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 Page 2
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
• 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?
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%
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?
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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This publication does not constitute professional advice. Any opinions or estimates contained in this publication
represent the judgment of Aster at this time and are subject to change without notice. Aster neither accepts or
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FY 2016/17- Tax Deduction at Source in Nepal

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