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.
All forms of tax on income generated by a natural or legal person except taxation on agricultural income is collected and administered by the Inland Revenue Department. The rates for taxation on employment income, business income, windfall gains and investment income is detailed out in the Income Tax act 2001 which is subject to amendment through the yearly Finance act.
Value added tax is collected by the federal government and is subject to a revenue sharing arrangement of 70-15-15 (Federal-Provincial and Local government respectively). The rules regarding application of value added tax, assessment of VAT, payment of VAT, vat refund and deduction is dealt by Value added Tax act, 1996 and Value added tax rules, 1997. As was the case with the laws concerning Income tax in Nepal, the laws relating to value added tax is also subject to amendment through the yearly finance act.
Excise duty is payable on manufacture and import of certain goods and services. Excisable goods and services are detailed in the annex of Excise duty Act, 2002. The rate of tax can either be based on value or the quantity of the product which is provided in the Excise duty act.