Setting up and operating a Non-Governmental Organization in Nepal involves navigating multiple regulatory bodies and compliance requirements. This guide explains the legal framework, registration process, tax obligations, and ongoing compliance requirements for NGOs operating in Nepal.
Legal Framework
The establishment and operation of NGOs in Nepal is governed by several key laws:
- Association Registration Act, 2034 (1977): The primary law governing NGO registration. Section 3 prohibits any person from establishing or operating an organization without first registering it with the concerned District Administration Office (DAO).
- Companies Act, 2063: Governs organizations registered as Company Not Distributing profit registered with Office of Company Registrar (OCR).
- Social Welfare Act, 2049 (1992): Regulates the affiliation of NGOs with the Social Welfare Council (SWC) for development activities, donor partnerships, and mobilization of foreign grants.
- Income Tax Act, 2058 (2002): Outlines tax exemptions and obligations for non-profit entities, including TDS withholding requirements.
- Labour Act, 2074 (2017): Governs employment contracts, minimum wages, and social security contributions applicable to NGO staff.
- Other laws and regulations as applicable.
Types of Non-Profit Organizations in Nepal
Organizations wishing to operate on a non-profit basis in Nepal can choose between two main structures:
1. Organization registered under Association Registration Act
Registered under the Association Registration Act, 2034 with the District Administration Office (DAO). This is the most common structure for community-level social organizations. The registration process is more complex and requires annual renewal with the DAO.
2. Company Not Distributing Profit
Registered under the Companies Act, 2063 with the Office of the Company Registrar (OCR). Any profit is reinvested in services or organizational growth rather than distributed to members. This structure is increasingly preferred due to its simpler registration and renewal process, and greater operational flexibility.
Both structures can receive domestic and foreign funding, but SWC approval is mandatory for mobilizing foreign grants in either case.
NGO Registration Process (Step by Step)
Step 1: Form the Executive Committee
A minimum of 9 members holding Nepali citizenship must form the founding executive committee, comprising: 1 President, 1 Vice-President, 1 Secretary, 1 Treasurer, and at least 5 general members. At least 33% of the executive committee must be women. Relatives (same family) generally cannot form a board, to prevent conflicts of interest.
Step 2: Prepare the Constitution (Bidhan)
Draft the organization’s constitution (Bidhan) clearly stating the objectives, governance structure, area of operation, and financial procedures. The scope of operation must be clearly defined at this stage, as expanding or changing it later requires approval from the registering authority.
Step 3: Obtain a Recommendation Letter from the Ward Office
Apply for a recommendation letter from the local ward office (Municipality/Metropolitan City) where the NGO’s registered office is located. A rent agreement with the landowner or proof of office address is required at this stage.
Step 4: Register at the District Administration Office (DAO)
Submit the following documents to the District Administration Office in the district of operation:
- Joint application form (signed by executive members)
- Organization’s constitution (Bidhan)
- Meeting minutes approving the NGO’s establishment
- Certified copies of citizenship certificates of all executive members
- Passport-sized photos of all members
- Character reports from Nepal Police for all members (from respective districts of origin)
- Recommendation letter from the ward office
- Rent agreement / office address proof
The DAO issues a Registration Certificate upon approval. The process typically takes 4 to 6 weeks if all documents are in order.
Step 5: Register for PAN at the Inland Revenue Department (IRD)
All registered NGOs must obtain a Permanent Account Number (PAN) from the Inland Revenue Department. PAN registration is required to open a bank account in the organization’s name and is mandatory for all tax compliance purposes. Submit the application along with copies of the registration certificate, minutes, and citizenship of the authorized signatory.
Step 6: Obtain SWC Affiliation
Affiliate with the Social Welfare Council (SWC) — the government body established to coordinate, monitor, and supervise NGOs and INGOs in Nepal. SWC affiliation is required to:
- Receive donations or grants (domestic or foreign)
- Obtain tax-exempt status from the IRD
- Implement projects funded by government, bilateral, or multilateral donors
- Operate with national-level recognition
The SWC affiliation fee is approximately NPR 3,000. The SWC affiliation certificate must be renewed every three years.
