A COMPARTIVE STUDY ON PROBLEMS AND PROSPECT OF

TAX SYSTEM OF NEPAL IN RELATON TO INDIVIDUALS AND

BUSINESS HOUSES

By
SAROJ BHUSAL
South Asian Institute Of Management
P.U. Regd.:- 2014-2-62-0024
Campus Roll No.:- 14220113

A Thesis Submitted to:

Office of the Dean
Faculty of Management
Pokhara University

In partial fulfillment of the requirement for the Degree of

Master of Business Adminstration (M.B.A- Global Business)

Kathmandu, Nepal
15th March 2017
 DECLARATION

I hereby declare that the work reported in this thesis entitled A

COMPARTIVE STUDY ON PROBLEMS AND PROSPECT OF TAX
SYSTEM OF NEPAL IN RELATON TO INDIVIDUALS AND BUSINESS
HOUSES submitted to Office of the Dean, Faculty of Management, Pokhara
University, is my original work done in the form of partial fulfillment of the
requirement for the Masters Degree in Business Adminstration (M.B.A- Global
Business) under the supervision of Prof. Ashok Raj Pandey of South Asian
Institute of Management.

SAROJ BHUSAL
Researcher
P.U. Regd.: 2014-2-62-0024
Campus Roll No.:- 14220113
 ACKNOWLEDGEMENT

In this context this study entitled A comparative study on problems and prospect
of tax system of Nepal in relation to individuals and business houses is mainly
done to analyze the present situation of tax system in Nepal. I am hearty thankful
to Pokhara University and South Asian Institute of Management for providing me
opportunity to make this thesis report.

I am especially thankful to my supervisor Mr Ashok Raj Pandey for his

constructive guidance and suggestions. His guidance and help has been a great
source of encouragement and inspiration to me. Without his valuable suggestion, I
would not have been able to complete it.

I am also highly thankful towards Professor Dr. Bijay Kc for allowing me to

carry out this study in the valuable topic like the one mention above.

Finally, I would like to express my sincere gratitude to those who have inspired
me and helped me to complete this work.

Saroj Bhusal.
 TABLE OF CONTENTS
Approval Sheet
Declaration
Acknowledgement
Table of Contents
List of Tables
List of Figures
Abbreviation

No. Page
CHAPTER-I: INTRODUCTION
1.1 Background of the Study 1
1.1.1 Tax History chronology 3
1.1.2 Purpose and effects of taxation 9
1.1.3 Taxation in Nepal 11
1.2 Problem Statement 13
1.3 focus of the study 14
1.4 Research questions 16
1.5 objectuves of the study 16
1.6 Theoretical framework 17
1.7 Research Methodology 18
1.7.2 Research Design 19
1.8 Limitation of the Study 19

CHAPTER-II: REVIEW OF LITERATURE

2.1 Brief overview 20
2.1.1 Brief introduction of income tax act 2058 20
2.2. Rights and duties of tax payers 25
2.2.1 Rights of tax payers 27
2.3 Income tax rates of Nepal 28
2.4. Coverage of income tax 30
2.5. Income tax rates for sole proprietorship firms 31
2.6. Income tax rate for non business income 32
2.7 Tax rate for non business chargeable assets 32
2.8 Double taxation relief 33
2.9 Maintenance of paper works and books of accounts 33
2.10 Special tax rates and concession for natural resident person 34
2.11 Tax Rate for Non Resident Natural Person 35
2.12. Taxation of Business & Entities 36
2.12.1 Reduced Rates- concession for industries 36
2.13 Income tax for small tax payers 38
2.14 Income tax for person choosing to pay tax based on turnover 38
2.15 Carry forward of normal business loss 39
2.16 Loss on disposal of assets 40
2.17. Withholding taxes 40
2.18 Exception- WHT not required 42
2.19: Tax Assessment 43
2.20 Special Budget Proposals 45

CHAPTER-III: RESEARCH METHODOLOGY

3.1 Research Methodology 47
3.2 Research Design 47
3.3 Population and Sample 47
3.4 nature and source of data 48
3.4.1. Primary source 48
3.4.2. Secondary source 48
3.5 Procedures and presentation for data analysis. 49

CHAPTER-IV: DATA PRESENTATION AND ANALYSIS

4.1 Group of Respondents and the sample size 50
4.2 Monthly salary of the respondents 51
4.3: Tax in range paid by the respondents annually 51
4.4. Knowledge about current self assessment process 52
4.5. Problems in tax assessment system 53
4.6. Reason for wide spread income tax evasion 55
4.7: Problem of income tax system of Nepal in relation to business houses 57
4.8 Tendency of business organizations to save tax 60
4.9 Mechanism to make tax payment easier and rational 61
4.10. Areas of improvement in current tax system. 64
4.11. Individual tax payers knowledge about tax they pay 65
4.12 Increasing the boundary of tax bracket 66
4.13 Peoples propensity to ask for bills 67

CHAPTER-V: SUMMARY, CONCLUSION AND

RECOMMENDATIONS
5.1 Summary 69
5.2 Conclusion 74
5.3 Recommendations 76

Bibliography
Questionnaire
 LIST OF TABLES

Table No. Title Page No.

1 Income Tax rates of Nepal 28

2 Income Tax rates for Sole Proprietorship 31

3 Income tax rate for non business income 32

4 Special tax rates for natural person 34

5 Income tax for small tax payers 38

6 Tax rates based on turnover 39

7 Size of samples 50

8 Monthly salary of respondents 51

9 Tax in range paid by the respondents 51

10 Awareness about current system of income tax assessment 52

11 Problem of tax assessment for business houses 54

12 Reasons for tax evasion 55

13 Problem of income tax for business houses 58

14 Tendency of business houses to save tax 60

15 Mechanism to save tax 61

16 Mechanism to make tax payment easy and rational 62

17 Area of improvement in current tax system 64

18 Individuals knowledge about the tax 65

19 Increase the boundary of tax bracket 66

20 Peoples propensity to ask for bills 67

 LIST OF FIGURES

Figure No. Title Page

1 Pie-chart : business houses awareness about

tax assessment system 53
2 Pie-chart : individuals awareness about
tax assessment system 53
3 Pie-chart: Problems of tax assessment 55
4 Bar Diagram: wide spread income tax evasion 56
5 Pie-chart: reasons for tax evasion 57
6 Bar Diagram: problem off tax system
for business 58
7 Pie-chart: problem of tax system for business 59
8 Pie-chart: tendency to save tax 60
9 Pie-chart: rational mechanism
to make tax system easier 64
10 Pie-chart: areas of improvement
in current tax system 65
11 Pie- chart: individual knowledge
about tax they pay 66
12 Pie-chart : increasing the limit
of tax bracket 67
13 Pie-chart: propensity of asking bills
after purchase 68
 ABBREVIATION

AD : Anno Domini
B.S. : Bikram Sambat
F.Y. : Fiscal Year
MBA : Masters in Business Adminstration
Pvt. : Private
Ltd. : Limited
SN : Serial Number
VAT : Value Added Tax.
USA : United States of America
DANIDA : Danish International Development
Agency.
GTZ : German Technical Cooperation
RAS : Revenue Adminstrative Support.
Ird : Inland Revenue Department.
GAAR : General Anti Avoidance Ruling.
TDS : Tax Deducted at source
PAN : Permanent Account Number
WHT : Withholding tax
NRB : Nepal Rastra Bank
GON : Government of Nepal.
 EXECUTIVE SUMMARY:

Tax is simply a liability, to pay an amount to the government. It is a

compulsory contribution from the taxpayers. Tax is computed and
paid as prescribed in law. Tax is a compulsory levy imposed by
government on persons as per the prevailing law and those who pay
tax do not get corresponding benefits from the government. It is
spent for common interest of the people. It is collected from haves
and spent for the interest of have-nots in the society.

The key to the financial resource of a country is the government

revenue. The sources of government revenue can be broadly
classified into two groups; tax revenue and non-tax revenue. The
government receives tax revenue as a compulsory payment whereas
non-tax revenue is a conditional source. Duty, fines, fees, penalty,
forfeiture receipts, rent of government property, donations and
miscellaneous income etc are the source of non-tax revenue. On the
other hand, income tax, sales tax, custom duties, VAT etc. are the
sources of tax revenue. Among the two sources of revenue, tax
revenue is the major source of internal revenue.

Different tax payers argue that tax system of Nepal needs lot of
improvements and there are many loopholes in the system which
needs to be resolved. The rate of import tax is more than 200%,
which affects the business organizations importing goods and
services. Some argue that VAT is not needed for certain amount,
which may affect large business houses. Besides from that tax
assessment process have lot of problems. The assessment procedure
of income tax is not effective. Undue delay in tax assessment not
only reduces the total revenue but also brings harassment to tax
payers. Separate taxation report is required for business
organizations for assessing their income, which is more time
consuming. Besides from that there is lack of systematic account
keeping in Nepalese business organizations which pose a problem in
tax assessment. Many small business organizations use the service
from 3rd party to perform their accounting works which creates more
complications.
According to the opinion survey undertaken on the two group of
respondent, it was found that the respondents view income tax as a
burden. Even those who are capable of paying tax found it
burdensome, without any direct or indirect benefits to the taxpayers.
It was also found that all the respondents pay tax but reluctantly.
They are more inclined towards saving tax through legal or illegal
means.

For the tax payers who are under business houses, they find dealing
with tax officials and tax offices very problematic. They face
problems in assessing and filing the income returns at the end of the
year. The respondents under this research who are mostly under
business argue that current assessment process/system of income tax
is very time consuming and requires complex legal process. In
reality, this is also true because the system demands many
documents and the process is rather lengthy.

The main problem in income tax system of Nepal is that tax

assessment system is not systematic. Large portion of respondents
think that tax officers are corrupt and they try to take unfair
advantage from any mistakes tax payers make. Many business
organizations that imports goods from foreign country and sell it in
Nepal think that, rate of import tax is too high, more than 200%,
which increase the price of goods.

Regarding the areas of improvement in current tax system of Nepal,

most respondents think that both tax payers and tax officers should
be educated about the tax system. Many organizations are using 3 rd
company to perform their accounting works and tax officials are also
not fully educated about tax laws.
Many respondents also said that government should provide
recognition to tax payers in form of some benefits, so that tax payers
will be motivated into paying tax. This will also help in reducing the
tax evading culture.

Individual tax payers on other hand seem to have very poor

understanding of the tax they pay. Most of the individuals were not
aware about the kinds of tax they usually pay.
 Chapter 1
INTRODUCTION

1.1 Background
A nation requires sufficient funds to carry out development plans, handle
day to day administration, maintain peace and security and launch other
public welfare activities. The funds required by the government are normally
collected from two sources debt and revenues. The debt can be collected
either from internal sources or from external sources. The debt collected
within the country is known as internal debt while the debt collected from
outside the country is called external debt. The debt financing of the
government is also known as deficit financing. The revenue of the
government comes basically from two sources: tax and non tax. Non tax
sources include different revenues like gifts, grants, revenues from public
enterprises, administrative revenues such as registration, fees, fines and
penalties. Tax sources include customs, excise duty, VAT, income tax. In
Nepal, tax is the major source of government revenues.

Tax is simply a liability, to pay an amount to the government. It is a

compulsory contribution from the taxpayers. Tax is computed and paid as
prescribed in law. Tax is a compulsory levy imposed by government on
persons as per the prevailing law and those who pay tax do not get
corresponding benefits from the government. It is spent for common interest
of the people. It is collected from haves and spent for the interest of have-
nots in the society.

The main objective of the modern government of any developing country is

to improve the living standard of its people through the development
process.

In order to achieve this goal, every government launches different

development programs, through different economic, socio-cultural and other
development activities.

1
For launching such programs a government needs several kinds of resource
like human, physical, financial etc. Among these resources, financial
resource is the most important resource without which no other resources
can be acquired. In other words, a country requires huge financial resource
for conducting the development activities or to maintain economic progress.
The government can mobilize both internal and external financial resources.
However, the internal resources are more preferable for making sustainable
economic development.

The key to the financial resource of a country is the government revenue.

The sources of government revenue can be broadly classified into two
groups; tax revenue and non-tax revenue. The government receives tax
revenue as a compulsory payment whereas non-tax revenue is a conditional
source. Duty, fines, fees, penalty, forfeiture receipts, rent of government
property, donations and miscellaneous income etc are the source of non-tax
revenue. On the other hand, income tax, sales tax, custom duties, VAT etc.
are the sources of tax revenue. Among the two sources of revenue, tax
revenue is the major source of internal revenue.

Great Britain is the first country in the world to introduce the modern
income tax. It introduced income tax in 1799 to finance the war fought with
France. USA introduced income tax in 1862 to generate revenue to finance
civil war. In India, while income tax in its modern form was adopted in
1860, several experiments were made from 1860 to 1886 and finally the
systematic income tax legislation was enacted in 1886.
Although taxes were collected in various forms in ancient era, the history of
modern income tax is not very old in Nepal. The idea of introducing income
tax in Nepal originated in the early 1950s when a multiparty democratic
political system was introduced.
Attempts were made to introduce income tax in subsequent years. In 1954,
an income tax with Rs 10000, basic allowance and progressive taxes ranging
from 5 to 25 percent was purposed. Due to political instability, it could not
be introduced until 1958.

2
The first elected government in 1959 finally introduced business profits and
salaries tax act, 1960 in Nepal. At that time income tax was levied only of
business profits and salaries. After about three years experience of income
tax the government replaced the prevailing tax act by income tax act 1962.
The coverage was extended in the act. In 1974, income tax act 1974 was
enacted. (Wikipedia)

1.1.1. TAX HISTORY CHRONOLOGY (Tax world.org)

EGYPT
During the various reins of the Egyptian Pharaohs tax collectors were known
as scribes. During one period the scribes imposed a tax on cooking oil. To
insure that citizens were not avoiding the cooking oil tax scribes would audit
households to insure that appropriate amounts of cooking oil were consumed
and that citizens were not using leavings generated by other cooking
processes as a substitute for the taxed oil.

