TDS on Services and Contract Payments in Nepal — FY 2083/84

The general withholding framework for service charges, commission, sales bonus, royalty and similar payments starts at: 15%

Example

Consultancy fee: NPR 200,000

Applicable general service TDS: 15%

TDS: NPR 30,000

Net: NPR 170,000

assuming the special VAT-registered service proviso does not apply.

Where the recipient satisfies the statutory VAT-registered resident-service condition: 1.5% TDS

Example

Professional/service invoice: Service value: NPR 200,000

VAT: NPR 26,000

Invoice total: NPR 226,000

TDS should be calculated on the applicable service/payment base, not simply on the VAT-inclusive amount.

At 1.5% on NPR 200,000: TDS = NPR 3,000

The VAT amount should not ordinarily be treated as the service provider's income for TDS computation merely because it appears in the gross invoice total.

Before applying 1.5%, check:

• resident recipient?

• VAT registered?

• correct VAT invoice?

• payment genuinely for service?

• specific statutory category?

• another overriding TDS rate?

Do not use:

“Consultant = 1.5%”

as a universal rule.

A PAN-only/non-VAT service provider can fall under the 15% general service rate.

Where a resident natural-person insurance agent receives service fee or commission: TDS = 20%

Finance Act 2083 introduced this specific rate, replacing reliance on the ordinary general commission rate for this category.

Example

Insurance commission: NPR 150,000

TDS: 20%

= NPR 30,000

Net: NPR 120,000

Section 89 governs qualifying contract/agreement payments.

A common current rate is: 1.5%

where the statutory contract-payment conditions and threshold are satisfied.

For a qualifying resident contract payment, section 89(1) requires withholding at 1.5% when the amount exceeds NPR 50,000. Section 89(2) requires the current payment to be combined with other payments made during the preceding ten days under the same contract, including the specified related-person payments. Classify the transaction and check the statutory exclusions first.

Example

Contract value/payment subject to withholding: NPR 500,000

TDS: 1.5%

= NPR 7,500

Net payment before other relevant adjustments: NPR 492,500

This distinction matters.

A business engages:

Chartered Accountant for tax advice

Likely starting point: service

Contractor to construct office partition

Likely starting point: contract/agreement

Software vendor to implement a system

Could involve:

• software licence;

• service;

• implementation contract;

• foreign royalty/service;

• VAT/digital-service implications.

The underlying agreement should therefore determine classification.

Specified contract payments to non-residents commonly attract: 5% withholding but that should not end the analysis.

Also check:

• Nepal-source rule;

• PE;

• treaty;

• permanent establishment attribution;

• VAT/DST where applicable;

• whether another specific withholding provision applies.

General commission: 15% unless a specific rule applies.

Examples of separate categories include:

• insurance agents;

• certain non-resident employment-company commissions;

• other specifically prescribed payments.

General royalty withholding normally starts at: 15% but non-resident royalties require treaty and source analysis.

Do not automatically use the domestic rate where a DTAA may restrict Nepal's tax.

Track the current payment together with payments made during the preceding ten days under the same contract, including payments involving the specified related persons. A lifetime total of every invoice under the contract is not the statutory aggregation test.

Example: Invoice 1: NPR 30,000

Invoice 2: NPR 30,000

If both NPR 30,000 payments fall within the statutory ten-day aggregation window under the same contract, the threshold calculation is NPR 60,000 and the section 89 withholding requirement must be applied to the relevant payment. Do not treat two payments separated by more than that window as automatically aggregated solely because they share a contract. Other withholding provisions and the full circumstances still matter.

Artificial splitting of invoices should not be used to avoid withholding.

Tax withheld under sections 88 and 89 must generally be: reported and deposited within 25 days after the end of the month of payment.

This requirement is stated in section 90 and confirmed by IRD.

Consultancy invoice: Service fee: NPR 100,000
VAT: NPR 13,000
Invoice: NPR 113,000
TDS rate: 1.5%

TDS: NPR 100,000 × 1.5%

= NPR 1,500

Simplified accounting logic for payer: Professional expense — Dr NPR 100,000

Input VAT — Dr NPR 13,000

TDS payable — Cr NPR 1,500

Supplier payable/bank — Cr NPR 111,500

The exact accounting entry depends on the entity's accounting system and payment timing.

For each material service/contract payment:

• Obtain contract/engagement letter

• Identify payment category

• Verify recipient PAN

• Verify VAT registration

• Verify invoice

• Determine resident/non-resident

• Check contract threshold

• Check the current payment and the preceding ten days of same-contract and specified related-person payments.

• Apply correct TDS rate

• Exclude VAT from TDS base where appropriate

• Check final/non-final nature

• Check DTAA for foreign recipient

• Deposit TDS within deadline

• File/verify e-TDS

• Reconcile with ledger

• Retain withholding evidence

Applying 1.5% to every consultant

Calculating TDS on VAT-inclusive total

Treating a contract as an ordinary service without reading the agreement

Ignoring the statutory ten-day same-contract aggregation test.

Applying domestic 15% automatically to every foreign service provider

Using 15% commission rate for insurance agents in FY 2083/84

Deducting tax but failing to file e-TDS

Service and contract withholding is transaction-specific. VAT status, residency, the agreement, recipient type and treaty provisions can materially change the applicable withholding treatment.

Section 89(2) examines the relevant payments in the preceding ten days under the same contract or the related-person arrangements addressed by the provision. Do not replace that test with a permanent cumulative total for the entire contract. For example, two NPR 30,000 payments within the relevant ten-day window need to be examined together; an earlier payment outside that window is not aggregated under this rule merely because it concerns the same project.