Withholding Taxes PDF

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Withholding Taxes (Tax Deducted at Source – TDS) Withholding tax means     

Deduction of Tax By withholding Agent At the time of Payment On certain income At Prescribed Rate

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withholding Tax (TDS) (payer/withholder) Payment means recording of bill/expenses of Payee/withholdee given in section 87, 88, 88ka & 89

Section 87

TDS on payment to Employee

Section 88

TDS on Investment Returns & Service Fee

Section 88Ka

TDS On Windfall Gain

Section 89

TDS on Contractual Payment

Section 90

Payment of TDS & TDS Return

Section 91

Certificate of TDS

Section 92

Final Withholding Payments

Section 93

Adjustment of TDS

Payment

Income of Payee

Non-exempt

Exempt

TDS required

No TDS

Non-exempt Income 1. 2. 3.

Taxable Income Repatriation Income Final withholding Payment

Timing of TDS – at the time of payment, TDS will be deducted by withholding agent.

Time of Payment 1. If cash basis of accounting is followed Time of Payment will be time of actual cash/cheque/kind receiving by the withholdee. 2. If accrual basis of accounting is followed Time of payment will be the time of recording bill/expenses in the books of Account. Giving Advance or settlement of creditor is not the time of payment.

Withholding Agent means the Person who has the duty to withhold tax as per chapter 17 of the Act while making payments including employment income, investment return, service fee and contract or agreements.

Withholdee means a person receiving or entitled to receive a payment from which income tax is required to be withheld under chapter 17 of the act.

    

Does the transaction meet definition of Payment? If yes, what type of payment and which section is applicable?? Is not the payment exempt income of payee??? If no Do the basic conditions exist/meet?? Deduct TDS at the rate given.

Withholding Tax by Employer (section 87) Conditions to be met 1. Employer must be resident person; and 2. Payment must have source in Nepal (recall the source of payment) If the above mentioned conditions are met, such employer must deduct TDS while making payment to employees. The liability of employer to deduct withholding tax will not be reduced though  Has right to deduct amounts from his salary  Other law has made provisions for not reducing the employment income.

Example Mr. Ram, staff of A.B Enterprises, receiving monthly salary of Rs. 20,000, had taken advances of Rs. 50,000 from office to be settled from future salary.

And during the month of Baishak, 2077, while making salary sheet, employer will deduct such advances from his/her salary. In this case, no salary will be payable to him due to settlement of advances. But as per ITA 2058, AB Enterprises must make deduction of TDS for the month of Baisakh and remaining balance may be utilized for advance settlement.

Labour Act has made provision of minimum wages to labourers, say Rs. 15,000 p.m. If Mr. Shyam is getting Rs. 15,000 p.m. from A.B Enterprises as salary. In this case also, AB enterprises should deduct TDS whatever is written in other Act.

Rate & method of TDS by employer Employer should deduct TDS on payment to employees by applying rates and methods specified in Schedule 1 of the ITA, 2058. Rates : Non-resident – 25% on balance taxable amount  Resident - on slab basis (recall the tax rates of natural person)

Method  TDS will be deducted usually on monthly basis  Every month,  add all employment income of that particular employee for whole income year = actual + estimated

 Deduct all reductions except donation. But reductions must be disclosed to employer or routed through employer.  Calculate Gross Tax liability  Deduct Tax Credits but not foreign tax credit  Female tax credit  Medical Tax credit (if routed through employer)  After this deduct  TDS deducted in previous months during the income year by the employer  TDS deducted in previous months during the income year by other employer (if information provided in regard to previous income and TDS)  Resultant will be amount of withholding tax to be deducted by the employer  Divide the amount with number of months remaining in an income year including the running month.  The value obtained will be the amount of TDS to be deducted during the month.  For next month, repeat the same process but diving withholding tax amount by one less months.  Example 1. Mr. Ram, an employee of resident entity is getting monthly salary of Rs. 60,000 including 10% RF contribution from employer. Total monthly contribution to ARF in the name of Mr. Ram was Rs. 8,000 p.m. Mr. Ram has done investment insurance and is paying Rs. 17,500 semiannual premium. This has already been informed to the employer. Ram received Rs.

10,000 as meeting allowance from employer which is listed under section 92 as FWP.  Should the employer deduct withholding tax on payment to Mr. Ram  If yes, calculate amount of TDS to be deducted for the month of Shrawan. 2. The employer added dearness allowances to Mr. Ram with effect from the month of Poush amounting to Rs. 10,000 p.m. Other information are same.  Calculated amount of TDS to be deducted for the month of Poush.

