Nepal Tax Updates
Key Takeaways & Highlights from Nepal Budget for the Fiscal Year 2080/2081 B.S. (2023/2024)
by Khatapana
Jun 5, 2023 - 12 min read
Share
This article sets out the key highlights of the Budget Speech and Financial Bill, 2080 outlining the key takeaways for the Fiscal Year 2080/2081 B.S. Please note that these updates are compiled based on their relevance to the private and business sectors in Nepal.
1. Context
Following the approval from the cabinet meeting, Hon. Finance Minister Dr. Prakash Sharan Mahat announced the budget for the upcoming Fiscal Year (F/Y) 2080/81 on Jestha 15, 2080 in the federal parliament's joint sitting. The annual budget of the government serves as a policy tool for stimulating economic development by providing needed advice and mobilizing resources for effective governance.
The revenue estimated to be collected in the current F/Y 2079/80 is Rs. 1179.84 billion while the budget for the expenditure of the upcoming F/Y 2080/81 is estimated to be Rs 1751.31 billion. Once again an inflated budget and it seems this budget will also fail to meet its implementation target whether it be in terms of revenue collection or the capital expenditure. The government’s budget estimation is indicating a massive budget deficit of more than Rs 500 billion. The deficit like the usual years is estimated to be covered through internal and international loans, foreign grants etc.
Regardless of the undesired reality of budget management in Nepal, this year the government has formulated the budget with one of the major objectives to lift the morale of the private sector by creating an investment friendly environment and creating employment opportunities and reducing poverty. Government has likewise brought significant provisions for the development of private and business sectors, especially budding sectors like Information Technology (IT). In the same manner, in order to promote the private sector, the government has brought even more flexible arrangements for the foreign investors.
Please find the relevant provisions and concessions brought by this year’s budget and Financial Bill, 2080 for various private sectors in the major highlights illustrated below:
2. Major Highlights
Industries and Entrepreneurial Development
- Provision will be implemented allowing incorporation of companies with a minimum authorized capital of Rs. 100 only. For now, in practice, the authorized capital should be at least Rs. 1 hundred thousand.
- The government fees on incorporation and capital increment processes for companies will be waived.
Foreign Direct Investment Promotion
- Sector wise minimum threshold to be prescribed for foreign investment by reviewing the existing cap.
- The minimum foreign investment threshold on the IT industry to be removed altogether.
- Industries exporting IT services will be provided with foreign exchange facility up to 10% of the foreign currency earned for the establishment of contact offices in a third country, purchase of software or program and installment of equipment.
- No approval will be required for the reinvestment of profit earned from foreign investment
- Arrangements will be made to approve foreign investment through an automatic route for industries open for foreign investment, except for industries requiring approval under prevailing law.
- Hedging facilities will be provided to minimize risks related to foreign exchange for foreign investors by authorizing a financial institution.
Infrastructural and Energy Sector
- Capital will be accumulated from innovative financial means such as green bonds, energy bonds, etc. based on local currency for large infrastructural projects such as hydropower projects, transmission lines, etc.
- Businesses licensed for the production, transmission, and distribution of electricity produced from hydro, wind, solar, and bioenergy that will commercially operate within 2084 B.S. will get 100% income tax exemption for 10 years after the commercial date of operation (COD), and after 10 years of COD, 50% income tax exemption will be granted for the next 5 years. (Previously, the COD should have been achieved within 2083 B.S.)
- Reservoir and semi-reservoir-based hydropower projects above 40 M.W. of capacity and the lower hydropower projects operating in tandem that can achieve their financial closure until 2085 B.S will get 100% income tax exemption for 15 years, and after 15 years, 50% income tax exemption will be granted for the next 6 years. (Previously, tax exemption was not applicable for lower projects operating in tandem.)
- 5% deduction of tax will be applicable on payment of interest on loans from foreign banks or financial institutions in foreign currency by reservoir and semi-reservoir-based hydropower projects above 200 M.W. of capacity that can achieve their financial closure until 2082 B.S. (Previously, no Tax Deduction at Source (TDS) was required).
Information Technology (IT) and FinTech Sector
- Person or entity who has earned foreign currency by exporting IT services, including business process outsourcing, cloud computing, etc., to be provided 50% income tax exemption up to F/Y 2084/85 in relation to such income earned in foreign currency.(For the financial year 2079/80, a special provision had slashed the tax rate to just 1% on such income generated in foreign currency.)
- Telecommunications can charge 10% as a telecommunication service charge for the payment of the service provided. (unchanged)
- Digital service tax of 2% shall be applicable for the digital service provided to consumers in Nepal by non resident persons.. However, the provision is not applicable for digital service with transaction amount below Rs. 2 million per annum. (New)
- Person providing digital services in Nepal must file tax returns and pay tax for the relevant fiscal year.
- Banks, financial institutions, and money transfer institutions shall deduct 5% advance tax on the payment of foreign currency earned by resident individuals who are not involved in commercial operations for providing software or digital services of similar nature outside Nepal. (Previously, the rate 1%)
- Resident E-commerce platforms based in Nepal shall deduct 1% advance tax on the payment made to the seller associated with their platforms, for the sale of products or services.
