Foreign Direct Investment (FDI) in Nepal

Foreign Direct Investment (FDI)

Applicable Acts:

Foreign Investment and Technology Transfer Act (FITTA)

Industrial Enterprise Act (IEA) 

No Foreign person can investment in Nepal without prior approval of the Department of Industry in Nepal. Any one desirous of making Foreign Investment or Transfer of Technology should file an application to the Department. The minimum amount for FDI is NPR Five Million for the project.

A. Forms of Investment:

Establish a new firm, either with 100% foreign equity or as a joint venture (JV) with Nepalese/foreign investor(s)
Equity investment (of existing company)
Debt investment
Technology transfer

B. Required Documents -  (Foreign equity investment in a new industry (100%) subsidiary or JVC):

-Project Report

-JV Agreement

-Citizenship Certificate of Local Party or Certificate of Incorporation and MOA/AOA (in case local party is a company)

-Copy of Passport of Foreign party or Certificate of Incorporation and MOA/AOA (in case foreign investor is a company)

-Bio-data / Company profile of the foreign investor

-Financial Credibility Certificate (CFC) of the foreign investor provided by a home country bank or domiciled country bank

C. Required Documents - (For investment in an existing industry by share transfer)

-Project Report

-Share Transfer Agreement

-Copy of minutes of the Board Meeting, Certificate of Incorporation and company profile of the foreign investor in the participant is a company.

-Bio-data / Company profile of the foreign investor

-Financial Credibility Certificate (CFC) of the foreign investor provided by a home country bank or domiciled country bank

Required Documents from Nepalese Company:

a copy of minutes of  the Board Meeting of the Nepalese Company regarding inclusion of FDI in to the Company.

Request letter from the share transferor (not required in case of issue of new shares)

Request letter from the share transferee (not required in case of issue of new shares)

Recent Auditor's Report

Tax Clearance Certificate

Authority letter from the respective companies concerned to sign on behalf of  the companies.

D. Required Documents - (For establishing a place of business):

 The foreign company go for establishment of a permanent establishment (PE) or a Liaison Office in Nepal after approval of the concerned authority in Nepal.

A Nepali Citizen shall be appointed as a contact person for this purpose. 

The PEs cannot undertake any income-generating activities in Nepal.

Liaison Office can oversee a company's existing business interest, spread awareness of a company's products, and explore opportunities for further growth and development.

Initial Requirements:

Copies of MOA/AOA and Certificate of Establishment (along with Nepali Translation)

Details of Parent Company

Details of Directors, Managers, Company Secretary

Details of contact person in Nepal and Business place in Nepal.

Other Requirements:

The company has to file annual returns (Accounts/ Audit) with Company Registrar Office in Nepal

 

 

Note: There are various forms of foreign businesses alternatives (1. Opening a Liaison office, 2. Opening Branch, 3. Opening Branch (as subsidiary/ Industry), 4. Permanent Establishment). 

Note: Minimum Investment as FDI is NPR 20 million.

Procedure of PAN registration

Permanent Account Number (PAN )

PAN is a unique number allocated to taxpayer by IRD. Any person doing Employment, Business or Profession, Trade in Nepal is required to obtain PAN from IRD. Any person desirous to obtain PAN can voluntarily apply for PAN.

Compulsory Registration in PAN:

For Natural Person, Following should obtain PAN compulsorily:

1. Who has provided house in rent to Government or Semi-Government Offices.
2. Auditor, Doctor, Engineer, Lawyer, Consultant, Insurer Agent, Artist and Commission Agent.
3. Person having turnover of sale/purchase more than NPR 1 million.
4. Employed person with income more than NPR 3.5 Lakh (4 Lakh in case of couple/Married).
5. Person who provides vehicles in rent.
6. Person who has VAT liability with respect of registered or non-registered business.

For Entity: Any entity registered as per law in Nepal such as Firm, Company, NGO, Trust, Local entity and organizations should obtain PAN.

