🎬 Video explanationकर प्रणाली र राजस्व प्रशासन
⏱ 4 min read
Taxes are the main source of income for the Government of Nepal. Lok Sewa asks about the difference between direct and indirect taxes, when VAT started and at what rate, which office collects which tax, and how tax powers are divided in the federal system. This note covers these key points in simple terms.
1. Basics of taxation
- A tax is a compulsory payment to the government without a direct return service.
- Article 115 of the Constitution: no tax can be levied or collected except under law.
- Adam Smith gave four canons of taxation: equality, certainty, convenience and economy.
| Direct tax | Indirect tax |
|---|---|
| Paid by the person on whom it is imposed; cannot be shifted | Burden can be shifted to the consumer through prices |
| Examples: income tax, property tax, land revenue | Examples: VAT, customs duty, excise duty |
| Often progressive | Often regressive (same rate for rich and poor) |
| Tax by rate | Meaning |
|---|---|
| Progressive | Rate rises as income rises (income tax slabs) |
| Proportional | Same rate for all levels of income |
| Regressive | Takes a larger share from low incomes |
2. Main taxes of Nepal
| Tax | Key facts |
|---|---|
| Value Added Tax (VAT) | Started on 1 Mangsir 2054 BS under the VAT Act 2052; standard rate 13%; largest single source of revenue |
| Income tax | Under the Income Tax Act 2058; progressive rates for individuals; includes social security tax on the first slab |
| Customs duty | Tax on imports and some exports, collected at customs points |
| Excise duty | Tax on goods such as alcohol, tobacco, vehicles and some industrial products |
| Property tax, land revenue | Collected by local governments |
3. Tax administration
- Inland Revenue Department (IRD), set up in 2058 BS, collects VAT, income tax and excise.
- Department of Customs collects customs duty.
- A PAN (Permanent Account Number) is issued by IRD to identify taxpayers; VAT-registered businesses issue VAT bills.
- Both offices work under the Ministry of Finance.
4. Tax powers in the federal system
| Government | Main taxes it can levy |
|---|---|
| Federal | Customs duty, excise duty, VAT, corporate and personal income tax, remuneration tax, passport and visa fees |
| Provincial | Vehicle tax, house and land registration fee, entertainment tax, advertisement tax, agricultural income tax (some shared with local levels) |
| Local | Property tax, house rent tax, land revenue (malpot), business tax, vehicle tax (shared), entertainment and advertisement tax (shared) |
- Revenue from VAT and domestic excise duty is shared: federal 70%, province 15%, local level 15%, under the Intergovernmental Fiscal Arrangement Act 2074.
- The National Natural Resources and Fiscal Commission recommends formulas for revenue sharing and grants.
5. Main taxes and who collects them
| Tax | Type | Collected by | Notes |
|---|---|---|---|
| Income tax | Direct | Federal (IRD) | First Rs 10 lakh of individual income taxed at 1% social security tax (FY 2083/84) |
| Value Added Tax (VAT) | Indirect | Federal (IRD, customs on imports) | Standard rate 13%; shared 70:15:15 |
| Excise duty | Indirect | Federal | On alcohol, tobacco and some other goods |
| Customs duty | Indirect | Federal (Department of Customs) | On imports and some exports |
| House and land tax | Direct | Local levels | Property tax |
| Vehicle tax | Direct | Provinces | Shared with local levels |
| House and land registration fee | Fee | Provinces | Collected at land revenue offices |
6. Problems and reforms
- Narrow tax base: many businesses and incomes are outside the tax net.
- Heavy reliance on import-based taxes (customs and VAT on imports).
- Tax evasion through under-invoicing and fake bills.
- Reforms include electronic billing, PAN for all businesses, risk-based audit and simpler procedures.
7. How this topic is asked in the exam
Objective items ask the difference between direct and indirect taxes, the VAT rate, which body collects which tax and how revenue is shared. Subjective questions ask about the problems of Nepal’s tax system or the role of taxation in development. Use the table above and suggest practical reforms.
📌 Key points to remember
- Article 115: no tax without law.
- Canons of taxation (Adam Smith): equality, certainty, convenience, economy.
- Direct tax cannot be shifted (income tax); indirect tax can (VAT, customs, excise).
- Progressive tax rate rises with income.
- VAT started on 1 Mangsir 2054 BS at 13%; VAT Act 2052.
- Income Tax Act 2058; IRD set up in 2058 BS; PAN issued by IRD.
- Customs duty is collected by the Department of Customs.
- VAT and domestic excise shared: federal 70%, province 15%, local 15%.
📝 Quiz
Test yourself: Taxation in Nepal
50 questions check what you read about Basics of taxation, Tax administration and Tax powers in the federal system. Each attempt picks 25 at random.
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