Withholding tax is the most routine thing a finance team does and one of the most commonly got wrong. The rate itself is rarely the problem. The problem is applying the right rate to the wrong base, missing a deduction entirely, or discovering three years later that a position taken on a supplier payment cannot be supported.
This is the FY 2083/84 position on the payments most businesses make, followed by the errors we see most often. Rates follow the Inland Revenue Department schedule under sections 87, 88, 88Ka, 89 and 95Ka of the Income Tax Act 2058.
The rates that matter day to day
Service fee, commission, consultancy — 1.5% or 15%
Where the recipient is registered for VAT, deduct 1.5% under section 88(1)(4). Where they are not, the general rate under section 88(1) is 15%. The same also applies at 1.5% to a resident entity dealing in VAT-exempt transactions.
This single distinction accounts for more corrections than any other. Check the PAN or VAT certificate before you decide — not after.
Contract or agreement — 1.5%
Section 89(1) applies to contract payments exceeding Rs. 50,000. A single payment of Rs. 50,000 or less falls outside it, but payments to the same party under the same contract are aggregated. Splitting an invoice does not avoid the deduction.
Payments under a contract to a non-resident carry 5% under section 89(3)(ka), and that deduction is final.
Rent — 10%, or nothing
Rent with a source in Nepal paid by a resident person carries 10% under section 88(1)(5). House rent received by a natural person is outside the Act's withholding provisions — municipal rent tax applies instead.
Vehicle hire from a VAT-registered vehicle-rental business drops to 1.5% under section 88(1)(5)(ka).
Freight and transport — 1.5% or 2.5%
Carriage services and transport hire carry 2.5% under section 88(1)(8), reduced to 1.5% where the recipient is a VAT-registered transport business.
Dividend — 5%, final
Section 88(2)(ka). Final withholding under section 92: the recipient adds nothing to their return and pays nothing further.
Interest — 15%, 6%, or nothing
The general rate is 15%. Interest on deposits, debentures or government bonds paid to a natural person, not connected with a business, by a bank, financial institution, cooperative, debenture issuer or listed company carries 6% under section 88(3), and is final. Interest paid to a resident bank or financial institution is not subject to withholding at all.
Insurance agent commission — 20%
Section 88(1)(14). A high rate, frequently applied at 15% in error.
Where the money is actually lost
1. Deducting on the VAT-inclusive amount. Withholding applies to the taxable value of the payment, not to the VAT charged on it. On a bill of Rs. 100,000 plus Rs. 13,000 VAT, deduct on Rs. 100,000. Deducting on Rs. 113,000 costs the supplier money and does not discharge any additional obligation.
2. Treating an unregistered service provider as registered. The gap between 1.5% and 15% is ten times the tax. On a year of consultancy payments this becomes a material short-deduction exposure, and the liability sits with the payer.
3. Splitting contracts under Rs. 50,000. Aggregation under the same contract is explicit. This is one of the first things an assessment tests.
4. Missing the deduction on a foreign payment. Payments to non-residents carry withholding, and the treatment can be affected by a tax treaty. The treaty position must be documented at the time, not asserted later.
5. Late deposit. The tax withheld must be deposited by the 25th of the following Nepali month, with the e-TDS return for that period. Late deposit attracts interest and a fee, and the delay is visible on the record permanently.
6. No file behind the position. Where a rate depends on a fact — VAT registration, residence status, the nature of a contract — the evidence for that fact should be on file when the payment is made. Assessments are answered from documentation, not from recollection.
The practical control
Most withholding errors are not judgement failures. They are process failures: nobody checks the supplier's registration status before the first payment, and nothing in the system flags a payment type that carries an unusual rate.
Two controls remove most of the risk:
A supplier master that records PAN, VAT registration status and residence, updated at onboarding rather than at payment.
A payment-type field on every voucher that maps to a rate, so the rate is a lookup rather than a decision made under time pressure.
Neither is expensive. Both are cheaper than an assessment covering three years of payments.
---
*Rates stated are those applicable for FY 2083/84 and are subject to amendment by the Finance Act. Several treatments depend on facts specific to the payment — residence status, treaty relief, exemption certificates, the terms of the contract. This is a general guide, not advice on a particular payment.*
*Our [TDS rate calculator](/tools/tds-calculator) covers 32 payment types with the section reference for each. Where an amount is material, have the position checked before the payment is made.*
Need a detailed assessment?
Our team can provide a confidential briefing on how this development affects your specific situation.
Request a Consultation