What is direct tax in Nepal?

Direct tax in Nepal refers to taxes that are paid directly by individuals and entities to the government based on their income, profits, or property. The key characteristic of direct taxes is that the tax burden cannot be shifted to others – the person or entity on whom the tax is imposed is responsible for paying it. Examples include income tax, corporate tax, and property tax.

What comes under Direct Tax in Nepal?

The main types of direct taxes in Nepal include:

• • Income tax (personal and corporate)

• • Property tax

• • Land revenue tax

• • Vehicle tax

• • Capital gains tax

• • Dividend tax

• • Interest tax

These taxes are directly paid by taxpayers to the Inland Revenue Department based on their income, assets, or financial transactions.

What are examples of direct tax?

Some common examples of direct taxes in Nepal are:

• • Personal income tax paid by individuals on their salaries and other income

• • Corporate income tax paid by companies on their profits

• • Property tax paid by property owners on the value of their real estate

• • Capital gains tax paid on profits from selling assets like stocks or property

• • Dividend tax paid on dividend income from investments

• • Vehicle tax paid annually by vehicle owners

These taxes are directly assessed on and paid by the taxpayer to the government.

How is direct tax different from indirect tax?

The key differences between direct and indirect taxes in Nepal are:

1. 1. Incidence: Direct taxes are paid directly by the taxpayer to the government. Indirect taxes are collected by intermediaries and passed on to consumers.

1. 1. Shifting: The burden of direct taxes cannot be shifted, while indirect taxes can be passed on to others.

1. 1. Types: Direct taxes include income tax, property tax, etc. Indirect taxes include VAT, customs duties, excise, etc.

1. 1. Assessment: Direct taxes are assessed on income/wealth. Indirect taxes are levied on goods and services.

1. 1. Rates: Direct tax rates are often progressive. Indirect tax rates are usually flat.

How does direct tax work?

Direct taxes in Nepal work as follows:

1. 1. The government imposes taxes on income, profits, or property of individuals and businesses.

1. 1. Taxpayers calculate their tax liability based on applicable rates and rules.

1. 1. They file tax returns declaring their income/assets and taxes due.

1. 1. Taxes are paid directly to the Inland Revenue Department through banks.

1. 1. For employment income, employers deduct taxes from salaries and remit to the government.

1. 1. The tax authority can audit returns and assess additional taxes if needed.

1. 1. Penalties apply for non-compliance or tax evasion.

The system relies on self-assessment with government oversight.

Who pays direct taxes?

Direct taxes in Nepal are paid by:

1. 1. Individuals – on their personal income from salary, business, investments, etc.

1. 1. Companies and businesses – on their profits and capital gains

1. 1. Property owners – on the value of land and buildings owned

1. 1. Vehicle owners – annual taxes on vehicles owned

1. 1. Investors – on dividend and interest income

1. 1. Employers – withholding taxes from employee salaries

1. 1. Self-employed professionals – on their business income

1. 1. Non-residents – on Nepal-sourced income

Essentially, any person or entity earning taxable income or owning taxable assets in Nepal is liable to pay applicable direct taxes.

What is the role of direct tax?

The key roles of direct taxes in Nepal are:

1. 1. Revenue generation for the government to fund public expenditure and development

1. 1. Redistributing wealth by taxing high-income groups at higher rates

1. 1. Encouraging savings and investment through tax incentives

1. 1. Discouraging harmful activities through higher tax rates (e.g. on tobacco)

1. 1. Promoting fiscal federalism by sharing tax revenues with provinces

1. 1. Formalizing the economy by bringing more people into the tax net

1. 1. Gathering economic data through tax returns for policy planning

1. 1. Promoting voluntary compliance and tax morale among citizens

Direct taxes are thus a crucial fiscal and economic policy tool for the government.

How to calculate direct tax?

The process to calculate direct tax in Nepal involves:

1. 1. Determine taxable income by adding all sources of income.

1. 1. Subtract allowable deductions and exemptions from total income.

1. 1. Apply the relevant tax rate slab to the taxable income. For individuals, rates range from 1% to 36% based on income level.

1. 1. Calculate tax payable by multiplying taxable income by applicable rate.

1. 1. Add any additional taxes like social security tax.

1. 1. Subtract tax credits and advance tax payments already made.

1. 1. The final amount is the direct tax payable.

For businesses, a flat 25% corporate tax rate generally applies on taxable profits. Specialized software and professional help is often used for complex calculations.

Read More:

• Import Tax Rate in Nepal
• History of Income Tax in Nepal
• Inland Revenue Department

Are there exemptions for direct taxes?