How to Apply for PAN: 

1. Online or Physical Application form is required to be filled duly. For online application
2. go to ird.gov.np
3. click on e-PAN
4. get Submission Number
5. fill the data such as username, password
6. click on PAN registration
7. Fill all the details
8. go to Help for any difficulty in filling the form

Documents Required:

A. For Individuals: 

In case of Individual PAN: 

1. Application form
2. 2 photos, 
3. Citizenship Certificate copy (Passport/ Identity provided by their embassy in case of  Foreigner)

In case of Business Pan: 

1. Application form
2. 2 photos
3. Certificate of Business registration
4. Rent agreement and 3 months TDS deposit receipt on Rent  (if rented property) or Proof of owned property.
5. Citizenship Certificate copy (Passport/ Identity provided by their embassy in case of  Foreigner)

A. For Entity:

1. Application Form
2. Registration certificate
3. MoA, AoA, Agreement
4. Rent Agreement (3 Months TDS should be paid on such rent)
5. BOD Minute authorizing a person whose photo should be attached to the form.
6. Citizenship Certificate copy (Passport/ Identity provided by their embassy in case of  Foreigner) for every partner.

Reverse VAT under Value Added Tax Act, 2052

Generally VAT has to be collected by the person who is registered as per VAT Act, 2052 and engaged in selling of Goods or providing services in Nepal.

In the following cases, buyer of the Goods or Services is required to pay VAT to the revenue itself which is known as reverse charging. Person need not issue any self-invoice in case of reverse charging as in many countries requires so:

Service receiver from foreigners: According to sec 8(2) any person (registered or not under VAT Act) in Nepal receive services from person outside Nepal need to pay VAT for services received. If the person is registered person, it can claim the VAT paid as credit same as other purchases on the basis of payment voucher.

Construction of Businesses Structure: According to sec 8(3) any person (registered or not under VAT) in Nepal engaged in constructing of commercial buildings, apartments, shopping malls or construction of similar nature of value more than NPR. 5 millions performs such works/ Purchases from the person who is not registered under VAT, need to pay VAT on the construction cost if the purchases is not made through the person who is registered under VAT. (kindly refer another blog on the same topic http://rpandeyassociates.blogspot.com/2017/05/reverse-charge-in-vat-section-83.html).

Importation: If any person imports goods from abroad, VAT need to pay at custom point as destination based tax.

Accounting for Reverse VAT:

Reverse VAT is to be shown separately in books of account. A sample journal entry (entry opinion may differ).

Dr. Expense (Expense Account Head )

Dr. VAT - Reverse Charge (input credit) 

Cr. Bank Account

Cr. TDS Payable

 

 Notes: 

Note 1: Conditions for reverse VAT (VAT Directive, Pg. 16):

1. Any Foreign person shall have provided Services to person in Nepal.

2. The supply of service is to be supplied from outside Nepal. 

3. The Referred Service shall be Taxable Service in Nepal. (refer schedule 1 for VAT exempt services)

4. The service is Not imported through Customs Department.

5. The Service Receiver is a registered taxpayer in Nepal.

 

Note 2: TDS as per section 88 of Income Tax Act, 2058 shall be deducted.

Reverse Charge in VAT - Section 8(3)

Applicable:

This section applies to the construction of Building Apartments, Shopping Complex including Road, Bridge,  Electricity Production Center, Hall which are not movable for value more than 50 lakhs.

Construction should be for Business Purpose. Business purpose means for sale or for use in income generation.

The construction should be at one place and value more than 50 lakhs. If Business place, Branches are constructed at different places, It shall not be included. But Road, Bridges etc constructed at different locations shall be considered as one unit.

All the works/ purchases shall be done from VAT registered person. If not done from VAT registration party, reverse charge shall be applicable. 

Valuation - more than 50 lakhs

All the cost related to the project (e.g. Electrification, Sanitation, painting, interior decoration etc) are to be included except Financial Costs. 

Calculation of Taxable Value and Tax

Pre-construction costs (e.g. Design, Financial Charges etc.) shall not be included for the computation of Taxable Value.

Construction Period

There is no construction period, rather a project is to be considered for taxation purpose.

Payment of Value Added Tax

Tax amount is calculated on Taxable Amount and should be paid within 25 days from the end of the month on which transaction occurred.

Penalty 

If the payment is not done as per this section 25% of penalty can be imposed.

