Simple Understanding of Income Tax Act, 2058 & Value

Added Tax Act, 2052.

This article has been prepared to provide basic knowledge about Income Tax and
Value Added Tax of Nepal. It is helpful for layman to gain basic concept of tax and
VAT.

Types of Tax
There are two basic types of tax that are levied in the income of and transactions by
an individual or an entity.
1. Direct Tax:
Tax that is directly levied on income earned by an individual or entity is direct
tax. This is referred to as Income Tax.

2. Indirect Taxes:
They refer to the taxes that are not levied on income but on transactions.
These are:
a. Value Added tax (VAT): This is levied on sales and purchase of taxable
goods and services. You have to pay VAT to supplier of taxable goods and
services, and have to collect VAT from customer on selling taxable goods
and services.
b. Custom Duty (Import Duty): This is levied on importation of custom
attractive goods and services.
c. Excise Duty: This is levied on importation, exportation and production of
excisable goods and services.
d. Health service Tax : Business Specific (Charged on the income of
Health service provider)
e. Education Tax : Business Specific (Charged on the income of Educational
institutions)

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Income Tax in Nepal

Basic Terms
Income tax is charged on the income derived by a resident person (irrespective of
the source of income/Global income basis) or by a non-resident (having income
source in Nepal).
Here,
1. Person Natural Person (i.e. Individual, Proprietorship Firm, and couple
opted)
Entity (i.e. Private limited company, Public Limited company,
Partnership Firm and other registered and unregistered entity)
2. Income-year Unless otherwise provided in specific sections, the period from
the start of Shrawan of a year to the end of Ashad of the following year.
3. Global Income Basis Income derived by a person all over the world (Except
those mentioned in DTAA)
4. Assessable Income Income from Business + Income from Employment +
income from Investment.
5. Taxable Income Assessable Income Allowable Donation Allowable staf
provident fund

Income
When a person earns income, s/he has to pay the tax thereon. Such income is
categorized into 2 levels:
1. Assessable income
This includes income from business, income from employment, income from
investment and windfall gain.
A person can, however, deduce tax exempt income as stated in section 11
(Concession and Facility) and section 64 (for Retirement Fund)
2. Taxable Income
This is amount of income in which tax is levied. This can be illustrated as
follows:
Assessable Income XXX
Reduction:
- Donation to exempt entity u/s 12 & 12 Ka XXX
- Contribution to Approved Retirement fund XXX
Taxable Income XXX

Category of Turnover and tax rate thereof:

A. For a Natural Person:
If you are Natural Person having turnover less than 20 lakhs and
earning taxable profit of less than 2 lakhs in a fiscal year, you are

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 regarded to as presumptive tax payer and have to pay tax on the basis of the
area of operation. This is shown as below:

Business Operated in/within Presumptive Tax amount

Metropolitan and Sub Metropolitan Rs. 5000 per Income Year
Municipality Rs. 2500 per Income Year
Other Than Above Rs. 1500 per Income Year

If you are Natural Person having turnover of more than 20 Lakhs and
less than 50 Lakhs you may opt to pay tax as per the following rates:

Transaction of Tax amount

Trading of Gas, Cigarette and other 0.25% of turnover
goods adding 3% commission
Trading of goods other than above 0.25% of turnover
Service business 2% of turnover
However, if the calculated tax is less than Rs. 5000 on the basis of above
calculation, then tax of Rs. 5000 is to be paid.

If you are a Natural Person other than mentioned above(including if you

dont opt the second option mentioned above), then you have to pay income
tax on the income that you have earned in a fiscal year as follows:

Income Slab Income Tax Rate

First: 3,50,000 (Single)/ 4,00,000 0% (No Tax)/ 1% (If income derived as
(Couple) employment income)
Second: 1,00,000 15%
Third: 20,50,000 (Single)/ 20,00,000 25% (20% or less if you fulfill the
(Couple) criteria under section 11 and schedule
1)
More than 25 lakhs 35%(28% or less if you fulfill the criteria
under section 11 and schedule 1)

B. For an Entity:
For Special Entity (manufacturing entity) and co-operative 20% Flat
rate of tax. (Some entities can enjoy further tax concession if they
fulfill the criteria under section 11 and schedule 1)
For Bank, Insurance, Petroleum, liquor Industry, Cigarette industry, Pan
Masala 30% Flat rate.
For the rest: 25% Flat rate.

