Filing income tax return is a citizen’s moral and social obligation. If you are required to file tax return, but haven’t done so, you might face legal consequences for non-compliance. Our income tax law is based on self assessment system and so any person liable to pay tax in Nepal is required to calculate his tax liability and deposit tax. This is one of the prime responsibilities of a person earning taxable income.
Sec. 99 of the Act provides that person not having taxable income in Nepal is not required to submit income tax return. However, not having taxable income does not mean that a person should not file return if he is in loss or if his income is lower than the minimum exemption limit. The term should be construed to mean not having economic activities leading to taxable income.
Lets us look at who should file income tax return.
- Non Resident Employees with Non Resident employer
Non-resident employees having Nepal source income but with non-Resident employer are required to submit income tax return in Nepal. If the non-resident employee has a resident employer, income tax return is not required because the resident employer is obliged to deduct and deposit tax on employment payment made to the non-resident person.
Suppose Mr. Smith, an Italian citizen is deputed to Nepal for working in Bajhang district in Nepal by Healthy Women, an INGO headquartered in Italy for a two months period. The monthly salary of Smith is $5,000. In such case, Mr. Smith is a non-resident with Nepal sourced income and employed by non-resident employer. It is responsibility of Mr. Smith to submit income tax return and pay tax in his income for the 2 months period.
2. Resident Employees meeting specified condition
Resident Employees are required to submit income tax return if they meet any of the following condition:
- All the employers are not resident in Nepal.
- The employee also has business or investment income, in addition to employment income.
- The employee work with more than one employer at a time during the year.
- The employee has foreign source income during the income year
- The employee wants to claim tax credit for medical tax expenses paid by him/her during the year (and not paid by employer)
- The employee has made additional contribution for approved retirement fund in addition to retirement contribution deducted and deposited by the employer.
Neha works for Mustang Bank Nepal Ltd. She was deputed to Dubai for three months of the year for purpose of marketing of remittance agency service of the bank. This means Neha should submit income tax return in Nepal for the year because she has foreign sourced income.
Saroj, a resident of Nepal, is appointed by Mayur Hotels India Ltd. for purpose of marketing of Mayur chain of hotels in Nepal. Here, Saroj is required to submit income tax return in Nepal because his employer is non-resident.
B Pvt. Ltd. Kathmandu deducts 10% PF contribution from its employees, and adds an equal amount from their side for retirement fund deposits. One of the employee Rsm, has decided to contribute additional Rs. 50,000 to CIT as it would enable deduction in taxable income. In such case, Ram should submit income tax return.
3. Resident with Foreign Source Windfall Gain
Resident person earning foreign source windfall gain are required to submit income tax return in Nepal.
Suppose Mr. Rai, a resident for Nepal, travelling to Los Angeles, won a lottery ticket in Malaysia, as per the promotion campaign of Air Asia. Mr. Rai was paid US10,000 on winning the lottery. Now, it is responsibility of Mr. Rai to submit income tax return declaring the income.
4. Non Resident Companies or Non Resident Persons with PE in Nepal
If you are Non-Resident company/person with PE in Nepal, the PE is required to submit full tax return. But if you don’t have PE, your tax liability in Nepal (due to earning Nepal sourced income) is limited to WHT deducted by the payer and such WHT is final withholding.
5. Resident Natural Person with Business or Professional Income
Resident Natural person with business income should always submit income tax return, with exception of natural persons operating public vehicle or natural persons whose income are exempt. Person earning final withholding payments are also not required to submit income tax return, but normally business incomes are not final withholding income.
Suppose Shyam is a college professor of a college under TU. He is occasionally asked to work as examiner to evaluate answer sheets by TU, HSEB and KU and receives payment without any tax deduction. But Shyam should submit tax return by disclosing those income as it is his income from profession.
6. Resident Natural Person with Foreign Sourced Investment Income
If you are resident person earning foreign sourced investment income, you are required to submit tax return.
Suppose Ram Naresh maintained fixed deposit in Singapore Bank while he was in USA. Now he has permanently come to Nepal and is resident for the year. The interest income in fixed deposit in Singapore Bank is foreign sourced investment income and Ram Naresh should file tax return.
7. Resident Natural Person with Investment Income from Sale of Land, Building and Shares
All resident natural person earning income from sales of Non Business Chargeable Assets (Land and Building meeting specified conditions, and shares) are required to submit income tax return.
Mr. Shyam is a well known investor with shares in several listed companies in Nepal. The broker firm deducts TDS while making payment to Shyam on any capital gain arising on the payment. Shyam does not file income tax return because he considers that the tax amount deducted by broker firm is the maximum amount of tax to be paid by him and so no further tax return is required.
Here, Shyam is not liable to any further tax on the capital gain because the TDS rate is the maximum rate of tax for shares disposal. But principally, non submission of tax return is wrong. Shyam is entitled to claim minimum exemption limit on capital gain taxes, can claim for past investment losses, and any expenses incurred for the purpose of investment income can be claimed such as staff salary, depreciation, office rent for investment purpose etc.
8. Resident Natural Person with Investment Income that are not final withholding payments
Resident Natural Persons with investment income that are not final withholding income are required to submit tax return. Final withholding income in case of natural person includes:
- Life Insurance payment received from resident insurance company
- Retirement Payment received from Approved (or Unapproved) Retirement Fund in Nepal or resident employer.
- Interest received from bank
Naresh retired from Alec Singapore on 1st of September 2014 and returned to Nepal thereafter. On 2 July 2015, he received retirement payment of $ 20,000 from Alec Singapore. Here, Naresh is a natural person receiving retirement payment, and the retirement payment is foreign sourced income which is not subject to TDS in Nepal. However, Naresh is a resident person subject to taxation on global income and is so required to submit income tax return and declare income in Nepal.
9. For 2072/73 Natural Person with more than Rs. 4 million annual income
This is a new provision for FY 2072/73. So, if you are a natural person earning more than Rs. 4 million income in FY 2072/73, you need to file a separate tax return. You need to include your income from business, employment, investment income, windfall gain and also tax exempt income while submitting return, except income from meeting fees and bank interest.
Non-filing returns and its implication
All tax returns have due date of Aswin end after the end of financial year. You might observe that most of the natural person living around you or whom you know, never submit final tax return. Some of them might be below the minimum tax threshold and so are not required to submit tax or pay it. What happens if the natural person has employment income and other tax income and does not submit income tax return or a business does not submit tax return?
Our income tax law is based on principle of self assessment. This means if you do not submit tax return, the law still assumes that you have submitted tax return and paid your taxes and you have no further liability to pay. This paves the way for tax officer to conduct amended tax assessment of the tax payer. So, if you have not filed your tax return, it still means that you submitted a tax return on the date of submission and you may still be subject to amended assessment.