Nepal introduced the Digital Service Tax (DST) through the Finance Bill, 2079/80 (2022–23) to address the rise of the digital economy has transformed how services are consumed in Nepal. Global platforms like OTT streaming services, social media advertising, cloud computing, mobile apps, and online marketplaces play a major role in Nepal’s economy even without maintaining a physical presence in the country.
Since then, the Inland Revenue Department (IRD) has issued detailed procedures in 2022 and 2024 to regulate compliance, clarify definitions, and streamline registration and reporting for non-resident service providers. Additionally, the Value Added Tax (VAT) Act has been amended to incorporate digital services.
This article provides a comprehensive overview of Digital Service Tax in Nepal, its scope, rate, compliance obligations, penalties, and VAT implications.
Evolution of Digital Service Tax in Nepal
- Finance Bill, 2079/80 (2022–23): Introduced DST for the first time.
- Procedure Related to DST, 2022: Provided compliance rules for non-resident digital service providers.
- Procedure for DST, 2081 (2024): Expanded definitions, clarified consumer criteria, and introduced stricter penalties.
- VAT Act Amendments (2052/1996): Added digital services as taxable supplies and mandated VAT registration for qualifying non-resident providers.
Who is a Consumer?
Under Nepalese tax law, a consumer is:
- A person whose normal place of residence is Nepal, consuming digital services for personal use.
- Not included: Persons consuming services for business purposes or under separate business arrangements.
This distinction is crucial because services for business use fall under the Income Tax Act, 2002 instead of DST.
What Are Digital Services?
Digital services are IT-enabled services provided over the internet with minimal human intervention. The law covers a wide range of digital transactions, including:
- Advertising services.
- Cinema, television, music, and OTT platforms (subscription-based).
- Data collection and processing services.
- Cloud computing and storage services.
- Online gaming.
- Mobile application-related services.
- Online marketplaces and services provided through them.
- Software supply and updates.
- Sale of data collected from Nepali residents.
- Download of data, images, statistics, or reports.
- Consultancy, skill development, training, and e-learning.
- E-books, e-libraries, e-newspapers, and e-journals.
- Other IT-enabled services of a similar nature.
When Are Digital Services Deemed Consumed in Nepal?
A digital service is considered provided to a Nepali consumer if any of these apply:
- Service is received in Nepal.
- Invoice issued to a Nepal address.
- Payment made from a Nepali bank account or via licensed Nepali payment institutions.
- Payment made via credit/debit card issued in Nepal.
- Service accessed via a Nepali IP address.
- Service consumed using a Nepali SIM card or landline code.
Taxability and Rate of DST
- DST is levied at 2% of the transaction value (excluding indirect taxes like VAT, excise duty, or customs duty).
- Threshold:
- Up to NPR 2 million (Finance Bill 2022) → Exempt.
- Up to NPR 3 million (Procedure 2024) → Exempt.
- If transactions exceed the threshold, DST applies to the entire transaction amount, not just the excess.
- DST is a direct tax → service providers cannot pass it on to consumers through invoices.
Interaction Between DST and Income Tax
- Income taxed under DST is not taxed again under the Income Tax Act, 2002.
- However, if services are provided to businesses instead of consumers, then Income Tax provisions apply.
VAT on Digital Services
In addition to DST, amendments to the Value Added Tax Act, 2052 (1996) impose VAT obligations on non-resident digital service providers.
- VAT Rate: 13%.
- Registration: Non-resident providers must register for VAT if they supply taxable digital services exceeding NPR 2 million in the last 12 months.
- VAT Returns: Must be filed monthly within 25 days from the end of the tax period (Nepali month).
- Penalties for Late VAT Filing:
- Higher of 0.05% of tax due per day or NPR 1,000 per tax period.
- Penalties for Late VAT Payment:
- 15% interest per annum + 10% additional annual fee of the unpaid tax.
Key Point: Non-resident providers may be liable for both DST and VAT, depending on the nature of the consumer and transaction.
Registration Requirements for Non-Resident Digital Service Providers
A non-resident person providing digital services in Nepal must obtain a Permanent Account Number (PAN) (for DST) and/or VAT registration if applicable.
PAN Registration Timeline
- Within 30 days of crossing the DST threshold.
- Voluntary registration is allowed anytime.
Documents Required for Registration
- Notarized English copy of company incorporation certificate (from country of residence).
- Notarized English copy of tax registration certificate (from country of residence).
- Notarized English copy of power of attorney and passport of the authorized person.
- Photo and signature of the authorized person.
- If a Nepali citizen is appointed, their citizenship/passport is also required.
Accounting and Filing of Returns
Non-resident digital service providers must:
- Maintain accounts in Nepali Rupees.
- Use the accrual basis of accounting.
- Follow the Nepali fiscal year (Shrawan 1 – Ashadh end).
- File DST returns within 3 months of the end of the income year.
- File VAT returns monthly within 25 days.
Payment of Tax
- DST: Payable within 3 months from fiscal year-end via electronic payment system.
- VAT: Payable monthly within 25 days from the end of the tax period.
- Interest: 15% per annum on delayed payments.
Penalties and Tax Assessments
- Late DST Filing: 0.1% of annual transactions per annum.
- Late VAT Filing: 0.05% of tax amount per day or NPR 1,000 per tax period, whichever is higher.
- Penalty for Concealment: 50% of the concealed tax.
