Digital Service Tax

2024-06-09

A compulsory financial charge to the government, i.e. tax has to be paid on the income from the digital services in the present context in Nepal. In the past, there was no tax implied by the government on the income from digital platforms but due to the sudden rise of digitalization and digital platforms becoming the primary income source of many people, tax has been levied.

The services that are delivered through digital platforms which include various websites, apps or software are called digital services. Digital services can be offered to customers, clients, or citizens by private persons, public companies, or governmental entities. These digital services are often the services provided by non-resident persons to the consumers within the country. The use of digital technologies to generate economic activity is known as the “digital economy”, which includes digital services.

Provisions:

Section 20, Finance Act 2079:

Finance Act 2079 has introduced digital service tax in Nepal.

Section 20 of the Finance Act 2079 incorporates a provision on digital service tax where it is mentioned that the digital service tax provided by the non-resident person to the consumers in the nation ought to pay a 2% service tax.[5]

Section 20 (1) of the Act, however also mentions that the annual transaction of the digital service must cross 2 million.

Section 20 (2) of the Act also mentions that a person who provides digital services in Nepal has to file his business details and taxes according to the income year.

Section 20 (3) of the Act states that “If the statement is not filed within the specified time according to sub-section 2, a fee will be charged at the rate of 0.1 per cent of the annual transaction amount and if a person does not file the tax by the specified date, interest will be charged at the rate of fifteen cents per annum. If the tax due is under-filed or hidden, a penalty of 50% of the tax amount will be imposed.”

Section 20 (4) of the Act states that “Income tax filed under this section shall not be subject to tax as per Income Tax Act, 2058.”

Section 20 (5) of the Act states that the administration of electronic service tax will be as determined by the Inland Revenue Department.

Procedure Relating to Digital Service Tax, 2022:

According to Section 2 (i) of the procedure, when a non-resident individual provides digital services to Nepalese consumers, they must meet one or more of the following requirements:[6]

Service received in Nepal,
Invoice issued to Nepal Address
Payment made from Nepalese Bank Account and Payment made from instrument of Licenced Institutions in Nepal,
Payment made from Debit Card, Credit Card or other payment medium of Bank and Licenced Institutions in Nepal,
Serviced received by using IP Address of Nepal,
Serviced received by using a SIM Card or Land Line having a Telecommunication Code of Nepal.[7]

Section 2 (k) of the procedure states the digital services which the tax could be levied upon, which include:

Advertisement services.
Cinema, Television, Music, Over the Top (OTT), & other similar Membership based services.
Data collection-related services.
Cloud services.
Gaming services.
Mobile Application related services.
Online marketplace services & those services availed through such platforms.
Software supply & updates
Sale of Data Collected by Nepalese Resident Person
Data & image download related services.
Consultancy, Skill Development & Training services.
E-Book, E-Library & E-Paper Service
Other services of a similar nature are covered in clause (a) to (l)

According to Section 3 of Procedure Relating to Digital Service Tax, 2022, the rate of tax is 2% and applicable to consumers with over 2 million income per annum. It is not possible to collect this tax by charging the customer more because it is a direct tax. Income tax filed under this section shall not be subject to tax as per the Income Tax Act, 2058. According to Section 4 of the procedure, the administration of this tax is carried out by the Large Taxpayer Office.

A permanent Account Number i.e. PAN is necessarily obtained according to Section 5 of the procedure. It is mentioned that the person who is required to pay DST must register and receive a PAN in Nepal. Individuals will still be required to pay DST even if they choose not to register. When a transaction exceeds the NPR 2 million barrier, one must register for a PAN within 30 days. It is acceptable to register for PAN voluntarily.

Moreover, the procedure mentions that:

The payment of taxes, together with interest and penalties for late payments, must be made online at the appropriate revenue heading within three months of the end of the income year.
The tax assessment and audit include the office's auditing activities, the issuing of preliminary and final tax assessment orders, and the implementation of tax penalties for misleading or undervaluing a transaction.
The online application, the evidence of payment and clearance, and the communication of cancellation or rejection are all part of the de-registration process.