(The introduction of additional 1% advance tax might have discouraging implications for the sellers in e-commerce platforms like daraz and sasto deal. This also means the riders, delivery personnel working with ride hailing companies like pathao and indrive who enjoy significant market share, will be taxed. Earlier, there was no such requirement of tax deduction and this is estimated to add significant tax collection to the government.)
Agricultural Sector
- Businesses involved in agriculture, business involved in vegetable dehydration, and cold store operations get a 50% exemption from income tax. (Previously, 100% tax exemption was given.)
- Frozen greens vegetables, frozen sweet corn, frozen potatoes, Coffee (Roasted, unroasted, decaffeinated, and beans), avocados, kiwis shall attract Value Added Tax (VAT)
- Woolen carpets and its weaving, dying, washing and knitting, shall attract VAT
Transport and Cargo Service Sector
- Payment to the businesses providing cargo service or leasing cargo vehicles that have been registered for VAT will be deducted from the 1.5% tax payment.
(Previously, the payment was deducted with 2.5% tax.)
Consultation Service
- Banks, financial institutions, and money transfer institutions shall deduct 5% advance tax on the payment of foreign currency earned by resident individuals who are not involved in commercial operations for providing consultation services outside Nepal. (Previously, the rate was 1%)
Content Creation
- Banks, financial institutions, and money transfer institutions shall deduct 5% advance tax on the payment of foreign currency earned by resident individuals who are not involved in commercial operations for uploading audio-visual content on social media. (Previously, the rate was 1%)
Banks and Financial Institutions
- Nepali banks and financial institutions or other entities listed by prevailing law or authority shall make a 6% tax deduction to individuals on the payment of interest that is non-commercial and sourced in Nepal for deposits, loans, debentures, and cooperative bonds. (Formerly, the rate was 5%).
Tourism Sector
- Individuals traveling abroad will be required to pay a 5% foreign tourism tax.. (New)
- Trekking and Tour related services will attract VAT
3. Individual Income Tax Rates for 2080-81
- The existing income tax rate has been updated for resident natural persons with taxable income of Rs. 2 million to Rs. 5 million and above Rs. 5 million. The following is the updated tax slab with additions.
| S.N | Taxable income (in Rs) | Applicable tax rates (Updated for F/Y 2080/81) | Amendment in previous tax slab | |
| Single | Couple | |||
| 1. | Up to 500,000 | Up to 600,000 | 1% | No change |
| 2. | Next 200,000 | Next 200,000 | 10% | No change |
| 3. | Next 300,000 | Next 300,000 | 20% | No change |
| 4. | Next 1,000,000 | Next 900,000 | 30% | No change |
| 5. | Next 3,000,000 | Next 3,000,000 | 36% | New tax slab introduced |
| 6. | Above 5,000,000 | Above 5,000,000 | 39% | New tax slab introduced |
4. Others
- "Luxury" tax of 2% to be imposed on the following goods and services. (New)
- on services provided by 5-star or above-rated hotels and luxury resorts
- imported alcohol and
- on valuable jewelry that cost over Rs 1 million
- Arrangements will be made for the mandatory issuance of invoices via electronic system and enrolling taxpayers with annual transactions exceeding Rs 250 million under the Central Billing Management System (CBMS).
- VAT-registered taxpayers with annual revenue up to Rs 10 million shall file VAT returns in four months in a year.
- A person licensed to conduct foreign employment business must file a foreign employment service fee of 1% of the payment collected from the person going for foreign employment.
Annex 1
Concessions and Rebates granted to business and firms by Financial Bill, 2080
| S.N | Provisions |
| 1. | Tax and interest pending until FY 2063-64 that had been assessed until Ashad end 2065 B.S shall be waived up to Rs 50,000 as per record. |
| 2. | A resident person engaged in Media House Business shall receive a 25% income waiver on tax chargeable to business income earned on F/Y 2079/80. |
| 3. | Entities that did not include bargain purchase gains from merger and acquisition in their revenue up to FY 2078/79 shall receive a waiver of relevant fee and interest, if the relevant tax is paid by the end of Mangsir, 2080 B.S. |
| 4. | A natural person engaged in the regular business of securities, land, or real estate who has not yet submitted revenue details or filed tax returns for the F/Y 2076/77 up to 2078/79 will receive waiver of pending tax, fees, and interest for the relevant and previous F/Y years, if 50% of the such tax amount required by the Income Tax Act, 2058 is paid by the end of Chaitra, 2080 B.S |
| 5. | Persons engaged in foreign employment or educational consultancy services business who haven't declared their actual domestic or foreign income or have paid the relevant tax amount shall receive a fee and interest waiver, if the relevant tax is paid by the end of Chaitra, 2080 B.S. |
| 6. | Non-residents who provide electronic services with an annual turnover of more than Rs 2 million will receive a waiver of charges, interest, and additional fees,if they are already under the tax ambit by obtaining PAN or if they obtain a PAN and file VAT returns for the period up to Jestha end, 2080 B.S by 10 Ashad 25, 2080 B.S. |
| 7. | Non-governmental organizations registered under the Organization Registration Act of 2034 that have received grants or donations from donor agencies or international non-governmental organizations will receive a waiver of assessed value-added tax, additional charges, interest, and fines, if they file an application with the relevant Internal Revenue Office by the end of Mangsir, 2080). |
