Business Registration and Tax Compliance in Nepal: Complete Guide to PAN, VAT, and Income Tax Requirements for New and Established Businesses

Introduction: Tax Compliance and Business Legitimacy in Nepal

Tax compliance represents the legal obligation of all registered businesses to register with tax authorities, accurately report income and sales, calculate appropriate taxes, and remit taxes to the government on established schedules. For entrepreneurs establishing businesses in Nepal, understanding and fulfilling tax compliance obligations is essential—not optional. Failure to comply results in substantial penalties, business closure, legal prosecution, and reputational damage.

Nepal's tax system is governed primarily by the Income Tax Act 2058 BS (2001 AD) and the VAT Act 2052 BS (1995 AD), administered by the Inland Revenue Department (IRD). The system establishes clear requirements for business registration through Permanent Account Number (PAN), Value Added Tax (VAT) registration, income tax compliance, record-keeping, and return filing.

For business lawyers, tax consultants, entrepreneurs, startup founders, and business owners, comprehensive understanding of tax compliance is essential. This includes knowing when PAN registration is required, what VAT thresholds trigger mandatory registration, how to calculate and file VAT returns, income tax compliance obligations, record-keeping requirements, annual deadlines, penalties for violations, and strategic tax management approaches.

This comprehensive guide addresses all dimensions of business tax compliance in Nepal: the legal framework and governing statutes; PAN registration procedures, requirements, and application process; VAT registration thresholds, mandatory sectors, registration procedures, and compliance; income tax compliance including calculation, filing, and record-keeping; annual tax filing deadlines and procedures; business deductions and record documentation; penalties and enforcement mechanisms; and tax planning strategies for business optimization.

Section 1: Legal Framework and Tax System Overview

1.1 The Income Tax Act 2058 BS and Tax Administration

Legislative Framework: The Income Tax Act 2058 BS (2001 AD) is the primary legislation governing income taxation in Nepal, establishing the comprehensive framework for tax calculation, filing, payment, and enforcement.

Statutes and Regulations:

• Income Tax Act 2058 BS: Primary legislation on income taxation
• Income Tax Rules 2059 BS: Detailed rules implementing the Act
• VAT Act 2052 BS: Legislation governing Value Added Tax
• VAT Rules 2053 BS: Detailed regulations for VAT compliance
• Various Tax Directives and Notifications: IRD periodically issues directives clarifying tax procedures and changing tax rates

The Inland Revenue Department (IRD):

Establishment: The IRD, operating under the Ministry of Finance (now Ministry of Law, Justice and Parliamentary Affairs in some contexts), is the primary tax authority administering Nepal's income tax and VAT systems.

IRD Powers and Responsibilities:

• Register businesses for PAN and VAT
• Assess and collect income taxes
• Assess and collect VAT
• Investigate tax violations and non-compliance
• Issue tax clearance certificates
• Maintain tax records and information
• Provide tax guidance and information
• Enforce tax compliance through penalties and prosecution

IRD Structure: The IRD operates through:

• Central IRD office in Kathmandu (headquarters)
• Regional Tax Offices in major cities (Kathmandu, Pokhara, Dhaka, Janakpur, Nepalgunj, Biratnagar)
• District Tax Offices throughout Nepal
• Online portals for registration and filing

1.2 The Tax System Structure

Three-Tier Tax System in Nepal:

Direct Taxes (taxes on income and property):

• Income tax (levied on business and employment income)
• Capital gains tax (on asset sales)
• Property tax (on real property)
• Corporate tax (on company profits)

Indirect Taxes (taxes on goods and services):

• Value Added Tax (VAT) - primary indirect tax on goods and services
• Excise duty (on specific goods like alcohol, tobacco)
• Customs duty (on imported goods)
• Infrastructure tax (on large vehicles)

Other Taxes:

• Property registration tax
• Vehicle tax
• Professional fees

1.3 Tax Year and Filing Calendar

Tax Year Definition: In Nepal, the tax year (fiscal year) runs from Shravan 1 of one BS year to Ashadh 30 of the next BS year (mid-July to mid-June in the Gregorian calendar).

