Taxes are imposed under various legislations specific to a particular kind of tax. The major tax legislations in Nepal are as follows:
- Income Tax Act 2002
- VAT Act 1996
- Excise Act 2002
- Customs Act 1962
- Finance Act of each year, which supplements the above mentioned legislations.
Inland Revenue Department (“IRD”), a department under the Ministry of Finance (“MoF”) is entrusted with the role of administration of Income Tax Act, VAT Act and Excise Act whereas Department of Customs administers the Customs Act. The collection and administration of the tax is done under individual legislations separately. However, the customs office at every customs entry point collects the applicable excise duty and VAT on import of goods together with the applicable customs duty. Relevant authorities entrusted with administration and collection of tax is presented in the table above.
1. Corporate Income Tax
Corporate Income Tax is levied under the provision of the Income Tax Act, which provides for the imposition and collection of tax on the income of companies.
- Resident companies are subject to tax on their worldwide income.
- Non-residents are required to pay tax on their net income acquired or earned in Nepal or income with source in Nepal.
- Tax is levied on the net income after making deductions for certain expenses/allowances as specified in the Income Tax Act.
The following companies are considered to be resident in Nepal for tax purposes in any income year:
- Companies registered in Nepal (in which case the place of management will not be relevant).
- Companies registered outside Nepal, if their place of effective management is deemed to be in Nepal in such income year.
In addition, a foreign permanent establishment (“PE”) of a non-resident person situated in Nepal is also considered to be a resident of Nepal for tax purposes. The Income Tax Act defines “foreign PE” as a foreign company, trust, partnership that:
- Undertakes business fully or partly from any places in Nepal through an agent, other than an independent agent.
- Installs or uses its main machinery or equipment at any place in Nepal.
- Provides technical, professional or consultancy services for a period or periods aggregating 90 days during a 12-month period, from one or more places within Nepal.
- Engages in a construction, installation, establishment or supervision of a project for a period of 90 days or more from any place in Nepal.
The current corporate income tax rate varies depending on the nature of business of the company and residential status of the company. The tax rates for a resident company in Nepal is listed in the table below:
|Industry||Nature of business||Tax rates|
|General||Commercial trading/service entities and other business not falling under any other classification||25%|
|Manufacturing||Special industries qualifying under the Industrial Enterprises Act 1992 (except related to tobacco and alcoholic beverages)||20%|
|Financial||Banks and other financial institutions and insurance companies||30%|
|Petroleum||Entity engaged in petroleum business under the Nepal Petroleum Act 1983||30%|
|Tobacco Related||Entities producing products with tobacco as basic raw material and entities producing liquors, beers and similar other products||30%|
|Other special entities||Entities engaged in construction and operation of roads, bridges, tunnel, rope way, sky bridge, trolley bus, trams etc.Export income of an entity with source in NepalEntity engaged in construction or operation of public infrastructure and to be transferred to GoNEntity engaged in construction, generation or transmission of hydropower||20%|
A foreign PE is subject to corporate income tax at 25%. The repatriated income of a foreign PE of a non-resident person situated in Nepal for an income-year shall be taxed at the rate of 5%. The non-resident companies are taxed at 25% for their income acquired or earned in Nepal or income with source in Nepal,except for the companies providing shipping, air transport or telecommunications services in Nepal, which is taxed at 5%.
The income in relation to a business consists of profit or gain from conducting the business, which includes:
- Service fee;
- Amounts derived from the disposal of trading stock;
- Net gains from the disposal of business assets or liabilities;
- Gain on the disposal of all depreciable assets in a pool of assets;
- Gifts received in respect of the business;
- Amounts derived as consideration for accepting a restriction on the capacity to conduct business; and
- Amounts derived that are effectively connected with the business and that would otherwise be included in income from an investment.
In computing the income from business, all actual costs are deductible to the extent they are incurred during the year by the entity in deriving the income from the business. The following methodology is available for the valuation of inventory:
- Prime cost or absorption cost method in case of cash accounting system;
- Absorption cost method in case of accrual accounting system; or
- Choice between first-in first-out method and average cost method.