If the following conditions are met, such natural person's tax liability shall be equal to the amount of tax withheld be employer. Thus will not file separate tax return. 1. Income from employment only having source in Nepal only. 2. All employers are resident person and only one employer at a time 3. Does not claim donation u/s 12 and claim medical tax credit for those expenses borne by the employer and RC to ARF deposited by employer

Withholding tax on Service Fees and Investment Return (Section 88)

Conditions  Person making such payment must be resident  Such payments shall have source in Nepal  Should not be covered by sections 87.

Service fee means any fee paid to a person based on market values, for services rendered by the person and includes a commission or meeting fee, management fee, or technical service fee Service fees paid to employees except FWP & exempt amounts are subject to withholding tax u/s 87. So, TDS on such payments are not made under sections 88.

All payments received by employees subject to Final withholding tax are taxed at rate given in section 88. If such payments are not final withholding payment, withholding tax are taxed at rate and method given in section 87.

Sales commission to employee

Employment income of employees are included in employment income and thus TDS on such payment will be done as per sections 87 and not under section 88 though the amount is service fee. Service fees to employees which are subject to FWT will be taxed under section 88. Withholding tax on meeting allowances upto Rs. 20,000 paid to employees are made under section 88 because this is FWP and will not be taxed under 87. If such meeting allowance was Rs. 12,000 to employees, it’s tax will be withheld under section 87. Method – Flat rate on payment/gain like 1.5%, 2.5%, 5%, 10%, 15% Royalty

15%

not FWP

Natural Resource Payment

15%

not FWP

Rent  Payment to VAT registered Vehicle service provider (passenger carrying) 1.5%

not FWP

 Payment to a natural person other than SPB for the temporary use of land or equipment or apparatus attached to such land 10% FWP  Payment to a natural person other than SPB for House rent or for equipment or apparatus attached to such building No TDS  Other rental Payments

10%

not FWP

Interest  Interest paid to a natural person other than SPB by a resident Bank & Financial institution, Cooperative, Listed company or entity issuing bonds/debentures 5%

FWP

 Other interest payment 15% not FWP (FWP for Tax Exempt Org)  Payment of interest by BFIs to foreign banks for loans taken in foreign currency for investment in areas as prescribed by NRB 10% FWP 

Example AB Pvt. Ltd. paid interest amounting to Rs. 50,000.00 to Mr. Ram. What is the rate of TDS? Is such income taxable further???

15% Not FWP, yes is included in taxable income of Mr. Ram under income from investment.

Payment for Lease of Aircraft

10%

not FWP

If Buddha air takes an airplane of Yati Airlines on lease payment of Rs. 1 lakh per hour. During the month of Baishak, total hour of flight was measured at 40 hours. How much is the TDS? 40 hrs x 1lakh = 40 lakhs @10% = Rs. 4 lakh is amount of TDS

Payment of commission to non-resident by resident employment agency 5% FWP

Other commissions by any resident person – 15%

not FWP

If VAT bills obtained for commission - 15% Sales bonus -

15%

If VAT bills obtained for sales bonus - 15% Meeting allowance

15%

not FWP

But will be FWP if per meeting allowance is upto Rs. 20,000 per person 15%

AB Pvt. Ltd. Paid meeting allowance to Mr. Ram (CEO) amounting to Rs. 15,000.00/25,000. Is TDS required? Is this FWP?? Which section is applicable for withholding taxes??

Service Fee (other than meeting allowance, commission or sales bonus)  If VAT bill provided - 1.5%  If VAT exempt service – 1.5% - health service?  If other - 15%

Payment for Transportation Services or renting means of transportation 2.5% If VAT bills raised

1.5%

Payment for use of satellite, radio, optical fiber, telecommunication equipment or electricity transmission line 10% not FWP

Payment of Investment Insurance -

5% on Gain

FWP

Gain = Total Payment by entity – total amount paid by insurer Mr. Ram had investment insurance of Rs. 10 lakhs (sum insured) covering period of 10 years. He annually paid Rs. 104,000. After maturity investment insurance company paid him sum insured + bonus @6.5% each year.

