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Auditing in Nepal:

1: Introduction

1.1.   Meaning

1.2.   Definition

1.3.   Features

1.4.   Scope of auditing

1.5.   Origin of Auditing

1.6.   Objectives of Auditing

1.7.   Advantage of Audit

1.8.   Accounting, Auditing and Investigation

1.9.   Evolution of Auditing in Nepal

1.10. Classification of Audit

1.10. 1.   Private Audit

1.10. 2.   Government Audit

1.10. 3.   Internal Audit

1.10. 4.   Statutory or compulsory Audit

1.10. 5.   Partial Audit

1.10. 6.   Balance Sheet Audit

1.10. 7.   Cost Audit

1.10. 8.   Management Audit

1.10. 9.   Interim Audit

1.10. 10.  Cash Audit

1.1. Meaning:

In general language Auditing is to check the account and related statements. Auditing is an examination of books of accounts and other related documents by an independent entity to see that they are true and correct or not. Auditing also includes the physical verification of assets and inventories. Preparation of report after investigation of all the accounting statements is the main part of auditing. The reporting is the conclusion of audit work therefore main focus goes on audit report.

"Audit" is the term taken from Latin word "Audire" which means "to listen". In ancient time, (around the age of 4th century) the business owners use to appoint auditor when he suspected the fraud and auditor used to listen the explanation given by persons relating to financial transactions. Main duty of an auditor was to listen carefully the explanation and suggest to business owner. At that time, auditing was conducted only to locate errors and frauds. After the development of double entry book keeping system by Luca Pacioli at 15th century the duty of an auditor was described. After the industrial revolution in England at 18th century the size and scope of business increased and scope of audit also increased. Now a day's auditing is the act of checking books of accounts and preparing report by an independent person. An independent person who checks books of accounts is known as an auditor. An auditor conducts the audit job and prepares the report in favors of owner who hired to him.

Traditionally, audits were mainly associated with gaining information about financial systems and the financial records of a company or a business. In modern time the term "Audit" is used in broad sense. Audit is not limited in financial transactions. It covers wide area like Social Audit, Environmental Audit, System Audit, Information Security Audit, Energy Audit, Clinical Audit etc. The general definition of an audit is an evaluation of a person, organization, system, process, enterprise, project or product. The term most commonly refers to audits in accounting, internal auditing, Auditing of NGOs, INGOs, social organizations and government auditing, but similar concepts also exist in project management, quality management, water management, and energy conservation. Different auditing concepts are started used in modern auditing system like performance audit, risk based audit and IT audit. As the information technology is used in modern accounting system the audit work also should be conducted by using information technology. Therefore Information and System Audit is the recent trend in modern auditing system.

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1.2. Definition:

Many authors and scholars have defined the auditing in different ways and views. The main definitions are mentioned here.

"Auditing is a systematic examination of financial statements, records and related operations to determine adherence to generally accepted accounting principles, management policies or stated requirements." —Robert E. Schlosser

"Auditing is an examination of accounting records undertaken with a view to establishing whether they correctly and completely reflect the transaction." — Lawrence R. Dicksee

"Auditing is the independent examination of financial information of any entity, whether profit oriented or not, and irrespective of its size or legal form, when such an examination is conducted with a view to expressing an opinion thereon."---- Institute of Chartered Accountants of India (ICAI)

"Auditing can be defined as inspecting, comparing, checking, reviewing, couching, ascertaining, examining and verifying the books of accounts of a business concerned with a view to have a correct and true idea of its financial state of affairs." --- M.L.Shandilya

"Systematic examination and verification of a firm's books of account, transaction records,  other relevant documents and physical inspection of inventory by qualified auditor."---

Auditing can be defined checking somebody else's accounting and reporting thereon"

 1.3. Features:

From the analysis of description and definition we can write the following features of auditing:

1.      Audit is undertaken by an independent person or body of persons who are duly qualified for the job.

2.      Audit is a critical review of the system of accounting and internal control. 

3.      It is an evaluation of a person, organization, system, process, enterprise, project or product.

4.      Audit is done with the help of vouchers, documents, information and explanations received from the authorities

5.      Detection of errors and frauds is an integral part of Auditing.

6.      Checking books of accounts and eventual document on the basis of generally accepted principles and procedures.

7.      Preparation of report based on the fact found during the course of audit.

8.      The auditor has to satisfy himself with the authenticity of the financial statements and report that they exhibit a true and fair view of the state of affairs of the concern.