In computing a company’s taxable income, all actual expenses incurred in the particular fiscal year in acquiring or earning the income of that particular fiscal year are allowed as deductions for tax purposes subject to certain limitations. An illustrative list of deductible expenses and limitations provided in the Income Tax Act is presented below:
- Cost of trading stock (goods sold);
- Repair and improvement costs – amount exceeding 7 % of the value of the block of relevant depreciable assets in any income year is not deductible and can be added to the base amount of the relevant asset block at the beginning of next income year. This limitation does not apply to aviation companies;
- Pollution control expenses, allowed up to 50% of total taxable income of concerned entity without deducting such expenses;
- Research and development expenses, allowed up to 50% of total taxable income of concerned entity without deducting such expenses; and
Any debt if written off is not allowed as deduction. Similarly the Income Tax Act provides that certain expenses are not deductible like:
- Personal expenses;
- Income tax paid under the Income Tax Act, fines, penalties paid to any government;
- Expenses incurred in deriving any exempt income or any amount subject to final withholding tax;
- Distribution of profit;
- Cash payments in excess of NPR 50,000 by entities whose annual turnover exceeds NPR 2 million unless explicitly permitted;
- Capital expenditure including cost incurred on detailed feasibility study, exploration and development related to natural resources; and
- Foreign income tax
The Income Tax Act allows deduction of depreciation from the taxable business income. Each depreciable asset at the time of its purchase or use for business for the first time is placed in a pool of depreciable assets and the depreciation is computed following the reducing balance method on the value of pool of depreciable assets at the rate prescribed by the Income Tax Act. An overview of the pool of depreciable assets and the rates of depreciation prescribed by the Income Tax Act is presented below:
|Class||Assets Included||Depreciation Rates|
|A||Buildings, structures, and similar works of permanent nature||5%|
|B||Computers, data handling equipment, fixtures, office furniture and office equipment||25%|
|C||Automobiles, buses and minibuses||20%|
|D||Construction and earth moving equipment and any depreciable asset not included in another class||15%|
|E||Intangible assets other than depreciable assets included in class D||Rate in % calculated as divided by the useful life (rounded down to the nearest half year) of the asset in the pool at the time the asset is most recently acquired|
In the year of purchase, depreciation is available for the full year if an asset is added to the pool for more than 6 months. In other cases, depreciation is allowed at either two thirds or one third of the normal rate, if the addition is made for less than 6 or 3 months, respectively.
Amounts derived from the disposal of an asset or assets are reduced from the written down value of the relevant pool. However, the net book value (cost less depreciation accrued till the income year) can be claimed as expenses in case the machines, equipment and other machinery installed in a public infrastructure project which an entity constructs, operates and then transfers to GoN, and a project relating to the construction of a powerhouse and generation and transmission of power has to be replaced due to the assets being old or obsolete and thus useless. The book value of those assets remaining at the date of transfer to GoN can be claimed as expenses for such companies.
Manufacturing industries can claim additional depreciation at one third of the normal rate.
- The Income Tax Act allows tax losses to be carried forward for a period of seven years and set off against the profits of the consecutive years.
- In the case of public infrastructure projects to be built, operated and transferred to GoN or electricity projects relating to construction of powerhouses and generation and transmission of electricity any unrelieved loss of the past 12 years can be deducted against the profit of a particular year.
- Losses of entities engaged in petroleum business under the Nepal Petroleum Act 1983 can also be carried forward for 12 years.
- Entities which has availed full or partial tax exemption in any of the year on investment or business income are not entitled to carry forward losses incurred in those exempt years.
- However, tax losses may not be carried back for set-off against taxable income of an earlier period.
All entities are required to adopt uniform income year ending on mid July of each year and are required to file tax returns within 3 months thereof i.e. by mid of October of each year although extension of 3 months may be requested and is generally granted.
The accounts of a company are required to be audited by an auditor qualified under the laws of Nepal. Tax returns need to be certified by the auditor and submitted along with the audited accounts within the stipulated time.
However, small and medium taxpayer, having annual turnover not exceeding NPR 10 Million are waived from audit and they can self-attest their tax return.
The Income Tax Act requires the payment of corporate income tax in advance in 3 instalments during an income year as follows:
|Instalment||Payment Due Date||Tax amount|
|Ist||Mid of January||40% of the total estimated tax liability for the year|
|IInd||Mid of April||70% of the total estimated tax liability for the year|
|IIIrd||Mid of July||100% of the total estimated tax liability for the year|
Income-tax payments are made in the year in which the income is earned in the form of:
- withholding tax; and
- advance tax.
The taxpayer is required to compute the estimated tax liability for a particular year and make advance payments in three instalments spread over the year as shown in the above table. Income from services including contract payment is subject to tax withholdings that may be adjusted for the purpose of calculating advance tax.
Fines & Penalties
The Income Tax Act also provides for late fee and/or interest for failure to maintain records, non-submission of returns or late submission, non-payment or short payment of advance tax etc.
Submission of false or misleading returns will also attract a penalty.
The Income Tax Act
provides for fines including imprisonment for a term ranging from six months to
two years for not paying or evading tax.
Income year in Nepal starts from mid July of a year and ends on mid July of the following year.