad it cannot be held to have been received
by or on behalf of the agent in India. Such payments were
therefore held to be not taxable in India. The relevant sections,
namely section 5(2) and section 9 of the Income-tax Act, 1961
not having undergone any change in this regard, the clarification
in Circular No. 23 still prevails. No tax is therefore deductible
under section 195 and consequently, the expenditure on export
commission and other related charges payable to a non-resident
for services rendered outside India becomes allowable
expenditure. On being apprised of this position, the Comptroller
and Auditor General have agreed to drop the objection referred
to above. Circular : No. 786, dated 7-2-2000.
(4) FOREIGN AGENTS OF INDIAN EXPORTERS -
DTAs adopt certain broad rules whereby the rights to tax are either
exclusively allocated to one of the countries or are divided between
the countries with provision for relief from double taxation. Where
an exclusive right to tax is conferred, it is generally given to the
country of the taxpayer's residence. Where both the country of
residence and the country of source of the income are given a
right to tax, generally the country of residence is required to
grant relief against double taxation, by way of either the credit or
exemption method.
One of the key tax revenue allocation rules is the rule whereby the
country of source is granted an unrestricted right to tax the business
profits of a "permanent establishment" situated within the country.
Conversely, the country of source may not tax business profits
emanating from it if there is no permanent establishment; in
such circumstances, the exclusive right to tax the profits is
assigned to the country of residence. (Emphasis by the author)
3.4
Only in the cases of incomes as described in the

DTAA, that both country of residence and the
country of source are given a right to tax, the
question of set-off of tax deducted by source country
in the country of residence will arise. When the
source country has no right to tax the income under
DTAA, the taxpayer in the country of residence
has no right to set-off the same since the source
country has levied the tax in violation of DTAA.
Thus the set-off will apply in the case of income
taxable in both the countries. If the income is taxable
only in one of the countries of DTAA, then no
question of set-off arises in the other country.
3.5
Thus the Supreme Court was misled while it stated

in Paragraph No. (Prakaran No.) 4 of the judgement
that there is no provision that the amount received
by the Indian company was not taxable in Nepal
and that the tax deducted in Nepal can be claimed
for set-off in India by the taxpayer in India, which
is not permissible under DTAA. The supreme court
did not go into the primary question of whether
Omega was liable to tax at all in Nepal on the
commission received under the DTAA, when only
the tax can be deducted in Nepal on such payment.
$=
g]kfn / ef/taLr ePsf] }w s/wfg d'lQm tyf ljQLo 5n

lg/f]w;DaGwL ;Demf}tfdf ;d]t g]kfndf pTkfbg ePsf]
;fdu|L ef/t ;d]tdf laqmL ljt/0f ubf{ ef/tdf /x]sf]
sDkgLn] k|fKt ug]{ Sales commission sf] /sd g]kfnaf6}
e'QmfgL k7fPsf] cj:yfdf g]kfndf ;|ft] ePsf] pQm e'QmfgL
/sdsf] s/ g]kfnn] lng gkfpg] eGg] Joj:yf g/x]sf /
A foreign agent of Indian exporter operates in his own country and

no part of his income arises in India. His commission is usually
remitted directly to him and is, therefore, not received by him or on
his behalf in India. Such an agent is not liable to income-tax in India
on the commission1. The Supreme Court of India has held to the
same effect in CIT v. Toshoku Ltd. [1980] 125 ITR 525. Circular
No.23,dated 23/7/1969
3.2 There is no difference in legal provision in Nepal

from that of India in this respect. Here also IRD
should give clear instruction by a circular for the
guidance of the taxpayers leaving the hand and
gloves attitude.
3.3 Similarly Australian Tax Handbook of 2004
published by Thomson describes the inter-country
dealings under DTAA as follows [Page 1532 Para
40.060]
KEY PRINCIPLES USED IN AGREEMENTS
40-060 Division of Taxing Rights
December 2012
taxation
To:tf] /sddf g]kfndf s/ ltl/;s]kl5 ;f] j/fj/sf] /sd
ef/tdf lghn] s/ 56 -qm]l86_ lng kfpg] g} /x]sf] x'Gbf
bf]xf]/f] s/ ltg'k{ g]{ cj:yf ;d]t /x]sf] b]lvb}g / lgj]bsn]
ef/tdf g]kfndf lt/]sf] s/nfO{ dfGotf lbPsf] 5}g / cfk"mn]
ltg{ k/]sf] 5 egL lhsL/ lng / k|df0f k]z ug{ ;s]sf]
klg 5}g . b]zdf ljBdfg oxL s/ sfg"gcg'k lgj]bsnfO{
cl3Nnf] jif{ klg o;/L g} s/ lgwf{/0f ePsf] / ;f] lgoldt
;d]t e} /x]sf] kfOG5 . -kfgf !$(_
4. 1
4.2
In Income tax law, each year is separate and

