“Freelancers” Tax in Nepal – Annoying !!

First Things First

Section 78(4) of the Income Tax Act, 2058 requires every person who is making transactions as per the Act to obtain the Permanent Account Number (PAN). Obtaining PAN means registering for the purpose of taxes. Similarly, under Rule 23(1) of the Income Tax Rules, 2059 any person who intends to earn assessable income shall apply to obtain PAN. These provisions in both the Act and Rules clearly require people to make registration in taxes by obtaining PAN before making any transaction (by definition earning “assessable income”).

So, what is a transaction for the purpose of taxes? Under Section 2(ta1) of the Income Tax Act, 2058 the transaction means the amount included pursuant to Section 7, 8 or 9 for the purpose of calculation of income from employment, business or investment in any income year. Plainly, speaking anyone who earns income from employment, business or investment is required to obtain PAN – get registered for the tax purposes.

Who even is a “freelancer”?

Let’s go through the provisions of the income tax laws that taxes “freelancers” in Nepal and the changes that we saw in the tax laws over the years. 

Firstly, there is no concept of “freelancer” in tax laws of Nepal. Under Income Tax Laws of Nepal – there is only the concept of employment, business and investment in Nepal, and by extension only the concept of employee, business person and investment. 

A “freelancer” is an individual who offers their services to clients on a project basis, typically in fields such as writing, graphic design, programming, marketing, consulting, and more. Freelancers are self-employed and work independently, providing their expertise and skills to different clients or companies on a temporary or contract basis. They are not bound to any particular employer and have the flexibility to choose the projects they work on and the clients they collaborate with. So this makes a freelancer’s enterprise a “profession”. The term profession and business are used interchangeably in the income tax law of Nepal so – being a freelancer is essentially pursuing a business enterprise and this subject to taxation laws like any other business enterprise. For more refer this illustration provided by the Income Tax Directive: १८.२ व्यवसाय 

So who are we talking about in this section of the post when we refer to them as “freelancers”? A misnomer alert: The freelancers that the Section 95Ka aims to cover aren’t exactly “freelancers” by definition. Let’s dissect this confusion. 

On the one hand the tax laws require any person making a personal business enterprise to register as a business for the purpose of taxes (be it an individual enterprise or some other legal entity). On the other, Section 95Ka seems to be applicable to: 
(i) resident natural person, and 
(ii) who are not pursuing any business, and 
(iii) earning foreign currency, and
(iv) making earning by: 

  1. providing software or similar kind of other electronic service outside Nepal, or
  2. providing consulting service outside Nepal, or
  3. uploading audio-visual materials in social network 

Seriously, who even is a “freelancer”?

The provision in Section 95Ka raises an important question: What defines a profession? Should individuals generating income in foreign currency through the aforementioned activities be exempt from registering as a business enterprise for tax purposes? While it may seem convenient for those earning foreign currency, as it relieves them from the burdensome formalities of the standard taxation system, it certainly doesn’t promote a level playing field for individuals earning in local currency while engaging in activities within Nepal.

By allowing such exemptions, we inadvertently create an imbalance that discourages local entrepreneurs and professionals from flourishing within their own country. It sends a message that their contributions are not valued as highly as those of individuals earning foreign currency. This disparity not only undermines the growth of local talent but also hampers the overall development of Nepal’s economy.

Shifting our focus from the critique, it is undeniably infuriating to navigate through the convoluted provisions of Section 95Ka. Does it really allow a so-called “professional” enterprise to conveniently skirt tax formalities? Or does it create an entirely new and perplexing “income category” that sits somewhere between “employment” and “profession/business”? The lack of clarity and consistency is exasperating.

Consider this scenario: I, for instance, cannot be considered an employee of YouTube, as my activity clearly falls under the category of a profession. However, this provision does not extend its benefits to individuals pursuing business activities. So, who on earth does this provision actually apply to? It seems to target “natural persons not pursuing business,” yet everyone availing these benefits happens to be freelancers—clearly engaged in a profession. Or are we required to transform our Section 95Ka enterprise into a “proper” business or profession once it achieves a certain level of economic dependence and regularity?

