Tax Laws

Income Tax Act 2058

Tax Advisor Nepal

What is the Income Tax Act 2058?

The Income Tax Act 2058 (2002) is Nepal’s primary legislation governing income taxation. It provides the legal framework for imposing and collecting income tax in Nepal. The Act defines taxable income, tax rates, deductions, exemptions, and procedures for tax assessment and collection. It applies to individuals, businesses, and other entities earning income in Nepal. The Act aims to mobilize revenue for national development by establishing an effective system of income taxation. It covers various types of income including business profits, employment income, investment returns, and capital gains. The Act also includes provisions on international taxation and tax administration.

When was the Income Tax Act 2058 enacted?

The Income Tax Act 2058 was enacted in 2002 (2058 in the Nepali calendar). It received royal assent on April 18, 2002 and came into effect immediately. The Act replaced the previous Income Tax Act of 1974. Its enactment was part of broader economic reforms to modernize Nepal’s tax system. The government introduced this new legislation to enhance revenue collection, simplify tax administration, and align Nepal’s income tax laws with international standards. The Act aimed to create a more transparent and efficient tax regime. Since its enactment, the Act has undergone several amendments to address changing economic conditions and policy priorities.

How does Income Tax Act 2058 define income?

The Income Tax Act 2058 defines income broadly as any economic benefit derived from employment, business, or investment. This includes salaries, business profits, rent, dividends, interest, and capital gains. The Act categorizes income into different heads: business income, employment income, and investment income. Each category has specific rules for calculation and taxation.

What are key provisions of Income Tax Act 2058?

The Income Tax Act 2058 includes several key provisions:

1. It defines taxable income and tax rates for individuals and entities.

1. The Act establishes a self-assessment system for filing tax returns.

1. It provides for deductions, exemptions, and tax credits.

1. The Act outlines procedures for tax assessment, collection, and appeals.

1. It includes provisions on international taxation and transfer pricing.

1. The Act defines penalties for non-compliance and tax evasion.

1. It establishes the powers and duties of tax authorities.

1. The Act provides for advance tax payments and tax withholding.

1. It includes special provisions for certain sectors like agriculture and exports.

1. The Act allows for double taxation relief through tax treaties.

What are the differences between taxation for individuals and entities?

The Income Tax Act 2058 differentiates between individual and entity taxation. Individuals are taxed at progressive rates, while entities face flat rates. Tax computation involves calculating total income, subtracting deductions, and applying relevant tax rates. For individuals, income sources include employment, business, and investments. Entities are taxed on business profits.

What are taxable and non taxable income in Nepal?

Taxable income encompasses salaries, business profits, rent, dividends, and capital gains. Non-taxable income includes agricultural income for individuals, certain government bonds’ interest, and specific social security payments. The Act provides various deductions like medical expenses for individuals and depreciation for businesses. Tax calculation considers income source, applicable exemptions, and taxpayer category.

What are the tax rates of Nepal?

Nepal’s tax rates vary for individuals and entities. For individuals, rates are progressive: 1% on income up to NPR 500,000, 10% from NPR 500,001 to 700,000, 20% from NPR 700,001 to 1,000,000, and 30% above NPR 1,000,000. Entities generally face a flat 25% rate, with variations for specific sectors.

What is the penalty under Income Tax Act 2058?

The Income Tax Act 2058 imposes various penalties for non-compliance:

1. Late filing of tax returns incurs a penalty of 0.1% of assessable income per year.

1. Failure to maintain proper records results in a fine of 0.1% of turnover.

1. Understating income attracts a penalty of 100% of the understated amount.

1. Non-payment or underpayment of tax leads to interest charges at 15% per annum.

1. Failure to withhold tax or submit withholding tax returns incurs penalties up to 100% of the tax amount.

1. Obstructing tax officers can result in fines up to NPR 50,000 or imprisonment up to three months.

1. Providing false statements or documents can lead to fines up to NPR 100,000 or imprisonment up to one year.

How are businesses taxed under this Act?

Under the Income Tax Act 2058, businesses are taxed as follows:

1. Companies face a standard 25% tax rate on taxable income.

1. Banks, financial institutions, and certain other sectors pay 30%.

1. Taxable income is calculated by deducting allowable expenses from gross income.

1. Depreciation on fixed assets is allowed as per prescribed rates.

1. Businesses must make advance tax payments in three installments.

1. Losses can be carried forward for up to seven years (12 years for certain industries).

1. Special tax rates apply to industries in special economic zones or remote areas.

1. Export income enjoys certain tax concessions.

1. Small businesses may opt for turnover-based taxation.

1. Transfer pricing rules apply to transactions between related entities.

What are deductions in Income Tax Act 2058?

The Income Tax Act 2058 provides for several deductions:

1. Individuals can claim deductions for life insurance premiums, health insurance premiums, and retirement contributions.

1. Medical expense deduction is available up to a certain limit.

1. Donations to approved organizations are deductible up to 5% of adjusted taxable income.

1. Businesses can deduct expenses incurred for income generation, including salaries, rent, and utility costs.

1. Depreciation on fixed assets is allowed as per prescribed rates.

1. Interest on business loans is generally deductible.

1. Research and development expenses can be deducted within specified limits.

1. Repair and maintenance expenses are deductible up to 7% of the depreciable asset base.

1. Bad debts can be written off under certain conditions.

1. Certain industries enjoy additional deductions for employment generation or location in remote areas.

What are the additional provisions surrounding Income Tax Act?

The Income Tax Act 2058 includes several additional provisions:

1. International taxation rules cover permanent establishments and transfer pricing.

1. Double taxation relief is available through tax treaties and unilateral credit mechanisms.

1. Advance rulings can be obtained from tax authorities on specific transactions.

1. Tax withholding is required on various payments including salaries, dividends, and service fees.

1. Special provisions exist for non-resident taxpayers and foreign-sourced income.

1. The Act provides for administrative reviews and appeals against tax assessments.

1. Tax clearance certificates are required for certain transactions.

1. Anti-avoidance rules address tax evasion and artificial arrangements.

1. Specific sectors like agriculture and exports enjoy certain tax incentives.

1. The Act empowers tax authorities to access information and conduct audits.

These provisions aim to create a comprehensive tax system addressing various economic activities and taxpayer categories.

Conclusion

The Income Tax Act 2058 forms the cornerstone of Nepal’s income tax system. Enacted in 2002, it provides a comprehensive framework for taxing various forms of income. The Act differentiates between individual and entity taxation, offering progressive rates for individuals and flat rates for most businesses. It defines taxable income broadly, covering employment, business, and investment income. The Act includes provisions for deductions, exemptions, and penalties for non-compliance.