An Overview of Tax Law in Nepal

The tax structure in Nepal consists of direct taxes like income tax and property tax, as well as indirect taxes such as value added tax (VAT) and customs duties. The Income Tax Act 2002 serves as the primary legislation for income taxation in Nepal, supplemented by annual Finance Acts that may introduce changes to tax rates and provisions.

The tax system in Nepal follows a self-assessment model, where taxpayers are required to calculate and pay their taxes based on the applicable laws. The Inland Revenue Department (IRD) under the Ministry of Finance is responsible for administering and enforcing direct taxes, while the Department of Customs handles customs duties and other import taxes.

Nepal has a progressive tax structure for individuals, with higher income earners paying a higher percentage of tax. For companies, there is generally a flat corporate tax rate, though certain sectors may be subject to different rates or tax incentives. The government also uses the tax system to incentivize priority sectors through various tax exemptions and deductions.

What is Tax in context of Nepal?

In the context of Nepal, tax refers to a mandatory financial charge or levy imposed by the government on individuals, companies, and other entities to fund various public expenditures and government activities. The tax system in Nepal is designed to raise revenue for the government while also serving as a tool for economic management and social welfare.

The concept of taxation in Nepal encompasses various types of taxes, including:

• Direct taxes: These are taxes levied directly on the income or assets of individuals and businesses. Examples include income tax, corporate tax, and property tax.
• Indirect taxes: These are taxes imposed on goods and services, with the burden typically passed on to the end consumer. Value Added Tax (VAT) and customs duties are major forms of indirect taxes in Nepal.
• Local taxes: Various taxes and fees imposed by local governments, such as business registration fees and property taxes.

Taxes in Nepal are collected based on the principle of equity and ability to pay. The tax system aims to ensure that those with higher incomes or more valuable assets contribute a larger share to government revenue.

Major Types of Tax in Nepal

Nepal’s tax system comprises several major types of taxes, each serving specific purposes in the overall revenue generation and economic management framework. The main types of taxes in Nepal include:

1. Income Tax: Levied on the income of individuals, companies, and other entities. It is a direct tax based on the taxpayer’s earnings during a fiscal year.
2. Value Added Tax (VAT): An indirect tax applied to the value added at each stage of production and distribution of goods and services. The standard VAT rate in Nepal is 13%.
3. Corporate Tax: Imposed on the profits of companies and other business entities. The general corporate tax rate is 25%, though it may vary for certain sectors.
4. Customs Duty: Taxes levied on goods imported into Nepal, with rates varying based on the type of goods and applicable trade agreements.
5. Excise Duty: Applied to specific goods manufactured or imported into Nepal, such as alcohol, tobacco, and certain luxury items.
6. Property Tax: Levied on immovable property, typically collected by local governments.
7. Capital Gains Tax: Imposed on profits from the sale of assets such as real estate or shares.
8. Dividend Tax: A tax on dividends distributed by companies to their shareholders.
9. Vehicle Tax: Annual tax paid by vehicle owners, usually based on the type and size of the vehicle.
10. Social Security Tax: A relatively new tax introduced to fund social security schemes for employees.

These various taxes contribute to the government’s revenue pool and are used to finance public services, infrastructure development, and other government expenditures.

Taxable Income in Nepal

Taxable income in Nepal refers to the portion of an individual’s or entity’s income that is subject to income tax under Nepali tax laws. The Income Tax Act 2002 provides the framework for determining taxable income. Generally, taxable income includes:

1. Employment Income: Salaries, wages, allowances, bonuses, and other benefits received from employment.
2. Business Income: Profits and gains derived from conducting any business or profession.
3. Investment Income: Interest, dividends, royalties, and rental income from investments.
4. Capital Gains: Profits from the sale of capital assets such as property or shares.

For residents of Nepal, taxable income includes income from both Nepali and foreign sources. Non-residents are taxed only on income sourced from Nepal. The fiscal year in Nepal runs from mid-July to mid-July of the following year.

To calculate taxable income, certain deductions and exemptions are allowed:

• Business expenses that are necessary and directly related to earning income
• Depreciation of business assets
• Contributions to approved retirement funds
• Donations to approved charitable organizations (up to certain limits)
• Personal exemptions for individuals

Taxpayers are required to maintain proper records of their income and expenses to accurately determine their taxable income. The Inland Revenue Department may conduct audits to verify the accuracy of reported taxable income.

Capital Gains Tax in Nepal

Capital Gains Tax (CGT) in Nepal is a tax levied on the profit or gain realized from the sale or disposal of capital assets. The tax is governed by the Income Tax Act 2002 and subsequent amendments. Capital assets typically include real estate, shares, bonds, and other investment properties.

For individuals, the Capital Gains Tax (CGT) rate is generally 5% for long-term capital gains, which applies to assets held for more than 365 days, and 7.5% for short-term gains. In the case of companies, capital gains are typically taxed at the standard corporate tax rate of 25%.

