Govt Adopts Risk-Based Model for Full Audits

The Ministry of Finance has introduced a new policy under which full audits will be carried out solely on a risk basis, in a bid to make the tax administration more transparent and taxpayer-friendly.

According to the Inland Revenue Department (IRD), large taxpayers’ files were previously subjected to full audits almost every year. Under the new approach, full audits will be conducted only for large taxpayers, multinational companies, and banks and financial institutions that are deemed to be at risk.

Officials said the department has already directed tax offices dealing with large and medium taxpayers to implement the new policy. This fiscal year, only companies that have not been audited for more than four years have been selected for full audits.

Companies with an annual turnover exceeding Rs 1 billion are categorized as large taxpayers, while those with turnover between Rs 500 million and Rs 1 billion fall under the medium taxpayer category. Previously, such companies were required to undergo a full audit at least once every four years, but that provision has now been scrapped.

Director General of the IRD, Madan Dahal, said that full audits will now be conducted on the basis of risk assessment. He added that this year, companies nearing the end of the four-year audit cycle have been chosen for full audits by the large and medium taxpayers’ offices.

Nepal’s tax system operates on the principle of self-declaration, under which the government collects taxes based on the information submitted by taxpayers. However, in the case of large taxpayers, tax officers may seek additional documents or evidence when deemed necessary. The business community has long complained that some tax officers misuse this process to exert unnecessary pressure on taxpayers.

Although the Income Tax Act recognises self-declaration as valid, it also permits audits of files that appear risky or suspicious. With the implementation of the new policy, officials expect a decline in unnecessary crowding at tax offices, undue pressure under the pretext of audits, and tax-related disputes.

Tax expert Dr Chandramani Adhikari welcomed the policy shift, calling it a positive step towards reforming tax administration. He said the Income Tax Act does not envisage full audits for all large taxpayers, and bringing everyone under the same scope was never appropriate. “Selecting files for audit based on risk is a much more rational and effective approach,” he said.