independent and because a mistake has happened
in one year the same mistake cannot be repeated
the next year also. Thus the Supreme court's view
that previous year's procedure should be followed
was wrong in principle and law, because the
supreme court is approached only to find the correct
position of law and procedure and had to examine
afresh even whether the previous year's procedure
was also right or wrong, without blindly following
the previous year assessment. Only because some
wrong practice has been adopted in the previous
year, the tax payer had come for relief to the
Supreme Court.
As a general rule, the principle of res judicata is not
applicable to decisions of tax authorities . It has
been held in CIT vs.Surji Devi Kunjilal jaipuria
charitable trust(no.1)[ 1990;186:ITR28(All)] that
when the earlier decision was based on a
concession made by the assessee that such earlier
decision could not operate as a res judicata . In
Ipoh(MM) vs CIT and Chenniaopppan(M) vsITO
[1968:67:ITR:106(SC)], the Supreme court of India
held that the doctrine of res judicata does not apply
so as to make a decision on a question of fact or
law in a proceeding for assessment in one year
binding in another year. The finding or question
of the past however, it is pointed out, may be a
good and cogent evidence in subsequent years,
though they are not binding and conclusive . The
same position was reiterated by the Supreme court
of
India
in
Umasharam
Shaw
vs.CIT[(1959:37:ITR:271(SC)] that an assessment is
inherently of a passing nature . All that is
determined by the assessment order is the amount
of tax to be paid for the particular year. There is
no lis or dispute between the assessing officer and

the assessee. Here it is difficult to attribute to an
assessment a permanence to provide an estoppel
by res judicata. Accordingly a decision by a taxing
authority on a pure question of law would not be
binding in the assessment of the assessee in the
succeeding years. [IRC vs Sneath 17:TC:149(court
of appeal of UK)]. The decision reached in one year
, however, would be a cogent factor in the
determination of a similar point in the following
year though not binding as estoppels on the
assessee or the State.[ Durga Prasad More Vs.
[CIT(1971:82:ITR:540(SC)]. The earlier decision has
been made only on the concession given by the
assessee and that cannot be taken as binding
precedent.
4.3
First thing is that so long as the Indian company

did not have a permanent establishment in Nepal,
the amount earned by the Indian company in
Nepal is taxable only in India and Nepal cannot
tax it according to Article 7 of the DTAA, as it is
clearly laid down. The LTO has not brought out
any evidence that the Indian company has any
permanent establishment in Nepal.
Article 7
BUSINESS PROFITS
1. The profits of an enterprise of a Contracting State shall
be taxable only in that State unless the enterprise carries
on business in the other Contracting State through a
permanent establishment situated therein. If the enterprise
carries on business as aforesaid, the profits of the
enterprise may be taxed in the other State but only so
much of them as is attributable to that permanent
establishment.
4.3
Section 9 of Nepal Treaty Act, 2047 states that:
(= ;lGw Joj:yf sfg"g ;/x nfu" x'g] M ;+;baf6 cg'df]bg,

;lDdng, :jLs[lt jf ;dy{g eO{ g]kfn /fHo jf g]kfn ;/sf/
kIf ePsf] s'g} ;lGwsf] s'/f k|rlnt sfg"g;Fu aflemPdf ;f]
;lGwsf] k|of]hgsf] nflu aflemPsf] xb;Dd k|rlnt sfg"g cdfGo
x'g]5 / tT;DaGwdf ;lGwsf] Joj:yf g]kfn sfg"g ;/x nfu"
x'g]5 .
December 2012
51
taxation
4.4
Even though these provisions were quoted during

the arguments, these provisions were overlooked
by the Supreme court and not gone into deeply
and thus with due respect, it has to be pointed out
ef/tdf /x]sf]
sDkgLn] k|fKt ug]{ Sales commission sf] /sd g]kfnaf6}
e'QmfgL k7fPsf] cj:yfdf g]kfndf ;|ft] ePsf] pQm e'QmfgL
/sdsf] s/ g]kfnn] lng gkfpg] eGg] Joj:yf g/x]sf]
that the conclusion of
4.6
4.7
Thus on both the counts, the Supreme Court was

mislead and went against the clear provision of
law and the assessee was made to suffer
unnecessarily.
5.1
Another following observation of the supreme

court also was not necessary.
%=
csf]t{ km{ lgj]bs sDkgLn] cf]du] fnfO{ e'QmfgL lbPsf] /sddf

s/ sf u/]sf] b]lvPsf] eP cf]du] f k|f=ln= n] ph"/ ug{k' g]d{ f
;f] k|f=ln= sf] ph"/ k/]sf] geO{ lgj]bssf] ph"/ k/]sf]
b]lvPsf] / lgj]bsn] e'QmfgL ul/;s]sf] /sddf s/ nfu]sf]
s'/fn] lgj]bssf] ;+ljwfg tyf sfg"gk|bQ ;DklQ;DaGwL
xs clwsf/df s'g} cf3ft k/]sf] b]lvPg . -kfgf !$(_
5.2
Here actually the assessee has been ordered to pay