Input Tax Credit (VAT) - Guidelines

Input Tax Credit

The person who is registered in VAT can claim credit of VAT paid while purchasing the Goods or Services through imports or from any other person registered on VAT. This credit is called Input Tax Credit (ITC). 

Input Tax Credit (ITC) is deducted from the VAT Liability which arises on Sales of Goods or Services (Output Tax). The balance amount is only paid to the government.

What is eligible for Input Tax Credit?

Ans: All purchase in relation to business such as Purchase/ Import of Raw Materials, Packing Materials, Machinery and Equipment, Office Equipment, Telephone Bill, Delivery Van, Diesel fuel and other expenses in connection with the business.

Such Credit can be claimed up to one year of Invoice Date. Tax invoice is the basis of claiming input credit of VAT. If the tax invoice is lost, credit can be claimed on the basis of verified true copy of the invoice.

What is not eligible for Input Tax Credit?

Ans: Soft Drinks/ Hard Drinks, Alcohol, Beer, Petrol, Entertainment Expenses. Such goods and services are eligible for input credit if those are the main business of the person.

On purchase of Automobiles(Three or Four wheeler) used for both personal and business use, only 40% credit can be claimed.

If the automobiles is used for business only(e.g. delivery van) 100% of credit can be claimed. If it for personal use only, no credit is allowed.

What is both Taxable and Non-Taxable goods are transacted?

If any person deals in both Taxable and Tax Free goods, then sales and purchase of taxable and non-taxable goods should be segregated and should be recorded separately.

If it is not possible to segregate the Taxable and Non-Taxable items, then credit can be availed in the ratio of sales.

Input Credit on goods damaged by theft/fire etc.

If goods are damaged due to the reason of theft, accident or fire an application is to be submitted to income tax office within 30 days to claim credit on such goods. After examining the case, the tax office may allow credit.

If manufacturing date is expired for any goods and are not in saleable condition, debit note can be issued for goods return. If goods cannot be returned, then within 30 days an application is to be made to the Inland Revenue Department with all the supporting documents.

In case, the goods are insured, credit is not allowed up to the amount of compensation by the insurance company.

If a business only registered in PAN goes for VAT registration, What will happen for the purchases already made and VAT paid.

In such case, an application is made within 15 to the tax officer for Credit of the stock present on the registration date. Format of application is as per Schedule 16 of VAT Rules. All the invoices relating to the closing stock should be enclosed with the application for verification.

After appropriate inquiry, the Tax Officer will decide on the case and will grant Input Credit.

Input Credit in case of Reverse VAT

If the service is obtained from any foreign party, Reverse VAT is applicable i.e. person making payment to the foreign person is responsible for VAT payment to the government.

The amount of VAT paid on reverse charge can be claimed by the person on the basis of payment (deposit) voucher.

Concept of Income Tax in Nepal

Income Tax is imposed on income of a person. Person as per Income Tax Act, 2058 means individual (Natural Person) or an entity (section 2). Entity includes Company, Trust, Partnership, Foreign Permanent Establishments, Retirement Funds etc.

Income of a person is taxed as per the Income Tax Act, 2058. Now the question is what is income? As per section 2 'Income means a person's income from any employment, business, investment or casual gain'. Income of a person from these sources is aggregated and total taxable income is computed on which tax rates are applied and Income Tax is calculated.

Some of the examples of Income:
1. Mr. a is working in ABC company Limited. He Receive salary of NPR 50,000 per month. Here, NPR 50,000 is income from Employment/ salary.
2. ABC has annual turnover of NPR 10 million. The Cost of Sales and Other Administrative and Financial Cost is NPR 9 Million. Here, Income from Business is 1 Million.
3. Similarly, I have Fixed Deposit of NPR 10 million in a commercial Bank in Nepal. I interest of 1 million per year. This is income from investment.
4. Mr. Z wins a lottery of NPR 100 million. This is his casual gain income.

Now, we have understood that income of any person is taxed as per Income Tax Act, 2058, Does it mean that any person working and earning in America has to pay taxes in Nepal?