Capital gain is calculated as the difference between the sale price and the purchase price (cost basis) of the asset. Certain expenses related to the purchase and sale of the asset may be deducted from the gain to arrive at the taxable amount.

For real estate transactions, a withholding tax of 2.5% is applied on the sale value if the property was owned for more than 5 years. If the property was owned for less than 5 years, the withholding tax increases to 5%.

Gains from the sale of shares listed on the Nepal Stock Exchange are subject to a 5% CGT for long-term holdings and 7.5% for short-term holdings. For unlisted company shares, the CGT is 10% for individuals and 15% for corporate entities.

Certain capital gains may be exempt from tax, such as gains from the sale of a personal residence that has been owned and occupied for more than 10 years. Capital losses can be carried forward for up to 7 years to offset future capital gains, reducing the taxable amount in future years.

Capital gains must be reported in the annual tax return. For certain transactions, such as real estate sales, the tax is withheld at the time of sale. Non-resident individuals and entities are also subject to CGT on gains from assets located within Nepal.

Dividends in Nepal

Dividend taxation in Nepal is governed by the Income Tax Act 2002 and is an important aspect of the country’s tax system. Dividends refer to the distribution of profits by a company to its shareholders.

The standard dividend tax rate in Nepal is 5% for both resident and non-resident shareholders. This tax is typically withheld by the company at the time of dividend distribution. The 5% dividend tax is considered a final tax for both individual and corporate shareholders. This means that the dividend income is not included in the recipient’s taxable income for further taxation.

Companies distributing dividends are required to withhold the 5% tax and remit it to the Inland Revenue Department. The withholding and payment must be done within 25 days from the end of the month in which the dividend was distributed.

Nepal does not impose an additional Dividend Distribution Tax on companies. If a Double Taxation Avoidance Agreement (DTAA) exists between Nepal and the country of the non-resident shareholder, the lower tax rate specified in the treaty may apply. Dividends received by one resident company from another resident company are exempt from the 5% withholding tax to avoid double taxation. Certain industries or companies in special economic zones may enjoy exemptions or reduced rates on dividend distributions.

Companies must report all dividend distributions in their annual tax returns. Shareholders receiving dividends should also report this income in their tax returns, even though it’s considered finally taxed. Failure to withhold or remit dividend tax can result in penalties and interest charges. The issuance of bonus shares (stock dividends) is not subject to dividend tax at the time of issuance. However, when these shares are sold, they may be subject to capital gains tax.

Exempt Income in Nepal

In Nepal, certain types of income are exempt from taxation under the Income Tax Act 2002 and subsequent amendments. These exemptions are designed to promote specific economic activities, support certain sectors, or provide relief to particular groups.

Category	Tax Treatment
Agricultural Income	Income derived from agriculture by individuals is generally exempt from income tax. Income from agro-based industries operated by companies may be taxable.
Social Security Payments	Payments received under government social security schemes are exempt from tax.
Certain Retirement Benefits	A portion of retirement payments from approved retirement funds may be tax-exempt, depending on the nature of the retirement scheme.
Scholarships and Academic Awards	Scholarships and stipends received for academic purposes are typically tax-exempt.
Donations and Gifts	Gifts received on certain occasions (e.g., weddings) up to specified limits are exempt. Gifts related to business may be taxable.
Income of Diplomatic Missions	Income earned by foreign diplomatic missions and their staff is generally exempt, based on reciprocal arrangements.
Income of Certain Non-Profit Organizations	Income of registered charitable, religious, or educational organizations may be exempt if they meet specific criteria.
Certain Investment Income	Interest income from government or development bonds may be tax-exempt. Dividends between resident companies are exempt to avoid double taxation.
Income from Micro-Enterprises	Small-scale enterprises below certain turnover thresholds may enjoy tax exemptions for a specified period.
Special Economic Zones	Businesses operating in designated Special Economic Zones may be eligible for tax exemptions for a certain period.
Renewable Energy Projects	Income from certain renewable energy projects may be exempt for a specified number of years.
Specific Industries	Certain industries deemed crucial for national development may enjoy tax exemptions or concessions for a limited period.

Deductions of Taxation in Nepal

Deductions play a crucial role in the Nepalese tax system, allowing taxpayers to reduce their taxable income. The Income Tax Act 2002 and subsequent amendments provide for various deductions that individuals and businesses can claim.

