Taxation of income in Nepal

Historical development of income tax in Nepal

1) Business profit and remuneration tax act 2017
2) Nepal income tax act 2019
Nepal income tax rule 2020
3) Income tax act 2031
Income tax act rule 2039
1. income tax act 2058
Income tax rule 2059

Reference
Income tax act 2058
Income tax rule 2059
Value added tax act 2052
Value added tax rule 2053
Custom duty act 2064
Excise duty act 2058

Income tax act 2058

Income tax rule 2059
Head of income
1. income from business and profession
2. Income from investment
3. Income from employment
4. Income from casual gain (25%fixed)
Features of income act 2058 “pay as you earn”
- Including all income tax related matter in one act
-Global income of a resident person is taxable
-Provision of resident status
-Defination of related terms/terminology
-Provision of block based depreciation system
-Estimation income statement and installment system of pay payment
-Provision of self assessment system
Provision of foreign tax credit
Provision of set-off and carry forward of losses
Provision of fine and penalties and appeal system
Defination of basic terminology
1. Income and assessment year
Income year Nepalese income year is considered as an income year
which started from 1st sharawan of a year and ended with 31st ashadh of
next year
-income year 2074/2075
Assessment year -assessment year is the year immediately following
the income year where in the income of the income year is assessed.
Assessment year 2075/2076
2) Income
Income of a person from employment,investment ,business and
profession and casual gain is known as income.
Gross assessable income
Total assessable income from employment,business ,profession and
investment before deducting any deductible expenses.
Net assessable income
Income after deducting all allowable deduction but before deducting
any common deduction or reduction.
Taxable income
Income derived after deducting common deduction from assessable
income.
1. person -Natural as well as artificial
2. Entity-all the organization registered as per the low are knows as
entity.(artificial person)
3. Individual- natural person,sole proprietorship firm run by natural
person and couple elected as for tax assessment under sec 50.
4. Company- company established under company act 2063
5. Partnership firm- partnership firm having less than 20 partners
but it excludes joint venture.
6. Resident person
A) individual
- whose normal place of a in Nepal
-Employee of Nepal government posted abroad
-Who present in Nepal for 183 days or more in the consecutive period
of 365 days.
B) entity
Entity registered and operated in Nepal
9) Capital and revenue receipt
Capital receipt -- an amount received for long term purpose is capital
receipts, like capital introduced by proprietor, issue of share,debenture,
loan taken, received for sale of depreciable assets etc
Revenue receipt -- an amount received for short term purpose is
revenue received sales of goods,sales for furniture for furniture
suppliers etc
10) Cash vs accrual basis accounting
Cash basis accounting --A tax accounting method that treats an amount
as income only when payment is received and as expenses when
payment is made
Accrual basis of accounting -- a tax accounting that treats an amount as
income when the person becomes entitled to the payment and as
expenses when the person is obliged to make the payment.
11) Retirement fund
Organization accepting and investing retirement contribution from a
person with the objective of providing retirement payment at the time
of retirement of a beneficiary.
Approved retirement fund
Retirement fund established with pre -approved of IRD(inland revenue
department)
Unapproved retirement fund
Retirement fund established without pre- approved IRD
12) Retirement contribution
Contribution made by a person to the retirement fund with the
objective of getting retirement payment at the time of retirement
Limit
1/3 of total assessable income xxx
Or actual contribution made xxx
Or maximize limit Rs 300000
(whichever is less)
Retirement made by unapproved retirement fund is not allowed for
deduction
13) Retirement payment
By approved retirement fund At the time of retirement beneficial
50% of total payment
Or Rs 500000
Whichever is higher is tax free and balance is taxed at @5%as a final
TDS
By unapproved retirement fund
Retirement payment is tax free but gain on retirement fund is taxed
@5% as final TDS
Gain = total retirement payment-total contribution
14) Trading stock
The stock hold by a person for resale purpose is called trading stock.
-Raw material
-Work in progress
-Finished stock
15) business assets -the assets used in business is called business
assets.eg peace of land used in business but it excludes trading stock
and depreciable assets.