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Facility and Concessions
C. Any manufacturing industry exporting its produced goods gets a concession
of 25% in the tax rate applicable.
D. If any Person gives donation and charity to any tax exempt entity then lower
of the following amounts is allowed as reduction in the assessable income:
Rs. 1,00,000
5% of Adjusted taxable Income
Actual Donation Paid
If any Company (Remember only Company is allowed and not Person) spend
any amount for the protection and conservation of historic, religious and
cultural importance or amount spend on infrastructural development of
sports then lower of the following amounts is allowed as reduction in
assessable income:
Rs. 10,00,000
10% of Assessable Income
Actual expenses
If any Person has paid some amount to the Prime Minister Disaster Relief
Fund and Reconstruction Fund established by Government of Nepal, then
such amount is allowed as reduction in taxable income.
Loss of Business of one year can be set of with the profit of such business in
subsequent year. This set of is allowed for up to 7 year. That is Year 1 Loss
can be set of from profit of Business up to Year 7.

Expenses that are not allowed to be deducted from Business Income

Following expenses are not allowed to deduct as expenses from the business
income:
Personal Nature Expenses
Fine and Penalty paid for breach of any laws. (Exception: if any amount is
paid as fine on any type of contract, then it is allowed to deduct as expenses)
Dividend
Cash paid for more than 50,000 at a time.
(Cash Paid means Hard Cash and paid through Bearer Cheque)
Capital nature expenses

Special Provision for Natural Person

There is a special provision made in the law for natural person who opt as couple.
This provision helps to reduce the tax liability of the tax payer.
If any person opts as couple in an income year: then first limit of taxable income
slab will be 400,000 instead of 350,000. [See Table below] Rest of the income
slabs prevail.

For Natural Person having Business For Natural Person Having

Income Employment Income
For First 400,000 0% For First 400,000 1%
(If Not Opted Couple for first 350,000 (If Not Opted Couple for first 350,000

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 0%) 1%)

Tax Administration and Tax offices

Based on turnover of the business, they have to get registered with the respective
tax offices or revenue offices set up in the area by the IRD.
Inland Revenue Department has categorized 3 diferent authorities for registration
and submission of tax and tax related documents which are mentioned in the
following table:

Turnover Respective Tax Authorities

Up to 5 Crore Taxpayer Service Offices (TSO) set in
the specific area
Above 5 Crore but Less Than 40 Crore Inland Revenue Offices (IRO)
Above 40 crore Large Taxpayer Office (LTO)

Documents, Records and Accounts to be kept

Every tax payer needs to keep their records and documents for up to 5 years from
the expiry of respective income year. These include:

Balance sheet
Income statement
Schedule for balance sheet and income statement
Auditors Report
Vouchers raised for the records
Supporting of vouchers
Purchase books
Sales books
Inventory records
Fixed assets details
Loan and investment details and confirmation thereof
And similar other documents

Tax Deducted at Source (TDS)

Tax deducted at source is one of the modes of collection of taxes, by which certain
amount is deducted by a person at the time of making certain specific payments to
the other person and the deducted amount is deposited to the government
accounts through respective tax offices.
It is an indirect method of collecting tax. It is based on PAYE concept [PAYE Pay As
You Earn]
Certain payments and their respective TDS rates are mentioned bellow:

Payments TDS Rates Primary

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 responsibility
Employment Income As per slab (1%, 15%, Employer
25%, 35%)
Rent 10% Rent Holder / Lessee /
(House/office/vehicle/machiner Tenant
y/other similar)
Sales commission and other 15% Person making
commission payment
Interest 15% Person making
payment
Amount paid for any expenses 1.5% Person making
on which VAT bill is received payment
If Non VAT bills 15% Person making
payment
Dividend 5% Person making
payment
Gift and windfall gain 25% Person making
payment
Meeting Allowance 15% Person making
payment

