Running a small or medium enterprise in Nepal requires strict financial discipline. The Fiscal Year 2025/26 brings new challenges and opportunities for business owners. The government has updated policies to support specific sectors. You must understand these changes to reduce your liability. Effective tax planning in Nepal is not about evading the law. The goal is using legal provisions to keep more of your hard-earned profit.

Many business owners view taxation as a burden. A smart entrepreneur views taxation as a manageable cost. You optimize your operations to align with the Income Tax Act 2058. You take advantage of exemptions designed for your growth. This guide outlines five specific strategies to optimize your tax position this fiscal year.

The most fundamental decision for any SME is selecting the correct tax structure. The Inland Revenue Department (IRD) offers a presumptive tax scheme for smaller entities. This scheme simplifies compliance. You do not need to maintain complex audit reports if you fit the criteria.

‍Understand the Thresholds 

‍Up to NPR 3 Million: You pay a flat tax. The rates are NPR 7,500 for metropolitan areas, NPR 4,000 for urban municipalities, and NPR 2,500 for rural municipalities.

‍NPR 3 Million to NPR 10 Million: You pay a turnover-based tax. The rate is usually 1 percent of your total turnover for goods trading. Service businesses pay slightly higher rates.

‍Why This Strategy Matters? 

Choosing this scheme saves administrative costs. You avoid hiring expensive auditors for full financial statements. You reduce the risk of non-compliance fines. The flat rate is often lower than the 25 percent corporate tax rate applied to net profits.

‍When to Switch? 

Do not assume this scheme is always better. If your business runs at a loss, paying a turnover tax is a disadvantage. A business with high expenses and low profit margins should opt for normal audit-based filing. In a normal filing, you pay tax only on your net profit. If you have a loss, you pay nothing. You must calculate your estimated profit margin before choosing. If your margin is low, file a normal return. If your margin is high, the turnover tax saves you money.

The Nepal government offers tax holidays to encourage specific industries. Many SME owners miss these because they do not read the fine print. The FY 2025/26 budget continues strong support for startups and the IT sector.

‍Startup Tax Holiday 

New businesses often struggle with cash flow in the early years. The government grants a 100 percent income tax exemption for five years to eligible startups. The definition of a startup now includes entities with a turnover of up to NPR 100 million. This is a massive increase from previous years. You must register your entity as a startup with the Department of Industry to claim this.

‍IT and Export Incentives 

The world demands digital services. Nepal wants to supply them. The budget provides a 75 percent tax exemption on income earned from exporting IT services. This effectively lowers your tax rate to 5 percent. If you run a software company, a BPO, or a digital design agency, this concession is vital. You must ensure your foreign income enters Nepal through formal banking channels to qualify.

‍Manufacturing and Special Industries 

Production-based businesses receive special treatment. Special industries get a 20 percent discount on the applicable tax rate. If you operate in a remote area, you get even more. Remote Area A offers a 90 percent rebate. Remote Area E offers a 10 percent rebate. Moving your factory to a less developed district reduces your tax bill significantly.

Depreciation is a non-cash expense. You do not pay cash out, but you reduce your taxable profit. The Income Tax Act allows you to deduct a portion of your asset costs every year. Smart SME tax strategies in Nepal involve timing your asset purchases.

‍The Pool System 

Assets fall into pools. You must identify which pool your asses fall into. Here’s a properly classified list showing the different asset pools.

Pool A: Buildings (5 percent rate)
‍Pool B: Computers and Office Furniture (25 percent rate)
‍Pool C: Vehicles (20 percent rate)
‍Pool D: Manufacturing Machinery (15 percent rate)

Timing Your Purchase 

The law allows a full year of depreciation if you buy the asset in the first six months of the fiscal year (Shrawan to Poush). If you buy in the next three months (Magh to Chaitra), you get 2/3rds of the rate. If you buy in the last three months (Baishakh to Ashad), you get only 1/3rd.Buy assets before Poush ends. You claim the full depreciation amount. This lowers your taxable income for the year. Waiting until Ashad reduces your claim.

