T&A C.2 History of Income Tax of Nepal

Chapter 2
Taxation of Income in Nepal

History of Income Tax in Nepal
Although the taxes were collected in various forms in ancient era, the history of modern income tax is not very old in
Nepal. The idea of introducing income tax in Nepal originated in the early 1950s when a multi-party democratic political
system was introduced. In 1951 A.D. then Finance Minister in his budget speech declared the intention of the government
to introduce and income tax. Attempts were then made to introduce income tax in subsequent years. In 1945, an income
tax with RS. 10,000 basic allowance and progressive taxes ranging from 5 to 25 percentage was proposed. Due to
political instability, it could not be introduced until 1958 A.D. The first elected government in 1959 A.D. finally
introduced Business Profits and Salaries Tax Act, 1960 in Nepal. At that time, income tax was levied only on business
profits and salaries. After about three years’ experience of income tax, the government replaced the prevailing tax act by
Income Tax Act, 1962. The coverage was then extended in the Act. In 1974 A.D. Income Tax Act, 1974 A.D. (2031B.S.)
was enacted. The act classified income sources into five groups i.e. (a) Agriculture (b) Industry, Trade, Profession or
Occupation (c) Remuneration (d) House and Compound Rents (e) Other Sources. However, agricultural income was kept
outside the tax net except few years through the Finance Acts.
The Parliament of Nepal enacted Income Tax Act, 2002 A.D. (2058 B.S.) with effective from 1 April 2002 A.D.
(Chaitra 19, 2058 B.S.) to enhance revenue mobilization through effective revenue collection procedure for the
economic development of the nation, and to amend and integrate the laws relating to income tax. This act has replaced
Income Tax Act, 1974 A.D. (2031 B.S.), which was amended for eight times and existed for a period of 28 years. The
Government of Nepal framed Income Tax Rules, 2059 in 2059 B.S. to help clarify the Act.
Business income and employment act or profit and remuneration tax act
2017
This act was enforced from Jestha 2, 2017. The following were the basic features of this act:
1. Some basic term with regard to income, business, employment, etc. were defined;
2. Procedure of tax; assessment and collection were provided;
3. Some tax exempted person were defined;
4. Provision for withholding tax was introduced;
5. Filling of tax return was made compulsory for some of the tax payers;
6. Provision of charging penalties and procedure of appeal against an assessment were provided;
and Rates for charging income tax were left on the finance act of the relevant year.
Nepal Income Tax Act 2019
Special features:
1. Special industries established with an investment of NPR 1 billion or more are excluded from the tax fold until five years from the
date of establishment
2. Additionally, if these industries are further excluded from the tax fold if they employ 500 employees or more during the year of
establishment
3. Special industries with an increased investment of up to NPR 1 billion after establishment are exempted from tax until 5 years from
the date of increment of capital
4. These industries are further excluded from the tax fold if they employ 500 employees or more during the year of the establishment
until 5 years from the date of increment of capital
5. Such industries will be exempted from tax if their increment amounts to 25% of installed capacity until five years from the date of
capital increment
1. Mining Petroleum & Natural Gas industries will be exempted from taxes on commencement of
commercial operation by April 12, 2024, for 7 years from the date of commercial operation
2. Energy-based industries will be exempted from taxes on commencement of commercial operation by
April 12, 2014, for 10 years from the date of commercial operation
3. Tourism-related industries with the commencement of operation by April 12, 2014, will be exempted
from taxes until five years from the date of commercial operation
4. Aviation industry established with an investment of more than NPR 2 billion & conducting
international flights will be exempted from tax until five years from the date of commercial operations
Income Tax Act in 2031(1974) in Nepal
Special features:
1. The act classified income sources into five groups i.e. (a) Agriculture (b) Industry, Trade, Profession or
Occupation (c) Remuneration (d) House and Compound Rents (e) Other Sources. However,
agricultural income was kept outside the tax net except few years through the Finance Acts.
2. Procedure of tax; assessment and collection were provided;
3. Provision of charging penalties and procedure of appeal against an assessment were provided; and
Rates for charging income tax were left on the finance act of the relevant year.
4. Chance of double taxation is reduced.
5. Minimize tax avoidance and tax evasion.
Income Tax Act 2058 in Nepal
Objectives: 1. Integrate Nepalese tax system with the tax
1. Bring all income generating activities into tax system with the tax system of foreign
net. countries.
2. Harmonize tax rates and concessions on 2. Develop a tax-payer-friendly-taxation system
equity grounds. by making it clear and transparent.
3. Widen the tax base. 3. Reduce the scope of discretionary
4. Minimize tax avoidance and tax evasion. interpretation of tax authorities.
5. Make income tax elastic and revenue 4. Make tax payers more responsible by
productive. enforcing the self-assessment systems.
6. Confine all the income tax related matters
within the act.
Special Features:
1. Confinement to tax related matters: All the legal provision confine in this act is
considered as code of income tax matters.
2. Provision for set-off and carry forward of losses: Business losses are adjusted in next
year income in this act.
3. Residential status: This act is clearly distinguished residential and non-residential status.
Non-residential status also taped on their income with source of Nepal.
4. Medicine tax credit: For resident person and natural person medical credit and specific
deduction facilities is provided by the act.
5. Focus on self-assessment of tax: This act has followed self-assessment of tax system as
payer friendly environment.
Definition of Important Terms
Resident:
A person who lives somewhere permanently or on a long-term basis is resident.
Temporary Resident:
A temporary resident is a foreign national granted the right to stay in a country for a certain length of time
(e.g. with a visa or residency permit), without full citizenship.
Non-resident:
A non-resident is an individual who mainly resides in one region or jurisdiction but has interests in another
region. In the region where they do not mainly reside, they will be classified by government authorities as
a non-resident.

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Chapter 2

Taxation of Income in Nepal

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