Value Added Tax
Value added tax is collected by the federal government and is subject to a revenue sharing arrangement of 70-15-15 (Federal-Provincial and Local government respectively). The rules regarding application of value added tax, assessment of VAT, payment of VAT, vat refund and deduction is dealt by Value added Tax act, 1996 and Value added tax rules, 1997. As was the case with the laws concerning Income tax in Nepal, the laws relating to value added tax is also subject to amendment through the yearly finance act.
Applicability of VAT
VAT is collected and levied on both goods and services
- Imported to Nepal
- Supplied in Nepal
- Exported from Nepal
The provision relating to collection and levying of VAT is present in section 6 of the VAT act. Section 6 makes it clear that VAT is a tax of territorial nature i.e. only those goods and services originating in Nepal or imported in Nepal are subject to VAT. Any transaction made outside the territory of Nepal is not subject to VAT whether it be conducted by a resident person or not.
Although section 7 of the VAT states that a single rate of 13 percent is applicable to goods subject to value added tax, in practice three distinct forms of VAT is present.
- Goods and services subject to 13 percent VAT
- Items not listed in schedule 1 or 2 of the VAT act subject to a flat rate of 13 percent VAT.
- Vat Exempt Goods and services
Schedule 1 details out the list of goods and services for which vat is exempt. Any business conducting any transaction in relation to goods or services for which VAT is exempt is not required to be registered, neither is it required to follow any formalities detailed out in the VAT act. although no VAT is applied to the goods or services detailed in section 1, businesses dealing exclusively with the items mentioned in schedule 1 are not allowed any VAT input credit. Goods and services exempt from VAT are:
- Basic agricultural products
- Agricultural inputs
- Goods of basic needs
- Live animals and Animal Products
- Medicine, Medicinal and similar health services
- Books, newspapers and printed materials
- Artistic and carving services
- Passenger and goods transportation services
- Personal or professional services
- Activities relating to purchase and sale of building and land
- Activities relating to facilities such as betting, lottery and Casino operation
- Activities classified as other goods and services
Goods and services subject to zero rate
Unlike VAT exempt goods and services, goods and services subject to zero rate mandatorily need to follow all procedures and formalities detailed out in the VAT act, additionally, goods and services subject to zero rate are allowed input tax credit in line with the provisions of the VAT act and regulations. The list of goods and services subject to zero rate are provided in schedule 2 of the VAT act. Details of goods and services subject to zero rate can be found here
Time and place of supply
VAT is a tax of territorial nature, therefore the time and place of supply of any good or service is an essential factor in the determination of applicability of VAT. The determination of time and place of supply is made in accordance with section 6 of the VAT act and rule 15 and 16 of VAT rules. The determination of time of supply is done as follows in order (whichever occurs first is regarded as the time of supply)
- At the time in which the supplier issued the invoice
- In case of supply of goods, at the time in which the recipient received or took the goods from the place of transaction of supplier,
- In case of supply of services, at the time in which the service is rendered,
- At the time in which the supplier received consideration for the goods or services
Determination of time of supply for supply of telecommunication, public services, supply of goods and services in accordance to any contract, supply of goods and services that does not receive tax deduction facility is done in the following manner
(a) In case of the telecommunication services to be supplied continuously or other similar type of public services, the time in which the invoice is issued,
(b) If the mode of payment of the value of any goods or services is made in installment or partial basis in more than one day according to the terms of the contract, time of supply means the day which occurs first from among the day in which the payment is made or the day mentioned in the Contract in which the payment has to be made.
(c) In case of goods and services that does not receive tax deduction facility pursuant to this Act for their use, the time in which such goods and service is used.
Place of supply is determined in the following manner
- In case of movable goods transferred by sale, the place where such goods are transferred or sold is deemed as the place of supply
- The location of goods in case of any immovable goods is deemed as the place of supply
- In case of imported foods, the customs point of Nepal is deemed as the place of supply
- In case of services, the place where the benefit of the supply is received is deemed as the place of supply
Taxable value of goods and services
VAT is levied on the taxable value of any good or service. The calculation of taxable value includes the cost of the good/service itself, the amount of expenditures relating to transportation and distribution borne by the supplier, profit to be earned, and all other tax amounts except VAT itself. In case of goods imported the taxable value is calculated after adding its customs duty, transportation cost, insurance cost, freight charges, commissions to be paid, and other relevant charges such as countervailing duty.
Discounts, commission or other similar commercial rebate granted in supplying goods and services are not included in the calculation of taxable value. An important aspect to consider in the calculation of taxable value is the market value of the goods and services. In accordance to section 13 of the VAT act, market value of any particular good or service is determined by taking into account any consideration received for the supply of similar kind of services between unrelated persons. The taxable value of a good/service is deemed to be its market value in circumstances when any goods or services are exchanged without monetary consideration, when the value of the good or service is lower than the market and when any good or supply is exchanged/supplied for only partial consideration i.e. supplied at a price lower than the prevailing market value.
Deduction of tax/Input credit
A supplier/importer of any good/service is allowed to deduct the amount of VAT paid previously from the amount of VAT collected and to be paid after the supply of good or services subject to the provisions of the VAT act and VAT rules. Section 16 of the act and Rule 26 detail out the conditions in which VAT may be deducted or input credit may be provided.
The key deductions allowed under the prevailing laws are
- Deductions in circumstances when goods and services previously transacted were not used for any taxable transaction within a period of one month
- VAT paid on capital goods imported or purchased by entering into a loan agreement
- VAT paid on goods in case of loss or damage of goods due to arson, theft, accident, wear and tear or disruptive activity
- VAT paid on import of goods or services or purchase of goods or services which is directly related with the taxable business
- In case any registered person exports more than forty percent of their total sale, VAT deduction may be sought by filling out an application in the prescribed format.
- Submit VAT return and pay applicable VAT within the 25th day of the following month
- Maintain purchase book, sales book, VAT account and provide customers with VAT account
- Maintain VAT records for a period of six years
- Inform and update the IRO about the changes in the business within 15 days of the change