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Requirement for Renewal of Tax Exemption Certificate

Date:September 22, 2016

A. Amendments to the Income Tax Rules 2002
The Income Tax Rules, 2002 (2059) (“ITR”) has recently been amended by the amendment published in the Nepal Gazette on July 4, 2016 (20-03-2073) (the "ITR Amendment").

The ITR Amendment has amended Rule 5 of ITR and added Rule 5A. The amended provisions deals with submission of financial statement and tax returns and the renewal of tax exemption certificate ("Tax Exempt Certificate") by tax exempt entities such as NGOs, INGOs and Charitable Organizations ("Tax Exempt Entities").

The ITR Amendment will have the following implications on the Tax Exempt Entities.
1. Renewal of Tax Exemption Certificate
1.1. The added provision in Rule 5A requires Tax Exempt Entities to get their Tax Exempt Certificate renewed with the Inland Revenue Department (“IRD”) on an annual basis.
1.2. Pursuant to the amendment, the Tax Exempt Certificate must be renewed within 3 months following the end of each Fiscal Year. Prior to the ITR Amendment, there was no requirement to renew the Tax Exempt Certificate issued to Tax Exempt Entities.
2. Submission of Financial Statement and Tax Returns by Tax Exempt Entities
2.1. The ITR Amendment also requires the Tax Exempt Entities to submit their audited annual financial statements to the IRD within 3 months after the expiry of each fiscal year. Prior to the amendment while entities receiving tax exemption through advance ruling were required to submit their annual financial statements such requirement was not applicable to other Tax Exempt Entities.
2.2.In case of Tax Exempt Entities that receive any taxable income, the tax withholding on which is regarded as final pursuant to Section 92 of Income Tax Act 2002 (2058) (such as on account of rent, interest, dividend, etc.), the ITR Amendment has introduced the requirement to submit tax returns in accordance with Section 96 of the Income Tax Act.

Note: The IRD has also published a notice in one of the national daily newspapers on August 24 2016 (08-05-2073) notifying all the concerned entities about the amendment.
B. SWC Increases Annual Minimum Financial Commitment of INGOs
1. Social Welfare Council (“SWC”) has amended the General Agreement and Services Facilitation Guideline, 2015 (2071) ("GA Guidelines"). By way of background, the GA Guidelines provides the procedural guidelines for entering into General Agreement; a bilateral agreement entered between the SWC and International Non-Government Organizations (“INGOs”) which serves as the principal agreement forming the basis for the presence and operation of the INGOs in Nepal and sets out, inter alia the minimum amount such an INGO is required to fund annually in Nepal.

For more information on the legal regime governing the INGOs in Nepal, please click here.
2. The amended provision of the GA Guidelines has increased the minimum annual financial commitment of INGOs was from US$ 100,000 to US$ 200,000. Following the amendment, the INGOs proposing to get involved in social welfare activities in Nepal will now be required to make annual financial commitment of US$ 200,000.
3. In case of the existing INGOs, the amended provision should to be applicable after the expiration of the term of their existing General Agreement with the SWC.