Income Tax Act 2058: Summary and Highlights

The Article covers the Major Provisions of Income Tax Act such as the Tax Assessable Income, Computation and Rate of Tax, and various forms of Deductions and Exemptions in Nepal for Income Tax.

Introduction to Income Tax Act 2058

According to the Act, Income refers to the income earned by any person from employment, profession or investment and the total amount of that income calculated.

An Income Year means a period from the first day of Shrawan (tentatively 15 July) of any year to the last day of Ashad (tentatively 14 July) of the next year. The Tax is collected through the Inland Revenue Department.

Tax to Be Levied in Nepal

Tax will be imposed on the following individuals during each income year and will be collected in accordance with this legislation:

(a) Individuals with taxable income in any given income year,

(b) Foreign permanent establishments of non-resident individuals located in Nepal, which remit income from any income year.

(c) Individuals who receive payment subject to final tax withholding in any income year.

Tax Assessable Income in Nepal

In computing the tax required to be paid by any person, it will be computed by applying the related rates mentioned to the taxable income of that person. In computing the tax, it will be computed by deducting the amount that is adjustable in tax and claimed by that person.

The taxable income of any person in any income year will be equal to the amount computed by subtracting the amount from the grand total amount of assessable income of each of the following income headings in that income year:

(a) Business,

(b) Employment, and

(c) Investment

The following incomes earned by any person for any business, employment or investment in any income year will be considered assessable income:

(a) Income earned by any resident person from his employment, business or investment in that income year irrespective of the place of his source of income, and

(b) Income earned in that income year by any non-resident person from employment, business or investment having income source in Nepal.

Computation of Taxation and Tax Rate in Nepal

Computation of Income From Business

The profits and benefits earned by any individual in any fiscal year from any business is calculated as the income of that business for that individual in that fiscal year. The Profits and Benefits will include the Following:

  1. Service charges
  2. Revenue from the sale of stock-in-trade
  3. Net profit from business property or liabilities, computed as per Chapter-8
  4. Amount considered derived from the disposal of depreciable property of the business
  5. Gifts received pertaining to the business
  6. Payments received for accepting any operational restrictions
  7. Amounts directly related to the business, even if they are typically considered investment income

Computation of Income from Employment

Remuneration received by a natural person from employment in any fiscal year will constitute their income for that year. The remuneration earned from employment will include payments such as:

  1. Wages, salary, leave pay, overtime, commissions, prizes, bonuses, and other benefits
  2. Personal allowances like dear, subsistence, entertainment, and transport allowances
  3. Reimbursement of personal expenses incurred by the individual or associated persons
  4. Payments related to terms of employment, termination, or retirement
  5. Retirement payments and contributions

Computation of Income from Investment

Profits and benefits derived from investments in any fiscal year will constitute the income earned from investments for that period. In computing the profits and benefits from investment, the following amounts received in any fiscal year will be considered:

  • Dividends, interest, payments for natural resources, rent, royalties, investment insurance profits, and retirement fund proceeds
  • Net profits from the disposal of non-business taxable property
  • Excess amounts from the disposal of depreciable property
  • Gifts related to investments
  • Retirement payments and contributions
  • Payments

Tax Exemptible Amounts and Other Exemptions in Nepal

Exemptible Amounts from Tax

The Following Amounts are Exempt from Tax in Nepal:

(a) Amounts granted tax exemption under bilateral or multilateral treaties between the Government of Nepal and foreign countries or international organizations.

(b) Amounts received by natural persons employed in the governmental service of a foreign country, provided they are residents or non-residents due to employment, and such amounts are paid from the governmental fund of that country.

(c) Amounts received by non-Nepalese citizens appointed in the service of the Government of Nepal under tax exemption terms.

(d) Allowances provided by the Government of Nepal to widows, senior citizens, or the disabled.

(e) Amounts received as gifts, inheritance, or scholarships, excluding those required for income computation.

(f) Amounts received by exempt organizations for donation, gifts, or other contributions directly related to their objectives, or amounts earned by Nepal Rastra Bank in line with its objectives.

(g) Pensions received by Nepalese citizens retired from the military or police service of a foreign country from the governmental fund of that country.

