Taxation in Nepal

A direct tax is a tax levied directly on the income or property of a person, and the burden falls on the same person on whom it is imposed; it cannot be shifted to anyone else. It is usually based on ability to pay. Examples: income tax on salary, business and investment income, property (house and land) tax, and vehicle tax.

ASYCUDA (Automated System for Customs Data) is a computerised customs management system developed by UNCTAD and used by Nepal Customs (ASYCUDA World) to process import and export declarations. It handles the declaration, assessment of duty and taxes, payment, risk selection and release of goods electronically at customs offices, which makes customs clearance faster and more transparent and gives accurate trade statistics and revenue data.

Tax deduction at source (TDS) means that the payer deducts the tax from a payment at the time of paying it to the recipient and deposits it with the Inland Revenue Department. The recipient receives the net amount and gets credit for the tax deducted. It ensures early and regular collection of revenue and reduces evasion.

Example: an employer deducts income tax from the monthly salary of an employee and deposits it in the government account; a company deducting tax at 10% when it pays rent to a landlord.

Estimated tax = 25% × Rs 500,000 = Rs 125,000.

The tax is paid in three instalments: 40% by the end of Poush, 70% (cumulative) by the end of Chaitra, and 100% by the end of Ashadh. The first instalment due at the end of Poush is 40% × 125,000 = Rs 50,000.

Paying it in Falgun makes it late by two months (Magh and Falgun). Interest for late payment at 15% per annum:

$50{,}000\times 15\%\times\frac{2}{12}=\text{Rs }1{,}250$

So the estimated tax is Rs 125,000 and the late payment charge is Rs 1,250 (interest on the unpaid first instalment).

Block D, rate 15%, increased by one third (to 20%) for an industry of special nature. An addition in the first six months (Bhadra) is included in full; an addition in the last six months (Chaitra) is included at two thirds.

Allowable depreciation = 1,500,000 × 20% = Rs 300,000

Opening written down value for the coming year:

$900{,}000+300{,}000+600{,}000-100{,}000-300{,}000=\text{Rs }1{,}400{,}000$

(The loss on the asset sold, 150,000 − 100,000, is not claimed separately; it is absorbed in the block.)

Under Section 18 of the Income Tax Act, 2058 research and development expenditure incurred in the year is allowed as a deduction against the business income of that year.

Business income before R&D = 800,000 − 550,000 = Rs 250,000

R&D cost of Rs 125,000 is less than this income, so it is allowed in full.

Allowable R&D cost = Rs 125,000.

Income after R&D = 250,000 − 125,000 = 125,000; after setting off the previous loss of Rs 50,000, the taxable income is Rs 75,000.

Capital gains of a resident natural person on non-business chargeable assets:

Capital gain tax:

• Shares: 500,000 × 5% = Rs 25,000
• Land: 500,000 × 5% = Rs 25,000

Capital gain tax = Rs 50,000.

Purchases for trading = 1,000,000 − 100,000 (plant and machinery is a capital item) = Rs 900,000. Office and administration cost is not part of cost of goods. Closing stock is valued at the lower of cost and market value, i.e. Rs 50,000.

Evolution of income tax in Nepal

1. Before 1951 (Rana period): revenue came mainly from land revenue, customs and other levies; there was no income tax.
2. After 1951 (2007 B.S.): with the end of the Rana regime, the government started to modernise the revenue system and the idea of taxing income was developed.
3. 1960 (2017 B.S.): the first income-based taxes were introduced in the form of the Business Profit and Salary Tax Act, taxing business profit and salary income.
4. 1974 (2031 B.S.): the Income Tax Act, 2031 was enacted. It brought different income taxes together in one Act, covering individuals, firms, companies and other entities.
5. 2002 (2058 B.S.): the present Income Tax Act, 2058 replaced the earlier Act, introducing a modern, self-assessment based system with the concepts of income year, resident and non-resident, three heads of income (employment, business, investment) and rules for capital gains, depreciation, withholding and loss set off. It is supported by the Income Tax Rules, 2059.
6. Later reforms: the Inland Revenue Department was organised for tax administration, PAN, VAT (1997) and e-filing (online return, e-TDS) were introduced, and the Act is amended every year through the Finance Act (rates, deductions, exemptions) and by other amendments to simplify compliance and widen the tax base.

Tax planning is the legal and systematic arrangement of a person's financial affairs, using the exemptions, deductions, rebates and incentives provided by the tax law, so that the tax liability is minimised or deferred, without breaking the law. It differs from tax evasion (illegal) and uses only legitimate means.

Main objectives

1. Minimising tax liability: to pay the lowest tax allowed by law by using deductions, exemptions and concessions.
2. Maximising after-tax profit and wealth: to increase the funds available for the owners and the business.
3. Productive investment: to channel savings and investment into areas that give tax benefits, such as industries, insurance, retirement funds and priority sectors.
4. Economic stability and growth: to use tax incentives to encourage employment, exports and capital formation.
5. Legal compliance: to avoid penalties and interest by filing accurate returns and keeping proper records.
6. Reducing litigation: to avoid disputes with the tax authority by planning transactions in advance.
7. Cash-flow and timing: to defer tax payments through timing of income and expenses, and to plan the cash needed for tax payments.