Category	Tax Treatment
Business Expenses	Expenses incurred wholly and exclusively for business purposes are generally deductible. This includes salaries, rent, utilities, raw materials, and other operational costs.
Depreciation	Depreciation on fixed assets used in business is allowed as a deduction, with different rates applying to different asset categories as specified in the Act.
Interest Expenses	Interest paid on loans taken for business purposes is deductible, though restrictions apply to interest paid to related parties.
Bad Debts	Genuine bad debts written off during the year can be claimed as a deduction.
Research and Development	Expenses incurred on research and development activities may be deductible.
Repairs and Maintenance	Costs for repairs and maintenance of business assets are deductible, subject to certain limits.
Donations	Donations to approved charitable organizations are deductible up to a certain percentage of taxable income.

Taxation for Individuals in Nepal

Taxation for individuals in Nepal is governed by the Income Tax Act 2002 and subsequent amendments. The system is progressive, meaning higher income earners pay a higher percentage of tax.

An individual is considered a tax resident in Nepal if they reside in the country for 183 days or more within a fiscal year. Residents are taxed on their worldwide income, while non-residents are only taxed on income sourced from Nepal.

Taxable income includes employment income, business income, investment income, and capital gains. For the fiscal year 2022/23, tax rates are structured progressively. The first NPR 500,000 is subject to a 1% Social Security Tax. The next NPR 200,000 is taxed at 10%, followed by 20% on the next NPR 300,000. Income beyond NPR 1,000,000 is taxed at 30%, and for amounts above NPR 2,000,000, an additional 20% is levied, resulting in an effective rate of 36%.

The tax-free threshold applies to the first NPR 500,000, which is only subject to the 1% Social Security Tax. Married couples can opt for joint filing, which provides slightly higher tax brackets. Tax deductions and exemptions are available for contributions to approved retirement funds, life insurance premiums, medical expenses, and remote area allowances.

Capital gains tax is charged at 5% for long-term gains on assets held for more than 365 days, and 7.5% for short-term gains. Dividend and interest income are generally subject to a final withholding tax of 5%.

Annual tax returns must be filed within three months after the fiscal year ends, typically by mid-October. Employers are required to withhold taxes on salary payments. In addition to income tax, a Social Security Tax of 1% is collected on the first NPR 500,000 of income.

Individuals with business income may also be required to pay advance tax in installments. Failure to file or pay taxes on time can lead to penalties and interest charges. Residents must report foreign income, but can claim foreign tax credits to avoid double taxation.

Taxation for Companies in Nepal

Corporate taxation in Nepal is governed by the Income Tax Act 2002 and subsequent amendments. The system aims to generate revenue while promoting investment and economic growth.

The standard corporate tax rate in Nepal is 25% for most companies. However, banks, financial institutions, and insurance companies are taxed at a higher rate of 30%, as are special industries like those involved in tobacco or alcohol production.

A company is considered a tax resident if it is incorporated in Nepal or has its place of effective management in Nepal. Resident companies are taxed on their worldwide income, whereas non-resident companies are only taxed on Nepal-sourced income.

Taxable income for companies includes business income, investment income, and capital gains. Certain types of income, such as dividends from resident companies, may be exempt from taxation.

Deductions are available for expenses incurred wholly and exclusively for business purposes. Companies can also claim depreciation on fixed assets according to prescribed rates, and interest on business loans is deductible, though subject to thin capitalization rules.

Tax incentives are available for various sectors such as manufacturing, hydropower, and tourism, which may benefit from tax holidays or reduced rates. Additional incentives are provided to companies operating in special economic zones or underdeveloped areas.

Capital gains for companies are taxed as part of regular income at the applicable corporate tax rate. Companies are also required to withhold taxes on various payments, including dividends, interest, and service fees.

Companies must pay advance tax in three installments during the fiscal year, ensuring that their tax obligations are met progressively. Additionally, annual tax returns must be filed within three months after the fiscal year ends, accompanied by audited financial statements. Transfer pricing rules mandate that transactions between related parties must be conducted at arm’s length.

Business losses can be carried forward for up to 7 years, with certain industries eligible for an extended period of 12 years. Dividends distributed by resident companies are subject to a 5% withholding tax, which is typically a final tax.

International Taxation in Nepal

International taxation in Nepal encompasses the tax treatment of cross-border transactions and foreign entities operating within the country. The Income Tax Act 2002 and various Double Taxation Avoidance Agreements (DTAAs) form the framework for international taxation.

Nepal has Double Taxation Avoidance Agreements (DTAAs) with several countries, including India, China, South Korea, and Austria. Foreign companies with a Permanent Establishment (PE) in Nepal are taxed on the income attributable to that PE. A PE can be established through a fixed place of business, a construction site, or the provision of services in Nepal that exceed a certain duration, as defined by tax laws.

Withholding taxes apply to payments made to non-residents. These include a 5% tax on dividends, and 15% on interest, royalties, and technical service fees. However, the rates may be reduced under applicable DTAAs, depending on the country involved.

