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Taxes are obligatory payments collected from people or businesses by the government, whether at the municipal, state, or federal levels. Tax revenues are used to fund a variety of government initiatives, such as Social Security and Medicare as well as public infrastructure and services like roads and schools.

Taxes are borne by whoever bears the cost of the tax in economics, whether this is the entity being taxed, such as a business, or the final users of the items produced by the firm. Taxes should be taken into consideration from an accounting standpoint, including payroll taxes, federal and state income taxes, and sales taxes.

What are the types of Tax?

Like many other nations, Nepal has a complex tax structure to raise money for its administration. The following are the main tax categories in Nepal:

  • Personal Income Tax: This tax is imposed on the earnings of individuals. The progressive structure of the tax rates means that people with higher incomes are required to pay a bigger proportion of it in taxes.
  • Corporate Income Tax:  Businesses in Nepal are required to pay corporate income tax on their profits. Although differences may occur based on the sector or businesses with special benefits, the standard rate is 25%.
  • Value Added Tax (VAT): A consumption tax known as VAT is levied on the value added to goods and services at each stage of production and distribution. Nepal’s standard VAT rate is 13%, yet it’s possible that some essentials will have lower rates.
  • Capital Gains tax: Capital gains tax is owed on the revenue generated by the sale of capital goods like stocks, real estate investment, or structures. Individual and business rates differ and may be subject to reductions or exclusions.
  • Excise tax: Alcohol, cigarettes, and various types of vehicles are examples of products that are subject to excise taxes since they are usually seen as luxury or non-essential commodities.
  • Customs Duty: Customs tax is imposed on commodities carried into Nepal. The costs may vary depending on the product’s nature and place of manufacture.
  • Other Taxes: Nepal imposes a number of other levies, such as stamp duty, property tax, and car tax.

Why is Tax important in Nepal?

Tax plays a vital role in many aspects such as revenue generation, social welfare, and so on. The importance of tax in Nepal is as follows:

  • The primary source of revenue for governments is taxes. Roads, schools, hospitals, and public safety are just a few of the things they finance in terms of infrastructure and public services.
  • Progressive taxation contributes to wealth redistribution and lowers income inequality by charging higher tax rates to people with higher earnings.
  • The economy may be regulated through tax laws. Governments can lower taxes during economic downturns to encourage expenditure, and they can raise taxes during times of strong inflation or economic expansion to rein in wasteful spending.
  • Taxes support social welfare programs including healthcare, unemployment insurance, and retirement pensions, offering a safety net for people in need.
  • Taxes are another source of funding for the armed forces and national defense, preserving a nation’s security and independence.
  •  Taxes, such as carbon taxes or green incentives, can be used to promote eco-friendly behavior and discourage actions that hurt the environment.

Tax Rate in Nepal Fiscal Year 2080/81

  • Income Tax Rate in Nepal For Individuals (unmarried)

Taxable Income (in Rs)Applicable Tax RateTax Payable (in Rs)
Up to 500,0001% (by special provision)5,000
Above 500,000 up to 700,00010%20,000
Above 700,000 up to 1,000,00020%60,000
Above 1,000,000 up to 2,000,00030%300,000
Above 2,000,000 up to 5,000,000 (additional 20% in the tax slab of S.N. 4)36% (additional 20% of 30)1,080,000
Above 5,000,000 (additional 30% in the tax slab of S.N. 4)39% (additional 30% of 30)390,000
  • Income Tax Rate in Nepal For Married Couples

Taxable Income (in Rs)Applicable Tax RateTax Payable (in Rs)
Up to 600,0001% (by special provision)6,000
Above 600,000 up to 800,00010%20,000
Above 800,000 up to 1,100,00020%60,000
Above 1,100,000 up to 2,000,00030%270,000
Above 2,000,000 up to 5,000,000 (additional 20% in the tax slab of S.N. 4)36% (additional 20% of 30)1,080,000
Above 5,000,000 (additional 30% in the tax slab of S.N. 4)39% (additional 30% of 30)390,000
  • Tax Rate in Nepal For Non-residents

Nature of TransitionFY 2023-24FY 2023-24
Income earned from normal transitionNo change25% flat rate on taxable income
Income earned providing shipping, air transport or telecom services, postage, satellite, and optical fiber projectNo change 5%
Income earned providing shipping, air transport, or telecom services within the territory of Nepal.No change 2%
Repatriation of profit by foreign permanent establishmentNo change 5%
  • Tax Rate in Nepal For Business

