Taxation of the Digital Economy in Nepal

Nepal uses separate DST and VAT rules for non-resident digital suppliers

Nepal’s Economic Act 2083 and Inland Revenue Department procedures create two separate tax regimes for covered digital services supplied from abroad. Digital Service Tax is a direct tax on certain revenue earned by a non-resident supplier. Value Added Tax is an indirect tax on qualifying supplies to users in Nepal.

The treatment depends on the supplier’s residence, the service, the customer’s status, where the user is located and the supplier’s turnover. A domestic platform or Nepal-resident service provider remains subject to the ordinary income-tax and VAT rules that apply to its own facts.

Which services fall within the digital-services rules?

The IRD procedures define an electronic service as one delivered through the internet with information technology as an essential part of the supply, minimal human intervention and substantial automation. The listed services include targeted online advertising, streaming and subscription content, cloud services, gaming, mobile applications, online marketplaces, software supply and updates, downloads, online training and similar services.

A user may be treated as located in Nepal when the service is delivered in Nepal, the supplier invoices a Nepal address, payment comes through a Nepal bank or payment provider, a Nepal-issued card is used, or the service uses a Nepal IP address, SIM card or landline. These indicators should be checked against the current procedure and the transaction records.

When does the 2% Digital Service Tax apply?

Section 23 of the Economic Act 2083 applies 2% DST to the transaction value, excluding indirect tax charged in Nepal, of covered electronic services supplied by a non-resident to users in Nepal. It also covers the sale of data collected from users in Nepal.

The Act excludes two categories from DST:

• covered annual turnover of up to NPR 3 million; and
• a sale made through a digital interface to a business user in Nepal for business purposes.

If annual covered turnover exceeds NPR 3 million, the 2% tax applies to the full covered amount. The DST procedure treats the tax as a direct tax, so the supplier may not add it to the sale price as a separately collected tax.

A liable non-resident must register and obtain a Permanent Account Number. The supplier must file the annual DST return and pay the tax within three months after the end of the income year. The procedure also requires accounting in Nepalese rupees and records supporting the reported transaction value.

When does 13% VAT apply to a non-resident supplier?

The VAT procedure requires a non-resident supplier to register and collect 13% VAT when its taxable electronic-service turnover in Nepal exceeds NPR 3 million during the preceding 12 months. Once registered after crossing the threshold, the supplier continues to collect VAT unless the registration is cancelled under the applicable rules.

The supplier files a VAT return for each Nepali month by the 25th day of the following month. The supplier must issue the required electronic invoice and account for foreign-currency transactions in Nepalese rupees using the exchange-rate rule in the procedure.

The procedure treats a supply to a Nepal business for business use differently. The non-resident supplier does not collect VAT on that qualifying sale. The Nepal business must assess and deposit VAT under the reverse-charge rule in Section 8(2) of the Value Added Tax Act.

Can DST and VAT apply at the same time?

Yes. The taxes serve different purposes and use different measurement periods. A qualifying consumer supply can fall within both regimes when the supplier exceeds the annual DST threshold and the rolling 12-month VAT threshold.

The business-use rules also differ from consumer treatment. A qualifying business purchase falls outside DST, and the non-resident supplier does not collect VAT under the non-resident VAT procedure. The Nepal business instead considers reverse-charge VAT and income-tax withholding.

How should a Nepal business handle a payment to a foreign supplier?

A Nepal business should not apply a fixed “15% withholding plus 2% DST” formula to every digital payment. Section 88 of the Income Tax Act addresses withholding on Nepal-source service fees, while the DST procedure states that a business user must withhold income tax when required by that Act. The rate and final treatment can depend on the nature and source of the payment, the supplier’s status and any applicable double-taxation agreement.

Before payment, the business should review the contract, invoice, service description, supplier residence, customer classification and intended business use. It should also retain the records used to determine reverse-charge VAT and withholding.

What records should a non-resident supplier retain?

• contracts, invoices, credit notes and payment records;
• evidence showing whether each customer is a consumer or business user;
• the address, payment, IP or telecommunications indicators used to identify users in Nepal;
• monthly and annual turnover calculations for the separate VAT and DST thresholds; and
• registration, return and tax-payment records filed with the Inland Revenue Department.

The IRD issued a 2083 clarification confirming how a registered non-resident may carry forward a negative VAT amount arising from credit notes. A supplier with refunds, cancellations or price adjustments should compare its return treatment with that notice.

What should be reviewed before relying on these rules?

Nepal enacts DST through the annual Economic Act and can amend the VAT and income-tax rules through fiscal legislation. A supplier or Nepal business should therefore check the Act and IRD procedures in force for the relevant income year. The customer type, payment source, permanent-establishment position and tax-treaty terms can change the result.

S & S Jurists can review the service flow, contracts, invoices and payment structure with the taxpayer’s accounting adviser before registration or filing.