Definitions and Legal Provisions
Meaning of Rent as per Income Tax Act
As per Section 2(Sa) of Income Tax Act, 2058 the defintion of Rent evolved as follows:
For the period 2058.12.19 to 2060.03.32
“भाडा” भन्नाले घर बहाल समेतका मूर्त सम्पत्तिको बहालमा लगाएको पट्टा अन्तर्गत गरिएका प्रिमियम लगायतका सबै भुक्तानी सम्झनु पर्छ । तर यस शब्दले प्राकृतिक स्रोत बापत भएको भुक्तानीलाई जनाउने छैन ।
For the period 2060.04.01 to 2075.03.32
“भाडा” भन्नाले घर बहाल समेतका मूर्त सम्पत्तिको बहाल तथा पट्टा अन्तर्गत गरिएका प्रिमियम लगायतका सबै भुक्तानी सम्झनु पर्छ । तर यस शब्दले प्राकृतिक स्रोत बापत भएको भुक्तानीलाई जनाउने छैन ।
For the period 2075.04.01 till date
“भाडा” भन्नाले घर बहाल समेतका मूर्त सम्पत्तिको बहाल तथा पट्टा अन्तर्गत गरिएका प्रिमियम लगायतका सबै भुक्तानी सम्झनु पर्छ । तर यस शब्दले प्राकृतिक स्रोत बापत भएको भुक्तानी वा एकलौटी फर्म बाहेकको प्राकृतिक व्यक्तिले घर बहाल बापत प्राप्त गरेको रकमलाई जनाउने छैन ।
Withholding Rates applicable on Rent as per Income Tax Act
As per Section 88 of Income Tax Act, 2058 the provision relating to withholding rates applicable on Rent evolved as follows:
For the period 2058.12.19 to 2065.03.31
दफा ८८(१): बासिन्दा व्यक्तिले नेपालमा स्रोत भएको ब्याज, प्राकृतिक स्रोत, भाडा, रोयल्टी, सेवा शुल्क, कमिशन, बिक्री बोनस, अवकाश भुक्तानी र अन्य कुनै प्रतिफल तथा अवकाश भुक्तानीको रकम भुक्तानी गर्दा कुल भुक्तानी रकमको १५% दरले कर कट्टी गर्नु पर्नेछ ।
For the period 2065.04.01 to 2075.03.32
दफा ८८(१): बासिन्दा व्यक्तिले नेपालमा स्रोत भएको ब्याज, प्राकृतिक स्रोत, भाडा, रोयल्टी, सेवा शुल्क, कमिशन, बिक्री बोनस, अवकाश भुक्तानी र अन्य कुनै प्रतिफल तथा अवकाश भुक्तानीको रकम भुक्तानी गर्दा कुल भुक्तानी रकमको १५% का दरले कर कट्टी गर्नु पर्नेछ । तर देहायको भुक्तानीमा देहायका दरले कर कट्टी गर्नु पर्नेछ: (५) वासिन्दा ब्यक्तिले नेपालमा स्रोत भएको भाडा भुक्तानी गरेकोमा १०% का दरले ।
For the period 2075.04.01 till date
दफा ८८(१): बासिन्दा व्यक्तिले नेपालमा स्रोत भएको ब्याज, प्राकृतिक स्रोत, भाडा, रोयल्टी, सेवा शुल्क, कमिशन, बिक्री बोनस, अवकाश भुक्तानी र अन्य कुनै प्रतिफल तथा अवकाश भुक्तानीको रकम भुक्तानी गर्दा कुल भुक्तानी रकमको १५% का दरले कर कट्टी गर्नु पर्नेछ । तर देहायको भुक्तानीमा देहायका दरले कर कट्टी गर्नु पर्नेछ: (५) बासिन्दा व्यक्तिले नेपालमा स्रोत भएको भाडा भुक्तानी गरेकोमा १०% का दरले, तर (क) मूल्य अभिवृद्धि करमा दर्ता भई सवारी साधन भाडामा दिने व्यवसाय गर्ने व्यक्तिलाई त्यस्तो सवारी साधनको भाडा बापत भुक्तानी गर्ने रकममा १.५% ले कर कट्टी गर्नु पर्नेछ । (ख) प्राकृतिक व्यक्तिले घर बहाल वापत प्राप्त गरेको रकममा कर कट्टी गर्नु पर्नेछैन ।
Meaning of Rent and Withholding Rates applicable on Rent as per Kathmandu Municipality Finance Act
The provisions regarding the collection of rental taxes by municipalties differs as per the Finance Act issued by the municipalties. It may not be relevant to discuss all the provisions issued by all municipalites regarding the application of rental taxes. However, as a general gist, the strucutre of the application of rental tax in Municipal Finance Act is as follows:
महानगरपालिका क्षेत्रभित्र कुनै व्यक्ति वा संस्थाले भवन, घर, पसल, ग्यारेज, गोदाम, टहरा, छप्पर, जग्गा वा पोखरी र अन्य पूरै वा आंशिक तवरले वहालमा दिएकोमा अनुसूची अनुसार वा घरधनीले चलनचल्ती अनुसार स्वःघोषणा गरेको सम्झौता पत्र अनुसारको बहाल रकममा १० प्रतिशत घर जग्गा वहाल कर लगाइने र असुल गरिनेछ । घर बहाल कर मासिक, त्रैमासिक, अर्धवार्षिक वा वार्षिक रुपमा बुझाउन सकिनेछ । तर एकपटक कबुल गरिसकेपछि वर्षभरी सोही अनुसार हुनुपर्नेछ । करदाताले महानगरपालिका क्षेत्रभित्रको आफ्नो बहाल आयमा थपघट भएमा वा बहालमा नलागेको अवस्थामा ३५ दिन भित्र वडाको सिफारिश सहित कार्यालयमा सोको विवरण एवं जानकारी पेश गर्नुपर्नेछ ।
Kathmandu Municipality had enforced the Finance Act 2074 effective since 2074.04.01 and Lalitpur Municipality had enforced the Finance Act 2074 since 2075.04.01. It is advised to visit the respective website of the concerned municipality and confirm the tax rate applicable on rental income and withholding requirements on such rental income by the lessee. The link to all local governments of Nepal visual map can be found here: स्थानिय तह
Is the lessee required to withhold the rental taxes while making the payment to the lessor? (This is only in regard to Kathmandu and Lalitpur Municipality)
The Finance Act of Kathmandu and Lalitpur Municipality had the following provision in Annexure 3 of the Act: संगठित संघसंस्था, कम्पनी, कार्यालय वा यस्तैप्रकृतिका अन्यले बहालमा बसे वापत बहाल रकम बुझाउंदा श्रोतमै अग्रिम बहाल कर कटिृ गरी दाखिला गर्नुपर्नेछ ।
However this provision was not carried in newer Finance Act issued by Kathmandu and Lalitpur Municipality on annual basis. However, all versions of Finance Acts contains the following provision which means that the withholding provision exists till date. दफा २३: साबिक बमोजिम हुने: यस ऐनमा उल्लिखित व्यवस्था यसै बमोजिम र उल्लिखित नभएको हकमा साविक बमोजिम नै हुनेछ ।
So it is clear that entities in Kathmandu and Lalitpur Municipality making payment of rental amount are required to withhold rental taxes as applicable. In regard to Other Municipality: Please confirm from the particular Finance Act issued by the municipality itself from link above.
A minor clarification: All local rental tax povisions (e.g. वहाल कर नियमावली) issued by local governmets under Local Self Governance Act, 2055 are no longer valid as the Act has been repealed and replaced by Local Government Act, 2074.
Important Links:
1. Lalitpur Municipality Finance Act 2075
2. Lalitpur Municipality Finance Act 2076
3. Lalitpur Municipality Finance Act 2077
4. Kathmandu Municipality Finance Act 2074
5. Kathmandu Municipality Finance Act 2075
6. Kathmandu Municipality Finance Act 2077
What happened to IRD v/s Municipality?
