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)