KATHMANDU, Feb 14: In a decision with significant implications for tax policy and foreign investment, the Supreme Court (SC) has barred the government from implementing its decision to grant a capital gains tax exemption to Dolma Impact Fund, ruling that such a move could cause irreparable loss to state revenue.
A joint bench of Justices Mahesh Sharma Paudel and Bal Krishna Dhakal on Wednesday upheld an earlier short-term interim order that had stayed the government’s decision. The full text of the order was made available to the media on Friday.
The controversy stems from an October 14, 2025 decision by the Inland Revenue Department (IRD) to exempt Dolma Impact Fund from capital gains tax on profits earned from the sale of shares in Nepal. The department had planned to notify CDS and Clearing Limited that, under the Double Taxation Avoidance Agreement (DTAA) signed between Nepal and Mauritius on August 3, 1999, the fund would not be required to deduct capital gains tax before repatriating its earnings.
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However, the move was challenged at the apex court by Bhesraj Luitel, who filed a writ petition seeking a stay on the decision, particularly objecting to the approval that would allow funds to be remitted abroad without tax deduction.
During the preliminary hearing on January 8, a single bench of Justice Paudel issued the short-term interim order directing authorities not to implement the decision and asked the defendants to submit written responses within 15 days. The joint bench has now continued that order.
In its ruling, the Supreme Court observed that under the Income Tax Act, 2002, Dolma Impact Fund does not appear eligible for exemption from capital gains tax.
The court’s reasoning hinged on the interpretation of Section 9(1) of the Treaty Act, 1990. The provision states that if a treaty to which Nepal or the Government of Nepal is a party—approved, ratified, accepted or endorsed by the House of Representatives or the Federal Parliament—conflicts with prevailing domestic law, the treaty provisions shall prevail to the extent of the inconsistency.
However, the bench noted that the Double Taxation Avoidance Agreement between Nepal and Mauritius does not appear to have been approved, ratified, accepted or endorsed by the legislature. In such a situation, national law must prevail over treaty provisions. “In case of inconsistency between the treaty provisions and national law, national law shall prevail,” the order states, concluding that Dolma Impact Fund is required to pay taxes as per prevailing law.
The court further emphasised the potential fiscal consequences of implementing the IRD’s decision. It said the October 14, 2025 decision by the Director General of the Inland Revenue Department, which stated that capital gains tax need not be deducted despite the applicability of tax under existing law, appeared at first glance to be in direct violation of Sections 73(4), 73(5) and 95A of the Income Tax Act, 2002, as well as Section 9(1) of the Treaty Act, 1990.
Given what it described as a prima facie legal error and the likelihood of irreparable loss to state revenue, the apex court deemed it appropriate—on the basis of balance of convenience—to issue and continue the interim order preventing the implementation of the tax exemption.
The ruling is expected to trigger broader debate over Nepal’s tax treaties, legislative oversight of international agreements, and the balance between attracting foreign investment and safeguarding domestic revenue.
