Income Tax Act 2058, Income Tax Rule 2059

First budget-2008 BS- introduced Income tax in as legal provision

Business profit and remuneration Act 2017 - Flat rate = 25%
Income Tax Act 2019 - (Source of Income-9)
Income Tax Act 2031 (Source -5 (Agriculture, Industries, Remuneration, House rent, Other)
Income Tax Act 2058 (Source -3 (Employment, Investment, Business )

Objectives of Income Tax Act 2058

The main objective of Income Tax Act, 2058 are as follows:
1. To confine all the income tax related matters within the act.
2. To develop a tax payer-friendly —taxation system by making it clear and transparent.
3. To using all income generating activities into tax net.
4. To integrate Nepalese tax system of foreign countries.
5. To reduce the scope of discretionary interpretation of the tax authorities.
6. To harmonize tax rate and concessions on equity grounds.
7. To make income tax elastic and revenue productive.
8. To minimize the tax avoidance and tax evasion.
9. To widen the tax bare.
10. To make taxpayers more responsible by enforcing the self assessment system.
11. To maintain the welfare state.

FEATURE OF INCOME TAX ACT 2058

The following are the features of the Income Tax Act 2058.
1. Use of Global and scheduler method to determine tax rate
2. All tax related matters within the one act
3. Specification of tax rates (multiple tax rates)
4. Various tax related concessions and exemptions
5. Specification of stock valuation methods
6. Simplification of depreciation related provisions
7. Taxing capital gains and dividends
8. Generous loss set-off and carries forward provision
9. Stringent fine and penalty provisions
10. Broadened the tax base
11. Self Assessment based tax system (self assessment + Jeopardy + Amended)
12. Less discretionary administration (uniformity and transparency)
13. Power and duties of tax administration and tax payers
14. Separate provision to Banking and Insurance business income
15. Administrative review and appeal system
16. Tax payers are categories as resident and non resident person
17. Base on Income year
18. Provision to avoidance of double taxation.

Tax policy types:

Proportional (fixed tax rate), Progressive (increasing tax rate on increasing income), Regressive (average tax rate
decreases as the taxable income increases), Digressive Tax (mixture of progressive tax and proportional tax)

Act Outlined Exempt organization in (section 2(s)as below:

Exempt organization means the following entities.
 a. following entities registered with Inland revenue department as tax exempt entity:
- A social, religious, educational, or charitable organization of public character registered without having a
profit motive.
- A amateur sporting association formed for the purpose of promoting social or sporting amenities not
involving acquisition of gain.
b. A political party registered with election commission.
c. A V.D.C municipality or D.D.C
d. Nepal Rastra Bank
e. Nepal government.
However, any benefit acquired by any person out of the assets of an amount driven by the entity except in pursuit of
the entity's functions or as payment for assets or services rendered to the entity by the person is not exempt for tax.

Residence and Non Residence Person for the nutimse of Tax Impose (section 2 ao):

Person means an individual or an entity. It may be as natural person, entity and company. For the purpose of tax
calculation following entities is outlined as residence persons by the income act 2058.
In the case of natural person:
• whose normal place of abode is in Nepal
• Who is present in Nepal for 183 days or more in any period of 365 consecutive days of any income year.
• Who is an employee or an official of government posted aboard at any time during the income year and any
partnership is called as residence.
In the case of the Trust: Trust established in Nepal and the trustee who is a resident of Nepal.
In the case of Company:
• A Company incorporated under the law of Nepal
• It has effective management in Nepal during the income year.
• A partnership firm,
Except above said the following are also treated as residence
• A VDC Municipality or DDC,
• A foreign government or a political subdivision of the foreign government -established under Nepal's law.
• Any institution or entity established under treaty.
• A foreign permanent establishment of a non resident person situated in Nepal.

Non Residence Person:

• All the person who does not fall under the residence person.

