Nepal’s Digital Service Tax policy defines its scope and includes precise definitions to ensure a comprehensive understanding of its applicability. These definitions form the foundation for interpreting the tax policy and determining who is liable and under what circumstances.
Scope of the Digital Service Tax
The scope of Nepal’s Digital Service Tax focuses on non-resident entities providing digital services to Nepali consumers. The policy applies to services delivered using information technology with minimal human intervention. To ensure compliance, the tax system incorporates various indicators to identify transactions linked to Nepal.
A non-resident person providing digital services is considered liable for Digital Service Tax if any of the following conditions are met:
- The service is received within Nepal.
- The billing address for the service is in Nepal.
- Payment for the service is made through accounts maintained in banks or other payment instruments issued by Nepali institutions.
- Payments are made using credit or debit cards issued by banks or licensed payment providers in Nepal.
- The service is accessed using an IP address located in Nepal.
- The service is accessed using a Nepali SIM card or landline with Nepal’s country code.
These provisions establish a broad framework that captures a wide range of digital services consumed by individuals in Nepal.
Definitions in the Digital Service Tax Policy
The Digital Service Tax policy introduces specific definitions to clarify its application. Below are the key terms defined in the policy:
Digital Service
Digital services are provided through information technology and delivered automatically via the Internet, requiring minimal human intervention. Examples of digital services include:
- Advertisements.
- Subscription-based services such as movies, television, music, and OTT platforms.
- Cloud computing and data storage services.
- Online marketplaces offering goods and services.
- Mobile applications and gaming platforms.
- Educational services, consultancy, and skill development programs.
- Digital content such as e-books, e-libraries, and e-newspapers.
Non-Resident Person
A non-resident is defined as any individual or entity not classified as a resident under Nepal’s Income Tax Act, 2058. This ensures that foreign service providers are subject to Digital Service Tax if Nepali residents consume their services.
Consumer
A consumer is an individual who uses goods or services for personal consumption and resides in Nepal. This definition excludes businesses or individuals who purchase goods and services for commercial purposes. The distinction between personal and business transactions is critical for determining tax applicability.
Income Year
The income year in Nepal is defined as the period from the first day of Shrawan (17th July) to the last day of Ashad (16th July) of the following year. This standardized timeline provides a consistent framework for reporting and tax calculations.
Transaction Value
The transaction value refers to the total value of goods and services provided within an income year, excluding any indirect taxes levied in Nepal. This figure forms the basis for calculating the 2% Digital Service Tax rate. Non-resident entities must disclose the transaction value in Nepali currency for accurate tax assessment.
Returns
Returns are the tax documents that non-resident service providers must submit to the Inland Revenue Department. These returns must include a detailed breakdown of the transaction value and be filed within three months after the completion of the income year. The format for submitting returns is outlined in Schedule 3 of the policy.
Department
The policy assigns the administration of the Digital Service Tax to the Inland Revenue Department. The Inland Revenue Department oversees compliance, collects taxes, and enforces penalties for non-compliance.
Permanent Account Number
A Permanent Account Number is a unique identification number issued to non-resident persons who register for the Digital Service Tax in Nepal. Non-resident entities must apply for this number through online registration, as Section 5(c) of the policy outlines.
Tax Officer
Tax Officer encompasses a range of officials authorized by the Government of Nepal to administer the Digital Service Tax. This includes the Chief Tax Officer, Section Officer, Director, and other designated officials. Tax Officers are responsible for assessing returns, conducting audits, and issuing penalties when necessary.
Key Elements That Establish the Taxable Scope
The policy’s emphasis on specific indicators ensures that only relevant digital services are taxed. Below are the key elements that determine the scope of taxation:
Location-Based Indicators
Using Nepal-based IP addresses, SIM cards, or billing addresses ensures that the tax is applied only to services consumed within the country.
Payment Method Indicators
Taxable transactions include those made through payment systems linked to Nepali banks or licensed institutions. This provision helps identify non-resident service providers benefiting from the Nepali economy.
Service Nature
Digital services provided directly to individual consumers in Nepal are taxable. However, services purchased for business use or provided to other entities fall outside the scope of the Digital Service Tax.
Source: Digital Service Tax 2079 (2022)
