NepalTax Obligations Detailed

In Nepal, employers face various tax obligations related to employee income, social security contributions, and business profits.

Employer Responsibilities for Income Tax

• Withholding Tax (WHT): Employers must deduct WHT from employee salaries monthly, based on the annual tax calculation divided by 12. This acts as an advance tax payment for employees. The WHT is not the final tax, and employees may be exempt from filing annual returns if they meet certain conditions (e.g., income solely from Nepali employment, income below NPR 4 million).
• WHT Return Filing: Employers must file WHT returns within 25 days of the end of each Nepali calendar month.
• Annual Employee Tax Returns: Employers must file annual tax returns for each employee, detailing total remuneration, deductions, and tax deducted and deposited.
• Tax Deadlines: Returns and payments are due within specified periods, often by the 25th of the following month for monthly WHT and within three months of the fiscal year-end for annual returns.

Social Security Contributions

• Employer Contribution: Employers contribute 20% of the employee's basic salary towards social security.
• Employee Contribution: Employees contribute 11% of their basic salary.
• Combined Contribution Allocation: The combined 31% contribution is allocated to different social security schemes.

Corporate Income Tax

• Tax Rate: The standard corporate income tax rate is 25% of net profit.
• Sector-Specific Rates: Certain sectors (e.g., banking, insurance, telecommunications, alcohol/tobacco) are subject to higher rates, such as 30%. Concessional rates may apply to industries in specific areas.
• Tax Year: The income year runs from mid-July to mid-July (Nepali fiscal year).
• Advance Tax Payments: Companies usually pay advance tax in installments throughout the year, with deadlines and percentages of estimated tax liability.
• Return Filing: Corporate tax returns are due within three months of the fiscal year-end, with a potential three-month extension upon application.
• Tax Treaties: Nepal has tax treaties with several countries to avoid double taxation.

Other Employer Obligations

• Bonus Payments: Employees are entitled to bonuses as per the Bonus Act.
• Overtime Pay: Overtime work must be compensated at 150% of the regular wage, subject to weekly and daily limits.
• Working Hours Records: Employers must maintain records of daily employee working hours.

Note: Tax regulations and rates can change periodically. This information is based on the available data as of today, February 5, 2025, and might not reflect the most recent updates. Consulting official government resources or tax professionals is crucial for the most accurate and current information.

In Nepal, employers deduct several taxes from employee salaries, including income tax, social security contributions, and a stamp tax.

Income Tax

Income tax is calculated based on a progressive tax system with varying rates and slabs. For the fiscal year 2025-26, the new tax regime includes a standard deduction of NPR 75,000 from salary income and allows for a deduction of 14% of the basic salary for contributions to the employee's Tier-I NPS account (National Pension Scheme). The new tax regime has raised the basic exemption limit to NPR 400,000. The old tax regime remains an option and includes different deductions, like Section 80C (up to NPR 150,000 for investments and expenses), Section 80D (up to NPR 25,000/50,000 for health insurance premiums), and Section 80TTA (up to NPR 10,000 for savings account interest). Specific details on the old regime slabs are unavailable. Additional deductions under the old regime may exist for certain circumstances such as incapacitated persons or those living in remote areas. Further specifics and updated slabs for 2025-26 require consultation with official resources.

Social Security Contributions

Employers are responsible for deducting social security contributions from employee salaries. These contributions include amounts for social security, unemployment insurance, and may also include retirement fund contributions. The rates and contribution amounts may vary based on the employee's salary and applicable regulations.

Stamp Tax

A stamp tax of 0.759% is applied to the total gross earnings on the payroll as of January 1, 2015. The tax is calculated on the total gross earnings, which include the base salary and any benefits or allowances.

Other Deductions

Other potential deductions include those related to life and medical insurance premiums. For life insurance, the deduction is either the actual annual premium or NPR 25,000, whichever is lower. For medical insurance, the deduction is either the actual premium paid or NPR 20,000, whichever is lower. Contributions to a retirement fund are also deductible, up to a certain limit.

Additional Considerations

Employers in Nepal must comply with various employment and labor laws when managing payroll. This includes calculating and distributing salaries, deducting taxes and social security contributions, and ensuring accurate record-keeping. Some companies may opt to outsource payroll services to specialized providers for compliance and efficiency. It's important to note that this information is current as of February 5, 2025, and may be subject to change. Always refer to the latest official guidelines and regulations from the Nepali government for the most up-to-date information.

In Nepal, the Value Added Tax (VAT) is a consumption tax levied on most goods and services.

VAT Rates

• Standard Rate: 13%

Registration Thresholds

• Goods: NPR 5,000,000 annual turnover
• Services: NPR 2,000,000 annual turnover
• Mixed Goods and Services: NPR 2,000,000 annual turnover

Businesses exceeding these thresholds must register for VAT within 30 days. Voluntary registration is also possible for businesses below the threshold. Foreign businesses providing digital services to Nepal with transactions exceeding NPR 2,000,000 annually are also required to register, irrespective of subsequent transaction amounts.