# Base of Income Taxation

Income Year: Income tax is imposed and calculated for an income year. It is normally correspondent with
government Fiscal year. Start of Shrawan to End of Asar is income year period.
Parties: Residence and non residence persons as per law.
Sources of Income (sec. 5)- These sources of incomes, theoretically, are based on labour, capital and labour plus
capital principles. The act has imposed the tax on :
• Income realized from every person
• A foreign permanent establishment of a non resident person situated in Nepal and has repatriated income
for the year
• A person who receives a final withholding payment during the year and
• who has taxable income for the year.
For tax assessment, Income Tax Act 2058 (section 5) has classified as per below.
a. Income from business
 b. Income from Employment; and
c. Income from Investment
Income from Windfall Gain - 25%

Tax Accounting:
Cash basis sec.23 :
• Individual- for employment or investment income- cash
• Bank and Financial institution — cash + accrual
• Only the amount earned and derived is included under income in cash basis.

• Derived but not received amount is not included.

• Only Paid amount is included under expenditure.
• Unpaid expenditure is not included under expenses.
Accrual Basis sec. 24 :
▪ A company — incomes from all source-accrual basis
▪ Individual-income from business-accrual basis
▪ All the amount derived whether received or not is included under the income
▪ All the expenses have created liability in included
PERSONAL TAX
Paticulars F/Y 2075-76
For Resident Person
Assessed as Individual Assessed as Couple
First Tax slab-3,50,000 -1% First Tax slab-4,0,000 -1%
Next 1,00,000 - 10% Next 1,00,000 - 10%
Next 2,00,000 - 20% Next 2,00,000 - 20%
Next 13,50,000 - 30% Next 13,00,000 - 30%
Balance Exceeding 20,00,000 - 36% Balance Exceeding 20,00,000 - 36%
For Non-Resident Person
1. Income earned from normal transactions. - 25%
a. Income earned from providing shipping, air transport or telecommunication services, posts
satellite, optical fiber project. - 5%
b. Income earned providing shipping, air transport of telecommunication services through the territory of
Nepal.-2%
c. Repatriation by Foreign Permanent Establishment. - 5%

# Business/Company/Firm /Industry
1.1 Domestic income of business : Normal Rate (NR) = 25%
1.2 Other (Special Industries) = 20% (Normal Rate)
1.3 Other Business:
• Commercial banks, Development Banks and Finance companies -30%
• General insurance business = 30%
• Entity engaged in Petroleum business under Nepal Petroleum Act , 2010 =30%
• Institution having licensed to exploration for petroleum or natural gas become commercial before B.S 2075 Chaitra
= 100% exempted up to seven years and 50% rebate on subsequent 3 years
• Income earned by the natural person wholly involved in special industry - Income earned by the resident person
relating to export activities = 20%
• Saving & Credit Co-Operatives established in rural areas under Co-Operatives Act, 2048. = Nil
• Saving and Credit Co-Operatives established in Metropolitan City, Sub-Metropolitan City and areas attached with
above metropolitan city and sub-metropolitan city under Co-Operative Act, 2048. = 20%

TAX ON INCOME FROM INVESTMENT

Individual : Tax withholding on capital gain for natural person on transaction exceeding Rs. 1 million (Upto 2074/75
limit was Rs 3 Million) (to be made by land revenue office at the time of registration)
disposal of land or land & building owned for more than 5 years — 2.5%
disposal of Land or land & building owned for less than 5 years — 5%
Corporate: Income from disposal of non business chargeable assets (Capital Gain)

Income from Windfall -25%

Wind fall gains from Literature, Arts, Culture, Sports, Journalism, Science & Technology and Public Administration
amount received up to 5 lacs = NO TAX

Special Provisions on Banking Business Sec. 59.

(1) In computing the income or loss made by any person carrying on a banking business from that business in any
income year, it shall be separately computed as if the banking business were a business distinct from any other
business carried on by that person.

"(1a) An amount that is up to five percent of a due and recoverable loan held in the risk bearing fund by a person
carrying on banking business Subject to the standards prescribed by the Nepal Rstara Bank shall be deducted as an
expense. Where the risk bearing fund is so maintained, and the expenses debited to the profits as a bad debt, the same
shall not be written off; and where the amount in that fund is capitalized or profits or dividends are distributed, the
same shall be included in the income of the year in which such distribution is made."

