Presumptive taxation involves the use of indirect means to ascertain tax liability, which differs from the usual rules based on the taxpayer's accounts. The term "presumptive" is used to indicate that there is a legal presumption that the taxpayer's income is no less than the amount resulting from the application of the indirect method. Presumptive techniques may be employed for a variety of reasons.
- Simplication in relation to the compliance burden on taxpayers with very low turnover (from the tax office perspective administrative burden of auditing such taxpayers)
- Providing relief from the detailed calculation of tax liability thereby reducing the requirement to go through tedious paperwork reducing the cost to hire a professional.
- Combat tax avoidance or evasion by widening the tax bracket while making it user friendly
Presumptive taxpayers have fixed tax amounts. In Nepal, there are two kinds of presumptive tax in existence:
- For business
- For vehicle owners
In this article, we are dealing only with the business.
Who should pay presumptive tax in Nepal?
Person liable to pay a Presumptive Tax shall be:- The resident person of Nepal
- Only generate income only from business having source in Nepal
- The Income from the Business (turnover) shall not be more than NRs. 20 lakh (NRs. Two million only) and the profit not exceeding NRs. 2 lakh (NRS. Two hundred thousand only)
- Not registered in VAT
- Shall not claim medical tax credit per Sec. 51 and advance tax under Sec. 93
Is it mandatory to pay presumptive tax?
Presumptive tax is only applicable to the person electing to file presumptive tax in writing thus, one can always opt-out and pay taxes as per the normal tax rate applicable for an entity.
What is the rate of presumptive tax?
The rate of presumptive tax has been defined by the Income Tax Act and rules. It gets updated each Income Year through the Finance Act (part of the budget speech). The latest Finance Act has defined the applicable taxes based on the location where such business is registered.
- Metropolitan and Submetropolitan City: NRs. 7,500
- Municipality: NRs. 4,000
- Rural Municipality: NRs. 2,500
When is the presumptive tax due?
The due date for payment of the tax is, generally, within three months from the end of the Income Year i.e. Ashoj end. However, a person can file an extension for tax return submission. Approval of the same is at the discretion of the tax office which again at max can be Poush's end.
The person opting for presumptive tax is not required to pay Advance Tax required to be paid in installments on Poush, Chaitra, and Ashad end. And, they will also not be able to claim the medical tax credit and advance taxes due from TDS withheld.
How do I pay Presumptive Tax?
Eligible taxpayers will have to log onto IRD's tax portal to make payment for Presumptive tax. The taxpayers shall be required to file the tax return in D-01 format after which taxes can be paid through a bank or mobile wallets or different payment channels authorized by IRD.
What is the penalty of late filing of Presumptive Tax return?
NRs. 100 per month of delay shall be charged to the presumptive taxpayer. A part of a month shall be treated as a delay of one month for the purpose of penalty calculation. Interest at the prevailing rate which is generally 15% shall also be applied in case of the late payment of tax and such interest shall be calculated starting 1st of Kartik of the following Income Year till the date when taxes are not paid.
E.g. ABC and Co., a company with a registered address in Kathmandu Municipality, had an income of NRs. 15 lakh and profit NRs. 1 Lakh 90 Hajar in Income Year 2076/77. The due date of filing of return and payment of taxes is Ashoj end, 2077. ABC and Co. have filed the income tax return extension and got the deadline extended to Poush end, 2077. However, failed to file the return and pay taxes and only did so on Chaitra 2077. In such case, the following will have to be paid:
Presumptive tax for the year 2076/77: NRs. 7,500
Penalty for delay in submission of returns: NRs. 600 (100*6; starting from Kartik 2077 to Chaitra 2077)
Interest for delay in payment of taxes: NRs. 562.50 (NRs. 7,500*15%*6/12)
Total amount due to Presumptive Tax Payer: NRs. 8,662.50
What about tax return certification by Auditor?
It is always recommended to have the proper books of accounts along with the supporting documents. Also, to have such books of accounts audited. For the purpose of income tax, the presumptive taxpayer is required to keep a record of the accounts, however, is not required to have their income tax return certified by auditors.
Source:
1) Definition of presumptive tax including reasons for the employment of such taxes - Tax Law Design and Drafting (volume 1; International Monetary Fund: 1996; Victor Thuronyi, ed.) Chapter 12, Presumptive taxation. Click here to read referred article
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