Laws · Analysis

Alcohol and tobacco advertising: banned under health law, but claimed as a deductible business expense under tax law

Possible conflict between lawsMedium confidenceEnacted ActReform recommendation

The Public Health Service Act 2075 bars producing, distributing and broadcasting advertising for alcohol, cigarettes and tobacco. The Income Tax Act 2058 lets businesses deduct expenses incurred in earning business income and does not expressly exclude spending on advertising the law forbids. The Auditor General reported in two successive annual reports that large alcohol and tobacco taxpayers claimed such spending as deductions, and said the two Acts should be brought into line.

Laws and sections involved

जनस्वास्थ्य सेवा ऐन, २०७५ · The Public Health Service Act, 2018 s.45(1)
Our translation: no advertising material of any kind that adversely affects human health, including for alcohol, cigarettes, tobacco and tobacco products, may be produced, distributed or broadcast.
Law Commission consolidated text (authenticated 2075/6/2, Act No. 11 of 2075; commences immediately under s.1(2)). The title page lists no amending Act. Later amendments not confirmed. Official text
आयकर ऐन, २०५८ · Income Tax Act, 2002 s.13 (general deduction); s.21(1) (non-deductible expenses)
Our paraphrase: s.13 allows a person to deduct expenses incurred in the income year, by that person, in activities that earn income from a business or investment. s.21(1) lists expenses that cannot be deducted (domestic or personal expenses, income tax itself, fines and similar charges paid for breaking a law, and others); the list we read does not mention advertising that another law forbids.
Law Commission consolidated text; the title page lists 13 amending Acts, the latest the Financial Act 2083 (2083/03/30). s.13 on PDF p.36; s.21 on PDF pp.43–44. Whether any Financial Act after 2083 changed s.21 is not confirmed. Official text
औद्योगिक व्यवसाय ऐन, २०७६ · Industrial Business Act, 2076 s.24(3) and its proviso
Our paraphrase: tobacco and alcohol industries (other than fruit-based brandy, cider and wine) get none of the concessions in s.24(2); but the proviso says they may deduct actual expenses for workers' welfare, pollution control, energy efficiency, research and development 'and other actual expenses for business promotion'.
Law Commission consolidated text (Gazette 2076/10/28); amended by two Acts of 2081 (2081/03/24 and 2081/12/18). s.24(3) on PDF p.25. Official text

The apparent issue

One Act makes a type of advertising unlawful; another Act's general deduction rule does not say whether money spent on that unlawful advertising may still reduce taxable income. The Industrial Business Act adds a third element: it lets alcohol and tobacco industries deduct 'actual expenses for business promotion', which could be read as covering some promotion spending. The result is uncertainty over whether, and how far, such spending is deductible.

Evidence

The Auditor General found that 13 taxpayers under the Large Taxpayers Office that produce and sell alcohol and tobacco products claimed Rs 2.32 billion of advertising and publicity expenses over 52 income years. It said that allowing deduction of spending in an area the law prohibits directly affects revenue, and that the Income Tax Act should be brought into line with the Act that makes such publicity unlawful. Office of the Auditor General Ministry of Finance chapter (Inland Revenue Department), para 83, printed p.131 (PDF p.161)
In the following year's report the Auditor General recorded that the same 13 taxpayers claimed Rs 476.8 million for advertising in FY 2080/81 and Rs 7.51 billion under other headings such as market promotion, sponsorship, research, brand development and promotion, and repeated that the two Acts should be brought into line. Office of the Auditor General Ministry of Finance chapter, para 76, printed p.134 (PDF p.166)
The texts of s.45(1) of the Public Health Service Act, ss.13 and 21 of the Income Tax Act and s.24(3) of the Industrial Business Act were read in the Law Commission's consolidated versions (see laws). Nepal Law Commission PHSA PDF p.18; ITA PDF pp.36, 43–44; IBA PDF p.25

Possible readings

Reading 1 (the Auditor General's view): spending on activity the law prohibits is not spending 'in activities that earn business income' within s.13, so it should not be deducted, and the Income Tax Act should say so expressly to remove doubt.
Reading 2: tax law taxes income as it is actually earned; s.21(1) lists what is not deductible and does not include such advertising, so unless that list is amended a business expense that is genuinely incurred remains deductible, while the advertising itself is dealt with by penalties under the health law.
Reading 3: some of the spending the Auditor General lists under headings such as market promotion, sponsorship or research may not be 'advertising material' within s.45(1) at all, and the Industrial Business Act proviso expressly lets these industries deduct actual business-promotion expenses; how much is affected depends on what each item actually was.

Why it matters in practice

If Reading 1 is right, tax may have been under-assessed and the same uncertainty could recur each year until the law is clarified. If Reading 2 or 3 is right, assessments are lawful but the tax system may in effect lower the cost of activity that another Act forbids. Either way, taxpayers and tax officers face uncertainty that could lead to disputes.

Hypothetical example

Hypothetical: a beverage company spends Rs 10 crore on billboards promoting a whisky brand and Rs 5 crore sponsoring a music festival where its brand name appears. Under one reading it may deduct neither; under another it may deduct both; under a third it may deduct the sponsorship as business promotion but not the billboards.

Possible improvements and trade-offs

Add to s.21(1) of the Income Tax Act an express bar on deducting spending on advertising or promotion that another Act prohibits (the direction the Auditor General recommends).
Clear rule and likely revenue gain; needs a precise definition so that lawful promotion (for example, of non-alcoholic products made by the same company) is not caught, and the Industrial Business Act proviso would need to be aligned.
Issue an Inland Revenue Department public ruling or directive explaining how s.13 applies to spending prohibited by other laws, without amending the Act.
Faster; but a directive cannot narrow a deduction the Act allows, so it may be challenged and may not settle the question.
Strengthen enforcement of s.45 of the Public Health Service Act instead, leaving tax rules unchanged.
Addresses the advertising directly; leaves the tax question open, so disputes over past and future deductions could continue.

Questions for legal review

Does s.13 of the Income Tax Act allow deduction of an expense incurred in an activity another Act prohibits, given that s.21(1) does not list it? Is there Supreme Court or Revenue Tribunal precedent on deducting expenses tied to unlawful activity?
What does 'advertising material' in s.45(1) cover — does it include sponsorship, brand-building events and point-of-sale material?
How does the proviso to s.24(3) of the Industrial Business Act ('actual expenses for business promotion') interact with s.45 of the Public Health Service Act?

Research status

Researched: 2026-10-12
Confidence: Medium confidence — All three provisions were read in official texts and the Auditor General states the mismatch directly in two reports. Confidence is not high because whether the deductions are in fact unlawful is a contested legal question, and the Industrial Business Act proviso points partly the other way.
Review: Not yet reviewed by a qualified lawyer.

Still unresolved

The Inland Revenue Department's or Ministry of Finance's response to the Auditor General's paragraphs was not found.
No court or Revenue Tribunal decision on this point was searched for or found.
The Alcohol Act and Excise rules referred to by the Auditor General were not opened.