Introduction
Businesses operating in Nepal must comply with multiple tax and social security registration requirements. The Primary Account Number (PAN), Value Added Tax (VAT), payroll systems, and Social Security Fund (SSF) contributions form the foundation of Nepal’s business regulatory framework. These systems ensure proper tax collection, employee protection, and government revenue generation. Understanding these obligations helps businesses maintain legal compliance and avoid penalties under Nepalese law.
PAN (Primary Account Number) for Businesses
Overview and Legal Framework
The Primary Account Number (PAN) is a unique identifier issued by the Inland Revenue Department (IRD) under the Income Tax Act, 2058 (2002). Every business entity, including sole proprietorships, partnerships, and companies, must obtain a PAN before commencing operations. The PAN serves as the primary reference for all tax-related transactions and financial dealings in Nepal.
PAN Registration Process
The PAN registration process involves submission of required documents to the IRD office. Applicants must complete the prescribed application form and provide proof of business registration, citizenship documents, and address verification. The IRD processes applications within seven working days and issues the PAN certificate. Businesses can apply online through the IRD portal or visit the nearest IRD office directly.
PAN Requirements and Obligations
| Requirement | Details |
|---|---|
| Mandatory for | All business entities and individuals earning income |
| Validity | Permanent and lifelong |
| Application Fee | No fee for PAN registration |
| Renewal | Not required; PAN remains valid indefinitely |
| Penalty for Non-Compliance | Fine up to NPR 10,000 under Income Tax Act |
VAT (Value Added Tax) Registration
VAT Registration Criteria
Value Added Tax registration is mandatory for businesses with annual turnover exceeding NPR 5 million. The VAT system operates under the Value Added Tax Act, 2052 (1996). Businesses below this threshold may voluntarily register for VAT. Registration enables businesses to claim input tax credits and maintain compliance with tax laws.
VAT Registration Procedure
The VAT registration process requires submission of application forms to the Inland Revenue Department. Applicants must provide business registration certificates, PAN certificates, bank account details, and premises information. The IRD verifies documents and issues VAT registration within 15 days. Businesses receive a VAT certificate and unique VAT identification number upon approval.
VAT Compliance Obligations
Registered VAT businesses must maintain detailed records of all transactions. Businesses file VAT returns monthly or quarterly depending on their turnover classification. The standard VAT rate in Nepal is 13 percent on most goods and services. Certain items including basic food grains, medicines, and educational materials qualify for exemption or reduced rates.
| VAT Category | Turnover Threshold | Filing Frequency |
|---|---|---|
| Mandatory Registration | Above NPR 5 million annually | Monthly or quarterly |
| Voluntary Registration | Below NPR 5 million | As per registration terms |
| Exempted Entities | Non-profit organizations | Not applicable |
Payroll System for Businesses
Payroll Registration Requirements
Businesses employing staff must register with the Inland Revenue Department for payroll tax purposes. The payroll system operates under the Income Tax Act, 2058 (2002). Employers must deduct income tax from employee salaries and remit payments to the IRD monthly. Payroll registration ensures proper tax withholding and employee record maintenance.
Income Tax Withholding Obligations
Employers must calculate and withhold income tax from employee salaries according to prescribed tax slabs. The tax rates vary based on employee income levels and personal circumstances. Employers file monthly income tax returns and deposit withheld amounts to designated bank accounts. Failure to remit withheld taxes results in penalties and interest charges under tax law.
Payroll Documentation and Records
Businesses must maintain comprehensive payroll records including employee contracts, salary registers, and tax deduction documents. The Inland Revenue Department requires submission of annual payroll statements and employee tax certificates. Employers issue Form 8 (Tax Certificate) to employees by January 31 each year. These records must be retained for at least five years as per legal requirements.
SSF (Social Security Fund) Contributions
SSF Registration and Coverage
The Social Security Fund operates under the Social Security Act, 2074 (2017). All businesses employing workers must register with the SSF and contribute on behalf of employees. The SSF provides benefits including medical coverage, disability protection, and retirement provisions. Registration occurs through the SSF office or online portal with business registration documents.