16) Depreciable assets - those assets there value loss in use

17) Non business chargeable assets
It includes share, securities or an interest in an entity as well land and
building but it excludes the following assets
1) business assets,depreciable assets or trading stock
2) A private residence of an individual that has been-
- owned continuously for at least 10years
-an interest of a beneficiary in a retirement fund
1. land and private residence of an individual that is disposed of for
less than 30 lakh rupee( private building means building with land
occupied)
2. Non business assets of an individual that is disposed of by way of
any type of transfer other than sales and purchase made within three
generations.
18)withholding payments
The payment required tax deduction at source is called withholding
payments. Such as rent, royalty,interest,commission
remuneration,natural payment,dividend and other service fees and
contract fees
-Final withholding payments/final TDS
-non final withholding payments/advance TDS
Withholding agent - the person who have right to deduct tax at source
Withholdee:- the person required TDS is called withholdee.
19)Royalty- Payment received for giving right of assets. Eg right to use a
copyright,patent,design,model,plan,secret formula,process or
trademark.
20)Natural resources payment - payment received for giving right to
removal of assets for eg payment for the right to take water, minerals or
living or non- living resource from the land.
21) General interest rate -15%
22)Adjusted taxable income
Adjusted taxable income means the income before deducting
interest(sec 14-2),donation(sec 12),pollution control cost(sec 17) and
research and development cost(sec 18)
23)tax exempted organization
1. Social, religious,educational or a charitable organization of a
public character established without profit motive.
2. An amateur sporting association formed for the purpose of
promoting social or sporting facilities not involving the acquisition
motive.
3. A political party registered with the election commission.
4. VDC,DDC,municipality
5. Nepal Rastra bank
Government of Nepal,provided that any entity, giving benefit to any
person from the assets of , and amounts derived by the entity expect in
pursuit of the entity’s function s per its objectives or as payment for
assets or services rendered to the entity by the person is not exempt
from tax.
Income from business
1. taxable income/admissible income
2. Non taxable income/inadmissible income
3. Allowable deduction/deductible expenses
4. Non allowable deduction / non deductible expenses
5. Tax rate,rebate,concessions and exemption
6. Format
7. Admissible income/taxable income(section 7)
A. services fees including management and technical service
fees,advisory fees, visiting fees,project preparation fees,tuition fees,and
other revenue depending upon the nature of service.
B. Amount derived from disposal of trading stock.
C. Net gain from the disposal of business assets and liabilities
net gain = total of incoming - total of outgoing
A. Net gain from the disposal of depreciable assets.(if only whole
pool is dissolve)
B. Income generally included in investment income but directly
relating to business such as rent income,interest income,royalty income
etc.
C. Payment received for accepting any restriction regarding business.
D. Compensation received for loss of stock(trading stock)
E. Income to be included into business due to change in accounting
system.
F. Income to be included into business income due to exchange rate
variation(exchange gain)
G. Under payment of interest/interest subsidy
H. Gift,price,reward relating to business
In the form of cash
In the form of goods -- current market price
L) income to be included in business income under long term contract
as per the percentage of work completion
M) bad debt recovered(previously allowed)
N) expenses which is deducted but not expended
O) other income miscellaneous income, sundry income,discount
received commission received etc.
1. Inadmissible income/non taxable income
Section 10
A. Remuneration received by a foreign diplomat working in a
diplomatic mission in Nepal under bilateral and multilateral treaty.
B. Remuneration received by foreign citizen from public fund of
foreign government working in Nepal.
C. Remuneration received by a foreign citizen from the employment
of Nepal government in terms of tax exemption.
D. Allowance distributed by the Nepal government widows,elder
citizen and disable or handicraft person
E. Income received in the form of gift.prizes,rewards
scholarship,bequest and inheritance expect relating to
