---
title: "Short note: taxation system in Nepal"
subject: "Engineering Economics"
chapter: 7
key: "semester_6/engineering_economics:short-note-taxation-nepal"
source: https://www.bctengineer.com/q/semester_6/engineering_economics/short-note-taxation-nepal
site: BCT Engineering
---

# Short note: taxation system in Nepal

Engineering Economics · Chapter 7: Depreciation and Corporate Income Taxes

- Asked in: 2067 Mangsir, 4 marks
- Answer checked by Claude Opus 5.5 (high effort) on 2026-10-14
- Page: https://www.bctengineer.com/q/semester_6/engineering_economics/short-note-taxation-nepal
- Whole chapter: https://www.bctengineer.com/md/semester_6/engineering_economics/chapter-7

## Question

Write a short note on the taxation system in Nepal.

## Short answer

Nepal’s taxation includes direct taxes (income tax at 25% for companies, progressive for individuals, capital gains) and indirect taxes (13% VAT, excise, customs). Tax depreciation uses declining-balance pools at rates 5–25%. The Inland Revenue Department administers central taxes.

## Answer

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.

## Check yourself

The answer's key points as multiple-choice questions, with the correct option and why.

1. Which pair correctly classifies taxes in Nepal?
   A. VAT and customs are direct; income tax is indirect
   B. Income tax and property tax are direct; VAT, excise and customs are indirect
   C. All taxes are direct because the government collects them
   D. Income tax and VAT are both direct
   Answer: B. Direct taxes fall on the taxpayer's income or property; indirect taxes such as VAT, excise and customs are collected through the price paid by the consumer. (Key point: Direct vs indirect taxes)

2. Which body administers income tax, VAT and excise duty?
   A. Department of Customs
   B. Nepal Rastra Bank
   C. Inland Revenue Department
   D. Local governments
   Answer: C. The IRD administers income tax, VAT and excise; Customs collects customs duty and local governments collect local taxes. (Key point: Tax administration)

3. How does the Income Tax Act treat depreciation of assets?
   A. Each asset is written off in a straight line over its life
   B. Assets are put in pools (blocks) with rates like 5%, 25%, 20% and 15% on the declining balance
   C. All assets are depreciated at 25% of original cost
   D. Depreciation is not allowed as a deduction
   Answer: B. Schedule 2 groups assets in blocks A-E with fixed rates applied to the declining pool balance. (Key point: Depreciation for tax)

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