Professional Tax Exemptions and Facilities

Tax exemption is granted to entities engaged in agricultural activities, provided they are registered as a firm, company, partnership, or corporation. Additionally, agricultural income earned outside the scope of agricultural business is also exempt from taxation.

Tax exemption extends to cooperative organizations, savings and credit cooperatives, and institutions operating under the Cooperatives Act, 2048 (1991), specifically those involved in agricultural and forest-based industries.

Taxation on income derived from special industries follows specific criteria:

  1. Enterprises providing employment to six hundred or more Nepalese citizens throughout the year are subject to taxation at a reduced rate of ninety percent.
  2. Industries operating in remote, undeveloped, or underdeveloped areas are taxed at reduced rates ranging from seventy to eighty percent over a ten-year period, including the initial operational year.

Donation and Gift Exemptions

Individuals are permitted to deduct the amount of donations or gifts given to eligible tax-exempt organizations when computing their taxable income for any given income year.

However, there are certain limitations to this deduction. In any income year, the deductible expenditure under this provision cannot exceed One Hundred Thousand Rupees or five percent of the taxable income assessed, whichever amount is lower.

Tax Deductible Amounts in Nepal

General Deduction

Any individual can deduct expenditures related to their business or investments in the income year, subject to certain conditions.

Interest Deduction

Individuals or entities may deduct interest charges on qualifying debt liabilities related to their business or investment activities. The deductibility of interest is contingent upon factors such as the purpose of the debt liability and any limitations imposed by tax regulations.

Cost of Stock-In-Trade

Businesses can deduct allowances for the cost of stock-in-trade disposed of in the income year. The deduction is calculated based on the difference between the initial and final values of the stock-in-trade.

Repair and Maintenance Expenses

Expenses incurred for repairing and maintaining depreciable property used in generating income from business or investments can be deducted, subject to a maximum limit.

Pollution Control Expense

Businesses can deduct expenses related to pollution control incurred in operating the business, limited to a percentage of taxable income.

Research and Development Expense

Expenses incurred for research and development in business operations can be deducted, up to a certain limit.

Depreciation Deduction Expenses

Depreciation expenses on depreciable properties used in generating income can be deducted according to the schedule provided.

Business/Investment Loss

Losses from business or investment can be deducted

Expenses of Income Tax that cannot be Deducted

When computing income derived from any business, employment, or investment in any fiscal year, the following expenses or amounts cannot be deductible:

(a) Expenses of a domestic or personal nature.

(b) Tax payments under this Act, fines, or similar fees paid to any government entity or local body for breaching laws, regulations, or bylaws.

(c) Expenses incurred to obtain exemptions under section 10 or expenses made to obtain amounts from which tax has already been deducted.

(d) Expenses related to payments outlined in Subsection (2).

(e) Profit distributions by any entity.

If an individual’s annual turnover exceeds two million rupees in any fiscal year and they make a cash payment exceeding Fifty Thousand Rupees at once, they cannot claim a deduction unless under the following circumstances:

(a) Payments made to the Government of Nepal, constitutional bodies, government-owned corporations or banks, or financial institutions.

(b) Payments to farmers or producers of primary agro-products, including payments to farmers who have processed such products themselves.

(c) Payments for retirement contributions or benefits.

(d) Payments made in areas without banking services.

(e) Payments made on days when banking services are closed or where cash payment is mandatory.

(f) Amounts deposited into the recipient’s bank account.

Conclusion

The Income Tax Act 2058 in Nepal outlines taxation principles for Income earned yearly through Various Source. Tax applies to individuals and foreign establishments with Nepal-sourced income. Taxable income is calculated by deducting adjustables. Business, employment, and investment incomes are assessed. Tax rates vary for different income sources. Tax deductions cover business expenses, interest, stock, repair, and environmental costs. Certain expenses are nondeductible, like personal expenses or fines. Additionally, cash payments over a threshold may limit deductions.

Disclaimer: This article is for informational purposes only and shall not be construed as legal advice, advertisement, personal communication or solicitation. Specific advice of professionals must be sought for each case.

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