fy 2016/17- tax deduction at source in nepal

This Fact Sheet on Tax

Deduction at Source is prepared

as a general guide on deduction

of TDS as per Income Tax Act

2058.

The solution of questions

referred to in the publication are

available in our tax knowledge

portal “QuickAnswers.” Please

refer to last page for further

details on QuickAnswers and

how to reach us.

Document last updated on:

1st January 2017

Fact Sheet on

Tax Deduction at Source

https://nepaltaxonline.com

Table of Contents

Concept

Overall obligation of Withholding Agent Page 2

When should TDS be deducted? Page 3

TDS not required Page 3

TDS as per Sec. 87 Page 3



TDS in cases of DTAA countries Page 8

TDS on Windfall Gain Page 8

TDS as per Sec. 95Ka Page 9

Advance Tax and Final withholding payments Page 9

Factsheet: Tax Deduction at Source

https://nepaltaxonline.com 2

Concept

Withholding tax (popularly known as Tax Deduction at Source or TDS) is one of the leading

source of tax receipts of the government. The TDS mechanism has several benefits,

especially to the government, with tax collection being easier mode of collection through

withholding agents. TDS also removes the administrative burden of collecting tax from

employees and other unaccounted sector.

But for the withholding agents, TDS compliance is not so easy. There are multiple rates,

and interrelated concepts which are not easy to understand. Organizations often receive

differing interpretations from tax officers, auditors and advisors, thus leading to confusion

over rates on payments they make. This document explores some basic concepts of TDS

as per Income Tax Act 2058 and links you to appropriate sources in QuickAnswers.

Overall obligation of Withholding Agent

The overall obligations of a person with respect to TDS are summarized as under:

• A person is not allowed to deduct TDS without first registering itself in tax office

obtaining, i.e. obtaining Permanent Account Number (PAN). So, the first obligation

for a person, for e.g. for an international entity, is to register in PAN.

• Only a resident person is allowed to deduct TDS. The resident natural person is

allowed to deduct WHT only for payments in connection with business.

• The person should deduct TDS on payments subject to TDS as per the rate

prescribed by Income Tax Act. Even if the payer fails to deduct WHT, it is regarded

that WHT has been deducted by the payer (deemed WHT).

• The person should submit TDS return and deposit TDS within 25 days of end of the

Nepali month in which TDS is deducted.

• The person should provide certificate of TDS, within the prescribed time (25 days

from end of Nepali Calendar Month in which Tax has been deducted) to the payees

from whom income tax has been deducted.

The person should provide TDS certificate to resigned / retired employees within 1

month of the last date in the company and to regular employees, within one month of

the year end.

With E-TDS, the TDS deposited by the withholder can be checked online by

obtaining username and password from tax office. Still, the withholder should

provide TDS certificate if so requested by the payee.



When should TDS be deducted?

TDS should be deducted when the payment is made to the payee. “Payment is defined by

Sec. 2(ag) of the Act.

There is widespread practice where TDS liability is assumed to have arisen when a

provision is created in the book to the payee or actual payment whichever is earlier. But for

TDS liability to arise, it is essential to ensure that the payment has actually been made to

the payee, as per Sec. 2 (ag). Mere book adjustment creating a provision or liability in the

books of the payer does not fulfill the condition of Sec. 2 (ag).

So, the legal principles and practice differs.

TDS not required

There are payments where TDS is not required, but provisions are not so straight forward.

For e.g. foreign source payments normally do not require TDS. Similarly, several payments

to natural person do not require TDS, e.g. agricultural payments, insurance payment on

death of natural person.

There are further exemptions in Sec.88:

1. Payment made for article published in newspaper and for setting out exam paper or

for examination of answer sheet.

2. Interest paid to a resident bank or a resident financial institution.

3. Tax-exempt payments.

4. Inter regional exchange fee paid to the bank issuing credit card.

5. Dividend and interest paid to mutual fund.

TDS as per Sec. 87

Income from Employment Resident employer should withhold tax while making

employment income payment with sources in Nepal to an employer as follows:

Further Discussion in our portal: Question No. 39-When does the liability of TDS arise?

Detail explanation of the provision in our portal: Question No. 48-What are the exceptions when TDS is not required?



Monthly WHT = Annual Tax calculated as per schedule 1 on annual employment income

divided by 12.

The WHT is not final tax, but the employee is exempt from submitting returns provided

certain conditions are fulfilled, such as only Nepal sourced employment income, one

employer at a time etc.

TDS as per Sec. 88

There are several payments covered by Sec. 88 requiring TDS. Some major provisions are

explained below:

a) Rental Payments

Rent means all payments including premium made under a lease of a tangible asset

including house rent.

