CLASSIFICATION AND

STATUS OF TAX PAYER

CLASSCCC(ASSESSES)

Classification of Assesses
Meaning of Assesses (Tax Payer)
In general, the term of assesses identified as tax payers. According to Income Tax Act, a Person, or an entity
or any organized structural body, who are liable to pay tax amount, is known as Assesses. The income tax
liability of a Person depends on the residential status in Nepal. What we need to understand is that it has
nothing to do with the actual citizenship of an individual. A Person who is a citizen of Australia or a green
card holder of the USA might be resident in Nepal for taxation purposes for a particular Income
Year. Similarly, a citizen of Nepal might end up as a non-resident. It all depends on the criteria specified by
the Nepalese Income Tax Act.

A. Individual
A Person, who is imposed for payment of tax liability on the basis of earned income level is identified as an
individual. It associates with the natural Person with classification of single and couple.
According to Income Tax Act, 2058, single individual is identified for those, who submits the return of file
to IRD without specification of spouse and or along with relative children.
Likewise, the term of couple relatively indicated for those natural people, who submits the return of file to
IRD with specification of spouse and or along with relative children.
According to Income Tax Act, 2058, individuals are broadly classified as resident and non-resident.
1. Classification on the basis of residential status: Resident individual refers. to an individual, who
mainly resides as permanent form. In other words, an individual is considered a resident of country in
which he has a permanent nature is known as Resident Person.
Nepalese Income Tax has defined resident Person under Sec. 2(kanga). In other words, Person meeting
the criteria listed below will be taxed in Nepal as a resident Person and all the rest will be treated as a
non-resident Person.
Residential Status for Natural Person
First Criteria: Whose Normal Place of Abode is in Nepal
Income Tax Act has not defined what is a normal place of abode means so we are taking a reference
from the double taxation avoidance agreement (DTAA). According to DTAA, any individual having his
 domicile or residence in Nepal will be treated as a resident of Nepal. This can bring complexity
especially in the situation where a Nepal citizen with the house is also a resident of some other country.
E.g. Ram is Nepali Citizen and also, holds Permanent Resident status for Australia and has homes in
both countries. In such case, he shall be deemed a resident of the country where his economic activities
are closer or where he generally stays (habitual abode). Here, normal place of abode refers. to a place
where major economic activities of taxpayer takes place
Second Criteria: An employee of the Nepal Government
In the case of an employee of the Nepal Government, whether S/he is inside or abroad on diplomatic
missions they will always be treated as residents of Nepal for tax purpose. In other words, Who is
appointed by Government of Nepal to foreign country as representative member in any time of the
income year.
Third Criteria: An individual who is present in Nepal for 183 days or more during the period of 365
consecutive days
It doesn't matter if a Person stays intermittently or in a different place within Nepal or the consecutive
365 days falls in two different Income Year. Criteria is straightforward, one should be physically present
in Nepal for the period of 183 days or more, and in the case of two different Income Year, the Income
year when 183 days was met will be counted.
b. For a Partnership firm
 All kinds of partnership firm, which are established under the provisions of Partnership Act.
c. For Trust
 If established in Nepal;
 The trustee of such trust is a resident Person in income year.
 If it is managed and controlled by a resident Person or group of Person.
d. For a company/Entity
 If incorporated under the provisions of laws of Nepal.
 If management of which is effective in Nepal in any income year.
e. Government of Nepal
f. VDC, Municipality or District Development Committee
g. An organization or entity established under any treaty or agreement.
h. A foreign permanent establishment of a non-resident Person situated in Nepal.
2. Non-resident Person: It associates to all those Person, who are other than a resident Person.

B. Entity
Besides an individual as a natural Person, all artificial structure as an institutional or organizational form
are called as entity. In general, entity must be established with an application of all rules and provisions of
relative act of Nepal Government. It includes following institution or organizations:
 Partnership firm, trust or company.
 A VDC, municipality, DDC
 Government of Nepal
 A foreign investment or joint venture organization established under the provisions of company act.
According to Income Tax Act, 2058, entity also broadly classified as resident and non-resident.
1. Resident entity: It refers to all artificial organizational structure, which is established under the
provisions of relative act of Government of Nepal.
 2. Non-resident entity: All organizational structure which are established and operated outside the
country of Nepal, are non-resident entity. In this condition, even if there is owneRs.hip of such entity
associated with Nepalese citizen, these are also called as non-resident entity.

