VAT Assessment, Tax Audit and IRD Investigation in Nepal

A VAT-registered taxpayer:

• calculates taxable sales;

• calculates Output VAT;

• claims eligible Input VAT;

• files Schedule 10;

• pays net VAT.

That filed return is the taxpayer's self-assessment position.

But IRD can subsequently verify it.

Section 20 permits assessment where, among other matters:

Return not filed

Taxpayer does not file within the statutory period.

Incomplete return

Required information is missing.

Erroneous return

Return contains incorrect figures/treatment.

False return

Return contains false/fraudulent information.

Understated VAT

Tax Officer has reasonable grounds to believe VAT liability has been understated or otherwise incorrectly reported.

Section 20 permits assessment based on matters including:

• proof/evidence of transactions;

• tax-audit findings;

• comparable transactions/tax paid by similar taxpayers,

subject to the statutory framework.

The assessment should not be arbitrary.

The tax authority must establish the basis for the proposed VAT adjustment.

Section 20 expressly places the burden of proof on the Tax Officer for the tax assessment made under that framework.

This does not mean that the taxpayer can refuse to provide records.

Section 23 gives IRD significant inspection/audit powers.

The practical position is: IRD must support its assessment

while taxpayer must maintain and produce required VAT records.

The current VAT assessment procedure gives the taxpayer a period to submit evidence/clarification before the final assessment order.

The current Rules framework reflects a: 15-day defence period

in the assessment process.

The taxpayer should use this stage seriously.

Do not submit:

“We disagree.”

Instead prepare:

• transaction reconciliation;

• tax invoice;

• purchase/sales book;

• bank evidence;

• Input VAT evidence;

• customs data;

• legal arguments.

VAT Section 20 contains an ordinary: four-year assessment limitation framework subject to statutory exceptions such as fraud and specific reassessment situations.

For a disputed limitation issue, review any applicable court decision together with the statutory wording and the filing history.

The precise limitation date should therefore be calculated from:

• filing history;

• applicable statutory wording;

• relevant judicial interpretation;

rather than assuming the Income Tax reassessment rule applies identically to VAT.

Important

Income Tax normal reassessment limit = current three-year framework does not mean: VAT limit also became three years.

They are different Acts.

Where the original VAT assessment/return is affected by fraud, the ordinary limitation protection can differ.

Therefore businesses should not describe the four-year rule as:

“IRD can never assess VAT after four years.”

Where IRD believes tax collection is at risk because the taxpayer may:

• leave Nepal;

• transfer property;

• conceal/remove assets;

the Tax Officer, with required approval, may use the Section 22 jeopardy-assessment mechanism.

This is an exceptional protective assessment process.

IRD has statutory powers to inspect and audit VAT compliance.

This can include verifying:

• VAT registration;

• tax invoices;

• sales;

• purchases;

• inventory;

• Input VAT;

• imports;

• business premises;

• books and records.

A taxpayer preventing lawful Section 23 inspection can face separate penalties.

IRD may compare:

Sales

VAT return ↔ financial statements

Purchases

VAT purchase book ↔ accounts

Customs

imports ↔ Input VAT

TDS

service transactions ↔ Income Tax withholding

Bank

collections ↔ turnover

Inventory

purchases + opening stock − sales ↔ closing stock

Electronic Billing

invoice sequence ↔ sales declaration.

Businesses should perform these reconciliations before IRD does.

• sales suppression;

• missing VAT invoices;

• duplicate Input VAT;

• blocked Input VAT;

• fake invoices;

• purchases unrelated to business;

• incorrect zero-rating;

• exempt/taxable misclassification;

• undeclared branches/warehouses;

• invalid Credit Notes;

• unexplained inventory differences;

• customs/VAT mismatches;

• electronic-billing manipulation.

VAT return showed: Output VAT:

NPR 1,000,000

Input VAT: NPR 800,000

VAT paid: NPR 200,000

IRD audit disallows: NPR 150,000 of Input VAT

Revised VAT: Output VAT: NPR 1,000,000
Allowed Input VAT: NPR 650,000

VAT liability: NPR 350,000

Already paid: NPR 200,000

Additional principal VAT: NPR 150,000

Then separate:

• additional fee;

• interest;

• penalty, if applicable

must be calculated according to the Act.

A taxpayer dissatisfied with VAT assessment can apply for Administrative Review under Section 31क within the statutory period.

The VAT Act separately provides the review/Revenue Tribunal route.

Use the separately applicable:

VAT Appeal & Administrative Review

resource rather than assuming the Income Tax appeal page applies unchanged.

• VAT registration certificate

• VAT returns

• Sales books

• Purchase books

• Tax invoices

• Credit/Debit Notes

• Customs declarations

• Input VAT reconciliation

• Output VAT reconciliation

• Financial statements

• Bank reconciliation

• Inventory records

• Contracts

• Zero-rate evidence

• Exemption evidence

• Electronic billing data

• IRD notices

• Response chronology

Applying Income Tax limitation periods to VAT

Ignoring a proposed assessment until the final order

Submitting only ledger printouts without underlying invoices

Claiming Input VAT solely because a supplier invoice exists

Failing to reconcile turnover across VAT, TDS and financial statements

VAT assessment is transaction- and invoice-intensive. The best defence is a contemporaneous audit trail that reconciles invoices, accounting records, customs data, inventory and filed VAT returns.