VAT Frequently Asked Questions

To register for VAT in Nepal:

1. Determine eligibility based on turnover threshold

2. Collect required documents:

- Business registration certificate

- PAN (Permanent Account Number) certificate

- Citizenship certificate of proprietor/partners

- Partnership deed (for partnerships)

- Memorandum and Articles of Association (for companies)

3. Complete VAT registration form (available on IRD website)

4. Submit application to local tax office or online

5. Undergo verification process by tax authorities

6. Receive VAT registration certificate

Businesses required to register for VAT in Nepal include:

• Those with an annual turnover exceeding NPR 5 million (for goods)

• Those with an annual turnover exceeding NPR 2 million (for services)

• Importers of any taxable goods or services, regardless of turnover

• Exporters of any goods or services, regardless of turnover

• Businesses engaged in specific industries such as:

- Liquor production and distribution

- Brick manufacturing

- Cigarette manufacturing

- Construction businesses

- Private educational institutions

- Private hospitals and nursing homes

Nepal currently operates with the following VAT rates:

**Standard Rate: 13%** - Applies to most goods and services in Nepal, including imports.

**Zero Rate: 0%** - Certain goods and services are zero-rated (Schedule 2). Businesses can still claim input tax credits on purchases related to zero-rated supplies.

**Exempt: No VAT** - Some goods and services (Schedule 1) are exempt from VAT. Businesses dealing exclusively in exempt supplies cannot claim input tax credits.

VAT returns must be filed on a **monthly basis** with the following requirements:

• **Filing Frequency:** Monthly

• **Due Date:** Within 25 days from the end of each month

• **Filing Method:** Online through the Inland Revenue Department's web portal or manually at the tax office

VAT-registered businesses must file returns even if they have no transactions or tax liability for a particular month (nil return).

The VAT return should include total sales, total purchases, input tax credits claimed, output tax collected, and net tax payable or refundable.

Key exempt transactions include:

• Basic agricultural products (unprocessed)

• Basic food items (rice, lentils, vegetables, etc.)

• Educational services provided by government-recognized institutions

• Health services provided by government and social welfare organizations

• Books, newspapers, and printed materials

• Passenger transportation services (except cable car services)

• Financial and insurance services

• Artistic and cultural services

• Postal services provided by the government

• Electricity supply

• Crude oil and natural gas

• Personal services rendered under employment

• House rental services for residential purposes

• Goods and services for official use of diplomatic missions and diplomats

**Note:** While these transactions are exempt from VAT, businesses dealing exclusively in exempt supplies cannot claim input tax credits on their purchases.

Essential documents for VAT compliance:

• **VAT Registration Certificate** (must be displayed at business place)

• **VAT Invoices** for all taxable supplies

• **Purchase Records** (original VAT invoices)

• **Sales Records** (copies of all issued VAT invoices)

• **VAT Account** (separate account showing input and output VAT)

• **Stock Records** (detailed inventory records)

• **Fixed Asset Register**

• **Bank Statements** (showing all business transactions)

• **VAT Returns** (copies of filed monthly returns)

• **Import and Export Documents** (customs declarations, bills of lading)

• **Credit and Debit Notes** (for invoice adjustments)

• **Daily Sales Register** (for retail businesses)

These documents must be maintained for at least **6 years** and be readily available for inspection by tax authorities.

Yes, Nepal imposes the following penalties:

**Late Filing:**

• 0.05% of the tax amount per day for the first 30 days

• 0.1% of the tax amount per day after 30 days

**Late Payment:**

• 15% per annum interest on the unpaid tax amount

**Failure to Register:**

• Fine up to NPR 100,000

• Possible imprisonment for up to 3 months

**Incorrect Returns:**

• 100% of the understated tax amount

**Failure to Issue VAT Invoice:**

• Fine up to NPR 10,000 for each instance

**False or Misleading Statements:**

• Fine up to NPR 100,000

• Possible imprisonment for up to 6 months

**Repeated Offenses:**

• Increased penalties for subsequent violations

Yes, businesses below the mandatory threshold can voluntarily register for VAT in Nepal.

**Advantages:**

• Input tax credit benefits

• Professional business image

• Ability to trade with VAT-registered businesses

**Disadvantages:**

• Compliance burden and administrative costs

• Potential cash flow impact

**Important:** Once voluntarily registered, you must remain in the VAT system for at least 1 year. The application process is similar to mandatory registration.

For foreign customers:

**Exports of goods:** Zero-rated (0% VAT)

**Services to foreign entities:**

• May be zero-rated if consumed outside Nepal

• Standard rate applies if consumed within Nepal

**Requirements:**

• Issue VAT invoices clearly stating zero-rating for eligible supplies

• Maintain proper documentation for zero-rated supplies

• For digital services, check specific rules on place of supply

Essential records include:

• Sales and purchase invoices

• VAT account showing input and output tax

• Stock records

• Fixed asset register

• Bank statements

• Copies of VAT returns

• Import and export documents

• Daily sales register (for retail businesses)

• Credit and debit notes

**All records must be kept for at least 6 years.**

Process for correcting VAT return errors:

1. Identify the error and its impact

2. **For minor errors:** Adjust in next VAT return

3. **For significant errors:**

- File an amended return

- Submit a written explanation to tax office

- Pay any additional tax due immediately

4. If overpaid, apply for refund or credit in future returns

5. Keep records of all corrections and communications with tax office

Steps for claiming VAT refunds:

1. **Eligibility Assessment:** Ensure you have excess input tax credits over output tax

2. **Preparation:** Complete the prescribed VAT refund form and gather supporting documents

3. **Submission:** File the refund application with the local tax office

4. **Verification:** Tax officers may conduct a desk audit or field verification

5. **Approval:** The tax office reviews the application

6. **Refund Issuance:** If approved, refund is issued within 60 days of application

7. **Appeal Process:** If rejected, taxpayers can appeal the decision

**Specific scenarios:**

• **Exporters** can claim monthly refunds with proof of export

• **Diplomatic Missions** can claim refunds on official purchases

• **Excess Credits** can be claimed after four months of consistent excess credits