Introduction

Nepal levies a variety of direct and indirect taxes such as income tax (corporate income tax and personal income tax), value added tax, excise duty, customs duty, property related tax (land registration tax, property transfer tax) and others. Some of the major provisions of such taxes is given below:

Direct Taxes

Income Year: Mid-July of one year to Mid-July of another year (Shrawan to Ashadh as per Nepali Calendar)

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 stays in Nepal for 183 days or more during an income year.

Tax Rate

COVID-19relaxation on corporate tax

Rebate on rate of taxes for FY 2078.79 (2021/22CE) to tax payer affected by COVID-19:

Any entity having turnover up to NPR 3 million – Waiver of 75% on income tax

Any entity having turnover between Rs 3million to Rs 10 million – Waiver of 50% income tax.

Hotels, Travels, Trekking, motion picture business (production, distribution and screening), party palace, Media Houses or Transportation with turnover more than 10 million most affected by COVID-19 pandemic in fiscal year 2021/22 – 50% of exemption on taxable income.

Tax Exemptions and Concessions

Further concessions provided by Income Tax Act, 2058 are as follows:

Note:

Where a person qualifies for more than one concession forthe same income, the person shall be entitled to one concession for that income at his discretion.

Donation made by a person to a tax-exempt organization is allowed as a reduction to the minimum of NPR 100,000 or 5% of Adjustable Taxable Income, whichever is lower. However, if any company has contributed to Prime Minister Relief Fund or Re-construction fund, the full amount of the contribution is deductible from Taxable Income.

Deductions

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 who 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 1lakh 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.
Apart from general deductions following deduction are capped with as follows:

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.

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.

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.

Note: Adjustable taxable income means taxable income without deducting the expense under consideration and donations, if any.

Depreciation

Depreciation is allowed as per written down value (WDV) basis and depreciable assets are categorized into various pools; the rate of depreciation is prescribed by Tax Authority as follows:

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

Special Cases of Depreciation

• 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.

The IRD may:

• Re-characterize the source and type of any income, loss, amount, or payment; or,
• Allocate costs, including head office expenses, incurred by one party in conducting business with their associate or associates (related party or related parties) based on the comparative turnovers of the businesses.
• Formalities for appropriate-adjustment will be applicable for the taxpayer from the countries having tax treaty with Nepal.

The tax law, in brief, states that transaction should be at arm’s length price. Presently, there is no filing requirement or requirement to prepare a detail Transfer Pricing Study Report in Nepal. Accordingly, no local standard requirement or compliances to be done. However, IRD is working on the Transfer Pricing Issue and very soon there will be some specific provisions regarding Transfer Pricing in Nepal.

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:15%

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 2079/80(2022/23 CE)

For Non-Resident Person

Note:

The following amounts are deductible:

• Contribution to Retirement Payment up to one-third of assessable income to maximum of NPR 300,000 (in case of Social Security Fund contribution ceiling NPR 500,000)
• Donation to tax exempted entities up to maximum of NPR 100,000
• Insurance premium up to maximum of NPR 40,000
• Health Insurance premium up to NPR 20,000
• Remote area allowances up to maximum of NPR 50,000
• 25 percent of the exemption limit allowed to resident natural person having pension income
• House insurance premium up to NPR 5,000
• Foreign Allowance – 75% of Foreign Allowance
• Pension -25% of Taxable income
• Handicapped Allowance- 50% of first tax slab

Further, medical tax credit up to maximum of NPR 750 is allowed and remaining can be carried forward. Additionally, 10% tax rebate is allowed to female individual.

Withholding Taxes

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

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 2022/23may 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)

Tax amnesties as per Finance Ordinance, 2079 (2022)

If a person having taxable income in the past files a tax return and pays tax for FY 2075/76, 2076/77, and 2077/78 after obtaining PAN within the end of Poush 2079 (14 January 2023), fines and penalties shall not be charged along with a waiver of tax compliance for FYs before FY 2075/76

Transport service providers allowed a deduction of payment made to natural persons without PAN for renting cargo transport if TDS has been deduction on such payment under Section 88 of Income Tax Act, 2058

Joint ventures registered as per Value Added Tax Act, 2052 and failing to pay VAT and submit tax returns up to 2078 Chaitra shall be waived applicable fines, additional charges and 50 % of interest if the joint venture submits the tax return along with tax as per tax return and 50 % interest within Poush end 2079. If any join venture has submitted the tax return up to Chaitra 2078 but tax has not been paid, additional charge and 50 % interest shall be waived if due amount of tax and 50 % of interest is paid within Poush end 2079.

Penalty and the remaining delay charges shall be waived in case of the licensee under Excise Act, 2058 who had failed to furnish excise returns and pay excise duty within Chaitra end 2078 files excise returns and pay outstanding excise duty and 50% of delay fees within Poush end 2079 (14 January 2023). This waiver facility is also available to the licensees who have furnished returns up to Chaitra end 2078 without a deposit of the applicable excise amount.

