Paying Taxes in Nepal
Nepal’s taxation system has seen some changes ever since its move to a federal structure. All three levels of government have specific taxation authority over their respective jurisdiction in accordance with the schedules of the constitution. The sections that follow will detail out the taxes to be collected by all three levels of government, the rate of taxation and other required information.
Federal government of Nepal according to the constitution of Nepal has the power to levy Income taxes, both on natural and legal persons, excise duty, Value added Tax and customs duty. Income taxes, Excise duty and VAT are collected by the Inland Revenue Department of Nepal, while Customs Duty is collected by the Customs department. There are separate legislations detailing out the provisions for different taxes collected by the Federal government. Additionally, amendments are made to the legislation almost on a yearly basis through the Yearly Finance Act, enacted to enforce the Yearly fiscal policy i.e. Budget. Other than the aforementioned taxes, the federal government also collects, Infrastructure development taxes which is included in the price of fuel. Amongst the Taxes collected by the Federal Government, Excise duty and VAT revenue is shared with the Provincial and Local governments in a ratio of 70-15-15. Other taxes are distributed through other forms of Intergovernmental Transfers.
Provincial governments as per the schedules of the constitution have specific authority to levy and collect taxes under certain headings. Motor Vehicle Tax, Agricultural Income Tax and entertainment tax are taxes over which the provincial governments have specific jurisdiction. Furthermore, Motor Vehicle Tax and Entertainment tax collected is shared between the Provincial and local governments. Motor Vehicle tax is shared in the ratio of 60-40 i.e. 60 percent is retained by the Provincial government, while 40 percent is transferred to the relevant local governments based on the parameters designed by the National Natural Resources and Fiscal Commission. Entertainment tax is shared in the ratio of 40-60 i.e. 40 percent is transferred to the provincial government and 60 percent is retained by the Local government. Agriculture income tax does not come under any sharing arrangements and is completely retained by the provincial governments.
Local governments as per the schedules of the constitution have the power to levy and collect, Business Tax, Wealth Tax, House Rent Tax, Advertisement Tax, Entertainment Tax, Herbs and Scraps Tax, and Land Tax. The determination of rate of tax for all taxes collected by the Local government is done by the Local Government itself except for Entertainment tax which is determined by the provincial governments and collected by the local governments. Entertainment tax revenue and Advertisement tax revenue is shared with the provincial government in the ration of 60-40 i.e. 60% is retained by the local government and 40% is transferred to the provincial government.