Kathmandu: Nepal has completed 29 years since the introduction of Value Added Tax (VAT), but experts say the country’s VAT registration threshold has failed to keep pace with inflation, economic growth, and international standards.
When VAT was introduced in 1997, businesses with an annual turnover of Rs 2 million were required to register for VAT. Nearly three decades later, however, the threshold has seen only limited revisions despite the significant decline in the purchasing power of money over time.
Historically, Nepal has revised the VAT threshold only twice. Based on recommendations from the High-Level Tax Reform Commission formed in 2014 under the leadership of tax expert Dr Rup Khadka, the government raised the threshold for goods traders to Rs 5 million from fiscal year 2015/16, while keeping the limit for goods-and-services businesses unchanged at Rs 2 million. Later, through the Economic Act for fiscal year 2024/25, the threshold for businesses dealing in both goods and services was increased to Rs 3 million.
Even so, experts argue that the current limits remain outdated and economically unrealistic. According to Dr Khadka, Nepal’s VAT threshold no longer reflects present-day inflation or global best practices. He noted that the Rs 2 million threshold fixed in 1997 had effectively reached nearly Rs 7 million in real value terms by 2015 due to inflation.
“The purchasing power of money has declined sharply over the past three decades,” Dr Khadka said, arguing that VAT thresholds should be revised upward periodically to maintain their real economic value. He added that even the Rs 5 million threshold introduced in 2015 has now become inadequate in practical terms.
VAT systems are currently in operation in more than 180 countries worldwide. According to Dr Khadka, most countries maintain a single unified threshold for both goods and services, whereas Nepal continues to apply separate limits, creating what he describes as an inconsistent and unnecessarily complex policy structure.
Compared to the average VAT threshold in SAARC countries, Nepal’s current limits are considered very low. The 2014 tax reform commission had recommended a unified threshold of around Rs 7 million for both goods and services to ease administrative burdens on small businesses and encourage compliance.
However, even after a decade, the government has not updated the VAT threshold in line with changing economic realities. As a result, many small businesses are still forced into mandatory VAT registration because of factors such as office rent, electricity consumption, or limited import activity rather than actual business scale.
Business groups and tax experts are increasingly calling for the threshold to be determined purely on the basis of annual turnover while removing procedural complications that disproportionately affect smaller enterprises.
Dr Khadka says two immediate reforms are necessary if Nepal wants to align its VAT system with international best practices. First, the threshold should be adjusted regularly based on inflation. Second, the separate thresholds for goods and services should be abolished in favour of a single unified limit.
Meanwhile, the Federation of Nepalese Chambers of Commerce and Industry has urged the government to significantly raise the VAT registration threshold. In its recommendations to Finance Minister Dr Swarnim Wagle, the federation proposed increasing the threshold to Rs 10 million for goods traders and Rs 5 million for businesses dealing in goods and services combined.
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