Withholding Taxes
A Note On The Nitty Gritty

By Rup Khadka

TAX withholding has been an important aspects of income tax system in various countries. The system has been adopted for several reasons. Firstly, it simplifies tax administration since under this system the tax is collected from a relatively small number of papers of income instead of a large number of receivers of income. It also reduces compliance and administrative costs since the large number of taxpayers (i.e. employees, depositors etc.) do not have to file tax returns and tax administration does not have to process them. Furthermore since the tax is collected mainly from employers and institutions that are usually better organized and whose number is relatively smaller than that of employees etc. the system helps minimize tax evasion. The withholding system also produces a steady flow of revenue to the exchequer.

The withholding tax system has been practiced in Nepal since the inception of income tax in 1959. Since that time tax is withheld on income at source by employers when the remuneration of employee is distributed. Withholding tax was extended to interest and dividends in 1975 and to commission, bonus, and other similar incomes in 1980,

The scope of withholding was expanded over the years. For example, a 5 per cent withholding tax was introduced in 1987/88 on import from Tibet and Tribhuvan International Airport. Its scope was extended in 1988/89, when a 5 per cent withholding tax was levied on the value as determined for the purpose of customs duties of imported commercial goods. It was repealed in 1990/91 but reintroduced in 1991/92 to a limited extent and extended to almost all imports over the years. It was extended to other types of income also over the years.

As a result, the scope withholding tax became very wide by 199/2000. The tax withholding was too open ended and undefined since it not only included unlimited range of payments but also included a "catch all" provision (i.e., all other payments are subject to 10 per cent withholding tax). This created uncertainty, non-compliance and high costs. It was also prone to tax fraud by withholders since they might not have deposited withheld tax to the treasury. This system also created difficulties to the taxpayers in getting credit for the amount withheld. The withheld tax paid on importation or purchases by the businessmen used to be shifted forward to the consumers via higher prices. Thus the income tax system, in practice, operated like a turnover tax.

Withholding is generally levied on income where it is not sure that tax will be collected. First attempt must be made to make the payers of income liable to provide information. Where the flow of income is documented, there is no need for withholding. It is, therefore, necessary to establish reporting requirement instead of withholding tax in the case of business income. Further, since installment system has been introduced recently, it would be better make installment system effect to ensure that tax is collected. So follow up on both reporting and installment should be done instead of levying withholding taxes on a variety of incomes.

Withholding system was rationalized to some extent in 2000/01 when the scope of withholding taxes was reduced. The draft Income Tax Act intenders to further fine-tune the withholding tax system. Under the new act, withholding will be limited to income payment. Business payments except contracts will not be subject to the withholding taxes.

The withholding tax will be final in case of dividends, interest paid to an individual not conducting a business, rent received by an individual other than conducting a business, gains from investment insurance and unapproved retirement funds, and contract payments exceeding Rs. 50,000. Withholding tax will also be levied on employment income, natural resource payments, royalties and service fees, interest, rent and retirement payments but it will not be the final. It will be adjusted at the time of payment of the final tax liability. Any of the above-mentioned payments made to non-resident persons will, however, be subject to final withholding taxes.

The withholdee shall be entitled to a tax credit only in an amount equal to the tax treated as paid and the credit shall be available for the income-year in which the payment is derived.

The draft Income Tax Act 2001 has also introduced detailed procedures relating to the withholding taxes. Any person who makes disbursement of incomes subject to withholding tax is required by law to withhold income tax at the time of disbursement, to remit all taxes thus withheld to the government account within 15 days and to submit particulars thereof to the tax office concerned. In cases where payment is due on an annual basis, tax is withheld for each period for which payment is actually made, on the basis of the total annual amount payable or of the total amount of tax due for the year. In case any person fails to withhold tax or withholds an amount less or more than that due, he shall adjust such omissions or discrepancies at the time of the next payment.

A withholding agent who withholds tax and pays the tax to the Department shall be treated as having paid the amount withheld to the withholdee for the purposes of any claim by the withholdee for payment of the amount withheld.

A withholding agent who fails to withhold tax but pays the tax that should have been withheld to the government shall be entitled to recover an amount equal to the tax paid from the withholdee.

A withholding agent shall be required to prepare and serve on a withholdee a withholding certificate. A withholding certificate shall be for a month and delivered within 15 days after the end of the month.

Corruption High Ways!

By Mukti Rijal

AN AUSTRIAN Cyclist who frequents Nepal very often is disappointed with the Nepalese roads. Sipping morning tea at a road side eatery near Naubise he tells of the harassments he had to meet as soon as he entered Nepal via Sunauli. He had to please policemen at every checkpoints. With no reason policemen stop and interrogate. Unless you talk back to them in precisely clear terms, they make you pay them. With no hesitation and mincing no words he accusses that the Nepalese highways have become "Corruption high ways". He shows the cracks and potholes in the highways and comments "this happens when roads are not asphalted properly." This results when people involved in road construction and rehabilitation perform "dishonestly." The cyclist, a lover of Nepal, seemed to this scribe a well wisher and the comments were though harse but not hostile.

The Prithvi highway, the only main highway linking meaningfully the capital city with the rest of the Kingdom-is virtually at the state of desirepair. It was rehabilitated not very long back and when it was ready it looked slim and slick. But now the highway is in tatters at several key places and points. It seems as if there is no agency to look after it. The vital points where repair is utmost needed are neglected. Come the rainy reason the damage to the road will go further. The Mugling Bazar a busy trijunction once famous for Dal Bhaat is stinking. The sewage runs over the road, as the drain is fully blocked. There is no agency to clear blockage and save the road from destruction.

The vehicles bound of Kathmandu need to stop at Mugling and pay road repair tax. The notice claims the tax you pay is used for repairing and maintaining the road you travel. The vehicles pay the tax for a time ranging from twenty five to at least seventy five rupees. This collects quite a huge amount which if honestly utilized can contribute much to maintain the road significantly. Given the deteriorating condition of the road it can be said that authorities are not committed to meet the claims they make through public notice to use the resources paid by the road users.

Tansen is a beautiful hill endowed with splendid and culture. However, its beauty and charm seemed fast decaying. Nature is not spoilt that much but culture is at peril. The interor of the Tansen Bazar is laden with waste and dirt. The tarred streets are breached. The tansen municipality and Palpa DDC owe a duty to save this historic and beautiful town from fast paced degeneration. When this scribe raised the point Palpa DDC president Jhabendra GC was very positive and expressed dismay over the condition. He said that efforts are being made to pave stones on the streets much similar to Kathmandu’s Basantpur pattern. This, as told by the DDC President, is the only way to save the Tansen Bazar from dirt and dust.