9.      The auditor has to inspect, compare, check, review, scrutinize the vouchers supporting the transactions and examine correspondence, minute books of shareholders, directors, Memorandum of Association and Articles of association etc., in order to establish correctness of the books of accounts.

1.4. Scope of auditing:

Scope of audit refers to its subject matter and area of operation. Various aspects are to be covered under the audit and the requirement of the relevant legislation. The scope of an audit is a statement that specifies the focus, extent, and boundary of a particular audit. The scope can be specified by defining the physical location of the audit, the organizational units
that will be examined, the processes and activities that will be included, and the time period that will be covered. In ancient time there were limited business organizations. Economic transactions also were in very few numbers. At that time the scope of auditing also was very limited. Generally, auditors used to check only cash transactions for errors and frauds. But, now-a-days, scope of auditing has been increased. In modern time auditing is not only to check the cash transactions for errors but also to examination of cash and non-cash books accounts, evidence, bills, stock and its physical verification.

Now-a-days internal auditing and internal check system are also developed. So, an auditor applies test check. An auditor should prepare and present report after the examination of profit and loss account and balance sheet. Auditor does not only check the books of account on the basis of evidence but also he has to check the authenticity of documents.

According to above facts, the scope of auditing can be pointed as follows:

Main Scope:

1.   Checking books of accounts to find out the truth and fairness.

2.   Verification of assets and liabilities after detail checking.

3.   Checking arithmetical accuracy of books of accounts.

4.   Expressing independent opinion about the financial statements.

5.   Preparing and presenting fair report to the concerned owners.

General Scope:

§      Limited scope in ancient time due to few transactions.

§      Test check can be used in recent audit system.

§      Scope and area also limits on the record provided by the organization.

§      Auditor should depend on the information provided by the owner.


1.5. Origin of Auditing:

"Audit" is the term taken from Latin word "Audire" which means "to listen". In ancient time, (around the age of 4th century) the business owners use to appoint auditor when he suspected the fraud and auditor used to listen the explanation given by persons relating to financial transactions. Main duty of an auditor was to listen carefully the explanation and suggest to business owner. After that the audire word is changed to audit word. Around the end of 4 th century, there were very few number of economic transactions. At that time, auditing was conducted only to locate errors and frauds. After the development of double entry book keeping system by Luca Pacioli (Father of modern accounting) at 15th century the duty of an auditor was described at first. After the industrial revolution in England at 18th century the size and scope of business increased and scope of audit also increased.

With the change in time, different facilities like communication, transportation, banking, insurance etc. started available. Different large scale industries, joint stock companies, partnership business started to open. Such large scale industries and company partners decided that auditing is the best mechanism to manage their business transactions. Such companies started to prepare audit report and submit with shareholders. After that function of an auditor expanded to check the accounts and account related transactions and prepare audit report. The companies started to internal control and internal auditing system. Auditors started to prepare the report according to "test check".

Different auditing concepts are started used in modern auditing system like performance audit, risk based audit and IT audit. As the information technology is used in modern accounting system the audit work also should be conducted by using information technology. Therefore Information and System Audit is the recent trend in modern auditing system. According to above mentioned process the auditing is originated and developed.

 1.6. Objectives of Auditing:

The basic objective of the auditing is to prove true and fairness of results presented by financial statements. Its objectives are classified into 3 groups:

v     Primary Objectives

v     Secondary Objectives

v     Specific Objectives

 v     Primary Objectives:

§         Examining the system of internal control

§         Checking arithmetical accuracy of books of accounts.

§         Verifying the validity of accounts.

§         Checking the proper distinction of capital and revenue nature of transactions

§         Checking the valuation of assets and liabilities

§         Verifying whether all the statutory requirements are fulfilled or not

§         Presenting true and fairness of operating results presented by financial statements.

v     Secondary/Subsidiary Objectives:

(1) Detection and prevention of errors:

(A) Clerical Errors or Arithmetical Errors:

(a) Errors of Omission:

—        Whole or partial omission

—        Omission of purchase to record in purchase book

—        Omission of charging depreciation in the book

—        Entry of sales is omitted to record only in debtor's a/c.

