Presumptive Taxation in Nepal. Tax provision for Very Small Businesses in Nepal.

Background.

This Blog contains a detailed explanation of Presumptive Taxation method, its use-case, eligibility, pros-cons. and Conclusion.

Methods of Income Tax Computation as per Income Tax Act 2058

As per Income Tax Act 2058, Income Tax is Computed as per following methods.

  1. Presumptive Taxation.
  2. Turnover Based Taxation.
  3. Detailed Tax Computation &
  4. Advance Tax for owning public vehicles.
  5. Final Withholding Tax
Methods for Assessing Income Tax in Nepal

Presumptive Taxation.

Introduction

Presumptive Method of Taxation is also known as ” Small Businesspersons Taxation” or D01 Taxpayer. It is an indirect method of computing tax liability where tax payable to IRD is based on the area of operation of business rather than level of Income. Small Businesspersons include those businesses whose yearly transaction falls within Rs 30 lakhs. Stalls on the footways, small stall cafes and similar business general fall under Small Businesspersons Criteria. For such small-businesses with less turnover/ transaction, maintaining proper accounting and filing a detailed Income tax Return is tedious, complex and costly. This can demotivate new business startups and cottage industries. Lawmakers understood this situation and framed Presumptive Taxation to cope with the difficulties stated above. Section 4.4 of Income Tax Act 2058 has stated the provisions for Presumptive Taxation which is discussed below.

Who are Eligible for Filing Presumptive Tax Return or D01 Return

Businesses fulfilling all the conditions stated below is can file Income Tax Return as Presumptive Taxpayer.

  1. The person has to be Resident Natural Person.( Entities and Non – Resident Natural Person can not file this Return)
  2. The person shall derive Income only from the Operation of Business having source in Nepal in that Income Year.
  3. The person shall not claim Medical Tax Credit (stated in Section 51) and shall also shall not claim Advance Withholding Taxes (stated in Section 92)
  4. The Transaction/ turnover of the Business for the Income year shall not exceed Rs. 30 lakhs.
  5. The Profit from the Business shall not exceed Rs. 3 lakhs.
  6. The person may or may not be registered for VAT.

NOTE:- The Text in the Pink Color in this post represents additions or amendments made by Finance Act 78.79.

Provision in (Section 4.4) Before Finance Act 78.79Provision in (Section 4.4) After Finance Act 78.79
The Turnover of the business for the Income yearshall not exceed Rs 20 Lakhs. The Turnover of the business for the Income yearshall not exceed Rs 30 Lakhs.
The Business must not be VAT registered. The Business may or may not be VAT registered.
The Taxable Income from the business shall not exceed Rs 2 lakhs. The Taxable Income from the business shall not exceed Rs 3 lakhs.
The provision of writing an application opting to apply Turnover Based Tax Computation methods to Inland Revenue Department ( IRD) in the specific form developed by IRD was mandatory. The provision of writing an application opting to apply Turnover Based Tax Computation methods to Inland Revenue Department ( IRD) in the specific form developed by IRD has been removed
Changes to turnover Based taxation by Finance Ordinance 78.79

How much Tax is Paid by Presumptive Taxpayer ?

Schedule 1 Section 1.7 states the amount of Tax to  be collected from Presumptive Taxpayers. The basis for Tax amount is made as per the location in which the business is operated.

SNAmountArea of Business Operation.
17500/-Metro & Sub Metro
24,000/-(Before Finance Ordinance Rs 5,000/-)Municipality
32,500/-Areas Other than Stated Above.

NOTE: Due to Covid19, 90% of tax has been waived for yearly transactions up-to Rs 20 lakhs, 75% of tax has been waived for yearly transactions 20 lakhs to 50 lakhs & 50% of tax has been waived for yearly transactions 50 lakhs to 1Crore.

Practicality.

In the Taxpayer portal of IRD, there is a section called D01 form Return under which Presumptive Tax Return is Filed. Link to the section is.Tax Return is submitted as per Section 96 of Income Tax Act 2058. D01 Form Nepal

D01 form for presumptive taxataion Nepal
D01 for Presumptive Income Tax Computation.

Example of Presumptive Taxation

Example 1

Shiv Prasad Regmi was a teacher of a Government School. Along with his teaching profession, he had a small Stationery Store within the periphery of the school registered as sole proprietorship. In the Fiscal Year 2078.79, total transactions of the stationery was Rs 25 lakhs. The business was not registered for VAT. He was aware of D01 Return/ Presumptive Taxation provision of Income Tax Act. So, he visited Tax Office for filing the return and paying the Income Tax of Rs 4000( business was registered in Municipality). But, Tax Officials did not file his D01 Return because for filing D01 Return, the source of Income for has to be only from the Business. Mister Regmi should Submit D03 Return as he has different types of Income i.e. Income from Business as well as Income from Employment.

d01 Taxpayer

Example 2

Krishna and Radha are a sole proprietor of Krishna Grocery Store & Radha Stationary store respectively registered at Birtamod Municipality. Both of them do not have any other sources of Income except the proprietorship business. In the Fiscal year 2078.2079 the total transaction of Krishna Grocery Store was Rs 23 lakhs and total Income was Rs 1.9 lakhs. Unfortunately, Radha Stationery Store could not perform well as She was Hospitalized for 7 months due to major scooter accident. The total transaction of Radha Stationery Stores was just Rs 25000 and she had to sustain a heavy loss due to Expired Books, damage by mouse & mites and rent of Rs 70 thousands per per. As both are eligible for D01 return, both of them have to pay Taxes of Rs 4000 to IRD.

Benefits.

Benefits of includes:

  • No Invoices of Expense and other deductible expense are to be kept for Tax purposes.
  • Need not to create complex Detailed Tax Computation.
  • Business Person can give more time for Business Improvement.

Snapshot of IRD D01 Form location.

What are some Cons of Presumptive Taxation?

As Tax is levied on Turnover/Transactions rather than on Income, the basic fundamental concept of taxation on Income is contradicted. Even the lose making businesses who have implemented Presumptive Taxation are forced to pay the Taxes. Similar is the case for entity carrying small business, if have implemented Presumptive Taxation bears loss due to any factors ( fire, theft, etc. ) has to pay Taxes. Moreover, due to the amendment of obligatory Provision for D01 and D02 taxpayer by Finance Act 2078, they can not opt for D03. It seems that the amendment will boost the tax Income in Fiscal Year 2078.2079 from Presumptive taxpayer and D02 taxpayer.

Conclusion.

Despite some issues in Presumptive Taxation, it is an Easy Tax Assessment mechanism for Small Businesses. In the nation with very low Financial Knowledge, this easy Tax Assessment mechanism has helped taxpayer to pay taxes with ease as the tax amount is fixed.

Click here to study about Tax Deductions available to Natural Person.

Latest Income Tax Rate in Nepal.

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