GREECE
In times of war the Athenians imposed a tax referred to as eisphora. No
one was exempt from the tax which was used to pay for special wartime
expenditures. The Greeks are one of the few societies that were able to
rescind the tax once the emergency was over. When additional resources
were gained by the war effort the resources were used to refund the tax.

Athenians imposed a monthly poll tax on foreigners, people who did not
have both an Athenian Mother and Father, of one drachma for men and a
half drachma for women. The tax was referred to as metoikion

ROMAN EMPIRE
The earliest taxes in Rome were customs duties on imports and exports
called portoria. Caesar Augustus was considered by many to be the most
brilliant tax strategist of the Roman Empire. During his reign as "First
Citizen" the publicani were virtually eliminated as tax collectors for the
central government. During this period cities were given the responsibility
for collecting taxes. Caesar Augustus instituted an inheritance tax to provide
3
retirement funds for the military. The tax was 5 percent on all inheritances
except gifts to children and spouses. The English and Dutch referred to the
inheritance tax of Augustus in developing their own inheritance taxes.
During the time of Julius Caesar a 1 percent sales tax was imposed. During
the time of Caesar Augustus the sales tax was 4 percent for slaves and 1
percent for everything else.

Saint Matthew was a publican (tax collector) from Capernaum during Caesar
Augustus reign. He was not of the old publicani but hired by the local
government to collect taxes.
In 60 A.D. Boadicea, queen of East Anglia led a revolt that can be attributed
to corrupt tax collectors in the British Isles. Her revolt allegedly killed all
Roman soldiers within 100 miles; seized London; and it is said that over
80,000 people were killed during the revolt. The Queen was able to raise an
army of 230,000. The revolt was crushed by Emperor Nero and resulted in
the appointment of new administrators for the British Isles.

GREAT BRITAIN
The first tax assessed in England was during occupation by the Roman
Empire.

Lady Godiva
Lady Godiva was an Anglo-Saxon woman who lived in England during the
11th century. According to legend, Lady Godiva's husband Leofric Earl of
Mercia promised to reduce the high taxes he levied on the residents of
Country when she agreed to ride naked through the streets of the town.
When Rome fell, the Saxon kings imposed taxes, referred to as Danegeld, on
land and property. The kings also imposed substantial customs duties.
The 100 years War (the conflict between England and France) began in 1337
and ended in 1453. One of the key factors that renewed fighting in 1369 was
the rebellion of the nobles of Aquitaine over the oppressive tax policies of
Edward, The Black Prince.

4
Taxes during 14th century were very progressive. The 1377 Poll tax noted
that the tax on the Duke of Lancaster was 520 times the tax on the common
peasant.

Under the earliest taxing schemes an income tax was imposed on the
wealthy, office holders, and the clergy. A tax on movable property was
imposed on merchants. The poor paid little or no taxes.
Charles I was ultimately charged with treason and beheaded. However, his
problems with Parliament came about because of a disagreement in 1629
about the rights of taxation afforded by the King and the rights of taxation
afforded by the Parliament.

The King's Writ stated that individuals should be taxed according to status
and means. Hence the idea of a progressive tax on those with the ability to
pay was developed very early.

Other prominent taxes imposed during this period were taxes on land and
various excise taxes. To pay for the army commanded by Oliver Cromwell,
Parliament, in 1643, imposed excise taxes on essential commodities (grain,
meat, etc.). The taxes imposed by Parliament extracted even more funds than
taxes imposed by Charles I, especially from the poor. The excise tax was
very regressive, increasing the tax on the poor so much that the Smithfield
riots occurred in 1647. The riots occurred because the new taxes lowered
rural laborers ability to buy wheat to the point where a family of four would
starve. In addition to the excise tax, the common lands used for hunting by
the peasant class were enclosed and peasant hunting was banned.

A precursor to the modern income tax we know today was invented by the
British in 1800 to finance their engagement in the war with Napoleon. The
tax was repealed in 1816 and opponents of the tax, who thought it should
only be used to finance wars, wanted all records of the tax destroyed along
with its repeal. Records were publicly burned by the Chancellor of the
Exchequer but copies were retained in the basement of the tax court.

5
COLONIAL AMERICA
Colonists were paying taxes under the Molasses Act which was modified in
1764 to include import duties on foreign molasses, sugar, wine and other
commodities. The new act was known as the Sugar Act.
Because the Sugar Act did not raise substantial revenue amounts, the Stamp
Act was added in 1765. The Stamp Act imposed a direct tax on all
newspapers printed in the colonies and most commercial and legal
documents.

The first known system of taxation was in ancient Egypt around 3000 BC
2800 BC in the first dynasty of the Old Kingdom. Records from the time
document that the pharaoh (a ruler of ancient Egypt) would conduct a
biennial (two yearly) tour of the kingdom, collecting tax revenues from the
people. Early taxation is also described in the Bible. In Genesis (chapter 47,
verse 24 - the New International Version), it states "But when the crop
comes in, give a fifth of it to Pharaoh. The other four-fifths you may keep as
seed for the fields and as food for yourselves and your households and your
children." Joseph was telling the people of Egypt how to divide their crop,
providing a portion to the Pharaoh. A share (20%) of the crop was tax.
(wikipedia.org)

In todays context, tax is one of the important sources of government

revenue in every country. The effectiveness in the economic system of a
country also depends upon effective and suitable tax system and policies. A
tax, in literal terms, refers to A charge or burden laid upon persons or
property for the support of a government. (www.thinkexist.com).

Further, it can be defined as a levy or any other type of a financial charge or

fee, which is imposed by different state or central governments on legal
entities or individuals (www.wikipedia.org). A taxpayer does not expect any
return for his tax paying. It is a compulsory contribution made by a taxpayer
to the government without having any direct personal benefits using the
rights given by law.

6
Local authorities like local governments, provincial governments, counties
and municipal corporations also have the right to impose taxes. The rates,
rules and regulations of taxation differ from one country to another and they
are complex in character. Tax is collected in money or cash.
There are many different kinds of taxes, most of which fall into a few basic
categories: taxes on income, taxes on property, and taxes on goods and
services.

Taxes on Income (debt.org)

The governments and local municipalities levy income taxes on personal
and business revenue and interest income. In most cases, income tax
brackets are progressive, meaning that the greater the income, the higher the
rate of taxation. Businesses pay taxes on their net income.

In addition to federal income taxes, the U.S. government also mandates that
employers subtract payroll taxes from their workers paychecks each pay
period, and then match the sums deducted. These payments are called FICA
taxes because they are authorized by the Federal Insurance contribution Act.
Total FICA taxes on individual workers are 7.65 percent of income; 6.2
percent goes to fund the nations social security system, while 1.45 percent
goes to Medicare. Self-employed individuals are liable for the entire 15.3
percent, although one half of that amount can be taken as an above-the-line
business deduction on a persons income tax return.

Capital gains taxes are those paid on any profits made from the sale of an
asset and are usually applied to stock and bond transactions. Profits made
from the sale of real state are also subject to a capital gains tax.

Estate taxes are imposed on the transfer of property upon the death of the
owner in USA. They were created to prevent the perpetuation of tax-free
wealth within the countrys most affluent families. Many states also impose
their own estate tax, sometimes known as an inheritance tax. Opponents of
these types of taxes believe that they are an unfair confiscation of wealth
passed on to an heir and call them death taxes

7
Taxes on Property
Property tax, sometimes known as an ad valorem tax, is imposed on the
value of real estate or other personal property. Property taxes are usually
imposed by local governments and charged on a recurring basis. For
example, homeowners will generally pay their real estate taxes either once a
year or as a monthly fee as part of their mortgage payments.
Real estate taxes are often subject to fluctuation based upon a jurisdictions
assessment of the worth of a property based on its condition, location and
market value. If property values have fallen due to adverse economic
circumstances, home taxes may decrease.
Other items that may be subject to a property tax are automobiles, boats,
recreational vehicles and airplanes.

Taxes on Goods and Services

The sales tax is most often used as a method for states and local
governments to raise revenue. Purchases made at the retail level are assessed
a percentage of the sales price of a particular item. Rates vary between
jurisdictions and the type of item bought. For example, a pair of shoes may
be taxed at one rate, restaurant food at another, while some items, like staple
commodities bought at a grocery store, may not be taxed at all. Also, the
same shoes may be taxed at a different rate if sold in a different state or
county.

Some believe that sales taxes are the most equitable form of taxation, since
they are essentially voluntary and they extract more money from those who
consume more. Others believe that they are the most regressive form of
taxation, since poorer people wind up paying a larger portion of their income
in sales taxes than wealthier individuals do.
So-called sin taxes are imposed on items like cigarettes and
alcohol. Luxury taxes are imposed on certain items, such as expensive cars
or jewelry
In this Thesis, we will be more focused on Income tax.

8
 In general, tax can be broadly classified into two types; direct tax and
indirect tax.
a) Direct tax :
Direct taxes refer to those taxes that are collected from the people or
organizations on which they are ostensibly imposed. In other words, a direct
tax is a form of tax, which is directly collected by the government from the
persons who bear the tax burden or who are supposed to pay tax. Corporate
taxes, income taxes and transfer taxes are the main forms of direct tax.
b) Indirect tax :
Indirect taxes are collected from someone other than the person ostensibly
responsible for paying the taxes. More precisely, an indirect tax is a form of
tax, the collection of which is performed by mediators who deposit the taxes
to the government and also perform functions associated with filing tax
returns. In this case, the customers bear the final tax burden. Some of the
main forms of indirect taxes are sales tax and value added tax (VAT).
(wikipedia.org)

1.1.2 Purpose and effects of taxation :

Funds provided by taxation have been used by states and their functional
equivalents throughout history to carry out many functions. Some of these
include expenditures on war, the enforcement of law and public order,
protection of property, economic infrastructure (roads, legal tender,
enforcement of contracts, etc.), public works, social engineering, and the
operation of government itself. Most modern governments also use taxes to
fund welfare and public services. These services can include education
systems, health care systems, pensions for the elderly, unemployment
benefits, and public transportation. Energy, water and waste management
systems are also common public utilities.

Governments use different kinds of taxes and vary the tax rates. This is done
to distribute the tax burden among individuals or classes of the population
involved in taxable activities, such as business, or to redistribute resources
between individuals or classes in the population. Historically, the nobility
were supported by taxes on the poor; modern social security systems are
intended to support the poor, the disabled, or the retired by taxes on those
9
who are still working. In addition, taxes are applied to fund foreign and
military aid, to influence the macroeconomic performance of the economy
(the government's strategy for doing this is called its fiscal policy), or to
modify patterns of consumption or employment within an economy, by
making some classes of transaction more or less attractive.

Some economists, especially neo-classical economists, argue that all

taxation creates market distortion and results in economic inefficiency,
though the government or the imposer of tax may be better-off. Further,
from the whole perspective of economics, we are also knowledgeable about
how taxes discourage market activity. For example, when a good is taxed,
the quantity of the good sold is smaller in the new equilibrium. Both buyers
and sellers share the burden of taxes. In the new equilibrium, buyers pay
more for the good, and sellers receive less. Similarly, tariff causes
deadweight loss, making the consumer worse-off, while making the
producers better-off. So, in this case there is unequal distribution of
economic prosperity; the government earns revenue and the producers are
also benefited but there is negative impact on the earnings/wealth of
consumers. Similarly, when a government imposes very high tax, it
shrinks/reduces the size of market, thereby making the dead-weight loss very
large and decreasing the nations tax revenue. The government or the
jurisdiction therefore sought to identify the kind of tax system that would
minimize this distortion. (N. Gregory Mankiw, 1997)

A nations tax system is often a reflection of its communal values or the

values of those in power. To create a system of taxation, a nation must make
choices regarding the distribution of the tax burden who will pay taxes
and how much they will pay and how the taxes collected will be spent. In
democratic nations where the public elects those in charge of establishing
the tax system, these choices reflect the type of community which the public
wishes to create. In countries where the public does not have a significant
amount of influence over the system of taxation, that system may be more of
a reflection on the values of those in power.

10
Taxation has four main purposes or effects: Revenue, Redistribution, Re-
pricing, and Representation.
The main purpose is revenue: taxes raise money to spend on roads,
schools and hospitals, and on more indirect government functions like good
regulation or justice systems. This is the most widely known function.
A second is redistribution. Normally, this means transferring wealth from
the richer sections of society to poorer sections. This function is widely
accepted in most democracies, although the extent to which this should
happen is always controversial.
The third purpose of taxation is re-pricing. Taxes are levied to address
externalities: tobacco is taxed, for example, to discourage smoking.
A fourth, consequential effect of taxation in its historical setting has been
representation. The American revolutionary slogan "no taxation without
representation" implied this: tax citizens and citizens demand accountability
from their rulers as the other part of this bargain. Several studies have shown
that direct taxation (such as income taxes) generates the greatest degree of
accountability and better governance, while indirect taxation tends to have
smaller effects. (wikipedia.org)

1.1.3 Taxation in Nepal

The principle sources of domestic tax revenue in Nepal are customs tariffs,
value-added taxes (VAT), excise duties, and income taxes on personal and
corporate incomes. There are also local development taxes, as well as license
and registration fees for houses, land, vehicles and for others.

The VAT was introduced in November 1997 as a reform designed to replace

sales taxes and most excises. The "octori," a traditional local tax on trade,
was also eliminated at this time. The VAT rate is 13% collected at every
stage of selling goods and services. Small business with annual turnover of
less than NR2 million are not required to register for the VAT, but
businesses who import more than NR10,000 (about $130) at a time, must
register. Goods exempted for the VAT include primary food stuffs,
agricultural products, and industrial machinery, though the government
plans to reduce this list as part of its Economic Reform Plan for 2002/03.

11
There is no VAT on goods for export, nor on raw materials imported by an
export promotion industry, nor the products of such an industry. (Industrial
enterprise act 1992)
Excise taxes are applied mainly to goods deemed hazardous to health, such
as alcoholic beverages, cigarettes and soft drinks. In January 2002, a new
Excise Act went into effect that raised rates slightly as part of the
government's effort to pay for increased security expenditures since 2001.
Companies engaged in construction, transportation, manufacturing and
power generation are subject to a 20% corporate income tax, whereas
financial institutions are liable for 30%. All other businesses are assessed at
25%.

