Kathmandu: New provisions related to Value Added Tax (VAT) included in the government’s financial bill will now come into effect only from the next fiscal year, reversing a practice introduced in 2019 that allowed VAT changes to be enforced immediately after the budget announcement.
Under the existing arrangement introduced in fiscal year 2019/20 by then Finance Minister Yubaraj Khatiwada, goods added to or removed from the VAT exemption list became subject to the new rules from the evening of the budget speech itself.
The government is now returning to the earlier system after concerns that immediate implementation created serious practical difficulties for businesses. Since traders are unable to immediately modify billing systems, pricing structures, and accounting processes in response to cabinet-issued ordinances, officials concluded that overnight VAT changes were unrealistic and disruptive.
At the time, Khatiwada had pushed for immediate enforcement largely because mobile phone traders were entitled to a 50 percent VAT refund. Delaying implementation until the start of the new fiscal year would have resulted in revenue losses for the government, prompting the decision to implement the changes immediately.
This year’s financial bill is also expected to significantly reduce the list of VAT-exempt goods. As exemptions are narrowed, several products that were previously outside the VAT net will now become taxable.
Finance Ministry officials say businesses cannot realistically adapt to such changes overnight. According to ministry sources, forcing previously tax-exempt products into the VAT system immediately after the budget effectively turns businesses into unintended violators because they lack sufficient time to update their systems and comply with the rules.
“The finance minister understands that imposing VAT overnight on previously exempt goods makes compliance practically impossible for businesses,” a ministry source said.
Sources also revealed that internal discussions at the Finance Ministry included broader VAT reform proposals, such as reducing the standard VAT rate from 13 percent to 10 percent by shrinking the exemption list, or imposing a lower 5 percent VAT on newly taxable goods.
However, officials say the final decision on the VAT rate structure will depend on Finance Minister Swarnim Wagle.
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