The Economic Act stipulates that VAT is to be collected from travellers leaving Nepal, but not from those entering. According to this law, such air services are neither supplied within Nepal nor imported into it. Even if considered exports, the VAT Act mandates a zero per cent VAT rate on exports.
June 18, Kathmandu: Despite widespread opposition to the Value Added Tax (VAT) imposed on international air services, the upcoming fiscal year’s budget includes a law requiring VAT from foreign airlines that do not even operate flights to Nepal.
Imposing VAT on air tickets contradicts the basic principles of taxation and Nepal’s international commitments. Last year’s budget (Economic Act 2023) introduced VAT on air services, prompting the Internal Revenue Department to issue a notice that VAT applies not only to domestic but also to international air services.
VAT is a consumption or destination-based tax, meaning it is applied where the goods or services are consumed. It applies to goods and services consumed within a country, whether produced domestically or imported. However, exports are subject to a zero per cent VAT rate.
Section 5 of the VAT Act specifies three scenarios for VAT application: supply of goods or services within Nepal, import of goods or services into Nepal, and export of goods or services from Nepal. The Act’s Schedule 2 mentions zero VAT on exported goods or services.
The Economic Act mandates VAT collection from outbound travellers but exempts inbound ones. This suggests that such air services are neither supplied nor imported into Nepal. Even if considered exports, the VAT Act provides for a zero per cent VAT on exports.
VAT is a destination-based tax, meaning it depends on where the product is consumed, not where it is sold. Domestic air service consumption occurs within the country, but international air service consumption happens outside the country, hence VAT is not typically imposed on international air services worldwide.
For example, if someone buys a ticket from Nepal to the USA, they do not purchase the air service in Nepal. The airline only spends about 10 minutes in Nepali airspace, and charging VAT on such a service contradicts tax principles, according to a chartered accountant.
However, last year’s budget included air services in the list of VAT-liable goods and services. The Internal Revenue Department’s notice mentioned VAT on international air services.
An official involved in tax law formulation argued that since foreign airlines generate income from Nepal but do not pay income tax here, VAT was deemed a scientific method for tax collection amid pressures to increase revenue.
Yet, Section 70 of the Income Tax Act requires foreign air service operators to pay a five per cent advance income tax on their total turnover in Nepal before repatriating earnings to their home countries.
The official claimed other countries also impose various taxes on international air services, arguing that equal treatment and ease of collection justify VAT imposition.
The International Civil Aviation Organization (ICAO), a UN-specialised agency, specifies in its tax policy that VAT and sales tax should not be levied on air services. ICAO distinguishes between “charges” and “taxes” on aviation services, asserting that charges cover the costs of providing civil aviation services and should not discriminate between domestic and international services, while taxes, typically levied by national or local governments, should not apply to civil aviation services.
ICAO’s 1993 resolution urged member states to reduce and eventually eliminate all forms of taxes on international air transport. Despite this, Nepal imposed VAT on international air services after 30 years.
Moreover, Nepal exempts VAT on fuel, lubricants, and other technical supplies used by international air services, by ICAO’s tax policy. Section 1 of ICAO’s tax-related resolutions stipulates exemptions or refunds for VAT on supplies like fuel and lubricants used in international flights. Nepal’s VAT Act 2052, Schedule 2(1), specifies zero VAT on goods for international flights destined outside Nepal.
Additionally, Nepali hotels supplying aviation catering to international air services are exempt from VAT, and duty-free shops at international airports do not charge VAT.
Senior Chartered Accountant, Umeshraj Pandey remarked that imposing VAT on foreign travelers while exempting international airlines from VAT on supplies contradicts VAT’s fundamental principles.
ICAO member states, including Nepal, should adhere to ICAO’s resolutions as guiding principles, according to Gyanendra Bhul, an official at the Civil Aviation Authority of Nepal.
The International Air Transport Association (IATA) also urges countries not to impose VAT on international air tickets, stating that if VAT is applied, it should be at a zero rate. IATA considers the imposition of VAT on international air travel a violation of fundamental principles and laws.
Tourism businesses, including the Trekking Agencies Association of Nepal (TAAN), have opposed VAT on airfares from the beginning. TAAN’s Secretary-General Binod Sapkota said the VAT makes Nepal an expensive destination and expressed hope that the government will reconsider the tax amidst dissatisfaction from international airlines.
Nepal imposes VAT on foreign airlines
The Economic Act mentions that international air transport service providers not starting flights from Nepal (offline airlines) must register for VAT by the end of the fiscal year 2024/25 and pay VAT collected since May 29, 2023, to receive waivers on interest, penalties, and additional fees.
While this provision appears to offer relief to taxpayers, it creates a scenario where, for example, an American Airlines ticket purchased from Nepal requires American Airlines to register and pay VAT in Nepal, which contradicts VAT’s fundamental principles.
IATA implemented a VAT collection system for tickets issued in Nepal, but offline airlines have not registered in Nepal, prompting the Internal Revenue Department to introduce this scheme.
China expressed concern over the VAT, arguing it contradicts basic principles and laws. After China’s letter, Nepal’s Foreign Minister initiated discussions with relevant ministries to address the issue. Although most airlines have started VAT collection, a meeting concluded that exceptions could not be made for Chinese airlines.
Culture, Tourism, and Civil Aviation Minister Hit Bahadur Tamang stated that the VAT on air tickets and other unnecessary taxes would be withdrawn.