‍Additional Depreciation for Manufacturers 

Manufacturing companies get an extra benefit. You claim an additional 1/3rd depreciation on top of the normal rate for your machinery. This accelerates your deduction. You reduce your tax liability faster in the early years of operations. Ensure your company registration explicitly states manufacturing as the primary objective.

Business is unpredictable. You will face bad years. The tax law allows you to use these bad years to lower your future tax bills. This provision is called "Loss Carry Forward."

‍The Seven-Year Rule 

You carry a business loss forward for seven years. If you lose NPR 1 million this year, you deduct this amount from your profits next year. You pay tax only on the remaining balance.

‍Example
‍
   1. Year 1: Loss of NPR 500,000. Tax paid: 0.
    2. Year 2: Profit of NPR 800,000.
    3. Taxable Income in Year 2: NPR 800,000 - NPR 500,000 = NPR 300,000.

‍Donation Claims 

You also lower your taxable income by donating to approved institutions. The law allows a deduction of up to NPR 100,000 or 5 percent of your adjusted taxable income, whichever is lower. Donations to tax-exempt organizations reduce your final tax bill. Keep official receipts for every donation.

‍Medical Tax Credit 

Small business owners often operate as sole proprietors. You claim a medical tax credit. The law allows a deduction of 15 percent of your medical costs, up to NPR 750. This is a small amount, but every rupee counts for a micro-enterprise.

The most expensive tax is a penalty. Fines and interest payments are not deductible expenses. You pay them from your post-tax profit. Avoiding these penalties is the most effective business tax strategy.

‍VAT Compliance 

Value Added Tax (VAT) rules are strict. You must file returns by the 25th of the following month. Missing this deadline attracts a fine. The government has removed VAT on certain digital payments to encourage compliance. Using digital channels creates a transparent audit trail. This makes filing easier.

‍TDS Deadlines 

You must deduct Tax Deducted at Source (TDS) on specific payments like rent, salaries, and audit fees. You must deposit this amount to the IRD within 25 days of the month end. Failure to deposit TDS attracts an interest rate of 15 percent per annum. This interest cost destroys your margins.

‍Digital Record Keeping 

The IRD is moving to a digital monitoring system. Your billing software must link to the IRD server if your turnover exceeds specific limits. Using approved software prevents errors. Manual bookkeeping leads to mistakes. Mistakes lead to fines. Automating your accounts ensures accuracy.

‍Partnering for Financial Success

‍Implementing these strategies requires time and expertise. You focus on growing your business. A professional team handles the complexity of compliance.GPR offers specialized taxation services for growing businesses in Nepal. The team at G.P. Rajbahak & Co. understands the nuances of the local market. We guide you through the exemptions and filing requirements. You gain a partner dedicated to your financial health. Secure your profits by working with experts who know the law inside out.

1. What is the tax rate for a private limited company in Nepal for FY 2025/26? 
‍
Ans: The standard corporate tax rate is 25 percent. Special industries like manufacturing pay 20 percent. Banks and financial institutions pay 30 percent. Startups and export-oriented IT companies enjoy significant exemptions, paying as little as 0 to 5 percent depending on eligibility.

‍2. How do I register my business as a startup to get the tax holiday? 

Ans: You apply to the Department of Industry. Your business must meet specific criteria. These include being in operation for less than 10 years, having an annual turnover under NPR 100 million, and using innovative technology or production methods. Once approved, you claim the 100 percent tax exemption for five years.

‍3. Do I need to register for VAT if my turnover is small? 

Ans: VAT registration is mandatory if your annual turnover for goods exceeds NPR 5 million. For services, the threshold is NPR 2 million. You register voluntarily even if you earn less. This allows you to claim refunds on the VAT you pay on purchases.

4. Are fines and penalties deductible from business income? 

Ans: No. You cannot deduct fines, penalties, or the income tax itself from your business income. These payments come from your net profit. This makes compliance crucial for maintaining profitability.

‍5. When is the deadline for filing the final tax return?

Ans: You must file your final income tax return within three months of the fiscal year-end. This usually falls in mid-Ashwin (end of September or early October). You apply for a three-month extension if needed, but you must pay the estimated tax liability by the original deadline to avoid interest.