It is utterly frustrating when lawmakers rewrite laws without even the slightest respect for definitions and clarity. Overwhelming sense of bewilderment !!

Provisions in Tax Laws and its Development

Before Finance Act, 2078

Before the provision of Section 6Kha, 6Ga and 6Gha were introduced by Finance Act, 2078 – any individuals who were pursuing the activity of earning foreign currency income by providing software or similar kind of other electronic service outside Nepal, consulting service outside Nepal, or uploading audio-visual materials in social network – were compulsorily required to get registered for the purpose of the income tax. Yes, many individuals pursuing such professions were not registered – but that’s just a practical inconsistency. The requirement was quite clear – if you earn professional income, you get registered. 

And it’s not just that, even if such individuals were engaged as an employee and earning employment income in foreign currency, they still were required to get registered for tax purposes and file an income tax return – Section 97(1) read with Section 4(3). But with the addition brought by Finance Act 2078 in Section 95Ka – this was no longer required. 

After Finance Act, 2078

Here is what Finance Act, 2078 introduced in Section 95Ka: 

(6Kha) Any individual resident not involved in the operation of business receiving payment in foreign currency for providing software or similar kind of other electronic service outside Nepal, the concerned bank, financial institution or money transfer institution shall collect advance tax at the rate of one percent of the amount received at the time of payment of such amount.

(6Ga) Any individual resident not involved in the operation of business receiving payment in foreign currency for providing consultancy service outside Nepal, the concerned bank, financial institution or money transfer institution shall collect advance tax at the rate of one percent of the amount received at the time of payment of such amount.

(6Gha) Any individual resident not involved in the operation of business receiving payment in foreign currency for uploading audio- visual material in social network, the concerned bank, financial institution or money transfer institution shall collect advance tax at the rate of one percent of the amount received at the time of payment of such amount.

Who does this provision of advance tax apply to?
(i) resident natural person, and 
(ii) who are not pursuing any business, and 
(iii) earning foreign currency, and
(iv) making earning by: 
1. providing software or similar kind of other electronic service outside Nepal, or
2. providing consulting service outside Nepal, or
3. uploading audio-visual materials in social network 

After Finance Act, 2079

Until Finance Act 2079 introduced some further changes, there were some important questions begging answers: 
(i) Are the taxes withheld under Section 6Kha, 6Ga and 6Gha final withholding taxes? 
(ii) Do such individuals have any further obligation to file tax returns?

These were unanswered by the Finance Act, 2079 and the provisions in Section 95Ka were not clear in this context. 

So Finance Act, 2079 brought came with additional amendment, specifically regarding the finality of taxes: 
Annexure 1 Section 1(4Ka):
Notwithstanding other provisions of this Section, the income of resident natural persons not engaged in operating business under Section 6Kha, 6Ga and 6Gha under Section 95Ka is taxed at the rate of one percent. 

Similarly, regarding the requirement to file the income tax return, an addition was made to Section 97 of the Income Tax Act, 2058: 
Section 97: Not required to file income tax return
(Ga1): Resident natural person who has earned income solely under subsections 6Kha, 6Ga and 6Gha of Section 95Ka for the income year. 

After Finance Act, 2080

Finance Act, 2080 increased the tax rates applicable under Section 96Ka(6Kha), Section 96Ka(6Ga) and Section 96Ka(6Gha) from one percent to five percent. 

Here is what Finance Act, 2080 changed in Section 95Ka: 
(6Kha) Any individual resident not involved in the operation of business receiving payment in foreign currency for providing software or similar kind of other electronic service outside Nepal, the concerned bank, financial institution or money transfer institution shall collect advance tax at the rate of five percent of the amount received at the time of payment of such amount.

(6Ga) Any individual resident not involved in the operation of business receiving payment in foreign currency for providing consultancy service outside Nepal, the concerned bank, financial institution or money transfer institution shall collect advance tax at the rate of five percent of the amount received at the time of payment of such amount.

(6Gha) Any individual resident not involved in the operation of business receiving payment in foreign currency for uploading audio- visual material in social network, the concerned bank, financial institution or money transfer institution shall collect advance tax at the rate of five percent of the amount received at the time of payment of such amount.