What is Digital Service Tax (DST) and who are affected by this new tax regime?
Traditional international tax practices are based on the concept of physical presence. In order to be taxed in a country, a business must have a physical presence, such as an office or warehouse, in that country. However, digital businesses can operate in a country without having a physical presence there.
This has created a number of problems for tax authorities. For example, it can be difficult to determine which country has the right to tax a digital business’s profits. It can also be difficult to enforce tax laws against digital businesses that do not have a physical presence in the country.
How to tax these digital service providers ?
Nepal has introduced a 2% digital service tax on services provided over the internet to Nepali consumers by foreign companies (Foreign Digital Service Providers) through the Finance Act, 2022 (B.S. 2079). The tax applies to foreign companies with an annual turnover from Nepal of more than Rs 2 million (approximately USD 15,500).
In other words, if a foreign company provides digital services to Nepali consumers and their annual turnover from Nepal exceeds Rs 2 million, they will have to pay a 2% tax on that turnover.
This tax is designed to address the challenges of taxing the digital economy, which is often borderless and intangible. It is also designed to protect Nepali consumers from unfair competition from foreign companies that do not have to pay taxes in Nepal.
The administration of the provisions as per the First Amendment (2023) to the Procedures for Digital Service Tax 2022 shall be performed through the Large Taxpayers’ Office of the Inland Revenue Department.
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Service (digital) to be deemed to be provided in Nepal
Digital service is deemed to be provided in Nepal if any of the following events occur:
- Service is received within Nepal,
- Billing address of services is in Nepal
- Payment is made through bank accounts or a payment instrument operated by Nepali institution or entity that has a license to do business there.
- Payment is made via digital payment instrument issued by banks or licensed payment provider institution or entity of Nepal,
- Service is received via internet protocol address in Nepal
- Service is received via SIM card having country code of Nepal or landline of Nepal
Procedures for tax payment on income generated in Nepal
Under the new digital service tax (DST) law in Nepal, foreign companies that provide digital services to Nepali consumers must apply for a permanent account number (PAN) within 30 days of exceeding the transaction threshold of Rs 2 million (approximately USD 15,500). However, non-resident companies can also apply for a PAN voluntarily at any time.
Tax returns filing deadlline and penalty for late-filing
Non-resident persons providing digital services to Nepali consumers must file their tax return online within 3 months of the end of the accounting year. If they fail to file their tax return on time, they will be charged a fee of 0.1% per year.
Tax payment deadline and penalty for late-payment
Taxes under the DST in Nepal must be paid within three months of the end of the fiscal year. If a company fails to pay its taxes on time, they will be charged interest at a rate of 15% per annum.
Note:
The accounting / fiscal year in Nepal typically ends on 16th of July on the Gregorian calendar. Hence, the non-resident digital service providers have until the mid of October to file their tax returns and make DST payments, if they wish to avoid penalties and penal interests.
Refer the DST Procedures, First Amendment for more details.
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