About 11.1% of state revenue comes from state-owned businesses and

property. Under the Industrial Enterprise Act and the Foreign Investment
and Technology Act, industries that install pollution-control,
environmentally-friendly technology are eligible for a rebate of 50% of its
investment from taxable income. After the equipment comes into operation,
10% of gross profits can be deducted from taxable income.

Since 1997, Nepal has received technical support in implementing its tax
reforms from the Danish International Development Agency (DANIDA) and
German Technical Cooperation (GTZ). In 2002, these agencies were
working in an alliance they called Revenue Administration Support (RAS).
The major structural reforms in which the RAS has assisted were the merger
in late 2001 of the Department of Taxation with the VAT Department to
form the Inland Revenue Office, and the subsequent consolidation of the 40
income tax offices and 17 VAT offices into 21, one-point-of-service, Inland
Revenue Offices distributed around the country. In their division of labor,
DANIDA has been supporting the mergers and the implementation of the
VAT and the new income tax, while GTZ has focused on the development
of Nepal's income tax/VAT system software, and the introduction of the new
income tax. (www.nationsencyclopedia.com)

12
1.2 Problem Statement
Economic development is the prime concern of every nation in the world. To
fulfill this objective every nation in the world are conducting various
developmental activities and projects. Nevertheless, underdeveloped nations
are facing serious problems in the process of economic development. This is
either because of lack of a good budget or because of inefficiency in various
laws, policies as well as the management system of government in utilizing a
countrys resources. Because of such reasons, most underdeveloped nations
are depending on the aid of developed nations. Nepal is not an exception to
this case. For the economic development of a nation sufficient resources are
needed.

Different tax payers argue that tax system of Nepal needs lot of
improvements and there are many loopholes in the system which needs to be
resolved. The rate of import tax is more than 200%, which affects the
business organizations importing goods and services. Some argue that VAT
is not needed for certain amount, which may affect large business houses.
Besides from that tax assessment process have lot of problems. The
assessment procedure of income tax is not effective. Undue delay in tax
assessment not only reduces the total revenue but also brings harassment to
tax payers. Separate taxation report is required for business organizations for
assessing their income, which is more time consuming. Besides from that
there is lack of systematic account keeping in Nepalese business
organizations which pose a problem in tax assessment. Many small business
organizations use the service from 3rd party to perform their accounting
works which creates more complications.

People in developing and underdeveloped nations tend to have greater

propensity to evade taxes. This is because they have lesser knowledge about
income tax and also they have to maintain their livelihood from their limited
income. Rich people are also avoiding taxes by using legal loopholes and
taking advantages of an inefficient tax management. Tax payers are saving
tax through various mechanisms like CIT/ Contribution to approved
retirement fund, insurance pay, CSR and donations. The notice of Authority

13
Misuse Investigation Commission of Nepal in the recent years has proved
that there is corrupt bureaucracy in revenue office or tax office.

There is poor taxpaying morality among people too. People are not educated
about the type of tax they pay. They dont ask for bills allowing business
man to evade tax. Tax evading culture is rampant because of inefficient tax
administration and poor enforcement of laws related to tax act. The tax
authorities are inefficient and ineffective in tax law enforcement. There are
no integrated programs for taxpayers education, assistance, guidance, and
counseling.

The current study examines and analyzes the tax assessment process for
business organizations, and assesses the opinion of tax payers both business
and individuals regarding the tax payer system. The study aims to identify
the problems in the income tax system, as well as the principal reasons
behind the tax evasion that is rampant. In addition the study examines the
methods adopted by business houses and individuals to reduce taxes through
legal provisions, and to identify the appropriate methods for improvement of
the tax system.

1.3 Focus of study

Income tax is the main constituent of direct tax and today, it has been
considered as one of the major elements of tax revenue. For this reason,
developed countries like USA, UK etc. collect great part of their government
revenue from this source. But, the underdeveloped countries like Nepal still
have been unable to maximize the collection of income tax. The importance
of income tax has been increasing day by day. But, Nepal has lagged behind
in the smooth implementation of income tax policies, laws and systems.
Hence, focusing on these aspects, this research tries to cover the major
constituents of income tax system in Nepal. It aims to find out the major
problems or defects in income tax system and tries to suggest appropriate
mechanisms for its improvement.
To understand about Income tax assessment process for business
organizations.

14
 To find out the opinion of tax payers about the income tax system in
Nepal in relation to business houses and individuals.
To analyze the income tax assessment process as well as to measure
the reasons for its unsoundness.
To identify the problem in income tax system and to suggest
appropriate mechanisms so it would be rational to the tax payers.
To understand the reasons for wide spread income tax evasion.
To identify areas of improvement in current tax system
To understand about the mechanisms business houses adopt to save
tax.
To understand about the education level of individual tax payers about
the tax they pay.

The current income tax portfolio of Nepal broadly consists of

Personal/Individual/Employment tax and Corporate/Business income taxes.
However, specifically, there are also incomes which are known as
investment incomes that are taxable, that can either be corporate or personal
income taxes; such as taxes on investment income including investment,
interest, rent, royalty, natural resource payment, gain from investment, gain
from an unapproved retirement fund interest etc. But, the major focus of this
study will be on corporate/business income tax and individuals paying tax.
In other words, the research will be based focusing on (opinions of) the
personal income tax payers who will be divided into employment and
corporate houses. However, the review of both individual as well as
corporate income tax will be given in the literature review section.

15
1.4 Research Questions
The study will be carried out to answer the following research questions?
What are the major problems of income tax system in Nepal?
What is the general perception/opinion of corporations and individuals
towards income tax?
What are the reasons for unsound income tax assessment process?
To identify the problem in income tax system and to suggest
appropriate mechanisms so it would be rational to the tax payers.
To identify the areas of improvement.
To understand about the education level of individual tax payers about
the tax they pay.

1.5 Objectives of the study

The main objective of the study would be to analyze the system of income
tax in Nepal and to give the appropriate suggestions to improve it so that
income tax process becomes more smooth and effective and rational for tax
payers ( business houses). Further, the following specific objectives has been
set for the study:
To understand about Income tax assessment process for business
organizations.
To find out the opinion of tax payers about the income tax system in
Nepal as applied to business houses and individuals.
To analyze the income tax assessment process as well as to measure
the reasons for its unsoundness.
To identify the problem in income tax system and to suggest
appropriate mechanisms so it would be rational to the tax payers.
To understand the reasons for wide spread income tax evasion.
To identify areas of improvement in current tax system
To understand about the mechanisms business houses adopt to save
tax.
To understand about the education level of individual tax payers about
the tax they pay.

16
1.6 Theoretical Framework
Income tax plays a very important role in the Nepalese economy. Income tax
is a tool of achieving maximum social and economic objectives as laid down
by the constitution of Nepal. It is also recognized as a good financial lever to
make the inequality in income narrow. According to modern economists,
income tax is essential not only for collecting government revenue but also
to maintain control over consumption, to promote saving and to generate
more employment. The equal distribution of income is also possible through
that the contribution of income tax to the revenue of the government must be
increased in Nepal. But Nepal still has been unable to maximize the
collection of income tax. (H.P. Marhatta, 1980)

Sources of government revenue in Nepal are very limited. The domestic

resources of government should be increased to escape from the high
dependency on foreign aid. Revenue from income tax can be maximized at
higher rates, introducing new income taxes or collecting tax properly within
the existing portfolio. Increment in tax rates might be burdensome to some
people as well as organizations. So, the government must also take good
care of effects of taxation. Introduction of new taxes and proper collection of
tax depend on good income tax management policies and laws.

If the government maintains and implements good tax system then it has a
lot of positive effects. For example, a good tax system improves the labor
supply i.e. on the individual/labor side, it encourages the workers to work
overtime if their pay is tied with the number of hours they work more
(N.Gregory Mankiw,1997). In other words, if the income tax system is
sound which does not impose much burden on them, the workers choose to
work more. Similarly, from the organization/corporations perspective, a
good income tax system encourages private business investments or the
investments in various projects as well as the foreign direct investment.
Thus, if the income tax system is sound, the country can achieve the
balanced economic development, which further depends on the effective and
efficient income tax management.

17
Although legal provisions are made and updated timely, there are many
problems which exist in the income tax practice in Nepal. The leakage in
tax, feeling of people about tax as a penalty, lack of consciousness among
people, inability of tax management to cover the new tax payers within the
portfolio of tax payers, delay in computation and collection, lack of accuracy
and unity in tax system, inefficiency of tax administration, high cost of tax
collection and administration etc. are some examples. Because of these
reasons, the income tax system of Nepal must be reviewed and immediate
corrections should be made. Further, the whole income tax management
must be made strong. The necessary corrections in the existing provisions
and policies are possible through information feedback system provided by
the management.

Any change in tax system also causes relative changes in market values with
the result that there are some winners and some losers. Further, changes to
tax system inevitably result in deadweight costs as tax payers and tax
administrators are forced to spend time and resources in education and
adjustments to new system. However, deadweight costs associated with
transition to new tax system can be lessened through the efforts of
academics. Scholarly works explaining and contextualizing change can
assist substantially in the education process associated with change and,
therefore, assist in minimizing transitional costs. (Rup Khadka, 2001)

1.7 Research Methodology

The primary purpose of this study is to measure the problems and suggest
appropriate mechanisms to make the income tax system of Nepal stronger.
Primary as well as the secondary data will be used for the study. Opinion
survey technique will be primarily adopted to find out the practical aspect of
income tax system in Nepal from different perspective. While conducting
opinion survey, questionnaires will be distributed to different groups of
people with different income levels, who are paying personal income tax and
different business houses. Secondary data will be collected from readily
available materials like books, articles, journals, unpublished dissertations,
internet and published/unpublished articles.
18
The data collected will be tabulated into separate formats and tables.
Statistical tools such percentage along with figure especially pie charts will
be used where necessary. Further, the descriptive and analytical methods
will be used to express the results.

1.7.3 Research Design

The research study will attempt to analyze the present income tax system in
Nepal, determine its problems and suggest for the appropriate suggestions.
The opinions of 30 respondents (Business houses) who are associated with
payment of income tax, and 30 respondents (individuals) will be collected
through questionnaire. The questionnaire will include general perception of
tax payers on the income tax system of Nepal including whether the system
is convenient and rational to them or not, reasons for the tax payers to evade
tax, income tax payers suggestions about what should be done to make the
tax system friendly to the tax payers etc.

Population and sample

The population for this study will comprise of all the organizations in
Kathmandu who pay income tax and 30 individual working in different
organizations. Total of 60 samples from Kathmandu valley will be taken to
fulfill the objectives of the study.

1.8 Limitations
The study will be confined to the Kathmandu valley only.
The research will be mostly based on information related to the historical
secondary data since the present data is very difficult to gather.
Many organizations dont want to share information regarding the tax, so
there may be difficulty in collection of data.

19
 Chapter : 2
Literature review.

2.1 Brief Overview:

The principal taxes in Nepal are the income tax and indirect taxes, such as
value added tax (VAT), customs duty and excise duties. Capital gains form
part of normal business income. Natural persons are also charged on gain on
non-business chargeable assets. Tax incentives focus mainly on
establishments in special zones, industries such as Information Technology,
Hydropower etc, and encouraging investments in agricultural, tourism, and
undeveloped areas. The incentives are normally in the form of rebates in
income tax rates. The income tax law has provisions for GAAR, Transfer
pricing and controlled foreign entities, but detailed guidelines are yet to be
prepared. Inland Revenue Department under Ministry of Finance
administers income tax, VAT and excise duties while Department of Custom
administers custom charges.

2.1 .1Brief Introduction of Income Tax Act 2058

Income tax is a system related with the income. Normally both capital and
income are used to calculate the tax. Modern tax system has been
implemented in Nepal since 2017 BS. Income tax is not only necessary for
the economic development of the country through tax collection but is also
important for maintaining social law in country. Present Income tax act
2058, is implemented in Nepal since Chaitra 19 2058. After the
implementation of this act, acts related to Income tax act 2031 and house tax
act 2033 has been removed.

20
This act has included various provisions to facilitate various things as
follows:
- To unite all the acts related to income tax
- To increase the boundary of tax
- To maintain more clarity of tax system
- To improve the tax system according to the change in international tax
laws

Income tax act 2058 has divided all the income into 4 parts namely,
business, employment, investment and capital gain. According to the act, tax
payers can determine the taxable amount from business, employment and
investment and decide what amount of tax they need to pay. Capital gains
will have to pay 25 % of the amount from various gains like, lottery and
prizes.

Income tax act, 2058 have clearly defined what kind of expenses you can
deduct from your income and what kind of expenses you cannot. It clearly
specifies about the method of calculating tax and time frame for tax
payment. We can also find sections that define about, various discounts, and
facilities that tax payers may receive.

This act have also included proving of the taxable amount, dividing tax into
4 headings, transfer pricing, indirect payments, General anti avoidance
ruling, GAAR to reduce the risk factors included in tax system.
One of the important provisions of the act is tax on capital gains of natural
person. Here person can determine the tax himself from the capital and
liabilities where Depreciable assets, business assets, business related and non
business related incomes can be used to calculate the tax natural person
needs to pay. Here non business taxable amount has been charged with
capital gain tax. Similarly on the share investment, the gains from such will
be charged with tax at the time of gain through the medium of TDS. One
needs to pay for the income from the capital gains and can also reduce their
taxable amount, in case of loss.

21
Income tax act 2058 has clearly defined about how much one needs to pay,
and what facilities he will receive. Husband and wife can remain as separate
natural person if they dont choose to be 1 natural person while paying tax.
Similarly all the natural persons can deduct their taxable income from the
health expense they incur.