Time limit for filing of return and payment of TDS

Every person responsible for deducting tax at source has to deduct the same and
must deposit it to the respective tax offices within 25 th day of following month along
with the specified return (e-TDS).
Q. What if the deducted amount is not paid in aforementioned time limit?
A Interest @ 15% is charged on the amount of TDS payable from the time of
expiry of payment to time of making payment assuming part of month as 1 month
i.e. you have to pay TDS within 25 th of following month, if not paid until that date
and paid on 26th day, then you will be liable to pay 15% interest for 1 month. [Note
here, just a days delay in making the payment means having to pay
interest for 1 month.]
Q. What if someone has deducted tax at source and made less payment to
me?
A If someone has deducted TDS and deposited in your Business name and PAN
(Permanent Account Number) then, you can deduct this amount of TDS from your
income tax liability at the end of income year. This amount must be claimed as
advance income tax to avail such deduction.
Q Can someone set off TDS payable (that you have to deposit) and TDS
receivable (that someone has deposited in your name) and made balance
amount as deposit or claim as advance tax?

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A No, these are independent amounts and cannot be set of against each other.
The amount of TDS that you have deducted from payment to be made is your
liability and the amount that has been deducted from your receivable amount is
your assets that you can deduct from your income tax payable at the year end.

Installment tax (Advance tax) [cu|Ldcfos/]

The person having business income or investment income has to deposit income
tax in advance as follows:

Time limit for payment of advance Amount of Advance income tax

tax
Up to the last day of Poush 40% of estimated annual income tax
Up to the last day of Chaitra 70% of estimated annual income tax
Up to the last day of Ashadh 100% of estimated annual income tax

If any person is paying tax on the basis of Turnover (Turnover more than 20 lakhs
and less than 50 lakhs)

Time limit for payment of advance Amount of Advance income tax

tax
Up to 20th day of Poush
Up to 20th day of Ashadh
Tax rate as mentioned on turnover up to
20thPoush
Tax rate as mentioned on estimated
turnover up to last day of Ashadh less
tax paid up to 20thPoush.

*Note: if amount of installment tax to be paid is less than Rs. 5000, then
installment amount is not required to be paid.

Q. What if installment amount is not paid in above mentioned time period?

A If installment is not paid in above mentioned time period, then fine of Rs. 2000
for not submitting advance tax return is levied and interest @ 15% on amounts to
be paid is charged assuming part of month as a month.
Q. Can I set off TDS deposited by others in my name from installment tax
to be paid as above?
A Yes you can deduct TDS deposited by others in your name as this is also
advance tax for you.
Q. If I estimated loss for any income year, do I still have to deposit
advance tax or have to submit advance tax return?
A No, if you estimate loss for any income year then you dont have to submit
return or deposit advance tax, but if actually at year end there is profit and if you

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havent submitted any return, you have to pay Rs. 2000 as fine for not submitting
return and interest for not depositing advance tax.
Q. What if the amount of my estimated income tax and actual income tax
are different?
A If the actual amount of tax to be paid is diferent than your estimated tax then
you have to pay the diferential amount & interest on the diferential amount of tax
to be paid @ 15%.

Tax Return to Be Submitted and time limit of submission

Every tax payer has to submit their tax return with respective tax authorities within
3 months from the expiry of income year. Here, income year means a period of 12
months in any fiscal year. But there are certain exceptions to this:
a. For the business which is in operation for the First Time then the income
year is: from the date of startup to the last day of Ashadh.
b. For business for which income tax authorities has made Jeopardy
Assessment then the income year is the first day of Shrawan to the day on
which Jeopardy Assessment is made.
c. For business where 50% or more ownership has been changed during any
year, then the income year is from the first day of Shrawan to the day on
which such ownership has been changed.
Whatever the case maybe, income tax return is to be submitted within 3 months
from the expiry of income year.
For normal scenario, such time to submit return is up to the last day of Ashwin.

Q. What if return not submitted in specified time period?

A If you do not file return within the stipulated time period, then you have to pay
fine which is the higher amount from the following:
a. 0.1% of turnover including any amount of income
b. Rs. 100 per month.