Calculate the amount of TDS to be deducted on such payment. Gain = Sum insured + accrued bonus - Total amount paid = 10,00,000 + 6.5% of 10 lakh for 10 yrs – 1.04 lakhs x 10 yrs = 1650000 – 1040000 = 610000 TDS = 5% on 610000 = Rs. 30,500.00

Retirement Payment by URF -

5% on Gain

FWP

Gain = Total Retirement Payment – total Retirement Contribution Mr. Ram has contributed Rs. 20,000 per year to an unapproved retirement fund for 30 years. Now he is retired. The URF has shown retirement payment of Rs. 930000 accrued to his account. Is TDS applicable? If yes, what is the amount of tax to be withheld by unapproved retirement fund while making payment?? Gain = Total Retirement Payments - Total retirement contribution = 930000 – 20000x30 yrs = 330,000 TDS = 5% on 330000 = Rs. 30,500.00

Retirement Payments by employer other than GoN

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15% on non-exempt Retirement Payment

FWP

Retirement Payment by ARF or GoN (as employer) -

5% on Gain

FWP

Gain will be calculated as follows S.N Particulars Amount Remarks 1. Total Retirement Payment Xxx 2. Exempt Amounts (upt 18th Xxx If paid by CIT & EPF, accrued RP upto 18th Chaitra 2058) Chaitra 2058 If paid by GoN, Leave encashment, gratuity & medical expenses 3. Non-exempt Retirement Xxx Payment (1-2) 4. Less : 50% of 3 or Rs. 5 lakhs Xxx w.e. is higher 5. Gain = 3-4 Xxx

Transitional Provisions for retirement savings, retirement payments, for employees in roll at the time of implementation of ITA 2058 (rule 20(6)) The following payments are exempted from tax

1. Amount contributed and gain accrued thereon in the retirement fund account of the employee maintained at EPF & CIT till 18th Chaitra 2058. 2. The accrual of the accumulated leave pay and gratuity till 18th chaitra 2058. 3. Medical Treatment Expenses upto Rs. 180,000.00 as per the rules in relation to the employment of an individual who was at service at the time of implementation of this Act Mr. Ram was employee of GoN since 2040 B.S. He retired on 2065 B.S. Following retirement payments were made to him 1. Accumulated leave Pay 2. Gratuity

Rs. 300,000 (Rs. 1 lakh is upto 2058.12.18) Rs. 700,000 (Rs. 3 lakh is upto 2058.12.18)

3.

Rs. 400,000

Medical Expenses

What amounts are Taxable and what are exempt???

Particulars Accumulated Leave Pay Gratuity Medical Expenses Total

Exempt 1 lakh

Non Exempt 2 lakh

3 lakh 1.8 lakhs 5.8 lakhs

4 lakh 2.2 lakhs 8.2 lakhs

Exempt amounts are not considered for further calculation Only non-exempt retirement payments are considered. Thus, retirement payment is Rs. 8.2 lakhs on which withholding tax is deducted. Retirement Payments by GoN as employer. Calculate amount of TDS to be deducted by GoN

5% on gain = non-exempt retirement payments – 50% of such payments or Rs. 5 lakhs w.e. is higer. =8.2 lakhs – 5 lakh = 3.2 lakhs TDS = 16K

What will be the amount of non-exempt retirement payment if such payments were made by the resident employer other than GoN. 15% on Retirement payment = 8.2 x 15% = 1.23 lakhs

Payment by mutual fund If paid to resident natural person – 5% on Gain

FWP

If paid to others

not FWP

- 15% on Gain

Dividend  If paid by resident company or partnership – 5% FWP  If paid by others Exempted  If distribution of dividend is out of the dividend income of the entity - No TDS

Dividend means  Capitalization of Profit (bonus Shares/stock dividend) o Increase in par value of shares without decrease in no. of shares are also dividend.  Payment to any beneficiary of the entity in any capacity o Provided that such payment is included in taxable income of the beneficiary or will be FWP other than dividend.  Example 1. Mr. Ram owns 100% shares of AB Pvt. Ltd. He is working as managing director of the company and company paid Rs. 500,000 as salary. He obtained Rs. 5,000 as meeting allowances from AB Pvt. Ltd. per meeting. He was additionally provided with commission of Rs. 1 lakh for increasing sales of the entity by 50% than previous year. Company distributed Rs. 3 lakh of bonus shares to its beneficiaries. Find out the amount of dividend and amount of TDS. 2. Mr. Shyam 10% shareholder of XY Pvt. Ltd. XY Pvt. Ltd. is an investment company and had invested in equity shares of many banks & financial institution of Nepal. Nepal Bank Limited & Laxmi Bank Ltd gave cash dividend to XY Pvt. Ltd. amounting to Rs. 400,000 and Rs. 600,000 respectively. Dividend income is the only source of income of XY Pvt. Ltd. XY Pvt. Ltd. declared dividend of Rs. 500,000 to its

shareholder during the income year. How much TDS is deducted on dividend received by Mr. Shyam???