The answer is NO. Only person who is the Resident of Nepal has to pay taxes on worldwide incomes and Non-Resident of Nepal has to pay taxes on income that is earned in Nepal (i.e. the source of the income is in Nepal).

For this we should understand Who is considered resident and Who is considered Non Resident of Nepal as per income tax act.

As per section 2 Following are Resident Person:

1. In case of Individual whose normal place of abode is in Nepal or Who has resided in Nepal for 183 days or more during a continuous period of 365 days. In case any individual is deputed by GoN to a foreign country in any time of the income year, he will be considered as resident e.g. foreign diplomats are always resident in Nepal.
2. A partnership firm registered and doing business in Nepal.
3. Trust which is established in Nepal and its trustees are resident in Nepal or is controlled by a resident person.
4. A Company incorporated as per laws of Nepal or has its effective management in Nepal.
5. Government of Nepal (GoN).
6. VDC, Municipality, DDC
7. an organization or an entity established under any treaty or agreement
8. Foreign Permanent Establishment (FPE) of a non-resident person situated in Nepal.

A person who is not a resident person is considered a non-resident.

Hence, anyone working and earning in America for a income year will not be resident in Nepal. S/He will not be liable for any tax in Nepal. But if any person is providing services in Nepal from America and he is receiving payments for such services, though the person is not a resident in Nepal, s/he will be taxed in Nepal (in the form of withholding tax).

Tax Rates

Tax rate for individual is incremental. There will be 1% social security tax in case of employment (No Tax for other income) if the income is up to 400,000, if the married individual files a coupled return, for others its 350,000. for next Rs. 100,000, 15% and then after 25% up to 2,500,000. If the income exceeds Rs. 2.5 million, 35% tax rate will be applied for the amount exceeding Rs. 2.5 million.

Women will get rebate of 10% of Tax Amount.

tax rates for entity:

1. General Rate for company is 25%.
2. For entity engaged in Cigarette , bidi, tobacco, liquor, beer etc. - 30%
3. Bank, Financial Institutions, General Insurance Business - 30%
4. Entity dealing in petroleum - 30%
5. Special Industry engaged in infrastructure (on BOOT system), Electricity production and distribution -- 20%
6. Repatriation by Non- Resident's Foreign Permanent Establishments - 5%
7. Income earned by Exports by a Natural Person - 15%

International Taxation

For taxation purposes all payments and gains need to be considered on the basis of the source country of the e-payment.

Tax is imposed on the repatriated income of a foreign permanent establishment of a non- resident person situated in Nepal.

A tax credit may be claimed for any foreign income tax paid with respect to foreign source income. The tax credits are calculated separately for assessable foreign income sourced in each country and will not exceed the average rate of Nepal Income Tax applied to the Assessable Foreign Income.

Income Tax Return

Unless explicitly requested by the Department, No returns are required from taxpayers who have no tax payable for the income year or are resident individuals who have income exclusively from an employment having a source in Nepal, who have only one resident employer at a time during the income year.

Others has to file a signed return of income no later than 3 months after the end of each income year (i.e. Ashwin end). This date can be extended up to Poush end with prior approval of IRD.

The Department may amend the assessment within 4 years in order to adjust the assessed person's liability to tax in such manner as Department considers best as per the income tax act, 2058.

As assessment can be amended at any time in case of fraud.

Value Added Tax - Introduction

Taxes are of two types, Direct Tax and Indirect Tax. Income Tax is an example of direct tax whereas Value Added Tax (VAT) is an example of indirect tax. In indirect tax the person paying and bearing the tax is different. 

VAT is levied on the value added of goods and services at each stage in the process of production/import and distribution.

VAT Rates in Nepal:
In Nepal single rate of VAT is applied that is 13%.

Schedule II of the VAT Act, 2052 list out the goods and services which are zero rated. Zero RATE means VAT is charged with 0% (No VAT) but the person can avail Input Credit. This is also known as exemption with credit. Following are zero rated:

1. Export of Goods and Services.
2. Goods stored or for retail sales or for consumption on flight to a destination outside Nepal.
3.  Services provided to any person belonging to outside Nepal.
4. Diplomatic supply
5. Prior Exempted Projects (with prior agreement)
6. Supply to Economic Zone
7. Supply to power sector
8. Art work, Sculpture, Paintings by Small enterprises in Nepal for export through Export Trading House. 