business,investment and employment
F. Pension income received by a Nepalese citizen retired from army
or police service of foreign government.
Section 11
G) agriculture income of an individual expect relating to business or
agro based industry
H) Income of co operative society under co-operative act 2048 mainly
based on agriculture and forest.
Final withholding payment(Section 92)
I) Dividend from residence company @5% final TDS
J) Gain on investment insurance received by the natural person@5%
final TDS
H) Retirement payment made by approved retirement fund or Nepal
government
50% of total payment
Or
Rs 500000
Whichever is higher is tax free and balance is taxed @5% as final TDS
I) Rent from land and building and associated fixture
(house rent),furniture received by the natural person other than
business @ 10% as a final TDS !
J) Interest received by a natural person from bank,financial institutions
other than business.@5%
k) Part time remuneration 15%
L) Casual income 25%
M) Amount received from accumulated home or sick leave
N) Remuneration received by writing article in newspaper and mag
zines.remuneration received by acting as an examiner such as setting of
question paper,checking of answer sheet and conducting the examiner.
1. admissible expenses/allowable deduction
A) general deduction (sec 13)
All the expenses (revenue expenses) incurred in the process of
production of goods and services are allowed for deduction such as
manufacturing expenses,office and adm expenses and selling and
distribution expenses
B) interest expenses (sec 14)
All the interest on loan taking for the purpose for the business are
allowed for deduction.but
- interest on owners capital is not allowable for deduction
-interest paid by one unit to another units of a same person is not
allowable for deduction.
-interest on loan taking for private use not allowed for deduction
-interest paid to the partner is allowed for deduction if partner the
included interest income in his taxable income.
-Interest paid to the director is allowed for a deduction if he included
the interest income in his taxable income.
Interest paid to the controlling entity (sec 14.2)
Limit
50% of adjusted taxable income before including any interest income
and before deducting any interest expenses + interest income during
the year
Or, Actual interest paid to the controlling entity
(whichever is less)
Note any unallowable interest paid to the controlling entity due to limit
can be carry-forward for next year.
C) cost of trading stock(sec15)
Trading concern
Beginning inventory XX
Add:- purchase XX
Purchase related expenses XX
Less:- ending inventory XX
Cost of trading stock XX
Manufacturing concern
Beginning inventory of finished goods XX
Add:- R/M consumed(opening + purchase - closing ) XX
Direct labour cost XX
Direct expenses XX
Royalty on production XX
Manufacturing overhead (depn -- X) XX
Less:- ending inventory of finished goods XX
Cost of trading stock XX
Valuation of inventory
Note:- Cost price or Market price (whichever is less)
Person adopting cash basis accounting can use either prime cost or
factory cost method for taking product cost
Person adopting accrual basis accounting must be use factory cost
method .
Prime cost -- Direct costing/Marginal costing/ Variable costing
Factory cost -- Full costing/Absorption costing/ Traditional costing
Person adopting cash or accrual basis accounting
Entity must adopting accrual basis accounting
D) Repair and improvement cost (sec 16)
Limit
7% of depreciation base amount XX
Or actual repair and improvement cost XX
(whichever is less)
Note any unallowable repair and improvement cost due to the limit for
the year should be capitalized under respective block of assets at the
end of the year or beginning of the next year.
E) Pollution and control cost (PPC) ( sec 17)
Limit
50% of adjusted taxable income XX
Or
Actual PCC XX
(whichever is less)
F) Research and development cost (R &D)(sec 18)
Limit
50% of adjusted taxable income
Or
Actual R &D
(whichever is less)
Note:- any unallowable PCC and R&D cost due to the limit should be
capitalized under block ‘D’ at the end of the year or beginning of the
next year.
Adjusted taxable income for PCC and R &D purpose
Details Rs
Gross income from business XX
Add:-assessable income from other business XX
Less:- allowable deduction XX
Business loss(current and previous) XX
Adjusted taxable income XX
Or
Net profit as per profit and loss a/c XX
Add:- pollution control cost ( if deducted) XX
Add:- research and dev cost (if deducted) XX
Add:-Donation (if deducted) XX
Less:- business loss (if not deducted) XX
Adjusted taxable income XX