tax of Rs. 20,42,327.28, which he is not supposed to
pay according to the clear laws of the country as
explained above, and thus his property rights with
the regard to the above amount has been affected.
The Indian trader if he has already received the full
payment of the commission, he has no cause to
come to the court here in Nepal. If Probiotech had
already paid the commission to the India trader
Omega in full, the tax now to be paid is an additional
burden to the assessee in Nepal, not provided under
the laws and thus he has been saddled with a
liability in contravention of the prevailing laws of
Nepal and is an unlawful appropriation of the
property of the taxpayer.
the court
was misleading and the income which is not taxable

at all in Nepal was made to bear tax, in
contravention to the provision of Article 7 of DTAA
with India and section 9 of Nepal Treaty Act,2047
as quoted above and sec 67(6)(jha).
4.5
has to be filed in India but without an Indian PAN, the

company cannot file a return in India.
DTAA provides for two types of incomes viz. One

taxable in one country only and another taxable in
both countries. Article 6 ,7and 8 of DTAA describes
the income taxable in only one country. i.e income
from immoveable property, income from business
and income from shipping and air transport
respectively. Income under Articles 10, 11 and 12
viz. Dividend, interest and royalties are taxable in
both the countries and tax paid in respect of these
incomes only in one country can be set off against
the tax payable in the other country. So in the case
of income under Article 6,7 and 8, no set off for tax
payable in the other country is available. This fact
also was overlooked by the Supreme Court or the
Supreme Court was misled by LTO.
This fact has been demonstrated by the Large Tax
payers office itself in another case by refusing to
give set off for the tax deducted in India.
A Nepal company supplied goods to a state government

of India but supply was made in Nepal and VAT bill
was raised. The state government wrongly deducted
income tax on the supply to the extent of about IRs 13
lakhs. If the Supreme court was right in its observation
that tax paid in one country could be got set off in the
other country, according to DTAA, then Large Tax
office(which argued the case that set off is available)
should have given credit to the company in Nepal
according to the above decision of the supreme court but
LTO refused to give credit for the tax so paid in India.
Once tax is deducted and paid, getting a refund is a long
drawn out process. One condition is that income return
December 2012
Under English Law, the courts developed the concept of

Law and Equity and where the plaintiff cannot get justice
under the normal law and is a sufferer, he can approach
the equity court for direction to get appropriate relief.
Thus the writ jurisdiction was not available under
common law in England to the Courts but during the
reign of Henry II in the 12th century England, who was
greatly interested in the law, seeing the delivery of justice
as one of the key tasks for a king and carefully appointing
good administrators to conduct the reforms started
rendering justice by the Royal edict on application was
introduced about 900 hundred years ago. During Queen
Victoria's reign, later the courts themselves have evolved
taxation
to render justice to the citizen under the Equity division
of the high court and thus the writ jurisdiction of high
court was born and one must understand that there is
no written constitution in England till today. When a
writ application is made, the court will have to look into
the justice of the case and not only the law of the land or
the alternative remedy, when that remedy is no immediate
remedy at all. The writ jurisdiction of the court takes up
cases which cannot be resolved under the normal legal
procedures and that are how Public Interest Litigations
have gained ground.
In India, in spite of written constitution, the judges of
the High court and Supreme courts have extended the
writ to fit cases where immediate relief is necessary and
where the judicial system is lethargic and non responsive.
In a very similar situation only, where the tax department
was asking for tax deducted at source the Supreme Court
of India took up the Vodafone application for a writ very
seriously and decided the case (without refusing to
consider the same stating that alternative remedy is
available as averred by the Nepal supreme court in the
case under discussion) after hearing both the sides came

to the conclusion that the capital gains is not taxable in
India and so no tax is deductible on the payment made.
Consideration of alternative remedy was squarely
misplaced in this case considered by the supreme court,
when justice had to be rendered. If the Supreme court
wants to dismiss the petition on the ground of alternative
remedy, then it should, without deciding the case, have
directed the assessee to file the case before the tribunal
within , say, 15 days of the receipt of this court's order,
on the grounds of natural justice, which usually, the
Indian courts do.
(Note: The author is in no way personally connected with the
case nor with the parties concerned with the case and this is
purely an academic exercise only, as a commentary as is
common in all other countries, but not very common in Nepal)
December 2012
53
News
Oath Taking and National Best Presented Accounts (BPA) 2010 Awards
Distribution Ceremony
During the occasion, Chief Guest Hon'ble Finance
Minister Barsha Man Pun presented the National Best
Presented Accounts (BPA) Awards-2011 to the winning
organization. Following organsations were awarded the
National BPA Awards-2011. Winners will participate for
the BPA Awards of SAFA (South Asian Federation of
Accountants).
Group Photograph of newly elected Council Members

