Though Nepal formulated the Procedure Related to Digital Service Tax that came into effect on 17 July 2022 targeting non-resident service providers to Nepal, most of the service providers have remained outside the tax system.
The government formulated the Procedure through the Finance Act and to date only two companies: Google and EBSCO ink have been registered in the digital service tax system, Inland Revenue Department said.
“Some other companies have expressed interest to enter the system. As the provision is new, we see challenges ahead to make it legally binding to all the target groups,” Department Spokesperson Raju Prasad Pyakurel said.
As per the Procedure, digital service tax is levied on non-resident persons for digital services provided to consumers in Nepal for transactions worth over NPR 2,000,000 (Two million) in every income year. And, its rate is two percent on the transaction value of digital service (excluding indirect tax levied in Nepal) provided by non-resident persons to consumers in Nepal. The Large Taxpayer Office is the regulating authority to administer the digital service tax.
As per the Procedure, tax shall be paid within three months after the completion of income year and if is not happened, interest of fifteen percent annually shall be charged and in auditing the transaction by the office, if it is found that any non-resident person has suppressed the tax liability by understating the transaction than the actual transaction, tax penalty of 50 percent of tax amount, that was concealed or hidden, shall be imposed.
There is no clear provision about those companies who are not registered in the Department and making them liable for tax payment, it is said.
The official research shows that it is facing a revenue loss on a greater scale as the social sites and non-resident service providers to Nepal are yet to be brought to the tax system.
A report prepared by the Nepal Revenue Advisory Committee which was scrapped by the Cabinet decision on 27 September 27 2022 stated that Nepal suffered a capital flight through social media advertising lately.
In Nepal the practice of advertising through non-registered social networking sites has soared. Such social networks are causing an exodus of billions of rupees from Nepal, according to the report.
The same document citing the dataportal.com stated that till 2022, the number of facebook users in Nepal was 13.3 million.
“According to statistica.com, Facebook’s advertising revenue from per advertisement was 40.96 US dollars in 2021 and this was 32.03 US dollars in 2020,” said the report, adding that the trend suggested that annual income of Facebook from its ad market in Nepal is more than Rs 60 billion.
Arrangements in other countries
The National Board of Revenue in Bangladesh has been imposing 15 percent Value Added Tax (VAT) to the tech companies such as facebook and google by first registering them in the system.
In addition, an arrangement of 15 percent TDS has been made for the non-residents while making payments for online advertisement.
Likewise, big tech companies, including Facebook, have been operating their business in India after registration. India has charged 18 percent goods and service tax and two percent TDS as income tax for online advertisement.
The users have been paying tax according to the concerned country’s tax system and service tax around 10 percent while receiving advertisement or online services through the non-registered company in Nepal and non-resident people through informal channels, states a report of the Revenue Advisory Committee.
It is claimed that the charge for advertisement through such companies registered in Nepal would be cheaper compared to that of other countries, which also would contribute to increase Nepal’s revenue.
For example, consumers need to pay a charge along with 18 percent goods and service tax while making advertisements through facebook in India. While doing this informally, the user has been paying an extra 10 percent exchange charge after 18 percent in receiving advertisement service.
If arrangements of payment are made legally by registering such companies in Nepal, it would be comparatively cheaper for users to make advertisements from Nepal than from India.
‘Service recipients would presumably be attracted to make such advertisements from Nepal if an arrangement was made to charge 15 percent with no VAT by issuing cards to the natural person’, the report notes.
It seems extra revenue amounting to over Rs 9 billion would be collected to the national coffer if such tax money was collected through the arrangements, the report states.
It may be noted that the Revenue Advisory Board in its ‘Revenue and Tax related Report for the fiscal year 2022/23’ had recommended the government to make arrangement for bringing social networking sites providing digital service to the tax net and allowing their business operation only after paying taxes.
