Business Tax Planning

Income Tax System of Nepal

Submitted By: Bishal Sapkota

MBA evening
Trimester VII
Nepal imposes a wide range of taxes, including income tax (corporate and
personal income tax), value added tax, excise duty, custom duty, property-related
taxes (land registration tax, property transfer tax), and stamp duty, among others.

Direct Taxes

Income Year:
Mid July of one year to Mid-July of another year ( shrawan to Ashad as per
Nepalese Calendar)

Corporate Income Tax

The taxability of the income of a person in Nepal is based on two broad principles.
Any resident person generating income or receiving any payment from outside
Nepal is taxed on the basis of 'Residence Principle'. Similarly, in case of non-
resident person generating income or receiving any payment from various income
heads viz- employment, business, investment or win fall fain, it is taxed in nepal
on the basis of 'source Principle'

An entity is resident in Nepal if it is registered / formed asper the laws of Nepal.

Tax Rates
Statutory corporate income tax rate on resident person is 25%. However, entities
operating banking and General Insurance Business, dealing petroleum products,
producing cigarettes, cigars, liquors and other related products are subject to 30%
tax rates. Similarly, 20% income tax rate is applicable to
- Special Industries (Manufacturing industries specified in Industrial Enterprises
Act)
- Entities operating road, bridge, tunnel, rope
-way or overhead bridge upon construction
- Entities operating trolley bus or tram
- Cooperatives other than fully exempt from tax
- Income from export

Taxable Income
Taxable income = Total income – Exempted Income – Deductions – Unabsorbed
Losses

Total Income
Income means income form employment, business , investment or win gall gain
and includes the Total income derived as per income tax act, 2002

Personal Income Tax

An individual is resident in Nepal if he resides for a period of 183 days or more in

365 consecutive days. A person who is not resident of Nepal is non-resident
individual. Income of an individual resident is taxed on progressive rate as follows

Income Tax Rate in Nepal for Individual (Unmarried)

Up to Rs 4 lakh of Annual Income, you have to pay 1% income tax i.e. maximum
Rs 4000

For Income of Rs. $ lakhs to % lakhs, you have to pay 10 percent income tax for
additional 1 lakh income about 4 Rlakhs. Thus, maximum income tax is
4000+10000 = 14000

For the income of Rs 500000 to Rs. 700,000 you have to pay 20 % income tax for
additional income above Rs 5 lakh. Hence, your maximum total income tax
becomes 14000 + 40000 = 54000

For Income between Rs 700000 and Rs 2000000 you have to pay 30 % income tax
for additional income hence, your maximum total income tax becomes 54000 +
390000 = 444000

For those earning more than Rs 20 lakh, you have to pay income tax at the rate of
36%, for additional income above Rs 20.

Income Tax rate in Nepal for Unmarried Individual

Annual Income Income Tax Rate (FY 2077/78)
Up to Rs 400000 1%
Additional Rs 100000 10%
Additional Rs 200000 20%
Additional Rs 1300000 30%
Additional Tax above Rs 2000000 36%
Income Tax Rate in Nepal for Married Couple
Annual Income Income Tax Rate (FY 2077/78)
Up to Rs 450,000 1%
Additional Rs 100,000 10%
Additional Rs 200,000 20%
Additional Rs 1,200,000 30%
Additional Tax above Rs 2,000,000 36%

Tax Rate in Nepal for Non-Residents

Source of Income Tax Rate
Normal Transactions 25%
Through shipping, air or telecom 5%
services, postage, satellite and optical
fiber project
Shipping, air or telecom service 2%
through the territory of Nepal
Repatriation of profit by Foreign 5%
Permanent Establishment

Corporate Income Tax in Nepal

Type of Business Normal Tax Rebate
Rate
Normal Business 25% -
Banks and FIs, General Insurance, Telecom and Internet 30% -
services, Capital market , Money Transfer ,
Entities with export income from a source in Nepal 25% 20%

EXEMPT INCOME
The following categories of income are exempt from tax:
 a. Agricultural income derived from sources in Nepal by a person other than
the income from an agriculture business derived by a firm, company, or
partnership.

b. The income of a social, religious, educational, or charitable organization of a

public character registered without having a profit motive and similar other
organizations approved by the Inland Revenue Department as exempt
organization. All expenses incurred in earning exempt income are not tax
deductible.

DEDUCTIONS
All actual expenses incurred in acquiring or earning income are allowable
deductions for tax purposes, if it has been incurred in that NFY by the entity,
including the following:
a. Interest;
b. Cost of trading stock;
c. Repair and improvement costs - amounts exceeding 7 percent of the value of
depreciable assets in any income year are not deductible and are instead added
to the depreciation basis of the relevant asset pool at the beginning of next
income year. This limitation does not apply to the aviation industry;
d. Pollution control expenses;
e. Research & Development expenses;
f. Depreciation; and g. Banking companies and financial institutions are allowed a
deduction for impairment of nonperforming assets (loan loss provision) subject to
5 percent of the total loan outstanding.
TAX PAYMENT / REFUNDS
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 estimate
taxable income and make advance payments in three installments spread over
the year. Income from services including contract payment is subject to tax
withholdings that may be adjusted for the purpose of calculating advance tax.

FINES AND PENALTIES

Failure to maintain records, non-submission of returns or late submission, non-
payment or short payment of tax will attract late fee/ interest at prescribed rates.
Submission of false or misleading returns shall attract a penalty ranging from 50
to 100 percent of tax loss. Fines including imprisonment for a term ranging from
one month to two years are prescribed for not paying or evading tax.

Value-Added Tax (VAT)

A value-added tax (VAT) is a consumption tax placed on a product whenever
value is added at each stage of the supply chain, from production to the point of
sale. The amount of VAT that the user pays is on the cost of the product, less any
of the costs of materials used in the product that have already been taxed.
A VAT is levied on the gross margin at each point in the manufacturing-
distribution-sales process of an item. The tax is assessed and collected at each
stage, in contrast to a sales tax, which is only assessed and paid by the consumer at
the very end of the supply chain.
The Value-Added Tax enforced in Nepal are as follows:
13 percent discount on VAT on goods and services remains unchanged from the
previous year
VAT on goods exports shall remain ‘zero’ percent
VAT paid by UN on its products and services for Covid-19 response shall be
refunded
Individuals operating without VAT registration, even after recommended, may be
penalized with 50 percent of payable tax
Transportation, tourism and movie theatres may now pay tax on a trimester basis

Customs Duty
Customs Duty is a tax imposed on imports and exports of goods. The custom duty
law imposed by Nepal are as follows:
Micro, cottage and small industries will get 50 percent exemption on machinery
imports
Increase in customs duty on petroleum product imports from NPR 15,200 to NPR
25, 200
Increase in customs duty on import of gold or semi-manufactured forms or in
powder from NPR 5,000 to NPR 8,500 per tola
Industries importing bulk and bitumen petroleum for their consumption will get
25% concession
Increase in customs duty on import of Spirits obtained by distilling grape wine or
grape marc from NPR 1,200 to NPR 1,500 per liter
Reduction in customs duty on import of separator used in Agriculture factory from
5% to 1%
Reduction in customs duty on import of Balances of a sensitivity of 50 mg or
better, with or without weights by Medical industry from 5% to 1%
Industry producing Surgical Mask will be levied 5% customs duty on import of
unwoven textile under, elastic ropes, rustproof metal strips
Poultry Industry will get 50% rebate on custom duty for fertilized eggs for the
production of chicks