Amidst a function held on Shrawan 7, 2069 Hon'ble
Finance Minister Barsha Man Pun administered oath of
office to the newly elected President CA Madhu Bir
Pande and other council members of the 6th council.
On the occasion, outgoing President CA Sudarshan Raj
Pandey briefly highlighted the achievement during his
tenure and wished his best for the new council.
The newly elected President CA Madhu Bir Pande in his
speech highlighted the future plans and policies of the
Institute for the forthcoming tenure.
Addressing the ceremony, Chief Guest Hon'ble Finance

Minister Barsha Man Pun applauded the Institute for its
endeavor in promoting and regulating the accounting
profession and chartered accountancy course in Nepal
and retiarated for all possible help from the Government
for the Institutional development. Mr. Pun congratulated
all the winners of the BPA Awards and expected that
the annual report in the coming years will be more
reliable, transparent and informative for the general
stakeholders.
The ceremony was addressed by Guest of Honors,
Governor Nepal Rastra Bank Dr. Yubaraj Khatiwada and
Officiating Auditor General Khem Prasad Dahal.
Honable Finance Minister Presenting BPA Award to

the winner
December 2012
The program ended with a vote of thanks from the newly

elected Vice President CA Mahesh Kumar Guragain.
Newly Elected President, Vice President

and Council Members Takes Oath of
Offices
On 22nd July, 2012 , CA. Madhu Bir Pande took oath of
office from Hon'able Finance Minister as the 16th
President of ICAN. On the same occasion, CA. Mahesh
Kumar Guragain and ten elected council members took
oath of Office from Chief Guest Hon'ble Finance Minister
Mr. Barsha Man Pun. President Pande performed his
responsibility as the Vice President of 3rd tenure of 5th
Council and was elected as president autonomously for
1st tenure on 6th Council. Similarly, Vice President CA.
Guragain also served as a member in 4th Council.
Government Nominee for the Council

As per the provision in the Nepal Chartered Accountants
Act,2053, the Government of Nepal on the
recommendation of the Office of the Auditor General
has nominated the following persons with accounting
experience as the council members of the 6th council of
the Institute.
1. Mr. Sukdev Khatri - Office of the Auditor General
2. Mr. Mahesh Prasad Dahal- Financial Comptroller
General Office
3. Mr. Jayadev Shrestha- Inland Revenue Department
Workshop on DTAA and Bilateral

Investment Promotion and Protection
Agreement
Newly Elected President takes the Oath of offices from

Finance Minister
Speaking on the Occasion the outgoing President CA.
Sudarshan Raj Pandey gave a brief outline of the
achievement of his tenure. After wishing his best to the
newly elected President and Vice President and other
council members, he handed over the President Medallion
to the newly elected President CA. Madhu Bir Pande.
Delivering his acceptance speech, the newly elected
president CA. Madhu Bir Pande thanked all the members
and colleagues who have faith in him and elected him
as a President of 6th Council.
Dr. Yuba Raj Khatiwada- Deputy Governor, Mr. Khem
Pradad Dahal- Acting Officiating Auditor General were
also present on the Occasion.
Preview of DTAA & Bileteral Investment Promotion

& Protection Agreement workshop
On July 22, 2012 a day workshop on DTAA and Bilateral
Investment Promotion and Protection Agreement with
India and contemporary issues on Income Tax was
organized by the Institute of Chartered Accountants of
Nepal. The workshop started with the opening remarks
by CA. Sudarshan Raj Pandey-President of ICAN. The
workshop was conducted in three different sessions. In
the first session, which was chaired by CA. Tirtha Raj
Upadhyay- Past President of ICAN, Mr. Gopal Prasad
Ghimire - Director, Large Tax Payers Office (LTO)
presented his paper on Double Taxation Treaty between
India and Nepal.
In the similar way the second session was chaired by
Mr. Tanka Mani Sharma- Director General, Internal
December 2012
55
Revenue Office. In the session, CA. Jagadish Agrawal

presented his paper on Contemporary Issue on Income
Tax Act, 2058 and Value Added Tax Act, 2052.
Similarly, the third and last session of the workshop was
chaired by Mr. Bhaskar Raj Rajkarnikar-Vice Chairman
of FNCCI, where Mr. Radesh Pant presented paper on
BIPPA and Investment Climate and the session.
In the seminar, altogether 127 participants participated
and discussion was made on the current Issues.
Representatives Met Deputy Governor