(b) Errors of Commission:

—        Incorrect entry either wholly or partially

—        Recorded Rs.500 instead of Rs.5000

—        Posting of amount in wrong side.

—        Over or under casting of subsidiary book.

(c) Compensating errors:

—        One error is overlapped by another error or two or more errors overlapped each other.

—        First time purchase of Rs.5000 recorded as Rs.50000 but second time purchase of Rs.50000 recorded as Rs.5000.

—        Total amount has no difference and trial balance cannot detect it.

(B) Error of principles:

—        The errors by the lack of proper accounting principles/knowledge.

—        If an accountant maintains books of accounts against the principles of accounting then that error is error f principles.

—        Treatment of revenue expenditure as capital expenditure and vice versa.

—        No proper valuation of assets.

—        Recording transactions into wrong side of accounts etc.

—        Error of Duplications:

(C) Error of Duplications:

—        Such errors arise when an entry in a book of original entry has been made twice and has also been posted twice.

(2) Detection and prevention of frauds:

(a) Embezzlement of cash:

—        By omitting to record receipts.

—        By entering fictitious payment.

—        Cancelling the purchase return.

—        By entering dummy name of worker in wage sheet.

—        By showing more or less profit than actual.

(b) Misappropriation of goods:

—        Wrong entry of receipt and issue of goods.

—        By exchanging low quality goods with high quality goods.

—        By showing more scrap in production process.

—        By recording new goods as old goods.

—        By showing less quantity than the actual quantity.

(c) Fraudulent manipulation of account:

This type of fraud is always internal, pre-determined and very difficult to detect.

This type of fraud is committed by employee, management authority or groups.

(i) Recording fictitious sales or purchase that profit may be increased or decreased.

(ii) Recording fictitious purchase.

(iii) Omission to record expenses or incomes.

(iv) By under or over valuation of assets.

(v) Showing fictitious receipt or payment.

(vi) Distributing dividend at the time of no profit.

(vii) Showing fictitious returns or not recording returns.

(d) Under or over valuation of stock:

·   Such errors are committed by top level executives of the business.

·   Use of cost price or market for valuation of stock against the company policy.

v     Specific Objectives:

·   To provide information to income tax authority.

·   To satisfy the provision of company act.

·   To have moral effect.

·   To verify the cost records by cost audit.

·   To promote the efficiency of managerial function by management audit.

·   To satisfy the legal provisions.

Methods of Detecting Errors:

1.      Check the total of trial balance.

2.      Compare data of books and accounts with the amount of trial balance.

3.      Check the balance of books of accounts.

4.      Compare the balance of last year with the opening balance of current year.

5.      Check the primary books of accounts.

6.      Check carefully in those places where there are chances of frauds.

7.      Check carefully in those places where there are chances of specific type of errors.

1.7. Advantage of Audit:

Now-a-days auditing is become a compulsory course of action into social organization, private organization and government organizations. The organizations enjoy the following auditing advantages:

a.          Audit helps to detect and prevent errors and frauds.

b.         Helps to maintain account regularly.

c.          Helps to get compensation: If there is any loss in the property of business, insurance company provides compensation on the basis of audited statement or valuation made by an auditor.

d.         Helps to obtain loan.

e.          Facilitates to the sale of business.

f.          Helps to access tax: Tax authority access tax on the basis of profit calculated by the auditor.

g.         Facilitates to compare: accountant compares the books of accounts with previous years audited records. (previous years to this year)

h.         Helps to clear the account of deceased partner.

i.           Helps to present as proof.

j.           Provides information about profit and loss.

k.         Helps to prepare plan/policy.

l.           Helps to increase the goodwill.

m.       To amalgamate the company.