(2) "Provided that, if the amount as referred to in Subsection (la) is deducted as expenditures, such loss shall not be
deductible."

Capital Gain Tax

Capital Gains Tax (CGT) is a tax on capital gain, the profit realized on the sale of a non-inventory asset that was greater
than the amount realized on the sale. The most common capital gains are realized from the sale of stocks,bonds,
precious metal, or property. In Nepali, we call it Labhaansh Kar. An investor can own shares that appreciate every year,
but the investor does not incur a capital gains tax on the shares until they are sold. It is also covered to gain form the
stock of listed or unlisted company.

▪ A capital gain is the difference between the purchase price (the basis) and the sale price of an asset.
▪ It covers 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,
▪ Formula: Sale Price — Purchase Price = Capital Gains Amount
▪ Capital Gain — tax will be levied.
▪ Capital Loss = No tax will be levied
(If the building is owned and resided for a period more than 10yrs., it does not fall within the definition of Non-Business
Chargeable Assets hence, it's not taxable.)

Rate of capital gain

Profit and Gain-from Disposal of Shares: (withholding-TDS)

Resident Entity
- Listed Shares 7.5%
- Non Listed Shares 10%
In case of Individual
- Listed Shares 10%
- Non Listed Shares 15%
Others
- Listed Shares 25%
 - Non Listed Shares 25%
On dividend paid by the resident entity.
- To Resident Person 5%
- To Non Resident Person 5%
Capital Gain tax on disposal of land and building classified as Non Business Chargeable Assets,
TDS to be deducted by concerned government office
- if the land and building is owned for period less than 5 years 5%
- if the if the land and building is owned for period more than 5 years 2.5%
(If the building-is owned and resided for a period more than 10yrs., it does not fall in the
definition of Non Business Chargeable Assets and so is not taxable.)
On gain from transaction on commodity future market 10%

# Offense and Punishment

123. Penalty to one who does not pay tax:
• payment of tax
• fine Five Thousand Rupees to Thirty Thousand Rupees
• imprisonment for a term from One month to Three months
• both penalties
124. Penalty to one who submits false or misleading statement :
• fine of a sum from Forty Thousand Rupees to One Hundred Sixty Thousand Rupees or
• imprisonment for a term from Six months to Two years or
• both penalties.
125. Penalty to one who obstructs or unduly influences tax administration :
• fine of a sum from Five Thousand Rupees to Twenty Thousand Rupees or
• imprisonment for a term from one month to Three months or
• both penalties
126. (1) Any authorized person who violates Section 84 (government confidentiality)
• fine of a sum not exceeding eighty Thousand Rupees or
• imprisonment for a term not exceeding one year or
• both penalties.
(2) In cases where any person who is not authorized under this Act collects tax or any other amount in the name of
tax or attempts to collect the same,
• fine of a sum from eighty Thousand Rupees to two hundred Thousand Rupees or
• imprisonment for a term from one year to three years or
• both penalties.
127. Penalty to accomplice: half a punishment imposed on the offender.
Provided that, if such an accomplice is a government employee, he shall be liable to punishment equal to the
punishment imposed on the offender.
128. Penalty to one who does not observe the Act: Except as otherwise provided for in ths Act, any person who does
not observe any provision of this Act or the rules framed under the Act shall be punished with a fine of a sum from Five
Thousasnd Rupees to Thirty Thousand Rupees.

