The budget announcement of 2022/23 mentioned the government was imposing a tax on foreign companies like Google and Facebook. Then finance minister Janardan Sharma in the announcement said the government was levying an electronic service tax which would be charged at the rate of two per cent on the transaction value of electronic services provided to consumers by non-residents.
Along with the provision of digital service tax in the Economic Act 2022, the law was changed to impose value-added tax on it as well. However, it was not so easy to tax foreign companies in Nepal which are established abroad. The initial efforts made by the Inland Revenue Department to make them pay taxes in Nepal did not bear fruit.
After the budget speech, the Inland Revenue Department issued a 30-day notice in Nepali language asking foreign companies to register in Nepal. However, it was evident these foreign companies would not understand the information given to them in Nepali. Realising the same, the department again issued a 30-day notice in English on July 7, 2022.
Prior to that, on July 6, 2022, the department made guidelines on value-added tax on electronic services. That too was in the Nepali language and the foreign companies did not come in contact within the given time.
“After that, the department made a guideline in English, and after that Google, Meta and other companies acknowledged it, but the Inland Revenue Department had not prepared the software to register them,” says a department source.
The Inland Revenue Department started making software to include these foreign companies in Nepal’s tax system. The department developed a system to register those foreign companies around December 2022. Finally, in May, Google and EBSCO International Corporation were registered in the Inland Revenue Department’s system to pay value-added tax and digital service tax in Nepal.
So far, half a dozen foreign companies registered in Nepal’s tax system. Rajeshwor Gyawali, the head of the Large Tax Payers Office says more companies will be included as the office is trying to make a favourable environment to do business in Nepal.
“The process took long and we learnt a lot. I think the foreign companies leant too. Now we can implement things smoothly which is good for the country,” said Gyawali.
What is the tax rate?
According to the procedures created by the Inland Revenue Department, foreign companies registered in Nepal’s tax system must pay tax at the rate of two per cent for service transactions made through electronic means. These companies, however, are exempted from paying the tax on annual transaction of electronic services levied on Nepalis if transactions are over Rs 2 million.
It is mentioned in the procedure that if there is a transaction of more than that amount, tax will be charged on all transactions. Since this tax is a direct tax, it cannot be recovered by adding the amount of tax to the price of the service.
Individuals/companies whose annual turnover is less than Rs 2 million will have to pay income tax, while those paying digital service tax will not have to pay income tax. The procedure also mentiones that everyone who has or does not have a permanent account number (PAN) should come under the scope of such tax. Payment of tax has to be made within three months from the date of the end of the fiscal year. It is mentioned in the procedure that if the amount is not deposited within the specified time, interest will be charged at the rate of 15 per cent per annum.
According to the policy, the government aims to impse tax on transcations made by Facebook, Tiktok, Twitter, Google, YouTube, and e-commerce websites. Currently, most of companies are providing electronic services without establishing an office in Nepal.
After this policy, the path has been opened to attract them to run officially in Nepal. According to tax experts, foreign companies want to register and do business in Nepal through official channels. When the government delays creating such an environment, a lot of money is being lost.
What services are taxable?
According to the procedure, goods and services that require information technology and are provided automatically through the internet with minimal human intervention are considered digital services. This includes services like advertising, movies, television, music, over-the-top (OTT), data collection, cloud services, gaming, mobile apps, online market, software supply and updating, data, image download services, education, consultancy, skill development and training services, e-book, e-library, e-magazine and others.
Who needs to play digital service tax in Nepal?
According to the procedure a tax will be imposed is the service is being offered in Nepal, if a bill is issued to an address in Nepal or if the amount is paid to a bank account in Nepal. This tax will be levied even if the payment is made through a debit card, credit card or other payment methods issued by Nepal’s banks and authorised payment provider organisations and agencies.
It is mentioned in the procedure that the service will be taxed if the service is received using an IP address within Nepal and if the service is received using a SIM card with a telecommunication code of Nepal or any landline in Nepal.
How to register?
As per the provisions of the Economic Act 2022, individuals or entities liable for taxation are required to be registered in Nepal and conduct their business transactions exclusively through a permanent account number. However, it is mentioned in the procedure that even if it is not registered, it is not exempted from the obligation to pay tax according to the procedure.
Under the provisions of the Act, a taxable person is required to submit an application to the designated office under the Inland Revenue Department within 30 days of surpassing the taxable transaction limit in order to obtain a permanent account number.
Additionally, the Act allows for voluntary registration at any time for those who wish to register officially. Notably, the process of obtaining a permanent account number has been made more accessible as it can now be done online, streamlining the registration procedure and facilitating convenience for taxpayers.
This story was translated from the original Nepali version and edited for clarity and length.