Example Tax Year:

Fiscal Year 2081 BS = Shravan 1, 2081 to Ashadh 30, 2082 BS (approximately July 16, 2024 to June 15, 2025 AD)

Critical Tax Calendar:

• Tax Year End: Ashadh 30 (approximately mid-June)
• Return Filing Deadline: Kartik 15 (approximately October-November) - 15 days after the 15th of Kartik
• Tax Payment Deadline: Typically concurrent with return filing or shortly thereafter
• Estimated Tax (Advance Tax): Installments may be due quarterly for certain taxpayers

Section 2: PAN Registration - Permanent Account Number

2.1 PAN Definition and Importance

PAN (Permanent Account Number) Definition: A PAN is a unique 9-digit number issued by the IRD to identify taxpayers and track their tax records throughout their business or employment tenure.

Format: The PAN is typically alphanumeric or fully numeric, such as: 1234567890 (example format)

Purpose of PAN:

• Unique Identification: Identifies the taxpayer uniquely in the tax system
• Tax Record Tracking: Tracks all income, deductions, and tax payments throughout business tenure
• Banking Requirement: Essential for opening business bank accounts
• Statutory Requirement: Legally required for issuing invoices and receipts
• Financial Transactions: Required for large financial transactions and government dealings
• Government Approval: Required for obtaining permits, licenses, and government approvals

Legal Requirement: Section 78 of the Income Tax Act 2058 makes PAN registration mandatory for:

• All businesses (proprietorships, partnerships, companies)
• Professionals and self-employed persons
• Employees earning above minimum threshold
• Entities engaging in significant financial transactions
• Foreign nationals engaged in Nepali business activities

Significance for Businesses: Without PAN:

• Cannot legally operate a business
• Cannot open bank accounts for business
• Cannot issue valid invoices or sales documents
• Cannot claim business deductions or file returns
• Subject to prosecution and penalties

2.2 Types of PAN Registrations

Individual PAN:

• For individual taxpayers (employees, professionals, self-employed)
• Based on individual citizenship or passport
• Used for personal income and business income

Business/Proprietary PAN:

• For sole proprietorship businesses
• Registered under business name
• Links to individual owner's personal PAN

Partnership PAN:

• For partnership businesses
• Registered under partnership name
• Links to individual partner PANs

Company PAN:

• For incorporated companies (private, public, non-profit)
• Registered at time of company incorporation
• Links to director and shareholder PANs

2.3 PAN Registration Procedure

Step 1: Determine PAN Type Required

For Proprietorship:

• Business registration certificate from ward office
• Business name and nature of business
• Individual owner identification

For Partnership:

• Partnership registration certificate
• Partnership deed
• Individual partner identifications

For Company:

• Certificate of Incorporation from OCR
• Company registration details
• Director identification documents

Step 2: Prepare Required Documents

For All PAN Types:

• Citizenship Certificate or Passport: Recent, attested copy showing valid ID
• Proof of Business: Business registration certificate or company incorporation certificate
• Address Proof: Lease agreement, electricity bill, or property document showing business address
• Recent Photographs: 2-4 color passport-size photographs (4cm × 6cm)
• Bank Account Details: Business bank account or account where business transactions occur

Additional for Companies:

• Certificate of Incorporation
• Memorandum and Articles of Association
• Board resolution authorizing PAN registration
• Director identification documents

Additional for Partnerships:

• Partnership deed
• All partner identification documents
• Partnership registration certificate

Step 3: Online PAN Application

Access the IRD Portal:

• Visit the IRD website (ird.gov.np)
• Navigate to "e-Services" or "Taxpayer Portal"
• Select "Registration (PAN, VAT, EXCISE)"
• Choose appropriate PAN category

Complete Online Form:

The application requires:

• Personal/Business Information: Name, address, contact details
• Registration Details: Business registration number, date, place
• Business Nature: Detailed description of business activities
• Estimated Income/Turnover: Annual projected revenue
• Banking Details: Business bank account number
• Director/Owner Information: Names, IDs, contact details (for companies)
• Tax Office Selection: Choose jurisdiction based on business location

Upload Supporting Documents:

• Scanned citizenship/passport (PDF, JPG, or PNG)
• Scanned business registration certificate
• Proof of address (utility bill)
• Photographs (as specified format)
• Other required documents by specific category

Review and Submit:

• Review entire application for accuracy
• Correct any errors before submission
• Submit application
• Download acknowledgment slip with submission number

Step 4: In-Person Verification

Schedule Verification Appointment:

• Contact local Tax Office to schedule appointment
• Provide submission number from online application
• Bring original documents and copies

Visit Tax Office:

