House Rent Tax Confusion in Nepal: What Businesses Need to Know

Since the Constitution of Nepal was enacted in 2015, Nepal’s governance system has been divided into three levels: federal, provincial and local. While this setup was meant to distribute powers more effectively, it has also caused confusion, especially around who gets to collect what kind of taxes. One area where this confusion has become a real issue for businesses is house rent tax.

This article breaks down the issue, explains where the confusion lies, and offers practical advice to businesses who may be stuck between two taxing authorities.

Federal vs. Local Tax Powers

According to the Constitution of Nepal, the federal government has exclusive power to impose corporate income tax. On the other hand, local governments (like municipalities and rural municipalities) have the power to levy certain local taxes, including house rent tax.

So far, so good. But the problem begins when both federal and local authorities try to tax rental income, especially when the property is owned by a company (lessor), not an individual.

What the Federal Law Says

The Income Tax Act, 2002 (ITA), which is enforced by the federal government, has some clear rules:

• It defines ‘rent’ to include payments made for using a house or property.
• However, rent received by an individual (a natural person) is not considered taxable income under the federal tax law.
• Because of that, when a company rents a space from an individual, it does not have to withhold tax (also known as TDS).
• But when the lessor is a company or an entity, then the rent becomes subject to 10% withholding tax.

This means that for the federal government, rent paid to a person is not taxed as income but rent paid to a company is taxed as a corporate income.

What Local Governments Are Doing

Each local government prepares a finance act every year, outlining the taxes they collect. For example, the Kathmandu Metropolitan City’s Finance Act for 2024 imposes a 10% house rent tax on all rental agreements – whether the property is owned by a person or a company.

That’s where the conflict begins. Local governments are trying to collect house rent tax from everyone, including where the lessor is an entity and already subject to taxes relating to the rent as a corporate income.

The Legal Clash

This overlapping taxation has left many businesses in a tough spot.

If a company rents a building owned by another company, it has to:

• Withhold 10% tax under federal law and pay it to the Inland Revenue Department (IRD).
• But now, some local governments are asking for an additional 10% house rent tax on the same rental.

Businesses are understandably concerned about double taxation, compliance burdens and the risk of being penalised by either authority. Local governments have refused to undertake local business registrations or renewal demanding proof of payment of rental taxes from businesses.

What the Courts Have Said

This issue has been taken to court multiple times in Nepal. A key takeaway from recent rulings, including one from the Supreme Court, is this:

• Local governments can collect house rent tax only from individuals, not from companies.
• Rent paid to a company should be taxed only under federal law, through the withholding tax (TDS) system.

This legal interpretation confirms that there is no conflict between federal and local laws but each must operate within its limits.

What Businesses Should Do

If your company is being asked to pay house rent tax to a local ward office - even though the lessor is a company - here are your options:

1. Ask for It in Writing

If a ward office is demanding payment, ask them to provide a formal letter stating their requirement. This creates a paper trail.

2. Respond Formally

If they won’t give you anything in writing, you can send them a letter yourself. In that letter, explain:

• That the rent is being paid to a company (not a person).
• That under current law and court rulings, house rent tax should not apply.
• That federal withholding tax is already being paid.

Try to get this letter officially registered at the ward office, or send it via postal mail so there’s a record.

3. Wait and Watch

If you don’t get a reply within a month or two, or if the ward office insists despite your explanation, you may consider legal action, such as filing a writ petition to challenge the demand.

4. Keep Paying Federal Taxes

Most importantly, don’t stop paying TDS to the IRD. Even if local authorities are pressuring you, skipping federal tax payments can lead to fines, penalties and future audits. Verbal confirmations from tax officers won’t hold up during an audit, only the law and proper documentation will.

Conclusion

Nepal’s transition to a federal system has brought many benefits but it’s also led to overlapping tax rules that can be hard to navigate, especially for companies renting office or commercial space. The good news is that the courts have clarified the law: local house rent tax applies only to individuals, not companies. For businesses, the best approach is to stay compliant with federal tax law, document all communications with local authorities and be ready to stand your ground - with legal backing - if necessary.

If your business finds itself caught between two tax offices, don’t panic. With proper documentation and knowledge of the law, you can manage the situation and avoid unnecessary double taxation.