Income Tax Provision of Depreciation (Sec. 19, annex 2)

For the purpose of calculating a person's income for an income year from any business or investment, there must
be deducted in respect of depreciation of depreciable assets owned and used by the person during the year in the
production of the person's income form the business or investment. It can be deducted from the income in given rates,
time bound and classification.
Depreciation methods
There are two methods vou can choose for calculating depreciation on an asset:
• diminishing value depreciation
• straight line depreciation

Class Assets Included Rates

A Building, structures, and similar works of a_permanent nature 5%
B Computers, data handling equipment, fixtures, office furniture, and 25%
office equipment
C Automobiles, buses, and minibuses and others 20%
D Construction and earth-moving equipment and any depreciable 15%
asset not included in another classes
E Intangible assets other than depreciable assets included in Class D divided by the useful
life of the assets

Threshold of remote allowances: ( rule 38)

For purposes of Sub-section (5) of Section 1 of Schedule-1 of the Act, the amount for remote allowances to be added to
the threshold of non-taxable amount of any person shall be as follows:-
(a) Fifty Thousand Rupees in the areas of category "a".
(b) Forty Thousand Rupees in the areas of category "b".
(c) Thirty Thousand Rupees in the areas of category "c".
(d) Twenty Thousand Rupees in the areas of category "d".
(e) Ten Thousand Rupees in the areas of category "e".

Exemptions in Income Tax: (chapter 4, section 10)

The following amounts shall be exempted from tax:
➢ Amount exempted from tax granted to any person entitled to tax exemption facility as provided for in a bilateral
or multilateral treaty concluded between Government of Nepal and any foreign country or international
organization.
➢ Amount received by any natural person for doing employment in the government service of a foreign country.
➢ who is not a citizen of Nepal or by his/her nearest family member from the govermment fund of a foreign
country.
➢ Amount received by a non-Nepalese citizen appointed in the service of Government of Nepal under a the term
and condition of tax exemption.
➢ Allowances provided by Government of Nepal to the widow, aged (senior citizen) or disabled. Amounts received
as gift, inheritance or scholarship.
➢ Amounts received by an organization entitled to exemption for Donation, gift, Other contributions directly
related with an organization entitled to exemption, Amount earned by Nepal Rastra Bank in consonance with its
objectives.
➢ Amount received for pension by a Nepalese citizen having retired from the military or police service of a foreign
country from the governmental fund of that country.

Deductible Amounts on income from business and investment(Chapter 5 Section 13-20)

➢ General Expenditures of made in that income year,
➢ Interest deduction
➢ Allowances for cost of stock-in-trade
➢ Repair and maintenance expenses (7% of Depreciable amount)
➢ Pollution control expenses (not exceed 50% of adjusted taxable income)
 ➢ Research and development expenses (not exceed 50% of adjusted taxable income)
➢ Depreciation deduction expenses (annex 2)
➢ Loss set off from business or investment (last 7 years losses, project petroleum product last 12 years)

Expenses that may not be deducted: (Section 21)

1. a. Expenses of domestic or personal nature,
b. Tax payable under this Act and a fine or similar other fee paid to the government of any country or any local
body thereof for a violation ot any law or regulation, byelaw framed thereunder,
c. Expenses to the extent of those spent by any person to obtain the amounts enjoying exemption pursuant to
section 10 or expenses made to obtain the amounts from which tax has been deducted finally,
d. Expenses for the payments referred to in Subsection (2),
e. Distribution of profits by any entity, or
f. Similar other amounts despite that they are not so mentioned in clauses (a), (h), (c), (d) and (e) as not to be
deductible, except those allowable under this Chapter or Chapters-6, 7, 10, 12 or 13.
2. If a person, whose annual turnover is more than two million rupees in any income year, makes a cash payment of
more than Fifty Thousand Rupees at a time in that income year except in the following circumstances, he shall not
be allowed to make that deduction: -
a. Payment made to Government of Nepal. constitutional body, corporation or bank or financial institution owned
by Government of Nepal,
b. Payment made to a farmers or producer producing a primary agro-product and payment to a farmer who has
processed such product on his own, notwithstanding that primary processing, of such product has already been
carried out,
c. Payment for retirement contribution or retirement payment,
d. Payment made in a place where banking services are not available,
e. Payment made on the day when banking services are closed or payment involving a mandatory provision of
payment in cash, or
f. Amount deposited in a bank account of the recipient of payment.
3. Subject to the provisions of Sections 14, 15, 16, 17, 18, 19, 20 and 71, no amount shall be deductible for capital
expenses or foreign income tax.