• Present all original documents for verification
• Biometric capture (fingerprints and photograph) by IRD staff
• Provide business stamped documents if applicable (for companies)
• Verify information submitted online matches documents

Verification Timeline: IRD staff verify:

• Document authenticity
• Information accuracy
• Business legitimacy
• Tax jurisdiction appropriateness
• Registration eligibility

Step 5: PAN Issuance

PAN Certificate:

• Issued within 1-2 working days of successful verification
• Contains: PAN number, taxpayer name, business name (if applicable), tax office, issue date
• Available in both English and Nepali

Digital Copy:

• Available in taxpayer portal immediately after approval
• Can be downloaded and used for transactions
• Legally valid as original certificate

Physical Copy:

• Provided at Tax Office
• Should be collected or received by mail
• Should be retained for records and bank account opening

2.4 PAN Registration Costs and Timeline

Registration Fee:

• No fee charged by the IRD for PAN registration
• Registration is completely free for all taxpayer types
• No hidden charges or processing fees

Total Timeline:

• Online Application to Submission: 15-30 minutes
• Application Processing: 1-3 working days
• Verification Appointment: Schedule and complete within 5-7 days
• PAN Issuance: 1-2 working days after verification
• Total Time: Typically 7-15 days from application to certificate receipt (with diligent application completion)

Delays: PAN issuance may be delayed if:

• Documents are incomplete or illegible
• Information in application doesn't match documents
• Business legitimacy is questioned
• Additional verification is needed
• Tax Office has high case backlog

2.5 PAN Maintenance and Renewal

PAN Permanence:

• Once issued, PAN is permanent and does not expire
• PAN remains valid throughout business tenure
• PAN continues after business ownership changes (subject to name change procedures)
• PAN survives through business transformations (e.g., partnership to company)

No Renewal Required:

• PAN does not require annual renewal
• No recurring fees or charges
• Taxpayer simply maintains PAN and ensures tax compliance

Maintaining PAN Activity:

While PAN itself doesn't require renewal, businesses must:

• File Annual Tax Returns: Even if no tax is owed (except if exempt)
• Maintain Records: Keep financial records demonstrating PAN use
• Update Information: Report address or business changes to IRD
• Comply with Tax Obligations: Pay taxes and file returns on schedule

Inactive PAN: If a taxpayer:

• Fails to file returns for consecutive years
• Conducts no business activities
• Makes no financial transactions through PAN
• Fails to respond to IRD inquiries

The IRD may deactivate the PAN, though reactivation is possible through renewed compliance.

Changes to PAN Information: PAN holders must report:

• Business Address Changes: File change notice with IRD
• Business Structure Changes: If business type changes (proprietorship to company, etc.)
• Ownership Changes: If ownership transfers or new partners added
• Permanent Discontinuation: If business ceases permanently

Section 3: VAT Registration and Compliance

3.1 VAT Definition and Purpose

VAT (Value Added Tax) Definition: VAT is an indirect tax applied to goods and services at each stage of production and distribution. The tax is collected by businesses and remitted to the government, with each business paying VAT only on the "value added" at its stage.

Value-Added Concept:

• A manufacturer buys raw materials (no VAT on input, or VAT recoverable)
• Manufacturer adds value by producing goods
• Manufacturer sells to wholesaler, charging VAT on selling price
• Wholesaler buys at wholesale price (with VAT), then sells to retailer, charging VAT
• Retailer sells to consumer (final customer) who cannot recover VAT

Each stage contributes VAT revenue to government based on value added.

Purpose of VAT:

• Generate government revenue
• Simplify tax collection across supply chain
• Enable businesses to recover VAT on business purchases
• Create transparent, traceable transactions
• Provide equity in taxation across sectors

3.2 VAT Thresholds and Mandatory Registration

Current VAT Thresholds (as of 2082 BS / 2025 AD):

For Goods (Merchandise Business):

• Threshold: Annual turnover exceeding NPR 5,000,000
• If annual sales exceed 5 million NPR, VAT registration is mandatory
• Threshold calculated on rolling 12-month basis (past or projected)

For Services:

• Threshold: Annual turnover exceeding NPR 2,000,000
• If annual service revenue exceeds 2 million NPR, VAT registration is mandatory

For Mixed Goods and Services:

• Threshold: Annual turnover exceeding NPR 2,000,000
• If combined turnover of goods plus services exceeds 2 million NPR, VAT registration is mandatory

