Background

On May 29, 2025, Nepal’s Finance Minister, Mr. Bishnu Prasad Paudel, presented the federal budget for Fiscal Year 2025/26 (2082/83), accompanied by the Finance Bill 2025, Appropriation Bill 2025, and National Debt Bill 2025. The Finance Bill introduces new tax headings, amnesty schemes, and amendments to key tax laws, including the Income Tax Act 2002, Value Added Tax Act 1996, Excise Duty Act 2002, and Customs Act 2007. While the Bill becomes fully effective after parliamentary approval and publication in the Nepal Gazette, certain provisions in the Schedule are effective from May 29, 2025.

Major Highlights

• Expanded Income Tax Exemptions: The Finance Bill promotes private sector participation in IT, hotel, and tourism sectors by extending income tax exemptions previously limited to special industries (manufacturing, agriculture, agroforestry, and minerals). IT, hotel, and resort businesses now enjoy a 20% reduction in corporate tax rates under the Income Tax Act 2002.
• Startup Tax Exemptions: Startups with an annual turnover of up to NPR 10 crores are eligible for full income tax exemption for their first five years of operation, expanding from the previous NPR 1 crore limit.
• Digital Services Tax (DST): Non-resident digital service providers are no longer subject to permanent establishment rules under the Income Tax Act. They must pay a 2% DST on annual turnover exceeding NPR 3 million, with B2B digital services exempt from DST.
• Change in Control Tax Waiver: Charges and interest on income tax from changes in control between resident entities are waived if the applicable tax is paid by July 15, 2025.
• Tax Amnesty Continuity: The Bill retains amnesty schemes from the previous Finance Act, offering waivers on interest, fees, and penalties for VAT and excise tax if the principal tax is settled, though eligibility criteria for income tax amnesty have been revised.
• Legal Remedies for Tax Assessments: Assessments under Luxury Tax and Health Risk Tax can now be challenged via administrative review at the Inland Revenue Department, with appeals possible at the Revenue Tribunal. However, no recourse is provided for DST assessments.

New Tax Allocations by Sector

1. Information Technology Sector

• Reduced Tax Rate: IT entities receive a 20% reduction in applicable income tax, lowering the effective rate to 20% from 25%.
• Specific IT Industry Exemption: Software development, data processing, cybercafes, and digital mapping industries in designated technological parks receive a 75% income tax exemption (previously 50%), pending government notification of such parks.
• Startup Expansion: Startups with up to NPR 10 crores in turnover are exempt from income tax for five years, subject to Inland Revenue Department definitions.
• IT Service Exports: A 5% final withholding tax applies to income from exporting IT services.
• Digital Service Providers: Non-resident providers are subject to a 2% DST on turnover above NPR 3 million, with no legal recourse for reassessments. VAT rules for digital services remain largely unchanged, with additional activities included.

2. Transportation Sector

• Old Vehicle Tax Exemption: Public and private vehicles over 20 years old or non-operational receive income tax exemptions for the last two years.
• International Aviation: Entities registering for VAT and paying applicable VAT for services from fiscal year 2023 by July 2025 are exempt from interest, charges, and fees.
• Continued Taxes: Green tax, road construction, maintenance, and pollution control charges remain applicable.
• Rental Expense Claims: Goods transport providers renting vehicles from natural persons can claim expenses for fiscal years 2021/22 to 2023/24 if Tax Deducted at Source was withheld.

3. Renewable Energy Sector

• Electric Charging Machines: Manufacturers and assemblers of electric vehicle charging machines receive full income tax exemption for five years from operation start.
• Green Hydrogen: Green hydrogen producers receive full income tax exemption for five years from operation start.

4. Hotel & Resort Sector

Reduced Tax Rate: Hotels and resorts receive a one-third tax reduction for individuals in the 30% tax bracket and a 20% reduction for entities, lowering the effective rate to 20%.

Employment-Based Incentives:

• 100+ Nepalese employees: 10% tax rate reduction.
• 300+ Nepalese employees: 20% tax rate reduction.
• 500+ Nepalese employees: 25% tax rate reduction.
• 1000+ Nepalese employees: 30% tax rate reduction.
• 100+ employees with 33% women, Dalits, or handicapped: Additional 10% tax rate reduction.

Luxury Tax: Five-star hotels and luxury resorts face a 2% tax on service sales.

Special Provisions for Dues and Relief

• Change in Control Waiver: Interest and charges on income tax from onshore share transfers are waived if tax is paid by July 15, 2025.
• Income Tax Return Failure: Taxpayers failing to file returns are exempt from additional tax liability if overdue returns and taxes are filed by January 2026.
• VAT Non-Compliance: Entities failing to register for VAT until 2024/25 receive waivers on fines, fees, and remaining interest if VAT returns are filed and 25% of interest is paid by January 2026.
• Excise Duty Non-Compliance: Excise license holders failing to collect duty until 2024/25 receive waivers on fines and delay charges if returns and 50% of delayed charges are filed by January 2026.

Revoked Provisions

• PAN Tax Amnesty: The amnesty for taxable transactions without PAN registration, requiring tax filings for 2021/22 and 2022/23, has been discontinued.
• Social Security Fund: Approved social security funds must now affiliate with existing Nepalese retirement funds.
• Advance Tax at Customs: Advance tax deductions on imported goods like live animals and dairy products have been removed.
• Digital Service Permanent Establishment: Permanent establishment rules for digital service providers have been eliminated, with DST limited to B2C transactions.