Step 7: Register at the Local Ward Office
After completing the above steps, register with the relevant local ward office where the NGO is based. This ensures local government recognition and is required for annual renewals.
Mobilization of Foreign Grants
NGOs wishing to receive and mobilize foreign grants must obtain project approval from the Social Welfare Council for each project. The SWC reviews the project proposal, donor details, and budget before issuing a Project Approval Certificate. Key requirements include:
- Submit a project proposal and application to the SWC with full details of the donor, project objectives, budget, and implementation plan
- Obtain a separate Project Approval Certificate for each project
- All foreign grants must comply with anti-money laundering regulations
- Foreign nationals cannot directly register an NGO in Nepal; however, they can collaborate with Nepali citizens or set up branches of International NGOs (INGOs) following separate INGO registration requirements under the Ministry of Home Affairs and SWC
Tax and Compliance Obligations
Tax Exemption Certificate
NGOs may apply for a Tax Exemption Certificate from the Inland Revenue Department under the Income Tax Act, 2058. To qualify, the organization must be a social, religious, educational, or charitable organization of public character registered without a profit motive. Tax exemption does not eliminate all tax obligations — it exempts the organization’s operational income from income tax, but TDS and other withholding obligations remain.
TDS (Tax Deducted at Source)
Even tax-exempt NGOs are required to deduct and deposit TDS on applicable payments, including:
- Salaries and remuneration to staff (as per applicable income tax slabs)
- Service fees and consultant payments (1.5% TDS if VAT invoice is provided, otherwise 15%)
- Rent payments to landlords (10% on the payment)
TDS must be deposited at the Inland Revenue Office within 25 days of the following month (as per the Nepali calendar). Monthly TDS returns must be filed accordingly.
Annual Tax Return
All registered NGOs — including those with tax-exempt status — must file an annual income tax return with the IRD. The deadline is within three months of the end of the fiscal year (by mid-October, i.e., end of Ashwin). An extension of up to 3 months may be obtained if there is a valid reason. Organizations are required to submit audited financial statements along with their annual return.
VAT
NGOs are generally exempt from VAT registration unless they engage in taxable activities with annual turnover exceeding NPR 3 million for service transactions and NPR 5 million for mixed transactions or transactions of goods. However, NGOs procuring goods or services subject to VAT will bear VAT costs, as they typically cannot claim VAT refunds unless specifically authorized.
Labour and Social Security Compliance
NGOs employing staff must comply with the Labour Act, 2074 and the Contribution-Based Social Security Act, 2074, including:
- Written employment contracts for all staff
- Minimum wage compliance (currently NPR 19,550 per month as per the notice effective from 1 Shrawan 2082)
- Social Security Fund contributions: 11% deduction from employee basic salary + 20% contribution by the employer, deposited in the Social Security Fund
Annual Renewal and Reporting Requirements
NGOs registered in Nepal must renew their registrations annually. The key reporting obligations are:
- District Administration Office (DAO): Annual renewal of the registration certificate, with submission of progress reports and audited financial statements
- Ward Office: Annual renewal and registration update
- Inland Revenue Department (IRD): Annual income tax return and TDS returns; tax clearance certificate
- Social Welfare Council (SWC): Affiliation renewal every three years; submission of annual progress reports and financial statements; project completion reports for each funded project
- Annual Audit: Financial statements must be audited annually by an auditor registered with the Institute of Chartered Accountants of Nepal (Chartered Accountant or Registered Auditor).
How SACA Can Help
Shankar Associates, Chartered Accountants provides a full range of audit, tax, and advisory services for NGOs and not-for-profit organizations operating in Nepal, including:
- Annual statutory and internal audit of NGO financial statements
- Tax registration, PAN filing, and TDS compliance
- Application and renewal of tax exemption certificates
- SWC affiliation and reporting assistance
- Labour and social security compliance advisory
- Foreign grant compliance and project financial management
- Preparation of financial reports for donor reporting
For more information or to schedule a consultation, please contact us.
Note: This article is for general informational purposes and reflects the regulatory framework as of FY 2081/82. NGO regulations in Nepal change frequently. Please consult a qualified professional for advice specific to your organization.
0 Comments