As per Sec.88, normal TDS rate on rental payment is 10%, including for TDS on

House/Office Rent and TDS on vehicle rental where VAT invoice is received is 1.5%.

b) Service Fees

In case of payments to service fee, TDS responsibility arises if following conditions are met:

• Payment should be made by resident person

• Source of payment should be in Nepal

Further Discussion in our portal:

• Question No. 19- We have appointed a new staff after three months of the fiscal year. She was employed earlier in another organization. How should we calculate TDS of the employee after appointing in our organization?

• Question No. 21- We have appointed few staffs on daily wage basis. They are not entitled to any benefits as per Employee laws of the organization and are paid for the days day work. Are they taxed as employees?

Further Discussion in our portal: Question No. 201: What are the TDS rates that apply for payment of vehicle charges or vehicle rental for different type of vehicles?



o If service is provided in Nepal- source is regarded in Nepal

o If service is not provided in Nepal - source is not regarded in Nepal

The TDS rate for service is 15%, subject to following special rate:

• If the service is provided by an entity and is a VAT exempt service- 1.5%

• If the service is provided by VAT registered person and VAT invoice is received-

1.5%

c) Payment made to Tax Exempt Organization

There are several matters that you need to consider in case of payment to tax exempt

organizations:

a. Not all payments of tax exempt organization is exempt from tax. Donations and gifts

and other contribution directly related to the functions of organization, such as grant

is not subject to tax.

b. Service fee earned by tax exempt organization is subject to TDS, with TDS rate

depending on VAT status of tax exempt organization.

c. Tax returns are required by tax exempt organization in cases income subject to tax

as per Sec. 7(2).


• Question No. 152- What is the criteria for segregating between grant and service fee in case of tax exempt organization because grant are exempt from TDS while service fees are taxable?

• Question No. 151- Should a tax exempt organization be registered in VAT? What will be the tax exempt status if the organization is subsequently registered in VAT and how would invoicing be done in such cases?


• Question No. 49- Nepal Rastra Bank gives us permission to remit foreign currency on condition that TDS is paid. But the supplier who provided individual service outside Nepal says that he needs to receive payment without tax. What is the applicable provision for deducting tax on such payments?

• Question No. 52- We send our staffs for training to Bangladesh and received an invoice with training fee as per Bangladesh law. What should be the TDS rate?



d) TDS on Retirement Payments

Retirement Payments is subject to TDS at 15%, subject to following:

- Where payment is made by Nepal Government or Approved Retirement Fund, TDS

rate is 5%, calculated on gain as follows:

Gain=Total Payment less lower of (50% of payment or Rs. 500,000 whichever is

higher)

- Where payment is made by Un-approved Retirement Fund, TDS rate is 5%, on gain

calculated as follows:

Gain= Total Payment receive less contribution made to un-approved retirement fund.

e) TDS on Other Payments

The other TDS rates given by Sec. 88 are:

• Natural resource payment- 15%.

• Commission paid by resident employment company to non- resident person- 5%

• Payment for lease of aircraft- 10%

• Consideration distributed by mutual fund to natural person- 5%

• satellite, bandwidth, optical fiber, equipment relating to telecommunication, and for

the use of electricity transmission line- 10%

• Interest by Banks and financial institutions and/or listed companies to a natural

person, except made in connection with business- 5%

• Payment of gain from Investment Insurance- 5%

Further Discussion in our portal: Question No. 173- An individual had a dispute with the employer on deduction of TDS on retirement payment from Approved Retirement Fund. The employer deducted 15% while the individual believed that the payment is subject to 5% TDS. What is the correct TDS rate that should be used?

Further Discussion in our portal: Question No. 111: Do procurement such as sand, stone, crusher etc. for construction of school building by an INGO qualify as natural resource payment for TDS purpose?



TDS as per Sec. 89

a) Tax Deductions While Paying for Contracts or Agreements

While paying more than Rs. 50,000 for contracts or agreements, a resident person must

deduct tax at the rate of 1.5% of the gross amount of payment.

The amount is calculated by adding to it any other payments made during the past ten days

to the payee or his associate by a person or his associate under a single contract.

In cases of payments made to non-resident person, the following rates apply:

a. Repair of aircraft and other agreement or contract- 5%

b. Payment to non-resident insurance company- 1.5%

c. At prescribed rates, if specified by IRD in writing.

For the purpose of this Section "contract" means a contract or agreement concluded to

supply goods or labor or construction, fixation or establishment of tangible property or

structure and any act prescribed by the Department as a contraction or contract as well as

it shall included the payment made for a service rendered in case such service is being

included by the contraction or contract in the course of construction or taxation or

establishment.

The section does not apply in following payments:

a. Any other payment, except the rent for a land or building or fixtures therewith, having

source in Nepal which is made to any other natural person except who is operating

business or

b. Tax-exempt payments, or payments requiring tax deductions under Section

87, 88 or 88A.


