INCOME TAX- NEPAL
The Income Tax Act, 2058 became effective since Chaitra 19, 2058. The Act governs all income tax matters and is applicable throughout the Kingdom of Nepal. It is also applicable to residents residing wherever outside Nepal.
The Act imposes tax on those activities contributing toward the creation of wealth. Wealth is created with the help of labor, capital and a capital-labor mix activities that generate income from employment, investment and business respectively. The Act makes broad classification of income encompassing almost all income-earning activities. They are:
- Employment (an individual's remuneration income from an employment for an income year)
- Investment (profits and gains of a person from conducting an investment for an income year)
- Business (profits and gains of a person from conducting a business for an income year)
Income and gains are ascertained only after deducting the corresponding expenses. The income from each business and investment needs to be calculated separately.
TAXING SUBJECTS (PERSONS)
The taxing subjects are the taxpayers on whom income tax is imposed and also called as persons. A person can be a natural person, who is an individual or a couple but includes also a proprietorship, or it can be an artificial person, i.e. an entity. An entity means a partnership, trust, company, and foreign permanent establishment or government body.
The Act distinguishes between resident and non-resident persons. A resident person is an individual whose normal place of abode is in Nepal and who is present at any time of the year, or who is present in Nepal for 183 days or more, or who is an employee of His Majesty's Government of Nepal posted abroad at any time during the year.
A trust is a resident person if it is established in Nepal, or has a resident person as a trustee, or is controlled by a resident person. A Company residing in Nepal and if it is incorporated under the laws of Nepal or has its effective management in Nepal. Partnerships are always resident persons. Permanent establishments are places where a person carries on a business and are subject to tax if they belong to a non-resident person and are situated in Nepal.
For every person the tax is imposed and calculated for an income year. The income year corresponds with Government's Fiscal Year, i.e. the period from the start of Shrawan of a year to the end of Ashad of the following year (mid-July to mid-July).
The assessable income of a person for an income-year from any employment, business, or investment is:
- in the case of a resident person, the person's income from the employment, business, or investment of the year irrespective of the location of the source of the income and
in the case of a non-resident person, the person's income from the employment, business, or investment of the year but only to the extent the income has a source in Nepal.
The assessable income does not include any income exempt such as income from non-business agriculture and agriculture business conducted in the land, income of cooperative society from business mainly based on agriculture and forest products and cooperative saving and credit scheme based on rural community; and income of approved retirement fund.
The taxable income of a person for an income-year is equal to the amount as calculated by subtracting reduction, if any, claimed for the year gifts to an exempt organizations retirement contribution to an approved retirement fund from the total of the person's assessable income for the year from different income heads.
The taxable income of a resident individual for an income-year will be taxed at the following rates:
|Up to Rs.85, 000
||- Not taxable|
|From Rs.85,000-upto Rs.1,55,000
||- @ 15 %|
|Above Rs. 1,55,000
||- @ 25% plus Rs.11250.|
The taxable income of a couple, if they chose to be treated as a couple will be taxed at the following rates;
|Up to Rs.100, 000
||- Not taxable|
|From Rs.100, 000-upto s.1, 75,000
||- @ 15 %.|
|Above Rs. 1,75,000
||- @ 25% plus Rs.11250.|
Any individual or couple having pension income can enjoy 25 percent of the normal exemption limit as an additional basic exemption.
Any individual working in prescribed remote area is entitled to deduct prescribed amount as remote area allowance from taxable income.
Any individual is entitled to deduct the following amount from taxable amount, if he is having investment insurance policy:
"Rs. 10,000 or 7% of insured amount or the actual premium paid, which ever is less."
Special duty on taxable income is reduced to 1.5%.
For the purposes of the Act, net gains from the disposal of non-business chargeable assets will be taxed at the rate of 10 percent.