The Problem
The Income Tax Act, 2058 (a federal legislation) requires withholding at the rate of 10% for payment of rent to person other than individual and also envisages the provision of income taxation on such rental income. The local bodies (various municipalities) has also issued legislation imposing taxes on the rental income in the form of local Finance Act along with withholding taxes provision. All lessees and lessors (other than an individual) were required to comply with rental tax formalities under both the Income Tax and the Local Finance Act. This clearly brought many confusion in the application of rental taxes.
Biratnagar High Court's Decision
Metropolitan Office Biratnagar submitted that only Metropolitan Office has power to collect tax on rental income under the Constitution and collection of taxes on rental income of corporates by IRD is in breach of the provisions of the Constitution and Inter-Government Fiscal Arrangement Act, 2074. Metropolitan Office Biratnagar submitted writ application in this regard. IRD submitted that the right of collection of tax on rental income of corporate entities rest with the federal government under the Income Tax Act and the collection of tax on rental income of corporate entities was undertaken for determining corporate income tax of the entities. Biratnagar High Court on July 08, 2019 held that collection of the income tax on the rental income of the corporate entities under the Income Tax Act did not result in taxation power of Biratnagar Metropolitan Office being infringed. Metropolitan Office Biratnagar has further challenged the decision of the High Court before the Supreme Court. Thus, until the issue is finally decided by the Supreme Court, the problem can be expected to exist or become worse. This should be taken care cautiously by all the lessors and lessees.
Link to the Biratnagar High Court’s Decision is here.
A notice to the similar effect had also been issued by Ministry of Finance. Link to the notice here.
How is the decision from Supreme Court likely to pan out?
The context of problem
Biratnagar High Court’s decision, though correct in its breadth, has failed to discuss the provision of the Constitution of Nepal dealing with the tax collection powers of Local Government and Federal Government.
Schedule 5 of the Constitution of Nepal, 2072 has provided a list of federal powers where #9 provides that the corporate and individual income tax is administered by the Federal Government. Similarly, the Schedule 8 of the Constitution, #4 provides that house rent tax is administered by Local Government.
The Income Tax Act, 2058 (which is a federal legislation) requires withholding at the rate of 10% for payment of rent. Section 2(af) of the ITA defines “Rent” as a premium received for the house rent as well as for the lease of a tangible property and payment for the provision of that lease. Provided that this term does not include any payment made for natural resources or amount received by the individual as a rent of house except for private/sole firm. ITA has clearly excluded the non-business rent income derived by an individual for the purpose of taxation.
The local bodies (various municipalities) has also issued legislation imposing taxes on the rental income in the form of local Finance Act with rate of different withholding taxes based on the local bodies. The lessees are required to comply with deduction of withholding taxes both under the Income Tax and the Local Finance Act. The liability for withholding of the lessors exists on both the Income Tax Act and the Local Finance Act. This certainly has brought confusion to the lessors.
The Ministry of Finance published a notice dated March 25, 2019 clarifying that lessees are subject to withholding tax under the Income Tax only where the lessors are corporate entity. In case the lessor is a natural person, provision of only the Local Finance Act is applicable. The local bodies have not provided any clarification and under the Local Finance Act, the rental tax is applicable to both lessors i.e. individual or corporate.
Resolution of the "disaccord"
The disagreement of the Local Government and Federal Government has been caused due to the disaccord in the list of powers provided in Schedule 5 and Schedule 8 of the Constitution. We can expect an amicable decision from the Supreme Court by clearly providing a demarcation between the business incomes and other rental incomes. This is because the rent income derived by a legal entity and proprietorship is normally in the nature of income taxable under Income Tax Act, 2058 to which corporate or individual income tax as administered by Federal Government is applicable.
In addition to this, Clause 57(6) of Constitution provides that while making law by Provincial Assembly, village council and municipal council pursuant to clause 57(5), they shall have to make laws without being inconsistent to Federal law and if such laws formulated by Provincial legislature, village council and municipal council is inconsistent with the Federal law, such law shall, to the extent of its being inconsistent, be void. This clause had not been dealt in the decision by Biratnagar High Court, but as of date, we can expect Supreme Court to factor this position of Constitution regarding the disaccord between the provisions of ITA and Local Finance Act.