CategoryFY 2023-24 Tax RateFY 2022-23 Tax RateNormal RateRebate
Normal business25%-25%25%
Special Industry under section 11 for the whole year25%20%20%20%
Entities constructing and operating ropeway, cable car, or sky bridge25%40%**15%**15%
Entities constructing and operating roads, bridges, tunnels, railways, and airports25%50%**12.5%**12.5%
Entities operating trolley buses or trams25%40%**15%**15%
Entities with export income from a source in Nepal25%20%20%20%
Entities involved in the construction or operation of public infrastructure and to be transferred to the GoN or involved in the construction of hydropower houses and their generation and transmission25%20%20%20%
Banks and financial institutions (Commercial Banks, Development Banks, and Finance Companies)30%-30%30%
Entity carrying General insurance business (Non-life Insurance)30%-30%30%
Entities involved in financial transactions [Newly added term in the list of 30% tax rate]30%-30%-
An entity engaged in petroleum business under Nepal Petroleum Act, 204030%-30%30%
Entity engaged in the business of cigarettes, tobacco, cigars, chewing tobacco, pan masala, alcohol, and beer30%-30%30%
Entity engaged in Telecommunication and Internet service30%-30%30%
An entity engaged in Money transfer30%-30%30%
Entity engaged in Capital market business, Securities business, Merchant banking, Commodity futures market, Securities and Commodity broker30%-30%30%

Vat in Nepal

VAT stands for Value Added Tax. In Nepal, it’s a tax applied at each stage of the production and distribution chain. Imagine a product journeying from raw material to the store shelf – VAT is a small tax bite taken at every step, It’s like a small fee for playing in the business sandbox.

  • In the case of B2C, you’re required to pay 13% VAT on every sale to a Nepali resident.
  • In the case of a B2B transaction with a legit VAT number, there is no requirement for you to collect the tax. The responsibility for handling the tax is assumed by the buyer’s business through Nepal’s reverse-charge mechanism.

Compulsory VAT Registration Requirements for Various Businesses in Nepal

Those engaged in the business of trading goods subject to VAT must register for compulsory VAT. Even if the business involves the trading of such goods in any amount (not just exceeding one rupee annually), registration for compulsory VAT is mandatory. The following businesses must register for compulsory VAT:

  • Businesses involved in the production of bricks, liquor distributors, wine, software, trekking, rafting, ultralight flights, paragliding, tourism rides, crusher, sand and stone mining, and slate and stone industry-related businesses.
  • Businesses involved in hardware, sanitary, furniture, fixtures, furnishing, automobiles, motor parts, electronics, marble, educational consultancy, discotheques, health clubs, massage therapy, beauty parlors, catering services, party palace business, parking services, businesses using machinery and equipment declared in the disclaimer used in restaurants, including bars, ice cream industry, color lab, boutiques, tailoring business including the supply of uniforms to educational institutions or health institutions or other organizations.
  • Businesses providing educational and legal consultation (lawyers) accounting and auditing services and companies. (This was not there before. It has been added to the current budget.)
  • The system has been established to register for compulsory VAT for goods mentioned in Schedule 1 of the previous VAT Act (goods not exempt from VAT), including mustard oil, soybean oil, tempo, and Dhunwani service.

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FAQs:

Who pays the highest tax in Nepal?

Nepal Telecommunication has paid the most income tax while Gorkha Brewery has the highest value-added tax (VAT).

How much income is tax-free in Nepal?

An annual income less than 500,000 is tax-free in Nepal

Which country pays the highest tax?

The Ivory Coast currently has the highest income tax rate globally, with an impressive 60% on the highest bracket of annual income

What is the tax rate for normal businesses in Nepal?

For normal business, the tax rate is 25%.

What is the formula of rate of VAT?

The formula for calculating the rate of Value Added Tax (VAT) is: VAT Rate = (Tax Amount/Net Sales)*100 Where: VAT Rate is the percentage rate of VAT. Tax Amount is the amount of VAT collected. Net Sales is the total sales amount before the inclusion of VAT. This formula expresses the VAT rate as a percentage of the net sales, indicating the proportion of the sales amount that constitutes the VAT.


Conclusion

For the governments, taxes are the main source of income. This money is used for a variety of purposes, including funding public services like schools, emergency services, and social programs as well as enhancing and maintaining public facilities such as the roads we drive on. Taxation is the backbone of a government, allowing it to deliver important services, correct social injustices, and promote economic stability and progress. Individuals and corporations have to understand many tax kinds and their effects in order to fulfill their commitments and improve the community. 

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