Foundation of Tax Deduction at Source (TDS) in Nepal
Tax Deduction at Source, commonly recognized as TDS, constitutes a crucial mechanism for tax collection stipulated by the Income Tax Act, 2058 (2002) of Nepal. This system functions by requiring the payer, officially termed the TDS withholding agent, to deduct a specified percentage of tax from certain payments made to the recipient, known as the withholdee, at the time of payment. The TDS withholding agent subsequently remits this deducted amount to the Inland Revenue Department (IRD). This approach ensures a consistent flow of revenue for the Government of Nepal and facilitates tax compliance by collecting tax closer to the point of income generation. Medha Law and Partners Is a leading law firm in Nepal.
Legal Basis and Applicability of TDS
The authority and mandatory nature of TDS deduction originate primarily from Chapter-17 of the Income Tax Act 2058, specifically referencing Section 87 for employment income and Section 88 for other types of payments. The law mandates a resident person to withhold tax on a prescribed set of transactions that possess a source in Nepal. These transactions predominantly cover payments related to employment, investment returns, service charges, and contracts.
The TDS mechanism serves not as a separate tax but rather as a technique for advance collection of the recipient’s ultimate income tax liability. For certain payments, the deducted TDS is treated as a final withholding tax, meaning the recipient has no further tax obligation on that specific income. For others, it is considered a non-final or adjustable tax, allowing the recipient to claim the deducted amount as a tax credit when filing their annual income return using Annex 10.
Defining the TDS Withholding Agent and Withholdee
The TDS withholding agent bears the statutory responsibility for executing the deduction and deposit. Section 2(o) of the Income Tax Act 2058 defines the “Person withholding advance tax” as one with a duty to withhold advance tax pursuant to Chapter-17. Typically, this agent is a resident person, company, or entity making specified payments. The withholdee, or the person subject to tax withholding, is the individual or entity receiving the payment from which the tax deduction occurs. This includes employees, landlords, service providers, or recipients of investment returns. The withholdee must possess a Permanent Account Number (PAN) for the deduction to be correctly recorded and to claim the tax credit later.
Specific TDS Rates and Payments under Income Tax Act 2058
Compliance necessitates the correct identification of the type of payment and the application of the corresponding TDS rate as prescribed in the Income Tax Act 2058, often detailed further in the Finance Act of the relevant fiscal year and various schedules.
TDS on Employment Income (Remuneration)
Section 87 of the Income Tax Act 2058 governs the withholding of tax from remuneration paid to employees. A resident employer must withhold tax at the time of making the payment. The calculation utilizes the progressive slab rates applicable to a natural person, as outlined in Schedule-1 of the Act.
The slabs and rates for an Individual and Couple (as per recent amendments and fiscal year provisions) are structured as follows:
The tax withholding agent calculates the annual estimated tax liability based on the slab rates, after allowing for permitted deductions such as remote area allowance, pension contribution, and life insurance premium (subject to limits), and deducts the corresponding TDS on a monthly basis. This TDS is an adjustable tax.
TDS on Investment Returns, Rent, Royalty, and Service Fees
Section 88 of the Income Tax Act 2058 prescribes the withholding tax on various investment returns and service-related payments. The general rate for certain payments, unless specifically exempted or subject to a lower rate, is 15%.
A resident person must withhold TDS on payments for business contracts. Section 89 of the Income Tax Act 2058 requires a TDS deduction at the rate of 1.5% on the contractual amount if the total value of the contract exceeds a specified threshold, historically NPR 50,000, made within an 11-day moving period. This TDS is an adjustable tax.
TDS on Payments to Non-Residents
Payments to non-resident persons for services or investment returns sourced in Nepal are subject to specific withholding tax rates, which can sometimes be affected by Double Tax Avoidance Agreements (DTAAs). Common rates include:
- Payment to a Non-Resident Person: Generally 15% on income sourced in Nepal unless otherwise specified.
- Interest/Royalty/Service Fee to Non-Resident: Typically 15% or rates specified in a DTAA.
Procedures for TDS Deduction, Deposit, and Return Filing
Adherence to strict timelines and precise documentation is vital for the TDS withholding agent to fulfill their statutory duties.
TDS Deposit and Deadlines
The TDS withholding agent must deposit the amount deducted at source with the Inland Revenue Department (IRD) or a designated tax office within a stipulated timeframe.
The deadline for depositing the deducted TDS is generally within 25 days after the end of the month in which the tax was withheld. Clause 90 of the Income Tax Act 2058 mandates this timeframe for submission of details and the associated payment. Failure to adhere to this deadline attracts interest and penalties.
TDS Return Filing Process and Timeline
The TDS withholding agent must file a periodic TDS statement or return detailing the deductions made and deposited.
The due date for filing the monthly TDS statement is also within 25 days after the end of the month to which the deduction relates. This aligns with the deposit deadline, ensuring that the IRD receives both the tax amount and the detailed record of the transactions.
