Rule 29: CGT As Final Tax for Share and Real Estate Earnings; Filing & Clearance Required for Income Over Rs. 40 Lakhs from FY 078/79
On Jestha 15, Finance Minister Dr. Prakash Sharan Mahat in a joint session of the parliament announced the fiscal budget for the upcoming FY 2080-81. In his address, he notified of that if a Nepali citizen declares income from share or real estate trading from FY 2076/77 to 2078/79, until Chaitra, 2080, the 50 percent tax levied tax in accordance with Income Tax Act, 2058 will be waived.
The arrangement also at at time had implied that even if the capital gains tax received during share trading has been paid, the income has to be filed.
See Rule 29 of the Economic Bill, 2080 here:
The investor associations argued that, up until now, transactions conducted by individuals, as opposed to firms or companies, have not been considered as business activities and, as a result, have not been subject to tax return submissions. In a joint press release, Nepal Investor Forum, Share Investor Association/Share Laganikarta Sangh Nepal and Nepal Capital Market Federation, expressed their concerns. They had further warned that if their demand maintain Capital Gain Tax (CGT) as the final tax was not fulfilled, they would protest the decision.
See earlier issued joint press release here:
Thereafter, the Inland Revenue Department (IRD) issued a press release stating that there have been no changes in the Income Tax Act 2058, in line with which CGT will be the final tax. However, the press release issued by the IRD had mentioned that only irregular/infrequent(पटके) share traders can entertain the said tax concessions as opposed to regular/frequent (नियमित) share traders.
This had caused confusion as to who can entertain the said tax concession of 50 per cent.
See first press release of IRD here:
The Inland Revenue Department (IRD) in the evening of the same day published a second notice in an attempt to further clarify the ongoing controversy with regard to the arrangements in the taxation system.
As per the second press release in relation to the same matter, IRD stated that, it has been understood through several media outlets that the investors are still in limbo particularly with regard to Rule no 29 of the Economic Bill, 2080.
In the second press release contrary to the earlier press release issued by the IRD which had mentioned that only irregular/infrequent(पटके) share traders can entertain the said tax concessions as opposed to regular/frequent (नियमित) share traders; IRD had mentioned that only those who have been trading shares as natural persons as opposed to those have been doing so as regular business will be able to entertain the tax concession.
See second press release here:
Later, a meeting to conduct negotiations between the representatives of the Finance Ministry, Inland Revenue Department (IRD), SEBON Chairman, Stock Brokers Association of Nepal (SBAN), and Nepal Investor Forum, Share Investor Federation and Nepal Capital Market Federation and other stakeholders had concluded. In that meeting, Minister Mahat had requested the investors to not panic and ascertained the fact the Capital Gain Tax (CGT) has been established as the final tax and that no additional taxes will be levied on profits from share trading.
Similarly, in a letter addressed to the Nepal Land & Housing Developers' Association (NLHDA), an organization representing real estate businessmen, the Inland Revenue Department (IRD) had affirmed that the existing legal framework governing the sale of real estate by natural persons remains unchanged and as such the capital gains tax, filed at either 5 percent or 7.5 percent according to the prescribed rules, will be considered final for such transactions.
See letter here:
On Wednesday, the Appropriation Bill for the fiscal year 2080-81 was put to a vote. The bill received 147 votes in favor, which constitutes a majority in the House of Representatives. The bill has passed without amendments.
Following the passing of the bill, without any amendments, has yet again left the investors in limbo with regard to the implementation of the Rule 29 of the Economic Bill, 2080.
Investor and activist Tilak Koirala has confirmed that the Capital Gains Tax (CGT) has been established as the final tax for share trading income at the rates of 5% and 7.5% for short-term and long-term holdings, respectively. However, individuals earning more than Rs. 40 lakhs annually are still required to file taxes and obtain tax clearance since the fiscal year 2078/79.
In a conversation with a Sharesansar correspondent, Koirala revealed that the Inland Revenue Department recently issued a circular to the Internal Revenue Offices, creating a database with separate software to record details of individuals earning an annual income exceeding Rs. 40 lakhs. These individuals are now obligated to fill out the D-4 statement and pay their taxes. Tax offices are sending SMS notifications to natural persons, urging them to provide the necessary details and file their taxes. This has resulted in a mandatory situation.
Koirala stated, "Since 2076/077, I have been earning an annual income of over Rs. 40 lakhs but have not paid taxes by filling out the D-4 statement for any financial year. However, I am now obligated to do so, starting from this year."
