What is Advance/Installment Tax?
Business owners in Nepal need to understand Advance Tax to comply with tax laws. This blog explains how Advance Tax works in Nepal, so you can navigate this important part of your business.
Advance Tax refers to the payment of income tax in advance before the end of the fiscal year. It is a system designed to ensure regular tax payments throughout the year rather than paying the entire tax liability at the end of the fiscal year.
The amount of advance tax that is payable is determined by the taxpayer’s estimated income tax liability for the year. The taxpayer’s estimated income tax liability is determined by their business income, expenses, and other deductions.
In Nepal, companies need to pay advance tax in three installments by estimating their annual income well in advance. Hence, it is also called Estimated Tax or Installment Tax.
Who should pay Installment Tax?
All businesses that do not come under the Presumptive Taxpayer Criteria (i.e., D-01 Return Filers) must file an estimated tax return and pay advance tax as required. This means that each and every company is required to pay advance tax if their annual tax amount is greater than Rs. 7,500.
Advance Tax Due Dates For FY 2079-80
| Due Date | Advance Tax Payment Percentage |
|---|---|
| End of Poush | Pay 40% of the Estimated tax amount |
| End of Chaitra | Pay 70% of the Estimated tax amount |
| End of Ashad | Pay 100% of the Estimated tax amount |
How to calculate Advance Tax Amount?
Calculating your company’s Advance Tax involves several steps. Here’s a simplified breakdown:
Step 1: Estimate Annual Sales
Begin by estimating the total annual sales your company expects to make.
Step 2: Calculate Gross Profit
To find the estimated annual gross profit, subtract the estimated Cost of Sales from the estimated annual sales. The Cost of Sales can be calculated using the formula: Opening Stock + Purchases + Direct Cost – Closing Stock.
Step 3: Estimate Indirect Expenses
Now, estimate your company’s annual indirect expenses, such as Administrative, Financial, and Selling Expenses. This will help you determine the estimated annual net profit.
Step 4: Determine Estimated Tax Liability
Using the estimated net profit, calculate the annual estimated tax liability. This will be the amount of tax your company is expected to pay based on its estimated earnings.
Step 5: Paying Advance Tax
To fulfill your Advance Tax obligations, follow these payment deadlines:
– Pay 40% of the estimated tax amount by the end of Poush.
– Pay 70% of the estimated tax amount by the end of Chaitra.
– Pay the remaining 100% of the estimated tax amount by the end of Ashad.
