The Basics of Value Added Tax (VAT)
VAT stands for Value Added Tax. It is charged on the sales of goods and services. VAT is applied each time a product or service is sold until it reaches the final consumer. The final consumer is someone who buys the product or service to use or consume, not to resell. In Nepal, VAT is governed by the VAT Act, 2052 (referred to as the 'Act').
Rate of VAT in Nepal
Nepal uses a single VAT rate of 13%. This rate is applied to the net selling price of goods and services and is added to the invoice given to the customer. Unlike some countries, such as India, Nepal does not have multiple VAT rates.
VAT Collection and Payment in Nepal
Businesses are responsible for collecting VAT and paying it to the Revenue Department. The tax period is usually monthly, unless the Revenue Department permits otherwise. Businesses need to calculate their VAT liability for each month and make payment by the 25th of the next month. For example, VAT collected in Shrawan must be paid by the 25th of Bhadra.
How VAT Works
VAT is imposed on the value added to goods and services. Each producer or distributor adds value to the materials they buy, and this added value is taxed at each stage of production and distribution. VAT is typically passed on to the consumer. Businesses collect VAT on sales and can deduct the VAT they paid on purchases. They must pay the difference or claim a refund if they paid more VAT on purchases than collected on sales.
What is Input Tax Credit?
Input Tax Credit (ITC) allows registered businesses to recover the VAT paid on their purchases. This includes VAT on goods and services bought in Nepal or imported. Businesses can claim ITC for purchases used in commercial activities, and they can recover VAT on capital goods fully in the period they are acquired. If the business’s exports exceed 50% of their sales or they are on credit for 6 months, they can claim a refund within 30 days.
What is Tax-Exempt?
Some goods and services are tax-exempt, meaning VAT is not charged. These include:
- Basic necessities like rice, pulses, and fresh fish.
- Basic agricultural products and related inputs.
- Social welfare services including medicine and education.
- Goods for disabled persons and certain transport services.
- Educational and cultural goods and services.
- Financial and insurance services.
- Postage, revenue stamps, and certain banking services.
Are Imported Goods Taxed?
Most imported goods are taxable at customs, calculated on their value plus any duties or taxes. VAT on imports is collected by Customs. Registrants can claim ITC for VAT paid on imported goods used in their business.
Are Exports Taxed?
VAT is only for goods and services consumed in Nepal. Exports are taxed at 0%, but exporters can claim ITC for VAT on goods and services used for their business.
Who Must Register for VAT?
Businesses must register if their annual taxable turnover exceeds 2 million rupees. Conglomerates with a combined turnover above this threshold must also register.
Are Small Businesses Affected?
Small businesses with annual sales under 2 million rupees can choose to register. Once registered, they must remain registered for the full fiscal year.
Cancelling VAT Registration
A VAT registration can be cancelled if a business’s taxable sales are under 2 million rupees for four consecutive quarters or if the business ceases operations.
Obligations of VAT Registrants
VAT registrants must:
- Submit VAT returns and pay tax by the 25th of the following month.
- Provide tax invoices to customers.
- Maintain purchase and sales records, and VAT accounts.
- Keep records for 6 years.
- Update the IRO on any business changes.
- Display their Certificate of Registration prominently.
- Allow tax officers to inspect records and stock.
What Should Be on a Tax Invoice?
A tax invoice must include:
- The name and address of the seller and buyer.
- The seller's PAN number and invoice number.
- The transaction date and details of the sale.
Invoices should be prepared in triplicate: one for the purchaser, one for audit purposes, and one for the seller's records.
What is an Abbreviated Invoice?
For retail sales under 5000 rupees, an abbreviated invoice may be used. This invoice does not require the purchaser's details. Businesses must request a detailed tax invoice if they want to claim input tax credits.
Maintaining Records
Most businesses need only minor changes to their record-keeping systems. Records should show VAT paid on purchases, VAT collected on sales, and a method to distinguish between taxable and exempt sales. Books and records must be kept for 6 years.
Required Books and Records
VAT registrants must keep:
- A purchase book.
- A sales book.
- A VAT account.
These records should include invoice numbers, dates, names and PAN numbers, taxable values, and VAT amounts. Businesses with both taxable and exempt sales need extra columns to track these separately.
