Blocked and Partial Input VAT in Nepal

VAT recovery is intended primarily for purchases used in taxable business activity.

Certain expenditure has:

• strong personal-consumption characteristics;

• mixed business/private use;

• special statutory treatment.

The Rules therefore restrict recovery even where the supplier correctly charged VAT.

VAT paid on specified beverages falls within the Rule 41 restriction.

The exact item classification should be checked from the current Rule/Schedule and transaction facts.

A business should not assume that because refreshments were purchased for a meeting, the VAT is automatically recoverable.

VAT on qualifying:

• liquor;

• beer;

• alcoholic beverages

is within the restricted Input VAT framework.

Hospitality and entertainment businesses whose principal business is supplying the relevant goods/services can be treated differently under the Rule 41 principal-business exception.

Rule 41 restricts input VAT on petrol for vehicles. Do not extend this clause to diesel, LPG or every other fuel without checking a separately applicable provision.

• petrol;

Businesses should not automatically claim fuel VAT because the fuel was purchased using a company vehicle.

VAT related to entertainment expenditure is restricted under Rule 41.

Examples requiring review may include:

• client entertainment;

• hospitality;

• recreational expenditure.

Income-tax deductibility and VAT recoverability are separate questions.

An expense can potentially be deductible for Income Tax but still have blocked Input VAT.

Rule 41 provides only: 40% Input VAT deduction for specified automobiles.

The Rules define the relevant automobile category broadly as motor vehicles with three or more wheels used on roads for carriage of passengers.

Example

Vehicle purchase value: NPR 4,000,000

VAT: NPR 520,000

Qualifying Input VAT at 40%: NPR 208,000

Non-creditable VAT: NPR 312,000

The non-creditable amount then requires accounting/tax-cost analysis.

A key exception applies where the taxpayer's principal business consists of supplying the goods/services covered by the restriction.

For example, a business whose principal activity is dealing in qualifying automobiles may not be subject to the same 40% restriction as an ordinary company buying a passenger car for management use.

The business model must therefore be established before applying Rule 41 mechanically.

Separate from Rule 41, Input VAT may also require proportional allocation where a purchase supports both:

• taxable supplies; and

• exempt supplies.

This is a different concept from statutory blocked Input VAT.

Blocked

Law prohibits/restricts the category.

Apportioned

The purchase partly supports taxable activity and partly supports non-creditable activity.

Even where a purchase is not listed as a Rule 41 blocked item, Input VAT cannot simply be claimed for private/personal consumption unrelated to taxable business.

Example

Company purchases household appliance exclusively for director's residence.

A VAT invoice exists.

That alone does not make the Input VAT a valid business claim.

Example: Expense value:

NPR 100,000

VAT: NPR 13,000

VAT fully blocked.

Instead of: Expense — 100,000
Input VAT — 13,000 the cost may need to be recorded as: Expense/asset cost — NPR 113,000

depending on the applicable accounting and Income Tax treatment.

Vehicle value: NPR 4,000,000

VAT: NPR 520,000

Input VAT allowed: NPR 208,000

Non-creditable VAT: NPR 312,000

Potential asset cost for accounting/tax consideration: NPR 4,312,000 subject to the relevant accounting and Income Tax rules.

CMA recommends assigning VAT categories in the accounting system: VAT-FULL

100% Input VAT

VAT-PARTIAL-40

40% Input VAT

VAT-BLOCKED

0% Input VAT

VAT-EXEMPT-RELATED

Non-creditable due to exempt activity

VAT-MIXED

Requires apportionment.

This greatly reduces errors during monthly VAT return preparation.

• Identify purchase

• Verify VAT invoice

• Determine business purpose

• Check Rule 41 category

• Beverage/alcohol?

• Petrol for vehicles?

• Entertainment?

• Passenger automobile?

• Principal-business exception?

• Taxable/exempt mixed use?

• Calculate allowed percentage

• Capitalise/expense blocked VAT correctly

• Reconcile with purchase book

• Prevent full credit where restricted

Claiming 100% VAT on ordinary passenger car

Claiming fuel VAT automatically

Claiming entertainment VAT because the expense is business-related

Ignoring principal-business exception

Confusing blocked VAT with income-tax disallowance

Recording blocked VAT as Input VAT indefinitely

The restrictions summarised here are drawn from Rule 41 in the official VAT Rules compilation including the twenty-seventh amendment. Check the actual item, business use and prescribed-process exception before claiming credit.

Blocked Input VAT is a statutory VAT restriction and should be coded at transaction level. Waiting until return preparation to identify restricted purchases increases the risk of over-claiming credit.