TAXES IN NEPAL ARE ADMINISTERED BY THE INLAND REVENUE DEPARTMENT (IRD) UNDER THE MINISTRY OF FINANCE. The two governing statutes are the INCOME TAX ACT 2058 (2002) and the VALUE ADDED TAX ACT 2052 (1996), AND RATES ARE REVISED EACH YEAR BY THE FINANCE ACT PASSED WITH THE BUDGET. THE MOST IMPORTANT PRACTICAL WARNING FOR THIS TOPIC: RATES, SLABS AND EXEMPTIONS CHANGE ANNUALLY. The figures below are representative of recent years and the STRUCTURE is stable, but any real calculation must use the current Finance Act. An exam answer should say so. THE TWO BROAD CATEGORIES: DIRECT TAXES — levied on income or wealth, borne by the person assessed and not passed on: · income tax on individuals · income tax on entities (corporate tax) · capital gains tax · property and vehicle taxes (largely local) INDIRECT TAXES — levied on transactions, collected by a business but ultimately borne by the consumer: · VALUE ADDED TAX (VAT) · EXCISE DUTY · CUSTOMS DUTY · health service tax, education service fee and similar levies VAT AND CUSTOMS TOGETHER PROVIDE THE LARGEST SHARE OF NEPAL'S REVENUE — a structure typical of developing economies, where taxing transactions at the border and the till is administratively far easier than assessing incomes. THE FISCAL YEAR runs from SHRAWAN 1 TO ASHAD END (mid-July to mid-July), NOT the Gregorian calendar year — a detail that matters whenever a project's cash flows are matched to tax periods. ── PERMANENT ACCOUNT NUMBER (PAN) ────────────────────────── A unique taxpayer identifier, MANDATORY for any business or any individual with taxable income. Without a PAN a firm cannot invoice, cannot bid for government work, and cannot clear goods through customs. IT IS THE ENTRY TICKET TO THE FORMAL ECONOMY.

── PERSONAL INCOME TAX ───────────────────────────────────── PROGRESSIVE, with different thresholds for an individual and for a couple, and with a SOCIAL SECURITY TAX on the first slab. The structure, in indicative recent terms: first slab 1% (social security tax) next slab 10% next slab 20% next slab 30% highest incomes an additional surcharge on the 30% rate THE PRINCIPLE IS PROGRESSIVITY: the rate applies only to income WITHIN each band, not to the whole income. A frequent error is to apply the top rate to everything. RESIDENT NATURAL PERSONS with only employment income are assessed on a withholding basis by the employer. ── CORPORATE INCOME TAX ──────────────────────────────────── NORMAL RATE 25% BANKS, FINANCE, INSURANCE, TELECOM 30% TOBACCO, ALCOHOL, and similar 30% SPECIAL INDUSTRIES (manufacturing) — CONCESSIONAL 20% Cooperatives and certain rural activities — lower or exempt THE CONCESSIONS ARE INDUSTRIAL POLICY IN TAX FORM, and the engineering-relevant ones are worth knowing: · HYDROPOWER projects receive substantial exemptions — commonly a full holiday for an initial period followed by a reduced rate for further years, with the terms depending on capacity and commissioning date under the Industrial Enterprises Act. · SPECIAL INDUSTRIES in remote or undeveloped areas receive further rebates. · Industries providing direct employment above specified thresholds receive additional rebates. · EXPORT income is taxed at a concessional rate. · ADDITIONAL DEPRECIATION ALLOWANCES apply to special industries, as noted in the depreciation topic. THE ENGINEERING CONSEQUENCE: A HYDROPOWER PROJECT'S FINANCIAL MODEL IS DOMINATED BY ITS TAX HOLIDAY. Moving the commissioning date across a policy boundary can change a project's NPV more than a significant change in construction cost, which is why developers pay close attention to the Finance Act. ── VALUE ADDED TAX (VAT) ─────────────────────────────────── STANDARD RATE: 13%, applied