Advantage of Auditing


A. Businessman's point of view

B. Investor's point of view

C. Other Advantages.

 Detection of errors and frauds

Protects interest

Evaluate financial status

 Loan from banks

Moral check

Settlements of claims

Builds reputation

Proper valuation of investments

Evidence in court

 Proper valuation of assets

Good security

Settlement of accounts

Government acceptance


Facilitates taxation

Update accounts



 Suggestions for improvement




1.8. Accounting, Auditing and Investigation:


Difference between auditing and accounting:  Accounting is the process of collecting, recording, analyzing and reporting of financial transactions but auditing refers to the examination of books of account along with evidential documents. Followings are the main difference between accounting and auditing:

S. No.

Basis of Difference



  1. 1.       


Accounting is the process identifying, recording, classifying, analyzing, reporting of financial transactions

Auditing is the process of checking books of accounts and other financial records by an independent person or entity to see that they are true and fair or not.

  1. 2.       

Beginning of work

Accounting starts before auditing, it is the base for auditing work

Auditing starts when work of accounting ends.

  1. 3.       


Account prepares profit and loss account and balance sheet and other financial statements

Auditor checks the books of accounts considering their fairness to check with the provision of company act and other requirements or not.

An auditor also can hire the expert when necessary.

  1. 4.       

Nature of work

Accounting keeps the records of financial transactions.

Auditor checks and verifies the books of accounts.

  1. 5.       

Nature of employee

An accountant is a permanent staff of an organization and draws the salary from the organization nature employee.

Auditor is not a permanent employee of the organization. The auditor gets remuneration after completion of auditing work.

  1. 6.       

Preparation of report

It is not compulsory to prepare report by an accountant after completing accounting work.

It is compulsory to prepare report after completing audit work.

  1. 7.       


Accountant is responsible to the management

The auditor is responsible to the owner, shareholders and other concerns.

  1. 8.       


It is not compulsory to have any special academic qualification to do the accounting work. Any person having accounting knowledge can do the accounting work.

An auditor must be license holder having stated academic qualification.

































Difference between auditing and investigation: Auditing and investigations are not same course of actions. Auditing is the examination of books of account to prove the true and fair of financial positions but investigation is the act of detail examination of activities so as to achieve certain objectives. Specially, investigation is made in suspected places. Followings are the main differences between auditing and investigation.

S. No.

Basis of Difference



  1. 1.       


Investigation is detail examination of any suspected activities to achieve certain objectives

Auditing is the process of checking books of accounts and other financial records by an independent person or entity to see that they are true and fair or not.

  1. 2.       


An investigation is carried out for some particular purpose i. e. to know financial position, to know production process, to evaluate environment impact, to check product quality etc.

Audit is carried out for the purpose of ascertaining account shows a true and fair view or not.

  1. 3.       

On behalf of

On behalf of proprietor of the business

On behalf of outside parties, money lenders, business buyers and also maybe society and government.

  1. 4.       


It covers wide and broad area. It includes an enquiry into other relevant matters connect with the investigation.

An auditing includes only examination of the accounts of a business.

  1. 5.       

Use of technique

Depth and thoroughly check and analyze and research.

Can use test check technique.

  1. 6.       


May cover short time to several month and several years.

Related to one year or six months.

  1. 7.       

Statutory obligation

There is no statutory obligation with regard to investigation.

Audit is compulsory course of action under law.

  1. 8.       

Examination of use of policies

Investigation does not check the use of policies.

Audit checks the use of policy.


1.9. Evolution of Auditing in Nepal:

General auditing practice in Nepal was started from many years ago but also systematic auditing was started from Baisakh-6, 1828 B.S.  On that day king Prithvi Narayan Shah established Kumari Chowk Adda and assigned the duty of examining central account of revenue and expenditures.

In 1903 B.S. Prime Minister Jung Bahadur Rana made provision of clearing the accounts of revenues and expenditures by Kumari Chowk Adda. To make efficient and strong financial administration Prime Minister Shree 3 Chandra Shamser appointed new officers in Kumari Chowk Adda in 1973 B.S for the receipt and clearance of account.

After the establishment of democracy in 2007, scientific method of auditing was started to maintain account and examination of it. After the implementation of budgeting system in 2008 and planning system in 2013 B.S., government established the office of Accountant General. The constitution of Kingdom of Nepal 2015 made a provision for audit of government accounting and established the Office of Auditor General in 2016 B.S. In Shrawan-1, 2027 B.S., Kumari Chowk Adda was converted to Goswara Tahabil.

