Taxation in Nepal

Tax, is the payment we make to the government, for a goods and service. It is this money that government uses for all the functions it is expected to deliver in various like military, infrastructure- economic and social, basic amenities and welfare. Income is taxed in accordance with the provisions of Income Tax Act 2002.

In Nepal, the taxes are classified in to two types, direct taxes and indirect taxes. Direct Taxes are those which are paid directly by the individual or organization to the imposing authority. They are levied on income and profits.

Indirect Taxes are those which are not paid directly by the individual or organization to the imposing authority. They are levied on goods and services and not on income and profits.

Direct TAX
Indirect TAX

Direct TAX

Corporate Income Tax

The taxability of the income of a person in Nepal is based on two broad principles.

• For residents: on the basis of “Residence Principle”.

• For Non-residents: on the basis of “Source Principle”.

Note: An entity is resident in Nepal if it is registered /incorporated in Nepal. An individual is

Resident in Nepal if the person stays in Nepal for 183 days or more during an income year.

Tax Rate
Tax		Rate%
1	Corporate tax rate (General)	25%
2	Bank, financial institution, an entity carrying on general insurance business, telecommunication and internet service, money transfer, capital market business, securities business, merchant banking business, commodity future market, securities and commodities broker business, conducting transaction of cigarette, bidi, cigar, chewing tobacco, powder tobacco, gutkha, panmasala, liquor, beer or petroleum works pursuant to the Nepal Petroleum Act, 2040 (1983).	30%
3	Dividend tax rate	5%
4	Repatriation by Foreign Permanent Establishment (FPE) of a Nonresident, , (over corporate tax as equivalent to a company)	5%
5	Non- residents carrying international flights (on gross proceeds basis), earning from communication devices installed in Nepal	5%
6	Non-resident person providing water transport, air transport or telecommunication service that doesn’t depart or transmit from Nepal as not to reach another foreign country	2%
7	Natural Resident Individual who receives foreign currency by providing Software, digital services, business process outsourcing or information technology-based services of similar nature out of Nepal, (currently applicable for 2022/23 only)	1%

Deduction

All the expenses incurred to derive the income are allowed for taxation if they are incurred during the year in the name of the taxpayer itself. Expense for personal purpose and paid in cash (over NPR 50,000) or payment in respect of expenditure not mentioning PAN in invoice exceeding NPR 2,000 are not allowed as deduction. However, such limitation is not applicable when goods are directly purchased from a natural person related to agriculture, forest, animal and other household items.

Salary and wages expenses paid to employee or labor that does not have PAN are not allowed as deduction except for casual wages payment up to NPR 3,000.

Seed capital provided by any person up to 1 lakh rupees to a maximum of 5 startup business other than the associated person, is allowed for deduction at the time of calculation of taxable income.

Deduction	Limit
Interest to shareholders with controlling interest	Limit: interest income + 50% of adjustable taxable income determined without any interest income or interest expense. The amount or part thereof, which is in excess of limit, can be carried forward to the next income year. This provision will be applicable if the interest has been paid to shareholder (either a non-resident, concessional person, or exempt-entity) and their control is at least 25% in Nepali company.
Repair and Maintenance Expense	Limit: Up to 7% of the depreciation base of each pool of asset (exception, this ceiling is not applicable to Air-line Company if the repair expense is relating to overhauling of aircraft). The amount or part thereof, which is in excess of limit, can be capitalized in the asset in the beginning of subsequent Income Year and depreciation is allowed subsequently.
a. Pollution Control Cost	Limit: Up to 50% of adjustable taxable income from business. The amount or part thereof, which is in excess of limit, can be capitalized in the asset in the beginning of subsequent Income Year and depreciation is allowed subsequently. Practically, no one claims their deduction under this provision.
b. Research and Development Cost	Limit: Up to 50% of adjustable taxable income from business The amount or part thereof, which is in excess of limit, can be capitalized in the asset in the beginning of subsequent Income Year and depreciation is allowed subsequently. Practically, no one claims their deduction under this provision.

Depreciation Depreciation is allowed as per written down value basis and depreciable assets are categorized into various pools; the rate of depreciation is prescribed by Tax Authority.
S.N.	Assets	Depreciation Rate
1	Building Structure and Assets of similar structures including leasehold asset	5%
2	Computer, Data Processing Equipment, Furniture, Fixtures and Office Equipment	25%
3	Automobiles, Bus and Minibuses	20%
4	Construction and Earth Moving equipment, unabsorbed portion of Repair & Maintenance, Pollution Control Cost and Research and Development Cost, and assets not covered in any other pools.	15%
5	Intangible assets other than depreciable assets mentioned in	As per Life Span of Asset

Accelerated depreciation of 1/3 of applicable rate is also available in case of following entities:

Special Industries

Hydro Power and Power Generation

Tram and Trolley operators

Building and operation of ropeway, cable car, overhead bridge.