Representatives of The Institute of Chartered Accountants
of Nepal and Deputy Governor met on November 9,
2012 to discuss the banking and other issues in Nepalese
prospective. The delegates from the institute were:
CA. Madhu Bir Pande- President
CA. Binay Prakash Shrestha- Executive Director &
Mr. Binod Prasad Neupane- Joint Director
Discussion Program on IFRS Implementation

Discussion program on IFRS implementation was
organized jointly by The Institute of Chartered
Accountants of Nepal (ICAN), Office of the Auditor
General (OAG) and Nepal Electricity Authority (NEA)
on October 10, 2012.
In the program, Ms Bimala Subedi- Officiating Auditor

General, Mr. Som Raj Pokharel- Deputy Auditor General,
Mr, Hari Ram Koirala- Chairman , Nepal Electricity
Authority and Secretary Ministry of Energy, CA. Madhu
Bir Pande- President , The Institute of Chartered
Accountants of Nepal, CA. Maha Prasad AdhikariDeputy Governor, Nepal Rastra Bank, CA. Narayan
Bajaj- Chairman, Accounting Standard Board, Mr. Bimal
Prasad Wagle- Chairman, Public Sector Enterprises
Board(PSE Board), Mr. Mahendra Lal Shrestha- Managing
Director, Nepal Electricity Authority and CA. Mahesh
Kumar Guragain- Vice President, The Institute of
Chartered Accountants of Nepal participated in the
program. Ms. Bimala Subedi was the Chief Guest of the
Program.
Mr. Mahendra Lal Shrestha - Managing Director, NEA,
welcome all participants with welcome speech and CA.
Madhu Bir Pande- Vice President, ICAN welcome all
with opening remarks.
Mr. Hari Ram Koirala- Chairman NEA and Secretary Ministry of Energy and Mr. Som Raj Pokharel-Deputy
Auditor General gave Key note speech on the program.
CA. Pradeep Kumar Shrestha- Past President of the
Institute and Past Chairman Nepal Accounting Standard
Board gave his opinion on the implementation of IFRS
in Nepal Country Prospective and also the IFRS Expert
Tony Malik opine his view on issue and challenges to
implement the IFRS in NEA.
In the program, floor discussion was conducted on the
issue of IFRS implementation. Mr. Bimal Wagle Chairman PSE Board and representative of World Bank
and Asian Development Bank Mr. Bigyan Pradhan were
also gave their opinion about IFRS implementation after
the floor discussion.
Similarly, CA. Narayan Bajaj- Chairman Accounting
Standard Board, CA. Maha Prasad Adhikari- Deputy
Governor and Ms. Bimala Subedi gave their opinion
about IFRS Implementation respectively.
At the end of the program CA. Mahesh Kumar Guragain
concluded the program with Vote of Thanks to all
participants.
Preview of Discussion Program on implementation of IFRS
December 2012
SAFA Committee and Board Meeting
Group Photograph of 23rd SAFA Board Meeting Delegates
On 14th September2012, 23rd SAFA Board Meeting and other three Committee Meetings were held in hotel Radisson,
Kathmandu.
CA. Narendra Bhattarai- Council Member and CA. Bijay Kumar Agrawal- Past President participated in Professional
Accountants in Business Committee meeting with other SAFA Committee Member's bodies.
Similarly, CA. Madhu Bir Pande- President participated in Task Force to Address Risk and Challenges to Accountancy
Profession in SAFA Region meeting with other SAFA Committee Member's bodies.
Similarly, CA. Suvod Kumar Karn- President and
CA. Paramananda Adhikari- Technical Director participated
in Small and Medium Practices Committee (SMPC) meeting with other SAFA Committee Member's bodies.
December 2012
57
Education & Examination Department

Result of the Chartered Accountancy Examination
The result of the Chartered Accountancy Examination of the CAP -I/Foundation, CAP II/ Intermediate and CAP
III /Final has been published. The detail of the result is as follows.
The details of Applicants for 2012 June Exam
The details of Appeared Examinee for 2012 June Exam
The details of Successful Examinee for 2012 June Exam
In the result, 347 students from CAP I and Foundation level are eligible to register to upcoming CAP II level after
passing the exam while 96 students from CAP II and Intermediate level are eligible to register to CAP III level. In
the Similar way, 11 students from CAP III and Final level are eligible to obtain the membership of ICAN.
December 2012
Registration Status of Students

Following are the students' registration status in Chartered
Accountancy (CA) and Accounting Technician (AT)
course on fiscal year 2068/69.
Course
No of Students
CAP I
569
CAP II
567
CAP III
108
AT
23
Accounting Technician Examination

Conducted
The Institute of Chartered Accountants of Nepal (ICAN)
has successfully conducted Accounting Technician (AT)
examination in September, 2012. Altogether 7 AT
examinees have taken examination, where 4 examinees
passed out the exam. Examination was conducted on
September 23, 24, 25 and 26, 2012. It's generally been
conducted twice a year on March and September. Details
of the exam are as follows:
Subjects
GMCS Training for CAP III level Students