In case of organizations, amount they distribute, change in ownership has

been clearly defined. Separate provisions have been given for tax payment
of Banking and insurance institutions. It have also mentioned about
maintaining retirement funds, permission to set up retirement funds and how
the amount to keep in these funds will be calculated.

In relation to international tax, this act talks about income source, loss, profit
and payments and foreigners managed company. Here temporary residents
in Nepal should only pay for the income generated within the country
whereas for permanent residents, they should pay for the global income.
However, if the tax has already been paid in another country of source, than
such amounts can be deducted from the taxable income in Nepal. Person
conducting business in fields related to water transportation, air
transportation and telecommunication have to pay tax on the revenue they
receive.

For the implementation and administration of tax system, income tax act
2058 have given the responsibility to head of Inland Revenue Department.
Similarly it has divided the responsibilities and authorities for the people
employed in Inland Revenue Department. Tax payers are educated about any
provisions that are implemented or removed, what they receive and how
they benefit. For this they can fill up a form and get all the information
necessary. However, overall responsibility has been given to head of ird.

Nepal Government has been given right to implement both sides tax free
with foreign country. In this age of globalization, income of a person is not
limited to a single country. Person is involved in different countries. So to
ease the transaction between two countries or contracting countries, two

22
sided tax free system can be implemented. Main aim of such system is to
remove double taxation, reduce the burden of tax and reduce tax leakage.

Until now Nepal government have made contract with 10 countries ( India,
Norway, Thai Land, Sri Lanka, Mourisos, Austria, Pakistan, China, Korea
and Katar ) to provide both sides tax reduction and remove tax leakage.
Income tax act 2058 has safeguarded the tax payers through this act. Privacy
of taxpayer has been prioritized and punishment for those who provide
information that hampers the privacy of tax payers. For the identification of
tax payers there is a system of PAN number. There is a system of E- filing to
give the details of income.

Taxpayers have to pay tax in installments for their income. Small taxpayers
from prescribed areas should pay estimated tax along with necessary
documents and incase tax is paid after earning income, tax payers have
facility of tax cut from the amount already paid.

Act also includes provisions like time, place and system of tax payment
which is mentioned in the act. Tax officer can search for the information
related to tax payers, and tax payers will be given certificate of tax cut.

Important aspect of income tax act 2058 is tax payers can determine the tax
amount by themselves. Normally, any employment, business, investment
and non business transaction done in Nepal which earns income to resident
or nonresident should provide the details of their transactions. If income
source is only from Nepal or a single employment person or owner of public
transportation, person need not provide details of every transaction.
Generally, a natural person is resident if he stays in Nepal for a period of
183 days or more in an income year or if his habitual place of abode is in
Nepal. A company is considered resident in Nepal if it is incorporated in
Nepal or if effective control and management of the company is in Nepal.

Another important aspect of Income Tax act is that, losses and expenses can
be deducted from taxable amount. Loss and expenses for business can be
carried for 7 years and on petroleum products its 12 years. Along with that,
23
loss from investment cannot be transferred to business and loss in foreign
country cannot be transferred to home country, but the loss from Nepals
business can be transferred to anywhere. Tax cut will not be granted for
businesses which dont require tax, or which requires less tax. Loss during
ownership cannot be transferred as well.

Tax officers have right to fix new tax rate for those taxpayers who fraudly
pay less tax, but such rate should be fixed within 1 year after receiving the
information of such fraud.

Income tax act 2058, have provision of Self assessment process/system.

Tax is re-monitored in two levels. 1st level is administrative monitoring
where tax payers can request to Maha Nirdeshak head of ird for
monitoring and if they are still not satisfied, they can go to revenue tribunal
Rajaswa Nyayadhikaran.

To go through 1st level, and provide application, unmarried person should

pay all the tax amount and request for re-monitoring. Whereas married
couple need to pay one third of the amount for registering application. If you
are not satisfied with the administrative monitoring than within 30 days of
such decision, s/he can file against that decision with revenue tribunal. For
this s/he needs to pay full amount of non-conflicted tax and 1/3 of conflicted
tax amount.

Income tax act 2058 has provisions for punishment and fines for non
compliance of the tax. Tax officer can charge you with fees and extra fees,
but punishment and fines are charged by court only. If transaction, related to
income is not provided, not recorded in books, no details from advance tax
payers, no payment in time, providing wrong information, influencing in bad
way, officer who damages privacy, non compliance of this act, will be
forced to pay fines according to the rule and may also go to jail. Officer who
charges taxpayer must go through court and register a case.

Tax act 2058 also has provisions related to tax collection, tax cut and tax
returns. Provisions like forfeiture of assets of tax payer who dont pay tax,
24
auctioning of such assets, restricting from going abroad, collecting tax from
agent of nonresident person and filing a case for non tax payers are also
included. If tax payer is not able to pay tax due to valid reason, government
can free him from his tax as well. If any tax payer pays more tax than he
should have, than his amount will be returned if he ask it back within 2 years
of such payment.

All the rates of income tax are included in this act. These rates cannot be
changed by Nepal Government and can only be changed through process of
bills. Act has also included pool system where depreciable assets and
incomes are classified and total expenses from all categories can be used for
tax cut.

2.2 Rights and Duties of Tax Payers (Related to income tax act 2058 and
income tax rules 2059)
All tax payers have to do certain legal things before starting their transaction
till the completion of such transaction, which falls under the rights and
duties of tax payers. Though there is no special provision regarding the
rights and duties of tax payers in income tax act, it talks about certain things
which taxpayers must follow.
Taxpayers have to register their transaction, provide transaction details
within the time, pay the tax, pay exact amount without any fraud, provide
papers and details if demanded by tax office, should be present whenever
asked to. These are the rights and duties of tax payers.
If taxpayers do not follow the guidelines as mentioned in the act, he may be
charged with extra money, fines, closing of business, auctioning of his
property, or forfeiture of assets.
1) Resister in income tax:
- Before starting any kind of transaction, one must take Permanent
Account Number (PAN) from nearest inland Revenue Department or Tax
office.
- The photo copy of PAN Card must be kept at the workplace where
everyone can see it.

25
- The details of the income shall be provided within 3 months after the
completion of economic year, that is within last date of Ashwin., in inland
revenue department, tax office or big taxpayers office.
2) Register in VAT
- Businesses with taxable income of more than 20 lakhs must register in
VAT (Value Added Tax)
- Individual doing business with taxable income of more than 10 lakhs
from both service and products, must also register for VAT.
- Person doing business of hardware, stationery, furniture fixture,
furnishing, automobiles, motor parts, electronic, marbles, education
consultancy, health club, catering service, party palace, restaurants and bars,
color labs in municipality must also register for VAT.
3) Receive the bills during purchase:
- Whenever you are buying or selling, you must do the transaction with
valid bill. Bill should contain name of the firm, PAN number, date, units of
products and price.
- No bills should be issued with under invoicing.
- Even though, customers dont ask for bill, seller must provide him
with bill, and only than he can receive payments.

26
2.2.1 Rights of the tax payers:
Section 74 of income tax act has clearly defined about rights of the tax
payers. Tax payers are also obliged to follow the income tax act rules in the
act and enjoy the rights they receive. Tax payers are person with taxable
income in any income year. They may also be permanent establishment of
foreign national in Nepal (section 68 sub section 3 and 4) or individuals
entitled to receive amount of tax cut in last income year.
Rights of tax payers
1. Right to equality: Tax office shall treat all the tax payers respectfully.
2. Right to know the information related to tax laws and their rights.
3. Right to calculate their own tax amount according to section 99
4. Right to provide proof relating to tax.
5. Right to hire lawyer to deal with case regarding tax.
6. Right of secrecy: Section 84 states that, all the information received
by tax officers must be kept secret. Sub section 1 states, however officer can
provide information to those who are knowledgeable about that transaction.
Information can only be given to tax officers, court, government worker who
needs data for statistics and to foreign officials with whom Nepal have made
treaty.
7. Right to advance rulling (section 76): if taxpayer is confused about
any law regarding tax system, s/he can give application in inland revenue
department regarding his confusion and he will get the clarification in
written form from the office.
8. Right to administrative review: administrative review is related to
monitoring and checking of decisions made by tax officers and seeing
weather they are in compliance with existing laws or not. If tax payer is not
satisfied with such laws, he can ask for justice. Section 115 states that, for
doing so, he must give application in inland revenue department.
9. Right to appeal in revenue tribunal(section 116): if taxpayer is not
satisfied with decision of administrative review, he can re apply in revenue
tribunal. First tax payer can complain about decision of tax officers in
administrative review and if s/he is still not satisfied. s/he can re apply in
revenue tribunal. While applying in revenue tribunal 50% of taxable amount
and 100 % of fines shall be paid as collateral. 1 copy of application provided
27
in revenue tribunal along with application should also be submitted to inland
revenue department within 15 days of application.
10. Right to tax refund: section 113 states that if taxpayer pays more
amount than s/he should have actually paid, than there is provision of refund
of such amount or such amount can be deducted from next tax payment s/he
has to make. Refund can be received within 60 days of application of such.
To get the excess amount back, one must apply within 2 years.
11. Right to know about possession and auction: section 104 states that
government should provide notice, if it needs to capture the asset of tax
payer. This notice must include details of asset to be captured, limit of
amount from such assets, information related to tax and fines while
auctioning such property.

2.3 Income Tax Rates of Nepal (ca.studentsnepal.com)

There has been a change in the Income Tax Rates applicable to the Resident
Person from the Budget this year. Slab Rate has been increased by 100,000
for Tax payers assessed as Individual/couple. Details of the same has been
provided below.

Individual Couple
Tax Tax
Particulars Rs rate Rs rate
first tax slab 250,000 1% 300,000 1%
next 100,000 15% 100,000 15%
balance
exceeding 350,000 25% 400,000 25%
Table 1: income tax rates of Nepal

In case the taxable salary of an individual is more than Rs 25 Lakhs,

additional tax at the rate of 40% shall be levied on the tax applicable on the
income above Rs 25,00,000 (i.e Above Rs 25,00,000 Tax rate of 35% is
applicable)

28
Notes:
1. Natural person working at remote areas are entitled to get deduction from
taxable income to a maximum of Rs. 50000.
2. Natural person with pension income included in the taxable income shall
be entitled to deduct from taxable income an additional 25% of amount
prescribed under first tax slab.
3. Incapacitated natural person shall be entitled to get deduction from
taxable income an additional 50% of amount prescribed under first tax slab.
4. A Resident natural person who has procured life insurance and paid
premium amount thereon shall be entitled to a deduction of actual annual
insurance premium or Rs. 20000 whichever is less from gross taxable
income.
5. A Resident natural person who has procured Health Insurance and paid
premium amount thereon shall be entitled to a deduction of actual annual
insurance premium or Rs. 20,000 whichever is less from gross taxable
income.
6. In case of the employee employed at the foreign diplomatic of Nepal only
25% of the foreign allowances are to be included in the income from salary
while calculating tax.
7. In case of the employee posted outside Nepal is getting foreign allowance
will get 75% rebate of such allowances.
8. In case of the female employee whose taxable income is only from
employment than 10% rebate is allowed on tax liability.
9. In case of individual having income from export, tax rate of 15% is
applicable in place of 25%.
10. Productive industries, except tobacco and alcohol industries are eligible
to get 50% discount on land registration fee.
11. Special Industries related with manufacturing, tourist services, electricity
production and distribution listed on NEPSE shall be provided with
concession of 15% on applicable tax rate. This budget has included
Agricultural, Forestry and Mineral Industries also in to the category of
Special Industries.

29
2.4 Coverage of income tax
The Draft Income Tax Act 2001 (followed by Income Tax Act 2002/2003)
has classified income into three major heads which are taxable. However,
the sources of income under each heading might have been updated from
time to time till now. But, the major types of income included under each
head as
as defined by this act are as follows :
1. Employment Income :
All payments or benefits received in respect of employment, including past
or future employment, are made taxable. For example, payments related to
the change of terms of employment, fringe benefits, various types of
allowances, payments received through third parties all are made taxable.

2. Investment Income :
All types of investment income including dividend, interest, natural resource
payment, rent, royalty, gain from unapproved fund interest, or retirement
payment made by an approved retirement fund are included in the taxable
income. Interest, dividends, royalties all are defined broadly. Capital gains
realized on the disposal of fixed assets are also included in the income.
Disposal is defined broadly.

3. Business Income :
Profits and gains from conducting from conducting the business are
considered as the business income for the purpose income tax. This type of
income may include; inter alia, service fees, amount derived from the
disposal of trading, and net gains from the disposable of business assets or
liabilities, etc.

However, though these are the incomes underlying each head, the income
tax revenue has been divided into main four groups viz., individual income
tax, corporate income tax, interest tax and house rent tax. Of these taxes,
corporate tax is collected from the government corporations, public and
private limited companies. Individual income tax is collected from
individuals and proprietorship firms. Interest tax is collected from banks and

30
finance companies that pay interest on all types of deposits and the house
rent tax levied on income obtained from renting out lands and buildings.
( Rup Khadka, 2001)

2.5 Income Tax Rates for Sole Proprietorship firms (RSTCA Nepal)
Sole Propritorship
Firm
Individual Couple
Tax
Particulars Rs Tax rate Rs rate
first tax slab 250,000 1% 300,000 1%
next 100,000 15% 100,000 15%
balance
exceeding 350,000 25% 400,000 25%
Table 2: Income Tax rates for sole proprietorship

In case the taxable salary of an individual is more than Rs 25 Lakhs,

additional tax at the rate of 40% shall be levied on the tax applicable on the
income above Rs 25,00,000 (i.e Above Rs 25,00,000 Tax rate of 35% is
applicable)
Note:
1) Export oriented business and for special industries, maximum of 15
and 20% tax will be charged on taxable income.

31
2.6 Income tax rate for non business income (www.ird.gov.np)
non business
income
Individuals Couple
Tax Tax
Particulars Rs rate Rs rate
Amount
exceeding 250,000 10% 300,000 10%
Table 3: income tax rate for non business income.

In case land and building is owned for more than 5 years, 2.5% is only
charged, if less than 5 years than they will be charged at 5%.

