The Inland Revenue Department (IRD) has begun cracking down on landlords who have been avoiding paying rental taxes or short-changing the taxman by presenting undervalued rental contracts.

In a bid to bolster revenue collection from rental tax, one of the least observed tax obligations, the IRD has prepared a directive on rental tax and a simplified passbook for landlords.

As per the guideline, rental taxes have been categorized into three sections — house tax or non-professional tax, commercial rental tax and residential apartment tax.

The IRD has fixed the tax rate at 10 percent of the rental as non-professional tax and 25 percent as commercial and residential apartment taxes.

“We have introduced the directive to make it mandatory to pay rental taxes,” said Tanka Mani Sharma, IRD director general. “A passbook will be provided to landlords to keep a record of the taxes by themselves,” said Sharma, “This way, taxpayers will depend less on tax officers to keep an account of their tax payments.”

The department said its on-site monitoring showed that a majority of house owners haven’t come under the rental tax net. “If these owners are brought under the net, the contribution of rental tax to the total revenue collection would exceed Rs 4 billion,” said Sharma. According to the IRD, commercial taxes have been brought under the tax net. “However, the low collection shows that landlords have been paying less than what is due,” said Sharma.

According to him, payment of rental taxes by government agencies and the public sector has been honest, while collection from the private sector has been less than expected.

Officials have estimated that only around 10 percent of the house owners have been paying taxes, and among them many have been undervaluing the rental contract and paying less than what is due.

Officials added that as the number of apartment complexes and shopping malls has been growing continually, rental tax collections would swell significantly if they were brought under the tax net.

The department is now targeting bringing 25,000 house owners under the rental tax net. According to the IRD, rental tax collection reached Rs 850 million during the eighth month of the fiscal year. The annual target stands at Rs 1.35 billion.

The IRD has also brought 3,217 house owners under the rental tax net during its on-site monitoring conducted during the period mid-January to March-end.

The IRD has planned to fix the reference rate for rental space by using the rentals being paid by banks and government offices as a guide. Under this provision, the rental tax for any business will be charged as per the rate fixed for banks.

source: The Kathmandu Post, 8 April 2012