Q. Is there any extension for time limit to submit return?

A Yes, as per Income Tax Act, 2058, the tax authorities may extend the time limit
for filing the income tax return for maximum period of 3 months either directly or
upon subsequent requests.

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Q. Does the extension of time limit mean extension for making payment of
income tax as well?
A No, it is only extension of time limit to submit return and not making payment.
You have to make payment of income tax within last day of Ashwin otherwise you
will be liable to pay interest @ 15% per annum assuming part of month as a month
on income tax liability amount.

Some other points to remember

1. A person availing freight service from a service provider should deduct TDS @
10% on the freight charge. If the service is provided by an individual
registered as a presumptive tax payer for transportation service, TDS
deduction is not required.
2. It is mandatory that while importing goods, expenses that are actually
incurred should be presented before the customs office. In case the amount
of expenses presented to the customs office difers from that presented in
books of accounts/tax office, then such expenses will be disallowed. Also the
import may be subjected to Post Clearance Audit by the Customs
Department.
3. In case of freight service provided by foreign nationals, TDS of 10% should
be deducted on the portion of the service within Nepal. This can be
segregated by deducting the transportation expense presented at customs
office from the total service invoice.
4.

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Value Added Tax (VAT)
Basic concept and terms
VAT is charged on taxable transaction. (Transaction means supply of any goods
and services.) In simple terms, VAT is charged on sales, distribution, delivery,
importation of taxable goods & services. It is based on date and place of supply, i.e.,
VAT is imposed on the date when it is distributed or invoiced. Hence VAT is levied
on:
a. Goods and services imported in Nepal
b. Goods and services distributed within Nepal
c. Goods and services exported from Nepal
There are two rates of VAT which are 13%& 0%. (0% rate is applicable for export of
taxable goods and service)
Every registered person has to assess and collect VAT. Things to remember here
is that only a registered person can assess and collect VAT. Registered person
means those registered in VAT.
In earlier section we have discussed that a firm can be registered in PAN, but PAN is
only registration for income tax and not for VAT. To be registered in VAT such person
need to get their PAN to be registered in VAT.
There are three types of registration in VAT:
1. Taxable Business this person has to keep Green plate writing their PAN in
White color.
2. Small vendors this person has to keep Yellow plate writing their PAN in Black
color.
3. Exempted goods dealer this person has to keep White plate writing their
PAN in Red color.

Registration
Every person before starting business has to register the business in VAT if it deals
in taxable transaction(s).
The VAT Act of Nepal specifies certain criteria for mandatory registration of VAT for
business involved in taxable transactions
a. If a persons annual turnover exceeds 50 lakhs in case of dealing in goods,
and 20 lakhs in case of service business or business dealing in a mix of goods
and service.
b. If any person does any business within metropolitan, sub-metropolitan,
municipality and other area prescribed by department.
c. If any person has taken business loan for 10 lakhs or more.
d. If any person holds a certain amount of stock as specified by the department.

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Taxable Value
VAT has to be imposed on taxable value of goods and services which is calculated
as:
Purchase invoice price + freight charge on import or delivery + other
distribution cost + custom duty + excise duty - discount

Invoice
Every person must issue invoice while selling goods and services to other person.
Such invoice should be printed in triplicate form. One (original) should be given to
customer, other should be kept in business for record keeping purpose and other
copy should be kept for submitting to the tax authorities in case a demand is made
by them. There are formats given by tax authorities for the invoices that are as
follows:
1. Word Tax Invoice should be written in first (original/customer) copy. And
word Invoice should be written in other 2 copies.
2. Such invoice should include printed invoice number.
3. Invoice should be used serially.
4. Invoice should include item description, quantity, and rate and amount
column.
5. If there is any discount then it should be given before taxable value (except
for notified goods).
6. It should include PAN of seller in printed form and should have enough space
to write PAN of buyer (if available).

Use of Computer Billing

If the business wants to issue computer generated billing, then it should take
permission from the concerned tax authorities (TSO/ IRO as applicable).
It should be remembered that if anyone uses computer billing without obtaining
permission from tax authorities, it is not held valid and a fine of Rs. 500,000 is
charged for such action.
Computer billing can be done using only software that are certified by IRD.