General Management and Communication Skill (GMCS)
training was successfully conducted. This training was
conducted for the students who have successfully
completed CA Examination (CAP III and Final Level)
from ICAN and those who attempted both groups of
CAP III and Final level. GMCS training was made
mandatory for the CAP III and Final level passed out
students from the year 2011. All together 9 students
participated in the training. Training was conducted in
three sessions on daily basis, which started on 2nd
September and was completed on 18th September 2012.
Advance A/C &

Management A/c
Audit
and Assurance
Corporate &
Other Laws
Tax Laws
Total
Applicants
Total
Appeared
CA Membership Examination Conducted

in November
Chartered Accountancy Membership Examination for
foreign Chartered Accountants Degree holders have been
conducted from November 16th to 20th, 2012. Total
number of applicants of Corporate Law, Direct Tax and
Indirect Tax exam were conducted for 84, 91,and 100
examinees respectively while the appeared examinee
were 76, 86 and 93 respectively. Chartered Accountancy
Degree from the foreign Institution its mandatory to take
the subjects mentioned above. As per the present rule of
ICAN, Foreign CA Degree holders have to pass exam
conducted by ICAN.
Crash Course
Group Photograph of GMCS Students & other officials with
President of ICAN
Application for Recognition

The Institute of Chartered Accountants of Nepal applied
for recognition of CA education to Tribhuvan University
under certain terms and conditions.
Institute of Chartered Accountants of Nepal had

Conducted Crash Course at NAME building Putalisadak
by targeting board exam of all Level Students of the
Institute. 12 classes of CAP I level, 25 Classes of CAP II
Level and 19 Classes of Cap III Level were organized
where 14, 14 and 8 Students attended the classes
respectively.
December 2012
59
Chartered Accountancy Examination

Conducted in December 2012
The Chartered Accountancy Examination of 2012 was
conducted by ICAN on December 2nd to December 7th,
2012. The details of Applicants and Appeared examinee
are as given below.
Scholarship Application Received

The Institute of Chartered Accountants of Nepal had
announced the scholarship notice for the deserving
students of different levels on 2069/06/17. As per the
announcement altogether 170 students applied for
scholarship where 82 from CAP I, 65 from CAP II and
23 from CAP III applied respectively for the same.
Accounting Technician (AT) Certificate

Distribution
CA. Suvod Kumar Karn- Past President and Chairman
Accounting Technician Board distributed Accounting
Technician Certificate to the AT passed students and
different classes of Registered Auditors members of the
Institute on October 17th, 2012 for the first time of its
history. All together 82 AT certificate were distributed.
79 Registered Auditors members and 3 AT Passed
Students were granted AT Certificate as per the decision
of AT Board.
CA. Suvod Kumar Karn Presenting AT certificate to the Member
Member Department
Membership, Certificate of Practice, and Auditing Firm
Following is the Total no of Registered Member, Certificate of Practice and Auditing Firms and the renewal status
till December end 2012.
December 2012
International Affiliation
Following Nepalese CA firms have International Affiliation with different status in ICAN.
President and Executive Director met ICAI President and Vice President
CA. Madhu Bir Pande- President and CA. Binay Prakash Shrestha- Executive Director of ICAN has met ICAI
President, CA. Jayadip Narendra Shah and Vice President, CA. Suvod Agrawal on 29 august, 2012. Nepalese Delegates
have discussed on four agendas with ICAI President and Vice President. The agendas were:
1)
2)
3)
4)
Mutual Recognition Agreement between ICAN and ICAI.

Removal of Center of CPT and PCC level from Nepal.
Conduction of IFRS and Technical Support from ICAI and
Conduction of ISA Certification Course and Technical Support from ICAI
December 2012
61
International News
ITAG Technical Committee Meeting (1213th December 2012)
Comprehensive discussion was held for the revised
preliminary markings awarded to the annual reports by
each member bodies. Based on the present marking
criteria the technical committee carried out the marking
session and finalized all the categories nominated for
SAFA BPA Awards from each member bodies. CA.
Paramananda Adhikari, Technical Director was
participated in the technical committee meeting as the
representative from the Institute of Chartered
Accountants of Nepal.
1. The results of the SAFA BPA Awards were circulated

for the review of the committee and the same was
proposed by CA. Abbas Uddin Khan of ICAB and
seconded by CA. Vijay Kumar Garg of ICAI.
2. It was decided to approve the following while
evaluating the reports thati.
In the case of abnormal variations of marks awarded

by a particular country being more than 20% of the
average excluding that country's marks, the particular
country with the abnormal variation to revisit their
own marking, during moderation.
ii. The areas on which marks are given to be mentioned

with page reference, to ease the process during
moderation.
iii. It was proposed by the representative of Nepal CA.
Paramananda Adhikari, the term Human Capital as
well as Human Resources Accountin in the checklist
to be replaced by "Human Resources Reporting" as
human resources accounting is not in practice in our
context and committee considered the same.
iv. It was decided to review the checklist to minimize
certain not practicable criterias for different sectors.
Technical Staff of the Member Bodies at SAFA BPA
Marking Session 2012
Meeting of the SAFA ITAG Committee