Residency

Natural Person Entity

 Person having normal place of  Registered in Nepal
adobe in Nepal OR
OR  Effective management in
 183 days rule Nepal
OR
 Employed by Nepal
Government

Points to be Remember
 A Person who has resided in Nepal for a period of 183 days or more in a duration of consecutive 365 days
or whose normal place of abode is Nepal are considered residents of Nepal.
 Dual residence is not recognized for the purpose of Nepalese tax.
 There is no separate provision for taxing the income of short-term visitors. Depending on the length of
stay, they will be classified as resident or non-resident and the Nepal sourced income shall be taxed
accordingly.
 Resident individuals are taxed on the income generated, regardless of the source of the income and non-
resident individuals are taxed on their Nepalese source income.
 Each taxpayer shall file a return of income for the tax year within 3 months after the end of such year.
An extension of up to 3 months can be given on application.
Computation of Total Taxable Income:
Specimen:
Statement of Taxable Income
Particulars Rs. Rs.
Assessable income from employment .......................................................................................... xxx
Assessable income from business/Profession ............................................................................. xxx
Assessable income from investment............................................................................................. xxx
Total assessable income xxx
Less : Allowable reductions:
Contribution to approved retirement fund (ARF) as per rules............................................. xxx
Donation to tax exempt entity as per rules ......................................................................... xxx xxx
Taxable income before other exemptions xxx
Less: Exemptions:
Life insurance premium as per rules .................................................................................... xxx
Health insurance premium as per rules ............................................................................... xxx
Disable exemption as per rules ............................................................................................ xxx
Pension exemption as per rules ........................................................................................... xxx
Remote area exemption as per rules ................................................................................... xxx
Foreign allowance exemption (only for Nepalese diplomat) ................................................. xxx xxx
Taxable Income xxx

Tax Rates
As per the provisions, specified in Income tax Act, tax amount will be charged as differential form with
different form of resident Person and non-resident Person. On the basis of legal status of non-resident
Person is not imposed for getting any exemptions. So, non-resident Person is taxed at a flat rate of 25%.
Likewise, any withholding taxes imposed on employment income, investment returns and service fee and
 contract payment in relation to non-resident Person are treated as final tax.
In respect of resident Person, tax is applicable on the basis of provision specified in Income Tax Act with
consideration of individual status or couple status.
Computation of Tax Liability for Resident Person
For resident individual
Up to Rs. 400,000 @1% ................................................................................................................. Rs. xxx
Next Rs. 1,00,000 @10%................................................................................................................. xxx
Next Rs. 200,000 @20%................................................................................................................. xxx
Next Rs.1300,000 @ 30%................................................................................................................. xxx
Balance (above Rs. 20 lakh) @36% ................................................................................................................. xxx
Total tax liability xxx
Less: Women employment tax rebate (10% of total tax liability) ............................................................................. xxx
Advance tax paid (Advance TDS + advance tax paid) .................................................................................... xxx
Medical tax credit as per rules ........................................................................................................................ xxx
Foreign tax credit as per rules......................................................................................................................... xxx
Tax amount payable to government/Refundable ± xxx

For resident couple:

Up to Rs. 4,50,000 @ 1% ...................................................................................................................... Rs. xxx
Next Rs. 1,00,000 @ 10%...................................................................................................................... xxx
Next Rs. 2,00,000 @ 20% ....................................................................................................................... xxx
Next Rs. 12,50,000 @ 30 %..................................................................................................................... xxx
Balance (above Rs. 20 lakh) @ 36% .................................................................................................................... xxx
Total tax liability xxx
Less: Medical tax credit as per rules ........................................................................................................................ xxx
Foreign tax credit as per rules......................................................................................................................... xxx
Advance tax paid as per rules ......................................................................................................................... xxx
Tax amount payable to government/Refundable ± xxx
Computation of Tax Liability for Non-resident Person
Taxable income Rs.……………… @25% flat rate ................................................................................................... Rs. xxx

Tax rate for a non-resident individual is taxed at flat tax rate 25% on total taxable income with source in
Nepal. Any exemption isn’t allowed for deductions and any withholding payment made to a non-resident
is treated as final. They need not pay any tax in Nepal on their foreign income.

Illustrative Problems
Illustration 1: Baker is an American and came to Nepal on 1st Marg of the previous year and stayed in Nepal till the end of
the year. He disclosed the following details of his income and expenditures:
i. Assessable income from business Rs. 300,000
ii. Assessable income from investment Rs. 200,000
iii. He donated Rs. 15,000 to a National Cricket Club.
iv. Other domestic and personal expenses Rs. 110,000
Required: a. Residential status with the explanation. b. Statement of total income.
SOLUTION:
a. Length of stay in Nepal (8 months × 30) = 240 days
Since, Mr. Backer stays in Nepal more than 182 days. So, his status is resident.
b. Calculation of total taxable income.
Assessable income from business ........................................................................................................................... 300,000
Assessable income from investment ....................................................................................................................... 200,000
 Total assessable income 500,000
Less: Allowable reductions:
Donation to cricket club
(5% of Rs. 500,000 or actual Rs. 15,000 or maximum Rs. 100,000, whichever is less) ................................ (15,000)
Taxable income 485,000