G) Depreciation (sec 19)

1) Block wise classification of assets and their rate of depn
Block/pool Types of assets rate method
A building group Building,construction and similar 5% DBM
types of permanent structure
B: Computer,data processing 25% DBM
furniture,equipment equipment,office furniture and
and computer group others office equipment
C: vehicle group Car, jeep,van, bus, mini 20% DBM
bus,truck,mini truck,motor bike etc
D: machinery group Construction and earth moving 15% DBM
equipment,plant and
machinery,production equipment etc
Intangible assets Patent right, copy Cost/life SLM
right,trademark,goodwill,software,de
sign,secret formula

Life of block E
10 years 10 years
10.2 years 10 years
10.5 years 10 years
10.6 years 10.5 years
10.11 years 10.5 years
Depn = total cost / life
2) Period wise purchased and their absorption
Period of purchase Absorbed Unabsorbed
1st sharawon to end of poush (1st 6 3/3 Nil
month)
1st magh to end of chaitra (next 3 2/3 1/3
month)
1st baishak to end of ashadh 1/3 2/3
3) Calculation of depreciation base amount and allowable depn for the
year
Details Blocks
Opening depreciation base amount XX
Add:- addition during the year(period wise purchase) XX
Less:- disposal during the year(cash salvage value) XX
Depreciation base amount XX
Rate of depreciation XX
Allowable depreciation( depn base x rate/100) XX
4) Calculation of depreciation base amount at the year end or beginning
of the next year
Balance after charging depreciation (depn base - depn) XX
Add:- unabsorbed portion of assets purchase(period wise XX
purchase)
Capitalized value of repair cost(respective block)
XX
Capitalized value of PCC and R&D cost(only on block D)
XX
Closing depreciation base amount XX
1. if the balance after charging depreciation is left less than Rs 2000.
the whole amount should be included in allowable depreciation and
closing balance will be nil.
2. Entity running special industry is allowed additional depreciation
1/3 of its normal allowable depreciation but individual running same
industry is not allowed such facility.
Special industry :- all the manufacturing industry except producing
liquor and tobacco product
1. entity engaged in building of public physical infrastructure or own
operate and transfer to Nepal government(boot entity) such as building
of power station,generating and transmission of electricity, construction
and operation of road bridge,tunnel.rope way trolley bus,sky bridge
etc,is also allowed additional depn 1/3 of its normal depn.
H) losses( sec 20)
Set off,carry forward of losses
Business losses
1. Domestic business loss
2. Foreign business loss
Domestic business loss can be set off from
- Another business income
-Domestic investment income
-Foreign business income
-Foreign investment income
Foreign business loss can be set off from
-Another foreign business(same country)
-Foreign investment income(same country)
Investment losses
1. domestic investment loss
2. Foreign investment loss
Domestic investment loss can be set off from
-Another domestic investment income
-Foreign investment income
Foreign investment loss can be set off from
-Another foreign investment income(same country)
Carry forward provision
1. general business loss can be carry forward up to next 7 years
2. Investment loss can be carry forward up to next 7 years
3. Loss of the entity engaged in building of public physical
infrastructure own operate and transfer to the Nepal government can
be carry forward up to next 12 years.
4. Loss of the entity engaged in petroleum business under petroleum