Step-by-Step E-Filing Process:
- Access the Taxpayer Portal: Visit the official website of the Inland Revenue Department (www.ird.gov.np) and access the Taxpayer Portal.
- Select E-TDS: Navigate to the e-TDS section or menu.
- Obtain Submission Number: The system requires obtaining a submission number for the document (Form Income Tax-T-D-01-01-0361, the monthly TDS statement) by entering required entity and period details.
- Enter Transaction Details: Input the particulars of each payment made, including the recipient’s Permanent Account Number (PAN) (mandatory for most business and investment payments), name, payment amount, TDS rate applied, and the TDS amount deducted. Accurate recording is essential for the recipient to claim the credit.
- Enter Voucher Information: The TDS withholding agent enters the details of the tax deposit made at the bank or IRO, including the Treasury Account Number, Voucher Number/Cash Receipt Number, and the payment date. This links the electronic statement with the actual payment.
- Finalize and Submit: Review the details and submit the electronic TDS statement. The submission number acts as a record identifier.
- Print Verification: Print the verification receipt or the submitted form for record-keeping.
Issuance of TDS Certificate
The TDS withholding agent has an obligation to issue a TDS certificate to the withholdee. This certificate is the fundamental document that allows the recipient to claim the deducted amount as a tax credit in their annual income tax return.
- General Payments: The TDS certificate (Form Income Tax-T-C-01-01-0361) must be issued within 15 days after the end of the month in which the tax was deducted.
- Remuneration (Employment): For employment income, the employer must issue the TDS certificate within 30 days after the end of the income year. If an employee is terminated, the certificate must be issued within 30 days after termination.
The TDS certificate must accurately reflect the amount deducted and deposited against the recipient’s Permanent Account Number (PAN).
Documents and Compliance Requirements for TDS
Maintaining meticulous records supports the claim of tax credit and shields the TDS withholding agent from non-compliance penalties.
Key Documents Required for TDS Deduction and Filing
The TDS withholding agent must maintain a comprehensive set of documents:
- Permanent Account Number (PAN) Certificate of the withholding agent.
- Voucher Information or Bank Deposit Receipt for the tax amount deposited with the IRD.
- Monthly TDS Statement (Form Income Tax-T-D-01-01-0361) submitted electronically.
- TDS Certificate (Form Income Tax-T-C-01-01-0361) issued to the withholdee.
- Invoices, bills, or payment vouchers supporting the transaction amount and the deduction.
- Details including the Permanent Account Number (PAN) of the withholdee.
Claiming TDS Credit (For the Withholdee)
The recipient of the income (the withholdee) must use the TDS certificate to claim the tax credit in their annual income tax return.
- Annual Income Return Submission: The withholdee must submit their income tax return (e.g., Form D-03 for non-presumptive taxpayers) within three months of the end of the fiscal year (typically by mid-October).
- Annex 10 Utilization: To claim the TDS credit, the withholdee must include Annex 10 (Form Income Tax-C-01-02-0960) with their income tax return. Annex 10 requires detailed information about the TDS deducted, including the name and Permanent Account Number (PAN) of the TDS withholding agent, the amount of TDS, and the relevant period. This annex is fundamental for reconciling the tax deducted with the final tax liability.
Consequences of Non-Compliance and Penalties
The Income Tax Act 2058 prescribes severe consequences for non-compliance with the TDS provisions, emphasizing the dual liability of the TDS withholding agent and the withholdee.
Failure to Deposit Deducted TDS
If the TDS withholding agent deducts the tax but fails to deposit the amount with the IRD by the due date (within 25 days after the end of the month), they face:
- Interest: Section 118 of the Income Tax Act 2058 specifies an interest charge on the outstanding tax amount. The general interest rate is 15% per annum on the tax not paid on time, calculated for the period the tax remained unpaid.
- Penalty: The IRD may also impose a penalty for the failure to remit the tax within the prescribed period.
Failure to File TDS Statement and Issue Certificate
The failure to file the monthly TDS statement or to issue the TDS certificate by the statutory deadlines can also result in penalties, as it impedes the IRD’s ability to track the revenue and the withholdee’s ability to claim the tax credit via Annex 10. Penalties for such non-compliance are levied under the Act’s general penalty provisions.
Other Penalties under Income Tax Act 2058
The Act also imposes penalties for general non-compliance which can be applied to TDS-related matters, including:
- Failure to Maintain Records: Section 129 can impose a penalty for not keeping the necessary records, such as Voucher Information and transaction details.
- Making False or Misleading Statements: Providing inaccurate details in the TDS statement or other documents is subject to heavy penalties under Section 127.
The imposition of these penalties underscores the absolute necessity for the TDS withholding agent to understand and strictly adhere to all legal requirements relating to deduction, deposit, TDS statement filing, and TDS certificate issuance. Utilizing the Permanent Account Number (PAN) correctly throughout the process is paramount for accurate tax reconciliation and avoiding punitive actions. Medha Law and Partners continually emphasizes robust tax governance to all clients operating within the Nepalese fiscal environment.
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