- Audit/Inspection: Tax officers may conduct audits and issue initial tax assessment orders. Taxpayers have 15 days to provide evidence before a final assessment.
De-Registration
If a non-resident provider stops providing digital services in Nepal:
- They must file a de-registration application with the Large Taxpayer Office (LTO).
- The LTO will either approve de-registration or provide reasons for refusal within 3 months.
Key Takeaways
- DST was first introduced in 2022 at a 2% rate.
- Thresholds differ between NPR 2 million (2022) and NPR 3 million (2024 Procedure).
- VAT applies at 13%, creating dual compliance obligations.
- Non-resident service providers must register, file returns, and pay taxes electronically.
- Strong penalties (late filing, late payment, concealment) ensure compliance.
- Oversight lies with the Large Taxpayer Office (LTO) under the IRD.
Conclusion
The Digital Service Tax and VAT on digital services in Nepal reflect Nepal’s efforts to regulate the growing cross-border digital economy and ensure fair taxation. Non-resident digital service providers must carefully navigate these laws to avoid financial penalties, reputational risks, and non-compliance issues.
At our law firm, we assist both international service providers and domestic businesses with:
- DST and VAT registration,
- PAN acquisition,
- Return filing and payment compliance,
- Advisory on cross-border digital taxation, and
- Representation before the tax authorities in Nepal.
FAQs
What is Digital Service Tax (DST)?
DST is a direct tax levied at 2% on the transaction value (excluding VAT, excise, or customs duty) of digital services provided by non-resident service providers to consumers in Nepal.
Who is considered a Consumer under DST?
A consumer is an individual residing in Nepal who uses or consumes digital services for personal purposes.
- If the services are used for business purposes, the user will not be considered a consumer.
Who is considered a Non-Resident Person?
A non-resident person is an entity or individual that:
- Does not reside in Nepal,
- Has no permanent business address in Nepal,
- Has no business representative or legally recognized representative in Nepal.
What services are covered under Digital Services?
Digital services include (but are not limited to):
- Online advertising services
- OTT, cinema, TV, and music subscriptions
- Cloud and data storage services
- Gaming services
- Mobile application services
- Online marketplace services
- Software supply and updates
- Data, image, and statistics downloads
- E-books, e-libraries, and e-journals
- Consultancy, skill development & training delivered digitally
What is the threshold for DST applicability?
- Annual transactions up to NPR 3 million → Exempt from DST.
- If the annual transaction exceeds NPR 3 million, then the entire transaction amount becomes taxable at 2%.
(Under Finance Bill 2079/80, the threshold was NPR 2 million, but as per Procedure 2081, it is NPR 3 million.)
How is DST different from VAT on Digital Services?
- DST (2%) is a direct tax applied to non-resident digital service providers on consumer transactions.
- VAT (13%) applies separately if the non-resident digital service provider has taxable digital services exceeding NPR 2 million in the last 12 months. After VAT registration, VAT must be collected and deposited monthly.
Can DST be charged to the consumer on the invoice?
No. DST is a direct tax liability of the non-resident service provider. It cannot be passed on to the consumer.
Who administers DST in Nepal?
DST is administered by the Large Taxpayer Office (LTO), Inland Revenue Department (IRD) of Nepal.
What are the PAN registration requirements for Non-Residents?
- Non-resident service providers exceeding the threshold must register in Nepal and obtain a Permanent Account Number (PAN) within 30 days of crossing the threshold.
- Voluntary PAN registration is also allowed even before the threshold is reached.
- VAT-registered entities do not need a separate PAN.
Documents required for PAN/VAT registration:
- Notarized English copies of incorporation & tax registration certificates from the home country
- Power of attorney & passport of the authorized person
- Photo & signature sample of the authorized person
- If authorized person is Nepali → Citizenship/passport also required
How should Non-Resident Persons maintain accounts for DST?
- Accounts must be maintained in Nepali currency (NPR).
- Based on accrual accounting system.
- Follow Nepali fiscal year (Shrawan 1 – Ashadh end).
- Returns must be filed within 3 months of the end of each income year (Annexure-3 format).
When and how should DST be paid?
- DST must be paid electronically within 3 months of the end of each fiscal year.
- Interest @ 15% per annum applies for late payments.
- Penalty of 0.1% of annual transaction amount per annum applies for late filing.
What are the provisions for VAT on digital services by Non-Residents?
- If digital services exceed NPR 2 million in the past 12 months, non-residents must register for VAT.
- VAT rate: 13%.
- VAT returns must be filed monthly within 25 days of the following month.
- Late filing penalty: 0.05% of tax amount per day or NPR 1000 per period (whichever is higher).
- Late VAT payment: 15% interest + 10% additional fee per annum.
What happens if a Non-Resident fails to register or file returns?
- Registration is compulsory. Failure to register does not exempt from liability.
- Tax officers may inspect and assess transactions.
- Penalty of 50% of the tax amount may be imposed on underreported transactions discovered during inspection.
What is the deregistration process for Non-Residents?
If a service provider stops providing digital services in Nepal, they must apply for de-registration using the prescribed format (Annexure-4).
Can both DST and VAT apply to the same transaction?
No.
- DST applies only to consumer services by non-residents.
- VAT applies if the non-resident is VAT registered and providing taxable digital services.
- If DST is levied, income tax under the Income Tax Act will not apply on the same transaction.