Filing and Payment

• Returns: Typically filed monthly, within 25 days of the end of the Nepali calendar month.
• Bi-monthly filing is available for tourism service providers and hoteliers. Quarterly filing options exist for publication/broadcasting media and brick producers.

Exempt Goods and Services

Exemptions include:

• Basic agricultural products (e.g., rice, wheat, maize)
• Certain essential goods and services

Penalties

Penalties apply for non-compliance:

• Late Filing: 0.1% of gross assessable income or NPR 100 per month of delay, whichever is higher.
• Non-Filing: Estimated turnover assessment and penalties by tax authorities.

Digital Services Tax (DST)

A 2% DST is levied on the turnover of non-resident digital service providers with annual revenue exceeding NPR 3,000,000 in Nepal.

Other Considerations

• Permanent Account Number (PAN) is required for tax registration.
• Tax returns and payments must be made electronically.
• While e-invoicing is not mandatory for VAT, it can be beneficial for record-keeping.
• Maintain records (invoices, contracts, financial statements) for at least five years.

Note: This information is current as of February 5, 2025, and is subject to change. Consult with a tax professional for the most up-to-date advice.

Nepal offers various tax incentives primarily aimed at boosting specific sectors and regions. These incentives generally take the form of tax rebates, exemptions, and credits. As of February 5, 2025, the following information summarizes Nepal's tax incentives; however, it is important to consult the latest official sources for the most current details, as tax regulations can change.

Incentives for Specific Industries

• Hydropower: 0% Corporate Income Tax (CIT) for the first 7 years of operation, followed by 50% of the normal CIT rate for the next 3 years.
• Oil and Natural Gas: Similar to hydropower, qualifying operations enjoy a 0% CIT for 7 years and a halved rate for the subsequent 3 years if commercial operations began before April 2019.
• Information Technology: Software development, data processing, and related IT services located in designated technology parks may benefit from a 50% tax rebate.
• Manufacturing: Special manufacturing industries may qualify for CIT rebates of 10% or 20%, depending upon the number of Nepali citizens directly employed throughout the year.

Export Promotion

• Export-Oriented Industries: A reduced CIT rate of 20% applies to income derived from exports.
• Intellectual Property: A 25% tax rebate is available on royalty income earned from exporting intellectual property rights. The sale of intellectual assets is taxed at 50% of the normal rate.

Regional Incentives

• Underdeveloped Areas: Industries establishing operations in designated underdeveloped areas may be eligible for significant CIT reductions, ranging from 10% to 30% of the normal rate, for the first 10 years of operation. Additional incentives may apply for investments exceeding NPR 2 million.
• Special Economic Zones (SEZs): Businesses operating within SEZs can enjoy CIT and dividend tax exemptions for the first 5 years, followed by a 50% tax rebate for the next 3 years. Foreign investors in SEZs engaged in technology transfer or management services may also qualify for a 50% income tax concession on service charges and royalties.

Incentives for Individuals

• Remote Area Allowance: Resident individuals working in remote areas can claim additional deductions from their taxable income, up to NPR 50,000, depending on the remoteness category (A- NPR 50,000, B- NPR 40,000, C- NPR 30,000, D- NPR 20,000, E- NPR 10,000). This facility is calculated proportionally based on the period of stay in the remote area.
• Pension Income Deduction: Resident individuals with pension income can deduct either 25% of the first tax band or their actual pension income, whichever is lower.
• Health Insurance Premium: A deduction is available for health insurance premiums paid to resident insurance companies, capped at the lower of NPR 20,000 or the actual premium paid.
• Medical Tax Credit: A tax credit is available for approved medical expenses, equivalent to either NPR 1,500 or 15% of the expenses, whichever is lower. Unused expenses can be carried forward to the next year.
• Foreign Tax Credit: Residents earning foreign income can claim a credit for taxes paid abroad on that income. The credit is limited to the average Nepali tax rate applicable to the foreign income.

Application Procedures

The specific application procedures for each incentive may vary. Businesses and individuals should consult the Inland Revenue Department (IRD) or a qualified tax advisor for detailed guidance on eligibility criteria and the application process.

General Tax Information for Nepal

• Corporate Income Tax (CIT) Rate: The standard CIT rate is 25%, although certain sectors like finance, alcohol, and tobacco have a higher rate of 30%.
• Individual Income Tax: Individuals are taxed at progressive rates, meaning higher income earners pay a higher percentage of tax.
• Value Added Tax (VAT): The standard VAT rate is 13%. Certain goods and services may be exempt.
• Tax Year: Nepal's tax year runs from mid-July to mid-July (based on the Nepali calendar).

This information is for general guidance only and does not constitute professional tax advice. It's crucial to verify the latest regulations and consult with tax professionals for specific situations.