What if the Local Government makes you pay the unnecessary rental taxes?
Since, fundamentally, this is a matter of inconsistency in the formulation of the law by Municipal Assembly / Village Assembly with the law formulated by Federal Parliament, as a legal remedy, if any adverse notice/order is issued to any individual / entity by Local Government or any facilities are denied, the concerned person can file a petition under Article 133 of the Constitution.
Article 133(1) of the Constitution reads:
Any citizen of Nepal may file a petition in the Supreme Court to have any law or any part thereof declared void on the ground of inconsistency with this Constitution because it imposes an unreasonable restriction on the enjoyment of any fundamental right conferred by this Constitution or on any other ground, or to have any law or any part thereof made by a State Assembly declared void because it is inconsistent with any law made by the Federal Parliament or to have any law or any part thereof made by a Municipal Assembly or Village Assembly declared void because it is inconsistent with a law made by the Federal Parliament or the State Assembly, and the Supreme Court shall have an extra-ordinary power to declare that law to be void either ab initio or from the date of its decision if the law appears to be so inconsistent.
Article 57(6) of the Constitution reads:
Any law to be made by the State Assembly, Village Assembly or Municipal Assembly pursuant to Article 57(3) or Article 57(5) shall be so made as not to be inconsistent with the Federal law, and any law made by the State Assembly, Village Assembly or Municipal Assembly which is inconsistent with the Federal law shall be invalid to the extent of such inconsistency.
But Kathmandu Metropolitan City doesn’t agree with this. Here is their most recent notice on the matter by Balen Shah: Notice from KTM Metro 2080.02.31
Example: A hypothetical company is engaged in property rental business
Here, this example is an application of the view above, in practical cases. Local Governments, however, do not agree with this view. Tax Authorities under Federal Government agree with this view.
A hypothetical company H.Co is involved in property rental business. It leases land and buildings from property owners who may be individuals or entities. H.Co makes certain improvements on the property, provides network and service for the person seeking rental and leases the properties to such person in a premium rental amount. How will the taxation work in this scenario?
Compliances of H.Co
- H.Co is required to pay rent to individual property owners by withholding rental taxes as per the particular Municipal Finance Act of the municipality where the property is located
- H.Co is required to pay rent to entity property owners by withholding rental taxes as per the Income Tax Act
- H.Co is required to pay income taxes on the incomes derived by it from the property rental business.
- The end lessee who makes rent payment to H.Co may have withheld income taxes on such rent payment, as applicable. H.Co is eligible to reduce such taxes from its final tax liabilies.
Compliances of Principal Lessors (If Individual)
- Individual Principal Lessors are required to pay rental taxes as per the particular Municipal Finance Act of the municipality where the property is located.
- In our case H.Co has already withheld and deposited such taxes so there will not be any additional tax liabilites of the Individual Principal Lessors. It is deemed to have been deposited by the individual principal lessor himself.
- Taxes under Income Tax Act, 2058 is not imposed to individual property owners. They only have rental tax liabilities under Municipal Finance Act.
Compliances of Principal Lessors (If Entity)
- Entity Principal Lessors are required to pay income taxes on the incomes derived by it from the rental activity.
- H.Co while making payment to Entity Principal Lessors has already withheld income taxes on such rent payment. Entity Principal Lessors is eligible to reduce such taxes from its final tax liabilies.
Compliaces of End Lessee
- End Lessee is requried to withhold taxes as per Income Tax Act while making payment to H.Co (who is an entity).
- If end lessee is an individual and the rental payment is not for the business purpose then such lessee are not required to withhold income taxes on such rental payment.
Update: Supreme Court has decided
Similar in line to the discussion above Supreme Court has decided in the case of अधिवक्ता सृजना अधिकारी समेत प्रधानमन्त्री तथा मन्त्रिपरिषदको कार्यालय सिंहदरबार समेत Case Number (see ful text here) ०७९-WC-००१४ on २०७९-०७-३० रिट निवेदन उत्प्रेषण