KATHMANDU, May 27: The government is weighing revisions to the value added tax (VAT) regime in response to long-standing demands from the private sector for multiple VAT rates. Officials at the Ministry of Finance (MoF) indicated that the government is likely to reduce the VAT rate to 10 percent from the existing 13 percent in the budget announcement scheduled for Friday. More than two decades ago, the VAT rate stood at 10 percent.
The move comes amid a sharp decline in aggregate demand, attributed to soaring prices of goods and services. Alongside the rate cut, the government is also considering raising the threshold for VAT applicability.
Revised interest rate corridor system introduced
Currently, VAT is levied on annual transactions of Rs 5 million in goods trade. For service trade, mixed operations involving goods and services, and digital services provided by foreign businesses, the threshold is set at Rs 3 million annually.
Nepal introduced VAT nearly three decades ago as an indirect tax. However, effective implementation has remained elusive due to widespread under-invoicing, traders failing to issue receipts, weak monitoring mechanisms, and an over-reliance on imports stemming from a fragile domestic production base. These shortcomings have contributed significantly to government revenue leakages.
VAT accounts for roughly one-third of Nepal’s total revenue collection. In fiscal year 2024/25, VAT revenue amounted to Rs 342 billion out of the total Rs 1.178 trillion. According to the Financial Comptroller General Office, VAT collections reached Rs 298 billion as of mid-April this year.
Tax experts believe that greater flexibility in the VAT regime could stimulate local consumption and ease market prices. VAT expert Rup Bahadur Khadka noted that a reduction in the VAT rate could enhance consumers’ purchasing power. “As the trading of goods and services increases, it might not largely affect the state’s revenue collection. On the other hand, it could help boost the confidence of business persons, encouraging more investment in the economy,” Khadka said.
However, Khadka cautioned against adopting multiple VAT rates, arguing that weak record-keeping systems would hinder effective implementation and potentially exacerbate revenue leakages. “As the record keeping system in many areas is weak, it will be difficult to implement it effectively, while it may give rise to more cases of revenue leakages,” he added.
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