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:
- Payer (Who makes payment for goods and/ or services)
- 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:
- Final Withholding Tax
- 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)
- Dividends paid by resident company - 5%
- Payment of Rent to Natural Person - 10%
- Gain on Investment Insurance -5%
- Gain on payments of Unrecognized Retirement Fund - 5%
- Payment of Interest by resident bank, finance Co. etc to a natural person - 5%
- Payment of Interest by resident bank, finance Co. etc to a Exempted Entity - 15%
- All payments to Non-Resident would be subject to final withholding tax. Sec. 92(1)(cha)
- Meeting Allowances, Payment to Part-Time Teachers - 15%
- 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)
Thanks for sharing
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ReplyDeletein connection to 2 example above. what if mr A has salary income? does he need to add his office rent income with salary income while calculating tax?
ReplyDeleteNo.
ReplyDeleteSuppose, XYZ Pvt Ltd. is taking loan of Rs. 10 Lakhs from Mr.A @ 15% pa. Whether the provision of TDS Attracted in this transaction and also rate of interest @ 15% is justifiable ?
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