VAT concerns goods and services and levied on sale, exchange, transfer, import, etc. of all goods and services apart from those specified by the law as exempt. This means that this tax encompasses all types of goods and services produced in or imported into the country apart from those listed as exempted by the law. VAT is imposed on different levels of value addition in the production and distribution process of goods and services. In short, the difference between the purchase price and the sales price of any firm is the value added.
In practice, the taxpayer does not have to calculate his value addition for the purpose of VAT. But the taxpayer has to collect VAT on the sales price at the rate specified by the VAT Act and after deducting the tax incurred on purchases made from the amount thus collected the taxpayer has to pay the balance amount as VAT. Under VAT Act, each registered manufacturer and distributor must collect tax on the sales of their goods and services.
VAT is levied at a flat rate of 13% of the invoice value of goods or services. Certain specified goods are outside the scope or exempt from VAT, in which case, the applicable rate is zero. Certain goods and services are also subject to 0% VAT. The difference between the VAT exempt and zero rated goods and services is that in case of VAT exempt goods and services, VAT paid on purchase or business expenditure cannot be claimed as refund. However, for the latter, the VAT paid on purchase or business expenditure can be claimed as refund.
In case of import of service, the VAT is collected on the basis of reverse charge system i.e. the importer of service has to pay the applicable VAT on behalf of non-resident and non-registered person and can avail credit of such tax i.e. set off against its VAT liability or claim refund.
In general, the taxpayer is allowed to offset his input VAT credit against output VAT. The credit and offset mechanism operates as follows:
- The manufacturer is allowed to offset VAT credit on imported and input raw materials and semi-finished goods against VAT on the sale of products, as long as the goods are not VAT exempted goods or special goods (such as cigarette, tobacco, cigar and alcohol);
- The trader is allowed to offset VAT on imported goods against VAT on the resale of the same, except the VAT exempted goods and special goods; and
- The service provider is allowed to offset VAT on direct expenses incurred for providing services against his output VAT.
VAT registration is compulsory for an entity with a turnover of NPR 5 million over the last 12 months in case of goods and NPR 2 million for services or both goods and services. Banking and financial services, education and health services, agricultural products and certain non-profit activities are exempted. General compliances for the Vat registered entities are as follows:
- Pay tax and file VAT returns within the 25th day of the following month;
- Issue a tax invoice to their customers;
- Maintain registers prescribed by the VAT Act like purchase book, sales book, etc.;
- Keep the VAT records for a period of 6 years;
- Notify the Inland Revenue Office of changes to the business including change in address, contact details or reorganization of entity within 15 days from the date of occurrence.