Schedule I list out the goods that are exempt from VAT. The person dealing in such goods are not required to collect VAT. At the same time they are not allowed to avail input credit. They only need to get registered under VAT (on the basis of turnover or voluntarily). Agriculture, Goods of Basic Needs, health, Education etc. are some of the sectors that are exempted under VAT.

Illustration:

Suppose X Limited imported Goods worth Rs. 10,00,000/- and paid VAT 13% on it i.e. Rs. 130,000/- (Consider it as stage - I). These goods are sold to Y Private Limited for 11,00,000/- Plus VAT 13% (11,00,000 X 13% = 143,000/-) (Consider it as Stage – II). Again, Y Private Limited sold these goods to Mr. Z who is final consumer of the goods for Rs. 12,50,000/- Plus VAT 13% (VAT = 162,500/- = 12,50,000/- X 13%) (Consider it as Stage – III).

The concept of VAT is tax on Value Addition. In this example at stage I VAT is Rs. 130,000/- i.e. 13% of import value Rs. 10,00.000/-. At stage II profit of 100,000/- has been added to the actual import value and the goods are sold for Rs. 11,00,000/- to Y Private Limited. Since VAT is charged only on value addition VAT is equal to Rs. 13,000/- (i.e. 13% of Rs. 100,000). At stage III Y Private Limited has made profit of Rs. 150,000/- VAT on this would be Rs. 19,500/- (i.e. 150,000/-X 13%).

Thus, Total VAT = 130,000/- + 13,000/- + 19500/- = Rs 162,500/-

The final consumer has paid 162,000/- VAT to the Z Private Limited. This shows that burden of VAT is on the ultimate consumer.

Input Tax Credit

In this example, total of Rs. 162,000/- has to be paid to the government, but who will pay (deposit) this amount to government actually. Does Y Private Limited has to pay the full VAT amount of Rs. 162,000/-.

The answer is NO. Y Private Limited will get Input Credit of Rs. 143,000/- which is charged by X Limited while selling goods. Hence, the liability of Y Pvt. Ltd. is Rs. 19,500/- (162000/- Less Rs. 143,000/-)only.

Similarly X Private Limited gets Input Credit of Rs. 130,000/- which has been paid while importing the goods and has to pay Rs. 13,000/- (143,000/- Less 130,000) only to the government.

X Limited is the importer and has paid Rs. 130,000/- while importing the goods at the customs point. 

In summary, The liablity of Y to government is Rs. 19,500/- and the Liability of X is Rs. 13,000/-. Since Rs. 130,000/- has already been paid to the government at the customs point, total Tax collection of government is Rs. 162,5000/-. This tax amount is actually on head of  Mr. Z who has borne total amount of tax.

Input Tax Credit is Not Allowed in the following Situations:

1. If the purchase is made from the party which is not registered under VAT.
2. Input Credit cannot be claimed from the following invoices:

• Liquor/ Alcohol
• Drinks 
• Petrol (for Diesel Input Credit can be claimed)
• Entertainment Expenses
• Abbreviated Tax Invoice
• On Purchase of Automobiles (Three or Four Wheeler) which is used in both for personal and Business - 40% of VAT can be claimed as Credit. If it solely for business purpose e.g. delivery van, 100% VAT can be claimed as input credit.

Exception: If the person is engaged in above mentioned business 100% credit is allowed. For example, if a person is a dealer in liquor, it can claim 100% credit of VAT on the purchases.

Registration under VAT:

Threshold: If any person has turnover less than NPR 5 million for a continuous period of 12 months (2 million in case of services) need not to register in VAT. But Such person can voluntarily register itself in VAT.

Compulsory Registration under VAT:  Person dealing in:
Hardware Sanitary, Furniture, Fixture, Furnishing, Automobiles (Motor Parts), Catering Services, Party Palace Business, Parking Business, Dry cleaners using Machinery, Restaurant with Bar, Color Lab, Boutique, Tailoring with Shirting and Suiting, Uniform Supplier to Educational institute/ Health institute and Ice Cream Industry.

