What are considered digital services under Nepal's new Digital Service Tax (DST) procedure?
The Inland Revenue Department ("IRD") has adopted a broad and technology-agnostic approach in defining what qualifies as a digital service. According to the Digital Service Tax 2081 (2024) Procedure ("Procedure"), digital services are those that are delivered online with minimal human interaction. This includes streaming platforms, advertising tools, cloud computing, software updates, online marketplaces, gaming services, mobile applications, as well as access to digital content such as e-books and e-journals. The inclusion of services like online consultancy, skill development programs, and data analytics highlights the tax authority's intent to capture evolving business models operating remotely in the Nepalese market.
How does Nepal determine whether a service is being provided to a Nepalese consumer?
A service is considered to be provided to a Nepalese consumer if any of the following apply:
- The consumer is located in Nepal
- The invoice is issued to a Nepalese address
- The payment is made via a Nepali bank or payment service provider
- A debit or credit card issued in Nepal is used
- The service is accessed through a Nepalese IP address
- The service is accessed via a Nepalese SIM card or landline
This test emphasizes the economic presence of the digital service provider, not physical presence.
Is there a monetary threshold for DST applicability?
Yes. The DST applies only if the annual gross transaction value exceeds NPR 3 million. Once that threshold is crossed, the entire amount becomes taxable at 2%.
Providers below this threshold are not liable to pay DST, though they may register voluntarily if they expect future expansion or wish to align with compliance protocols early.
Who qualifies as a consumer for the purpose of DST?
A consumer is defined as a natural person residing in Nepal who purchases digital services for personal, non-business use. Services procured for business or commercial purposes fall outside the DST regime and may instead be taxed under Nepal's Income Tax Act, 2002.
How is residency determined for tax purposes under Nepalese law?
Nepalese tax law distinguishes between resident and non-resident entities. A company is considered resident in Nepal if:
- It is incorporated or registered in Nepal, or
- Its place of effective management ("PoEM") is in Nepal during the tax year.
PoEM refers to where strategic commercial decisions are made. Foreign companies that are not incorporated in Nepal and do not have their PoEM in Nepal are treated as non-residents and are subject to DST if they provide digital services to Nepalese consumers.
When must a non-resident digital service provider file a DST return in Nepal?
Non-resident providers must file a DST return within three months from the end of each Nepali fiscal year (Shrawan 1st to Ashadh 31st, approximately mid-July to mid-July). For example, for the fiscal year ending Ashadh 2081, the deadline is mid-October 2025. Returns must be filed electronically in the format specified by the IRD.
What are the consequences of filing the DST return after the deadline?
A penalty of 0.1% per annum is imposed on the total annual transaction amount if the return is filed late. This penalty accrues continuously from the due date until compliance is achieved. Chronic delays can trigger further enforcement by the Large Taxpayer Office.
What happens if a digital service provider fails to deposit the DST on time?
Failure to pay DST on time results in interest at 15% per annum on the unpaid tax. Since the DST cannot be passed on to consumers, this becomes a direct cost to the provider and can affect margins, reputation, and future regulatory risk.
What if a non-resident underreports DST or is audited?
If underreporting is found, a penalty of 50% of the concealed tax amount is imposed.
The audit process includes:
- Issuance of an initial tax assessment order
- A 15-day window for the provider to submit documentary evidence
- Issuance of a final tax assessment by the tax officer based on the response.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