SSF Contribution Rates and Calculation
| Contribution Type | Employer Rate | Employee Rate | Total Rate |
|---|---|---|---|
| General Workers | 11% | 11% | 22% |
| Self-Employed | 22% | — | 22% |
| Voluntary Members | — | 22% | 22% |
Employers calculate SSF contributions based on employee monthly salaries. The employer contributes 11 percent while employees contribute 11 percent from their wages. Self-employed individuals and voluntary members contribute 22 percent of their income. Contributions are calculated on the basic salary excluding allowances and bonuses in certain cases.
SSF Compliance and Reporting
Businesses must remit SSF contributions monthly to designated bank accounts. The SSF issues contribution receipts and maintains member records. Employers file quarterly and annual SSF reports detailing employee contributions and coverage. Non-compliance results in penalties, interest charges, and potential legal action under the Social Security Act.
Integrated Compliance Framework
Coordination Between Systems
PAN, VAT, payroll, and SSF systems operate in coordination under Nepal’s tax and social security framework. Businesses must ensure consistency across all systems regarding business information and employee records. The Inland Revenue Department and Social Security Fund share information to verify compliance. Integrated compliance reduces administrative burden and ensures accurate reporting.
Record-Keeping Requirements
Businesses must maintain integrated records covering all tax and social security obligations. Documentation includes business registration certificates, PAN certificates, VAT certificates, payroll registers, and SSF contribution receipts. Records must be organized chronologically and retained for minimum five years. Digital record-keeping systems facilitate compliance and audit processes.
Penalties for Non-Compliance
| Violation | Penalty Range | Legal Basis |
|---|---|---|
| PAN non-registration | Up to NPR 10,000 | Income Tax Act, 2058 |
| VAT non-registration | Up to NPR 50,000 | VAT Act, 2052 |
| Payroll tax default | 10–50% of unpaid tax | Income Tax Act, 2058 |
| SSF non-contribution | 10% penalty plus interest | Social Security Act, 2074 |
Frequently Asked Questions
What is the difference between PAN and VAT registration?
PAN is a unique identifier for all taxpayers required for income tax purposes. VAT registration applies specifically to businesses with turnover exceeding NPR 5 million and involves collecting and remitting sales tax on transactions.
Can a business operate without VAT registration if turnover is below NPR 5 million?
Yes, VAT registration is mandatory only for businesses exceeding NPR 5 million annual turnover. Businesses below this threshold may voluntarily register to claim input tax credits.
What happens if an employer fails to remit SSF contributions?
The Social Security Fund imposes 10 percent penalty on unpaid contributions plus interest charges. Continued non-compliance may result in legal action and business registration suspension.
How often must businesses file payroll tax returns?
Employers must file monthly income tax returns and remit withheld taxes to the Inland Revenue Department within specified deadlines.
Are there any exemptions from SSF contributions?
Certain categories including government employees, armed forces personnel, and specific occupational groups receive exemptions under the Social Security Act, 2074.
What documents are required for PAN registration?
Applicants must provide business registration certificates, citizenship documents, address verification, and completed application forms to the Inland Revenue Department.
Can businesses register for VAT online?
Yes, the Inland Revenue Department provides online VAT registration through its official portal with required documentation submission.
What is the penalty for VAT non-compliance?
Penalties range from NPR 50,000 to higher amounts depending on violation severity under the Value Added Tax Act, 2052.
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Conclusion
Compliance with PAN, VAT, payroll, and SSF requirements forms the legal foundation for business operations in Nepal. Businesses must understand registration procedures, contribution rates, and reporting obligations under applicable laws. Maintaining accurate records and timely submissions prevents penalties and ensures regulatory compliance. Consulting with tax professionals and social security advisors helps businesses navigate these complex requirements effectively.
