Nepal introduced the Digital Service Tax 2022 through the Finance Act 2079. The Inland Revenue Department established the Procedure Relating to Digital Service Tax, 2079, to administer and simplify this taxation framework.
This policy applies to transactions involving digital services provided by non-resident entities to consumers within Nepal. The Digital Service Tax aims to address the growing economic significance of digital services and ensure that non-resident entities contribute to Nepal’s tax revenue.
What is Digital Service Tax?
The Digital Service Tax is a direct tax levied on the transaction value of digital services consumed by individuals in Nepal. This tax applies to various digital services such as advertisements, streaming services, gaming, cloud computing, and online marketplaces. The policy defines key terms and provides clear guidelines to help businesses and individuals understand their tax obligations.
Purpose of the Policy
The primary purpose of the Digital Service Tax is to ensure fairness in taxation by including non-resident service providers in Nepal’s tax system. By focusing on digital services, the government seeks to address the challenges posed by cross-border digital transactions. It also creates a level playing field for all service providers, whether they operate domestically or internationally. The policy also aims to generate additional revenue for the state to fund public services and infrastructure.
Key Definitions
Understanding the terminology used in the policy is crucial to interpreting its scope and application. Below are some essential definitions of the procedure:
- Digital Service: Services delivered using information technology with minimal human intervention. This includes advertisements, streaming platforms, cloud services, e-books, and more.
- Non-resident Person: Any individual or entity not classified as a resident under Nepal’s Income Tax Act, 2058.
- Consumer: A person whose primary residence is in Nepal and consumes goods or services for personal use. Business-to-business transactions are excluded from this definition.
- Income Year: The period from the first day of Shrawan (17th July) of one year to the last day of Ashad (16th July) of the following year.
Scope of the Tax
The Digital Service Tax applies to non-resident entities providing digital services to Nepali consumers. The tax liability arises if any of the following conditions are met:
- The service is received within Nepal.
- The billing address for the service is in Nepal.
- Payment is made through accounts in Nepali banks or using payment instruments issued by Nepali institutions.
- The service is accessed using an IP address, SIM card, or landline associated with Nepal.
This comprehensive scope covers all significant digital transactions linked to Nepali consumers.
Tax Rate and Threshold
The tax rate is 2% of the transaction value, excluding any indirect taxes levied in Nepal. However, transactions below a threshold of two million Nepali rupees per income year are exempt. The tax applies to the entire amount if the transaction value exceeds this threshold. This provision exempts small-scale service providers while ensuring that larger businesses contribute their fair share.
Administrative Authority
The Large Taxpayer Office administers the Digital Service Tax. It oversees registration, compliance, and enforcement and ensures smooth policy implementation.
Basis of Taxation
The Digital Service Tax in Nepal is designed as a direct tax, meaning the tax amount is calculated directly on the digital services’ transaction value. This structure ensures that the tax is not passed on to the consumer by increasing the service’s cost. Instead, the service provider absorbs the tax liability, promoting transparency in the taxation process.
Another critical aspect of the Digital Service Tax is its distinction from Income Tax Act 2 of 058. Income taxed under this procedure is not subject to additional income tax obligations under the Income Tax Act. However, standard income tax laws will apply for services provided to businesses or entities other than individual consumers. This separation ensures clarity in taxation, avoiding double taxation while maintaining fairness.
Registration Requirements
Non-resident entities that qualify as taxable persons under the Digital Service Tax must register in Nepal to comply with the policy. This includes obtaining a Permanent Account Number as a tax identifier. Businesses are required to register within 30 days of exceeding the transaction threshold of two million Nepali rupees. Additionally, entities can opt for voluntary registration even before crossing the threshold.
To facilitate compliance, the policy provides an online registration application process. Applicants must submit various documents, including:
- A notarized copy of the business registration certificate from the entity’s country of residence.
- A notarized tax registration identification number from the entity’s country of residence.
- Documentation of an authorized representative for tax purposes, including their photograph and specimen signature.
Entities already registered under Nepal’s VAT system do not need a separate PAN. This integration streamlines the compliance process for non-resident entities.
Ensuring Compliance and Accountability
To ensure compliance, the policy outlines specific reporting and payment procedures. Non-resident entities are required to:
- Maintain accounts on an accrual basis, ensuring accurate representation of transactions.
- Convert and disclose all transaction values in Nepali currency.
- File their tax returns online within three months following the completion of the income year.
Failure to comply with these deadlines results in penalties. For example, late submissions incur a fee of 0.1% per year, and interest is charged at an annual rate of 15% for delayed tax payments. These provisions encourage timely compliance and deter non-compliance.
Significance of the Digital Service Tax
Introducing the Digital Service Tax is a significant step in modernizing Nepal’s tax system. As digital transactions increasingly dominate global commerce, the Digital Service Tax ensures that the country captures revenue from non-resident entities benefiting from its consumer base. This taxation model aligns with international trends, where countries are introducing similar frameworks to address the challenges of taxing digital services.
By targeting non-resident service providers, the policy also promotes fair competition, ensuring domestic businesses do not face disproportionate tax burdens compared to their international counterparts. Furthermore, the revenue generated from the Digital Service Tax can support national development initiatives, strengthening Nepal’s digital infrastructure and public services.
Source: Digital Service Tax 2079 (2022)