Rebate on Tax Liability for Resident Female with only employment

income:
A female resident natural person deriving income only from employment in
Nepal shall be provided with a rebate of 10% on the tax liability. Income
Tax Manual, 2068 requires the female to opt for individual assessment of tax
to avail the Rebate facility.

2.7 Tax Rate for Non Business Chargeable Assets

Gain from disposal of Non Business Chargeable Assets of a resident natural

person is taxed at 10% after taking into consideration exemption limit (i.e.
Rs. 350,000 for individual and Rs. 400,000 for couples), subject to
following:
In case of land and buildings, where the disposed land & buildings has
been owned for more than 5 years, tax rate of 2.5% shall apply.

In case the disposed land & buildings has been owned for less than 5 years,
tax rate of 5% shall apply.

32
 In case of gain from disposal of shares of listed entities, 5% tax rate shall
apply for resident natural person.

Gain from Non Business Chargeable Assets includes:

Gain from sale of shares of companies,

Gain from sale of building owned and resided for less than 10 years and
disposed for more than Rs.30 lakhs and gain from sale of land disposed for
more than Rs. 30 Lakhs

The tax is collected on source, deducted as withholding tax (WHT). The tax
payer should submit tax
returns to avail exemption benefit.

2.8 Double Taxation relief

Nepal has double tax avoidance treaty (DTAT) with ten countries: Austria,
China, Korea, India, Mauritius, Norway, Pakistan, Qatar, Sri Lanka and
Thailand. Nepal also has unilateral tax credit mechanism where resident tax
payers are eligible to claim foreign tax credit for tax paid abroad with
respect to their taxable income in Nepal.

2.9 Maintenance of paper works and books of accounts

- All the papers related to transaction submitted in Internal Revenue
Department must be maintained by taxpayer for 5 years and presented
whenever demanded.
- Besides from the details those taxpayers have submitted, additional
documents demanded by tax office must be presented.

33
2.10. Special tax rates and concession for natural resident person

Particulars Applicable Tax Rates

For incomes earned from 20% where 25% tax rate applies
operating special industries
For incomes earned from export 15% where 25% tax rate applies
business
Table 4: special tax rates for natural person.
person

Life Insurance Premium

While calculating taxable income, life Insurance premium paid by a resident
natural person is deductible up to the limit of Rs 20,000. Where both
husband and wife have opted as couple, the insurance paid can be clubbed to
claim for deduction, subject to maximum of Rs. 20,000.

Health Insurance Premium

If a resident natural person pays health insurance premium to a resident

insurance company, lower of the following amount is deductible for tax
purpose:
a. Rs. 20,000; or

b. Annual Health insurance premium paid to resident insurance company

Additional limit for pension income

If income of a resident natural person includes pension income, the taxable

income is first reduced by additional 25% or pension amount included in
income whichever is lower and tax liability is calculated on balance income.

34
 Employees working in Diplomatic Agencies

75% of foreign allowance is deducted from taxable income in case of an

employee employed at diplomatic agencies of Nepal situated at foreign
countries.

Incapacitated natural persons

In case of incapacitated natural persons, the minimum exemption limit (Rs.
350,000 for individual and Rs. 400,000 for couples) is increased by
additional 50%.

Remote Area Benefit

In case of resident natural persons working in remote areas minimum
exemption limit shall be increased by Rs 50,000 depending on remote area
category as follows

Category A: Rs 50,000
Category B: Rs 40,000
Category C: Rs 30,000
Category D : Rs 20,000
Category E : Rs 10,000

2.11 Tax Rate for Non Resident Natural Person

Taxable income of a non resident natural person shall be taxed at 25%.
Nonresident natural persons are allowed to claim Remote Area Benefit.

35
2.12 Taxation of Business & Entities ( Normal Tax Rates Applicable
tax)
General companies/ firms/ industries. 25%
Special Industries. 20%
Banks and Financial institutions. 30%
General Insurance Companies 30%
Entities engaged in business of petroleum products 30%
Industries producing products with tobacco as basic raw material and
industries producing liquors, beers and similar other products. 30%
Entities involved in operation of roads, bridges, tunnels (including
cable-car), ropeways, sky bridge. After construction. 20%
Entities involved in trolley bus 20%
Cooperative societies registered as per cooperative act 2048 and
engaged in business other than tax exempt 20%
Export income of entity with source in Nepal 20%

2.12.1 Reduced Rates- concessions for industries

Special industries and information technology industries providing
direct employment to 300 or more Nepalese citizens during a period. 90%
Special Industries providing direct employment to 1200 or more
Nepalese. 80%
Special Industries providing direct employment to more than 100
Nepalese citizens during a period, 33% of which are women, incapacitated
and dalits. 80%
Special Industries providing direct employment to 100 or more
Nepalese nationals during a period, and that provides employment
exclusively to Nepalese citizens only. 70%
Special industries operating in remote area for first ten years. 10%
Special industries operating in undeveloped area for first ten years.
20%
Special industries operating in underdeveloped area for first ten years.
30%

36
 Special industry with capital investment of more than Rs 1 billion and
employing 500 individuals during the whole year and 50% of applicable rate
thereafter for next three years. 0% for first 5 years of operation
Agriculture based industry providing direct employment to 100 or
more Nepalese national during the year and all the employees shall
exclusively be the Nepalese national. 70%
Tourism industry providing direct employment to 100 or more
Nepalese national during the year, and all the employees shall exclusively be
the Nepalese national. 70%
Tourism industry providing direct employment to 100 or more
Nepalese national and all employees should exclusively be Nepalese. 70%
Industries established in special economic zone of hilly district as
specified by the government and mountain district. 0% for 10 years and 50%
thereafter.
Industries established in special economic zone of other areas. 0% for
5 years and 50 % of rate thereafter.
Income from foreign technology, management fee and royalty earned
by foreign investor from industries established in special economic zone.
50%
Capitalization of profit by special industry, agro- based industry and
tourism industry established at special economic zone for capacity
expansion. Dividend tax- Nil
Industries operating in Technology Park, Biotech Park, and IT park
and involved in software development, statistical processing, cyber caf,
digital mapping. 50%
Entity involved in generation, transmission or distribution of
hydroelectricity within end of chaitra of 2080. 0% for 10 years and 50 % for
next 5 years of applicable Rate.
In case of dividend of industries in special economic zones, dividend
tax is exempt for first 5 years of operation and 50% concession is provided
for dividend tax in next 3 years.
Income from construction and operation of roads, bridges, tunnels,
ropeway, sky bridge of investment and operation of. 40% rebate on
applicable rate.

37
 Industries producing brandy, cider and wine based on fruits and
established in remote areas. 40% rebate for 1st 10 years.
Industries related to Tourism sector or aviation company for
international flights with capital investment of more than Rs 2 billion. No
tax for first 5 years and 50 % for next three years.

2.13 Income Tax for Small Tax Payers

Resident Natural Persons who derives income only from business having
source in Nepal with annual business turnover of Rs. 20,00,000 and net
income below Rs. 2,00,000 and not registered for VAT purpose may chose
to pay tax as below. In such case, the person cannot claim medical tax credit
or advance tax arising out of tax withheld by withholding agent.
Location of business Tax
For resident natural persons operating Rs 5000
business in metropolitan and sub
metropolitan areas. (per annum)
For resident natural persons operating Rs 2500
business in municipality areas (per
annum)
For resident natural persons operating Rs 1500
business in other areas (per annum)
Table 5: income tax for small tax payers

2.14 Income Tax for Person choosing to pay Tax based on Turnover
Resident Natural Persons who derives income only from business having
source in Nepal with annual business turnover exceeding Rs. 20,00,000 and
which is below Rs. 50,00,000 and not registered for VAT purpose may
chose to pay tax as below. In such case, the person cannot claim medical tax
credit or advance tax arising out of tax withheld by withholding agent.

38
Nature of business Rate of tax
Person dealing in goods which are 0.24% of turnover
sold on the basis of commission-the
rate of commission of which is up to
3% or sold by adding up to 3% value
while selling such goods including
gas, cigarette.
Person dealing in goods not specified 0.75% of Turnover
above
Person dealing in services 2% of Turnover
Table 6: Tax rates based on turnover

The person who derives income from consultancy or expert services that are
provided by a natural person including doctor, engineer, auditor, lawyer,
sportspersons, artist or consultant cannot choose to pay turnover tax.

2.15 Carry forward of normal business loss

Losses arising from business in an income year may be set off against
income from any other business or investment in that year of the same
person. Investment loss cannot be set-off from business income. A business
loss may be carried forward and set off against future business profits in the
next seven assessment years. Similarly, investment loss may be carried
forward and set off against future business profits in the next seven
assessment years. Foreign sourced loss can be set-off only with foreign
sourced income. In certain business such as projects involved in
construction, generation and transmission of electricity; projects involved in
construction and operation of public infrastructure projects under BOT and
persons dealing in Petroleum under Petroleum Act 2040; the business loss is
allowed to be carried forward to be set off for next 12 Income years.
Any business loss that is not set-off in seven years can be carried forward
indefinitely to set off against gain from disposal of business assets and
liabilities. In case of natural persons, any business loss and investment loss

39
that is not set-off in seven years can be carried forward indefinitely to set off
against gain from disposal of non-business chargeable assets.

2.16 Loss on disposal of Assets

The Income Tax law has classified assets of an entity into stock, depreciable
assets and business assets. Personal assets of Natural persons may be taxed
as Non Business Chargeable Assets if they meet certain criteria.
Loss from stock is adjusted in cost of goods sold.
Depreciation is calculated on pool basis, with assets classified into five
pools. Gain or loss on disposal of depreciable assets is not calculated
separately for each asset, but considered on pool basis. If there is loss on
disposal of a pool of depreciable assets, it is deductible as normal loss in the
concerned income year.
Non depreciable capital assets are categorized as business assets. Any loss
from disposal of business assets can be claimed as deduction in the same
year as normal loss. But while calculating gain from disposal of business
assets in a year, any unrelieved business loss of previous years (due to seven
years limit) can be claimed for setoff. The same provision applies for
disposal of business liability.

2.17 Withholding Taxes (WHT or TDS)

WHT is deducted only by resident persons. The resident natural person is

allowed to deduct TDS only for payments in connection with business. For
the recipient, TDS can be either advance tax or final tax.

WHT or TDS is final tax if the payment falls within the list of final
withholding payment. Final withholding payments basically include:
a. Payments received by natural persons other than in connection with
business such as gains from investment insurance, retirement payments,
interest etc.
b. Windfall gains
c. Payments received by tax exempt organization
d. Payments made to non-resident person

40
e. Dividend distributed by resident entity and benefit distributed to a natural
person by Mutual Fund
f. Meeting allowance, Payment for part time lecture

Even if the payer fails to deduct WHT, it is regarded that WHT has been
deducted by the payer (deemed WHT). The Withholding taxes deducted
from the recipient and the return of such taxes shall be filed within 25th of
next month as per Nepalese calendar for every deduction in each month.

The person choosing to pay tax based on turnover shall deposit tax withheld
by it while making payment of tax in installments as per Sec. 95 (1), i.e. by
Poush end (Mid January) along with installment amount and by Ashad end
(Mid July) along with second installment tax amount.
The house rent tax for an Income Year shall be deposited at once during the
month of Ashad of the particular Income Year (applicable to resident person,
not in connection with business)

Income from Employment

Resident employer should withhold tax while making employment income
payment with sources in Nepal to an employer as follows: Monthly WHT =
Annual Tax on annual employment income divided by 12. The WHT is not
final tax, but the employee is exempt from submitting returns provided
certain conditions are fulfilled, such as only Nepal sourced employment
income, one employer at a time etc. and the taxable income of such person
does not exceed Rs. 4 Million. If the employee has foreign sourced income
or the taxable income of such employee exceeds Rs. 4 Million, tax return is
mandatory.

41
2.18 Exceptions- WHT not required

Payments made by natural persons other than conducting business.

Payment of remuneration to the writer of the articles published in

Newspaper & magazines.

Payment of remuneration for preparation of question paper or

checking of answer sheet

Interregional interchange charges paid to a bank issuing Credit Cards.

Interest or fee paid by Nepal Govt., under an agreement, to Foreign

Govt. or an international organization (to which Nepal is a party).
Payment of interest to a resident bank or other resident financial
institution

Payments that are exempt from tax

Payment of dividend or interest to Mutual Fund

42
2.19 Tax Assessment, Appeal & Review and Renewal of Tax Exemption
Certificate

1 Self Assessment
The taxpayer is required to make self assessment of its tax and should file
annual return and pay tax within 3 months from the end of an income year.
So, the tax should be paid and return should be filed within Ashoj end 2074
(Mid October, 2017) for the income year 2073/74 (2016/17). However, a
taxpayer may have due date extended for a maximum period of 3 months i.e.
up to Poush end 2074 (mid January, 2018) on request to IRD with bonafide
reasons for such extension.

2 Amended Assessment
The tax return filed as per self assessment by a taxpayer is not final. Tax
Authority may revise the assessment within four years from the date of
submission of tax return under self assessment. It may revise it as many
times as it deems necessary but within the four years period. If tax authority
obtains evidence that the tax return of any year is misleading due to
fraudulent assessment, it may revise the assessment at any time after the
submission of return, but within one year of obtaining the information. If
any authorized body restricts tax authority to make additional assessment,
the tax authority cannot make amended assessment.

3 Appeal & review

When tax authority makes amended assessment, the taxpayer has the right to
go for administrative review. The review petition can be filed within 30 days
of obtaining notification issued under Sec 102. In case a taxpayer cannot file
a review petition within the specified days, the due date may be extended for
another 30 days if an application is filed within 7 days of expiry of the due
date of first 30 days. A deposit of one-third of disputed tax is required for
application.
In case Inland Revenue Department (IRD) does not decide in the review
application within 60 days of filing the review petition or decides against the
tax payer, the taxpayer may file an application to Revenue Tribunal within
43
35 days. The application deadline may be extended further by 30 Days. A
deposit of 50% of disputed tax is required for application.

