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Nepal

Country Name: Federal Democratic Republic of Nepal
Currency: Nepalese Rupee (NPR)
Primary Tax Authority: Inland Revenue Department (IRD)
Key Legislation:

  • Income Tax Act 2058 (2002)
  • Value Added Tax (VAT) Act 2052 (1996)
  • Customs Act
  • Excise Duty Act

Fiscal Authority Allocation

Centralized Fiscal System:
Nepal operates a centralized tax system. The Inland Revenue Department (IRD) is responsible for administering and collecting taxes, including corporate income tax (CIT), personal income tax (PIT), value-added tax (VAT), excise duties, and other levies.

Corporate Income Tax (CIT)

Standard Rate: 25%
Nepal imposes a corporate income tax rate of 25% on most companies. Special rates apply for banks, telecommunications, and insurance companies.

Sector-Specific CIT Rates:

  • Banks, Insurance, and Financial Institutions: 30%
  • Telecommunications and Tobacco Companies: 30%
  • Manufacturing and Exporting Companies: 20%
  • Special Industries (as defined by law): 20%

Corporate Forms and Taxation:

  1. Domestic Companies: Subject to CIT on their worldwide income.
  2. Foreign Companies: Subject to CIT only on Nepal-sourced income.

Exemptions and Incentives:

  • Special Economic Zones (SEZs): Companies operating in SEZs benefit from tax holidays (up to 10 years) and reduced CIT rates of 50% for an additional five years.
  • Export Incentives: Exporting companies may enjoy reduced CIT rates of 20%.
  • Investment Promotion: Nepal encourages foreign investment in key sectors such as energy, infrastructure, and tourism, offering tax holidays and customs duty exemptions.

Goods and Services Tax (GST) / Value-Added Tax (VAT)

Standard Rate: 13%
Nepal imposes a VAT at a standard rate of 13% on the supply of most goods and services. VAT is also levied on imports into Nepal. Businesses with an annual turnover above the VAT registration threshold must register and remit VAT.

Exemptions:
Certain goods and services, including basic agricultural products, healthcare, education, and financial services, are VAT-exempt. Exports are zero-rated, allowing businesses to reclaim VAT paid on inputs used for producing export goods.

Personal Income Tax (PIT)

Progressive Rates:
Nepal applies a progressive personal income tax system on both residents and non-residents. Tax rates differ for individuals and married couples filing jointly. The PIT rates for 2023 are as follows:

For Individuals (Annual Income):

  • Up to NPR 500,000: 1%
  • NPR 500,001 to NPR 700,000: 10%
  • NPR 700,001 to NPR 2,000,000: 20%
  • Above NPR 2,000,000: 30%

For Married Couples (Joint Filing):

  • Up to NPR 600,000: 1%
  • NPR 600,001 to NPR 800,000: 10%
  • NPR 800,001 to NPR 2,500,000: 20%
  • Above NPR 2,500,000: 30%

Deductions and Allowances:
Nepal allows for various deductions, including contributions to social security, charitable donations, and interest paid on home loans.

Additional Mandatory Contributions

Social Security Contributions:
Employers and employees must contribute to Nepal’s social security system, which covers pensions, healthcare, and unemployment benefits.

  • Employer Contribution: 20% of gross salary.
  • Employee Contribution: 11% of gross salary.

Withholding Taxes

  • Dividends: 5%
  • Interest: 15% for residents, 5% for non-residents.
  • Royalties: 15%
    Nepal imposes withholding taxes on dividends, interest, and royalties. Rates may be reduced under double taxation agreements (DTAs).

Transfer Pricing Rules

Nepal has adopted transfer pricing regulations to prevent tax base erosion. All related-party transactions must follow the arm’s-length principle. Companies must maintain documentation to support the pricing of cross-border transactions.

Special Tax Regimes

  • Special Economic Zones (SEZs): Companies operating in SEZs benefit from tax exemptions, reduced customs duties, and a lower CIT rate. SEZs are aimed at promoting investment in export-oriented industries, manufacturing, and technology.
  • Hydropower Projects: Nepal provides tax holidays for up to 10 years for hydropower projects, with an additional 50% CIT reduction for the next five years.

Other Taxes

  • Customs Duties: Import duties vary by product type, ranging from 0% to 80%. Essential goods such as food, medicines, and raw materials typically attract lower rates.
  • Excise Taxes: Excise taxes are levied on specific goods, including alcohol, tobacco, and fuel.
  • Property Tax: Property taxes are imposed on the transfer and ownership of real estate, with rates varying by property value and location.

Double Taxation Agreements (DTAs)

Nepal has signed several double taxation agreements (DTAs) with countries such as India, China, the United Kingdom, and Norway. These agreements help reduce withholding taxes on cross-border income and prevent double taxation of income earned in Nepal and abroad.

Local Taxes

Local governments in Nepal may impose taxes such as property taxes, vehicle taxes, and business license fees. However, most significant taxes, including CIT and PIT, are administered centrally by the Inland Revenue Department (IRD).

Compliance and Reporting

Annual Filing:
Corporate tax returns must be filed by mid-October following the end of the Nepali fiscal year, which runs from mid-July to mid-July. Personal income tax returns are generally due by mid-July of the following year. VAT returns are filed monthly or quarterly, depending on the size of the business.

Penalties for Late Filing:
Penalties apply for late filing or non-compliance with tax laws. Penalties can range from fines to interest on unpaid taxes, with the rate for late payments typically set at 15% per year.

Recent Developments

Focus on Hydropower and Infrastructure Development:
Nepal continues to prioritize the development of its hydropower sector, offering tax incentives and investment promotion initiatives to attract foreign direct investment (FDI). Hydropower is seen as a key driver of economic growth and energy security.

Digital Economy and E-Commerce Taxation:
As part of its efforts to modernize the economy, Nepal is exploring ways to tax the growing digital economy. This includes the potential implementation of new tax regulations for e-commerce businesses operating in the country.

Tax Compliance Modernization:
Nepal is working to enhance tax compliance by adopting digital systems for tax filing and payment. The government has introduced online platforms to simplify VAT and income tax filings, and further reforms are expected to improve tax enforcement.

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