VAT Registration In Nepal

VAT Registration in Nepal

1. What is Value Added Tax (VAT) ?

VAT is an indirect tax. It is an improved and modified form of sales tax. It is levied on value added of goods and services at each stage in the process of production and distribution chain. This stage can be import, manufacturing, wholesale, and retail. VAT is based on consumption rather than income. In contrast to a progressive income tax, which levies more taxes on the wealthy, VAT is charged equally on every purchase.12 It is a tax on consumer spending. It is collected by VAT registered traders on their supplies of goods and services affected within the State, for consideration, to their customers. Generally, each such trader in the chain of supply from manufacturer through to retailer charges VAT on his or her sales and is entitled to deduct from this amount the VAT paid on his or her purchases.13 VAT is a form of consumption tax. From the perspective of the buyer, it is a tax on the purchase price. From that of the seller, it is a tax only on the value added to a product, material, or service, from an accounting point of view, by this stage of its manufacture or distribution. The manufacturer remits to the government the difference between these two amounts, and retains the rest for themselves to offset the taxes they had previously paid on the inputs. The purpose of VAT is to generate tax revenues to the government similar to the corporate income tax or the personal income tax.14 Over 130 countries worldwide have introduced VAT over the past three decades and Nepal is almost the last few to introduce it. Nepal already had a system of sales tax collection wherein the taxes were collected at one point from the transaction involving the sale of goods. VAT would, however, be collected in stage from one stage to another. The mechanism of VAT is such that, for goods that are imported and consumed in a particular state, the first seller pays the first point tax, and the next seller pays tax only on the value addition done leading to a total tax burden exactly equal to the last point tax.15 Therefore, VAT provides a new and buoyant revenue base. It is non-distortionary tax, so it provides exemptions and zero rating in some goods and services for specific transactions, such as export and for typical buyers. Hence, VAT provides a new buoyant revenue base, typically yielding more revenue.

2. Legal Framework

Nepal’s VAT system is governed by:

- Value Added Tax Act, 2052 (1996)

- Value Added Tax Rules, 2053 (1997)

- Annual Finance Acts and periodic circulars or directives from the Inland Revenue Department (IRD)

The legal framework is regularly amended to address emerging economic practices, especially in digital commerce and cross-border transactions.

3. Who Must Register for VAT?

Mandatory VAT registration applies to:

- Businesses with an annual turnover of over NPR 5 million

- Importers, exporters, and service providers dealing with taxable goods/services

- Any business specified by the IRD, including those in the digital economy

Voluntary registration is allowed for businesses below the threshold that wish to claim input tax credit and operate transparently.

4. Requirements for VAT registration in Nepal

• Proof of deposit if requested by Inland Revenue Office (only for foreigner) • MOA & AOA of Company (in case of companies),

• Company Registration Certificate from respective departments (e.g., Company Registrar Office/Department of Commerce/Department of Industry Department of Science/VDC/Municipalities,

• Application Form,

• Copy of the citizenship certificate of the individual or of the partner who signs the application form for the partnership firm or the person who signs the application form for the limited companies’ corporations (Any authentic identification document for foreigner),

• Two passport size photos of the individual or of the partner who signs the application form for the partnership firm or the person who signs application form for the limited company’s corporations,

• Rent agreement (10% of rent shall be paid for 3 months in advance),

• Hand drawn sketch of the business location or main office or head office of the applicant,

• Power of attorney in case a representative is sent for registration (except for applicants registering individual).

5. VAT Compliance Obligations

Registered VAT payers must:

- Issue valid VAT invoices with mandatory details (see recent changes below)

- File monthly VAT returns by the 25th of the following month

- Maintain proper records of transactions, purchases, and VAT accounts

- Remit VAT payments timely to avoid fines or legal consequences

6. Recent Changes and Updates (As of FY 2082/83)

• Abolition of VAT on Digital Transactions: The government has removed VAT on electronic payment services, including inter-bank fund transfers and clearing house operations.

• Mandatory E-Invoicing & New Invoice Format: The new amendments require businesses to:

• Include HS code (first four digits), brand, and model of goods in the VAT invoice

• Use approved e-billing systems integrated with IRD’s real-time system

• Digital Services VAT for Foreign Companies: Foreign companies offering digital services (like Google, Meta, Netflix) to Nepali users are liable for VAT and Digital Service Tax (DST).

• The 2082/83 budget proposes a study to assess the feasibility of introducing multiple VAT rates. The current flat 13% remains applicable.

7. Input Tax Credit and Refunds

A registered VAT payer can claim credit for the input VAT paid on goods or services used for taxable business activities. For businesses like exporters (zero-rated supply), excess input credit can be claimed as a VAT refund, subject to IRD review and documentation.

8. VAT Exemptions and Zero-Rated Items

VAT-exempt items include:

- Unprocessed agricultural products

- Educational and healthcare services

- Financial and insurance services

- Public transportation

- Cultural, religious, and charitable activities

Zero-rated goods/services include exports, allowing full input credit with no output VAT liability.

9. Penalties and Legal Consequences

Failure to comply with VAT laws may result in:

- Monetary fines for late filing, non-payment, or underreporting

- Interest on delayed payments

- Seizure of business documents or assets in severe cases

- Criminal liability, including imprisonment for fraud or repeated violations

Disclaimer : This content is for general informational purposes only and does not constitute legal advice. For specific guidance, please consult our legal professionals.