Which Goods and Services Are VAT Exempt in Nepal? A Plain Guide to Schedule 1

Groups of exempt goods and services in Schedule 1

13

Standard VAT rate for what is not exempt

13%

Customs code match needed for goods in Groups 1 to 11

8-digit

Year of the VAT Act (B.S.)

2052

"Is this VAT exempt?" is one of the most common questions a Nepali business owner asks an accountant. It is also one of the questions most often answered from habit instead of from the law. A shopkeeper says that food is exempt. A landlord says that rent is exempt. A trainer says that education is exempt. Each statement is partly true, and the part that is not true is where tax assessments come from.

This article walks through Schedule 1 of the Value Added Tax Act, 2052, in plain language. It explains what the schedule covers, how to read it, how exempt differs from zero-rated, and what to check before you decide that a sale does not carry VAT. It is built from the text of the schedule itself. The edition we hold carries footnotes showing amendments by the Financial Acts of 2019, 2020 and 2021, so always confirm against the latest Finance Act and the Inland Revenue Department's notices before relying on any single item.

What "VAT exempt" actually means

VAT in Nepal is charged at a standard rate of 13% on taxable supplies of goods and services. The VAT Act then lists things that are taken out of that charge. Schedule 1, which the Act describes as relating to sub-section (3) of Section 5, is titled "List of goods and services exempted from tax".

Exempt means that the supplier does not charge VAT on the sale. It does not mean that the supplier has no VAT questions. The supplier still needs to know whether it has made only exempt sales, only taxable sales or a mix, because that affects registration, returns and the treatment of VAT paid on purchases. We return to that below.

The first rule to hold on to is simple: exemption must be found in the schedule. A good or service is not exempt because it feels essential, because it is cheap, because it is sold to individuals or because a competitor does not charge VAT on it. If it is not named in Schedule 1, or granted by a specific government decision, the safe assumption is that VAT applies.

The 13 groups at a glance

Schedule 1 is organised into groups. Here is what each group covers, in the words of the schedule, simplified.

We have deliberately kept the table to what the schedule says. Where it says "listed", the list runs to hundreds of customs codes, and the code decides the answer, not the everyday name of the product.

How to read Groups 1 to 11: the customs code rule

For goods in Groups 1 to 11, the schedule has a note that matters more than any single entry. Tax is exempt only if both the name and the description of the goods match the heading and sub-heading given in the schedule, which follows the eight-digit customs classification under four-digit headings. The same note says this does not stop goods from being exempt under a sub-heading called "others" where the goods are not named individually.

In practice this means three things.

A further note says the Government of Nepal may grant exemption where it considers it appropriate. That is a separate route. If you rely on a specific government exemption, keep a copy of the decision on file with the date.

Group by group: where people go wrong

Group 1 and 2: farm produce, salt, fuel, electricity

Fresh vegetables such as potatoes, tomatoes and onions, and flowers, plants and many fruit, appear in Group 1. The edge cases are processed goods. Once produce is cut, cooked, packed with other ingredients or turned into a different product, you are no longer looking at the same customs heading. Check the code of what you actually sell.

Group 2 lists salt, certain petroleum oils (including kerosene) and electricity production, distribution and transmission. A business that generates or distributes electricity should read that entry in the latest Act, because the exact wording of the entry decides which activities are covered.

Group 5: medicine and health

The schedule lists medicines and related materials by code and also covers similar health services. A clinic selling medicine and also selling cosmetics or general merchandise has two kinds of supply. The exempt part and the taxable part need separate treatment.

Group 6: education

Education is exempt only in the forms the schedule lists: research in schools and universities, vocational or professional training and refresher training by organisations fully owned by the Government of Nepal, educational service by schools and universities, and the canteen and hostel an educational institute runs by itself for its own purpose.

Notice what is missing. A private training company that is not a school or university and is not fully government-owned is not in the list as written. Many businesses assume that anything called training or education is exempt. The text does not say that. If your business sells courses, read the exact wording of Group 6 against your legal form and what you sell, and get a written view if it is close.