Accounts and records to be kept

Every person shall kept records and accounts of their business. A registered person
should keep purchase and sales register and shall get it attested by tax officers.

Collection of VAT in case of service received from foreign institutions

If any person, whether registered or not, receives service from foreign countries,
then they have to deposit VAT amount assuming such amount as taxable amount.
Normally seller of goods collects VAT on goods sold and deposits the excess amount
of sales VAT than purchase VAT. But in case of service received from outside of
Nepal, the seller doesnt pay VAT. Buyer/benefit receiver himself has to assess,
collect and deposit VAT which is called Reverse Charging VAT.

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Tax credit (of set of VAT)
Registered person dealing in taxable transactions is allowed to set of Purchase VAT
with sales VAT. A Person has collects VAT from customer while selling goods to them
and pays VAT while purchasing goods from suppliers. Collected VAT need to be
deposited to the tax authorities, hence this provision allows a person to set of
purchase VAT with sales VAT and deposit the balance amount.
Note that VAT credit on purchase of any goods has to be taken within 1 year from
the date of invoice otherwise no VAT credit on that invoice will be allowed.
However tax credit is not allowed in following goods and services:
1. VAT paid on petrol for light vehicles (Note: VAT paid on petrol for generator
and other is allowed)
2. VAT paid on soft drinks (Note: soft drinks include juice, coke, Fanta etc. and
mineral water)
3. VAT paid on Hard Drinks (Note: Liquor and alcohol items)
4. VAT paid on entertainment (Note: Entertainment means a place where public
are invited to participate, hotel and restaurant bills for party seminar with
person other than stafs of company etc.)
5. Partial credit:
VAT paid on automobiles (4 wheelers) which is used both for personal and
business but extent of use cannot be established 40% of VAT paid can be
allowed as credit.

Proportionate Credit
If you are doing business which is a mix of taxable and non-taxable transaction,
then rule of obtaining credit or set of is as follows:
1. 100% of VAT paid on goods & services which are directly related to taxable
goods and service.
2. 0% of VAT paid on goods & services which are directly related to exempted
goods and service. This means VAT paid on goods & service which is directly
related to exempted goods are not allowed to set of.
In case a direct relationship cannot be established with taxable and exempted
goods, then VAT paid on such expenses can be claimed in proportion to the sales
value of taxable goods in the period in which such expense is made.

Filing of VAT return and payment of VAT thereon

Every VAT registered person has to submit return of VAT to the respective tax
authorities within 25th day of following month.
Every registered person have to pay VAT amount to be paid to the respective tax
authorities within 25th day of following month.

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If VAT return -df:s]jf/L_ is not submitted within above mentioned time limit then
higher of the following amounts is charged as fine:
a. 0.05% per day of VAT, or
b. Rs. 1000 per tax period (monthly/trimester)
If the amount of VAT is not paid within above mentioned time limit then following
amount is charged:
a. 10% additional fee of VAT is to be paid. And
b. 15% interest on amount of VAT is to be paid.
Note: if there is VAT payable, then only fine for not submitting VAT return is charged.

Excess amount of VAT remained after set of with sales VAT

If any amount remains after setting of purchase VAT with sales VAT (i.e. if purchase
VAT is more than sales VAT) then remaining amount of VAT can be carried forward
as VAT receivable to the next VAT period.
But if you are business entity or person exporting more than 50% of your products
then you can claim refund of excess amount of purchase VAT in the same month
when it has credit balance (receivable).

Ofence and punishment

There are various ofences and punishments given in the Act, some of which are as
follows:

Offence Punishment
Operated business without getting Rs. 10,000 per tax period
registered (Monthly/trimester)
Not kept and displayed tax plate Rs. 2,000 per assessment
Invoice not issued Rs. 5,000 per ofence
VAT collected by unregistered person 100% of VAT amount
Purchase register and sales register not Rs. 10,000
attested/kept/updated
Editable erasable software used for Rs. 500,000
computer billing
Excess inventory found during physical Ordered to book as income and 50% of
verification than reported in purchase market value of such excess goods
register. found.

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