Short note: taxation system in Nepal

Taxation in Nepal is governed by laws made by the federal parliament (and, for local taxes, by provincial and local governments under the 2015 Constitution). Taxes are the main source of government revenue. Figures below are as per the acts and Finance Acts in force; rates are revised in each annual budget.

Structure

• Direct taxes: charged on income or property of the taxpayer, who bears the burden.
  • Income tax, under the Income Tax Act, 2058 (2002). Companies pay a flat rate (generally 25%; 30% for banks, financial institutions and insurance; 20% for some industries and special-sector firms). Individuals pay on progressive slabs (1% social security tax on the first slab, then 10%, 20% and 30%, and a higher slab for large incomes); rates differ for individuals and couples.
  • Tax on capital gains, interest, dividends, rent, and withholding (TDS) on payments.
  • Property, house and land tax, land registration fee and vehicle tax.
• Indirect taxes: collected from the consumer through the price.
  • Value Added Tax (VAT) under the Value Added Tax Act, 2052 (1996), at 13% on goods and services.
  • Excise duty (Excise Duty Act, 2058) on goods such as alcohol, tobacco and vehicles.
  • Customs duty on imports (Customs Act, 2064), which is a large share of revenue.

Tax administration

• Inland Revenue Department (IRD) administers income tax, VAT and excise duty; the Department of Customs collects customs duty. Local governments collect local taxes (property tax, business tax, etc.).
• Taxpayers must register, obtain a Permanent Account Number (PAN) and file returns; VAT and income tax are paid under self-assessment.

Depreciation under the Income Tax Act

Depreciable assets are put in pools (Schedule 2): Block A buildings 5%; Block B computers, furniture and office equipment 25%; Block C automobiles and construction equipment 20%; Block D other assets 15%; Block E intangibles written off over their useful life. These rates apply on the declining pool balance.

Relevance: income tax and depreciation reduce the after-tax cash flow of every project, so after-tax analysis must use the actual rate and depreciation rules.