act 2040 can be carry forward up to next 12 years
5. Loss due to donation, PCC and R &D cost is not allowed for carry
forward
6. Loss of the entity getting special concession is not allowed for set
off and carry forward against normal business income.
7. loss of the entity getting special concession in any year can not be
carry forward for the next year.
8. Loss of the entity engaged in long term contract under global
competition at the end of its completion after carry forward may
allowed carry backward facility by IRD as per request made by such
entity
I) Bad dept expenses(sec 25)
J) Other expenses relating to the business
Miscellaneous expenses,sundry expenses,discount and commission
allowed,scrap loss etc
K) common deduction/reduction(sec 63)
1. contribution retirement fund
1/3 of total assessable income
Or, actual contribution made
Or, maximum limit Rs 300000
(whichever is less)
Note:- but contribution made to unapproved retirement fund is not
allowable for deduction
1. donation to tax exempt organization (sec12)
A. general donation
5% of adjusted taxable income
Or,actual donation paid
Or, maximum limit Rs 100000
(whichever is less)
B) donation given by a company for the work of protection and
promotion of ancient and religious heritage and building of public
physical infrastructure for the development and promotion of sports
activities in the society is allowed as under
10% total assessable income
Or,actual donation paid
Or,maximum limit Rs 1000000
(whichever is less)
Donation given to earthquake victim through P.M. relief fund and
reconstruction fund is fully allowable for reduction.
The government of Nepal may allowed full or partial amount of
donation for specific purpose for publishing notice on Nepal
gazette(rajpatra)
1. inadmissible expenses/deduction not allowed(sec 21)
A. personal and domestic expenses of tax payer
B. Expenses of capital nature,such as acquisition of fixed
assets,expenses relating to disposal of liabilities or premium on
redemption of bond and debenture.
C. Fine and penalties for violating rules and regulation or breach of
low
D. Tax paid under income tax act 2058,
Income tax ,interest on tax payable,fine or penalties for delay in
payment of tax or non payment of tax.
E) legal expenses incurred appeal against tax officer or tax department
F) Expenses relating to non taxable income or final withholding
payment.
G)Distribution of income or appropriation of profit
Provision of tax, tax paid,provision for dividend,dividend paid,transfer
to general reserve,transfer to various fund
H)Ttax paid to the foreign government(if foreign tax credit is claimed)
I) Cash payment at a time more than rs 50000 by a person having
annual turnover 20 lakh or more expect in the following condition.
-If the payment is made to the Nepal government constitutional
bodies,and owned corporation (bank and financial institution)
-If the payment is made to the approved retirement fund
-If payment is made at the time when banking service are closed
- If the payment is made at the place where banking are not available
around 10 km area
- if payment is made to a farmer producing primary agriculture product
1. tax rates, rebates, concession and exemption
case of individual
A. A individual is generally taxed at progressive tax rate system as
follows.
Individual having employment income
For individual (74/75) For couple(74/75) Rate
Up to Rs 350000 Up to Rs 400000 1%
Next Rs 100000 Next Rs 100000 15%
Next Rs 2050000 2000000 25%
Balance Balance 35%

