The Supreme Court of Nepal (“Supreme Court”) has ruled that the federal government has the authority to collect house rent tax from legal persons, while local governments may collect such tax from natural persons. This decision resolves a long-standing conflict over tax jurisdiction in Nepal and aims to prevent double taxation under existing law.
The case arose from conflicting provisions in the Constitution of Nepal, 2015 (“Constitution”). Schedule 8(4) grants local governments exclusive power to collect house rent tax, while Schedule 5(9) vests the federal government with authority over corporate income tax, which includes rental income from legal persons. This overlap led to confusion about who holds legitimate taxing power over house rent income from different types of entities.
Petitioners Argue Local Government Holds House Rent Tax Authority in Nepal
In Advocate Srijana Adhikari & CA Sailendra Upreti v. Prime Minister, Inland Revenue Department et al. (“Adhikari Case”), the petitioners claimed that the power to collect house rent tax lies exclusively with the local government, regardless of whether it involves natural or legal persons.
They argued that Schedule 8(4) of the Constitution should override the general provision of Schedule 5(9), applying the principle of harmonious interpretation. According to their reading, interpreting Schedule 5(9) independently would undermine the specific and clear mandate of Schedule 8(4) concerning house rent tax.
The petitioners also cited Section 2(af) of the Income Tax Act, 2002 (2058) (“Income Tax Act”), which excludes rent received by individuals (except sole proprietors) from being classified as “rent” for federal taxation purposes. They claimed this exclusion reinforces local government’s authority over all forms of house rent tax. Additionally, they challenged Decision No. 3 of the gazette notification dated 26 March 2018 (“Gazette”), which states that the Inland Revenue Department shall not collect rent tax from natural persons only—arguing this wording unlawfully expands federal tax jurisdiction over legal persons.
Supreme Court of Nepal Upholds Federal Government’s Right to Tax House Rent from Legal Persons (2025)
The Supreme Court dismissed the writ petition and upheld the federal government’s authority to collect house rent tax from legal persons in Nepal. The Court held that no enabling law exists to implement Schedule 8(4) in a way that empowers local governments to collect tax from legal persons. Moreover, the petitioners failed to demonstrate that any local government was actively exercising such taxation rights.
The Supreme Court further interpreted Section 9 of the Income Tax Act to include rent under investment income. Section 88(5) imposes a 10% tax deduction on such income, with an exemption for natural persons. This indicates that natural persons are taxed by local governments, while legal persons—who are not exempt—fall under federal tax jurisdiction. This framework maintains tax equity and prevents double taxation.
Regarding the Gazette, the Court held that it clarifies jurisdiction rather than contradicts the Constitution. The Gazette affirms that house rent tax from natural persons remains with local governments, while rent earned by legal persons is subject to federal tax collection. In the absence of a local statute granting power over legal person taxation, federal taxation stands valid.
Conclusion: Supreme Court Defines House Rent Tax Jurisdiction in Nepal
The Supreme Court has confirmed that the federal government holds the authority to collect house rent tax from legal persons, while local governments are authorized to collect rent tax from natural persons. This decision strengthens the constitutional principle of harmonious interpretation and brings clarity to Nepal’s tax jurisdiction framework.
By upholding Section 2(af) of the Income Tax Act and the Gazette, the Court provided a definitive resolution to the overlapping authority between federal and local government taxation over rent income. The ruling in the Adhikari Case is now a key precedent in interpreting house rent tax law in Nepal.
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