VAT on Digital Services in Nepal: A Guide for Foreign Providers

With a relatively young demographic, a median age of 26.7 years, a large working-age population, and a rapidly expanding digital economy driven by a high smartphone adoption rate, increasing internet access, and a growing fintech sector, Nepal's market is increasingly attractive to foreign digital service providers.

Streaming platforms, cloud service companies, online marketplaces, and software-as-a-service (SaaS) providers are all finding a growing user base in the  South Asian Himalayan country. This growth caught the attention of the Inland Revenue Department (IRD), which, in 2022, introduced VAT rules specifically for foreign digital service providers, making a pivotal shift in how cross-border digital transactions are taxed.

Nepal’s VAT Framework for Digital Services

Nepal introduced VAT obligation for foreign digital services providers through procedures issued by the IRD. Notably, these rules were amended several times to clarify the scope and registration requirements. Nonetheless, the rules apply to services provided electronically, often instantly, through software platforms, applications, or online systems rather than through traditional in-person interaction.

Digital companies operating in Nepal should also bear in mind that in 2022, the government introduced a separate Digital Service Tax (DST) regime. Under this separate regime, a 2% DST applies to foreign companies that provide services to local consumers. However, it is important to keep in mind that DST operates independently from VAT. 

The VAT rules distinguish between services supplied to consumers (B2C transactions) and services supplied to businesses or other non-consumer entities (B2B transactions). Thus, B2B transactions are not related to the supply of digital services for VAT purposes, meaning the foreign supplier is generally not required to charge Nepali VAT directly. Instead, the reverse-charge mechanism applies, requiring local businesses to handle VAT on imported services.  

Types of Taxable Digital Services

The scope of digital services subject to VAT in Nepal is intentionally broad to cover the most common online business activities. Therefore, digital advertising services, such as online ads displayed on websites, social media platforms, or search engines, are subject to VAT. Additionally, subscription-based entertainment services, including streaming platforms for films, television, and music, where users pay recurring fees for access to digital media, also fall under the scope of VAT.

Furthermore, the definition includes data-related and technology infrastructure services, including data collection and processing, as well as cloud services that provide online storage, hosting, computing power, or software access over the internet. Gaming services, including online and mobile games, are also treated as digital services.

Mobile application services and online marketplace services are included in the list of taxable services. Consequently, app distribution platforms and e-commerce marketplaces can fall within the definition, together with the services provided through those platforms. The list of digital services treated as taxable includes the supply, licensing, or updating of software. 

Notably, the VAT also applies to professional-type services such as consultancy, skill development, and training services offered through digital platforms, recorded courses, or automated learning systems. Importantly, the list is non-exhaustive, leaving regulators room to treat other services of a similar nature as taxable.

Which Foreign Businesses Are Affected? 

Foreign businesses must register for VAT in Nepal if the value of their taxable digital service transactions exceeds NPR 3 million (around USD 20,000) during the previous 12 months. Once registered, foreign digital suppliers must apply a 13% standard VAT rate on taxable digital services supplied to consumers in Nepal. 

Importantly, the obligation to register for VAT remains even if the value of future transactions later falls below the threshold. By implementing this rule, the Nepal government prevents businesses from repeatedly moving in and out of the VAT system based on temporary fluctuations in sales.

Concerning the registration procedure, foreign businesses must submit their VAT registration application within 30 days from the day the threshold is exceeded. However, digital providers may also voluntarily register for VAT, or register in advance if they expect to exceed the threshold in the future. 

To complete the VAT registration process, businesses must submit scanned supporting documents together with the application, including a notarized English copy of the company’s registration certificate and tax registration certificate issued in its country of residence.

Common Tax Compliance Mistakes

One of the most common compliance mistakes foreign businesses make in Nepal is confusing VAT with DST obligations. While both VAT and DST apply once foreign businesses exceed the NPR 3 million threshold, the difference between these two is significant. Moreover, it is vital not to mistakenly assume that paying DST eliminates VAT obligations, or vice versa.

The DST is a direct, revenue-based tax, meaning it cannot be collected by adding such a tax to the consumer. As such, the 2% DST applies to the total annual transaction value excluding indirect tax.  In contrast, VAT is a consumption-based, indirect type of tax. Therefore, once businesses exceed the NPR 3 million threshold, they must apply 13% VAT on each transaction relating to digital services, and not on the annual total.

Another common VAT-related mistake includes failing to monitor customer location data properly. VAT obligation in Nepal depends heavily on determining whether the customer is located there. Businesses that do not collect billing addresses, IP information, or payment data may struggle to determine whether their services are taxable in the country. As a direct consequence of this mistake, businesses may fail to realize that they have exceeded the threshold, which further results in late VAT registration, late filing, and late ot non payment of due VAT.

Misclassifying B2C and B2B transactions is also a frequent mistake foreign digital businesses make. Sometimes a consumer misrepresents their status, claiming to be a business and not an individual consumer, and uses the service without paying the appropriate VAT. However, VAT rules address this situation and shift liability back to the consumer, who can then be held responsible for the unpaid VAT.

Conclusion

Nepal has developed a relatively firm and comprehensive system for taxing foreign digital service providers. By combining VAT and DST rules and setting a relatively low threshold, the country requires many foreign digital companies to register, collect, and remit tax, and comply with local reporting obligations when supplying digital services to Nepalese consumers.

Both the VAT and DST regimes are designed to apply broadly across streaming platforms, SaaS providers, cloud services, online advertising, marketplaces, and many other electronically supplied services, making compliance increasingly important for international digital businesses. As a result of all factors, foreign digital service providers with growing customer bases in Nepal should carefully monitor their thresholds, customer location evidence, and B2C sales activity to determine whether VAT registration is required.

Source: EY, Bloomberg, Nepal Inland Revenue Department - Procedure relating to value added tax on digital service  provided by non-resident person, VATabout - Nepal: Digital Service Tax Act Published, LexisNexis, Nepal Inland Revenue Department - Digital Service Tax (DST) and Value Added Tax (VAT) Registration, VATabout - Digital Economy Taxation: VAT/GST on Digital Services vs. DST Explained