In 2017 B.S. Auditing Act 2018 was implemented. Scope of auditor has increased after the enactment of company Act, 2021. According to company act, all companies should compulsorily make the audit of books of account. After that business sectors also started auditing in Nepal. Constitution of kingdom of Nepal 2047 has also accepted the auditor general as the constitution body. Company act 2053 and new company act 2063 also included the compulsory provision of auditing books of account. The act has clearly described the appointment, power, right, duties and qualification of the auditor. In 2048 B.S. Auditing Act 2048 was implemented. Interim Constitution of Nepal has also accepted the auditor general as the constitution body. There is written then provision of auditor general at Part-12 section 122 to 124 in the interim constitution 2063. There is clearly defined the provision, qualification, right, duties, power, function of auditor general and also written about audit report.


Taxation in Nepal/ Tax in Nepal:




a.     Background: The government of any country conducts different infrastructure development and other public service activities like maintains peace, security and handles day to day administration. In order to carry out such activities the government requires sufficient revenue (fund). The government collects the revenue from different sources such as tax, remittance from public enterprises, fees, penalties, grants and loan. However, across all these sources of collecting the public revenues, taxation is the main source since it occupies the most important place in the government treasury.

b.    Meaning, Concept and Definition of Tax: Tax is the compulsory imposition imposed by government to its people. Tax is the liability to pay an amount to the government. It is a compulsory contribution to the national revenue from the tax payers according to the law.

According to Findlays Shirras, "A compulsory contribution to public authorities to meet the general expenses of the government which has been incurred for the public good and without reference to special benefit"

According to Prof. Seligman, "A compulsory contribution from a person to the government to defray the expenses incurred in the common interest of all without reference to special benefit conferred."

From the above definition, we can give the conclusion that:

(1)      Tax is collected from haves and basically spent for the interest of have-nots in the society.

(2)      Tax is spent for the common interest of the people.

(3)      The tax payers do not get any corresponding benefits from the government.

(4)      Tax is levied on persons as per the prevailing laws.

(5)      Tax is a compulsory imposition by the government to its peoples.

In conclusion, tax is a compulsory payment by the citizen to the government without the expectation of any personal benefit, which is re-distributed by the government in the nation in the form of infrastructure development and public service. 

Types of Taxes:

Basically taxes are categorized in the following basis:

(A)    On the Basis of Burden Shifting (On the Basis of Liability to Pay):

1.    Direct Tax: A direct tax is a tax paid by a person on whom it is legally imposed. It is not transferable from one person to another person. The person paying and bearing tax is the same in direct tax. In the words of Dalton: "Direct tax is really paid by the same person on whom it is legally imposed". It is the tax on income and property. Examples of direst tax are:

(I) Income Tax, (II) Property Tax, (III) Vehicle Tax, (IV) Interest Tax, (V) Expenditure Tax, (VI) Gift Tax etc.

Merits of Direct Tax:

(a)     Equitable: The person having more income should pay more tax and person having low income should pay less tax. So, there is the feature of equality in direct tax as per income.

(b)     Certainty: There is the certainty in the procedure, structure and time of tax payment in direct tax.

(c)      Elasticity: The government can change the tax rate with the change in the level of income or property.

(d)     Consciousness of the citizens: Direct tax is paid by the person upon whom it is imposed. Tax payers feel their contribution to the public fund and be consciousness about the fund where it is expended.

Demerits of Direct Tax:

(a)     Feeling of Burden: Direct tax is a part of income or property that is compulsory to pay to the government. It creates feeling of high economic burden to tax payers.

(b)     Expensive: The direct tax collection procedure is expensive because the tax authority should deal with large no of tax payers. The tax authority should spend for more employee, time, technology and resources.

(c)      Lack of Mass Participation: Direct tax is levied to the people who have property of income more than exemption. But the government gives exemptions to different individuals according to certain conditions. So, whole population is not under the direct tax bracket.

(d)     Chances of Evasion: The tax payers should pay the tax to the government out of the part of his/her income in return he/she gets no direct benefit. Therefore, he/she tries to avoid the tax or to pay the less tax.

