Nepal: Digital Service Tax Act Published

Nepal's adoption of the Digital Service Tax Act (DSA) marks a significant step in aligning the country with a global trend. The DSA, also known as the Electronic Service Tax Procedure, regulates the tax obligations of non-resident businesses providing digital services to Nepali consumers.

In addition to the DSA, the Nepali government amended the VAT Act to regulate further VAT-related matters related to providing digital services by foreign digital service providers. 

Foreign Providers and VAT Liabilities

Under the newly adopted DSA, electronic services are those provided electronically to a consumer located in Nepal, such as advertising services, subscription-based services for movies, television, or music, data collection, and cloud services, online marketplace services, and download services, including statistics and images.

When determining whether the consumer is from Nepal, foreign digital service providers may use data such as bank account or card details, IP address, billing address, SIM card, or telephone country code details.

The DSA ensures a fair tax system. All digital services are subject to a 13% VAT rate, except those exempt from the rules. The DSA provides an exemption threshold set at NPR 3 million (around USD 22,400) annually, ensuring that smaller businesses are not unduly burdened. The new threshold is NPR 1 million higher than the one previously set at NPR 2 million.

All taxable persons who exceed the threshold must submit an electronic VAT application within 30 days of exceeding it. In addition to the VAT application form, additional notarized documents must be submitted.

Once registered, all taxpayers must submit a monthly VAT return by the 25th day of the month following the reporting period.

Conclusion

Implementing rules for foreign digital service providers and information on the VAT Act amendments should inform foreign digital service providers about their tax obligations in Nepal.

As the number of internet users continues to rise in Nepal and more people are engaged in online activities, foreign digital service providers should investigate whether their businesses are affected by the Digital Services Tax Act and amendments made to the VAT Act.

Source: Electronic Service Tax (Digital Service Tax) Procedure, 2081, Procedure for Value Added Tax on Electronic Services Provided by Non-Resident Persons, 2079 (Second Amendment, 2081)