Tax for NGOs and Not-for-Profits in Nepal

Introduction to Tax for NGOs and Not-for-Profits in Nepal

In Nepal, the tax for NGOs and not-for-profits is governed primarily by the Income Tax Act 2058 (2002) and related regulations. The Act provides specific provisions for the tax treatment of these organizations, recognizing their unique nature and social contributions.

Non-governmental organizations (NGOs) and not-for-profit entities play a vital role in Nepal’s social and economic development. These organizations operate with the primary goal of serving the public interest rather than generating profits. They are still subject to certain tax regulations and obligations under Nepali law.

NGOs in Nepal are generally registered under the Association Registration Act 2034 (1977) or the Social Welfare Act 2049 (1992). The tax treatment of these organizations depends on their registration status, activities, and compliance with relevant laws and regulations.

The Income Tax Act 2058 defines an “organization entitled to tax exemption” as:

1. A social, religious, educational, or charitable organization of public character registered without having a profit motive
2. An amateur sports organization formed to promote social or sports activities that does not result in profit to the organization or its members

These organizations can apply for tax-exempt status with the Inland Revenue Department (IRD). However, it’s important to note that tax-exempt status does not mean complete freedom from all tax obligations. NGOs still have certain responsibilities and reporting requirements to maintain their tax-exempt status and ensure compliance with Nepali tax laws.

Tax Obligations and Exemptions for NGOs

NGOs and not-for-profits in Nepal enjoy certain tax exemptions, but they also have specific tax obligations. Understanding these is crucial for proper compliance and financial management.

Tax Exemptions

1. Income Tax Exemption: NGOs registered as tax-exempt organizations are generally exempt from income tax on their core activities. This exemption applies to income derived from donations, grants, and membership fees used for the organization’s stated objectives.
2. Custom Duty Exemption: NGOs may be eligible for exemption from custom duties on imported goods that are directly related to their approved projects or programs. This exemption requires approval from the Ministry of Finance.
3. Vehicle Tax Exemption: NGOs may be exempt from vehicle tax for vehicles used for their approved projects, subject to certain conditions and approvals.

Tax Obligations in Nepal

NGOs engaging in any profit-making activities or operating businesses must pay taxes on income derived from such activities at regular corporate tax rates.

Withholding Tax: NGOs are required to withhold tax on certain payments, such as:

• Salaries and wages of employees (at progressive rates)
• Rent payments (10% for entities, local government rates for individuals)
• Service fees to resident persons (1.5% if VAT registered, 15% if not)
• Payments to non-resident persons (15% or as per applicable tax treaty)

Social Security Tax: NGOs must contribute to the Social Security Fund for their employees, with both employer and employee contributions required.

Value Added Tax (VAT): While NGOs are generally not required to register for VAT, they may need to do so if they engage in taxable activities exceeding the registration threshold (currently NPR 5 million for goods and NPR 2 million for services).

Property Tax: NGOs are generally subject to property tax on owned real estate, unless specifically exempted by local government authorities.

Tax Deducted at Source (TDS) Returns: NGOs must file monthly TDS returns for any taxes withheld from payments made.

Annual Tax Returns: Even tax-exempt NGOs are required to file annual tax returns with the IRD, reporting their income, expenses, and activities.

Procedure for Taxation of NGOs & Non-Profits

1. Register for tax-exempt status with the Inland Revenue Department
2. Maintain proper financial records and documentation
3. Prepare required tax forms, including TDS and annual returns
4. File returns and reports within specified deadlines
5. Ensure ongoing compliance through regular reviews and audits

Documents Required for NGO Tax Services

NGOs seeking tax services in Nepal need to provide the following:

1. Registration certificate from the relevant government authority
2. PAN (Permanent Account Number) certificate
3. Tax exemption certificate (if applicable)
4. Constitution or bylaws of the organization
5. Annual financial statements and audit reports
6. Minutes of board meetings related to financial decisions
7. Donor agreements and project proposals
8. Bank statements and reconciliations
9. Payroll records and employee contracts
10. Receipts and invoices for all income and expenses

Green Financial’s Tax Services for NGOs

1. Tax registration and exemption application assistance
2. Annual tax return preparation and filing
3. TDS calculation and return filing
4. VAT registration and compliance (if applicable)
5. Tax planning and advisory services
6. Representation before tax authorities
7. Tax audit support
8. Training on tax compliance for NGO staff

Timeframe for NGO Tax Processes

The timeframe for various NGO tax processes in Nepal can vary:

1. Tax-exempt status application: 1-3 months
2. Monthly TDS return filing: Due within 25 days of the end of each month
3. Annual tax return filing: Due within 3 months of the end of the fiscal year (mid-October)
4. VAT return filing (if applicable): Due within 25 days of the end of each month
5. Tax audit (if required): Usually completed within 3-6 months of the fiscal year-end

Cost Considerations for NGO Tax Services

The cost of tax services for NGOs in Nepal can vary depending on the organization’s size, complexity, and specific needs. Factors influencing the cost include:

1. Annual revenue and expenditure
2. Number of employees and payroll complexity
3. Volume of transactions and financial activities
4. Requirement for specialized tax advisory services
5. Frequency of reporting (monthly, quarterly, annually)
6. Need for tax audit support

GFCS offers competitive pricing for NGO tax services, with transparent fee structures based on the scope of work required. We provide detailed quotations after assessing each organization’s specific needs and circumstances.

Relevant Laws and Authorities for NGO Taxation

The primary laws and authorities governing NGO taxation in Nepal include:

1. Income Tax Act 2058 (2002) and Income Tax Rules 2059 (2002)
2. Value Added Tax Act 2052 (1996) and Value Added Tax Rules 2053 (1997)
3. Association Registration Act 2034 (1977)
4. Social Welfare Act 2049 (1992)
5. Inland Revenue Department (IRD)
6. Ministry of Finance
7. Social Welfare Council

NGOs must comply with these laws and work with the relevant authorities to ensure proper tax compliance.

NGO Tax Practices in Nepal

NGO tax practices in Nepal have evolved over the years, with increased scrutiny and regulation. Some key practices include:

1. Maintaining clear separation between tax-exempt and taxable activities
2. Implementing robust financial management systems
3. Regular internal audits and financial reviews
4. Proper documentation of all financial transactions and decisions
5. Timely filing of all required tax returns and reports
6. Seeking professional tax advice for complex transactions or structures
7. Providing regular tax compliance training to staff and board members
8. Conducting periodic risk assessments related to tax compliance

These practices help NGOs maintain their tax-exempt status and avoid potential issues with tax authorities.

Conclusion

Taxation for NGOs and not-for-profits in Nepal involves a balance between enjoying certain exemptions and fulfilling specific obligations. These organizations benefit from tax-exempt status for their core activities, but they must still comply with various tax regulations, including withholding taxes, filing returns, and maintaining proper records.

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