Budget brings limited reform to Income Tax Act Section 57, Private sector says key concerns remain unaddressed

KATHMANDU: The government has introduced a limited amendment to the controversial Section 57 of Nepal’s Income Tax Act through the Budget for Fiscal Year 2083/84, offering relief in cases involving inheritance and involuntary ownership transfers but stopping short of broader reforms long sought by the private sector.

For more than a decade, Section 57 of the Income Tax Act has been among the most debated tax provisions in Nepal. Whether during budget consultations, tax policy discussions, or interactions with major business houses, concerns over the provision have consistently surfaced as a major issue affecting investment, mergers and acquisitions, succession planning, and business expansion.

Presenting the national budget for the upcoming fiscal year, Finance Minister Swarnim Wagle announced a targeted amendment to the provision. However, tax experts and business leaders note that the change addresses only a narrow aspect of the law and does not fully resolve concerns related to foreign direct investment (FDI) and domestic business transactions.

What Has Changed?

Under the budget announcement, ownership changes occurring in a controlled entity due to the death of a natural person and other involuntary transfers of ownership will no longer trigger the provisions of Section 57 of the Income Tax Act, 2058.

In practical terms, this means that when ownership is transferred through inheritance following the death of an individual shareholder, the transaction will not be treated as a taxable disposal under Section 57.

The amendment is expected to ease succession-related issues faced by family-owned businesses and legacy enterprises, where heirs were often exposed to tax liabilities despite the transfer being involuntary.

Why Has Section 57 Been Controversial?

Section 57 stipulates that if more than 50 percent ownership of an entity changes within a three-year period, the entity is deemed to have undergone a disposal event. The tax authority then reassesses the entity, and a 25 percent tax may be imposed on the gains arising from that deemed disposal.

The provision was originally introduced to prevent tax avoidance through ownership restructuring. However, businesses have long argued that it creates unintended consequences and discourages legitimate investment transactions.

Private sector representatives have repeatedly claimed that the provision:

• Creates significant tax liabilities during ownership restructuring.
• Discourages mergers, acquisitions, and investment transactions.
• Restricts business succession and intergenerational transfer of enterprises.
• Limits the ability of companies to utilize accumulated tax losses.
• Creates uncertainty for both domestic and foreign investors.

Business associations have also argued that the provision effectively penalizes existing shareholders who may not have sold their shares but are nonetheless affected by changes in overall ownership structure.

Private Sector’s Major Demand Remains Unmet

Despite the latest amendment, business leaders say one of their biggest concerns remains unresolved.

The private sector has long sought reforms to both Section 57 and Section 95A of the Income Tax Act, arguing that the combined application of the two provisions often creates a form of double taxation on a single transaction.

According to business groups, the current framework can result in a substantial portion of gains being paid as taxes. In some disputed cases, companies pursuing legal remedies have argued that tax liabilities and associated costs could exceed the actual profit generated from the transaction.

Industry bodies had urged the government to comprehensively revise these provisions in the new budget. However, the Budget 2083/84 did not address those broader demands.

Impact on Business Succession

One area where the amendment is expected to have an immediate impact is the transfer of family-owned businesses.

Previously, even when ownership was transferred to heirs following the death of a shareholder, the transaction could potentially trigger tax consequences under Section 57. Business groups argued that such treatment was unfair because the transfer was not a commercial sale but a legal succession of ownership rights.

With the new provision, inheritance-related transfers will be recognized as direct ownership changes without invoking Section 57, reducing tax complications for family enterprises and making succession planning easier.

Investment Climate Still Under Scrutiny

While tax professionals have welcomed the relief provided for inheritance cases, many believe the amendment falls short of the structural reforms needed to make Nepal a more attractive destination for investment.

Foreign investors, private equity funds, venture capital firms, and domestic corporate groups have consistently cited Section 57 as one of the key tax provisions requiring modernization. The latest budget has addressed a specific practical issue but has left the broader framework largely intact.

As Nepal seeks to attract greater foreign direct investment, encourage business consolidation, and promote private-sector-led growth, debate over the future of Section 57 is likely to continue in the coming years.