Procedure relating to Value Added Tax on Digital Service Provided by Non-Resident Person:

Digital services that nonresidents offer to customers in Nepal are subject to a 13% VAT as of May 29, 2022.[8] This VAT duty is applicable if, throughout the previous 12 months, a foreigner offering digital services to Nepali customers has completed transactions totalling more than NPR 2 million.[9]

The following are the key amendments the IRD made:

A non-resident may produce any kind of "Tax invoice" for the provision of digital services, but it must at least include the following information:

Name and PAN of the seller
Name and PAN of the customer (if available)
Date of Transaction
A description of the services offered
Transaction value

Any tax levied under the Nepal VAT and DST Laws will be the responsibility of the customer who "mis-declares" himself as someone other than the consumer and acquires or uses the services offered by the nonresident. The value of digital services would be determined in Nepali Rupees using the exchange rate set by the Nepal Rastra Bank on the day the VAT return is turned in to the department, in cases where the consideration paid for a supply of digital services is received by a nonresident in a convertible foreign currency. Monthly VAT returns must include information about sales, and if accessible, customer PAN information should also be included.

Analysis:

The analysis of the provisions regarding Digital Service Tax in Nepal can be classified into different perspectives which can be described below:

Economic Perspective:

Both favourable and unfavourable effects on Nepal's economy may result from the digital services tax. Positively, more money raised by the tax may be allocated to government spending and infrastructure projects. Taxes have the potential to stop tax evasion and avoidance as well as level the playing field for domestic and international digital service providers. On the downside, the levy may discourage investment in and cost to customers and non-resident providers and raise costs associated with digital innovation. In addition, there is a chance that the tax may lead to double taxation and trade conflicts, as well as technical and administrative difficulties in its administration.

Legal Perspective:

There may be repercussions for Nepal's judicial system from the digital service tax. On the one hand, taxes have the potential to improve Nepal's tax laws and policies while also reflecting global tax trends and digital age regulations. Along with safeguarding Nepal's sovereignty and national interest, taxes can help advance tax fairness and the rule of law. However, in addition to requiring the interpretation and explanation of pertinent laws and procedures, the tax may also cause taxpayers and tax authorities to experience legal confusion and complexity. Additionally, the tax may lead to domestic and international legal disputes and challenges, necessitating the coordination and harmonization of tax laws and treaties.

Social Perspective:

The Nepali society may be impacted by the digital service tax. One way that taxes can help society is by giving the government the money it needs to deliver public goods and services like infrastructure, security, healthcare, and education. In addition to promoting social justice and inclusivity, the tax can lessen inequality and the digital gap. Conversely, the tax may have an impact on society by driving up costs and decreasing access to digital services, which may have ramifications for social welfare and advancement. In addition to fostering societal awareness and discussion, taxes also need the involvement and communication of all relevant parties, including the public, government, taxpayers, and civil society.

Practice:

The following are some examples of non-resident businesses in Nepal that are liable to pay DST:

Facebook and Google for their services related to advertising
For movies, TV shows, music, and over-the-top (OTT) services, consider Netflix, Amazon Prime, and YouTube Premium.
For delivering data collection services, Rakuten and AOC Research
The cloud services offered by Microsoft Azure and Amazon AWS
Activision, Sony, Nintendo, and Ubisoft for their game services
Google and Apple for their services related to mobile applications

Google, LinkedIn, Amazon, and NCS Pearson are just a few of the businesses that have previously paid DST to the government of Nepal. Some, like Meta Platforms, Microsoft, and Ibsco, have registered but have not yet paid their taxes.[10]

Necessity:

Nepal's digital service tax is a reaction to the global trend of taxing the digital economy, which has been expanding quickly in recent years and posing problems for the established tax structure. Numerous nations have imposed or are considering imposing comparable taxes on digital services rendered by non-resident businesses, including France, India, Italy, Spain, Turkey, and the UK.

