Employers in Nepal are obligated to contribute to the Social Security Fund (SSF) on behalf of their eligible employees. The contribution rate is set at 20% of the employee's basic salary. The SSF provides benefits such as medical treatment, accident insurance, maternity benefits, dependent benefits, and old-age pensions.

Other Potential Contributions

While not mandatory, employers may choose to establish a voluntary Provident Fund scheme. In such cases, matching employer contributions would be applicable. A skills development levy may also apply to employers exceeding a certain size threshold, though readily available details on this are limited.

Important Considerations

Employers must register with the SSF and obtain an employer registration number. Contributions and related filings must be submitted by specified deadlines. Failure to comply with regulations can result in penalties and interest charges.

Additional Notes

Certain industries may have additional employer tax contribution obligations. Also, Nepal's tax regulations can change, so it's crucial for employers to stay updated.

Nepal operates under a progressive tax system, meaning that tax rates increase as income levels rise. The most current tax brackets and rates can be found on the website of the Inland Revenue Department of Nepal (IRD). Employers are responsible for withholding income tax from employee salaries based on the IRD's tax tables.

Social Security Contributions

Employees in Nepal are obligated to contribute to the Social Security Fund (SSF). The employee contribution rate to the SSF is 11% of their basic salary. The employer withholds and remits the employee's SSF contribution.

Allowances and Deductions

Employees are entitled to a standard deduction to reduce their taxable income. Additional allowances are available, such as provident fund contributions (within government-set limits), life insurance premiums, and medical expenses (within limits).

Non-Resident Employees

Non-resident employees working in Nepal may be subject to different tax rules and withholding rates. Treaties with specific countries might impact their tax situation.

Additional Notes

Some employment benefits may be taxable as part of an employee's income.

VAT, or Value Added Tax, is a consumption tax levied at each stage of the production and distribution chain of goods and services. The final consumer bears the ultimate cost. In Nepal, the standard VAT rate is currently 13%. Businesses with an annual taxable turnover exceeding NPR 2 million must register for VAT with the Inland Revenue Department (IRD) of Nepal.

VAT on Services

Most services supplied in Nepal are subject to VAT. This includes professional services, consultancy services, technical services, repair and maintenance, transportation, hospitality, and many more. Services exported outside Nepal are generally zero-rated for VAT purposes. This means no VAT is charged on the export, and the exporter can claim a refund for any VAT paid on inputs related to the exported service.

VAT Calculation for Services

The VAT on services is calculated by first determining the output VAT, which is the VAT on the total sales value of services provided during a tax period (usually monthly or quarterly). The formula for this is: Output VAT = Total Sales Value * 13%. Businesses can then claim a credit for VAT paid on business-related purchases (goods and services), referred to as input VAT. The net VAT payable to the IRD is determined by subtracting the input VAT from the output VAT. If input VAT exceeds output VAT, you are eligible for a VAT refund.

VAT Compliance for Service Providers

Service providers must issue VAT invoices for all taxable services, clearly showing the VAT amount charged. VAT returns must be filed periodically (monthly or quarterly) and the net VAT payable submitted on time. Accurate records of all sales, purchases, and VAT calculations must be maintained for auditing purposes.

Special Provisions for Services

Services imported into Nepal are subject to VAT. The VAT is typically calculated on the value of the imported service plus any customs duties. Non-resident businesses providing digital services to Nepali consumers may need to register for VAT if their turnover exceeds a certain threshold. This includes services like software downloads, online subscriptions, and advertising. The Inland Revenue Department of Nepal has a specific provision for this.

Tax incentives are a crucial tool for promoting investment and economic growth. They come in various forms, such as initial depreciation allowances, carry forward of losses, and exemptions for specific sectors.

Initial Depreciation Allowance

Businesses can claim an additional depreciation deduction of 25% in the first year of acquiring fixed assets.

Carry Forward of Losses

Businesses can carry forward unadjusted losses for up to 7 years to offset against future taxable profits.

Exemption for Specific Sectors

Businesses in specific sectors such as agriculture, tourism, and infrastructure development may be eligible for full or partial income tax exemptions for a certain period.

Tax Incentives Based on Location

Nepal offers tax holidays and reduced rates based on the business location to promote investment in less developed regions.

Special Economic Zones (SEZs)

Businesses operating within SEZs enjoy significant tax breaks, including a 100% income tax exemption for the first five years and a 50% exemption for the subsequent period.

Rural Areas

Businesses located in rural areas may be eligible for a certain percentage of income tax exemption.

Underdeveloped, Far Underdeveloped, and Least Developed Areas

Businesses located in these designated areas can enjoy income tax rebates ranging from 70% to 90% for a period of 10 years.

Sector-Specific Tax Incentives

Manufacturing Industries

Manufacturing industries (except those related to tobacco and alcohol) enjoy a reduced corporate income tax rate of 20%.

Export-Oriented Industries

Exporters of certain goods may be eligible for income tax deductions or exemptions based on the percentage of export earnings.

Hydropower Generation and Transmission

Companies involved in hydropower generation and transmission benefit from a 100% income tax exemption for the first 10 years of commercial operation and a 50% exemption for the subsequent five years.

Infrastructure Development

Companies engaged in building public infrastructure projects may be eligible for a 20% corporate income tax rate.

Other Tax Incentives

Research and Development (R&D) Expenses

Businesses can claim a deduction of up to 150% of their R&D expenses.

Investment in Shares

Individuals investing in shares of certain listed companies can claim a tax deduction.

Training Expenses

Businesses can deduct double the amount of expenses incurred on employee training programs.