VAT Process for Companies in Nepal

Financial Services

Value Added Tax (VAT) is a crucial aspect of business operations in Nepal. Understanding the VAT process is essential for companies to comply with tax regulations and avoid penalties. This article provides a comprehensive guide to the VAT process for companies in Nepal, covering registration, filing, rates, and more.

Who Needs to Register for VAT?

In Nepal, VAT registration is mandatory for certain businesses and voluntary for others. Companies must register for VAT if:

Their annual turnover exceeds the VAT threshold
They import or export goods or services
They operate in specific industries, such as hotels, travel agencies, or telecommunications

Businesses below the threshold may choose to register voluntarily to claim input tax credits and enhance their credibility. However, small businesses with minimal transactions may opt to stay unregistered to avoid the administrative burden.

Where to Register for VAT in Nepal?

VAT registration in Nepal is handled by the Inland Revenue Department (IRD). To register:

Visit the nearest IRD office or use their online portal
Submit the VAT registration form (Form 01.01)
Provide necessary documents, including company registration certificate and PAN card
Pay the registration fee
Receive your VAT certificate and unique VAT number

The IRD typically processes applications within 7-10 working days. Once registered, companies must display their VAT certificate prominently at their place of business.

What is the VAT Threshold in Nepal?

The VAT threshold in Nepal determines which businesses must mandatorily register for VAT. As of 2024, the thresholds are:

NPR 5 million annual turnover for goods suppliers
NPR 2 million annual turnover for service providers
NPR 1 million for businesses in metropolitan and sub-metropolitan areas

Businesses approaching these thresholds should monitor their turnover closely. If they exceed the limit, they must register for VAT within 30 days. Failure to do so can result in penalties and backdated tax liabilities.

How Often Must VAT Returns Be Filed?

VAT-registered businesses in Nepal must file VAT returns regularly. The filing frequency depends on the company’s turnover:

Monthly: For businesses with annual turnover exceeding NPR 10 million
Bi-monthly: For businesses with annual turnover between NPR 5-10 million
Quarterly: For businesses with annual turnover below NPR 5 million

Returns must be filed within 25 days of the end of each tax period. For example, a monthly filer must submit their return for January by February 25th. Consistent and timely filing is crucial to avoid penalties and maintain good standing with the IRD.

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What is the Current VAT Rate?

The standard VAT rate in Nepal is 13%. This rate applies to most goods and services, including:

Retail sales
Imports
Professional services
Manufacturing

However, some items are exempt from VAT or subject to a zero rate:

Basic necessities like unprocessed food items
Agricultural products
Educational services
Healthcare services
Exports (zero-rated)

Understanding which rate applies to your products or services is essential for correct VAT calculation and compliance.

How to File VAT Returns Online?

Filing VAT returns online in Nepal is a straightforward process that saves time and reduces errors. Here’s a step-by-step guide:

Log in to the IRD’s online portal using your PAN and password
Select “VAT Return” from the available options
Choose the appropriate tax period for your return
Enter your sales and purchase details, including taxable and exempt transactions
The system will automatically calculate your VAT liability or refund
Review the information for accuracy
Submit the return electronically

After submission, you’ll receive a confirmation receipt. If you owe VAT, you can pay through online banking or at authorized banks. Keep all records of your filings and payments for future reference.

What are the Penalties for Late VAT Filing?

The IRD imposes strict penalties for late VAT filing to encourage compliance. Penalties include:

Late filing fee: NPR 1,000 per month or 0.05% of the tax due, whichever is higher
Interest: 15% per annum on unpaid tax
Additional fines for repeated non-compliance

In severe cases, the IRD may suspend business operations or pursue legal action. To avoid these penalties, companies should:

Set reminders for filing deadlines
Maintain accurate and up-to-date records
Allocate sufficient time for return preparation
Consider hiring a tax professional for complex returns

Prompt communication with the IRD in case of unavoidable delays can sometimes mitigate penalties.

How to Claim VAT Refunds in Nepal?

VAT refunds occur when input tax (VAT paid on purchases) exceeds output tax (VAT collected on sales). To claim a refund:

Accurately record all VAT-eligible purchases
File your VAT return, showing the refund due
Submit a refund application to the IRD
Provide supporting documents, including purchase invoices
Wait for the IRD to process your claim (usually within 60 days)

Refunds are typically issued for:

Exporters with zero-rated supplies
Businesses with significant capital investments
Companies consistently in a VAT credit position

The IRD may conduct audits before approving large refunds, so maintaining proper documentation is crucial.

What Records Must Be Kept for VAT?

Proper record-keeping is essential for VAT compliance in Nepal. Companies must maintain:

Sales and purchase invoices
VAT account books
Import and export documents
Bank statements
Stock records
Fixed asset registers

These records should be kept for at least 6 years from the date of the last transaction. Proper record-keeping helps in:

Accurate VAT return filing
Smooth tax audits
Claiming input tax credits
Resolving discrepancies with the IRD

Implementing a robust accounting system can significantly ease the record-keeping process.

How to Deregister from VAT in Nepal?

Deregistering from VAT may be necessary if a business closes, changes its structure, or falls below the registration threshold. To deregister:

Submit a deregistration application to the IRD
Provide reasons for deregistration and supporting documents
Settle any outstanding VAT liabilities
Undergo a final VAT audit by the IRD
Receive a deregistration certificate

After deregistration, businesses must:

Stop charging VAT on sales
Return their VAT certificate to the IRD
Keep records for an additional 6 years

Deregistration can have tax implications, so consulting with a tax professional is advisable before proceeding.

By following these guidelines and maintaining compliance with VAT regulations, companies in Nepal can ensure smooth operations and avoid unnecessary penalties or complications with tax authorities.