Filing the online final return

1. Open the Inland Revenue Department Taxpayer Portal (taxpayerportal.ird.gov.np). Taxpayers must have a PAN and have registered for online services.
2. Log in with the PAN and the password (user name), and enter the captcha.
3. From the menu choose Return then Income Tax Return (online return filing), and select the income year.
4. Select the type of return (e.g., final return for the income year, or the individual/entity form).
5. Fill in the details of income from employment, business and investment, deductions, losses, tax credits and advance tax paid, the balance sheet and profit and loss account where required.
6. Check the computed tax. If tax is payable, pay it through the bank voucher or e-payment (connectIPS/e-banking). Enter the payment details or attach the receipt.
7. Submit the return and keep the acknowledgement; the return is treated as filed and the assessment is made on a self-assessment basis.

Submitting E-TDS

1. Log in to the same portal with the PAN of the withholding agent (payer) who is registered for TDS.
2. Choose E-TDS (withholding tax return) and select the month and year of deduction.
3. Enter or upload (in the prescribed Excel/CSV template) the details of each payee: PAN, name, nature of payment, amount paid, tax withheld.
4. Check the totals of payments and tax deducted and verify them against the TDS deposited.
5. Deposit the tax (within 25 days of the end of the month) through the bank/e-payment and attach the payment details.
6. Submit and save the acknowledgement. Deductees can then see the credit on their own accounts.

Step 1: Adjust the profit and loss of the affected years

• Year 6: the donation of Rs 30,000 to a tax-exempt entity was deducted. A donation is allowed only up to 5% of adjusted taxable income (maximum Rs 100,000); in a loss year this limit is nil, so it is added back. Adjusted loss = (50,000) + 30,000 = (20,000).
• Year 9: the profit is before research and development cost of Rs 135,000, which is an allowable deduction. Adjusted profit = 675,000 − 135,000 = 540,000.

Step 2: Set off the losses

A business loss can be carried forward and set off for 7 years after the year in which it arose, the earliest loss first.

The profits of years 5, 7 and 8 are used to absorb the earliest losses (year 1), so no tax arises in those years. The Rs 30,000 left from year 1 cannot be carried to year 9, because the 7-year period (years 2 to 8) has ended.

Step 3: Taxable income of year 9

Exchange rate: US$ 1 = Rs 136.

Declared goods

Undeclared goods: 10 pairs of ladies' shoes found in excess of the invoice = 10 × US$40 = US$ 400 = Rs 54,400. Duty at 15% = Rs 8,160. The excess goods are not covered by the invoice, so a fine equal to the customs duty (100%) of Rs 8,160 is also levied.

Total transaction amount = 2,244,000 + 54,400 = Rs 2,298,400 (US$ 16,900)

Customs duty and fine

Rules applied: a loss from a source in Nepal is first set off against income of the same type, then against other income of the year; a loss from a foreign source can be set off only against foreign-source income. Any loss not absorbed is carried forward (up to 7 years).

Statement of set off (Rs)

1. Domestic business loss of 350,000 is set off against domestic business income of 250,000, leaving a loss of 100,000.
2. Domestic investment loss of 75,000 is set off against domestic investment income of 100,000, leaving income of 25,000.
3. The remaining domestic business loss of 100,000 is set off against the domestic investment income of 25,000, leaving a loss of 75,000.
4. The loss of 75,000 is set off against the foreign income (business 100,000 and investment 25,000 after its own loss), which is permitted because only a foreign loss is restricted to foreign income.

No loss remains to be carried forward.

Cost of whiskey

Profit is 20% of the selling price, so cost is 80% of the price:

$\text{Ex-factory price}=\frac{550{,}000}{0.80}=\text{Rs }687{,}500\quad(\text{profit }137{,}500)$

Excise duty at 20% on the ex-factory price:

$687{,}500\times 20\%=\text{Rs }137{,}500$

Cost Rs 550,000 and excise duty paid to the government Rs 137,500. The price including excise duty is 687,500 + 137,500 = Rs 825,000.

Self-assessment is a system in which the taxpayer computes his or her own income and tax, files the return and pays the tax without waiting for an assessment by the tax officer, who later only audits selected returns. Nepal adopted it under the Income Tax Act, 2058. The statement is largely true in the current circumstances, although the system is still the right direction and its weakness can be reduced.

Reasons why self-assessment is not fully effective in Nepal

1. Low tax consciousness and literacy: many taxpayers do not understand the law, the rates or the return forms and do not see tax paying as a civic duty.
2. Weak accounting and record keeping: small and medium businesses often keep no proper books or keep double books, so the reported income cannot be relied on.
3. Large informal sector and cash economy: many transactions are in cash and without bills, so income is easy to conceal.
4. Tendency to evade: a low level of trust in the government and the perception of wasteful spending and corruption weaken voluntary compliance.
5. Limited audit capacity: the tax administration has too few skilled auditors and weak information systems, so the chance of an audit is low and false returns go undetected.
6. Weak enforcement: delay in penalties and litigation, and the practice of settling cases, reduce the deterrent.
7. Complexity and frequent changes in the law, and dependence on tax consultants and accountants, add cost for small taxpayers.
8. Poor infrastructure and digital divide: limited internet and computer access affects online filing in rural areas.

