Introduction: A Major Relief for Large Taxpayers in Nepal
Large companies in Nepal have long faced challenges during the tax audit process. Every fiscal year, many businesses complained about the burden and pressure of undergoing a full audit, a comprehensive review of their income and expenditure records by the Inland Revenue Department (IRD).
Responding to these long-standing grievances, the Government of Nepal has taken a big step toward easing the compliance process. Finance Minister Rameshwar Khanal announced a new risk-based full audit system that frees low-risk large taxpayers from the obligation of mandatory audits. This marks a major shift in the country’s tax administration and aims to promote fairness, transparency, and efficiency.
What Is a ‘Full Audit’ in Nepal?
Understanding Full Audit Under the Income Tax Act
A full audit is an in-depth inspection of a taxpayer’s financial statements, records, and declarations by the IRD. It goes beyond regular tax reviews, allowing officers to verify income, expenses, and other transactions in detail.
The Income Tax Act allows tax authorities to perform such audits to ensure that the information submitted through self-declaration is accurate and that taxpayers have paid the right amount of tax.
Why Businesses Feared the Full Audit Process
For many years, the full audit process had become a source of stress for business owners. Tax officers often requested extra documents, held repeated meetings, and delayed final decisions. Large companies, especially those with turnovers exceeding NPR 1 billion, were automatically placed under full audit, regardless of their risk level.
Entrepreneurs argued that this system not only increased their administrative costs but also created opportunities for unnecessary pressure and inconvenience.
The New Government Policy: Risk-Based Full Audit System
Statement from the Finance Minister and IRD
Finance Minister Rameshwar Khanal announced that the government would reform the full audit system to make tax services more convenient for compliant taxpayers.
According to Madan Dahal, Director General of the Inland Revenue Department, both small and large taxpayers will now face full audits only when a risk is detected. The IRD has already issued instructions to large and medium taxpayer offices not to conduct audits of all large companies as before.
How the Risk-Based System Works
The new audit policy uses a risk-based selection approach. This means tax authorities will analyze taxpayer data and identify which companies pose potential risks based on specific indicators such as:
Sudden changes in income or expenses
Unusual tax deductions or claims
Delayed or inconsistent tax filings
Industry-specific risk patterns
By focusing on these factors, the IRD aims to improve compliance monitoring while reducing the burden on law-abiding taxpayers.
Who Will Still Face a Full Audit?
High Risk Large Taxpayers
Companies classified as high-risk will continue to undergo full audits. These are typically businesses with irregularities in their tax returns or those operating in sectors prone to tax manipulation.
Multinational Companies and Financial Institutions
The government has confirmed that all banks, financial institutions, and multinational companies will still be subject to full audits. Due to their size, complexity, and international transactions, these entities require stricter oversight to maintain transparency and prevent financial misconduct.
Who Gets Exempted from Full Audit?
Low-Risk Large Companies
Large companies that maintain accurate records, submit tax returns on time, and show consistent income and expenses will be classified as low-risk. These companies will not face mandatory full audits every year. Instead, they may be reviewed occasionally, based on performance and compliance history.
Medium and Small Businesses
Medium taxpayers (with turnovers between NPR 500 million and NPR 1 billion) will also benefit from this approach. The same principle applies only companies flagged as risky will face a detailed audit. This reform will significantly reduce the workload for both businesses and tax offices.
Business Categories Affected by the Change
In Nepal, businesses are categorized for audit purposes as follows:
Large taxpayers: Annual turnover above NPR 1 billion
Medium taxpayers: Annual turnover between NPR 500 million and NPR 1 billion
Small taxpayers: Below NPR 500 million
Until now, large and medium companies were automatically selected for full audits every four years. Under the new rule, this will change—only those with red flags will be selected.
Benefits of the New Risk-Based Full Audit Policy
Reduced Administrative Hassles
Businesses will now spend less time gathering documents and attending audit meetings. The IRD can also save resources by focusing on truly high-risk cases instead of auditing everyone.
Enhanced Trust Between Government and Businesses
By adopting a fair, transparent audit process, the government is building trust with the business community. This step promotes voluntary compliance and reduces the perception that tax audits are tools of harassment.
Time and Cost Savings
A targeted audit system helps companies cut compliance costs—no more unnecessary accounting fees and audit delays. It also enables the IRD to allocate manpower efficiently to critical cases.
Expert Opinions on the Policy Change
Views from Chartered Accountant Sheshmani Dahal
Chartered Accountant Sheshmani Dahal welcomed the reform, calling it a positive development. He noted that the Income Tax Act never required all large taxpayers to be fully audited.
“Full audits should be based on risk, not routine,” he said. “Stopping full audits completely would be unwise, but limiting them to high-risk cases ensures accountability while reducing unnecessary interference.”
Industry Reactions
Many business associations have praised the government’s move, saying it creates a friendlier environment for investors. However, some have urged the IRD to maintain transparency in how it identifies and classifies risk, so the system cannot be misused.