Temporary Registration: person involved in Industry, Business promotional short-term exhibitions are required to obtain VAT registration. VAT registration should be obtained before starting such exhibitions.
 

Salaried person, Banking and financial services, education and health services, agriculture produce etc. are not required to get register in VAT.

only person registered under VAT can claim input VAT as credit.

Capital Gain Tax - Nepal

Capital Gain Tax 

Capital Gains (Losses) means any profits or gains (Losses) arising from transfer of Capital Assets/ Capital Liabilities.

Transfer means: Transfer of ownership, distributions, mergers, Leases, extinguishment, destroy, lost, expired.

Gains from the transfer of Business Assets or Depreciable Assets are included in Business Income.

Gains on transfer of Non-Business Chargeable Assets (NBCA) are taxed at the prescribe rates. Other Capital Assets are not taxed e.g. Gains on Gold.

NBCA includes land, building, an interest in entity or securities. However, it does not includes:

1. Business Asset, Depreciable Asset or Trading Stock
2. A private building of an individual that has been owned continuously for ten years or more.
3. Interest in a retirement fund of a beneficiary
4. Land, House and land and building of an individual disposed off (sold/transferred) in less than thirty lakh rupees.
5. Assets of an individual that is disposed off by way of any type of transfer other than sales and purchase made within three generations.

NBCA hence includes only three types of assets:

• Land: all types of land
• Buildings: all buildings (except some residential)
• Securities: shares, debentures in an entity

Some to the information is given through following Questions and Answers.

Q. When the Tax on Land and Building collected?

Ans: Land Registration Office (Malpot) at the time of registration should collect the income tax.

Q. what is the tax rate for transfer of land and building (a) owned more than 10 years (b) owned 6 years (c) owned less than 5 years?

Ans:

a.       If owned more than 10 years, it is not considered NBCA, hence not taxable.

b.      If owned 5-10 years, tax rate is 2.5%.

c.       If owned for less than 5 years, tax rate is 5%

For entity who is not in real estate business:  tax rate is 10%

The tax so collected by the Malpot is considered as advance and it can be claimed as tax credit while submitting the income tax return.

Q. What is the area of a personal buildings?

Ans: The area of personal building and equal land area around the building or 1 ropani, whichever is less.

Q. What is the exemption limit for land and Building?

Ans: Upto NPR 30 lakh. Transfer of land and building below NPR 30 lakh is not taxable.

Q. what is any person has two houses?

Ans: one house is considered as personal(residential) building at the discretion of that person.

Shares and Debentures

Q. How the taxation is done on Securities?

Ans:

If listed in Nepal Stock Exchange:

1. For Natural Person: 5% (Final)
2. For Other (entity): 10% (Not Final)

If Not listed in Nepal Stock Exchange:

1. For Natural Person: 10% (Final)
2. For Others (entity): 15%(Not Fianl)

Q. How TDS is calculated on transfer of Securities?

Ans: if selling price of the share is more that the purchase price:

Income = Selling Price – Purchasing Price

In case, Purchase price is more than selling price there will be Capital Loss. Capital Loss can be set-off against capital gains.

CONCEPT OF TAX DEDUCTION AT SOURCE (TDS)/ WITHHOLDING TAX - NEPAL

Section to study:  
Section 2(ka) -withholding agent
Section 2(NA)- withholdee
Section 2(ga)- final withholding payment
Section 2(sa)-Rent
Section 87-withholding by employers
Section 88-withholding from Inestment Returns and Service Fees
Section 89-withholding from contract payments
Section 90- statements and payments of Tax Withheld
Section 91-withholding certificate
Section 92-final withholding payments
Section 93 Inclusion and Credit for Non-Final Withholding Tax

You should understand about:

a.     Payer (Withholding Agent)

b.     Payee (Withholdee)

c.     Withholding tax or Tax Deducted at Source (TDS)

d.     TDS Rates

e.      Final withholding tax

f.       Non-Final or Creditable withholding Tax

Income Tax Act requires the calculation of Taxable Income and computation of Income Tax in such income at the prescribed rates. Taxable Income and Income Tax are computed on annual basis. Income Tax is paid within prescribed time to the government. 

