Nepal Income Tax: 5 Key Takeaways for Entrepreneurs

Welcome to the world of entrepreneurs!

Nepal has seen some notable improvements in the recent years in offering business opportunities to its dominant young population.

The Oli government’s pitch for start-up businesses and entrepreneurship is helping many young entrepreneurs to turn their dreams into reality.

There are a wide range of entrepreneurs stemming up across the country through some game-changing initiatives.

However, on the finance side, many of them are still far away from understanding government regulations and tax-related matters, which are key to their growing business.

Here are 5 important tax-related facts that Nepali entrepreneurs should know:

1) Advanced Tax

Is your company’s Estimated Tax Liability (ETL) after ‘credit to the Withholding Tax’ is NPR 5,000 and more? Then you are liable to pay ‘Advanced Tax’.

In that case, you will have to pay ETL to the Inland Revenue department in the following installments:

• 40% of total ETL before ‘Poush’ ends;
• 70% of total ETL before ‘Chaitra’ ends;
• And, 100% before the end of ‘Ashad’

Estimated tax shouldn’t be less than 90% of the annual tax paid to the IT department, and tax returns should be filed before the end of next ‘Poush’. Failing to do make this payment puts you under the ambit of ‘Interest u/s 118 (i.e. 15% p.a.) of Income Tax Act of Nepal’.

2) Withholding Tax

According to the Income Tax Act 2058, resident payers making payments covered under Section 87 to 89 can only withhold Income Tax.

Payments covered under Section 87-89 of Nepal IT Act 2058 include:

• Withholding Tax on Salary Payment: Slab Rate
• Withholding Tax on Services Payment: VAT Invoice – 1.5%, otherwise 15%
• Withholding Tax on Interest Payment Paid by Bank FI to Natural Person: 5%

Note: Paid by Any Person to Resident Bank FI: No WHT

• Withholding Tax on Contract Payment: 5% (If payment within 10 days is more than NPR 50,000)
• Withholding Tax on Rent: 10%
• Withholding Tax on Dividend: 5%
• Withholding Tax on Payment of gain from Insurance Investment: 5%
• Withholding Tax on Gain from Unapproved Retirement Fund: 5%

3) IT Filing

Under the Section 99 of Income Tax Act 2058, Income Tax Return filing should happen within 3 months from the ‘date of closure’ of Income Year.

However, it can be extended to additional 3 months after through Inland Revenue department’s approval well before the ‘first filing deadline’ or the ‘extended deadline’.

Under the Section 117(1)(b), any delay in submission of Final Tax Return under Section 96 of the Income Tax Act will lead to penalty imposition as follows:

• NPR 100 per month of delay – For Presumptive taxpayers as specified by Section 4(4).
• 1% of assessable income – For other taxpayers without deducting any amount or NPR 100 per month of delay whichever is higher.

4) Tax Rates

Tax Rates on taxable income will be calculated as per the Schedule 1 of Income Tax Act, 2058, which includes two sections:

Section 1: Tax Rate applicable to Natural Person

Progressive tax rates will be applicable to the resident natural person.

Section 2: Tax Rate applicable for Entity

Normal Tax Rate of 25% is applicable.

5) Value Added Tax

13% VAT will be charged on transactions involving goods/services liable under VAT. VAT payable on purchase of such goods/services will be set off from the VAT applicable to all those services. Payable VAT should be paid within 25^th from the end of the month/trimester that the transaction happens in. Even the VAT Return should be submitted within the same period.

On an EndNote
While these are some important ones, there are many such tax-related clauses under Nepal Income Tax rules for entrepreneurs listed at the Nepal Bureau of Standards and Metrology (NBSM).