• Question No. Q.120- What are the conditions where we need to consider the invoice limit of Rs. 50,000?

• Question No. Q.211- Does the provision of 5% TDS on payment to non-residents apply where a non-resident company with no legal presence in Nepal has entered into a onetime contract with a resident entity in Nepal for supply of goods that is manufactured outside Nepal and shipped from the country of business setup of non-resident located outside Nepal?



TDS in cases of Double Tax Avoidance Agreement countries

Sec. 74 of the law gives right to the Government of Nepal to sign an international

agreement with the concerned foreign government to avoid such double taxation.

In case any international agreement provides for Nepal to exempt any income or payment

or to apply reduced rates of tax on any income or payment, the provision of double tax

avoidance agreement applies. So, far Nepal has signed such DTAA with ten countries:

Austria, India, China, Srilanka, Korea, Qatar, Thailand, Mauritius, Pakistan & Norway.

Double tax avoidance agreement has been largely ignored in case of TDS decisions, with

even Supreme Court rulings in contrary with the DTAA principles. Principally, DTAA

provisions should be followed in deciding whether TDS provision as per Income Tax law

applies to a service provider or employees who come from country with whom Nepal has

signed DTAA.

TDS on Windfall Gain

The TDS rate on windfall gain is 25%.

Government of Nepal may provide exemption in the windfall income by publishing a

Notification in the Nepal Gazette on the national or international awards received for

contributing in the sector of literature, art, culture, sports, journalism, science, technology

and public administration.

No windfall gain tax is imposed on an award up-to Five Lakhs rupees received for

contributing in the sector of literature, art, culture, sports, journalism, science, technology

and public administration.


• Question No. Q51- What is the applicability of TDS provisions in case of payment

made to Indian service provider in light of Double Tax Avoidance Treaty between

Nepal & India?

• Question No. Q.210- We have hired employee from India. How would you tax

income under the head salaries in case of resident and non-resident in light of

Double Taxation Avoidance agreement between Nepal and India? What would be

the case if the salary is paid from Indian office and not shown as expense in

Nepal?



TDS as per Sec. 95Ka

TDS on disposal of land and building and shares, securities etc. is advance tax for all

recipients.

The TDS rates are:

a. On gain from disposal of interest held in a resident entity listed in recognized stock

exchange

- received by a resident natural person- 5%

- received by others- 10%

b. On gain from disposal of interest held in a resident entity not listed in stock

exchange

- received by a resident natural person- 10%

- received by others- 15%

c. TDS on disposal of land and building of a natural person

- If the land and building is not a Non-Business Chargeable Asset (NBCA)- No

TDS/no tax.

- if the land and building is NBCA and is owned for period less than 5 years- 5%

- if the land and building is not NBCA and is owned for period more than 5 years-

2.5%

d. TDS on disposal of Land and building owned by entity (Introduced since F.Y.

2016/17)- 10%

e. TDS on gain from transaction on commodity future market- 10%

Advance Tax and Final withholding payments

TDS deducted could either be advance tax or final withholding payments.

- Advance Tax can be claimed in the year such income is included as income in

income tax statement of the person. Where the TDS deducted is only an advance

tax, the recipient normally have a responsibility to submit income tax return, unless

specifically exempt from return.

- WHT is final tax if the payment falls within the list of final withholding payment given

by Sec. 92 of the Act. No further tax is levied in case of final withholding payments

and so it is not required to be included in income, and any expenditure incurred for

earning the income cannot be claimed. (Sec. 21).

Final withholding payments include:

� Dividends paid by resident companies or partnership firms



� Rent paid in consideration of lands or buildings and fittings and equipment

connected with them with sources in Nepal to natural persons other than those

conducting a business.

� Payment made by a resident person for gains from investment insurance.

� Gains paid by a resident person in consideration of interest in a retirement fund

for which no approval has been obtained.

� Interest paid by the bank, financial institution, or any other institution issuing

debentures, or company listed under prevailing laws or cooperatives referred to

in Subsection (3) of Section 88 and having following conditions:

- Payment which has a source in Nepal and which is not received by the

individual in the course of conducting a business,

- Payment made to an exempt organization referred to in Section 2(s),

� Payments made to non-resident persons that are subject to withholding tax

under Section 87, 88 , 88A or 89

� Retirement payment made by the Government of Nepal or approved retirement

fund or un-approved retirement fund including all types of retirement payments

(except pension paid on regular basis).

� Meeting fee, payments made for occasional teaching

� Payment for Windfall gain

� Consideration amount distributed by mutual fund to natural person

Further Information

Further information and detail discussion on TDS queries included in this document is available in “QuickAnswers,” the online tax knowledge portal developed by Aster Advisory Pvt. Ltd.



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fy 2016/17- tax deduction at source in nepal

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