The Government of Nepal has established a simplified method of taxation for small businesses. Small businesses often have limited resources and time, and a complex tax system can be a burden for them. By simplifying the tax system, the government has made  it easier for small businesses to comply with their tax obligations and free up their time to focus on running and growing their businesses.

Imagine a grocery store at the corner of the street or the hairdresser salon or the tea stall. Will they really be able to comply with the tax compliance requirements? Think about a mom and pop store having to file their tax returns every month and then getting their books of account audited. The compliance related complexities are the top most reason why small businesses especially the sole proprietorship firms wish to stay out of the tax ambit. And then there are tax related inspections which are nothing short of harassment. 

Even bigger businesses that are required to register for VAT and comply with other filing related requirements deliberately understate their revenue so that they continue to benefit from the simplified method of taxation for small businesses. 

So, what exactly is the simplified method of taxation for small businesses?

Businesses with a certain range of transactions & profit will result in a more or less similar amount of tax liability. Hence, the government has exempted these businesses from calculating taxes in detail. 

A simplified tax system also reduces the risk of errors and unintentional non-compliance, which can lead to costly penalties and fines. This helps  to create a level playing field for small businesses, as they are often at a disadvantage compared to larger businesses when it comes to navigating the complex tax rules.

Under the prevailing taxation laws of Nepal, the tax for small business can be computed under following 3 methods:

1. Presumptive taxation for small business operators 
2. Presumptive taxation on persons owning vehicles used for public transportation. 
3. Turnover based taxation 

Presumptive taxation for small business operators 

Under this method, flat amount of taxes are prescribed based on location of the business as follows:

However, one shall fulfill following criteria to be eligible for presumptive taxation.

1. Income shall be derived by Resident Natural Person from business only.
2. Business should have turnover not exceeding Rs. 30 lakhs in an Income Year.
3. Taxable income(profit) from business shouldn't exceed Rs. 3 lakhs in an Income Year. 
4. Assessee shouldn’t claim advance tax withheld by the agent under section 93 & shouldn’t claim Medical tax credit under section 51.

Turnover based taxation 

In this method, a certain percentage of tax is levied based on turnover & nature of business. However, persons providing professional services such as lawyers, doctors, engineers, sportspersons, auditors, actors & consultants cannot claim to pay taxes from this method. Tax under this method can be calculated as follows 

1. For turnover up to 30 lakhs, presumptive taxation for small business as mentioned above is applied. 
2. For turnover exceeding 30 lakhs, in addition to presumptive tax, following rates are applicable.

However, one shall fulfill following criteria to be eligible for turnover based taxation:

1. Income shall be derived by Resident Natural Person from business only.
2. Business should have turnover that exceeds Rs. 30 lakhs but not Rs.1 crores  in an Income Year.
3. Taxable income(profit) from business shouldn't exceed Rs.10 lakhs in an Income Year. 

Presumptive taxation for Public Vehicle Owners

If a natural person owns a vehicle/s  which is/are used for public transportation, he/she shall pay the following flat tax amounts in the Transport Management Office. 

It is to be noted that above tax rates & amounts are applicable only for natural persons with sole proprietorship business. If you operate a partnership firm or company, you are subject to a flat tax rate of 25% on the taxable income. 

Examples:- Mr. A has a sole trading concern that deals in clothes in Kathmandu, with annual turnover of 20 lakhs & net profit of Rs. 2.5 lakhs 

Tax liability of Mr. A 

=Rs. 7500( Since, Kathmandu is a metropolitan city)

What if he has  turnover of  Rs. 60 lakhs & profit amounting to Rs. 6 lakhs??? 

Tax liability of Mr. A 

1. Presumptive Taxation as assessed above =Rs. 7,500
2. Turnover based taxation= 1% on turnover exceeding 30 lakhs but not exceeding 50 lakh(i.e. 20 lakhs) +  0.80% on 10 lakhs ( 60 lakhs - 50 lakhs )
                                         = Rs.20,000+ Rs 8,000

                                       = Rs. 28,000 

Total liability of Mr. A = Rs.7,500 + Rs. 28,000

                                 = Rs. 35,500 

What if Mr. A has a bus which he has used for public transportation. 

Tax liability of Mr. A= Rs. 8,000 

Interesting, isn't it? Do you think this simplified method of taxation for small businesses is actually simple? Here is one way to find out. 

If you run a small business and are able able to calculate and pay your taxes yourself without anyone's help, then this method is simple. Otherwise, not.