For Import/Export:

• Threshold: Imports exceeding NPR 10,000 in a single transaction
• Any import of taxable goods valued over 10,000 NPR triggers VAT registration requirements

For Commercial Loans:

• Threshold: Obtaining commercial loans exceeding NPR 1,000,000
• Businesses obtaining loans over 1 million NPR must register for VAT

Important Principles:

• Rolling 12-Month Calculation: Thresholds are calculated based on any 12-month period (past or projected)
• First Crossing Triggers Obligation: Once threshold is crossed, business must register within 30 days
• Mandatory Registration Sectors: Certain sectors must register regardless of turnover (see section 3.3)

3.3 Mandatory VAT Sectors

Regardless of turnover, the following sectors must register for VAT:

Manufacturing Industries:

• All manufacturing businesses (textiles, food, chemicals, electronics, machinery)
• Processing facilities
• Assembly operations
• Value-added production

Import-Export Businesses:

• Importers of any taxable goods
• Exporters of goods
• Trading companies dealing in imports/exports

Hotels, Restaurants, and Bars:

• Hotels and accommodation providers
• Restaurants and eating establishments
• Bars and beverage sellers
• Catering services

Professional Services:

• Consulting firms (management, business, engineering)
• Accounting and auditing firms
• Legal services
• Architectural services
• Engineering services

Telecommunications:

• Telephone service providers
• Internet service providers
• Mobile service providers
• Broadcasting and media companies

Financial Services:

• Banks and financial institutions
• Insurance companies
• Investment firms

Healthcare:

• Hospitals and healthcare facilities
• Diagnostic clinics
• Pharmacy chains

Education:

• Universities and colleges
• Professional training institutes
• Educational consultancies

Transportation and Logistics:

• Airlines and air cargo
• Shipping and maritime services
• Trucking and logistics companies
• Travel agencies and tour operators

Real Estate and Construction:

• Construction companies
• Real estate developers
• Property management companies

Media and Entertainment:

• Advertising agencies
• Event management companies
• Film and entertainment production

Security and Services:

• Security service providers
• Cleaning and maintenance services
• Personnel supply services

3.4 VAT Registration Procedure

Step 1: Obtain PAN First

Before VAT registration, the business must have:

• Active PAN: Registered with IRD
• Confirmed PAN Number: Received PAN certificate with valid number
• Tax Office Assignment: Know which tax office administers the PAN

VAT registration requires linking to existing PAN.

Step 2: Prepare Required Documentation

Essential Documents:

• PAN Certificate: Original or certified copy
• Business Registration Certificate: Proof of legal business establishment
• Company Registration Certificate (for companies): OCR-issued certificate
• Citizenship Certificates: For owners/directors with certified copies
• Passport Copies (for foreigners): Attested copies
• Business Address Proof: Lease agreement or property ownership document
• Bank Account Details: Business bank account information
• Photographs: Passport-size recent photographs of owner/directors
• Financial Projections: Estimated turnover or financial statements
• Memorandum and Articles (for companies): MOA and AOA copies

Additional Documentation (depending on sector):

• Manufacturing: Factory registration, license
• Import/Export: Import/export license
• Finance: Banking license or approval
• Healthcare: Health sector registration
• Education: School/university registration

Step 3: Online VAT Application

Access IRD Portal:

• Visit ird.gov.np
• Navigate to "Taxpayer Portal" or "e-Services"
• Select "VAT Registration"

Complete VAT Application Form:

The application requires:

• Taxpayer Information: Name, address, contact, PAN
• Business Details: Business name, nature, registration details
• Turnover Information: Estimated annual turnover and projections
• Sector Information: Specific sector and mandatory sector status
• Banking Information: Primary business bank account
• Responsible Officers: Names of persons responsible for VAT compliance
• Tax Office Selection: Jurisdiction based on business location

Upload Required Documents:

• All documents must be in PDF format
• Documents must be clear and legible
• Scanned at minimum 300 DPI
• Documents properly labeled and organized

Review and Submit:

• Verify all information for accuracy
• Correct any errors before final submission
• Submit application
• Download acknowledgment with submission number and reference

Step 4: Biometric Verification

Schedule Appointment:

• Contact assigned Tax Office
• Provide submission number from online application
• Schedule verification appointment

In-Person Verification:

• Present original documents for verification
• Tax officer verifies document authenticity
• Biometric information captured (fingerprints and photograph)
• Verify business legitimacy and registration
• Confirm turnover and sector classification