The presumptive tax for individuals conducting small businesses (who have a turnover of Rs.1.2 million or an income of Rs.120, 000) in the Metropolitan or Sub-Metropolitans, Municipalities and anywhere else in Nepal amounts to Rs 2,000 Rs. 1,500 and Rs.1,000 respectively.
The taxable income of a non-resident individual is taxed at the rate of 25 percent.
The taxable income of an entity will be taxed at the rate of 25 percent unless prescribed otherwise.
The taxable income of a bank, or financial institution, or general insurance business, or an entity conducting petroleum work under Petroleum Act, 2040 for an income-year is taxed at the rate of 30 percent.
Gain from Lump sum retirement payment made by an approved retirement fund or HMG/N is taxed at the rate of 6 percent as a final withholding tax.Gain is calculated by deducting 50 percent of the payment or Rs. 500,000 whichever is higher from the total lump sum payment.
The taxable income derived by an individual from special industry or export business will be taxed at the rate of 20 percent.
The taxable Income derived by an entity engaged in an industrial enterprise or export business or derived from operating any road, bridge, tunnel, ropeway, or flying bridge. Construction business or any trolley bus or tram manufacturing business is taxed at the rate of 20 percent.
The taxable income of an entity engaged in power generation, transmission, or distribution is taxed at the rate of 20 percent.
-The taxable income of an estate of a deceased resident individual or trust of an incapacitated resident individual will be taxed at the normal tax rate as though the estate or trust was a resident individual.
The repatriated income of a foreign permanent establishment of a non-resident person situated in Nepal will be taxed at the rate of 10 percent.
The taxable income of a non-resident person deriving income from providing shipping, air transport or telecommunication services in Nepal will be taxed at the rate of 5 percent.
-The taxable income of an entity wholly engaged in the projects conducted by any entity so as to build public infrastructure, own operate and transfer it to the HMG/N in power generation, transmission, or distribution for an income-year shall be taxed at the rate of 20 percent.
The following amounts are exempt from tax:
- Amounts derived by a person entitled to privileges under a bilateral or a multilateral treaty concluded between His Majesty's Government and a foreign country or an international organization;
- Amounts derived by an individual from employment in the public service of the government of a foreign country, provided that, the individual is a resident person solely by reason of performing the employment or is a non-resident person; and the amounts are payable from the public funds of the country;
- Amounts derived from public fund of the foreign country by an individual who is not a citizen of Nepal or by a member of the immediate family of the individual.
- Amounts derived by an individual who is not a citizen of Nepal from employment by His Majesty's Government on terms of a tax exemption;
- Allowances paid by His Majesty's Government to widows, elder citizens, or disabled individuals;
- Amounts derived by way of gift, bequest, inheritance, or scholarship, except as required to be included in calculating income under this Act;________
- Amounts derived by an exempt organization by way of gift; or other contributions that directly relate to the organization's function, whether or not the contribution is made in return for consideration provided by the organization, and___________
Pension received by a Nepali citizen retired from the army or police service of a foreign country provided the amounts are payable from the public fund of that country.
For tax purposes, an individual is required to maintain his accounts on a cash basis in calculating the individual's income from an employment or investment and a company is required to maintain its accounts on an accrual basis within the basic framework of generally accepted accounting principle.
Bad debts are allowed to be written off if a debt claim of a bank or financial institution has become bad debt as determined in accordance with the prescribed standards.
Inclusions and deductions under a long-term contract are calculated according to the percentage of the contract completed during the year.
CAPITAL GAIN TAX
The Act has introduced capital gain tax. However, the Act does not cover all such gains i.e. only those gains, which are received from the disposal of business assets or liabilities and those from the disposal of non-business assets of an investment of a person, which are regarded as chargeable and will be taxed accordingly.
Business assets comprise assets to the extent to which they are used in a business. Non-business chargeable assets mean securities or an interest in an entity as well as land and buildings. Both definitions exclude depreciable assets or trading stock.