Arguments that it can work

• It reduces the discretion and harassment of assessment officers and corruption in assessment, and saves time for both sides.
• PAN, VAT, e-filing, e-TDS, the withholding system and the use of third-party information are improving compliance. The growing number of PAN holders and revenue shows progress.
• Risk-based audit helps focus limited resources, and penalties and interest discourage evasion.

Conclusion: the effectiveness of self-assessment depends on literacy, honesty, good records and a strong audit system. These conditions are only partly present in Nepal, so the system is not yet fully effective. I agree with the statement to that extent, but I would not reject the system: the government should strengthen taxpayer education, simplify the law, extend digital systems and third-party information, improve audit and apply penalties consistently so that voluntary compliance grows.

Withholding tax means the tax deducted by the payer from certain payments at the time of making the payment and deposited with the Inland Revenue Department on behalf of the recipient (Sections 87 and 88 of the Income Tax Act, 2058).

Significance in revenue collection

1. Early and regular collection: tax comes in during the year as payments are made, which gives the government a steady flow of revenue.
2. Reduces evasion: since the tax is taken at source and the payer reports the payment, the recipient cannot easily hide the income.
3. Convenience and lower cost: the government collects from a few payers instead of many recipients, and the taxpayer pays in small amounts.
4. Widens the tax base: it reaches income that is difficult to trace, such as interest, dividend, rent and payments to non-residents.
5. Cross-checking: it provides information about payments that can be matched with the returns of the recipients.
6. Fewer disputes: final withholding closes the liability and avoids filing and assessment for some incomes, so administration is simpler.
7. Revenue from non-residents: tax can be collected on payments sent abroad, where the recipient is outside the reach of the tax office.

Five payments subject to final withholding in Nepal (the tax deducted is the final tax and the income is not included again in the return)

1. Dividend paid by a company: 5%.
2. Interest on deposits paid to a resident natural person, other than from business: 5%.
3. Winnings such as lottery, prizes and gambling: 25%.
4. Rent of building or land paid to a resident natural person: 10%.
5. Payments to non-residents such as royalty, interest, dividend and service fees, where the final tax is applied (generally 15% to 25%, depending on the item and treaty).

The retirement payments and capital gain on listed shares by natural persons are also taxed by final withholding.

Assumptions: the amount of staff welfare expenses is not legible in the question and is taken as Rs 50,000 (allowable); consultation fees were received after 15% TDS, so the gross fee is 170,000 / 0.85 = Rs 200,000 and TDS Rs 30,000 is an advance tax credit; the resident natural person is a single assessee for the 2081/82 slabs, with the life insurance deduction limited to Rs 40,000.

(a) Assessable (net) income from profession

Own life insurance premium is a personal item, not a business expense, and is claimed separately below.

Assessable income from profession = 1,610,000 − 675,000 = Rs 935,000.

(b) Statement of taxable income

Dividend (40,000), bank interest (130,000, which includes the 10,000 in other professional income) and lottery income (30,000) are subject to final withholding (5%, 5% and 25%), so they are not included.

(c) Tax liability

Less: TDS already deducted on consultation fees (30,000), the net tax payable is Rs 74,500.

Assumptions: the amounts are the gains on each disposal; resident natural person (single assessee) with the 2081/82 rates. The private car is a personal-use asset, not a chargeable asset, so no gain arises on it.

1. Total capital gain

2. Assessable income from investment

The capital gains are taxed separately at the flat rates above; only the natural resource payment goes to the slab computation.

3. Statement of taxable income (taxed at slab rates)

4. Tax liability

Assumptions: company tax rate 25%; plant is in Block D (15%); the input VAT is creditable, so it is not an expense; interest and rent are investment income; agricultural income is exempt; capital gain on listed shares by a company is taxed separately at 10%.

(a) Assessable income from business

1. Adjusted gross profit

2. Add: other business incomes

Gain on listed shares, interest, rent and agriculture income are not business income; the balance of bad debt recovered (28,000) was not allowed before and is not income.

3. Allowable expenses

Not allowed: VAT paid on purchase (200,000), dividend (20,000), book depreciation (125,000), provision for doubtful debt (10,000), advance income tax (100,000).

4. Donation: paid to the tax-exempt entity (40,000) and the public school (50,000) = 90,000, allowed up to the lower of 5% of adjusted taxable income (about 122,000) and Rs 100,000, so 90,000 is allowed. The gift to a beggar (25,000) is not allowed.

Taxable income and tax liability

(b) Three expenses not deductible in computing the taxable income of a business

1. Income tax paid, including advance income tax.
2. Fines and penalties for breach of any law, such as the penalty for late payment of bills.
3. Distribution of profit such as dividend, and personal or private expenses such as the gift to a beggar. (Provision for doubtful debts and expenses of a capital nature are also not deductible.)