Verification Duration: Usually completed within 30-60 minutes

Step 5: VAT Registration Certificate Issuance

Registration Certificate:

• Issued after successful verification
• Contains: VAT registration number (9-digit unique number), taxpayer name, business name, date of registration, assigned Tax Office
• Provides: Authority to collect VAT from customers

Timing:

• Certificate issued typically within 3-5 working days of successful verification
• Available in both English and Nepali
• Digital copy available through taxpayer portal
• Physical copy available at Tax Office

VAT Number Use:

• Display prominently at business premises
• Include on all invoices and sales documents
• Use in business communications
• Reference in VAT filings

3.5 VAT Calculation and Filing

VAT Rate in Nepal:

• Standard Rate: 13% (on most goods and services)
• Reduced Rates: 0% (exports, certain essential items), 0% (medicines), lower rates on specific items
• Exempt Items: Basic food items (rice, flour, salt), certain services, educational services

VAT Calculation Method:

Standard VAT Calculation:

1. Determine Taxable Amount: Selling price of goods/services (excluding VAT unless VAT-inclusive pricing used)
2. Apply VAT Rate: Multiply taxable amount by VAT rate (typically 13%)
3. Calculate Input Tax Credit: VAT paid on business purchases (inputs)
4. Calculate Output Tax: VAT charged to customers
5. Net VAT Due: Output VAT minus Input VAT (VAT paid on purchases)

Example:

Retailer Purchases Goods:

• Purchase price: 1,000,000 NPR
• VAT on purchases (Input Tax): 1,000,000 × 13% = 130,000 NPR
• Total paid: 1,130,000 NPR

Retailer Sells Goods:

• Selling price: 1,500,000 NPR
• VAT charged to customer (Output Tax): 1,500,000 × 13% = 195,000 NPR
• Total customer pays: 1,695,000 NPR

Net VAT Due to Government:

• Output VAT (from sales): 195,000 NPR
• Less Input VAT (on purchases): (130,000) NPR
• Net VAT: 65,000 NPR

The retailer remits 65,000 NPR to government (the VAT on value added: 500,000 NPR × 13%)

VAT Filing Frequency:

• Monthly Filing: Required for most VAT-registered businesses
• Quarterly Filing: Available for small businesses under certain conditions
• Annual Filing: Not permitted; minimum is quarterly

VAT Filing Deadline:

• Monthly VAT: Due by 15th of following month (e.g., January VAT due by February 15)
• Quarterly VAT: Due 15 days after quarter-end
• Late Filing: Subject to penalties

VAT Return Content:

The monthly/quarterly VAT return includes:

• Output Tax: Total VAT charged to customers
• Input Tax: Total VAT paid on business purchases
• Exempt Sales: Sales not subject to VAT (if any)
• Net VAT Due: Output minus Input Tax
• Supporting Documentation: Invoices, purchase receipts
• Declaration: Certification of accuracy

Input Tax Eligibility:

VAT paid on business purchases is recoverable if:

• Purchase is for business purposes
• Purchase is documented with valid invoice containing VAT number
• Purchase is not personal/consumption-related
• Purchase is related to taxable supplies (not exempt supplies)

VAT Records and Documentation:

Businesses must maintain:

• All sales invoices (with VAT separately shown)
• All purchase invoices and receipts
• Tax returns and filings
• Bank statements and payment records
• Records for at least 6 years (retention requirement)

3.6 VAT Deregistration

When to Deregister:

Businesses may deregister for VAT when:

• Annual turnover falls below threshold for consecutive 12 months
• Business ceases operations permanently
• Business is liquidated or dissolved

Deregistration Process:

1. Submit Application: Written application to Tax Office
2. Settle Outstanding VAT: Pay any VAT due through final filing
3. File Final VAT Return: Comprehensive final VAT return for final period
4. Tax Audit: Tax Office may conduct final audit
5. Receive Deregistration Certificate: Formal certificate confirming deregistration

Continued Compliance: Until deregistration is approved, business must:

• Continue VAT filings
• Continue VAT payments
• Maintain VAT records
• Comply with all VAT regulations

Section 4: Income Tax Compliance

4.1 Income Tax Requirements and Calculation

Taxable Income Definition: All business income is subject to income tax, defined as:

Gross Revenue - Allowable Deductions = Taxable Income

Gross Revenue includes:

• Sales of goods
• Service revenue
• Rental income
• Interest income
• Dividend income
• Other business revenue

Allowable Deductions include:

• Cost of goods sold (for merchandise business)
• Employee salaries and wages
• Rent for business premises
• Utilities and supplies
• Professional fees (accounting, legal)
• Depreciation on business assets
• Interest on business loans
• Charitable donations (limited)
• Business insurance
• Repairs and maintenance
• Advertising and promotion
• Office equipment and supplies
• Training and development

Disallowed Deductions (not deductible):

• Personal and household expenses
• Income taxes paid (not deductible)
• Donations beyond allowed percentage
• Penalties and fines
• Capital purchases (deducted as depreciation instead)
• Gifts to individuals
• Loan principal repayment (interest is deductible, not principal)

Income Tax Rates (current as of 2082 BS / 2025 AD):

For Proprietorships and Partnerships:

The tax rate depends on business structure. As a general principle:

• Normal business income: Progressive rates from 1% to 30% depending on income level
• Capital gains: Special reduced rates or may be treated as regular income

For Companies:

• Standard corporate tax rate: 25% on profit
• Some preferential rates for specific sectors

Rates are Subject to Change: IRD periodically updates tax rates through budget announcements and tax circulars.

4.2 Income Tax Filing and Return Requirements

Annual Tax Return Filing:

Who Must File:

• All businesses with PAN (even if no tax owed)
• Proprietorships with business income
• Partnerships
• Companies
• Foreign entities engaged in Nepali business

When to File:

• Deadline: By Kartik 15 (approximately mid-November)
• More specifically: Within 15 days after Kartik 15
• Exact date specified annually in budget documents

Example:

For fiscal year ending Ashadh 30, 2082, returns are due by Kartik 15, 2082 (approximately mid-November 2025)

File Filing:

• Electronically: Through IRD online portal (preferred)
• Manually: At Tax Office (less common)

Return Contents:

The annual income tax return includes:

• Income Summary: Total revenue and business income
• Deductions Claimed: Detailed list of allowable deductions
• Calculation of Taxable Income: Revenue minus deductions
• Tax Calculation: Taxable income multiplied by applicable rate
• Tax Payments Made: Record of advance tax and installment payments during year
• Final Tax Due or Refund: Difference between total tax calculated and taxes paid
• Supporting Documentation: Financial statements, depreciation schedules, deduction details

Documentation Requirements:

Taxpayers must maintain:

• Financial Statements: Income statement and balance sheet
• Bank Statements: All business bank accounts showing deposits and payments
• Invoices and Receipts: All sales and purchase documentation
• Expense Records: Categorized records supporting deductions
• Fixed Asset Register: Depreciation calculations
• Employee Records: Payroll and wage documentation
• Loan Documentation: Loan agreements and interest payment records

4.3 Advance Tax and Tax Installments

Advance Tax Concept:

Rather than paying all tax at return filing time, businesses may be required to pay estimated tax in advance during the tax year through installments.

Who Pays Advance Tax:

Typically, larger businesses and those with substantial tax liabilities must pay advance tax. Small businesses or those with minimal tax may not be required to pay advance tax.

Advance Tax Schedule:

• First Installment: Ashadh (mid-June) - 25% of estimated annual tax
• Second Installment: Kartik (mid-November) - 25% of estimated annual tax
• Third Installment: Magh (mid-January) - 25% of estimated annual tax
• Fourth Installment: Chaitra (mid-March) - 25% of estimated annual tax

Estimation Process:

Taxpayers estimate tax based on:

• Projected annual income
• Business growth expectations
• Prior year tax paid
• Current year financial performance

Adjustment at Filing:

At annual return filing:

• Total advance tax paid is credited against total tax due
• If advance tax exceeds final tax: Refund is issued
• If final tax exceeds advance tax: Additional payment is due

4.4 Income Tax Return Filing Process

Step 1: Prepare Financial Information

• Compile all income records (invoices, receipts, bank statements)
• Calculate total revenue
• Organize expense documentation
• Calculate allowable deductions
• Calculate taxable income
• Estimate tax liability

Step 2: Online Filing Through IRD Portal

• Access IRD Taxpayer Portal (ird.gov.np)
• Login with PAN and password
• Navigate to "Income Tax Return Filing"
• Select tax year
• Enter income information
• Enter deduction information
• Upload supporting documents
• Review calculations