at every stage of supply. REGISTRATION IS COMPULSORY above an annual turnover threshold, and for certain businesses regardless of turnover. THE MECHANISM, which is what makes VAT different from a sales tax and is the examinable part: VAT PAYABLE = OUTPUT VAT (charged on sales) − INPUT VAT (paid on purchases) EACH BUSINESS REMITS ONLY THE TAX ON THE VALUE IT ADDED, so the tax does not compound through the supply chain. A worked illustration, at 13%: A contractor buys materials for Rs 1,000,000 input VAT paid Rs 130,000 and invoices the client Rs 1,500,000 output VAT charged Rs 195,000 VAT REMITTED TO IRD = 195,000 − 130,000 = Rs 65,000 which is 13% of the Rs 500,000 of value added. ✓ THE CRITICAL CONSEQUENCE FOR PROJECT APPRAISAL: FOR A VAT-REGISTERED BUSINESS, VAT ON INPUTS IS RECOVERABLE AND IS THEREFORE NOT A PROJECT COST. Cash flows should be estimated NET OF RECOVERABLE VAT. INCLUDING IT OVERSTATES THE INVESTMENT BY 13% and understates the NPV — a common and material error. BUT for a non-registered buyer, or for exempt supplies where input VAT cannot be reclaimed, THE VAT IS A REAL COST and must be included. EXEMPT AND ZERO-RATED SUPPLIES: basic agricultural goods, education, health services and similar are exempt; EXPORTS are ZERO-RATED, which is different — a zero-rated supplier charges no VAT but CAN still reclaim input VAT, so exports leave the country genuinely untaxed. ── TAX DEDUCTED AT SOURCE (TDS) ──────────────────────────── The payer withholds tax when making certain payments and remits it directly to the IRD. Indicative rates: service contracts and consultancy 1.5% payments to a VAT-registered service provider 1.5% rent 10% interest 5% / 15% dividends 5% professional / expert fees 15% TDS IS NOT AN ADDITIONAL TAX — it is an ADVANCE PAYMENT of the recipient's income tax, credited against their final liability. ITS PURPOSE IS COLLECTION EFFICIENCY: it is far easier to collect from a few large payers than from many small recipients. FOR AN ENGINEERING CONSULTANCY THIS IS A CASH FLOW ISSUE RATHER THAN A COST ISSUE: the tax is withheld when the invoice is paid, months before the liability would otherwise fall due, which ties up working capital. ── OTHER TAXES RELEVANT TO ENGINEERING ───────────────────── CUSTOMS DUTY — on imported plant, equipment and materials. SIGNIFICANT FOR ANY CAPITAL PROJECT IN NEPAL, since most machinery is imported. Concessional or nil rates often apply to industrial machinery and to equipment for priority sectors such as hydropower. EXCISE DUTY — on specified goods, domestic and imported. CAPITAL GAINS TAX — on disposal of land, buildings and securities. LOCAL TAXES — property tax, business registration, land revenue, levied by municipalities under the fiscal federalism introduced by the 2015 Constitution. ── PUTTING IT TOGETHER: AFTER-TAX PROJECT ANALYSIS ───────── THE CORRECT SEQUENCE, which is what an exam question on this topic is really asking for: 1. Estimate revenues and cash operating expenses, NET OF RECOVERABLE VAT. 2. Subtract DEPRECIATION to obtain taxable income. 3. Apply the corporate tax rate to get the tax. 4. ADD DEPRECIATION BACK, since it was never a cash outflow: AFTER-TAX CASH FLOW = (revenue − cash expenses − depreciation)(1 − t) + depreciation 5. Discount the after-tax cash flows at an AFTER-TAX discount rate. THE TWO ERRORS TO AVOID, and both are common: · FORGETTING TO ADD DEPRECIATION BACK, which understates cash flow by the full depreciation charge. · MIXING A PRE-TAX DISCOUNT RATE WITH AFTER-TAX CASH FLOWS, which understates the project's value. CONSISTENCY IS EVERYTHING: pre-tax flows with a pre-tax rate, or after-tax flows with an after-tax rate. NEVER ONE OF EACH.