Yes, Nepal provides several exemptions for direct taxes:

1. 1. Basic exemption limit on personal income (currently NPR 450,000 for individuals)

1. 1. Exemptions for specific income sources like agricultural income

1. 1. Deductions for expenses like medical costs, insurance premiums

1. 1. Tax holidays for new industries in priority sectors

1. 1. Reduced rates for small businesses and cooperatives

1. 1. Exemptions for charitable and religious organizations

1. 1. Concessions for senior citizens, disabled persons, and remote areas

1. 1. Exemptions on certain capital gains and dividends

1. 1. Tax rebates for women and disadvantaged groups

1. 1. Industry-specific incentives like for hydropower and tourism sectors

The exemptions aim to promote equity, investment and priority sectors.

How are direct taxes collected?

Direct taxes in Nepal are collected through the following methods:

1. 1. Self-assessment: Taxpayers calculate and pay taxes voluntarily.

1. 1. Withholding: Employers deduct taxes from employee salaries.

1. 1. Advance tax: Businesses pay taxes in installments throughout the year.

1. 1. Tax deduction at source (TDS): On certain payments like rent, contracts, etc.

1. 1. Online payments: Through banking channels and digital payment systems.

1. 1. Physical payments: At tax offices and authorized banks.

1. 1. Automated systems: For vehicle and property taxes based on government records.

1. 1. Audits and assessments: Tax authorities verify returns and collect additional taxes.

1. 1. Enforcement actions: For non-compliant taxpayers through penalties and legal measures.

The Inland Revenue Department oversees the overall tax collection process.

How often are direct taxes paid?

The frequency of direct tax payments in Nepal varies:

1. 1. Personal income tax: Annually, with the fiscal year ending mid-July. Returns are due by mid-October.

1. 1. Corporate tax: Annually, with advance tax in three installments during the year.

1. 1. Withholding tax: Monthly remittance by employers.

1. 1. Property tax: Annually, usually at the start of the fiscal year.

1. 1. Vehicle tax: Annually, based on the registration date.

1. 1. Capital gains tax: At the time of asset sale/transfer.

1. 1. Dividend/interest tax: At the time of payment/credit.

1. 1. Advance tax for businesses: Three installments – by mid-January, mid-April, and fiscal year-end.

1. 1. Tax deducted at source (TDS): Monthly deposit by the deductor.

The exact timing can vary based on the type of tax and taxpayer category.

What is the rate of direct taxes?

The rates for key direct taxes in Nepal are:

Income Tax:

• • Individuals: Progressive rates from 1% to 36%

• • Couples: 1% to 36% with higher income slabs

• • Companies: Flat 25% (with some variations)

Property Tax:

• • Determined by local governments, usually 0.1% to 0.5% of property value

Vehicle Tax:

• • Varies by vehicle type and engine capacity

Capital Gains Tax:

• • 5% to 10% for individuals

• • 25% for companies

Dividend Tax:

• • 5% for resident individuals

• • 5% to 25% for non-residents

The exact rates can vary based on income levels, nature of transaction, and specific provisions in tax laws.

Are direct taxes progressive?

Yes, direct taxes in Nepal, especially income tax, are generally progressive in nature. This means:

1. 1. Tax rates increase as the taxable income increases.

1. 1. Higher income earners pay a larger percentage of their income in taxes.

1. 1. The personal income tax structure has multiple slabs with increasing rates.

1. 1. There are exemptions and lower rates for low-income groups.

1. 1. Additional social security tax applies on high incomes.

1. 1. Certain allowances and deductions phase out for high-income taxpayers.

1. 1. Property taxes often have higher rates for more valuable properties.

1. 1. Corporate tax has some progressive elements like lower rates for small businesses.

This progressive structure aims to ensure vertical equity in the tax system, where those with higher ability to pay contribute more.

How to file direct tax returns?

The process to file direct tax returns in Nepal involves:

1. 1. Obtain Permanent Account Number (PAN) from Inland Revenue Department.

1. 1. Maintain records of income, expenses, and tax payments throughout the year.

1. 1. Calculate taxable income and tax liability at year-end.

1. 1. Fill out the appropriate tax return form (paper or online).

1. 1. Attach required supporting documents and financial statements.

1. 1. Submit the return to the tax office or file electronically by the due date.

1. 1. Pay any remaining tax due along with the return.

1. 1. Keep copies of returns and payment receipts for future reference.

1. 1. Respond to any queries or audit requests from tax authorities.

1. 1. File amended returns if errors are discovered later.

Professional help from accountants or tax advisors is often used for complex returns. The government is increasingly promoting online filing for convenience.

Direct Tax in Nepal

Q1: What is direct tax in Nepal?

A1: Direct tax is a tax paid directly by individuals or entities to the government, such as income tax.

Q2: What are examples of direct taxes in Nepal?

A2: Examples include personal income tax, corporate tax, and capital gains tax.

Q3: Who collects direct taxes in Nepal?

A3: The Inland Revenue Department (IRD) is responsible for collecting direct taxes in Nepal.

Q4: How are direct taxes calculated in Nepal?

A4: Direct taxes are calculated based on income or profit, using applicable tax rates and deductions.

Q5: Are direct taxes progressive in Nepal?

A5: Yes, many direct taxes in Nepal, like income tax, use a progressive rate structure.