History of Taxation System in Nepal
Taxes are compulsory contribution of wealth levied upon person, natural or corporate,to defray the expenses incurred in conferring common Benefit of the state.
The government of Nepal collects tax as the revenue and distributes to its local authority later on.
According to constitution of Nepal,No one shall collect taxes without framing law.So Various laws ( Income tax,Value added tax,Custom Act etc.) are framed to collect taxes in Nepal.
Objective of the taxation
Tax are levied on person to collect revenue for government. Following are the objective to collect tax.
- Raising revenue
- Prevention of concentration of Wealth in fews hand.
- Redistribution of the Wealth
- Maintenance of Welfare of state
- To encourage national need based industry
- Increasing Saving and Investment.
Types of Taxation System in Nepal
There are two types of taxes system in Nepal . One is Direct Tax,where tax is levied to a person who consumes the good and services. And another is Indirect tax,where tax is levied on person(payee) who further shifts burden of tax to another person.
History of income tax
History of income tax can be studied by dividing into Four Era,
Period Before 2019
- This is the period of tax without having specific Act of parliament.
Some progress in this period
- Provision is made to charge income tax on income from employment and business.
- Taxable income was divided into 10 slabs.
- Income tax rate for each slab at the rate ranging 5% to 25 %.
- Relaxation of income tax were given to small scale,middle and big industries.
Business income and employment Act,2017
- Enforced from 2017/02/02
- Basic term like income,business,employment etc were defined.
- Procedure for tax assessment and collection were made.
- Tax exempt person are defined.
- Provision of tax deducted at source (TDS) were Introduced.
- Filing of tax return was made compulsory for some taxpayers.
- Charging penalty and procedure of appeal against an assessment were established.
Period between 2019-2031 BS
- Enforced on shrawan 9 ,2019.
- Extra –territorial Jurisdiction for all the citizen irrespective of place of earning.
- Sources of income were classified as following:business ,employment,profession,house,land rent,investment,agriculture,insurance business,agency
- Some terms like couple,partnership firms,non-resident person etc were defined.
- Provision for appointment of assessment committee in each area were made.
- Method of calculation of taxable income under different heads were set.
- Provision was made to enter into agreement with foreign country with regard to income tax for avoiding the double taxation.
- Provision was made to make revised return incase alteration of previous return.
- Set off and carry forward of losses were incorporated.
- Income tax department were made.
Period between 2031 and 2058
- Enforced from kartik,5,2031.
- Total of 66 sections were made.
- 8 ammendments with notable changes during the period.
- Detailed definition for some of the terms used in taxation.
- Income were classified in five heads:
- Income from agriculture.
- Income from business ,industry, prosession.
- Income from employment
- Income from house rent and land rent
- Income from other sources.
- Provision was made in such away that resident person had to pay tax on income earned in Nepal and also on income accrued and received outside nepal.
- Expenses incurred for earning tax exempted income were not allowed to deduct from taxable income.
- Provision regarding self assessment,filing of tax return.
- Appointment of committee for tax assessment for small taxpayer.
- Filing of revised tax return
- Calculation of taxable income.
- Method of charging tax on different tax payer like firm, private limited companies,minor,diabled person,natural person.couple etc.
- Provision regarding tax assessment by authorities under certain circumstances were also made fundamental part of the Act.
- Provision of right of tax officer to order for filing of tax return .
- Provision of jeopardy assessment was also made.
- Provisions regarding withholding tax was also made.
- Provision regarding deffered revenue was also made.
Period after 2058
As the afore mentioned Acts were not accordance with the international law,therefor need for the new revised Act was neccesory .hence income tax Act,2058 came into force.
Income tax Act ,2058
The repealed act having many amendments and several transitional provisions through Financial Acts have created a thrust for a new and quite revised Act for income tax. Globalization of the trade, establishment of new kinds of foreign entities in Nepal, emerging complications in business relationships, establishment of joint venture enterprises in which more than one foreign country is associated, tax based on books of accounts and self assessments etc are the new features, which are felt to be incorporated in Income Tax Act.
Lecturer Dr. Peter A. Harris, technical advisor to IMF, prepared the draft of this Act. The International Monetary Fund had ﬁnanced the entire project. Harvard Institute for International Development, which is a branch of Harvard University, had fully cooperated with Nepal in reforming tax laws. The VAT Act, 2052 is also based on the draft given by the Institute. The Institute’s contribution to reforming income tax also is notable.
GON had worked hard and taken the help of FNCCI to give the ﬁnal shape to the Act. It had conducted several rounds of talks with advocates, chartered accountants, foreign tax consultants, business houses, and all other concerned personalities.
Difﬁculty was faced mainly due to translation of the draft in Nepali language. Each and every word was translated in Nepali language; however, the words are very difﬁcult to understand even by the tax consultants and chartered accountants. It had created misunderstandings in the businessmen.
Inland Revenue Department came up with several publications of booklets and established a special ofﬁce named by ‘Customers Service Center’ for easy understanding of the Act.
Income Tax Act, 2058 is short name of the Act and its real name, legally called as long name of the act is ‘Act for amending and consolidating of law regarding Income Tax’. This act has enacted as extra-territorial jurisdiction basis for resident.