House Rental tax issues in Nepal

बिजपाटी संवाददाता

बिजपाटी संवाददाता

Apr 03, 2023 | 06:17:32 PM मा प्रकाशित

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Umesh Rijal


Income Tax Act, 2058

As per the Section 88 (1) (5) of Income Tax Act, 2058, every resident person, while making payment of rent having source in Nepal, shall deduct tax at the rate of 10%. However, this provision shall not apply while making the payment of rent having source in Nepal to a natural person. This text of the Income Tax Act, 2058 is clear when a person makes the payment of rent to any person (other than natural person i.e., firm, company, or any other institutions), such person shall deduct 10% tax and deposit the same with Inland Revenue Department.

Examples to illustrate above provision of Income Tax Act, 2058

1)      Mr. A is providing a flat on lease to Mr. B at the monthly lease rental of Rs. 20,000. In this case, source of rental income is in Nepal, lessor and lessee are both natural persons. Hence, there is no liability on the hand of Mr. B to deduct tax. Mr. A will deposit the tax amount on the concerned local authority.

2)      Mr. A is providing a flat on lease to M/s C Limited at the monthly lease rental of Rs. 20,000. In this case, source of rental income is in Nepal, lessor is a natural person and lessee is a company. Hence, there is no liability on the hand of M/s C to deduct tax. Tax shall be deposited with the local authority as per the lease agreement.

3)      M/s D Ltd. is providing a flat on lease to Mr. F at the monthly lease rental of Rs. 20,000. In this case, source of rental income is in Nepal, lessor is a company and lessee is a natural person. Hence, Mr. F will shall deduct tax and deposit the same with the IRD.

4)      M/s G Ltd. is providing a flat on lease to M/s H Ltd. at a monthly lease rental of Rs. 20,000. In this case, source of rental income is in Nepal, both lessor and lessee are a company. Hence, M/s H Ltd. shall deduct tax and deposit the same with the IRD.


Kathmandu Metropolitan City Finance Act, 2079

As per the Section – 4 of Kathmandu Metropolitan City Finance Act, 2079, rental tax shall mean the tax imposed upon the rental income earned by any person by leasing out/letting out the building, house, shop, garage, workshop, warehouse, truss, shed, land, or pond, either wholly or partly, within the vicinity of Kathmandu Metropolitan City, as per the Annexure – 6. Further, as per the Annexure – 6 of Kathmandu Metropolitan City Finance Act, 2079, any person or institution leasing out or providing on rent any building or similar other structures, rental tax shall be collected on the rental amount from such person or institution at the rate of 10%.

The above provision of Kathmandu Metropolitan City Finance Act, 2079 is clear that no matter who is the lessor or lessee, 10% rental tax shall be collected on the rental amount. This provision clearly contradicts with the provision as per the Section 88 (1) (5) of the Income Tax Act, 2058. This provision doesn’t have any impact in case the lessor is a natural person; since, we’ve already established as per the Income Tax Act, 2058 that, lessee is not required to deduct tax and deposit the same with IRD when the lessor is a natural person.

It has an impact only in case the lessor is a person (other than a natural person) i.e., in this case:

·         Lessee must comply with the Income Tax Act, 2058 by deducing and depositing 10% tax while making the rental payment.

·         Further, lessee or lessor, as the case maybe, must comply with the concerned local government’s rule (for example, Kathmandu Metropolitan City Finance Act, 2079) and deposit necessary tax on rental amount.

It is a clear case of double taxation on the single payment.

 

Impact of this Contradiction

For Lessor (other than natural person):

In this case lessor shows rental income as an income on the profit and loss account and pays tax at the rate of 30% or 25% as the case maybe. Let’s understand this by an example below:

M/s Z Ltd. is providing it’s flat on rent to M/s Y at the monthly rental amount of Rs. 100,000. Now,

For M/s Z Ltd.

Particulars

Amount (double tax on rental income)

Amount (no double tax on rental income)

Rental Income for the years

1,200,000

1,200,000

Less: Tax to Local Government

120,000

-

Net Rental Income

1,080,000

1,200,000

Tax @ 25%

270,000

300,000

Less: TDS (IRD)

120,000

120,000

Net Tax Payable (IRD)

150,000

180,000

Net outflow of cash from the taxpayer’s pocket in the name of house rent

390,000

300,000

Average rate of tax for the taxpayer

32.5%

25%

Due to this issue, taxpayer now must pay the tax at the rate of 32.5% instead of existing rate of 25% that is even subject to the condition that IRD allows tax paid to local authorities as an expense.

If lessor agrees for the abovementioned treatment, there is not liability on the hand of the lessee. However, lessor might not agree with this term and the lease agreement might not contain all these provisions in detail. In the second instance, lessees must deposit the rental tax with the local authority even just to renew the business registration with them at their own expense.

The Constitution of Nepal, 2072

As per the Schedule – 8 of The Constitution of Nepal, 2072, the Local Government shall have the power to impose tax on house rent. However, the definition of house rent has not been provided therein. Similarly, as per the Schedule – 5 of The Constitution of Nepal, 2072, the Federal Government shall have the power to impose corporate income tax, and individual income tax. The question is here that: whether the house rent income falls under the definition of income under Income Tax Act, 2058? Since, it is unnatural even for the state to impose double tax on the same income – there must be clarity in the interpretation of the Constitution, and Supreme Court must provide clarity on the same.

