Running a small business in Nepal can be challenging, but managing your taxes doesn't have to be. The government offers a simple tax system for small businesses, helping you focus on what matters most—growing your business. Yes, if you run a small business, then there is no need to worry about calculating your profits and taxes. Here's a straightforward guide to help you understand the process.

What Counts as a Small Business?

In Nepal, a small business is typically a sole proprietorship run by an individual. To qualify, your business should have a turnover of up to Rs. 30 lakhs, with profits not exceeding Rs. 3 lakhs. So, what does this actually mean? This means that your total sales during a financial year should not be above Rs. 30 lakhs and your profit also should not be more than Rs. 3 lakhs. Now you may be wondering what does sales or turnover or profit mean? 

• Sales/Turnover: This refers to the total amount of money generated by selling goods or services before any expenses are deducted. It's the total revenue you earn from your business operations.
• Profit: This is the amount of money left over after all business expenses have been deducted from your sales. It represents your actual earnings.

Now, let’s understand these concepts with an example.

Example: Online Store

Tara owns an online store that sells handmade crafts and accessories through your Instagram page. She has registered her business in her name as a sole proprietorship business. Here’s how she would calculate her sales and profit:

• Sales/Turnover: Imagine that in one year, Tara sells products worth Rs. 25 lakhs. This total revenue includes all the money she received from customers before paying any expenses.
• Expenses: These might include costs such as purchasing materials (Rs. 15 lakhs), salary/wages of her staffs (Rs. 4 lakhs), rent (Rs. 1 lakhs) and marketing & promotion (Rs. 2.5 lakh), totaling Rs. 22.5 lakhs.

• Profit: To calculate Tara's profit, subtract her expenses from her sales:

  Profit=Sales−Expenses=Rs. 25,00,000−Rs. 22,50,000=Rs. 2,50,000 

In this example, the profit of Tara's online business is Rs. 2.5 lakhs and hence her business qualifies as a small business eligible for the presumptive tax system. 

But how will Tara know all these i.e. sales, expense etc.? Well, she has to record each transactions to know exactly how much is her sales, expenses and profit are. While she can record them manually in a notebook or track them using an excel sheet, she may simply download Khatapana app and record it there. She can easily record her sales, track expenses and automatically know what the profit is. Yes, it's that simple and if she sells on credit i.e. उधारो, she can easily send reminders, follow up for payments and collect all her dues from her customers. And all this without paying anything. Yes, Khatapana app is FREE!   

Now coming back to our article, small businesses under this category may include any business that a person can register and run. Here are few examples:

• Grocery shops (kirana pasals)
• Bakeries
• Restaurants and hotels
• Dairy and juice shops
• Small vendors and tea shops
• Hair cut saloons, beauty parlors
• Cosmetic shop 
• Clothing store
• Online trading business
• Handicraft shop
• Meat shop
• Fruit/vegetable vendor
• Cyber cafe
• Printing shop
• Stationery store
• Book shop

If you're running any of these businesses, understanding your tax obligations can help you avoid unexpected expenses.

Do You Qualify as a Small Business?

You qualify as a small business if:

• Your income comes solely from business activities within Nepal.
• Your annual turnover doesn't exceed Rs. 30 lakhs, and your profit isn't more than Rs. 3 lakhs.
• You're not registered for VAT (Value Added Tax). Please note if you sell goods then you don't have to register for VAT until your annual sales is above Rs. 50 lakhs. In case of services, the limit is Rs. 20 lakhs and if you deal in both, then the limit is Rs. 30 lakh. 
• You haven't claimed medical tax credits or TDS (tax deducted at source) credits.

If you meet these conditions, you can take advantage of a simplified tax process called presumptive tax.

Understanding Presumptive Tax

Presumptive tax is a simplified tax system for small businesses. Instead of complicated calculations, you pay a fixed amount based on where your business is located:

• Metropolitan or Sub-Metropolitan Area: Rs. 7,500 annually
• Municipality: Rs. 4,000 annually
• Rural Municipality: Rs. 2,500 annually

This system makes it easy to predict your tax expenses. So, if we were to continue with the example of the Tara's online business and let's say the business is registered in Bhaktapur municipality, then the total taxes Tara will have to pay is Rs. 4,000 only. No matter how much profit her business makes up to Rs. 3 lakhs, the tax will remain the same. However, the business has to be registered as a sole proprietorship i.e. in Tara's personal name as this benefit is not available to any other forms of business like partnership firms or a company. Please note that you can easily register a sole proprietorship business at your ward office. All you need is a copy of your citizenship and rental agreement for your shop or business location. Click here to read more about various forms of business structures and registration in Nepal. 