2.     Indirect Tax: Indirect tax is imposed on one person but partly or wholly paid by another. The person paying the tax and the person bearing the tax is different. In the words of Dalton: "An indirect tax is imposed on one person but paid partly or wholly by another". It is the tax on consumption or expenditure. Examples of indirect taxes are:

(I) Value Added Tax, (II) Sales Tax, (III) Entertainment Tax, (IV) Hotel Tax, (V) Excise Duty, (VI) Contract Tax etc.

Merits of Indirect Tax:

(a)     Convenient: Indirect tax paid only at the time of consumption. It is convenient as the tax payer does not have to pay a lump sum amount for tax.

(b)     Mass Participation: Each person who consumes goods or services should pay indirect tax. So, there is participation of each and every person in indirect tax.

(c)      Less Chances of Evasion: The seller collects the indirect tax from the consumer and payers indirectly pay in purchase price. So, both parties feel no burden and less chances of tax evasion.

(d)     Control on the Consumption of Harmful Goods: Government increases the tax rate on harmful goods like tobacco and alcoholic products. High tax rate results on price increase and consumption decrease.

Demerits of Indirect Tax:

(a)     Uncertainty in Revenue: It is uncertain because fluctuation on demand results fluctuation on tax revenue.

(b)     Regretful/Inequitable: The tax rate to poor and rich person is same. So, it is not equitable.

(c)      Lack of Public Awareness: Indirect tax is paid as a part of purchase price. So, consumers may not know how much tax they are paying to the government and they have no any attention towards the redistribution of public fund.

(d)     Bad Effect on Consumption, Production and Employment: Indirect tax increases the product price. If the product price is increased which then the demand and consumption also decrease causes the low production and unemployment.

History of Income Tax Law in Nepal:

Great Britain introduced the income tax at first time in the world in 1799 to mange the fund for war fought against France. America started income tax system at 1862 to collect fund for civil war in the country. India adopted income tax at 1860 but systematic income tax legislation was enacted in 1886. Germany started systematic income tax system at 1891.

Nepalese ancient tax system was based on Vedas and Puranas. At the time of Manu and Chanakya, the principle of collecting tax from the people was imposition of tax without harming the activities of the people. Although there was tax system in Nepal in ancient time also, the concept of income tax was brought only by the first budget at 2008 B.S. However, it was actually introduced only in 2017 B.S. when the Finance Act 2016 and Business Profits and Remuneration Act 2016 were enacted. The marginal rate of taxation prescribed by the Finance Act was 25%. Since the income tax was imposed only on income from business profit and remuneration. The tax act could not cover all the sources of income and was replaced by the Income Tax Act 2019 in 2019 B.S. The act was amended in 2029 B.S. extensively. However, this Act could not fulfill the need of the time; it was replaced in 2031 B.S. by Income Tax Act. 2031. There were 66 sections and classified the sources of income into 5 groups (I) Agriculture, (II) Industry, Business, Profession or Occupation, (III) Remuneration, (IV) House and Compound Rents and (V) Other Sources. However, agriculture income was kept outside the tax net except in the financial year 2030 to 2033.

Income Tax Act 2031 has replaced by Income Tax Act 2058 in 19th Chaitra 2058. The objectives of new income tax act are:

­         To bring all the income generating activities within tax net.

­         To increase the base of taxation.

­         To bring all the income tax related provisions within one act.

­         To make income related provisions clear and transparent.

­         To interlink Nepalese tax system with tax system of other country.

­         To make tax system based on account.

­         To minimize tax avoidance and tax evasion.

­         To make tax system compatible to modern economy.

­         To reducing the scope of discretionary interpretation of the tax administration thereby ensuring simplicity, uniformity and the transparency.

­         To define the power as well as authority of the tax administration.

The Government of Nepal framed income Tax Rules, 2059 in 2059 to help clarifying the Act.


