TDS in Nepal: rates that apply to a small business and how to withhold

What is TDS?

TDS stands for tax deducted at source. When you make certain payments, the Income Tax Act 2058 makes you withhold a part of the payment. To withhold means to keep back part of the amount instead of paying it to the person. You deposit that part with the Inland Revenue Department in the name of the person you paid. The recipient later sets that amount against their own income tax.

Three things follow from this.

First, the money you withhold is not yours, and the tax is not your tax. You are only collecting it and passing it on.

Second, because you are the one collecting it, a failure to collect is yours. A business that does not deduct can be required to pay the amount itself, with interest and a fine. It then has to try to recover the money from a supplier who has already been paid in full.

Third, TDS is separate from VAT. A supplier’s bill can carry VAT that you pay and a deduction that you withhold at the same time. One does not cancel the other.

Which payments attract TDS most often?

The list below covers the payments a shop, distributor or small service business usually makes. It is not the full schedule. For that, use the Department’s own list.

For every other payment, use the schedule. Interest, payments to non-residents, transport and vehicle hire, meeting and sitting allowances, part-time teaching, insurance commission, royalties and retirement payments all have their own treatment. Several have more than one rate, depending on who is paid and whether they are registered. For those, work from the Inland Revenue Department’s withholding schedule. For anything unusual, confirm with the IRD or your accountant. Do not guess from a number you saw last year.

One warning applies to the whole table. Rates and thresholds are amended by Finance Acts every year. A rate that was right in the last fiscal year may not be right in this one. Check the current schedule at the start of each year and when the budget changes anything.

The routine

At payment. Work out the gross amount, which is the full amount before deduction. Apply the correct rate for the payment type and the payee, and pay the net amount. Record both halves against the supplier: what you paid and what you withheld. From that moment, the deduction is a liability, meaning money you owe the Department.

Within 15 days of the end of the Nepali month. Deposit what you withheld during the month with the Department, and file the statement for the period. If you pay late, you are charged interest. It is charged on the tax you were holding, not on your own profit.

With the payment, or promptly after. Issue the payee a deduction certificate showing the gross, the rate, the amount withheld and the period. This is the document they need, and they will ask you for it at year end.

At year end. Reconcile the two totals: check that what you deducted matches what you deposited. Make sure a certificate exists for every deduction. A gap here can hold up a tax clearance certificate.

Where does TDS go wrong?

• Deducting at the wrong rate because the payee’s registration status was never checked. The same service can attract different rates depending on who supplies it.
• Netting the deduction against the supplier’s next bill instead of depositing it. The liability is to the Department, not to the supplier.
• Paying rent in full for months and discovering the obligation at audit. This is the single most common case in small shops.
• No certificates. Without one, the deduction becomes a dispute with the payee instead of a credit they can use, and they have a fair complaint.
• Treating the deduction as an expense. Until you deposit it, it is money you owe, not a cost of your business.
• Working from last year’s rate. See the warning above.

What the software can do, and what it cannot

A billing system should at least keep the record tidy. It should capture the deduction on the bill when you enter it and calculate the net payable for you. The liability should show in the payables ledger (the list of what you owe suppliers), not on a notepad. You should also be able to run a report for the month before you deposit. In Kuver Books, TDS is recorded on supplier bills. The amount you withheld and the amount you still owe the supplier come from the same entry, so you do not keep them in two separate systems. Payables and the cash ledger are in the same account as your billing, and reports export for your accountant. The purchase bills page shows the flow.

There are two things no software can do for you. It cannot tell you the correct rate for an unusual payment, because that depends on the Act as amended this year and on facts about your payee. And it cannot file for you. Use the TDS calculator to check an amount, use the salary income tax calculator for payroll estimates, and confirm the rate and the filing with the IRD or your accountant.