This article is about the types of tax and tax laws in Nepal.
Introduction
Taxation plays an important role in any country’s economy. Understanding the local tax laws is essential for businesses and individuals operating in Nepal. This guide provides an overview of the tax system in Nepal, including the types of taxes, tax rates, compliance requirements, and the roles of various tax authorities.
Taxation in the Nepali Constitution
The Constitution of Nepal grants the federal government the power to impose taxes on income, customs, and excise. Provincial governments can impose taxes on property, land, and entertainment. This division ensures that both levels of government have the necessary resources to fulfill their responsibilities.
Types of Taxes in Nepal
Nepal’s tax system includes both direct and indirect taxes:
Direct Taxes
Direct taxes are levied on the income or profits of individuals and entities. The main direct tax in Nepal is the income tax.
Income Tax
Individual Rates: Income tax rates for individuals range from 1% to 39%, depending on income levels.
Corporate Rates: Corporate income tax rates vary from 20% to 30%, depending on the sector. For example, the normal corporate tax rate is 25%, but sectors like hydropower enjoy a concessional rate of 20%, while banking is taxed at 30%.
Non-Listed Companies: Capital gains from the sale of shares of non-listed companies are subject to withholding tax at 10% for individuals and 15% for others. The entire capital gain is then taxed at the applicable corporate tax rate.
Dividend Tax
Dividends are taxed at a flat rate of 5%.
Indirect Taxes
Indirect taxes are levied on the consumption or transaction of goods and services.
Value Added Tax (VAT)
VAT is imposed at 13% on most goods and services.
Excise Duty
Excise duty applies to certain goods such as alcohol, tobacco, and petroleum products, with rates varying based on the type and quantity of goods.
Customs Duty
Customs duty rates range from 0% to 40%, depending on the product type and its origin.
Luxury Tax
Introduced in 2021/22, the luxury tax is levied at 2% on high-end goods and services like precious metals and foreign tour packages.
Non-Tax Revenues
Besides taxes, the government collects revenue from non-tax sources such as fees, fines, penalties, royalties, dividends, and grants. These non-tax revenues contribute a small portion to the total revenue collection.
Tax Compliance for Businesses
Businesses operating in Nepal must adhere to several compliance requirements:
Registration:
Businesses must register with the Department of Industry and obtain a business license.
A Tax Identification Number (TIN) from the Inland Revenue Department is mandatory.
VAT registration is required if annual turnover exceeds NPR 2 million.
Tax Returns
Regular tax returns must be filed, and proper accounting records must be maintained.
Authorities Regulating Taxes
The main tax authorities in Nepal include:
Inland Revenue Department (IRD)
The IRD administers and collects direct and indirect taxes (excluding customs duty). It also issues directives and circulars to implement tax laws and regulations.
Department of Customs (DOC)
The DOC administers and collects customs duties. It issues directives and circulars for customs laws and regulations.
Nepal Rastra Bank (NRB)
The NRB, the central bank, also acts as a Financial Information Unit (FIU), analyzing financial information related to money laundering and terrorism financing.
Office of Auditor General (OAG)
The OAG audits the accounts and financial transactions of public entities, ensuring compliance and effectiveness in tax administration.
Tax Position for Foreign Entities
Tax Resident
Companies are considered tax residents in Nepal if:
They are registered in Nepal.
They are registered outside Nepal but have their place of effective management in Nepal.
Tax residents are taxed on their worldwide income, while non-residents are taxed only on income sourced in Nepal.
Non-Tax Resident
Non-resident businesses are taxed on income sourced in Nepal. They are subject to:
Corporate tax at 25%
Dividend tax at 5%
Tax on remitted income by permanent establishments at 5%
Filing and Payment Procedures
Taxpayers must follow these steps to file and pay taxes:
Method of Payment
Identify designated places for tax payment. In their absence, taxes can be paid at recognized banks.
Bank Payments
Inform the Department of payments made through banks. Payments can be made via cash, cheques, drafts, or electronic transfers.
Order of Payment
If a cheque fails to clear, the taxpayer must reimburse the Department for all expenses. The Department decides the priority of payments if multiple taxes, interests, and fees are owed.
Conclusion
Understanding tax laws in Nepal is essential for businesses and individuals to ensure compliance and avoid penalties. The tax system in Nepal includes various direct and indirect taxes, each with specific rates and regulations. By following the proper registration procedures, filing accurate tax returns, and making timely payments, taxpayers can navigate the complexities of the Nepali tax system.