How Companies Should Prepare for the New Audit Approach
Maintain Accurate Financial Records
Even though low-risk companies are exempt from mandatory audits, it remains crucial to maintain accurate and transparent accounting records. Incomplete or inconsistent financial statements can quickly push a company into the high-risk category.
Strengthen Internal Controls
Businesses should establish strong internal auditing systems to ensure all transactions are properly recorded and verified. Using modern accounting software and hiring qualified professionals can minimize human error and ensure compliance.
Stay Updated on Tax Law Changes
Tax policies in Nepal continue to evolve. Companies must regularly monitor IRD notices and government circulars to stay informed. Working with certified tax consultants ensures that businesses don’t miss any new compliance requirements.
Potential Challenges and Criticisms
Risk of Misuse or Inconsistent Application
While the new rule is a relief, experts warn that the discretion given to tax officers to decide risk levels could lead to uneven enforcement. A transparent and well-defined audit selection system is essential to prevent potential misuse.
Balancing Compliance and Oversight
Reducing full audits shouldn’t mean reducing accountability. The IRD must balance efficiency with vigilance to ensure tax evasion doesn’t increase under the risk-based model.
What This Means for Nepal’s Business Environment
Easier Tax Compliance
This policy reform is expected to improve Nepal’s business climate. Fewer audits mean businesses can focus more on growth and less on administrative burdens. It also encourages more firms to register formally and pay taxes honestly.
👉 Learn more about the latest legal and tax compliance requirements for different industries in Nepal in 2025 to ensure your business stays fully compliant and avoids penalties.
Government’s Move Toward Digital and Data-Driven Taxation
The shift toward risk-based audits reflects Nepal’s gradual transition to data-driven governance. With the help of technology, the IRD can analyze taxpayer patterns and select audit targets more accurately, promoting fairness and efficiency.
Conclusion: A Step Toward Smarter Tax Governance
The government’s decision to exempt low-risk large companies from mandatory full audits marks a major reform in Nepal’s tax system. It reflects a broader commitment to improving taxpayer services, fostering business confidence, and encouraging voluntary compliance.
While full audits remain necessary for high-risk cases, this risk-based approach brings balance—ensuring that honest taxpayers are not overburdened while maintaining robust oversight where needed.
As Nepal modernizes its tax administration, businesses should embrace transparency, strengthen recordkeeping, and continue to comply faithfully with tax laws. This policy change is not just a relief—it’s a sign of smarter, fairer, and more efficient governance.
Frequently Asked Questions (FAQs) About Full Audit Policy in Nepal
1. What is a full audit in Nepal?
A full audit in Nepal is a detailed examination of a company’s financial records, income, and expenses by the Inland Revenue Department (IRD). It goes beyond basic checks to verify the accuracy of tax declarations and ensure compliance with the Income Tax Act.
2. Who needs a full audit in Nepal?
Previously, all large taxpayers with an annual turnover above NPR 1 billion were required to undergo a full audit every few years. Under the new policy, only high-risk taxpayers, banks, financial institutions, and multinational companies are required to undergo a full audit.
3. What is a risk-based audit system?
A risk-based audit system identifies taxpayers for detailed audit based on specific risk indicators—such as unusual financial activity, inconsistent filings, or suspicious deductions. This approach ensures that only high-risk companies face full audits while compliant businesses are spared.
4. Who is considered a large taxpayer in Nepal?
A company with an annual turnover of more than NPR 1 billion is classified as a large taxpayer. Those with turnovers between NPR 500 million and 1 billion fall under the medium taxpayer category.
5. How often do large companies face full audits?
Under previous rules, large companies were typically audited every four years. With the new risk-based system, audits will occur only when risk indicators are identified by the IRD.
6. Are small and medium enterprises (SMEs) affected by this new rule?
Yes. The same risk-based principle applies to medium and small taxpayers. Only those identified as high-risk will undergo a full audit, reducing compliance pressure for most SMEs.
7. Why did the government change the full audit system?
The government introduced the new system to make tax compliance easier, reduce unnecessary audits, and build trust between taxpayers and authorities. The goal is to focus resources on high-risk cases while rewarding compliant businesses.
8. How can companies avoid being marked as high-risk?
Businesses can lower their risk by maintaining accurate accounting records, submitting tax returns on time, and ensuring transparency in all financial transactions. Regular internal audits and hiring professional accountants also help.
9. What happens if a company is selected for a full audit?
If selected, the company must provide all required documents, including income statements, balance sheets, expense details, and tax records. The IRD will review these to confirm compliance and accuracy.
10. When will the new audit policy take effect?
The new risk-based full audit system has already been implemented through directives issued by the IRD in Asoj (mid-September). It applies to audits from the fiscal year 2024/25 onward.
11. Does this policy mean there will be no audits at all?
No. Audits will still take place—but only for high-risk or selected companies. The system aims to balance efficiency with accountability rather than eliminating audits altogether.
12. How does this change benefit Nepal’s business environment?
The reform promotes a more business-friendly environment by reducing red tape, cutting costs, and encouraging compliance. It also helps attract investment by improving the transparency and predictability of Nepal’s tax system.