Step 3: Submit Return

• Review entire return for accuracy
• Verify tax calculation
• Attach all required supporting documents
• Submit electronically
• Download acknowledgment with filing number

Step 4: Payment of Taxes Due

• If advance tax exceeds final tax: No payment needed (refund applied)
• If final tax exceeds advance tax: Pay difference immediately
• If no advance tax paid: Pay total final tax by deadline

Payment Methods:

• Bank transfer to designated IRD account
• Direct payment at Tax Office
• Online payment through authorized payment portal

Step 5: Maintain Records

• Keep acknowledgment from filing
• Retain all supporting documents
• Maintain filed tax return copy
• Keep payment proof/receipts

Section 5: Business Record-Keeping and Documentation

5.1 Record-Keeping Requirements

Legal Requirement:

Section 94 of the Income Tax Act 2058 requires businesses to maintain detailed financial records documenting all income and expenses.

Minimum Records:

• Cash Book: Record of all cash receipts and disbursements
• Bank Statements: Monthly reconciliation of business bank account
• Sales Records: Daily sales, invoice register, VAT record
• Purchase Records: Vendor invoices, purchase registers, VAT paid
• Expense Records: Utilities, rent, salaries, professional fees
• Fixed Asset Register: Equipment and depreciation calculations
• Payroll Records: Employee names, wages, deductions
• Inventory Records: Stock purchases, sales, year-end inventory
• Loan Documentation: Loan agreements, interest calculations, repayment records

5.2 Record Retention Period

General Retention Period:

All business records must be maintained for minimum 6 years from date of creation or transaction.

Specific Retention Requirements:

• Tax Returns: Retain permanently
• Financial Statements: 6 years minimum
• Invoices and Receipts: 6 years minimum
• Bank Statements: 6 years minimum
• Loan and Debt Documents: Duration of loan plus 6 years
• Fixed Asset Documentation: Life of asset plus 6 years

Electronic vs. Physical Records:

• Electronic records acceptable if:
  • Stored securely with backup
  • Accessible for audit
  • Authenticable (digital signature or certificate)
  • Cannot be easily altered

5.3 Accounting Standards and Practices

Double-Entry Bookkeeping:

Recommended accounting system showing:

• Debit and credit for each transaction
• Balance sheet and income statement
• Reconciliation of accounts

Cash vs. Accrual Accounting:

• Cash Basis: Record income when received, expenses when paid (simpler, suitable for small businesses)
• Accrual Basis: Record income when earned, expenses when incurred (more accurate, required for companies)

Generally Accepted Accounting Principles (GAAP) or Nepal Accounting Standards should be followed.

Section 6: Annual Compliance Calendar and Deadlines

6.1 Critical Tax Deadlines

Tax Year Schedule (for fiscal year ending Ashadh 30, 2082):

Monthly/Quarterly Deadlines:

• Monthly VAT: Due by 15th of following month
• Quarterly VAT (if applicable): Due 15 days after quarter-end
• Advance Tax: Due on fixed dates (Ashadh, Kartik, Magh, Chaitra)

6.2 Late Filing and Payment Penalties

Late Filing Penalties:

If tax returns filed after deadline:

• Penalty: 5-10% of total tax assessed
• Additional Penalties: Interest at 1% per month on unpaid tax
• Minimum Penalty: Applicable even if no tax is ultimately owed

Late Payment Penalties:

If taxes not paid by deadline:

• Interest: 1% per month on unpaid tax amount
• Late Payment Penalty: 5-10% of unpaid tax (varies by situation)
• Accumulation: Interest accrues monthly until payment

Severe Non-Compliance:

For serious violations (non-filing for years, false reporting):

• Enhanced Penalties: 10-25% of tax involved
• Criminal Prosecution: Potential imprisonment
• Business License Revocation: IRD may recommend license cancellation

Section 7: Tax Deductions and Record Documentation

7.1 Common Deductible Expenses

Employee Costs:

• Salaries and Wages: Fully deductible (must withhold income tax)
• Bonuses: Deductible in year accrued (if paid within 6 months following year-end)
• Benefits: Provident fund, gratuity, insurance contributions
• Training: Employee training and development costs

Facilities and Operations:

• Rent: Rent for business premises
• Utilities: Electricity, water, gas, internet bills
• Office Supplies: Paper, pens, office equipment
• Insurance: Business liability, property, vehicle insurance
• Maintenance: Repairs and maintenance of business property/equipment
• Cleaning: Janitorial and facility cleaning services

