VAT Registration for Foreign Service Providers in Nepal

15 September 2023

The Inland Revenue Department of Nepal formulated the Procedure Relating to Value Added Tax on Digital Service Provided by Non-Resident Person, 2022 (“Procedure Relating to VAT on Digital Service”) which came into effect on 17 July 2022. The Procedure Related to VAT on Digital Service sets out the provisions related to Value Added Tax (VAT) registration, filings of tax returns and de-registration of VAT applicable for non-resident digital service providers.

Scope of Services

Under the Procedure Related to VAT on Digital Service Tax, digital service includes the following services, rendering to the customer, which essentially require information technology and provided automatically through internet with minimal human intervention:

  1. Advertising services;
  2. Movies, television, music, over the top (O.T.T.) and other similar subscription based services;
  3. Data collection services;
  4. Cloud services;
  5. Gaming services;
  6. Mobile application related services;
  7. Online marketplace services and services and goods provided through it;
  8. Supply and update of software;
  9. Sales of data collected from Nepal resident person;
  10. Download of data, images and similar services;
  11. Education, consultancy, skill development and training services; and
  12. E-book, e-library and e-newspaper.

Definition of Consumer

Procedure Relating to VAT on Digital Service defines consumer as “a person who consumes services having normal place of abode in Nepal. Provided, a person who purchases goods and services by separate arrangement for business purpose or to use in business shall not be considered as consumer.”

Threshold for VAT Registration

VAT on digital service must be paid for digital services provided to consumers in Nepal for transaction value of more than NPR 2,000,000 (Nepalese Rupees Two Million) per income year by registering under VAT.

However, a non-resident person who has registered for tax once the transaction threshold is exceeded will have to collect tax irrespective of transaction amount.

Payment of Tax

In case of transaction with the consumers, the non-resident digital service provider must pay VAT by collecting it on transaction value of digital service.

Since the service provided to person other than the consumers is not covered by the digital service, the non-resident person does not have to collect VAT on such services. So, in case the person other than consumer purchases services from outside of Nepal, the reverse VAT system is applicable pursuant to section 8(2) of the VAT Act, 2052.

Pursuant to section 3(e) of Procedure Relating to VAT on Digital Service, the consumer shall be responsible in case of consuming the service by wrongly declaring themself as a person other than the consumer.

Rate of Tax

The rate of VAT is 13 (thirteen) percent on the transaction value of digital service provided by non-resident person to consumers in Nepal.

Regulating Authority

The Large Taxpayer Office is the regulating authority to administer the digital service tax.

Registration

Non-resident person carrying out transaction of taxable digital services more than two million rupees within the last twelve months must register under VAT and collect VAT from the date of registration.

The procedures to obtain VAT registration number for non-resident person are set out below:

Submit an application along with relevant documents at the Large Taxpayer Office via online medium.
The Large Taxpayer Office will issue the registration certificate in the prescribed format within 7 days of reciept of an application.

Filing of Returns

Non-resident digital service providers must file tax returns at the Large Taxpayer Office via online medium within 25 days of the next month of the expiry of tax period.

De-Registration

If a registered non-resident person intends to de-register for any reason or close its transaction in Nepal, such person must file an application at the Large Taxpayer Office. Upon receipt of such application, the Large Taxpayer Office will notify about de-registration or reason of not being deregistered within 3 months.

However unless the tax liability remaining to be paid is not cleared by non-resident person, the registration cannot be cancelled.

Audit of VAT for Digital Service in Nepal

Tax Administration Office can conduct audits on non-resident tax payers if found any reasons to believe that the amount of tax was understated by the non-resident person. If it is established that a non-resident person has understated their tax liability, a penalty of 100% of the claimed amount of tax or imprisonment for up to 6 (six) months or both is imposed.

Disclaimer: This article is for informational purposes only and shall not be construed as legal advice, advertisement, personal communication, solicitation or inducement of any sort from the firm or its members. The firm shall not be liable for consequences arising out of actions undertaken by any person relying on the information provided herein. 

The copyright of the contents of this article is vested with Imperial Law Associates.

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