Nepal’s transfer pricing rules require that transactions between related parties be conducted at arm’s length, ensuring fairness in pricing. A foreign tax credit is available to Nepalese residents for taxes paid on foreign-source income. However, this credit is subject to certain limitations to ensure that tax relief is granted only for the amount of foreign taxes paid on income that is also subject to tax in Nepal.

Branch profit tax applies to the repatriation of profits by branches of foreign companies operating in Nepal. A 5% tax is imposed on the repatriated profits, ensuring that foreign companies contribute to the tax base when they send earnings out of the country. Non-residents are subject to tax on capital gains from the disposal of assets located in Nepal. This applies to real estate, shares, or other investments, ensuring that gains made by non-resident individuals or entities are taxed appropriately.

Read More: Taxation in Nepal Nepalese Tax Structure Income Tax Rules, 2059

Taxation for Specific Industries in Nepal

Nepal’s tax system includes specific provisions for certain industries, recognizing their unique characteristics or importance to the national economy.

Industry	Tax Treatment
Hydropower Industry	Concessional tax rate of 20%. Tax holiday of 10 years and a 50% rebate for an additional 5 years for projects commencing operations by 2023-24. Exemption from dividend tax for a specified period.
Manufacturing Industry	Standard corporate tax rate of 25%. Additional incentives for export-oriented industries. Concessions for industries established in underdeveloped areas.
Banking and Financial Institutions	Higher tax rate of 30%. Special provisions for loan loss provisions and interest income recognition.
Tourism Industry	Tax holidays for new hotels and resorts in designated areas. Concessional rates for travel and trekking agencies.
Information Technology	Tax exemptions for IT parks and related businesses. Concessions for software development and IT services exports.
Agriculture	Income from individual farming generally exempt. Concessional rates for agro-based industries.
Education Sector	Tax exemptions for certain educational institutions. Special provisions for private schools and colleges.
Healthcare	Tax incentives for hospitals in remote areas. Concessions for pharmaceutical industries.
Renewable Energy	Tax holidays for solar, wind, and biomass energy projects. Additional incentives for rural electrification projects.
Mining and Quarrying	Specific royalty regimes. Tax based on extraction volumes for certain minerals.
Telecommunications	Higher tax rate of 30%. Special provisions for spectrum fees and license renewals.
Insurance	30% tax rate for insurance companies. Special rules for premium recognition and reserve calculations.
Special Economic Zones (SEZ)	Various tax exemptions and concessions for industries in SEZs. Reduced customs duties on imports for SEZ industries.
Small and Medium Enterprises (SMEs)	Simplified tax regimes for small businesses. Turnover-based taxation options for certain categories.
Construction Industry	Special provisions for long-term contracts. Tax treatment of joint ventures and consortiums.

Tax Dispute Resolution Mechanisms in Nepal

Nepal has established various mechanisms for resolving tax disputes between taxpayers and tax authorities. These mechanisms aim to provide fair and efficient resolution of tax-related conflicts. The key elements of tax dispute resolution in Nepal include:

1. Administrative Review
2. Revenue Tribunal
3. Supreme Court
4. Alternative Dispute Resolution (ADR)
5. Mutual Agreement Procedure (MAP)

International Tax Agreements in Nepal

Nepal has entered into several international tax agreements to facilitate cross-border trade and investment while preventing double taxation and tax evasion.

Nepal has signed DTAAs with the following countries: India, China, South Korea, Thailand, Sri Lanka, Mauritius, Austria, Austria, Norway, Pakistan, & Qatar.

Laws governing Taxation in Nepal

The taxation system in Nepal is governed by a framework of laws, acts, and regulations:

1. Income Tax Act, 2002 (2058 BS)
2. Value Added Tax Act, 1996 (2052 BS)
3. Customs Act, 2007 (2064 BS)
4. Excise Act, 2002 (2058 BS)
5. Industrial Enterprises Act, 2020 (2076 BS)
6. Banks and Financial Institutions Act, 2017 (2073 BS)
7. Insurance Act

These laws work in conjunction to form the comprehensive legal framework for taxation in Nepal. They are supplemented by various regulations, directives, and circulars issued by relevant authorities like the Inland Revenue Department and the Ministry of Finance.

Authorities enforcing Taxation in Nepal

The enforcement of tax laws in Nepal is carried out by various government bodies and institution:

1. Inland Revenue Department (IRD)
2. Department of Customs
3. Ministry of Finance
4. Revenue Tribunal
5. Company Registrar’s Office

Read More:

1. Tax Audit Process in Nepal
2. An Overview of Tax Law in Nepal
3. Tax Law for Foreign Companies in Nepal
4. Corporate Tax Law in Nepal
5. VAT Registration Process in Nepal

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Disclaimer: This material is presented solely for informational purposes, without constituting legal advice, counsel, or solicitation, and no liability shall arise from any actions, omissions, or reliance on its contents, directly or indirectly, in any manner whatsoever, irrespective of the jurisdiction or specific circumstances.