4 Renewal of Tax Exemption Certificate

Tax Exempt Organizations are required to renew their tax exemption
certificate within 3 months of the end of fiscal year, i.e. with Mid October
every year, for which an application shall be filed along with the following
documents:
a. Audited Financial Statements

b. Withholding Tax Return and proof of deposit of Withholding Taxes

Tax Exempt Organizations are also required to submit tax returns in cases
where the income is composed of such incomes which are not exempted.
After renewal of tax exemption certificate, a new certificate is issued by Tax
Officer. A Tax Exempt Organization cannot enjoy tax exemption benefits
unless the certificates are renewed.

44
2.20 Special Budget Proposals A. Tax Proposals- Income Tax & VAT

Telecommunication Service Fee

Telecommunication Service Fee has increased to 11% from 10%.

Health Service Tax

5% of Health Service Tax is levied on Health Services invoices of all entities
providing health services, except for those provided by Government of
Nepal and Community Hospitals. The health organizations may register
themselves for VAT and collect VAT instead of Health Service Tax.

Education Service Fee (EST)

Education Service Fee is levied as follows:
All educational institutions operated by Private sector within Nepal
providing education above Higher Secondary Level: 1% on Monthly fee and
Admission Fee

All private sector educational institutions within Kathmandu Valley, sub

metropolitan city, municipality, district headquarters and other areas where
IRD has prescribed educational institution to collect EST: 1% on Monthly
Fee and Admission Fee
Date of submission of Return and payment of tax: On quarterly basis within
25th of next month immediately succeeding the quarter end (i.e. tax
collected from Shrawan to Kartik shall be deposited within 25th of Mangsir;
from Mangsir to Falgun within 25th of Chaitra and from Chaitra to Ashad
within 25th of Shrawan)
Interest & Fees due to non submission and non-payment:
15% p.a. interest, if not deposited on time and Rs. 1,000 fees if return is not
submitted on time
All the educational institutes under public Educational guthi are not
required to collect educational service fee.

45
All students departing from Nepal who are obtaining exchange facility for
educational fees: 1% of Fees at the time of granting such exchange facility

Date of submission of Return and payment of tax: On monthly basis within

25th of next month

Infrastructure Tax

Rs. 5 per liter at the point of import when importing aviation fuel, petrol and
diesel.
Road Repair and Improvement Fees:
Rs. 4 per liter in petrol and Rs. 2 per liter in Diesel at the point of import.

Pollution Control Tax

50 Paisa per liter in petrol and diesel.

Telephone Ownership Fees

At the time of Installation of phone (Post Paid and Landline)- Rs. 1,000
At the time of change in ownership of Telephone (landline & Post paid):
Rs. 1,000.
In case of prepaid telephone- 2% from every SIM card sales and Recharge
Card Sales.
Revenue is to be deposited within 25th of next month.

Royalty of Casino

8.1. Royalty of Rs. 30 Million per annum by the license holder which is Rs.
7.5 Million for gaming industry using modern machines and equipments
8.2. The amount shall be paid within 2 months of the beginning of fiscal
year

Fees related to Forest Products

9.1. If woods of Sal and Khaer is sold to outsiders by Community Forest:

15% of sales to be deposited to GONs Federal Reserve fund.
46
 Chapter: 3
Research Methodology

3.1. Research Methodology

Research methodology is a research method used to meet the specified
objectives. It is a systematic way to find out the probable solution. It refers
to the various sequential steps (along with rational of each steps) to be
adopted by a researcher in studying the problem with certain objectives in
view. Thus the research method designed to achieve the objectives of this
thesis contains research design, population and sample, data collection
procedure, tools for analysis and methods of analysis and presentations.

3.2. Research Design:

The research design is a plan, structure and strategy of investigation
conceived so as to obtain answers to research questions. The plan is the
overall scheme or program of the research. It includes an outline of what the
investigator will do from writing the problem statement and their operational
implications to the final analysis of the data. The purpose of the research
design is to provide a maximum amount of information relevant to the
problem under investigation at a minimum cost. This research study is
concerned with past phenomena both numerical as well as opinions. This
study is both descriptive and analytical.

3.3. Population and sample:

The population for this study was comprised of the entire person belonging
to or associated with income tax in Nepal. They were Business houses who
pay tax in any way and individuals paying tax. In order to fulfill the
objectives of the study, 60 samples from the population in the Kathmandu
Valley were carefully selected by consultation with lecturers and best
judgment of the researcher. The respondents could be divided into different
groups. The following Table shows the groups of respondents and the size of
samples.

47
Respondents Number
Business houses 30
Individuals 30

3.4. Nature and source of data:

Both primary as well as secondary data were collected in order to achieve
the real and factual result out of this research. Since the nature of these
primary and secondary data is different, collection procedure also tend to
vary. A set of questionnaires was designed and distributed to the selected
respondents well-learned in and at least familiar to tax system of Nepal and
its implications. Information and data were also collected from respondent
through field visit by the researcher. The secondary data were collected
through internet, annual reports, different books and publications. The
sources and data collection procedure is explained below.

3.4.1. Primary sources:

The primary data were collected through following techniques :
a. Interview
b. Questionnaire
c. Telephone queries
d. Discussion with resource persons.
e. Field Survey

3.4.2. Secondary sources:

The secondary data of this research were collected from the following
sources:
a. Published and unpublished reports, articles and dissertations on
the concerned subject.
b. Published documents of National Planning Commission
c. Publication and annual report of Inland Revenue Department (IRD)
d. Different publication of Central Bureau of Statistics.
e. Publications of Nepal Rastra Bank
f. Various books written by tax officers and scholars

48
g. Publications, Budget Speeches and Economic Survey of various
fiscal year of Ministry of Finance, the Government of Nepal.
h. Newspapers, such as, Gorkhapatra, The Rising Nepal, Kantipur Daily, and
so on
i. Publications of various inland revenue department.
j. Websites: The collected data through secondary sources have been
tabulated in different ways according to the requirements of the study

3.5. Procedures and presentation and data analysis:

In the process of presentation and analysis of the data, various statistical
tools were used in order to get the meaningful result. Collected data from
primary and secondary sources were first processed for tabulation and
analysis. For the purpose of analysis, following simple statistical tools were
used:
a. Simple percentage.
b. Charts and Diagrams.

49
 Chapter 4
DATA ANALYSIS AND PRESENTATION

An empirical investigation has been conducted in order to find out various

aspects of income tax from the experience of the real world. The major tool
used for this purpose is an opinion questionnaire, which was given to 30 sole
ownership business organizations in Kathmandu valley and another
questionnaire was given to 30 individuals working in Kathmandu valley.
Further, the respondents included the personnel/employees from different
organizations, bank, and sole ownership business houses like small media
companies; suppliers of construction materials, pharmaceutical company,
and paper company. The respondents were divided into two groups; those
who pay tax under employment and sole ownership business.

4.1 Group of Respondents and the sample size

Table 8
Groups of respondents
S.N Group Sample size
1 Employment 30
2 Business houses 30
Total 60
Table 7: size of samples

50
4.2 Monthly salary of the respondents
Monthly Income
Less More than
Group 500,00-
than 100000-500,000 10,00,000
10,00,000
100,000
Business 10
8 5 7
organizations
Employment 24 6 - -
Total 60
Table 8: Monthly salary of respondents

4.3 Tax (in range) paid by the respondents:

Before asking the question about the range of tax, the questionnaire
(question no. 3) had also asked about whether the respondents paid any
amount of income tax or not. Since, the entire respondents response was
positive i.e. yes, the range of tax paid by the respondents is directly
shown, which the questionnaire had asked in question no. 3.

Tax that respondents pay annually.

Income tax in range

Group 100,000 500,000
< 1,00,000 10,00,0
500,000 10,00,000
00
Business
6 10 9 5
Houses
Employment 30 - -
Table 9: Tax range paid by the respondents.

51
4.4 Knowledge about current self assessment process
Question no. 5 in the questionnaire had asked about whether the respondents
are knowledgeable about the current self assessment system or process of
income tax assessment. The response was to be given (to be ticked in the
question) in yes or no answer. Their response is shown in the table
below.

Awareness about current system/process of income tax assessment

Group Yes (%) No (%) Total (%)
Business houses 47.83 52.17 100
Individuals 20 80 100
Table 10: awareness about current system of income tax assessment
Source : Opinion Survey

The table shows the percentage of respondents in each group who know or
dont know about the current system/process of income tax assessment. The
tables show that most of the respondents are not knowledgeable about the
current process/system of income tax assessment. However, there is also
significant portion of respondents who know about it. It is likely that those
who are employees do not know about the process or system of income tax
assessment since their income tax is assessed and submitted by the
organization itself. But, it is also found that many business organizations are
also not knowledgeable about it. According to opinion survey only 47% of
business organizations are knowledgeable about current income tax
assessment process. This may be because many small business organizations
use the service from 3rd party to do their accounting and legal work.

52
Figure 1: Pie chart on awareness about tax assessment system from business
houses

Figure 2: Pie chart on awareness about tax assessment system from

individuals

4.5. Problems in tax assessment system:

Question no 6 had asked what are the problems in tax assessment system of
Nepal. This question was asked only to business houses. Only those
respondents who knew about assessment system of Nepal were taken into
consideration in question no. 6. Respondents were provided with various

53
problems of tax assessment process and asked to rank 1 for most important
reason, 2 for less important reason and so on.

particulars Percentage (%)

Need to provide audited balance sheet 14
Tax officers reacting to certain bills 14
Separate taxation report may be required 19
Process is more time consuming 18
Complex legal process 17
Lack of systematic account keeping 18
total 100
Table 11: problem of tax assessment for business houses

The answer of the respondents shows that, most business organizations think
that major problem in income tax assessment process is, separate taxation
report is required for general expense, which is difficult to prepare during
the time of assessment. Second problem they see is the lack of systematic
account keeping in Nepalese business organizations, which pose as a
problem in tax assessment. Many small organizations use 3rd organization to
do their accounting and taxation work. They may manipulate the datas.
Third reason is that since separate taxation report is required, it is more time
consuming, which creates complex legal process which is the 4 th problem.
Need to provide audited balance sheet during tax assessment is considered as
5th problem and finally 6th problem is tax officers reacting to false bills. As
many business organizations get the bills without any VAT or PAN numbers
in it in their daily transactions. This bills cannot be presented for tax
assessment as tax officers will not accept these kind of bills.
It can be shown in following pie- chart as well.

54
Figure 3: pie chart: problems of tax assessment

4.6. Reason for widespread income tax evasion

Question 7 asked respondents about the reasons of widespread income tax
evasion in Nepal. This question was asked to both business houses and
individuals. Respondents were provided with reasons which they were asked
to rank. 1 for most important reason, 2 for less important reason and so on.
particulars Business house (%) Individual (%)
Inefficient tax 19.5 25
administration
Widespread practice of 18.7 11
illegal business
Poor tax paying morality 18.2 23
of tax payers
Poor enforcement of laws 19.9 14
related to tax act
Tax payers gets no 23.7 27
benefits
Table 12: Reasons for Tax evasion

55
23.7% respondents think that main problem of income tax evasion is that tax
payers get no benefits for paying their taxes. 19.9 % respondents think poor
enforcement of laws related to tax as reason for tax evasion. 19.5%
respondents were of the view that inefficient tax administration is the reason
for tax evasion. 18.7 % of respondents think that people are evading tax due
to widespread practice of illegal business in the country who dont pay tax at
all. And remaining 18.2% respondents think that people have poor taxpaying
morality.

The individual response shows that 27% of respondents think that reason for
wide income tax evasion is tax payers gets no benefit from government.
They just pay tax for nothing in return, which is why they are de-motivated
to pay tax. 25% believe that inefficient tax administration is another reason
for tax evasion.23% of respondents thinks that there is very poor taxpaying
morality in Nepalese individuals. 11% respondents believe that there are
many illegal businesses in operation so tax evading culture is growing.

Figure 4: bar diagram of wide spread income tax evasion.

56
Figure 5:pie chart of business houses reason for tax evasion.

4.7. Problem of income tax system of Nepal in relation to business

houses
Question number 8 asked about major problem in income tax system of
Nepal in relation to business houses. This question was asked to both
business houses and individuals. Respondents were asked to rank the
problems given. The result of which are shown below:

57
particulars Business house (%) Individuals(%)
Rate of import tax is 20.80 25
high
Vat is not needed for 17.25 19.7
certain amount which
may hamper big
organizations
Tax assessment system 21.78 8.3
is not systematic
tax evasion culture 18.72 22.3
Corrupt tax officers 21.41 24.7
total 100 100
Table 13: Problem of income tax for business houses

Figure 6: bar diagram showing problem of tax system to business houses

Most of the business houses think that main problem in tax system of Nepal
is that tax assessment system is not systematic. Second highest opinion was
of tax officers being corrupt. Tax officers try to take the full advantage of
any mistakes or errors that business houses have made by corruption. Third
in majority thinks that high rate of import tax causes problem in operating
business. Specially, business that requires importing of raw materials or
58
finished product from abroad view it as major problem. The rate of import
tax is above 200%, which increases the price of product. As a result
businesses face competitive disadvantage. 17% of respondents think that
there is problem in VAT. vat is not needed for certain amount, so small
business organizations can take full advantage of it, however big
organizations have high transaction amount and need to go through vat. so
big business houses may be affected to some extent.

Most of the individual respondents 25% of them think that main problem in
tax system of Nepal for business houses is rate of import tax is high. So that
the price of imported goods increases too. Second highest majority thinks
that corruption in tax office is second problem. 22% individuals think that
high tax evasion culture is another problem of tax system of Nepal.

Figure7: pie chart problem of tax system for business houses

59
4.8. Tendency of business organizations to save tax
Question 9 asked about whether business organizations have adopted any
measures to save tax? This question was asked only to business organization
and not to individual tax payers. The result is shown in table
Particulars Percentage
Yes 51%
no 49%
Table 14: tendency of business houses to save tax.