Special Provision for Natural Person (Sec. 50-51, annex-1 and rule 17)
1. Single/Couple natural person threreshold is different.
2. Medical Tax credit facility
3. Minimum tax exemption limited (minimum a lso imposed Social Security Tax)
4. Progressive Tax rates are levied for income
5. Remote area allowance exemption is provisions as per allowance level
6. Pension allowance provision.

Special Provision for Entity/retirement (Sec. 50-52, 63-65,rule 20)

Income Tax Act 2058 has outlined various provisions for entity/corporation. Some of them are:
▪ Separate taxing between beneficiary and a company- it treat separate to company and beneficiary.
▪ Dividend distribution as interest to investors
▪ Tax free on repay of capital
▪ Dividends to companies — treat TDS will he final tax payment.
▪ Dividend distribution and 25% degree of control of company
▪ Liquidation of entities
▪ Amount of dividend not to be included in the income of entity
▪ income of an approved retirement fund is free of tax

Income from business (Section 7)

If any natural person or corporate body earns income by running any business, industry or trade within an income year.
Such income included while computing taxable income from business. Section 7(2) of Income Tax Act 2058 specifies
certain income included on forming income front business. Each income that is a part of income from business is
specified and so there is no chance for assumption of any other income, which is not specified in the section, to be
included in income from business. Such incomes of business i.e. taxable income are given on the Sec 7.
1. Service fee
2. Amount derived from the disposal of trading stock
3. Net gain from the disposal of business assets/liabilities.
4. Gain on sale of depreciable assets used in business.
5. Gift received from parties in respect of business.
6. Compensation received in restriction of business
7. Amount received by any investment that is directly related to business
8. Amount required being included due to change in accounting System.
9. Gain due to Change in exchange rate.
10. Bad debt recovered
11. Under payment of interest of loan.
12. Compensation received against loss of profit/stock.
13. Any benefit or perquisites
14. Amount received after the cessation of a business.
15. Amount derived according to the percentage of contract completed during the year under long-term contract.
16. Deducted expenditure which is not so expended.
17. Other incomes required to be included, e.g. Misc. incomes, sundry incomes, discount, commission.

Income from Employment (Section 8)

Income received by an employee in the form of salary, allowances, any facilities and benefit etc. are included under
this head. Following are the sources of income from employment as per section 8, 24, 25, 27, 29, 30 and 31 of ITA.
1. Salary and wages.
2. Paid leave.
3. Income received from overtime work.
4. Commission and charge earned.
5. Gift and reward received in connection of employment.
6. Bonus income.
7. Payment made for facilities enjoyed by employee but paid by employer.
8. Rent expended born by employer.
9. Entertainment and transportation expenses born by employer.
10. Expenses paid by employer in respect of employee or his /her relatives.
11. Income earned by employee in respect of accepting any contract between employer and employee.
12. Any payment made by employer to employee in respect of employment.

Income From Investment (Section-9)

Investment income includes income earned by any person or entity in the form of dividend, interest, rent, royalty,
income from natural resources, income received from registered retirement fund, income from insurance investment,
gift and any other non-business taxable income.
1. Dividends (except from resident company)
2. Interest
3. Rent
4. Natural resource payment
5. Royalty
6. Gain from disposal of depreciable assets (used in investment)
7. Gift in respect of investment
8. Amount derived as consideration of accepting any restriction regarding investment
9. Income to be included due to change in accounting method
10. Exchange gain
11. Bad debt recovered
 12. Underpayment of interest than standard
13. Amount received from compensation
14. Amount paid to third person instead of actual payee (investor)
15. others
TDS-WITHHOLDING IN FOLLOWING PAYMENT
• Wind fall gains
• Payment of rent
• Profit and Gain from Transaction of commodity future market
• Profit and Gain from Disposal of Shares
• On payment of gain in investment insurance
• On payment of gain from unapproved retirement fund
• On payment of interest
• On payment of premium
• Contract payment
• Dividend Paid
• Payment made against question setting, answer evaluation