The general rule of income taxes is that: (i) if you are an individual, you pay your taxes on tax band basis on the taxable income, and (ii) if you are an entity for tax purposes, you pay your taxes on the basis of flat rate applied to the taxable income.
However, if your income qualifies the certain criteria, then you will be required to pay taxes on presumptive basis, i.e. independent of the profit your business makes, but based on certain percentage of the turnover or some flat amount.
Small Vendors Taxation
Under Section 4(4), the income tax payable by a resident individual, who meets all of the following conditions, is required to pay small vendor taxation under Schedule 1(7) of the Income Tax Act:
- Exclusive Business Income: The resident individual’s income for an income year consists exclusively of income from a business having a source in Nepal; and
- Medical and Advance Tax Credit are not claimed: The resident individual does not claim medical tax credit under Section 51 and advance tax credit under Section 93; and
- Income and Turnover doesn’t exceed: If the income and turnover of the business does not exceed the threshold of Rs. 300,000 and 3,000,000 respectively;
Under Schedule 1(7), if the above criteria are met, then the taxes payable by the individual conducting such business in Metropolitan City or Sub-metropolitan City is Rs. 7500. Similarly, it is Rs. 4000 for Municipality and Rs. 2500 for other places.
Turnover Taxation
Under Section 4(4Ka), the income tax payable by a resident individual, who meets all of the following conditions, is required to pay turnover taxation under Schedule 1(17) of the Income Tax Act:
- Exclusive Business Income: The resident individual’s income for an income year consists exclusively of income from a business having a source in Nepal; and
- Turnover Threshold: If the turnover of the business exceeds Rs. 3,000,000 but not exceeding Rs. 10,000,000;
- Income Threshold: If the income of the business doesn’t Rs. 1,000,000; and
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Excluding Certain Professional Services: Income shall not be from consultancy and professional services like those provided by Doctor, Engineer, Auditor, Lawyer, Sports Player, Actor, Consultant and Specialist
If the above criteria are met, then the taxes payable by the individual conducting such business in Service Sector is 2% of the turnover. For individual in non Service Sector but involved in transaction of goods with upto 3% commission or value addition (including gas and cigarette), the applicable tax rate is 0.25% of the turnover for turnover between Rs. 3,000,000 to Rs. 5,000,000 and 0.3% on the turnover exceeding Rs. 5,000,000. Similarly, for individual in non Service Sector but involved in transaction of goods with upto 3% commission or value addition (including gas and cigarette), the applicable tax rate is 1% of the turnover for turnover between Rs. 3,000,000 to Rs. 5,000,000 and 0.8% on the turnover exceeding Rs. 5,000,000.