Income Tax Records, Late Filing, Interest and Penalties in Nepal

Five years from the end of the relevant income year.

The statutory Section 81 text also requires the records to be maintained in Nepal.

Late returns, inadequate records, underpaid instalment tax and overdue tax can trigger different fees and interest. They should not all be described simply as a “fine”.

What Records Must Be Maintained?

Section 81 broadly requires:

Return-supporting records

Information and documents supporting returns and other documents submitted to IRD.

Tax-computation records

Documents necessary to determine tax payable.

Deduction records

Documents supporting expenditure/deductions claimed.

IRD's Transfer Pricing Directive repeats these Section 81 requirements and specifically requires relevant documents to be maintained so that they are readily available for IRD inspection.

Five-Year Retention Period

Unless IRD specifies another period by written notice:

records must be safely retained for at least five years from the end of the relevant income year.

Example

Income year: FY 2083/84

Do not destroy tax records immediately after filing the return or obtaining tax clearance.

The statutory five-year retention clock must first be completed, and longer retention may be prudent where there is:

• assessment;

• litigation;

• asset cost history;

• carried-forward losses;

• long-term contract;

• related-party issue;

• other continuing tax relevance.

Electronic Records

Tax records can increasingly exist electronically.

The current statutory/administrative framework recognises:

• electronic invoices;

• electronic records;

• electronic submission;

• IRD access to electronic information.

Taxpayers should maintain electronic records with:

• reliable backup;

• access controls;

• audit trail;

• readable export;

• document linkage.

A scanned invoice should not be stored in a way that makes it impossible to prove which accounting transaction it supports.

Foreign-language Documents

If a required record is not in Nepali or English, Section 81 allows IRD to require a Nepali translation prepared by a legally recognised translator at the taxpayer's cost.

This is especially relevant for:

• foreign contracts;

• invoices;

• technical agreements;

• loan agreements;

• royalty agreements;

• transfer-pricing documents.

Failure to Keep Required Records

Section 117 imposes administrative fees where the taxpayer fails to maintain required Section 81 records.

IRD's current FAQ describes the charge by reference to the statutory percentage/minimum formula and separately warns taxpayers that failure to maintain required documents attracts a fee.

Calculate the fee from the applicable Section 117 formula, using the type and duration of default and the statutory base. One fixed figure does not cover every case.

Late Income Tax Return

Failure to file an annual income-tax return on time can attract a Section 117 fee.

IRD currently explains the ordinary annual-return failure fee as the higher amount determined through the statutory formula involving:

• the applicable percentage of the specified assessable-income base; or

• the monthly minimum charge.

Therefore:

A nil accounting profit does not automatically mean there is no late-filing consequence.

Estimated Tax Statement Default

Section 117(1)(क) imposes a fee for failure to submit the estimated-income statement required by section 95(1). The current formula is NPR 5,000 per statement or 0.01% of the assessable-income amount stated in that statement, whichever is higher. This is not a general monthly charge.

Keep this filing fee separate from section 118 interest on an instalment-tax shortfall and section 119 interest on overdue tax. Identify the actual filing obligation and the applicable income year before calculating the charge.

Late e-TDS Return

If a withholding person fails to submit the Section 90 withholding return, Section 117 imposes a separate fee based on the amount required to be withheld and the duration of delay.

The current Act translation specifies 2.5% per year of the amount required to be withheld, applied according to the statutory monthly/part-month mechanism.

This is in addition to the consequences of not actually depositing withheld tax.

Late Tax Payment Interest — Section 119

Where tax is not paid by the prescribed due date, Section 119 applies interest at the normal interest rate for the period the tax remains due.

IRD currently states:

Normal interest rate = 15% per annum

and explains that interest is calculated for each month or part of a month from the payment due date until payment.

Filing Extension Does Not Remove Interest

Section 119 expressly provides that an extension of time to file a return under Section 98 does not automatically provide relief from late-payment interest.

IRD confirms this treatment.

Therefore:

Return filing deadline extension ≠ interest-free tax payment extension.

Instalment Tax Shortfall — Section 118

Section 118 applies where advance/instalment tax has been materially underpaid compared with the required estimated amount.

This is separate from Section 119 ordinary overdue-tax interest.

Taxpayers should therefore:

• forecast taxable income;

• update estimates;

• reconcile TDS credits;

• avoid deliberately low estimates.

False or Misleading Statements

Administrative consequences can also arise where a taxpayer makes a false/misleading statement.

IRD currently describes:

Error without intentional/negligent conduct

Charge broadly equal to 50% of the tax shortfall.

Intentional/negligent false statement

Charge broadly equal to 100% of the tax shortfall.

Separate criminal provisions can also apply in serious cases.

Therefore paying the administrative charge does not necessarily eliminate all other legal exposure.

Records Should Match Across Tax Systems

A robust tax file should reconcile: Financial statements

↔ Income Tax Return

↔ VAT

↔ e-TDS

↔ Bank

↔ Payroll

↔ Customs/import records

↔ OCR/company records where relevant

Large unexplained differences are a common source of tax queries.

Recommended Digital Tax File

Permanent master

• PAN/VAT certificate

• incorporation/registration

• tax-clearance history

• legal agreements

• major asset records

Annual file

• trial balance

• financial statements

• tax computation

• return

• tax depreciation

• tax-loss schedule

• TDS reconciliation

• advance tax

• payment vouchers

• VAT reconciliation

• supporting schedules

Transaction evidence

• invoices

• contracts

• bank evidence

• payroll

• import/customs documents

• related-party documents

Compliance Checklist

• Maintain transaction records

• retain invoices

• retain bank/payment evidence

• retain contracts

• Maintain tax-depreciation schedule

• Maintain tax-loss schedule

• Reconcile TDS

• Reconcile VAT

• retain filed returns

• retain IRD notices

• Preserve records for statutory minimum period

• Preserve litigation/asset records longer where needed

• Back up electronic data

• Verify records are retrievable

• translate foreign documents where IRD requires

Common Errors

Destroying records immediately after receiving tax clearance

Assuming scanned files need no backup

Treating late filing, late tax payment and inadequate record keeping as one penalty

Believing return-extension approval also suspends interest

Failing to reconcile TDS/VAT with financial statements

Relying only on the accounting software without retaining underlying evidence

Further guidance and practical checks

Tax documentation should be designed for future verification, not merely for preparation of the current year's return. Records may remain relevant after the ordinary five-year period where litigation, assets, losses or continuing transactions are involved.