Hence, government has to wait for the whole year for tax revenue. Instead, Income Tax Act, 2058 has provisions by which government can collect tax revenue as income is earned by the person. This concept is also known as PAYE (Pay as you Earn).

Withholding Tax (Section 87 to Section 93) and Installments (Section 94 and Section 95) are the provisions in the IT Act in which tax is paid as income is earned. Here we will discuss about withholding tax or TDS.

Every payment transactions has two parties:

1.  Payer (Who makes payment for goods and/ or services) 
2. Receiver (Who provides goods and/or services and receives payments)

The payer while making payments for certain goods/services (as prescribed by the IT Act) has to make certain percentage of deduction(as prescribed by the IT Act) from the Gross payment and only balance amount has to be paid to the receiver.

For example Mr. A is the owner of a house in Kathmandu. The house is rented to XYZ Private Limited for 100,000/- per month.

Here, XYZ Pvt. Ltd.(the Payer) has to make payment to Mr. A (Receiver) Rs. 100,000/-. XYZ Pvt. Ltd. deducts Rs. 10,000/-(i,e. 10% of Rs. 1 lakh) and balance 90,000/- is paid to Mr. A. The deducted amount (TDS) Rs. 10,000/- has to be paid to the government by XYZ Pvt. Ltd.

I also want to explain that Rs. 100,000/- is the rent income of Mr. A and the same is rental expenditure for XYZ Pvt. Ltd. But here Rs. 100,000/- has not to be included in the income of Mr. A as Rs. 10,000/- has been deducted as Withholding Tax and as per section 88 (1)(4), it is Final in the hands of receiver, as Mr. A is a Natural Person.

Withholding Tax is of Two Types in Nepal:

1. Final Withholding Tax
2. Non-Final /Creditable withholding tax

Final Withholding Tax

In Final withholding tax, the receiver of the payment need not to show the received amount as income and also cannot claim the tax credit of the deducted amount.

For example, in the above case of Mr. A and XYZ Private Limited, Rent Income of Mr. A Rs. 100,000/- is not included in income of Mr. A. Similarly, he cannot claim Rs. 10,000/-, which has been withheld (deducted) by XYZ Private Limited, as tax credit.

Following are Final Final withholding tax payments (as per section 92)

1. Dividends paid by resident company - 5%
2. Payment of Rent to Natural Person - 10%
3. Gain on Investment Insurance -5%
4. Gain on payments of Unrecognized Retirement Fund - 5%
5. Payment of Interest by resident bank, finance Co. etc to a natural person - 5%
6. Payment of Interest by resident bank, finance Co. etc to a Exempted Entity - 15%
7. All payments to Non-Resident would be subject to final withholding tax. Sec. 92(1)(cha)
8. Meeting Allowances, Payment to Part-Time Teachers - 15%
9. Windfall Gains - 25%

 Non-Final/Creditable Withholding Tax

In case, the receiver of the payment has to include the amount received as income and claims the credit for the tax deduction, it is Non-Final/creditable Withholding tax.

For Example, Motor Constructions and XYZ Limited entered into a contract in which Motor Constructions agreed to build Lift in the building owned by XYZ Limited for Rs. 25 Lakhs.

XYZ Limited (Payer) has to deduct 1.5% withholding tax i,e,. Rs. 37,500/- and has to pay only Rs. 24,62,500/- (25 lakh – 37,500/-).

Motor Constructions has to include 25 lakh in its income and can claim Rs. 37,500/- as tax credit during his final assessment for the financial year. (Section 93)

TDS Returns and Payments (Sections 90)

Payment of TDS is to be made within 25 days from the month end. For example, TDS deducted in the month of Shrawan is deposited with in 25th of Bhadra and so on.

The person who has deducted the TDS (withholding agent) has to file a monthly withholding tax return through e-TDS system.

Interest, Fines and Penalties

If TDS return is not filed - 1.5% per month of the TDS amount.
If TDS is not paid within the prescribed time limit - 15% per annum (calculated monthly basis)