Understanding Presumptive Tax

But how is it simpler and beneficial compared to other form of business? Now let's take another example of Tara's friend Sara. Inspired with Tara's success, Sara also opens an online business for selling bags. And instead of registering her business as a sole proprietorship, Sara registered it as a one person/single shareholder private limited company at the Office of Company Registrar. And Sara's company also made a profit of Rs. 2.5 lakhs with a total sales of Rs. 25 lakhs. But, Sara's auditor tells her that she will have to pay 25% tax on the profit of her company. So, the tax payable will be Rs. 2.5 lakhs X 25% =Rs. 62,500 ! That's Rs. 58,500 more than what Tara paid for her online business. 

Sara tells the same thing to her auditor. Please note when you register your business as a company, you will have to engage an auditor to audit your financial statements. Since Tara registered her business as a sole proprietorship, she is not required to hire an auditor too. So, she ends of saving even more in audit fees. 

So when Sara's company auditor hears about Tara paying just Rs. 4,000 in taxes and making a net profit of Rs. 2,46,000 after taxes, he tells Sara that the nature of their business is different and Sara also would have made a similar profit if she registered her business as a sole proprietorship. Now Sara regrets that she did not consult with Tara while registering her business. But how did Tara make such a brilliant decision and save so much in taxes and other costs? Guess what? She consulted the experts from Khatpana and took their help in registering her business. And as a bonus, she also got Khatapana app for free to manage her business as well as personal transaction. 

Finally Sara also makes up her mind to download the Khatapana app and consult the experts before making any business or financial decision. Well, better late than never. Sara will have to be happy with whatever is left after paying such a huge tax, right? Not yet. If she wants to take out the profits, her company will have to pay out that profit in the form of dividend and pay an additional 5% tax on such amount. So, another 5% loss? Yes, exactly. 

Here is a summarized table to help you understand how much Sara and Tara eventually get in their hands despite earning equal profits: 
 

See how Tara made Rs. 67,875 more by making a smart decision.  

How to File and Pay Your Taxes Online Under the Simplified Tax System in Nepal

Filing your taxes online is straightforward. Here’s how you can do it:

1. Visit the IRD e-Tax Portal: Go to the IRD Tax Payer Portal.
2. Log In: Use your PAN (Permanent Account Number) to log in.
3. Fill Out the Online Form: Enter your business details, such as:
   • Business name and location
   • Business turnover
   • Business expenses
   • PAN number
4. Submit the Form: Check that all the information is correct, then submit it online.
5. Pay Your Tax Online: Choose a payment method:
   • Online banking
   • Connect IPS
   • Corporate Pay
   • Mobile wallets (e.g., eSewa, Khalti)
6. Get Confirmation: Download the payment receipt or confirmation certificate and save it for your records.

Once verified, you’ll receive a tax clearance certificate, showing that your taxes are up to date.

Key Benefits of Presumptive Tax

Well, you would have already know the benefits from the example of Tara and Sara. Using presumptive tax simplifies your financial planning. You know exactly how much you owe based on your location, which helps you avoid surprises. It’s designed to save you time and reduce stress, allowing you to focus on running your business successfully. Plus until your business is within the limit as specified above, you will continue to save a lot in taxes. But what happens if your sales exceed Rs. 30 lakhs in a year or your profit is more than Rs. 3 lakh? Well, there is a simplified taxation system for such business as well. And we discuss about this here. 

Final Thoughts

Navigating taxes as a small business owner in Nepal doesn’t have to be overwhelming. By using the presumptive tax system, you can manage your taxes with ease and spend more time growing your business. Keep accurate records, understand your obligations, and make the most of the resources available to you. And you can do all this for free using our  on your mobile. If you want to use Khatapana web, we offer a very budget friendly subscription at Rs. 500 a month. And before you buy, you can try as much as you like to see if this is helpful for you. Click here to access the Khatapana web demo: https://demo.khatapana.com/

If you have any questions or need assistance, don't hesitate to reach out to the tax experts of Khatapana. They can help ensure you're on the right track and compliant with all regulations.