Decision of Biratnagar High Court

After careful study of the decision of Biratnagar High Court (case no. 075-WO-0359), we can deduce the following points:

·         House rental tax as per the Annexure – 8 of The Constitution of Nepal, 2072 is under the purview of the local authorities,

·         Corporate/institutional income tax as per the Annexure – 4 of The Constitution of Nepal, 2072 is under the purview of the central government,

·         House rental tax as per the Annexure – 8 of The Constitution of Nepal, 2072 means the tax levied on rental income, and rental income means the rent received by the natural person,

·         Rent received by the person (other than natural person) is not the rental income, rather, it is the business income (direct/indirect) or income from investment,

·         Rental income for institutions (other than natural person) is a subheading of income taxable under the Income Tax Act, 2058, hence, the claim of local authority for house rental tax is not tenable,

·         IRD is collecting TDS on rental expense (income) and it is not the house rent tax the comes under the purview of local authorities,

If we closely analyze the decision of the Biratnagar High Court, it seems that local authorities may collect house rent tax and IRD may collect TDS on rental expense (income). Further, the definition of house rental tax doesn’t cover the rental income earned by person other than the natural person.

House Rent Tax in India

In India, the Income Tax Act, 1961 governs the taxation on rental income from rented properties. Generally, it is calculated as below:

Particulars

Amount

Gross Rental Amount

xxxxx

Less: Municipal taxes

(xxxx)

Net Rental Amount

xxxxx

Less: Standard Deduction @ 30% of Net Rental Amount

(xxxx)

Less: Interest on Home Loan up to Rs. 200,000 (u/s 24b)

(xxxx)

Less: Interest on Home Loan up to Rs. 150,000 (u/s80EEA)

(xxxx)

Net Taxable Rent

xxxxx

House Rent Tax in USA


Figure 1: Image source www.investopedia.com (Folger, 2022)

After careful analysis of the provision of taxation of house rental income in Nepal, India, and USA, it is evident that practice of taxing at the rate of 10% flat on the gross rental amount is unscientific and unjust for people with lower income level and having only rental income as the source of livelihood. If direct tax is of progressive nature, then there must have been provision to tax at the lesser rate to the person earning lower rental income and the rate must be increased accordingly. Further, people earning rental income invest huge amounts of money on the construction/acquisition of the house/building and might have obtained finance from the financial institutions as well. It is only justified to tax the rental income by providing deductions for the loan repayment of the housing loan/other loan obtained during the construction/acquisition of the building property. Of course, there will be administrative hassle to keep track of all the details of house rental income, loan obtained, loan repayment, and other information; however, isn’t it the job of government to take the administrative hassle and provide the taxpayer with the optimum solution instead of charging tax by a blanket rate for all?

Current Issue

At present – in case where lessor is not a natural person – lessees are facing issue at the time of business registration renewal at the local authorities (Ward level). In most of the cases rental agreements must have been executed before Kathmandu Metropolitan City Finance Act, 2079 comes into force. Most of the rental agreements contain the clause that lessee is responsible for deducting and making timely deposit of the applicable taxes (TDS as per the Income Tax Act, 2058) on rental amount before making payment to the lessor. These rental agreements are valid for multiple years and might not have yet expired. Clause 11 (1) of Kathmandu Metropolitan City Directive Related to House Rent, 2079 states that unless otherwise expressed in the lease agreement the liability to deposit the house rent tax shall be of the lessor. Further, Clause 17 (3) of the Kathmandu Metropolitan City Directive Related to House Rent, 2079 states that liability of lessor shall not be reduced even if the lessee has agreed to pay but has not paid the house rent tax. These two clauses clearly state that the lessor shall be ultimately responsible for depositing the house rent tax.

However, there is no way out for the lessee if lessor denies this responsibility and lease agreement has not specified the responsibility of payment of the house rent tax. In this case, lessee has to bear the tax liability just for the purpose of renewing the business registration with local authorities. There are lots of questions that need answers from the government and lawmaker:

·         Is it justified to trap the lessee (by not renewing their business registration) even if the liability to pay tax remains with the lessor?

·         Isn’t it the responsibility of IRD to seek clarification from the Supreme Court regarding the jurisdiction of house rental tax in dispute?

·         Isn’t it the responsibility of local authorities (KMC) to seek clarification from the Supreme Court regarding the jurisdiction of house rental tax in dispute?

·         Isn’t it the responsibility of local authorities and IRD to resolve this dispute before publishing public notice with mandated timeframe to deposit the house rent tax?

These questions come into the mind of the citizens having awareness of the legal system and various statues applicable in Nepal.

Conclusion

A taxpayer is not reluctant to pay taxes as long as she/he senses any benefits coming out of it in some way and there are seamless administrative procedures for the same. However, in Nepal, it seems like taxpayers have to struggle a lot to comply with the regulations, and there is no support from the concerned authorities when different authorities have differing opinions without any possible way out. In this issue, what taxpayers are looking for a clear way out from the Supreme Court or any other competent authority. Some of the taxpayers are even holding off the payment of rental tax for the time being until the issue is clarified, and this is a huge loss to the government in terms of financial management and taxpayer’s trust towards the authorities. We expect competent authorities to clarify this issue for the sake of taxpayers and ease of doing business.


Writer Umesh Rijal is Chartered accountant by profession. 

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