Figure 8: pie chart of tendency to save tax

51 percent of business organizations have adopted measures to save the tax,

whereas 49% organizations have not adopted any measures.
Only those organizations which were adopting the measures to save tax were
taken to question no 10, where I tried to understand different measures of
saving tax which they had adopted. This was a multiple choice question and
respondents got to choose more than 1 options. The response for which are
shown in the table below:

60
Answer choice responses percentage
CIT / contribution to 8 38.10
approved retirement fund
Insurance pay 5 23.81
Corporate social 4 19.05
responsibility
donation 4 19.05
total 100
Table 15: mechanism to save tax

Most of the business organization has opened account for their employees in
citizen investment trust that is 38.1% of business organizations are saving
tax through contribution to retirement fund. 23% of business organizations
have saved their tax by doing insurance. 19% of organizations are doing
corporate social responsibility which helps them to save tax and 19% of
organizations are saving tax through donation. However, only donation upto
100,000 will help in saving tax according to the law.

4.9. Mechanism to make tax payment easier and rational for tax payers
Question 10 was about the mechanism that can be adopted to make the tax
payment easier and rational for tax payers. Respondents were asked to rank
1 for most important reason, 2 for less important reason and so on.

61
The data gathered from opinion survey are presented below:
details No of Percent No of Percentage
business age % individual %
houses respondents
education and 18 19 15 30.61
training to tax
officers and tax
payers
Transparency of 16 18 20 40.82
rules and
regulations to avoid
corruption
Motivation to tax 14 14 -
payers should be
provided
Guatantee from 15 17 14 28.57
government to get
the benefits
Providing awards 13 14 -
for best tax payers
Easy access/ ease 15 17 -
of payment
Total 100 100
Table 16: mechanism to make tax payment easy and rational

In this question I tried to understand tax payers view regarding, how we can
make the current tax system easier and rational for tax payer.
Most of the business organizations think that education and training should
be given to tax officers and tax payers. There are many small companies
who hire another company to perform its entire accounting works because
they dont understand the tax laws and view it as complex work. If we could
provide a small training of 1 week, than we can help all the business
organization (mostly small) to understand about the functioning of tax

62
system and the motive behind the law, this way there wont be any 3rd
person between company and tax office.
18.11 percent of respondents think that the tax laws should be made more
transparent so that they can avoid corruption, however tax officers like
Bhav Nath Dahal have different view regarding this matter, they say tax
law is transparent enough and if you make tax assessment of your company
yourself without going to any third party, you wont face any problem you
can easily pay tax without bribing anyone. However he also agrees that
there are some problems in tax system.

Third in majority, think that tax payers are having difficulty in paying tax
because of limited access to tax office. If someone goes to pay tax, than it
will take full one day of that person. So, small companies with limited staffs
are mainly facing this problem. Many business organizations think that tax
payment mechanism is not good enough and we can implement online
payment of tax which will be much faster and easier for tax payers.
Fourth in majority, thinks that there should be tax recognition from
government, meaning that, they should get benefits from government for
paying the tax. If we look at country like America tax payers get different
kinds of facilities and benefits for paying tax and still they evade tax, ours is
a country where we dont get any benefit so tax payers have propensity to
evade tax. 13.94 percent of respondent think that awards should be provided
to best tax payers. The results are illustrated in Venn diagram:

63
Figure 9: pie chart showing rational mechanism.

4.10. Areas of improvements:

Question 11 asked respondent about the areas of improvement in current tax
system of Nepal. Here I tried to understand what can be the various
measures for improving tax system of Nepal. The results are shown below:

particulars Business houses (%) Individuals (%)

Education and training to 30.38 27.27
tax officers and tax
payers
Provide recognition to 21.04 30.30
tax payers in form of
some benefits
Make easy access for tax 27.61 21.21
payment
Increase the boundary of 20.95 21.21
taxable amount
Table 17: Area of improvements in current tax system
Source: Opinion Survey

64
Fig 10: pie chart showing areas of improvement in current tax system
Source: business houses opinion survey

4.11: Individual tax payers knowledge about the type of tax they pay.
Here I tried to understand the individual tax payers knowledge about the
different kind of tax they pay.

particulars Percentage (%)

Income tax 46.15
Vat 46.15
Excise duty 7.69
Table 18: individuals knowledge about the tax

This question was asked only to individual tax payers who work in different
organizations. This was a tricky question. Here I tried to understand
individual tax payers knowledge regarding the type of tax they need to pay.
Basically all individuals pay income tax, VAT and Excise duty. Where
income tax is direct and VAT and Excise duty are indirect tax. However
when asked non of the respondents said that they paid all of these tax. So we
can say that tax payers knowledge regarding tax they pay is really poor.

65
Figure 11: pie chart of individuals knowledge about tax they pay

4.12. Response regarding increasing the boundary of tax bracket

Question 6 of individual survey asked respondents weather they think,
government can increase revenue by increasing tax limit. The responses are
shown in the table below:

Particulars No of respondents Percentage (%)

yes 18 60
No 12 40
Table 19: Increase the boundary of tax bracket.

Here we had asked the respondents if the government can/cannot collect

revenue by increasing limits on income tax. Most of the answers were
repetitive. Those who said yes they argued that if the income tax limit is
increased (i.e. progressive rates), then more revenue will be collected since
higher incomes will be levied at higher rates. However, this is the general
answer which everyone can analyze. But those who said no argued that by
increasing the tax limit more then there can be more chance of tax evasion
or; people choose to save more through more legal or illegal means because

66
no one wants to pay a large portion their income as a tax, even those with a
very high levels of income. This can also be shown in the following pie
chart.

Figure 12: Pie chart: increasing the limit of tax brackets

4.13. Peoples propensity to ask for bills.

Here I tried to understand the propensity of individuals to ask for bills after
purchasing goods and services. Respondents were asked if they always ask
for bills after purchasing goods and services ?

particulars No of respondents Percentage (%)

Always 6 20
Mostly 15 50
Sometimes 9 30
Never 0 0
Table 20: peoples propensity to ask for bills

Here I tried to understand individuals propensity of taking bills after

purchasing goods or services. Most of the respondents 50% of respondents
said that they mostly ask for bills. 30% of respondents ask for bills
sometimes and sometimes they dont and only 30 % of respondents said that
they always ask for bills after purchase of goods and services. Since most
individuals mostly purchase goods from nearby retail shop, they dont ask
for goods. Even when they make bulk purchase they dont ask for bills. Even
67
if they ask for bills, retail shop provides them bill in a piece of paper without
VAT and PAN number. This will allow many business organizations in
evading tax. Individual buyers need to be educated to take the bills so that
government will earn more revenue which will be further invested in
development of country. Eventually individuals will get benefit from it.
This can also be shown in a pie- chart below:

Figure 13: Pie chart: propensity of asking bills after purchase.

68
 Chapter 5
SUMMARY, CONCLUSION AND RECOMMENDATION

5.1. Summary

According to the opinion survey undertaken on the two group of respondent,

it was found that the respondents view income tax as a burden. Even those
who are capable of paying tax found it burdensome, without any direct or
indirect benefits to the taxpayers. It was also found that all the respondents
pay tax but reluctantly. They are more inclined towards saving tax through
legal or illegal means (though there were very few respondents who used
clever techniques or illegal method to save tax). In fact, it is also true in the
real sense that paying income tax to the government of Nepal has no value,
when the government doesnt properly utilize what the public pay to them
freely. Nobody wants to give their money freely or when there is no benefits
involved. Even to some taxpayers, paying tax itself is a hassle while thinking
about benefits is very far.

For the tax payers who are under business houses, they find dealing with tax
officials and tax offices very problematic. They face problems in assessing
and filing the income returns at the end of the year. The respondents under
this research who are mostly under business argue that current assessment
process/system of income tax is very time consuming and requires complex
legal process. In reality, this is also true because the system demands many
documents and the process is rather lengthy. Further, there is the harassment
from tax officers as they exert their power on tax payers. In fact, the
government personnel in reality try to exert their power over the public
when providing specific service.

A large portion of respondents involved in this research also view the

current income tax system of the country is very irrational. The first
important fact is that no benefit is involved in paying tax (which has already
been mentioned above). Paying tax is only a burden. At the same time there
is also a lack of information related to income tax. For example, continuous

69
updates are made from time to time in the provisions of existing income tax
acts and rules, which are not easily known. When, gathering information
about the current exemption limit, especially to those who has just started a
business, one has to look for primary source such as tax office or the tax
experts. Such information is rarely available through secondary sources such
as published sources or internet. If anyway, the information is available, it is
the information related to past years and not current year. Apart from
unavailability of information, there is also a lack of awareness among the tax
payers about the current system of income tax.

Large portion of respondents are not aware about the tax assessment system
of Nepal. It is likely that those who are employees do not know about the
process or system of income tax assessment since their income tax is
assessed and submitted by the organization itself. But, it is also found that
many business organizations are also not knowledgeable about it. This may
be because many small business organizations use the service from 3rd party
to do their accounting and legal work.

Most of the business organizations think that major problem in income tax
assessment process is that, separate taxation report should be prepared when
accessing the income, which is difficult to prepare during the time of
assessment. Apart from this most of the business organization also lack
systematic account keeping system, which pose as a problem in tax
assessment. .It is more time consuming. Business organizations are also
required to provide audited balance sheet during tax assessment.

The response towards the practice of widespread tax evasion was also build
around the idea of more tax burden or no benefits involved. However,
the evasion is also caused by poor enforcement of laws and rules related to
the income tax act. Tax administration is also inefficient. It is also true in the
case of Nepal that there is poor taxpaying morality among tax payers. Even
in developed country, where tax payers get different benefits, people try to
evade tax. Ours is the country where tax payers gets no benefit at all so
people try to pay as little tax as possible. They even use clever tricks to

70
evade tax. Most of the business organizations increase their expenses and
reduce the revenues than the actual figure, so that they will have to pay less.

The main problem in income tax system of Nepal is that tax assessment
system is not systematic. Large portion of respondents think that tax officers
are corrupt and they try to take unfair advantage from any mistakes tax
payers make. Many business organizations that imports goods from foreign
country and sell it in Nepal think that, rate of import tax is too high, more
than 200%, which increase the price of goods.

Looking at the side of various measures adopted by the respondents in

saving tax; contribution to approved retirement fund has been seen as the
most reliable and easier legal means. In fact, nowadays more organizations
are interested towards retirement fund as organizations dont want to be
engaged with trade unions.

There were also the respondents who adopted both measures like CIT fund
as well as insurance. Many organizations are also spending money in
corporate social responsibility and donations. However, only donations up to
Rs 100,000 will help to save tax. Some also give donations to save tax,
saying that it is more beneficial in terms of personal satisfaction than paying
tax to the government without any return. Hence, it can be analyzed from
this research that people see tax as a burden and try to save it from various
measures as far as practicable.

Most of the business organizations think that education and training should
be given to tax officers and tax payers. There are many small companies
who hire another company to perform its entire accounting works because
they dont understand the tax laws and view it as complex work. If we could
provide a small training of 1 week, than we can help all the business
organization (mostly small) to understand about the functioning of tax
system and the motive behind the law, this way there wont be any 3rd
person between company and tax office.

71
 Another majority of respondents think that tax payers are having difficulty
in paying tax because of limited access to tax office. If someone goes to pay
tax, than it will take full one day of that person. So, small companies with
limited staffs are mainly facing this problem. Many business organizations
think that tax payment mechanism is not good enough and we can
implement online payment system which will be much faster and easier for
tax payers.

Some respondents think that there should be tax recognition from

government, meaning that, they should get benefits from government for
paying the tax. If we look at country like America tax payers get different
kinds of facilities and benefits for paying tax and still they evade tax, ours is
a country where we dont get any benefit so tax payers have propensity to
evade tax. Others say that there should be transparency of rules and
regulations in order to avoid corruption, and awards should be provided to
tax payers to motivate people in paying tax.

Regarding the areas of improvement in current tax system of Nepal, most

respondents think that both tax payers and tax officers should be educated
about the tax system. Many organizations are using 3rd company to perform
their accounting works and tax officials are also not fully educated about tax
laws. Actually the process of selecting tax officer is not good enough. They
are selected through Public Service Commission where the one who
memorizes most general knowledge is selected rather than one who knows
the subject matter of tax rules of country.

Another improvement can be in payment of tax. There is limited access to

tax office. If someone goes to pay tax, than it will take full one day of that
person. So, small companies with limited staffs are mainly facing this
problem. Many business organizations think that mechanism for tax
payment is not good enough. It will be much easier to pay tax if we could
implement online payment system. This will be much faster and easier for
tax payers. Such a system has already been established in government

72
organizations like Nepal Electricity Authority and Nepal Telecom for
collection of revenues.

Many respondents also said that government should provide recognition to

tax payers in form of some benefits, so that tax payers will be motivated into
paying tax. This will also help in reducing the tax evading culture.
Individual tax payers on other hand seem to have very poor understanding of
the tax they pay. Most of the individuals were not aware about the kinds of
tax they usually pay. Basically all individuals pay income tax, VAT and
Excise duty. Where income tax is direct and VAT and Excise duty are
indirect tax. However when asked non of the respondents said that they paid
all of these tax.

It is also found from the survey that, individuals do not always ask for bills
after shopping or purchase, allowing shop keepers to evade tax. Even if they
ask for bills, retail shop provides them bill in a piece of paper without VAT
and PAN number and customers accept it. This helps many business
organizations in evading tax. Individual buyers need to be educated to help
them understand the importance of taking bills so that government will earn
more revenue which will be further invested in development of country.
Eventually individuals will get benefit from it.

Regarding the areas of improvement in current tax system of Nepal, most

respondents think that both tax payers and tax officers should be educated
about the tax system. Many organizations are using 3rd company to perform
their accounting works and tax officials are also not fully educated about tax
laws. Actually the process of selecting tax officer is not good enough. They
are selected through Public Service Commission where the one who
memorizes most general knowledge is selected rather than one who knows
the subject matter of tax rules of country.

