Nepal’s Digital Service Tax policy defines a straightforward taxation structure to create a fair and efficient system for taxing non-resident service providers. The policy outlines the tax rate, establishes a transaction threshold, and provides specific details on how taxes are calculated and applied.
Tax Rate for Digital Services
The Digital Service Tax is levied at a flat rate of 2% on the transaction value of digital services. This rate applies to the total value of taxable services provided by non-resident entities to Nepali consumers.
The transaction value used to calculate the tax excludes any indirect taxes levied in Nepal, ensuring that only the service cost forms the basis of taxation. This prevents double taxation and allows for a clear assessment of the tax liability.
Transaction Thresholds and Exemptions
To accommodate smaller transactions and businesses, the policy sets a transaction threshold:
- Non-resident service providers are exempt from paying Digital Service Tax if their annual transaction value with Nepali consumers is less than two million Nepali rupees during an income year.
- If the transaction value exceeds two million rupees, the entire transaction value becomes subject to the 2% tax rate.
This threshold ensures that small-scale service providers are not taxed, focusing on larger entities with significant economic activity in Nepal.
Direct Taxation Approach
The Digital Service Tax is a direct tax, meaning the tax is not added to the value of the digital service and passed on to consumers. Instead, the service provider absorbs the tax liability, which helps prevent price inflation for end-users. This approach also ensures that the tax remains consistent regardless of the service provider’s pricing strategies.
Separate Tax Treatment
The income earned by non-resident entities through digital services provided to Nepali consumers is taxed exclusively under the Digital Service Tax framework. Such income is not subject to additional taxation under the Income Tax Act, 2058. However, if the services are provided to businesses or entities other than consumers, the income from these transactions is taxed according to standard income tax laws.
This distinction ensures clarity in tax administration and prevents overlapping of tax obligations. It also simplifies compliance for non-resident service providers by clearly separating consumer-based transactions from business-to-business transactions.
Disclosure of Transaction Value
The policy requires non-resident service providers to disclose the transaction value of their digital services. For this purpose, the transaction value must include all goods and services provided to Nepali consumers. However, in cases where an online marketplace facilitates goods and services offered by Nepali residents, these specific transactions are excluded from the non-resident provider’s transaction value.
This separation ensures that non-resident entities are only taxed on the revenue they generate from their direct digital service offerings and are not unfairly taxed on goods or services provided by local vendors through their platform.
Non-Inclusion of Indirect Taxes
The transaction value used to calculate the Digital Service Tax excludes any indirect taxes levied in Nepal. This provision ensures that the Digital Service Tax only applies to the net revenue generated from digital services, thereby preventing additional taxation layers that could increase the financial burden on non-resident service providers.
Transparency in Tax Disclosure
Nonresident entities must disclose the gross transaction value of their services in their tax filings to ensure transparency and accurate tax calculations. The policy mandates that all disclosures are made in Nepali currency, regardless of the original transaction currency. This requirement simplifies tax assessment and ensures uniformity in the reporting process.
Implications of Crossing the Transaction Threshold
If a non-resident service provider exceeds the transaction threshold of two million Nepali rupees in an income year, the Digital Service Tax applies to the entire transaction value from the first rupee. This retrospective application ensures that all economic activities above the threshold are taxed uniformly. Service providers must, therefore, monitor their transaction volumes carefully to remain compliant with the policy.
Importance of Tax Rates and Thresholds
The 2% flat tax rate and the transaction threshold of two million rupees balance simplicity and fairness. This structure:
- Encourages compliance by making the tax easy to calculate and administer.
- It exempts smaller service providers with limited activity in Nepal and focuses instead on larger players with significant revenue.
- Align with international best practices by taxing only substantial digital transactions.
The threshold exemption also supports the growth of smaller digital businesses by allowing them to operate without the additional tax burden until they reach a particular scale.
Source: Digital Service Tax 2079 (2022)