Building and operation of roads, bridge, subway, tunnel, railway, airport way.

Entities engaged in infrastructure development under BOOT scheme

Co-operative registered under Co-operative Act

Depreciation (Special Cases)

Purchase of power generating asset for its own business purpose shall claim 50% of the cost of asset as depreciation allowances during income year when asset is capitalized.

In case of Fiscal printer or electronic cash register to issue invoice shall claim 100% of the cost as depreciation in the year when such asset is purchased irrespective of the date of purchase.

Losses Carried Forward

Losses can be carried forward up to 7 years from the year of occurrence. However, in case of business extracting petroleum products, BOOT projects, Projects involved in Electricity, Powerhouse Generation and Transmission are allowed to carry forward up to 12 years. In case of long-term contract obtained from international bidding losses can be carried back.

Foreign Tax Credit

In case that a resident person has paid overseas income tax on its taxable income derived from sources outside Nepal, the income tax paid overseas can be adjusted against its tax payable in Nepal. However, the adjustable amount of overseas income tax cannot exceed the amount of income tax otherwise payable in Nepal in respect of non-Nepal sourced income. If the taxpayer wishes for deduction of foreign tax from its foreign income, the deduction is permitted.

Tax Avoidance Scheme

If a person makes any arrangement with the purpose of avoiding or reducing tax liability, Taxation Authority may, for the purpose of determination of tax liability, re-characterize the arrangement or part of it. Similarly, if a person does any transaction with a purpose to reduce tax liability entering into ‘Transfer Pricing’ or ‘Income Splitting’ arrangement, Tax Authority has the power to re-characterize and assess the tax.

Transfer Pricing

Nepal tax laws has provisions on Transfer Pricing which covers transaction between “associated person”. In any arrangement between persons who are associates (related parties), the IRD may, by notice in writing, distribute, apportion, or allocate amounts to be included or deducted in calculating the income between the persons as is necessary to reflect the taxable income (or tax payable) that would have arisen for them if the arrangement had been conducted at arm’s length.

Double Taxation Avoidance Agreement (DTAA)

Nepal has entered into tax treaties with 11 countries (Austria, Bangladesh, China, India, Republic of Korea, Mauritius, Norway, Pakistan, Qatar, Sri Lanka and Thailand). The purposes of tax treaties are to avoid international double taxation on the same income and to prevent tax avoidance.

Cooperative societies

Cooperative societies registered under Cooperative Act, 2074 and not involved in transactions exempted under section 11(2) shall be levied tax as follows:

Cooperatives operating in Municipality areas	7.5%
Cooperatives operating in sub- metropolitan areas	10%
Cooperatives operating in metropolitan areas	!5%

Personal Income Tax

An individual is resident in Nepal if he resides for a period of 183 days or more in income year (mid-July to mid-July basis). A person who is not resident of Nepal is non-resident individual.

For Resident Person -FY 2022/23
Assessed as Individual		Assessed as Couple
Income Level (NPR)	Tax Rate	Income Level (NPR)	Tax Rate
Up to 500,000	1%	Up to 600,000	1%
Next 200,000	10%	Next 200,000	10%
Next 300,000	20%	Next 300,000	20%
Next 1,000,000	30%	Next 900,000	30%
More than 2,000,000	36%	More than 2,000,000	36%

For Non-Resident Person FY 2022/23
Source of income	Tax Rate
Normal Transactions	25%
Through shipping, air or telecom services, postage satellite and optical fiber project	5%
shipping, air or telecom services through the territory of Nepal	2%
Repartition of profit by foreign permanent establishment	5%

For Resident Person -FY 2022/24
Assessed as Individual		Assessed as Couple
Income Level (NPR)	Tax Rate	Income Level (NPR)	Tax Rate
Up to 500,000	1%	Up to 600,000	1%
Next 200,000	10%	Next 200,000	10%
Next 300,000	20%	Next 300,000	20%
Next 1,000,000	30%	Next 900,000	30%
Next 3,000,000	36%	Next 3,000,000	36%
Above 5,000,000	39%	Above 5,000,000	39%

*Does not apply to Pension Income, Person contributing to SSF, Proprietorship

For Non-Resident Person FY 2023/24
Source of income	Tax Rate
1. Income earned from normal transactions.	25%
a. Income earned from providing shipping, air transport or telecommunication services, postage, satellite, optical fiber project.	5%
b. Income earned providing shipping, air transport of telecommunication services, through the territory of Nepal.	2%
C Repartition of profit by foreign permanent establishment	5%