Illustration 2: Mr. Pradhan, a permanent officer of Government of Nepal was posted outside the country representing the
Government of Nepal at the Embassy of Nepal in Bangladesh. He was drawing Rs. 45,000 p.m. as his salary. He left Nepal
on 1st Marg. He was paid $2,500 as foreign allowance and $1,500 as outstation allowance. Dollar exchange rate applicable
was Rs. 110 for one US dollar. He stayed there till the end of Ashadh of previous year.
Required: a. Residential status b. Taxable income
c. Tax liability
SOLUTION:
a. Since Mr. Pradhan is an officer of Government of Nepal posted abroad. So, his residential status is resident.
b. Calculation of taxable income:
Particulars Rs. Rs.
Salary (Rs. 45,000 × 12) ................................................................................................................... 540,000
Dashain allowance ........................................................................................................................... 45,000
Contribution to PF by employer (10% of Rs. 540,000) ...................................................................... 54,000
Foreign allowance ($2,500 × Rs. 110) .............................................................................................. 275,000
Outstation allowance ($1,500×Rs. 110) ............................................................................................ 165,000
Income from employment 1,079,000
Income from investment.................................................................................................................... Nil
Total assessable income 1,079,000
Less: Allowable reduction:
Contribution to ARF:
(Actual ARF Rs. 108,000 or 1/3rd of 1,079,000 or maximum limit Rs. 300,000 whichever is (108,000)
lower)
Foreign allowance exemption (75% of foreign allowance i.e. 440,000 (330,000)
Taxable income 641,000
c. Calculation of tax liability:
First Rs. 400,000 (single) @ 1% = Rs. 4,000
Next Rs. 100,000 @ 10% = Rs. 10,000
Balance Rs. 141,000 @ 20% = Rs. 28,200
Total tax liability = Rs. 42,200

Illustration 3: Mr. Koizumi is working in an embassy representing Japan and came to Nepal on 1st Falgun of previous
year. His salary and other facilities are paid by the country he represents. He declared the following sources of income
during the previous year.
a. Salary Rs. 500,000
b. Foreign allowance Rs. 200,000
c. He runs a small business in Nepal and a net profit of Rs. 225,000 in a previous year.
d. Consultation fees receipt Rs. 170,000 (net).
e. During the year he donated Rs. 30,000 to a public hospital.
Required: a. Residential status b. Taxable income.
c. Tax liability
SOLUTION:
a. Length of stay = 1st Falgun to Ashad end
= 5 months × 30 days = 150 days
Since, Mr. Koizumi stayed in Nepal for less than 183 days. So, his residential status is a non-resident.
b. Calculation of taxable income of Mr. Koizumi.
Particulars Rs.
Assessable income from employment .................................................................................................................. Nil
Assessable income from business ........................................................................................................................ 225,000
Total assessable income 225,000
Less: Donation to a public hospital:
(Actual Rs. 30,000 or 5% of 225,000 or maximum limit Rs. 100,000 whichever is lower) .......................... 11,250
Total taxable income 213,750
c. Calculation of tax liabilities
 For non-resident Person 25% of total taxable income
Therefore, total tax liabilities = 25% of Rs. 213,750 = Rs. 53,437.5
Notes :
i. Consultation fee received by the non-resident person after TDS is final withholding payment.
ii. Employment income received b a foreign diplomat from the public fund of foreign country are exempt from tax.

Illustration 4: Mr. Prakash, an Indian citizen came to Nepal as an expert on 1st Chaitra of previous year and he had
stayed here till the end of Ashad and earned the following incomes:
i. Consultancy fees received Rs. 425,000 (net)
ii. Assessable income business Rs. 350,000
iii. Gain on sale of shares Rs. 90,000 (net)
iv. Lottery received Rs. 75,000 (net)
He had claimed the following expenses for deductions:
i. Expenses related to consultancy fee of Rs. 5,000
ii. Donation given to a tax exempted organization approved by IRD of Rs. 15,000
Required: a. Residential status. b. Taxable income.
c. Tax liability.
SOLUTION:
a. Length of stay in Nepal = 1st Chaitra to end of Ashad
= 4 month × 30 days = 120 days
Since, Mr. Prakash stayed in Nepal for less than 183 days, so, his residential status is non-resident.
b. Calculation of taxable income
Particulars Rs.
Assessable income from business ........................................................................................................................... 3,50,000
Assessable income from investment:....................................................................................................................... Nil
Total assessable income 350,000
Less: Allowable donation
(Actual Rs. 15,000, 5% of Rs. 350,000 or maximum limit Rs. 100,000 whichever is less) ............................ 15,000
Total taxable income 335,000
c. Calculation of tax liability
= 335,000 @ 25% = Rs. 83,750
Hints: Any payment received after TDS of non-resident person is treated as final withholding income.
Points To Remember [PTR]
• All withholding payments for non-residential individual are final withholding. So, consultation service fee
after TDS is final.
• Any income earned in Nepal by non-resident is taxable but, income derived outside of Nepal is non-
taxable
• Salary and allowance paid to a foreign individual by foreign government are tax exempt.
• If a taxpayer lives in Nepal 183 days or more in any period of 365 consecutive days is residential
taxpayer
• However, it is not necessary that 183 days must fall in an income year.
• Salary from part time teaching is final withholding.

