How long should I keep tax records & underlying accounting documents per Nepal's Income Tax?

Every year one has to go through thousands and thousands of documents before coming up with the final tax return that gets submitted to Inland Revenue Department. All these piles of documents need to be properly archived for future reference. Depending on the number of years and the volume of transactions, the documents that require storage might a just few index files to buildings full of archived documents. The cost is really huge to taxpayers, be it a natural person or an entity. Hence, the question always pops up. What can we do to minimize the burden while remaining compliant with the statutory requirements? Can we dispose of some of these documents and make room for new ones? When it is safe to throw old tax documents into the dustbin.

Nepalese Income Tax has defined the period under Section 81. It reads as follows:

"Every person, who is required to keep accounts and records, is also required to keep these records and accounts safely for five years starting from the following year of the respective income year."

What does that mean?

Let us clarify with the example. 

ABC Co. has filed the income tax return for FY 2077/78 on Ashoj 2078. In such case, the period of 5 years begins from FY 2078/79 thus, tax records & their supporting documents will have to be kept till 2082/83 i.e till Ashad end, 2083.

Don't get confused, provision applies equally to natural person and entity.

If you read the provision properly, they have put a caveat where it says "who is required to keep accounts and records". Income Tax Act has defined the same in Section 81 only. And, it states:

"every person liable to pay tax as per this Act"

Meaning, everyone who is taxed per the Nepalese Income Tax Act, 2058 has to keep accounting records that support the taxes paid up to 5 years from the following Income Year for which returns were filed. However, it should be noted that those taxpayers who are in a legal dispute with Inland Revenue Department or Inland Revenue Office or has the file open for ongoing assessment will require to keep the records safely till the period those get settled.

Is there any document specified?

Yes, Income Tax Act has made it mandatory to keep the following records and documents:

a) All records and documents that are necessary to explain the information provided or to be provided in tax returns and in other documents to be filed with the tax office.

b) All documents and records that are sufficient to determine the actual tax liability of the person, and

c) All documents and records those are sufficient to prove the validity of the expenses shown in the books.

In a way, all the accounting records, invoices, receipts, supporting documents, etc. that capture the events or transactions recorded during the Income Year needs to be kept safely.

What about the language of records?

Taxpayer can keep their accounts and records either in English or in the Nepali language. However, for persons keeping it in any other language, those need to be translated into Nepali from an authorized person at their own cost.

Note: These are only provisions from the Tax Act depending on the registration status of the entities timeframes for archiving documents might be longer so please do consult those as well before disposing off any documents.

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Thank you and Have a Nice Day.