Final withholding tax and its implications
However, Final withholding tax is little bit different, the im0plication of a income being a final withholding income is that, the tax is deducted at source by the payer and the tax deposited by the payer is supposed to be final. The payee need not include that income in his taxable income.
As per Section 92 of income tax act The following payments shall be treated as payments from which tax is withheld finally:
- Dividend paid by a resident company or partnership firm.
- Rent paid for the land or building and fixtures and equipment appurtenant thereto having source in Nepal to other natural person except one who is carrying on business,
- Profit paid by a resident person for investment insurance,
- Profit paid by a resident person for the interest of an unapproved retirement fund,
- Interest paid by a bank or financial institution as mentioned in Sub-section (3) of Section 88 or entity issuing debentures or listed companies and Co-operatives to a natural person not engaged in business activities or payment made to exempt entities.
- Payment subject to tax withholding made to a nonresident person pursuant to Sections 87, 88 or 89
Lets discuss the most common ones
The first one is pretty straight forward, if you receive dividend from company or share of profits from partnership TDS is deducted at 5% and it is considered final withholding. You need not include it in your income. So if your are a employed individual and you are wondering that I have two sources one from employment and another from investment, I need to file return, No , you do not. The income from dividend need not be include in your income as it is a final withholding tax
As per the Section 88 (1) (5) of Income Tax Act, 2058, every resident person, while making payment of rent having source in Nepal, shall deduct tax at the rate of 10%. However, this provision shall not apply while making the payment of rent having source in Nepal to a natural person. This text of the Income Tax Act, 2058 is clear when a person makes the payment of rent to any person (other than natural person i.e., firm, company, or any other institutions), such person shall deduct 10% tax and deposit the same with Inland Revenue Department.
As per the Section – 4 of Kathmandu Metropolitan City Finance Act, 2079, rental tax shall mean the tax imposed upon the rental income earned by any person by leasing out/letting out the building, house, shop, garage, workshop, warehouse, truss, shed, land, or pond, either wholly or partly, within the vicinity of Kathmandu Metropolitan City, as per the Annexure – 6. Further, as per the Annexure – 6 of Kathmandu Metropolitan City Finance Act, 2079, any person or institution leasing out or providing on rent any building or similar other structures, rental tax shall be collected on the rental amount from such person or institution at the rate of 10%
The above provision of Kathmandu Metropolitan City Finance Act, 2079 is clear that no matter who is the lessor or lessee, 10% rental tax shall be collected on the rental amount. This provision clearly contradicts with the provision as per the Section 88 (1) (5) of the Income Tax Act, 2058. Practically, rental tax is deducted at local level and the receipt should be presented to IRD to obtain tax clearance.
To sum up payment made to individual person by entities – no need to deduct tax as per income tax act, but rental tax to the government needs to be paid.
Payment made to other person by entities – Conflict in IRD and local act, practically, pay tax at local office and present proof of payment to IRD.
Payment made by individual person to other individual - no need to deduct tax as per income tax act, but rental tax to the local government needs to be paid.
Payment made by individual person to firms and companies - no need to deduct tax as per income tax act, but rental tax to the local government needs to be paid.
Payment made by bank and financial institution to a natural person and not conducting business and tax exempt entities. is liable to be finally withheld.
e.g.. Shanti organic firm has deposited on a fixed deposit in a bank, the interest in such deposit is not liable to be finally withheld. However had it been deposited by Mr. A, it would be liable to be finally withheld.
Matri Nepal has deposited Fixed deposit in bank, interest on such deposit is liable to be finally withheld
Similarly, TDS liable to be withheld in case of a non -resident person needs to be finally withheld