Individual having business or investment income

For individual(74/75) For couple (74/75) Rate
Up to Rs 350000 Up to 400000 Nil
Next Rs 100000 Next Rs 100000 15%
Next Rs 2050000 Next Rs 2000000 25%
Balance Balance 35%
B) individual running special industry is taxed 20% in place of 25%
C) individual having export income during the year is taxed at 15% in
place of 25%
D) individual is allowed following additional exemption in addition to
his/her statory exemption
1. additional exemption for life insurance premium
Limit
Actual premium paid
Or, maximum limit Rs 20000
(whichever is less)
1. health insurance premium
Actual premium paid
Or maximum limit Rs 200000
(whichever is less)
1. additional exemption for working in remote area/hardship
allowance
Remote area A B C D E
Exemption (Rs) 50000 40000 30000 20000 10000
1. Additional exemption for pension
25% of basic exemption
Or,pension income during the year
(whichever is less is tax free)
1. additional exemption to a disable or handicraft person 50% basic
exemption is tax free
2. Additional exemption to the Nepalese diplomat posted
abroad/75% foreign allowance tax free
3. An individual having gain on non business chargeable
assets(capital gain)is taxed @ 10% of after adjusting basic exemption.
Gain on sales of share
Listed company @5%
Non listed company @ 10%
Gain on sales of land and building
Ownership within 5 years @ 5%
Ownership more than 5 years @ 2.5%
1. If a resident individual is a women having remuneration income
only, she is entitled to a rebate of 10% on tax liability
2. Individual having annual turnover not more than 2000000 and
annual profit not exceeding Rs 200000 may elect him/herself as a small
tax payers required to pay tax depending on the area where the
business conducted.
Metropolis or sub metropolis Rs 5000
Municipalities Rs 2500
Other place Rs 1500
However individual selecting this facility is not allowed to claim advance
tax paid, medical tax credit,basic and other exemption.
Annual tax applicable to public transport is as follows
Minibus,mini truck,truck,bus Rs 3000
Car,jeep,van,micro bus Rs 2400
Three wheeler,auto rickshaw,tempo Rs 1550
Tractor and power tiller Rs 1000
1. the following exemption(rebate) are available from tax liability(tax
credit)
A. medical tax credit
Limit
15% of approved medical bill
Or maximum limit Rs 750
(whichever is less)
Note:- any allowable medical tax credit due to limit during the year is
allowed for carry forward up to next year
B) women having employment income only is allowed 10 % tax rebate
on total tax liability.
C) foreign tax credit
Tax liability on foreign income as per average tax rate in Nepal
Or actual tax paid to foreign country
(whichever is less)
Average tax rate in Nepal = total tax liability / total taxable income
10) Non resident individual is taxed at flat rate of 25% on his/her
taxable income and no exemption are allowed,
In case if entity
1. entity are generally taxed at flate rate of 25% and no exemption is
allowed.
2. Income of an unapproved retirement fund is taxed at flate rate of
25%
3. Income of and approved retirement fund is exempt form tax(zero
tax)
4. Entity running special industry is taxed at flate rate of 20%
5. Entity having export income during the year is taxed at a flate rate
of 20%
6. Export income of manufacturing firm expert manufacture goods is
taxed at flate rate 20%----
7. Income of a co-operate society registered under co-operate act
2048 except relating to agriculture and forest taxed at a flate rate of
20%.
8. Entity engaged in building of public physical infrastructure owing
operating and transfer to the Nepal government (BOOT entity) is taxed
at flate rate of 20%.
9. Entity engaged in petroleum business under petroleum act 2040
(exploring and excavating of petroleum) is taxed at flate rate of 30%
10. Repatriated income of a foreign permanent establishment of non
resident person situated in Nepal is taxed at 5%
11. Non resident person providing shipping, air transport and
telecommunication service situated in Nepal is taxed at 5%
- service within Nepal @2%
-service beyond Nepal(inside and outside the Nepal @5%
1. special industry and IT industry providing direct employment to
300 or more Nepalese citizen during the whole year is taxed at 90% of
normal applicable taxed rate
IT industry = 90% of 25%=22.5%
Special industry = 90% of 20%= 18%
1. special industry providing direct employment to 1200 or more
Nepalese citizen during the whole year is taxed at 80% of normal
applicable rate (80% of 20% = 16% )
2. Special industry providing direct employment to 100 or more
Nepalese citizen at least including 33% women or downtrodden
people(dalit) or handicraft person is taxed at 80% of normal applicable
rate (80%of 20 = 16% )
3. Special industry established in highly undeveloped region,
undeveloped region and underdeveloped region is taxed at 10%,20%
and 30% of normal applicable tax rate respectively for 1 st 10 years
including operating year of operation.
Highly undeveloped region = 10% of 20 % = 2%
Undeveloped region = 20% of 20% = 4%
Underdeveloped region = 30% of 20% = 6%
1. special industry established in specific economic zone(SEZ)
situated in mountain district and hilly district is as under
1St 10 years ----------- total tax free
After 10 years --------50% of the tax rebate
1. special industries established in SEZ situated other than
maintained above is taxed as under
1st 5 year ----------- total tax free
After 5 year --------50% of tax rebate
1. industry getting two or more concession at time is allowed only
one facility as per the selection made by such industry.
2. Licensed industries engaged in production and distribution of
electricity, if production and distribution completed by the end of
chaitra 2075, 100 % exemption. The facility is available also for solar.
Biogas and wind energy.
3. Format

Computation of assessable income from business

As per income tax act 2048
Particulars Rs Rs
Gross assessable income from business
Services fees
Amt derived from disposal of trading stock
All other income
Less:- allowable deduction
General deduction
Interest
All allowable deduction (expect PCC and R &D)
Total deduction before PCC and R&D
Adjusted taxable income before loss
adjustment
Less:- business loss
Adjusted taxable income for PCC and R&D
Less:- allowable PCC and R&D
Assessable income from business
 Statement of total taxable income
Particulars Rs Rs
Assessable income from business
Assessable income from other business
Assessable income from investment
Assessable income from employment
Total assessable income
Less:- allowable deduction
Contribution to retirement fund
Donation
total taxable income before exemption
Life insurance premium
Health insurance premium
Remote are facility
Pension facility
Other deduction (general and special)
Taxable income