Withholding taxes
Payment Subject to Withholding	Withholding Tax Rate (%)	Final Withholding (Yes or No)
If the payee is non-resident	As below	Always final
Interest, Natural Resource, Royalty, Commission, Service Fee, Sales Bonus payment by a resident person having source in Nepal	15%	No
Resident employment company making payment of employment related commission to non-resident	5%	Yes
Payment of interest on deposit to Life Insurance Company by resident Bank and Financial	5%	Yes
Payment of interest on loan provided to each other by Cooperative bank and Cooperatives	No TDS
Lease payment of aircraft	10%	No
Service payment to a resident person registered under VAT Payment of more than NPR 50,000 under a contract or agreement	1.5%	No
House rent payment having source in Nepal	No federal tax, but there is local tax, rate may vary to local authorities (indicative rate is 10%)	Yes
Rent other than house rent	10%	No
Dividend, Gain from Investment Insurance	5%	Yes
Windfall Gain	25%	Yes
Payment for service to a non-resident company	5%	Yes
Payment of repair & maintenance of contract or agreement to a non-resident company	5%	Yes
Payment of re-insurance premium to a non-resident	1.5%	Yes
Payment for the carriage service and vehicle provide in rent for carriage service	2.5%	No
Resident BFIs making payment of Interest on loan taken from foreign banks or other financial institutions in foreign currency and investing in specified areas prescribed by NRB.	10%	Yes
Resident BFIs on providing foreign exchange facility for language test or standardized test fee to students going abroad	15%	Yes
Reward/rebate awarded to consumer making payment through electronic payment medium including payment card, digital wallet, mobile banking on purchase of goods or services	No TDS
Payment of registration fee, education fee, and exam fee to foreign university or school	5%	Yes
Receipt of payment in foreign currency by providing software or similar electronic service outside Nepal	1% (Deducted by banks and financial institutions as advance Tax	No
Interest on loan taken in foreign currency from foreign banks or other financial institutions by reservoir or partial reservoir hydropower project of more than 200 MW and whose financial closure No TDS have been completed within Chaitra end, 2080 B.S
Other payment to non-resident	As per written information by IRD	Yes
Consideration distributed to individual by mutual fund	55	Yes
Payment for use of satellite, bandwidth, optical fiber, tools related to communications or electricity transmission line	10%	No
Royalty payment to a resident individual for literary article and composition	1.5%	No
Note: If any contributor transfers his contribution from approved retirement fund to social security fund established under Contribution Based Social Security Fund Act, 2074 (2017 CE) within Chaitra End, 2078 (Mid-April 2022), then no TDS shall be applicable under Section 88 on such amount. Payment for rent of vehicle or transport vehicle and payment for carriage service of a natural person except of sole proprietorship firm shall be treated as payment from which tax is withheld finally.

Capital Gain Tax (Gain on the sale of Shares)
Seller	Tax collected at source		Annual tax rate
Seller	Listed Entity	Unlisted entity	Annual tax rate
Resident – individual	Ownership of 365 days or more – 5%	10%	Same as TCS
Resident -entity	10%	15%	Corporate tax rate
Other	25%	25%

Gain on Transfer of Land & Building
Seller	Tax collected at source		Annual tax rate
Seller	Owned less than 5 Years or more	Owned 5 Years or more	Annual tax rate
Resident – individual	7.5%	5%	Same as TCS
Resident -entity	1.5%	1.5%	Corporate tax rate

Change of Control

Where there is change of 50% or more in the underlying ownership of an entity as compared with its ownership 3 years previously, the entity shall be treated as disposing off any assets and any liabilities owned by it at the market price. Where there is change in ownership during the Income Year of an entity, the parts of the Income Year before and after the change in ownership are treated as separate Income Years.

Compliance Requirement

Income Tax Return

Within three months from the end of Income Year. If application is made to Tax Office for extension, IRD may extend such notice for maximum of three months.

Any error on Income Tax Return submitted can be rectified by submitting revised Income Tax Return within 30 days from the date of submission of erroneous tax return.

Estimated Tax Return

Taxpayer needs to file estimated tax return till Mid-January.

They need to pay installment tax on the basis of estimated tax liability

Within Mid-January (Poush end) of Income Year (First Installment) – 40% of estimated tax liability

Within Mid-April (Chaitra end) of Income Year (Second Installment) – 70% of estimated tax liability

Within Mid-July (Ashadh end) of Income Year (third Installment) – 100% of estimated tax liability Estimated tax liability, for this purpose, should be not less than 90% of tax for that year. An additional fine of 15% p.a. is charged in case a lesser amount of estimated tax is deposited as a result of an estimation error of more than 10% as compared to the final tax liability.

Tax Assessment

Assessment system is based on Self-Assessment. However, an assessment under Self-Assessment scheme may be subject to review and amendment, termed as “Re-assessment” or “Amended Assessment”, by Tax Authority which can be performed within four years from the due date of submission of Income Tax Return. For example, an amended assessment of Income tax return for FY 2022/23 may be issued by mid-October 2027.

