Tax provisions for NGOs and INGOs in Nepal

Tax for NGOs                                                                                                                                                            Ram Babu Adhikary

According to Nepalese tax laws, organizations that are social, religious, educational, or charitable, and not

profit-driven, are usually exempt from taxes. This includes NGOs registered as social organizations or

approved by the Inland Revenue Department.

In recent years, the Inland Revenue Department has stopped renewing tax-exempt certificates for

NGOs and is not issuing new ones. This change could have significant effects, so let's break it

down.

Regardless of tax exemptions, certain types of income were always taxable:

• If an organization receives income from consulting fees or services, even if related to a social

cause, that income is taxable.

• If an organization earns profits from winning bids or competitive processes with profit-making

entities, those profits are taxable.

• Any income generated from activities not aligned with the organization's objectives is also taxable.

So, NGOs should pay taxes on these types of income, following the prevailing rates. They should also pay

taxes on unrestricted funds if there's a surplus. Additionally, NGOs have responsibilities like withholding

taxes on payments to service providers and deducting employment taxes from employees' salaries.

Tax for INGOs

The taxation situation for INGOs in Nepal is causing confusion and debate. Some INGOs have received tax

exemption certificates, while others haven't. This debate started when tax officials questioned whether

INGOs should be exempt from taxes.

INGOs have been contributing withholding taxes and submitting financial statements for years. But if they

don't have a tax exemption certificate, do they need to pay taxes on unspent amounts at year-end? The

Income Tax Act defines certain organizations as tax-exempt. These organizations need to apply for a tax

exemption certificate. If they have this certificate, they only need to submit audited financial statements.

Otherwise, they must file separate income tax returns.

The existing tax return form doesn't clearly address grants income and related expenditure for INGOs. This

has led to inconsistencies in how tax officers handle returns, leaving taxpayers confused. Fundamentally,

tax is only levied when income is generated. INGOs in Nepal typically don't generate their own income;

they receive funds from headquarters or donors. However, according to the Act, INGOs aren't categorized

as tax-exempt entities. They need to be registered as social, religious, educational, or charitable

organizations without a profit motive to qualify for tax exemption.

All INGOs in Nepal operate under general and project-specific agreements with the Social Welfare Council.

They lack legal registration like NGOs, so they don't qualify for tax exemption certificates. Even recent

finance bills haven't included INGOs in tax waivers for social organizations. This indicates a government

push to tax INGOs.