Another improvement can be in payment of tax. There is limited access to

tax office. If someone goes to pay tax, than it will take full one day of that
person. So, small companies with limited staffs are mainly facing this
problem. Many business organizations think that mechanism for tax
73
payment is not good enough. It will be much easier to pay tax if we could
implement online payment system. This will be much faster and easier for
tax payers. Such a system has already been established in government
organizations like Nepal Electricity Authority and Nepal Telecom for
collection of revenues.

Many respondents also said that government should provide recognition to

tax payers in form of some benefits, so that tax payers will be motivated into
paying tax. This will also help in reducing the tax evading culture.

5.2. Conclusion:
Tax is something paid without any hope of benefit because government will
spend it all over the country. Even saints paid tax in old days. They paid tax
to nature in the name of GOD. No one wants to pay tax but we need to be
responsible towards it and think it as a responsibility and not as a force.
People try to evade tax. Even in developed country, they try to evade tax,
ours is a country where tax payers gets no benefits at all so they try to evade
tax through various legal and illegal means. However according to Benjamin
Franklin, In this world nothing can be said to be certain, except death and
taxes.

However government should constantly refine its tax laws and change it
according to the changing time. People think income tax as burden. Even
those who are capable of paying tax found it burdensome, without any direct
or indirect benefits to the taxpayers. It was also found that those who pay tax
pay it reluctantly. They are more inclined towards saving tax through legal
or illegal means (though there were very few respondents who used clever
techniques or illegal method to save tax).

Business houses, find dealing with tax officials and tax offices very
problematic. They face problems in assessing and filing the income returns
at the end of the year. They argued that current assessment process/system
of income tax is very time consuming and requires complex legal process.

74
There is tax evading culture in the country. People try to save as much tax as
possible through various legal and illegal means. Most of the business
houses increase their expense and reduce their income and try to save tax.
Besides from this people need to be educated about the motives behind the
tax rules so that they understand the importance of paying tax. So first thing
Nepal should do is to educate tax payers and tax officers about the tax acts
and its motive. Besides from this government should provide recognition to
tax payers who pay tax in form of some benefits.

Another problem in the tax system was found to be lack of access to tax
offices to pay tax. Many small organizations said that, if someone goes to
tax office to pay for tax. Their whole day will be wasted and government
officers try to take undue advantage of any small mistakes tax payers have
made.

There is difficulty in getting refund too. If tax payer makes any mistake, s/he
will be penalized, but if they pay more tax by mistake, it is not easy to get
refund. You will not be refunded, but you will have to adjust that money in
next lot of paying tax.

Another problem that I found from my study was that, all the tax payers are
categorized in same group. One who pays high tax and one who pays less
tax are kept in same category. High tax payers should have received
incentives which is not seen in Nepal.

If a person wants to start a business in Nepal, s/he well have to spend about a
week going to different departments of government. If they want to rent a
government land, it will require around 3 months. However in our neighbor
country India, new comers can start business within 24 hours if they want to.
This type of support from government is not available in Nepal. This type of
support is necessary to develop the spirit of entrepreneurship in people. If
more business runs in the country, government will able to collect more tax.

75
5.3. Recommendations
On the basis of the findings, the recommendations can be made on the
following areas:
Success of income tax system is highly dependent upon the quality of
income tax law. So, the income tax law should be clear, comprehensive and
simple. It should not involve any loopholes or ambiguity. Therefore, it
should be reviewed and reformed frequently. The following suggestions can
be given for the improvement of existing tax laws and policies:
1. The related provisions should be aggregated in one head or section,
the language used should be simplified and vague words should be well
defined.

2. The time of re-assessment should be reduced, in case of amended

assessment, from 4 year to minimum time, say one year.

3. The provisions of fines, penalties and punishments should be made at

higher rate for income tax evaders. In other words, the government should
provide special facilities to the regular tax payers while those who are
dishonest in paying tax should be deprived from such facilities. However,
the tax should be levied in such a way so that the tax payers especially the
lower and medium income group does not feel tax burden. The, exemption
limit can also be lowered, but the amount of tax paid should very minimum
according to the income levels so that the tax payers do not feel that they are
paying with burden.

4. The provision of punishment to the tax officers who harass tax payers
should be widened.

5. Provision of education should be made to increase the tax

consciousness of the income tax payers. People should be educated more
about tax. The students at school and college level should be given
knowledge about tax. Information related to income tax should be
communicated frequently through various medias.

76
6. There should be recognition to tax payers in form of some benefits.
For example government can introduce law saying 5% discount on taxable
amount if paid within 1st week after completion of economic year.

7. Income tax assessment procedure should be improved. For the

improvement of income tax assessment procedure, first of all the delays in
assessments should be reduced as possible. Separate taxation report is
required along with audited balance sheet for assessing the income, which is
more time consuming.

8. There should be easy access of tax office to tax payers. Online tax
payment mechanism can be introduced which will provide access to tax
office from anywhere. Online payment has already been enabled in different
government offices.
9. The administration should try to increase effective public participation
to minimize the income tax evasion. Applying the following suggestions can
help to minimize the tax evasion :
Increase the administrative effort.
Enforce laws to maintain proper accounts.
Minimize illegal business activities.
Revenue department should also try to find out the income tax evaders
through spying activities or research mechanisms.

10. Human Resource Management is the sole important factor to achieve

the objective of the organization. Since, the government organizations are
careless towards managing the human resource; they have failed to employ
right kind of people in the right job. There is a wide practice of source-force
in the process of recruitment and selection which has resulted in hiring
uneducated and incompetent people so the outcome from the activities of
such human resource as well as the whole government has always been less
productive. This has added more problems. In order to enhance the effort of
the personnel from the tax department and tax offices, there should be
effective recruitment and selection mechanisms. Likewise, the frequent
trainings to the tax officials should also be given. However, their motivation

77
level should also be considered. This is because without motivation of the
employees, providing training is worthless. So, at first, the sole motivating
factors of the staffs should be recognized. In government organizations, the
sole motivating factors of the employees are generally the good incentives
and rewards. But, the government has always failed to recognize such
motivating factor or has shown no interest in providing benefits, incentives
and rewards to its personnel. This is the reason corruption mostly occurs in
government offices. Because of low benefits of working in the government
organizations, the employees here also give less effort in performing their
job effectively because of which the tax evaders are taking advantage. So,
the government should also enhance mechanism of good incentives and
rewards to its personnel.

11. In order to make the income tax payment friendly to the tax payers,
the slabs of tax rates should also be reduced to only one for the personal
income tax with a single rate that is satisfactory to the tax payers. Further,
the progressive tax rates can be levied on the partnerships and corporations
but with suitable rates. However, according to the principle of economics,
tax causes dead-weight loss. If the tax is high, the higher will be the dead-
weight loss and the government can raise only a small amount of revenue
(N. Gregory Mankiw). Hence, the government must also be aware of side-
effects caused by taxation. To add more, the government must also employ
those who are more knowledgeable in economics.

Though efforts have been made to hold these characteristics in the existing
income tax system, the complete success hasnt been achieved. The current
political scenario of the country has also acted a hindrance in such efforts.
There are many things to be reformed in the existing income tax system of
Nepal. Therefore, it is the responsibility of all the Nepali citizens to
participate in the efforts made by the state for introducing Nepal as an
advanced and independent (if not developed) nation with systematic policies
and procedures through better mobilization of internal resource.

78
79
APPENDIX
 BIBLIOGRAPHY

Wikkipedia.org
Taxworld.org
www.thinkexit.com
Debt.org
Handbook on Taxation
N. Gregory Mankiw, 1997
www.nationsencyclopedia.com
H.P. Marhatta, 1980
Rup Khadka, 2001
Bhava Nath Dahal 2016
Income tax act 2058
RSTCA Nepal
www.ird.gov.np
Central bureau of statistics
Hello, my name is Saroj Bhusal. I am student of MBA (Global Business), at South Asian
Institute of Management. I am conducting a survey on problem and prospect of tax
system of Nepal as part of my thesis. This research is done for the sole purpose of the
fulfillment of the course of Masters of Business Administration. So please help me by
filling this questionnaire. Thank you.
Questionnaire for income tax payers
1. Name of organization

2. Your current monthly income:

Amount: ..

3. Do you pay any amount of income tax ?

Yes ( ) No ( )

4. If yes, what might be the amount of tax paid by you annually?

Amount:....................................
Less than 100,000 100,000 to 500,000 500,000 to 10,00,000
10,00,000
( ) ( ) ( ) ( )

5. Are you aware about current Self assessment process/system of income tax? If yes
go to question no. 6, else go to question no. 8.
Yes ( ) No ( )

6. What are the problems you see in tax assessment system of Nepal? Please rank 1 for
most important, 2 for less important and so on.
Need to provide audited balance sheet( )
Tax officers reacting to false bills ( )
Separate taxation report is required ( )
More time consuming. ( )
Complex legal process. ( )
 Lack of systematic account keeping(
Other reasons (you can specify) ( )
..

7. What are the main reasons (according to your knowledge/opinion) of widespread

income tax evasion? (please rank from 1 to 6; 1 is most important and 2 for less
important and so on)
Inefficient tax administration. ( )
Widespread practice of illegal business. ( )
Poor tax paying morality and tax payers compliance. ( )
Poor enforcement of laws related to tax act. ( )
No benefits. ( )
Other reasons (you can mention).

8. Where do you think lies the major problem in Income tax system of Nepal? Please
rank 1 for most important, 2 for less important and so on.
Rate of Import tax is very high ( )
Value Added Tax is not needed for certain amount, which may affect large
business houses ( )
Tax assessment process is not systematic( )
Tax evasion culture ( )
Corrupt tax officers( )
Others
Why?

9. Have you adopted any measures for saving tax?

Yes ( ) No ( )
 If yes, what are the measures that you have adopted? (you can tick more than one)
CIT/Contribution in approved retirement fund. ( )
Insurance pay ( )
Corporate social Responsibility ( )
Donations ( )
If donations
why?
.
Others.

10. What mechanism can be implemented to make the tax payment easier and rational for
tax payers? (Please rank from 1-5, 1 for most important, 2 for important, 3,4 and 5 for
less important accordingly)
Education and training to tax officers and tax payers (business houses) ( )
Transparency of rules and regulation to avoid any confusion ( )
Tax recognition.(guarantee from government to get the benefit) ( )
Providing award for best tax payers. ( )
Ease of payment / easy access ( ).

11. What can be the areas of improvement in current tax system of Nepal? You can
choose more than 1 options.
Education and training to tax officers and tax payers ( )
Provide recognition to tax payers in form of some benefits ( )
Make easy access for payment of tax( )
Increase the boundary of taxable amount ( )
Hello, my name is Saroj Bhusal. I am student of MBA (Global Business), at South Asian
Institute of Management. I am conducting a survey on problem and prospect of tax
system of Nepal as part of my thesis. This research is done for the sole purpose of the
fulfillment of the course of Masters of Business Administration. So please help me by
filling this questionnaire. Thank you
1. What is your profession:.

2. What is your monthly income?

Less than 100,000( ) 100000-500000( ) 500000-1000000( ) more than 10,00,000(

)
3. Do you pay any amount of income tax ?
Yes ( ) No ( )
4. If yes, what might be the amount of tax paid by you?
Amount:....................................
Less than 100,000 100,000 to 500,000 500,000 to 10,00,000
10,00,000
( ) ( ) ( )
( )
5. Are you aware about current Self assessment process/system of income tax?
Yes ( ) No ( )

6. Do you think that government can increase tax revenue by increasing tax limit?
Yes( ) No( )
Why.

7. Do you ask for bill after purchasing goods or services?

Always( ) mostly( ) sometimes only( ) never(
)

8. What are the taxes you have paid?

Income tax ( ) Vat ( ) Excise Duty ( )

9. What are the main reasons (according to your knowledge/opinion) of widespread

income tax evasion? (please rank from 1 to 6; 1 is most important and 2 for less
important and so on)
Inefficient tax administration. ( )
 Widespread practice of illegal business. ( )
Poor tax paying morality and tax payers compliance. ( )
Poor enforcement of laws related to tax act. ( )
No benefits. ( )

10. Where do you think lies the major problem in Income tax system of Nepal? Please
rank 1 for most important, 2 for less important and so on.
Rate of Import tax is very high ( )
Value Added Tax is not needed for certain amount, which may affect large
business houses ( )
Tax assessment process is not systematic ( )
Tax evasion culture ( )
Corrupt tax officers( )
Others
Why?

11. What mechanism can be implemented to make the tax payment easier and rational for tax
payers? (Please rank from 1-5, 1 for most important, 2 for important, 3,4 and 5 for less
important accordingly)
Education and training to tax officers and tax payers (business houses) ( )
Transparency of rules and regulations to avoid corruption ( )
Tax recognition.(guarantee from government to get the benefit) ( )
Providing award for best tax payers. ( )
Ease of payment / easy access ( ).

12. What can be the areas of improvement in current tax system of Nepal? You can choose
more than 1 options.
Education and training to tax officers and tax payers ( )
Provide recognition to tax payers in form of some benefits ( )
Make easy access for payment of tax( )
Increase the boundary of taxable amount ( )
5th National tax day:
5th National tax day was celebrated in Nepal in 2073 Mangshir 1 with the
motto pay tax with pride, we wish for prosperous nation. Surya Nepal pvt
ltd was recognized as the highest tax paying company and from individuals
Siddhartha shamsher Jabara was recognized as the highest tax payer.
Highest tax payers in different Tax payer
fields
Company Surya Nepal Pvt Ltd
Exporter Dabur Nepal
Highest VAT payer Nepal telecom
Company paying highest income tax Unilever pvt ltd
Business firm paying highest income Sipradi traders
tax
Agricultural company oom feed
Finance company National sahakari bank
Corporatives Chimek
Bank Nabil bank
Insurance company LIC insurance
Remittance company IME
Tourism industry Tara gaun regency
Small company Sangrila energy
Medium company Ciwek hospital
Person paying highest amount of tax Siddhartha smasher Jabara