What is VAT in Nepal?

VAT is levied on consumption rather than income. In contrast to a progressive income

tax, which raises taxes on the wealthy, VAT is levied equally on all purchases. A VAT
system is used in more than 160 countries. It is most commonly found in the European
Union (EU). Nonetheless, it is not without controversy. Nepal implemented VAT on
November 16, 1997. This tax was imposed at the manufacturing level in place of sales
tax, hotel tax, contract tax, and entertainment tax. The former sales tax, contract tax,
hotel tax, entertainment tax, and service tax have all been replaced by the VAT, which
was designed to collect revenue in the same way as the previous 4 taxes.

Because the collection of customs fees and income taxes is heavily reliant on the VAT’s
e-activity, which is intended to improve revenue collection, it was designed to collect the
same amount of money as the four taxes it replaced. The VAT can be used in a variety
of ways. VAT (Value Added Tax) is an indirect tax on the creation of value. Its
administration is in the hands of the Nepalese Inland Revenue Department (IRD). VAT is
typically levied at a rate of 13% in Nepal, though certain goods and services are VAT-
free.

VAT Registration Procedure

Any individual involved in a taxable transaction must file an application for registration
with IRO in the prescribed form. However, there are a few thresholds that, if not
exceeded, do not necessitate VAT registration.

Person completing a transaction with a turnover of no more than fifty lakh rupees and,
in the case of products and services, a turnover of no more than ten lakh rupees within
the previous twelve months. Anyone who imports products worth ten thousand rupees
or more for business purposes into Nepal once a year must have the transaction
registered.

In the event that a small-business owner wishes to have his transaction registered on
his own initiative, he may file an application. In these cases, the tax officer conducts an
examination and registers the transaction.

Whereas VAT registration is required for the following businesses, even if they are
below the threshold: hardware, sanitary, furniture, fixtures, furnishings, automobiles,
motor parts, electronics, marbles, education consultancy, health spa, catering service,
park place, discothèque, color lab, parking services, restaurant with bar, and dry
cleaners with machinery.
Benefits of VAT Registration for
Businesses
VAT is a global system. As a result, four major implications of VAT can be seen globally.
There are others, but here are some of the main advantages:

 An individual would not feel the burden.

A VAT registration number is a number or your business’s identification number that
may not appear to be interesting. However, it adds credibility to your company, makes
you appear trustworthy, and creates a professional aura for your company. When the
value is added after the VAT registration, the tax is to be paid, and the individual is
relieved of unnecessary stress.

Request your VAT refunds

The benefit of VAT registration is that the initial payment is refunded. When your
company is VAT-registered, you will be able to easily reclaim VAT on all goods and
services purchased. However, there should be a balance between charging and
receiving VAT payments over the course of the year.
You can easily reclaim any previous VAT payments.

After you’ve registered for VAT, you can reclaim the VAT you paid on goods from the
previous four years that you’re still using/using. Your company should have been in
operation for a long time and should have VAT invoices and records for that time period
to be used for this purpose.

An advantage for the businessman

The tax is based on the idea that each producer or distributor adds value to the
materials they buy in some way, and that this added value is taxed at each stage of the
manufacturing and distribution chain. It is assumed that VAT is completely passed on
to the consumer. Under the VAT system, producers, distributors, and service providers
charge VAT on the goods or services they sell or provide. The difference between the
VAT charged on purchases and the VAT collected on sales determines how much a
registrant must remit or deduct.

A significant source of income for the government

By broadening the tax base, VAT can be developed as a primary, main, and stable
source of revenue.
To address the issue of smuggling or understating the taxable value, because sales tax
was previously only collected at the point of sale, and value-added below this point was
not included. In such cases, the old sales tax system made tax evasion easy; however,
evasion is more difficult with VAT.

In accordance with international standards, VAT was implemented.

Reduce Nepal’s reliance/subservience on customs duties as part of Nepal’s

commitment to the WTO, BIMSTEC, and SAFTA.

To modernize the tax system through improved accounting practices and increased
business transparency.

Transparency
The tax levied on goods, sales, or purchases at the outset is unclear. This is due to the
fact that the amount of tax levied on the goods is unknown at the next stage. The
amount of tax would be known at each stage of the sale or purchase of goods under the
VAT system.

Just and equitable

The VAT imposes uniform tax rates across the state, preventing unfair advantages from
being gained while the tax is in effect.

Simplifying procedure
The VAT system simplifies procedures relating to return filing, tax payment, declaration,
and assessment in order to minimize any interface between the tax payer and the tax
collector.

Limit Your Discretion

The VAT system proposes limiting the assessing officer’s discretion in order to treat
everyone equally. There would be no leeway in imposing penalties for late filing of
returns, non-filing of returns, late payment of tax or nonpayment of tax, or tax evasion,
for example. Any form of harassment would be prohibited in such a system.

Computerization
VAT proposes computerization to target tax evaders through the production of
Exception Reports. In a large number of cases, no processing or scrutiny of returns
would be required, freeing tax-compliant dealers from the harassment that is so
common in assessment.

The management information system, which would be implemented as part of the

integrated computerization, would increase the efficiency and responsiveness of the tax
department.

Conclusion
The government should introduce and market more taxpayer education enhancement
programs on a niche as well as a broad scale.

Proper VAT imposition in businesses necessitates good accounting practices. As a

result, the government must put in place procedures to audit and cross-check
accounting practices in organizations. Strict policies should be strengthened, and
communication between customs and the Inland Revenue Department should be
enhanced.

Other Business, conditions for Registration

If a person wishes to conduct transactions not listed in Schedule 1, the
registration obligation is created in any of the following conditions:

 If the person obtains business loan exceeding Rs. 10 Lakhs

 If the turnover of the person exceeds Rs. 50 lakhs in last twelve months
where it is goods business, or Rs. 20 lakhs in last 12 months where it is
service business or mixed business of goods and services

The person shall register for VAT within thirty days of happening of the
events as above.