Methods of tax collection
The collection of taxes is one of the important functions of tax administration. A large portion of taxes is collected voluntarily. For the rest, the tax officials may take swift actions to recover taxes from defaulters. As per the income tax act, 2058, the government collects taxes through the following methods:
- Installment method
- Withholding/advance tax method
- Collection along with self-assessment
- Presumptive taxation
- Recovery or forced collection
A major portion of taxes from the business sector is collected through the installment method. Under this method, taxpayers having assessable income from a business or investment are required to pay income tax in the following three installments on the basis of the latest tax return or the estimated income of the current income year, whichever is higher:
- 1st installment: 40% of estimated tax is to be paid by the end of poush.
- 2nd installment: 70% of the estimated tax is to be paid by the end of chaitra.
- 3rd installment: 100% of the estimated tax is to be paid by the end of Ashadh.
The taxpayer should pay the remaining amount after deducting the amount of tax paid earlier while paying tax in subsequent installments.
Likewise, the person paying tax based on the volume of transaction is required to pay tax in two installments as follows:
a.By the end of Poush: At the prescribed rate on transactions up to Poush 20.
b.By the end of Ashadh: Tax payable amount on the estimated transaction by the end of Ashadh based on actual transaction up to ashadh 20 after deducting tax submitted on Poush end.
Withholding/Advance Tax Method
Withholding tax is the tax deducted from employment income, investment return, service fees, contract or other incomes by the payer of the income and paid to tax authorities wholly on behalf of the recipient (i.e. withholdee). Withholding tax, also known as tax deducted at source (TDS), is imposed on the receiver but collected through payers. It is based on PAYE (Pay As You earn) concept.
Any person who makes disbursement of incomes subject to withholding tax is required to withhold income tax at the time of disbursement, to remit all taxes thus withheld to the government account within 25 days and to submit particulars thereof to the tax office concerned.
The advance tax or withholding tax is considered as deducted by the person and at the time of the tax is required to be withheld even if actually withholding does not happen. The person responsible to recover advance tax is required to a submit the statement in the stipulated manner and format within 25 days of the month end. Both the taxpayer and the person responsible to recover advance tax are singly or jointly responsible to submit such tax to inland revenue department in case the later fails to deduct advance tax and fails to submit the tax assumed as deducted in the stipulated time.
Collection along with self-assessment
Each taxpayer is required to file a return within three months after the end of each income year. While filing the final return, taxpayers are required to pay the outstanding tax, if any.
Presumptive taxation is a system of taxation under which income tax is levied on the average income in place of actual income. Under this system, tax is levied at annual flat rates. It is suitable to small taxpayers whose actual incomes and actual expenses are extremely difficult or practically not feasible to assess. Income tax act, 2058 has made the following provisions to collect taxes from small taxpayers:
a. A taxpayer having income from business only with source in Nepal; not claiming medical tax credit and advance tax; not registered with VAT; annual turnover and net income do not exceed Rs. 2,00,000 and Rs. 20,00,000 respectively, may elect to pay annual taxes at a flat rate basis ranging from Rs. 1500 to Rs. 5000 depending on the location of a business.
b. A taxpayer running public transport business is required to pay annual taxes ranging from rs. 1,000 to Rs. 3,000 per vehicle.
Recovery or forced collection
The government may collect the delinquent taxes from defaulters in different ways such as the recovery of tax from person owing money to tax debtor, recovery from the agent of a non-resident, recovery from a receiver, recovery by issuing departure prohibition order or recovery from the sale (auction) of charged assets. All these recovery measures are discussed in detail in the next section.