Exceptions on deduction of TDS u/s 88 – No TDS 1. 2. 3. 4. 5. 6. 7. 8.

Payment by a natural person except by SPB Payment for publishing articles in the newspaper Interest paid to a resident bank or financial institution Payment of amounts that are exempted from tax Interregional interchange fee paid to a bank using credit card Dividend or interest paid to a mutual fund Payment of house rent to a natural person other than SPB Payment of incentive to consumers who makes payment for purchase of goods and service through electronic medium like card, e-money (wallet), mobile banking as per prevailing law.

Withholding Tax on windfall Gain (Section 88ka) Windfall gain means lottery, gifts, prizes, tips, winnings or any benefit/gain received suddenly. Conditions: No conditions attached

A person making payment of windfall gain shall withhold tax at 25% of such payment. FWP

Exception is on prize if the following conditions are met (Exempt Amount) 1. Prize upto Rs. 5 lakh is exempt 2. Shall be national or international level 3. Shall be in the recognition of the person's contribution to specific fields like literature, arts, culture, sports, journalism, science, technology and public administration.

Withholding Tax on Contractual Payments (section 89) Conditions to be satisfied 1. Contractual payments (regardless of the source of payments) 2. Made by resident person.

Rate of TDS – 1.5% in case the amount of payment exceeds Rs. 50,000 Further notes  For calculating the threshold of Rs. 50,000, payment of last 10 days for the same contract to same person or associated person are also considered.  Contract for the purpose of section 89 means contract related to  supply of goods or human resources  construction, installation, or establishment of tangible assets or structure & auxiliary services thereon  other works prescribed as contract by the department

 In case of payment exceeding Rs. 5 million to Consumer group – 1.5%

TDS on contractual payments to non-residents    

For contract Insurance premium Commission paid for reinsurance In other cases

- 5% - 1.5% - 1.5% - as prescribed by IRD

TDS not required u/s 89  Payment by a natural person other than conducting a business  If the payment is exempt amount  In case the payments are under section 87 & 88 of ITA, 2058

Final withholding Payments (section 92) The following payments are final withholding payments if TDS on such payments has been deducted u/s 87, 88, 88ka & 89 of ITA, 2058. 1. 2.

3. 4. 5.

6. 7.

Dividend paid by resident company and partnership Payment of rent to a natural person other than SPB for the temporary use of land or equipment or apparatus attached to such land Gain on investment from insurance paid by resident person Payment of gain from unapproved retirement fund to a resident person Payment of interest by a resident bank, financial institution, cooperatives, any other entity issuing debenture or any company listed under prevailing law against deposit, debenture or government bond to i. Natural person other than SPB ii. Tax Exempt Organization Withholding payments made to a non-resident person u/s 87, 88, 88ka & 89 of ITA, 2058. All type of retirement payments including that made by GoN and approved retirement fund (except pension received on regular basis)

8.

Meeting allowances to the extent Rs. 20,000 per meeting, occasional lecture fee, payment against setting question paper and checking answer sheets. 9. Windfall gain 10. Consideration/benefit paid by Mutual Fund to a natural person 11. Payment of transportation rent or vehicle rent to a natural person other than received by private firm

Deposit/payment of withholding taxes and e-TDS return  The withholding agent shall deposit withholding taxes deducted during Nepali calendar month within 25th days of the end of such month.  If withholding agent did not deduct such tax or did not deposit such tax within the said time, the responsibility shifts to withholdee. He gets additional 25 days to deposit such tax as if they were deducted by withholding agent.  Same time limit is given to file e-TDS return.  However, person filing D02 return have to deposited collected TDS at the time of their advance tax deposit (i.e. poush end and ashadh end)

Certificate of withholding taxes The withholding agent shall issue a certificate within 25th days of the end of the month when tax is withheld clearly showing the period of tax withholding. Such certificate shall spell out the following

 It shall be certified as prescribed by IRD, if IRD prescribes any such method, and  The certific...