Advance Ruling

If there is ambiguity in application of any issue as per Income Tax Act, there is provision of making application for advance ruling to IRD and the instruction issued by IRD is binding to the applicant.

Appeal

If the taxpayer is not satisfied with the decision of amended assessment by Tax Authority, the taxpayer has a right to apply for administrative review by depositing one-fourth of disputed amount and further to Revenue Tribunal by depositing 100% of undisputed tax and 50% of disputed tax, charges and interest as a cash deposit or a bank guarantee (amount deposited for administrative review in Inland Revenue Department shall also be considered).

Digital Service Tax (DST)

To bring the foreign technology-based companies into the purview of Nepalese tax jurisdiction, the concept of Digital Service Tax (DST) has been started in Nepal under the administration of the Inland Revenue Department. Digital service tax of 2% on transaction value shall be collected on digital services provided by non-residents to customers in Nepal. Following are the major provisions relating to DST:

Tax shall not be levied for digital services provided to consumers in Nepal up to transaction value of two million rupees per income year. However, if transaction exceeds more than two million rupees, tax shall be levied on entire transaction.

Foreign services providers shall file the return and deposit tax amount in each fiscal year.

Taxable person shall file an application to the office for getting Permanent Address Number (PAN) within 30 days of crossing the threshold.

Income on which digital service tax has been deposited shall not be taxable under the Income Tax Act, 2058.

Fine of 0.1% per annum of the transaction value to be collected for the delay in filing return and interest at the rate of 15% per annum of payable amount to be charged on delay in payment of tax. A fine of 25% of the deficit tax amounts to be levied in case of under deposit of tax or fraudulent activities.

The Inland Revenue Department has issued the “Procedures relating to Digital Service Tax, 2022” applicable from 17 July 2022.

Indirect TAX

Value Added Tax (VAT)

Applicability: VAT is applicable on supply of goods or services;

• supplied within Nepal,

• imported into Nepal, and

• exported from Nepal

Some goods or services which are of necessities and agro-products are exempted and some are zero rated (export of services).

Tax Rate – Single rate 13%

Registration

Person supplying the goods crossing threshold of NPR 5 million and supplying services or goods & services both crossing the limit of NPR 2 million are required to be registered under VAT.

Small vendors to the extent of threshold may voluntarily register.

VAT Records

VAT paid on purchases relating to the business, excluding VAT paid on food, beverage, entertainment, and petrol used for vehicles (no-credit items), are allowed of input tax credit within one year from the date of transaction. In case of VAT paid on purchase of automobiles, only 40% of VAT payment is allowed for credit.

VAT Credit and Refund

Input tax credit of a tax period which could not be adjusted against next four consecutive months, the taxpayer can claim the refund. Similarly, in case of more than 40 percent of export out of total sales in a tax period is eligible for refund.

Such refund shall be requested within 3 years from the end of tax-month.

VAT Return

Every registered taxpayer is required to submit VAT return within 25 days from the end of Nepalese Calendar month. However, in case brick industries, printing, printing and electronic publications or broadcasting houses, hotel, tourism, cinema hall, and transporter desire, the department may fix tax period of four months.

Facilities

Bank guarantee facility is available for VAT payable on import of raw materials solely usable for production of exportable goods. For this benefit, industry shall have export record of more than 40% of its sales during previous 12 months and domestic value addition of at least 10%.

Tax Assessment

Assessment system is based on Self-Assessment. However, an assessment under Self-Assessment scheme may be subject to review and amendment by Tax Authority which can be performed within four years from the date of submission of VAT Return. However, tax officer shall not conduct reassessment of tax where, the revenue tribunal or other authorized court has already amended or reduced the determined tax. But such bodies may order for reassessment of tax, and tax officer may determine the tax.

Penalty for Digital service providers

Twenty thousand rupees for each time for the violation of an order given by the tax officer to register.

Advance Ruling

If there is ambiguity in application of any issue as per VAT Act, there is provision for making application for advance ruling to IRD and the instruction issued by IRD is binding to the applicant.

Appeal

If the taxpayer is not satisfied with the decision of amended assessment by Tax Authority, the taxpayer has a right to apply for administrative review by depositing one fourth of disputed amount and further to Revenue Tribunal by depositing entire of the undisputed amount of tax and fifty percent of the disputed amount of tax and fine as cash deposit or bank guarantee (amount deposited for administrative review in Inland Revenue Department shall also be considered).

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Taxation in Nepal

Direct TAX

Interest to shareholders with controlling interest

Repair and Maintenance Expense

a. Pollution Control Cost

b. Research and Development Cost

Indirect TAX