Practical Questions
SHORT QUESTIONS
Problem 1. __ Mr. Honda, Japanese citizen came to Nepal on 1st Baishakh and stayed till end of income year.
During staying period, he earned following income in previous year.
• Income from business Rs. 300,000 before charging rent of shop Rs. 9,000 and telephone charge
Rs.5,000.
• Commission received Rs. 60,000 was omitted to record in above business income.
• Gain from investment Rs. 90,000.
• Salary from part time lecture in private college Rs. 17,000 (Net).
• He donated Rs. 30,000 to public school.
 Required: a.Residential Status b. Taxable income
c. Tax liability

Problem 2. __ Mr. Robert, an American citizen came to Nepal as an expert on 1st Marg of previous year and he
had stayed here till the end of Ashad and he earned the following income:
• Consultancy fees received Rs. 425,000 (net)
• Income from business of Rs. 300,000
• Gain on sale of share Rs. 54,000 (net)
• Lottery received Rs. 30,000 (net)
He had claimed the following expenses for deduction:
• Expenses related to consultancy fees Rs. 5,000.
• Donation given to Red Cross Society of Rs. 15,000
• He paid life insurance premium Rs.20,000 for own policy and Rs 10,000 for his children.
Required: a.Residential status b. Taxable income
c. Tax liability

Problem 3. __ Miss. Sujina, a government officer in the Government of Nepal, was appointed as a first
secretary at the embassy of Nepal in India. She was drawing Rs. 60,000 per month as her salary. She left
Nepal on 1st Poush of previous income year. She was paid $2,000 as foreign allowance and $1,500 as
foreign allowance in addition to salary. Dollar exchange rate was applicable as Rs. 110 for $ 1. She stayed
there till the end of income year. Medical expenses incurred by her Rs.5,000 and her life insurance
premium paid by employer Rs.22,000.
Required: a.Residential status b. Taxable income
c. Tax liability

Problem 4. __ Mr. Rahim, is working in an embassy representing Pakistan and came to Nepal on 1st Aswin of
previous year. His salary and other remuneration are paid by the country he represents. He declared
following sources of income during the previous year:
• Salary $ 3,000 p.m.
• Foreign allowance $ 500 p.m.
• Dearness allowance $ 1,500 p.m.
• Net gain from disposal of shares Rs. 90,000 (net)
• She earned income Rs. 600,000 from business in Nepal.
• Lottery income Rs. 37,500 (net)
• He claimed reduction for donation to Red Cross Society Rs. 20,000
Required: a.Residential status b. Taxable income
c. Tax liability

Problem 5. __ Mr. Mahendra citizen of Srilanka earned the following incomes during his stay in Nepal from
Aswin 30 to end of Ashadh of previous year.
• Income from trading activity Rs. 300,000
• Lottery income Rs. 75,000 (net)
• Consultancy service fee received (TDS Rs. 30,000) Rs. 170,000
• Gain on non-business chargeable assets Rs. 80,000
Expenses claimed for deduction are as follows:
• Lottery ticket purchase Rs. 5,000
• Collection charge of consultancy fees Rs. 20,000
• Donation to public hospital Rs. 30,000
• He paid health insurance premium Rs. 15,000.
Required: a.Residential status b. Statement of total taxable income
c. Tax liability

Problem 6. __ Mrs. Kim is a permanent representative of USA to Nepal and working since 4 months. She
received the following incomes during his stay in Nepal.
 • Salary $ 600 (exchange rate of 1$ is Rs. 110)
• Telephone bill paid by the employer Rs. 20,000
• Foreign allowance Rs. 8,000 p.m.
• Lottery income Rs. 60,000 (net)
• Meeting fee Rs. 17,000 (net)
• Income from consultancy service Rs. 80,000
Required: a.Residential status b. Total taxable income
c. Tax liability.

Problem 7. __ Mr. Ramesh Kharel a Foreign Secretary of Nepal Government, was appointed as permanent
representative of Nepal to United Nations. He left to UN on 1st Paush of the previous year on which date he
was automatically terminated from his present post. He was paid there US $6,000 as his foreign allowance
and $2,500 as his family allowances. The exchange rate applicable for the US $ was Rs.110. He stayed
there till the end of previous fiscal year. He was drawing Rs. 52,000 pm. as his salary while he was in
Nepal.
Required: a.His residential status b. Taxable income