Nepal needs the digital service tax because it can assist the government in maintaining tax compliance and fairness while also generating income from the expanding digital economy. In addition to preventing tax avoidance and evasion, the digital service tax may level the playing field for both domestic and foreign digital service providers. By giving the government the funds to offer public goods and services like infrastructure, security, healthcare, and education, the digital service tax may contribute to the development of society.[11]

Additionally, base erosion and profit shifting (BEPS)—a tax avoidance tactic used by multinational corporations to shift their profits to low-tax or no-tax jurisdictions and take advantage of mismatches and gaps in the tax laws—is addressed by Nepal's digital service tax. The goal of Nepal's digital service tax is to guarantee that non-resident digital service providers, who generate value and have a major economic presence in the country, pay their fair amount of taxes.

Nepal's digital service tax is anticipated to bring in money for the state, money that would then be allocated to public projects and advancement. Over Rs 100 million has been collected in the initial two months of the digital service tax's implementation in Nepal, from July 17 to September 15, 2022, according to the Inland Revenue Department.

In addition to levelling the playing field for both domestic and foreign digital service providers, the digital service tax in Nepal encourages the adoption and use of digital technologies by both businesses and consumers.[12] This helps to drive innovation and the digital transformation of the nation. The government, taxpayers, civil society, and the general public must all participate in and have a conversation about the digital service tax in Nepal, which has the potential to increase digital literacy and awareness among stakeholders.

The Issue of Digital Assets (Cryptocurrency):

The Inland Revenue Department's (IRD) regulations do not specifically address digital assets (including cryptocurrency) about Digital Service Tax (DST) in Nepal, hence the matter is not entirely apparent. Some digital assets and services related to cryptocurrencies might be included by DST by the definition of digital services, such as:

Promoting services associated with cryptocurrency and digital assets
Services for gathering and storing data about digital assets and cryptocurrency
Cloud services for cryptocurrency and digital assets
Services connected to mobile applications for digital assets and cryptocurrency
Services and products offered through online marketplaces that are connected to digital assets and cryptocurrency
Provision and upkeep of software about digital assets and cryptocurrency
Sales of information about digital assets and cryptocurrencies gathered from Nepalese citizens
Download services containing information and images about digital assets and cryptocurrency
Services for talent development, education, consulting, and training in the areas of digital assets and cryptocurrency
Services for e-books, e-library, and e-newspapers about digital assets and cryptocurrency

If any of the above services are provided by a non-resident person to the consumers in Nepal, then they are liable to pay taxes according to the provisions provided by the Inland Revenue Department, i.e. 2% on digital service tax and 13% VAT including the same criteria.

Nonetheless, there are several difficulties and ambiguities about how digital assets and cryptocurrencies are taxed in Nepal, including:

How to calculate the transaction value of cryptocurrencies and digital assets, particularly when their prices fluctuate a lot. Figuring out the digital services' transaction value, particularly when they incorporate digital assets and cryptocurrency or are offered in foreign currencies.
How to locate and identify customers, particularly when they utilize platforms or wallets that are anonymous or use pseudonyms. Deciding who the customers are and where they are, particularly if they utilize proxies or VPNs to access digital services or anonymous wallets.
How to enforce DST and VAT compliance and collection, particularly in cases where non-resident individuals might not have a physical presence or bank account in Nepal, as well as their non-cooperation in the collection of DST and VAT.
Strategies for preventing non-taxation or double taxation, particularly when non-resident individuals can be subject to various tax regimes in their home nation or another jurisdiction, or in the absence of mutual agreements or tax treaties with Nepal.
How to handle digital assets and cryptocurrency regulation and legal status, particularly in light of the Nepal Rastra Bank's ban on cryptocurrency use in the country.

Conclusion:

Thus, Nepal's DST is an audacious and creative initiative to tax the digital economy, however, it also needs to be carefully implemented and coordinated with various tax regimes and stakeholders. The DST ought to be in line with applicable tax treaties as well as global best practices and standards, like the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS). To handle new problems and challenges and to represent the evolving dynamics and advancements of the digital economy, the DST must be additionally evaluated and modified regularly. In the end, the DST ought to promote a cooperative and friendly atmosphere for both consumers and digital service providers, while also serving the best interests of Nepal and its residents.

Digital Service Tax

Digital Service Tax

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Provisions:

Analysis:

Practice:

Necessity:

The Issue of Digital Assets (Cryptocurrency):

Conclusion:

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