Not included in non-business chargeable assets are also private residences of an individual owned and lived in continuously for 3 years or more if they are not disposed of for more than Rs.10 million. Since profits and gains are different bases of taxation they need to be calculated separately.
The tax is imposed on the net gains, which are the total gains minus the total losses including unrelieved losses for the current income year and those from a previous income year, which thus can be carried forward forever. Gains and losses are defined as the difference between incoming and outgoing for the asset or liability.
SPECIAL PROVISIONS FOR INDIVIDUALS
A resident natural person and a resident spouse of the person may, by notice in writing, elect to be treated as a single individual for a particular income-year.
Each spouse of a couple making an election as above with respect to an income-year is jointly and separately liable with the other spouse for any tax payable by the couple for the year.
A resident individual may claim a medical tax credit for an income-year not exceeding Rs 750 for any approved medical costs paid by the individual him/herself or through others during the year in respect of the individual.
Tax credit limit of Rs. 750/- is calculated by multiplying the total approved medical cost by 15%. Any unrelieved medical costs are carried forward. Medical Tax Credit facility is equally applicable to all individual taxpayers.
SPECIAL PROVISIONS FOR ENTITY
An entity is liable to tax separately from its beneficiary who is defined as any person having an interest in an entity. Unless stated otherwise in the Act, transactions between an entity and its managers and beneficiaries are recognized.
The profit of entities can either be retained or distributed to its beneficiaries such as shareholders. The entity can also repay capital or grant collateral benefits to them. Collateral benefit, which can be characterized as a kind of hidden distribution of profit. Distributions of profits and collateral benefits are dividends representing a return of interest in capital, and need to be distinguished from repayment of capital, which is the return of the capital itself. For that the Act provides a profit first rule saying that a distribution is a return of capital to the extent that it is not a distribution of profits. If the entity repays capital it is free of tax.
Dividends of a resident company are taxed to the company's shareholders in the form of a final withholding tax. The re-distribution of such taxed dividend is tax free.
Dividends of a non-resident entity, which are distributed to a resident beneficiary, are taxed by inclusion in calculating the income of the beneficiary.
For taxation purposes, all payments and gains need to be considered on the basis of the source country of the payment. Details of the circumstances under which the source rules are defined are given in the Act.
Tax is imposed on the repatriated income of a foreign permanent establishment of a nonresident person situated in Nepal.
A non-resident person carrying on a business of charterer or air transport operator are taxed at a flat rate on their amounts derived from carriage of passengers, mail or goods which embark in Nepal. The provision is also applied to nonresident persons who transmit messages by any technical means if the apparatus is established in Nepal.
A tax credit may be claimed for any foreign income tax paid with respect to foreign source income. The tax credits are calculated separately for assessable foreign income source in each country and will not exceed the average rate of Nepal income tax applied to the assessable foreign income.
RETURNS AND ASSESSMENTS
In general, every taxpayer should file a signed return of income not later than 3 months after the end of each income year.
No returns are required from taxpayers who have no tax liability for the year or are resident individuals who have income exclusively from an employment having a source in Nepal, who have only one resident employer at a time during the year and who do not claim a deduction of their taxable income by gifts to exempt organizations.
The Department may amend an assessment within 4 years in order to adjust the assessed person's liability to tax in such manner as, according to the Department's best judgment, is consistent with the intention of the Act. An assessment may be amended at any time in cases of fraud.
Where the department makes a jeopardy or amended assessment, it will serve a written notice on the taxpayer.
REVIEW AND APPEAL
A taxpayer who is aggrieved by a review able decision may file an objection within 30 days after the decision is made. In doing so, such Taxpayer has to deposit 50% of due amount. The Department may extend this period for another 30 days upon request. The Department may stay or amend or do necessary corrections with regard to these review able decisions. If the Department fails to serve a taxpayer with a notice of an objection decision, within 90 days, the taxpayer may elect to treat the Department as having refused his objection and appeal to the Revenue Tribunal.