Group 7: books and newspapers

Printed books, brochures and leaflets, dictionaries and encyclopedias, newspapers and periodicals, printed music, printed calendars and newsprint are listed, along with e-books, e-magazines and e-library service charges. Advertising revenue earned by a newspaper is a different question from the sale of the newspaper itself, so do not assume one exemption covers every line of the income statement.

Group 8 to 10: art, transport and professional service

Group 8 covers arts, sculpture, architecture and similar handicrafts and related service, and the entrance fee to a library, museum, art museum and zoo.

Group 9 covers air travel, service from a machinery bridge, public transport carrying passengers except cable car, rent of carrier, carriage service other than carriage related to supply, and cargo service. The exceptions inside this group are doing a lot of work. The Inland Revenue Department's freight directive treats the import leg and the export leg of a cross-border consignment differently, which is why we wrote a separate article on VAT on import and export freight.

Group 10 lists an actor, player, writer, designer, translator or interpreter providing professional service institutionally or personally, and the service of supplying human resources to foreign countries. The list is specific. A professional service that is not named is not exempt just because it sounds similar.

Group 12: buildings and land, and the hotel exception

The purchase, sale and rental of buildings and land is exempt, except for services provided by a hotel, a guest house or an apartment, and by an entity carrying on business such as a hotel or guest house. A landlord who lets floors to ordinary tenants is on the exempt side. A landlord who is, in substance, running a guest house is not. The Supreme Court has examined who must prove which side of the line a letting falls on. See our article on VAT on building rent and the burden of proof.

Group 13: betting, casinos and lotteries

Activities relating to facilities provided for the organisation of bets or gambling, and lotteries, are listed as exempt. Other taxes can apply to these activities even where VAT does not. Check the rest of the law before treating the sector as tax-free.

Exempt, zero-rated and taxable: the difference that costs money

The three words are often mixed up, and the difference is financial.

That last point is the one that surprises people. A business that makes only exempt supplies may find that the VAT it pays on rent, equipment and services becomes a cost it cannot recover. A business that makes both exempt and taxable supplies usually has to split its input VAT between the two. The exact rule for apportionment is in the VAT Act and the Rules, and the Supreme Court has dealt with how a proportionate credit must be justified. Read that provision, or take advice, before you claim a full credit on mixed purchases.

A worked illustration (illustrative, not a client case)

A trading company sells two product lines out of one shop.

Line A carries no VAT. Line B carries VAT at 13%, which is NPR 65,000 on NPR 5,00,000. The company also pays rent and buys a refrigerator. The rent and the refrigerator serve both lines, so part of the VAT paid on them relates to exempt sales. A claim for the whole input VAT, on the footing that the business is "mainly taxable", is the kind of claim that draws questions at assessment.

What would help the company: separate sales records for each line, a written basis for how shared costs are split, and a customs-code check for every product at the point of listing it in the billing system.

A checklist before you treat something as exempt

Our view

In our experience, businesses lose more money by wrongly assuming exemption than by wrongly assuming tax. The reason is not that officers are unfair. It is that exemption is an exception, and the person claiming an exception has to be able to show where it sits. A short file note naming the Schedule 1 group, the customs code and the date you checked will do more for you in a review than any amount of explanation after the fact.

We also think the system would work better with plainer lists. A schedule that depends on eight-digit codes is hard for a shopkeeper to apply. Until that changes, the practical answer is to build the code check into the item set-up in your billing software, so the question is answered once, when the product is created, and not again for every invoice.

Frequently asked

Sources and limits

This article reads the text of Schedule 1 to the Value Added Tax Act, 2052 (relating to sub-section (3) of Section 5), in the edition showing amendments by the Financial Acts of 2019, 2020 and 2021. We did not review later Finance Acts, so any change after that is not reflected here. Group 4 was not set out in the extract we read. The treatment of input credit for exempt supplies and the apportionment rule should be confirmed against the VAT Act and Rules in force.

General information only, not advice.