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.

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.

Income From Business - Nepal

Taxable Income and computation of tax from Business

(Income tax act 2058, nepal)

Important Sections:

Section – 2 ka. ja.,

section -  7 – Charging section

section 22 – method of accounting

section 31 – characterization of compensation payments

section 13 to section 20 - Deductions allowed

section 12 – donations

section 21 – Deduction not allowed

section 59 – loss provision (For Bank)

Section 71 - Foreign Tax Credit

Business entity prepares its annual financial statements. The profit and loss account is a statement which shows profit earned or losses incurred by any entity for a financial year. Similarly balance sheet shows its financial position at the end of that financial year.

Generally Financial Reports are prepared in accordance with GAAP, Accounting Standards, Company Laws etc. 

For computation of Income Tax of the entity, at first Taxable Income is to be computed. Prescribed Income Tax Rates are applied to find the Income Tax.

So, what is taxable income?

For business entity, taxable income is computed by applying laws and procedures prescribed in the Income Tax Act, 2058. Section 7 is the charging section for computation of Income from Business. This section explains what are to be included in business income. Similarly, Section 13 to 19 explains the expenses that can be deducted for the income. Section 20 talks about the losses that can be set off against the income. Section 21 explains the expenses that are not deductible as per Income Tax Act.

Net Income (Profit) = Gross Income - Allowable Expenses 

Example: For ABC Private Limited

Sales Income - 500,000/-

Expenses 

- Cost of Sales - 200,000/-

- Salary 150,000/-

- Telephone 30,000/-

- Electricity 50,000/-

- Interest 70,000/-

Net Income = Nil

Tax = Nil (since no income/profit)

While vouching the documents, Income Tax Officer found that telephone is also used for personal purpose by Director of the company 50% i,e,. Rs. 15,000/- and Electricity expenses also included of home expenses of the Director 20% i,e,. Rs. 10,000/-

Therefore the expenses deductible would be Rs. 475,000/- only. Income would be Rs. 25,000/- (Rs. 500,000-475,000). Applying Normal Tax Rate for the company i,e,. 25%.

Income Tax = 25,000 X 25% = Rs. 6,250/-