| 8. | Persons engaged in construction business who have not submitted VAT returns or paid the necessary VAT up to Chaitra end, 2079 will receive a waiver of penalties, additional charges, and interest liable under VAT Act 2052, if 50% of the relevant tax and interest is paid by the end of Poush 2080 B.S. Persons who have submitted the tax returns, but have not paid the necessary VAT up to Chaitra end, 2079 will also receive a waiver of additional charges and interest liable under VAT Act2052, if 50% of the relevant tax and interest is paid by the end of Poush 2080 B.S. |
| 9. | Persons engaged in the cargo services industry who are required to be registered under the VAT Act, 2052, have not paid the VAT amount due to non-registration will receive a waiver of the outstanding VAT, additional fees, interest, and penalties, if 5% of the total value of taxable transactions during the relevant taxable period is paid by the end of Poush 2080 B.S. |
| 10. | Herbal industries that are registered or not registered under VAT, that haven’t collected and paid the VAT on VAT applicable goods since F/Y 2071/72, will receive waiver of outstanding VAT, interest, additional fees, and penalties, if 5% of the taxable transaction value between F/Y 2071/72 up to Jestha 14, 2080 B.S is paid by the end of Poush , 2080 B.S, by registering for VAT (if not). |
Annex 2
Commercial concessions and facilities for the F/Y 2080/81
S.N | Business/Details of the Entity/ Income Situation |
| 1. | Income derived from agricultural business, registered under a firm, company, partnership, or organized organization, will be exempted from agricultural income taxes, except for income generated from agricultural business conducted on the specified land as described in clauses (d) and (e) of section 12 of the Land Act, 2021. |
| 2. | The following taxes are applicable to an individual based on the income derived from special industries and the information technology industry in any given income year: |
However, if there are more than 100 Nepali citizens who are directly employed throughout the year, including at least 33 individuals from progressive groups such as women, Dalits, or disabled people, a tax exemption of 10% will be granted in the additional amount that needs to be paid. | |
| 3. | For special industries and tourism industries (excluding casinos) that have commenced operations within a certain date and provide direct employment to more than 1 hundred individuals on an annual basis:
However, tax will not applicable if such industries that are currently in operation increase their capital by a minimum of 25 %, reaching a total investment of at least 2 billion rupees, and provide direct employment to 3 hundred or more individuals on an annual basis, then for the first 5 years from the date of capacity increment
|
| 4. | In any income year arising from sources within Nepal: (a) If the income of an individual resident is subject to a tax rate of 20 %, they will receive tax exemption of 25 %. (b) If the income of an individual resident is subject to a tax rate of 30 %, they will receive tax exemption of 50 %. |
| 5. | For entities listed in Schedule 11, Subsection (3g), engaged in productive manufacturing, tourism services, hydroelectric production, distribution, and transmission, will be granted a tax exemption of 15 %. |
| 6. |
|
| 7. | Regarding the tax rate applied to the income received by an individual from the export of intellectual property as royalty income, a tax exemption of 25 % will be granted. |
| 8. | Regarding the tax rate applicable to the income derived from the sale of intellectual property through transfer by an individual, a tax exemption of 50 % will be granted. |
| 9. | For tourism related industries and airlines companies operating international flights established with capital above Rs 1 billion, full tax exemption will be granted until 5 years of commercial date of operation and 50% tax exemption will be granted for the next 5 years. |
| 10. | For tourism related industries and airlines companies operating international flights established with capital above 3 billion rupees, full tax exemption will be granted until 10 years of commercial date of operation and 50% tax exemption will be granted for the next 5 years. |
| 11. | For tourism related industries and airlines companies operating international flights established with capital above Rs 5 billion, full tax exemption will be granted until 15 years of commercial date of operation. |
| 12. | When a private company with a paid-up capital of Rs 500 million or more undergoes a transformation from a private company to a public company and operates as a public company, tax exemption of 10 % will be granted on the applicable tax for a period of up to 3 years from the date of such transformation However, a company establishing itself as a public company as per the Companies Act, 2063 shall not be entitled to the benefits under this subsection. |
| 13. | For the operations and transactions of cottage industries:
|
| 14. | Startups designated by the department, operating with an annual turnover of up to Rs. 10 million by utilizing innovative knowledge, ideas, skills, techniques, practices, and methods will be exempted from any tax for a duration of up to 5 years from the starting date |
| 15. | For a period of 5 years from the initiation of the business, tax will not be applicable to the industries established up until the end of Ashad 2082 B.S with the aim of manufacturing agricultural equipment. |
| 16. | An individual who qualifies for multiple exemptions based on the same income can only claim one specific exemption according to sub-section (2b) to obtain the additional benefit provided. |
Help Center
Comments
In point 13, what is the definition of cottage industries a/c to Nepal Govt?