Value Added Tax, 1997 ( 2054)

Nepal's Government introduced VAT system in 1997, (2054) from November 16, 1997. Although the VAT Act was passed in 1995 and the VAT regulation was approved in 1996. The VAT Act replaced the existing Sales Tax, the Contract Tax, the Hotel Tax and the

Entertainment Tax. It was designed to collect the same revenue as the four taxes it replaced. As designed  law, the VAT is a tax on many goods and services consumed in Nepal.  It was a new tax system for Nepal. It was justified in the light of government fiscal imbalances and need for extra revenue mobilization through an efficient tax system. At that time it was hoped that the introduction of new system would, however, make local business more competitive and remove the tax from exports. After implementation of VAT, it slightly changed the price of some goods and services.

The objective in enforcing VAT Act by the Government is to increase revenue mobilization by making effective the process of collecting revenues required for the economic development of the country. It is expedient to impose a value added tax on all transactions including the sale, distribution, delivery, import, export of goods or services and to collect revenues effectively by regulating the process of collection.

Coverage of VAT

The coverage of VAT in Nepal is based on transfer, sales, supply, import and export of goods and services except some special provisions. It is levied on the value added at each stage of the production or distribution. Every persons or firms or companies that are involved in such transaction liable to pay and collect tax. The actual coverage is structured by standard rates. The list of tax exempted and zero rated goods and services are mentioned in the Schedule one and two, respectively, in the Act. 

Taxable Goods and Services (Section-7 Schedule-1)

Nepal's VAT system is based on excluded concept. It has given the tax exemptions for certain goods and services and these are listed in Schedule one of VAT Act, 1995. All the goods and services other than the listed in schedule one are taxable. For these goods and services, in Nepal two types of tax rates are applicable. One is standard rate and other is zero rate. If any body like to know that a certain good or service is taxable or not he/she should check the Schedule-1; if such goods or services are mentioned in Schedule -1, that is not taxable and if that is not mentioned in such schedule, goods and services are taxable.

Standard Rated Areas

Nepal has adopted "inclusive basket system" for tax-exempted goods and services (Section 7, Schedule-1), which makes broad-based tax coverage. It has mentioned the list of zero rated goods, services and activities (Schedule-2). For all goods and services that do not fall under these two annexes standard rate is applicable. For this purpose the rate of tax is 13 percent. Under this system all transactions regarding transfer, sales, supply, import and export of goods and services, where value add exists are taxable, except some special provisions. Thus, except this provision all value added economic transactions are taxable and tax is collected at the rate of 13 percent. This is called standard rate area.   

Zero Rated Areas (Section-7 Schedule-2)

Under the VAT system some goods and services are, may be, taxed at zero-rate. Exporters are allowed to claim input tax credits for VAT paid or payable on purchases of goods and services relating to their commercial activities. Exports taxed at zero percent (0%) include exports of both goods and services.

Exempted Goods and Services

Under VAT system all goods and services are divided into two basic categories, taxable and tax-exempt. Goods and services are either

taxed at the standard rate of 13 percent or they are taxed at zero percent. Those taxed at the standard rate include all goods and services except those that are specified as taxed at zero percent or tax-exempted (Section5.3, Schedule 1).

In the following transactions, the purchaser does not pay VAT. The latest list of tax-exempt goods and services is given:

Group 1: Basic agricultural products:

Group 2. Goods related to basic needs:

Group 3 Live animals and animal products:

Group 4. Agriculture inputs:

Group 5 Medicines, medical treatment and medical services:

Group 6 Education:

Group 7 Books, Newspapers and  printing inputs:

Group 8 Cultural, artistic and skillful services:

Group 9 Public traveling services and transportation:

Group 10 Vocational and professional services:   

Group 11 Other Goods and services

1. Postal services (provided by Nepal Government):

2. Excise ticket

3. Financial and Life Insurance services,

4. Bank-currency note and cheque-book

5. Gold and Silver:

6. Electricity supply of 440 and 220 volt,

7. Raw wool,

8. Battery tempo, chassis of battery-tempo and battery of the same.

9. Bio-gas, solar power, and all machinery and accessories related to power generation from air power under the recommendation of Alternative Power Center.

10. Airplane, helicopter, fire-brigade, ambulance and human dead body carriers.

11.  Products of jutes.

12.     Industrial machines that can be import under five percent customs duty,

13.     Wool-carpet and dying, weaving, knitting and coloring of woolen-carpet and thread used for woolen carpet industry.

14.     Hundred- percent cotton made sadi, dhoti (male and female use), petani and gamchha certified by specified Association.

15.     Woolen thread used for hand knitting sweater inside the country (excluding artificial and acrylic yarn).

16.     Goods and kinds provided in grants under approval of Ministry of Finance for the use of natural divine or disaster.

17.     Luggage imported under personal luggage (jhiti- gunta and baggage) provision.

18.     The tax collected by textiles and matches (wood stick user) industry will be refunded to the producer as the process defined by government. The 25 percent of total tax collection by the producers of mustard oil, flour, perfumes, will be refunded to the producers.

Tax paid on the purchase of domestic raw materials, semi raw materials, and machinery used for textile industry and woolen