Professional Services:

• Accounting: Accounting and bookkeeping services
• Legal: Legal advice and services
• Auditing: Audit fees
• Consulting: Business consulting services
• Advertising: Marketing and advertising expenses
• Promotions: Sales promotion costs

Financial Costs:

• Interest: Interest on business loans (principal not deductible)
• Bank Charges: Bank fees and charges
• Processing Fees: Loan origination and processing fees

Asset-Related Deductions:

• Depreciation: Annual depreciation on business assets (not actual capital cost)
• Asset Repairs: Repairs to maintain asset condition

7.2 Depreciation Calculation

Depreciation Purpose:

Rather than deducting entire cost of assets when purchased, depreciation allows gradual deduction over the asset's useful life.

Depreciation Rates (typical):

Depreciation Calculation:

Straight-Line Depreciation (most common):

Annual Depreciation = (Asset Cost - Salvage Value) / Useful Life

Example:

Computer purchased for 100,000 NPR, useful life 4 years, salvage value 20,000 NPR:

Annual Depreciation = (100,000 - 20,000) / 4 = 20,000 NPR per year

Over 4 years, 20,000 NPR deduction annually, total 80,000 NPR (salvage value of 20,000 remains)

First Year Convention:

Typically, depreciation is calculated only from the date of asset acquisition (pro-rated for partial years).

Section 8: Penalties and Enforcement

8.1 Types of Tax Violations

Failure to Register:

• Not obtaining PAN when required
• Not registering for VAT when threshold crossed
• Operating unregistered business

Failure to File:

• Not filing annual income tax return by deadline
• Not filing VAT returns
• Not filing required information reports

Failure to Pay:

• Not paying calculated tax by deadline
• Not paying VAT collected to government
• Not making advance tax installments

False Reporting:

• Understating income
• Overstating deductions
• Claiming false tax credits
• Providing false information to IRD

Record Violations:

• Not maintaining required records
• Destroying records before retention period
• Falsifying records

8.2 Penalties for Non-Compliance

Late Filing Penalties:

• 5-10% of tax assessed
• Levied even if no tax ultimately owed
• Penalties accumulate for continuing violations

Late Payment Penalties and Interest:

• 1% monthly interest on unpaid tax (approximately 12% annually)
• 5-10% additional penalty on unpaid tax
• Interest accrues until payment

False Return Penalties:

• 20-50% penalty on tax found to be underpaid
• May include criminal prosecution
• Potential imprisonment for serious false reporting

Failure to Keep Records:

• 10,000-50,000 NPR fine
• May result in estimated assessment (IRD assesses income estimate without records)

Non-Compliance Escalation:

Repeated violations result in:

• Cumulative penalties
• Higher penalty percentages
• Business license suspension
• Criminal prosecution
• Asset seizure in extreme cases

8.3 Tax Audit and Investigation

Random Audit Risk:

All businesses face potential tax audit, though high-risk businesses face greater audit likelihood:

• High-income businesses
• Businesses with inconsistent reporting
• Businesses in high-evasion sectors
• Businesses with insufficient documentation
• Businesses claiming unusual deductions

Audit Notice and Process:

1. Audit Notice: IRD notifies business of audit with notice period
2. Document Submission: Business provides records for review
3. Examination: Tax officer reviews records and calculations
4. Adjustments: Officer may adjust reported income if discrepancies found
5. Assessment: Formal assessment of corrected tax
6. Appeal Rights: Business may appeal assessment
7. Payment: Business pays additional tax (if owed) or receives refund

Appeals Process:

Businesses disagreeing with assessments may:

• File appeal with Tax Office within 35 days
• Appeal to Tax Appellate Commission (TAC) if not satisfied
• Ultimately appeal to courts

Conclusion: Strategic Tax Compliance

Effective tax compliance requires businesses to understand and fulfill their obligations regarding PAN registration, VAT registration and filing, income tax calculation and return filing, and record-keeping. Strategic tax planning—including appropriate deduction claims, depreciation calculations, and business structure selection—enables businesses to minimize tax liability while maintaining full legal compliance.

For entrepreneurs and business owners, establishing robust financial management and accounting systems from the outset, maintaining detailed records, and understanding tax obligations are essential for long-term business success and avoiding costly penalties and enforcement actions.