Withholding tax means retention of tax amount by payer while making payment for procured goods or services. The concept of withholding tax was first introduced by United States in 1862 during presidency of Abraham Lincoln. In this concept, Income tax is paid by payer of income irrespective of recipient. It means tax is levied from person at the time of receiving payment (income). The amount of tax to be withheld by payer depends upon various factors such nature of recipient’s income (e.g., interest, dividends, rental income, gain on sold property e.t.c). 

Any entity that withholds tax under the prevailing laws are required to remit it to the Government account (within 25 days in case of Nepal) and submit the particulars thereof to the concerned tax offices. The tax so withheld is treated as payment of recipient tax liability and subject to adjustment in account of recipient entity.

The practice of withholding tax varies among different countries. In some countries, withholding taxes are levied as per local and provincial laws so that taxes of both federal and local governments are levied. In case of cross border transactions, taxes withheld in one country are allowed to offset against tax payable in recipient’s resident country as per agreement between governments of two countries.

Taxes in Nepal are levied by both federal and local level government. Taxes are levied by federal government as per Income Tax Act,2058 and taxes are levied by local level government as per their policy being within the jurisdiction of Constitution of Nepal,2072. 

Withholding taxes also avoids tax evasion through proper control from the end of service/ goods receiver. Withholding taxes make the economy flexible by distributing government revenue throughout the year rather than being concentrated on specific time period of year.

Withholding Tax in Nepal

The provision related to withholding tax in Nepal has been mentioned in chapter 17 (section 87 to 92) of Income Tax Act,2058. It includes various provision related with withholding of tax in case of payment of salary by employer, service charge by service receiver, return by pension fund e.t.c. Such taxes withheld by respective entity shall be required to deposit the same with inland revenue offices within 25 days of next month.

Some of other withholding tax requirement in Nepal are tabulated below:

(Note: Rate of tax may be subject to change on yearly basis through amendment in Income Tax Act and finance bill. It is advised to be updated with the same.)