VAT Registration and TDS Obligations in Nepal: A Practical Guide

Two separate obligations get treated as one problem far too often. VAT registration is about a threshold you cross; TDS is about a role you fall into the moment you make certain kinds of payments, regardless of your own turnover. A business well under the VAT threshold can still be a TDS withholding agent from its very first month of operation, simply because it pays office rent or hires a contractor.

Prepared by Nishant Marasini and team · Position stated as at 22 September 2026

VAT registration: the threshold rule

Value Added Tax in Nepal is governed by the VAT Act, 2052, and registration becomes mandatory once annual transaction value crosses the threshold set for the relevant category of business — the figures differ for the supply of goods versus the supply of services, and both are revised periodically through the annual budget, so the specific rupee threshold in force should always be checked against the current Finance Act rather than assumed from a prior year. Certain businesses are required to register regardless of turnover — this includes specified categories such as those dealing in particular goods or services the law designates for compulsory registration from the outset, and businesses that choose to import or export commercially, where VAT registration is a precondition to customs clearance rather than a turnover-triggered event.

Below the mandatory threshold, voluntary registration is available and is often the more sensible commercial decision than it first appears — a business that sells primarily to VAT-registered corporate buyers loses nothing by registering voluntarily, since its customers can claim input credit either way, while a business selling to end consumers below threshold usually has good reason to stay unregistered and avoid the compliance overhead. The decision should be made on the actual customer base, not on a general instinct that registration is always a burden.

The registration process with IRD

Registration is applied for at the relevant Inland Revenue Office covering the business's registered address, supported by the business's registration certificate (from the Office of Company Registrar, Department of Cottage and Small Industries, or the relevant local authority depending on business form), PAN details, and information on the nature and scale of the business. Once registered, VAT registration and PAN function together — a VAT-registered business's PAN effectively becomes its VAT number, and the two cannot be separated once the business is VAT-registered; deregistration back to a plain PAN-only status is a distinct process with its own conditions and is not simply a matter of stopping VAT filings.

Registration triggers obligations that start immediately: VAT must be charged on taxable supplies from the effective date of registration, VAT invoices meeting the prescribed format must be issued, and purchase and sales registers must be maintained in the form IRD expects, not merely in whatever format the business's existing accounting software happens to output by default.

Monthly VAT return filing

VAT is a monthly-cycle tax. The registered business is required to file a VAT return and settle any net VAT payable by the 25th of the following month, and this applies even in months where the business had no sales — a nil return is still a return, and failing to file one because there was nothing to report is treated as a filing default, not a non-event. Input VAT on purchases can be claimed against output VAT on sales within the same return, but only where the supporting purchase invoice is itself a valid VAT invoice from a registered supplier; input claimed against an invoice that does not meet the required particulars is routinely disallowed on review, which is a common source of businesses discovering, well after the fact, that VAT they believed they had recovered was never properly claimable.

TDS: the obligation that arrives without registration

Tax Deducted at Source under the Income Tax Act operates on a completely different logic from VAT. There is no threshold and no registration event — the moment a business makes a payment of a type the Act designates for withholding, it becomes a withholding agent for that payment, obligated to deduct tax at the prescribed rate before paying the counterparty, whether or not the business itself is VAT-registered, and often whether or not it is even a large business at all. A small consultancy paying monthly rent for its office is a withholding agent on that rent from the first payment.

The categories most businesses encounter routinely include:

• Contractor and construction payments — payments to contractors for construction, supply, or service contracts above the specified threshold attract withholding at the rate the Act prescribes for that category.
• Rent — payments for house or land rental are subject to withholding, a category almost every business encounters regardless of size, since nearly every business pays rent for premises.
• Professional or consultancy fees — payments to consultants, professionals, and service providers for specified categories of professional service attract withholding, distinct from the rate applied to ordinary contract payments.
• Interest — interest paid by a business, including on loans and certain deposits, is subject to withholding at source, with the rate and treatment differing between interest paid to individuals, to corporate lenders, and to financial institutions.

The applicable rate differs by category and is set out in Schedule 1 of the Income Tax Act as amended by successive Finance Acts, so the correct rate for a given payment type should be confirmed against the current schedule rather than carried forward from memory of a prior engagement — rates for some categories have moved in recent budgets while others have stayed fixed for years, and assuming uniformity across categories is a frequent source of under-withholding.

Depositing what was withheld, and issuing the certificate

Withholding the tax is only half the obligation. The withholding agent must deposit the amount deducted with IRD by the 25th of the month following the month of deduction — the same monthly rhythm as VAT, but a wholly separate filing and payment — and must issue a TDS certificate to the party from whom the tax was withheld, since that certificate is what the recipient later relies on to claim credit against their own final tax liability. A withholding agent that deducts tax correctly but never issues the certificate leaves the counterparty unable to substantiate their credit, which becomes the counterparty's problem at their own assessment, not the withholding agent's — but it is exactly the kind of gap that damages a commercial relationship and invites disputes over who was responsible for the shortfall.

The trap: withheld but not deposited

The most common and most avoidable exposure is a business that correctly deducts TDS from a payment — so the counterparty has already received a reduced, net amount — but then fails to deposit the withheld sum with IRD by the monthly deadline, whether from a cash flow squeeze, an administrative oversight, or simply because TDS deposit was not built into the same compliance calendar as VAT. This creates a penalty exposure that belongs entirely to the withholding agent and is separate from the tax position of the underlying transaction itself. The counterparty has already been paid net of tax and has a certificate (or an expectation of one) showing tax was withheld on their behalf; the business is now sitting on funds that were never its own to begin with, with interest running on the late deposit. Unlike a business's own underpaid tax, where the business at least retains use of its own money during the delay, TDS withheld from someone else and not deposited is exposure layered on top of a liability that was, in cash terms, already collected.

Because TDS deposit and VAT return both fall due on the 25th of the following month, businesses that run a single mid-month compliance check often catch VAT because it is the more visible monthly obligation, and only notice a missed TDS deposit when IRD's own systems flag the mismatch between what was reported as withheld on a payment and what was actually deposited — by which point interest has already accrued for as long as the deposit was outstanding.

The practical takeaway

VAT registration is a threshold question, answered once and then revisited periodically as turnover changes or the Finance Act moves the threshold. TDS is a role question, triggered payment by payment, that a business can fall into on day one regardless of size or VAT status. Treating both as the same monthly ritual — file, pay, move on — is roughly right operationally, but the two obligations should be tracked on separate checklists, because the consequence of getting TDS deposit wrong is not just a penalty on the business's own tax; it is exposure on money that was already someone else's.