(14th December 2012)
The SAFA ITAG Committee meeting was commenced
from the welcome speech by the Chairman of the
Committee CA. Lasantha Wickremasinghe. The meeting
thanking the Technical Committee for the work done
during the two day conference marking sessions and for
the successful completion of the finalization of SAFA
BPA award winners. He also welcomed the Committee
members at the first meeting held in CA Sri Lanka new
building. CA. Paramananda Adhikari, Technical Director
was participated in the ITAG Committee as the
representative from the Institute of Chartered Accountants
of Nepal.
The following was discussed and approved in the
meeting.
December 2012
v.
It was decided that the committee shall put forward

proposals for the revision of the checklist by email
on or before 31st December 2012, for discussion at
the next ITAG Committee meeting to be held in
Bangladesh. Further it was noted that comments not
communicated in advance, will not be discussed at
the meeting.
vi. Further suggestion was made by the representative

from Nepal, CA. Paramananda Adhikari to consider
including Maldives, Bhutan and Afghanistan in the
SAFA BPA Awards competition in addition to the
current participation of five countries. While it was
mentioned that there has been no response though
they have been invited to participate, it was decided
to discuss how they could be motivated to participate
at the next committee meeting and put forward a
proposal to the SAFA Board.
SAFA Events at Lahore, Pakistan

A five member delegation of ICAN led by Vice President
CA. Mahesh Kumar Guragain participated in SAFA
events that were held from 8-10 November, 2012 at
Lahore, Pakistan. The delegation comprises of the
followings.
CA. Mahesh Kumar Guragain-Vice President
CA. Suvod Kumar Karn - SAFA Board Member and Past
President
CA. Suresh Devkota- Council Member
RA. Badri Prasad Bhattarai- Council Member
CA. Paramananda Adhikari- Technical Director
Followings Events were took place in Lahore, Pakistan
best presented auual reports awards. Among those were

specific areas, ratios value added statement, horizontal
and vertical analysis, date of approving the financial
statements and holding of annual general meeting.
Because of dispute arose in these areas the meeting could
not come into conclusion to finalize any categories and
the same version was forwarded to the SAFA Board for
its consideration for further processs.
On 10th November at the SAFA Board Meeting the
progress made by the SAFA Committee during the two
days meeting was briefed by ITAG Committee Chairman
CA. Lasantha Wickemasinghe and the Board decided
the SAFA BPA Conference marking session would be
carried out bythe technical committee comprising the
technical staffs of the five member bodies and the date
of technical commiittee meeting would be 12-13 of
December 2012 at Colombo Sri Lanka. It is expected that
such conference marking will be finalised within 2 days
and an additional meeting of SAFA-ITAG Committee
will be held in Colombo on 14th of December 2012 to
approve the report of the technical committee.
Delegates in the SAFA BPA Conference
Meeting of SAFA-International Relation

Committee (Informal)
SAFA ITAG Committee Meeting (8-9
November, 2012)
Wide discussion was held for the preliminary markings
awarded to the annual reports by each member bodies.
Wide discussion was made in some of the criterias of
An informal meeting of SAFA-International Relation

Committee was held on 9th November 2012, regarding
the development of accounting profession in Afghanistan,
Bhutan and Maldives. However, in absence of
representation from these countries it was decided that
some more information to be collected from these
countries. Further it was informed that support can be
provided on present working relation between India and
Bhutan, Pakistan and Afghanistan, Sri-Lanka and
Maldives.
December 2012
63
SAFA Committee on Governmental and

Public Sector Accounting
Report was presented by the Committee chairman
CA. Muhammad Rafi about the status of public sector
financial management of the respective member countries.
The questionnaire once again was revised and circulated
to the member bodies. It was further decided that some
more informations are yet to be incorporated so
immediate meeting before SAFA assembly is desired to
be held.
24th SAFA Board Meeting

SAFA Board Member along with Vice-President and
other delegates from ICA Nepal were participated in the
meeting. In the SAFA Board Meeting the following were
discussed comprehensively discussed.
SAFA ITAG Committee chairman briefed about the
progress of the meeting and board ratified the
committee's recommendation and modalities for the
assessment of evaluation by technical staffs of the
member bodies. The report of technical committee
to be reviewed by ITAG committee and recommended
to the SAFA Board for its final approval despite
there were some reservations from Bangladesh over
the changed modalities.
The date for SAFA Assembly meeting was proposed
in Dhaka in between 10 to12 January 2013.
Report of SAFA committee on Government and Public
Sector was briefed out by the Chairman however,
there was some task still not completed and the after
compilational of country perspective report the
meeting will be hld before the SAFA assembly
scheduled to be held in Dhaka somewhere in January
2013.
On 10th December 2012, a half day seminar from 2.00