Regarding the implementation of Rule no. 29, which has been contested, Koirala explained, "If Rule 29 of the Economic Bill had not been inactive, every natural person would have received a notice to submit their income statement from the fiscal year 2076/077, filing taxes according to the Income Tax Act. This would have involved applying divisive policies such as 'regular investment' and 'infrequent' and imposing a 39% income tax rate. The Inland Revenue Offices are now emphasizing tax payments. It is evident that the profit tax of 5% or 7.5% paid by all natural persons during the sale of listed securities has become the final tax. The hassle of filing taxes based on income tax limits from previous years and completing the D- 04 statement has ceased."
"However, starting from the fiscal year 2078/079, strict enforcement of filling out the D-04 statement, as stipulated in section 97 of the Income Tax Act 2058, has been initiated. Investors with an income exceeding Rs. 40 lakhs must obtain a submission number on D-4 form, complete the required information, and make the tax payment at the tax payer's office where they obtained their PAN number before the end of Asoj."
Koirala said that a penalty of 0.01% of the total income on a monthly basis will be levied in case if failure to fill out the D-4 form after Asoj.
"Failure to comply will result in a late penalty amounting to 0.01% of the total income on a monthly basis. Although individuals with an income less than Rs. 40 lakhs are not required to fill out the D-4 form, it is advisable to stay up-to-date with tax payments," Koirala elaborated.
Koirala highlighted the ongoing confusion regarding tax clearance procedures, specifically related to capital gains tax paid by natural persons when selling shares. He explained, "Circular No. 144, issued by the Inland Revenue Department on Ashad 5, 2077, has created a problem. While a natural person can obtain a PAN (taxpayer) number from any office, tax payments can only be made at the office where taxes are filed. NEPSE deducts capital gains tax in advance when investors sell shares and files them at the medium-level taxpayer office in Kathmandu Babarmahal."
"There is now confusion regarding whether investors in Jumla have to visit the medium-level taxpayer office in Kathmandu to collect their tax payments. Investors are perplexed due to the inconsistent behavior of tax offices," Koirala shared.
To resolve these inconveniences, Koirala suggested that the government, relevant offices, and stakeholders prioritize digitization and automation of tax filing and subsequent clearance processes. He emphasized the need to establish a system where the tax payment amount is automatically deposited into the government account and reflected in the taxpayer number of the relevant investor when capital gains tax is deducted during share sales. Koirala pointed out that some investors' profit tax amounts have not been filed by NEPSE in the tax office, resulting in them not being reflected in their PAN number. This causes difficulties for investors despite them having paid their taxes. Implementing a system that allows investors to obtain tax payment certificates for capital gains tax, interest tax, and dividend tax in a digital format would help eliminate tax-related complaints with the government. Additionally, Koirala proposed defining the advance taxes paid by investors as final taxes to prevent tax evasion in share transactions conducted through NEPSE.
Similarly, acting President of the Share Investors Association Tara Prasad Phullel asserted that despite the approval of the Budget for FY 2080-81 rule 29 of the Economic Bill, 2080 will not come into effect.
"Although the Budget has been approved by the parliament, Rule 29 of the Economic Bill, 2080 will not be implemented as will be amended and necessary changes will be made in the said rule," Phullel said.
Phullel assured that they had reached an agreement with concerned officials to scrap said tax provisions as implied by Rule 29. "We have an agreement with the concerned officials that establishes capital gain tax as the final tax on share trading income and the same will remain to be the case," added Phullel.
However, Phulled shared that he was not aware of mandatory tax filing of share income over Rs. 40 lakh. "I am not aware of any such official directives to mandatorily file for taxes in case share trading income exceeds Rs. 40 lakhs. There are rumors about this in across media platforms, but, I have not received any official directive in relation to the same."
Similarly, Basanta Raj Tiwari, Under Secretary at the Ministry of Finance, said that although the budget (Economic Appropriation Bill) has been approved by the parliament the Economic Bill, 2080 has not been passed.
Tiwari said, "The Economic Bill, 2080 is still under discussion." Therefore, by default the Rule 29 of the Economic Bill, 2080 has not come into effect.
An appropriation, also known as supply bill or spending bill, is a proposed law that authorizes the expenditure of government funds. It is a bill that sets money aside for specific spending.
(Compilation and Reporting by Aashish Chaudhary)
