Value Added Tax (VAT) in Nepal — Complete Overview

Example

Taxable sale value: NPR 100,000

VAT at 13%: NPR 13,000

Total invoice: NPR 113,000

Suppose allowable Input VAT during the same period is: NPR 8,000

Then: Output VAT: NPR 13,000
Less Input VAT: NPR 8,000

Net VAT: NPR 5,000

VAT Is a Transaction Tax

Income tax primarily taxes income/profit.

VAT taxes taxable supplies.

A business can therefore:

• make an accounting loss;

• have no income-tax liability;

but still have VAT payable because it made taxable sales.

Likewise, VAT collected from customers is generally not business income.

It is tax collected for the Government.

Taxable, Exempt and Zero-rated Are Different

VAT transactions must be classified correctly.

Taxable at 13%

Ordinary taxable supply.

Exempt

A supply listed as exempt under the VAT Act/Schedule does not bear output VAT.

Input VAT connected with exempt activities may also be restricted.

Zero-rated

VAT applies at 0%, rather than the transaction being outside the VAT system.

This distinction is important because qualifying zero-rated activities—particularly exports—can generally preserve input-tax recovery rights subject to the Act.

Therefore:

VAT exempt ≠ VAT zero-rated

Who Collects VAT?

A VAT-registered person making a taxable supply normally:

1. issues the prescribed tax invoice;

2. charges VAT;

3. records Output VAT;

4. claims eligible Input VAT;

5. files VAT return;

6. deposits net VAT payable.

VAT registration and invoicing should be completed before a person begins collecting VAT from customers.

VAT Registration Threshold

The current VAT Rules use taxable turnover over the previous twelve months for the ordinary thresholds:

• Goods, transport-vehicle rental and transport services: more than NPR 5,000,000.
• Other taxable services: more than NPR 3,000,000.
• Taxable mixed goods and services: more than NPR 3,000,000.

Identify the actual activity and check mandatory-registration categories separately. These thresholds are not the only circumstances in which registration is required.

Voluntary VAT Registration

A small business below the threshold may generally apply for voluntary registration, subject to the VAT Act and Rules.

IRD explains benefits including:

• ability to transact more easily with VAT-registered customers;

• ability to deal with government buyers where relevant;

• ability to claim eligible Input VAT.

Voluntary registration should nevertheless be considered carefully because registration also creates:

• monthly/periodic compliance;

• tax invoicing;

• VAT record requirements;

• return filing;

• audit exposure.

VAT on Imports

VAT also applies to taxable imports.

The registration rules contain a special rule requiring registration in specified taxable-import circumstances, including a taxable import exceeding the prescribed amount in a single transaction. The current Rules retain the NPR 10,000 single-import registration trigger, subject to the statutory exception.

Customs VAT paid on business imports may qualify for Input VAT credit where the statutory conditions are satisfied.

Input VAT

Section 17 permits a VAT-registered person to claim eligible tax paid/payable when purchasing or importing goods or services connected with taxable transactions.

IRD's VAT Directive describes the system as:

output tax collected minus allowable tax paid on taxable business inputs.

Input VAT is therefore central to VAT computation.

However, not every VAT-bearing purchase qualifies for full credit.

Restricted Input VAT

The current VAT Rules specifically restrict credit for certain expenditure.

Examples include:

• beverages;

• alcoholic beverages;

• petrol for vehicles;

• entertainment expenditure.

The Rules also provide partial credit for defined road passenger automobiles with three or more wheels, subject to the prescribed-process principal-business exception. The current Rule 41 text provides 40% Input VAT credit on qualifying passenger automobiles, subject to the exceptions for businesses whose principal activity involves supplying those goods/services.

See the blocked-and-partial-input-VAT guide for the restrictions and exceptions.

VAT Invoice

A VAT-registered supplier must issue the prescribed tax invoice when making taxable supplies.

Rule 17 requires the tax invoice to follow the prescribed Schedule format and identifies information relating to the supplier, transaction and goods/services. The current Rules also contain updated Schedule 5/5ख invoice formats.

An ordinary handwritten or accounting-system bill is not automatically a valid VAT invoice.

VAT Return

IRD provides the VAT return in Schedule 10 through the Taxpayer Portal.

The return generally includes:

• taxable sales;

• Output VAT;

• purchases/imports;

• Input VAT;

• adjustments;

• tax payable/credit.

See the VAT return-filing guide for the applicable period, deadline and payment requirements.

VAT and TDS Are Different

Businesses often confuse VAT and income-tax withholding.

Example: Professional service:

NPR 100,000

VAT: 13% = NPR 13,000

Invoice: NPR 113,000

Income-tax TDS may separately apply to the service value.

IRD confirms that income-tax withholding should generally be calculated on the VAT-exclusive amount, not the VAT-inclusive invoice amount.

So: VAT ≠ TDS

and one does not replace the other.

VAT Accounting Example

Sale: NPR 100,000

VAT: NPR 13,000

Accounting: Customer / Bank — Dr 113,000

Sales — Cr 100,000

Output VAT Payable — Cr 13,000

VAT collected is a liability, not revenue.

Current Source Control

IRD currently publishes:

• VAT Act, 2052 consolidated through Finance Act 2082;

• Finance Act 2083 separately;

• VAT Rules, 2053 through the 27th Amendment;

• VAT Directive 2069, Third Amendment 2080;

• specific VAT procedures/directives for sectors and digital services.

Read the cited sources together: Consolidated VAT Act base

Finance Act 2083 overlay until IRD publishes a consolidated Act incorporating FY 2083/84 amendments.

VAT Compliance Checklist

• Determine whether supply is taxable

• Determine 13% / zero-rate / exemption

• Check registration requirement

• Obtain VAT registration

• Issue valid tax invoices

• Maintain sales book

• Maintain purchase book

• Record imports

• Identify eligible Input VAT

• Identify blocked/partial Input VAT

• Reconcile Output VAT

• Prepare VAT return

• Pay net VAT

• retain VAT documentation

• Reconcile VAT to financial statements

Common Errors

Treating all business turnover as VAT-taxable

Confusing VAT exemption with zero-rating

Collecting VAT before proper registration

Claiming every purchase VAT as Input VAT

Using VAT-inclusive amount for income-tax TDS

Treating VAT collected as business revenue

Related CMA Resources

• VAT Registration

• VAT Registration Threshold

• VAT Invoice

• Input Tax Credit

• Blocked Input VAT

• VAT Return Filing

• VAT Refund

• VAT Deregistration

• VAT on Imports and Exports

Further guidance and practical checks

VAT is invoice- and transaction-driven. Correct classification of the supply and supporting tax invoice are fundamental to both Output VAT and Input VAT.