Industries having excise license can claim a deduction of stock cost outstanding for more than 15 years, whose cost deduction is already recommended by Inland Revenue Department through physical inspection and report but the pending decision for stock cost deduction, by applying with the respective Inland Revenue Office within Poush end 2079 (14 January 2023).

Resident person earning foreign exchange by providing services based on information technology such as business process outsourcing, software programming, cloud computing shall be levied only 1 % tax as per Income Tax Act 2058 on income earned in foreign currency.

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 service 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 amount 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 Taxes

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

Purchase book, Sales Book and VAT records, either manual or computerized (complying permission procedures), are the basic records to be maintained by a registered person. The retention period is six years.

VAT Credit and Refund

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.

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.

Digital Services by Non-Resident Service Providers

1. Non-resident person having a business of digital services and whose taxable transaction for the past twelve months exceeds Twenty Lakhs must be registered under VAT Act.
2. The registration procedure for the Non-Residents providing digital services shall be as determined by the department.
3. If the business of a Non-Resident person providing electronic services registered under subsection (1) is closed, the registration shall be canceled as per the procedures determined by the department.

Note:

“Digital Services” means the following services provided through the internet to the consumer for which information technology is essential and is provided automatically with minimal human intervention:

a) Advertising services

b) Cinema, Television, Music, Over the Top (OTT), and membership in any other services,

c)Data Collection Services

d) Cloud Services

e) Gaming Services

f) Mobile Application Services

g) Online Market Place services and other related services.

h) Supply and updating of software

i) Downloading services including facts, pictures, etc.

j) Counselling, skill development and training services

k) In addition to clauses (a) to (j), other related services

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)

Excise Duty

Applicable Act

Excise Act 2058 (2002)& Excise Rules 2059 (2003) and amendment made by Finance Act from time to time.

Applicability

Excise Duty is applicable to goods/services produced/imported into Nepal. Relaxation and exemption are mentioned to certain goods produced in Nepal.

Tax Rate

Specific to individual item based on specific rate or ad-valorem basis.

Valuation

On production – Factory Price

On import–Value for customs purpose plus customs duty

Licensing

For the items where excise duty is levied, no one can manufacture, import, sale or store a product without taking license. License taken is valid for one year and has to be renewed by paying renewal fee.

Excise Duty Credit

Excise duty paid on purchase of raw materials and auxiliary materials allowed. No excise duty credit is allowed to packaging materials.

Management System

Physical Control System – in case of alcohol, spirit, molasses, beer and khudo.

Self-Removal System – in case of goods other than tobacco related products

Facilities

Bank Guarantee Facility is provided to goods imported through bonded warehouse.

Full exemption of excise duty is provided in case of export. Similarly, full exemption is provided to industries producing goods using scrap more than 90%.

Records

Records of excisable goods purchased, produced, sold, released and balance of stock as certified by excise duty officer.

Time of Payment

Physical Removal System : At the time of issuance of invoice
Self-Removal System : Within 25^th of the month following the issue of invoice
Goods imported : At the time when such goods enter Nepal through custom point

Excise Return

Within 25 days from the end of Nepalese Calendar month.

Advance Ruling

If there is ambiguity in application of any issue as per Excise 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 can further appeal to Revenue Tribunal by depositing100 % 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)

Customs Duty

Applicable Act

Customs Duty Act 2064 (2007CE)& Customs Duty Rules 2064 (2007CE) and amendment made by Finance Act from time to time.

Applicability

Customs Duty applies to import and export of goods and services.

Tax Rate

Specific to individual item (as prescribed in tariff on the basis of HS code)

Taxable Value

Based on transaction value determined as per General Agreement on Tariff and Trade 1994 and valuation principles mentioned in Customs Duty Act.

Facilities

Bank Guarantee Facility is provided to export industries and Duty-Free Shops. Further, certain customs exemption is provided to those industries established in Special Economic Zone (SEZ).

Special exemption/concession is provided to those goods if imported from neighboring countries like China, India. Also, concessional tariff rate applicable for the import of those goods which are imported under bilateral/multilateral agreement.

Post Clearance Audit (PCA): Customs Authority can make PCA after clearance of goods as required.

Appeal and Review

If an importer is not satisfied with the valuation made by Custom Authority, then such person can apply to Valuation Review Committee.

Other Taxes

Telecommunication Service Charge

To be charged from customer 10% of the collected amount.

Telephone Ownership Fee

NPR500 per connection in case of postpaid and landline and 2% of value of SIM and Recharge Card

Infrastructure Tax

NPR10 per liter for import of petrol and diesel.

Road Repair and Improvement Fee

NPR 4 per liter in petrol and NPR 2 per liter in Diesel

Pollution Control Fee

NPR1.50 per liter in petrol and diesel

Casino Royalty

Annual License Fee for Casino – NPR 50million.

Annual License Fee for Casino using only modern equipment and machines – 10.5million

Note:

40 % of such royalty amount shall be deposited within Poush end, another 30 % within Chaitra end and remaining 30 % within Ashadh end.

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