PM to 9.00 PM on "Emerging Trends in Professional
Accountancy" was organised by the Institute of Cost and
Management Accountants of Pakistan at Lahore Expo
Center. It was our previledge that ICA Nepal was allotted
one of the sessions of the conference named "Search on
cloud computing, a feature of corporate leader" and
"Sustainability accounting and integrated reporting" to
be chaired. Vice President Mr. Mahesh Kumar Guragain
chaired the session. Delegates from ICAN including
technical director had attended the seminar.
Condolences
The Institute of Chartered Accountants of Nepal

organized a condolence program for CA. Binod Bahadur
Rajbhandary on 2069/08/25. He passed away at the
age of 54 on 2069/08/16. He had preformed his
responsibility as a 10th President (2006-2007), before
which President he performed as a Vice President and
Council Member of ICAN. During the program Past
Presidents, President, Vice President, invitee as well
as staff members of ICAN were present to express the
deep condolence to late Rajbhandary.
CA. Madhu Bir Pande- President, CA. Komal Bahadur
Chitracar- Past and first President of ICAN, CA. Tirtha
Raj Upadhyay- Past President, CA. Prabhu Ram
Bhandary- Past President and CA. Pushpa Lall ShresthaPast President have shared their deepest sympathy on
late Rajbhandary. They all focused on the contribution
made by Late Rajbhandary.
Late Rajbhandary was born in Kathmandu on
2015/05/25. He had completed Chartered Accountancy
Course on 1986 May from the Institute of Chartered
Accountants of INDIA (ICAI). He was the member of
ICAN since 2054/02/17.
Delegates of 24th SAFA Board Meeting
SAFA Summit and 12th Management

Accountants International Conference
December 2012
Status of ICAN Building
Proposed ICAN Building
Construction in Progress as on 2069/10/2

Ican Journal December 2012

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December 2012

(Quarterly Journal of The Institute of Chartered Accountants of Nepal)

Mr. Binaya Paudel

Economic Capital-with Reference to Financial Service

The Institute of Chartered Accountants of Nepal

Merger of BFIs in Nepal: Due Dilingence & Documentation

- Mr. Abhishek Gautam

Designed & Printed By

- Mr. Kamal Regmi

Globalization: Support and Discontent

Education & Examination News

13 Behaviors from the Speed of Trust by Stephen M.R.

Deductibility of TAX at Source in Nepal Undr DTAA

Having resolutely upheld a very demanding tradition of excellence to make accountancy

The Editorial Board

important to maintain relationship with various accounting bodies

Effort for Mutual Recognition with ICAI

CA. Madhu Bir Pande

'Economic Capital'- with Reference to

"The best business is the one

The term 'Capital' originated in the

CA. Yuba Raj Pandeya

Approaches to Capital for

CA. Pandeya is Member of ICAN

The Nepal Chartered Accountant

Current Solvency Frame Work

As per Insolvency Act, 2063 (Section 2(b)) of Nepal, 'Being

The Nepal Chartered Accountant

Statutory Balance Sheet

To understand the solvency approach lets first understand

Proposed Solvency II Frame Work

Move form Accounting to Economic Capital

and again we lack ability to understand what is happening

The Nepal Chartered Accountant

Audit of Saving & Credit Cooperative:

ICAN's Guidance note on

Saving & Credit Cooperative should

Section 37 of the Cooperative Act,

The Nepal Chartered Accountant

I think above Section 37(5) is

Applicability of the Company Act, 2063

the Cooperative Act. Similarly, Section 8(2) of the

Issues of Loan Loss Provision

Provision for Staff Bonus

The Nepal Chartered Accountant

whether deposit to the Social Welfare Fund (as required

a) Loss to the Employee: Bonus amount will be after

b) Loss to the Cooperatives: Cooperatives should pay

Section 27 of the Cooperatives Act, 2048 states that amount

*Applicable tax rate for Cooperatives doing transactions in Metropolitian city,

From the above table it is clear that Provision for staff

10 The Nepal Chartered Accountant

The remaining amount to be utilized for the education

Report of Account Committee

Co-operative Bylaws, 2068

Saving and Credit Cooperatives which are registered in

Regulator say: to control the rapid growth of the

The Nepal Chartered Accountant

Merger of BFIs in Neapl: Due Diligence

The costs of buying a business

CA. Ramesh Dhital

Merger is an aspect of corporate

Infrastructure Development Bank

10. Pashupati Development Bank &