Types of Assesses (tax payers):

Income Tax Act 2058 has classified the assesses/tax payers as following types:

(1)  On the Basis of  Residential Status:

      Tax payers are classified in residential and non-residential on the basis of                    residential status to impose the tax.

a.      Residential: Here, residential means the person whose worldwide income is taxable. There is different provision to individual and company for residential status. In case of individual, the individual whose domicile place is Nepal, Habitual abode is in Nepal and length of stay is more than 182 days in one income year in Nepal is resident otherwise non-resident. But in case of company the company where it is registered, where its head office is located and where its effective management during income year is in Nepal is resident otherwise non-resident.

b.      Non-Resident: According to Income Tax Act 2058, non-resident means the persons other than resident are non-resident. The person whose length of stay in Nepal is less than 183 days in one income year, whose domicile place and habitual abode is not in Nepal is non-resident. The companies which are not-registered according to Nepalese company act are non-resident.

Resident persons (individual and company) get all the facilities provided by income tax act but non-residents do not get such facilities.

(2)  Natural Person and Entity:

      Income Tax Act 2058 has classified the assesses in the form of natural person and    
     entity. According to Section 2 (kha), “Person” means Natural Person and Entity.

a.      Natural Person: According to section 2 (wa) natural person means an individual person and proprietorship firm (whether registered on unregistered) owned by the person if any and a couple making an election as single natural person under section (50).

b.      Entity: An entity [(section 2 (Bha)] means (I) A partnership, Trust or Company (II) A VDC, Municipality or DDC (III) Government of Nepal (IV) A foreign government or a public international organization established under treaty and (IV) A permanent establishment of an individual or an entity that is not situated in the country in which the individual or entity is resident.

(3)  On the Basis of Personal Status: Income Tax Act 2058 has classified tax payers  in two types according to personal status:

a.      Single: Single means residential individual without any dependent upon him. If the married couples are income holders and want to submit the account individually then are also treated as single. The current exemption limit to the single is Rs.100000.

b.      Couple: If residential couples select to file return jointly by having joint request for particular then they are treated as couple. In such case, they would be collectively responsible for filling the return. The income holders who have to take care to dependents are treated as couple. The current exemption limit to the single is Rs.125000.

(4)  On the Basis of Accounting System:

Income Tax Act 2058 has classified tax payers in two types on the basis of accounting system. First one is cash basis and another accrual basis:

a.      Tax Payers Who Keep Account on Cash Basis: The taxpayers who keep account on cash basis for calculating the  income from employment, business or investment should:

-          Treat an amount as derived and include in income only when the cash is received or made available to the person.

-          Treat an expense as incurred and deduct in that calculation only when the payment is made.

Under cash basis of accounting, the date on which transactions are made is irrelevant but cash payment and cash received date is relevant.

b.      Tax Payers Who Keep Account on Cash Basis: The tax payers who earn the income from business and investment specially the company should maintain the account on accrual basis. According to the accrual system incomes and expenses are maintained on account at the time of transaction. All the credit transaction (receipt and payment) are entered into the account at the time of transaction. In other words no emphasis is given for cash receipt in accounting entry. The tax payers keeping account on accrual basis includes amount in income when tax payers entitled to receive and deduct payment when taxpayers are obligated to make payment.


Income Head

Accounting  Method


Employment, Investment

Cash Basis

Sole Trader, Proprietor


Cash or Accrual Basis


Business, Investment

Accrual Basis

Other Entity

Business, Investment

Cash or Accrual Basis

If any tax payers want to change the accounting method then acceptance of Inland Revenue Department is necessary.

(5)  On the Basis of Forms Used in Assessment: The tax payers are classified in 4 types on the basis of assessment form issued by the Inland Revenue Department:

a.      Presumptive Tax Payers  : The following tax payers are presumptive tax payers and should fill the presumptive assessment form:

                                i.      Nepalese resident.

                             ii.      Foreign citizen who are living in Nepal.

                           iii.      Income earned only from the Nepalese source.

                           iv.      Annual income is only up to Rs.150000.

                              v.      Annual transaction is up to Rs.1500000.

b.      Simplified Return Filed Tax Payers (;/nLs[t cfo ljj/0f eg]{ s/bftf) : The following tax payers can fill the simplified form:

                                i.      Nepalese resident.

                             ii.      Foreign citizens who are living in Nepal.

                           iii.      Income earned only from Nepalese source business and Investment.

                           iv.      Annual transaction is up to Rs.5000000.

                              v.      The professionals like doctors, layers, engineers, auditors etc. whose annual remuneration is not more than Rs.1000000.