IRD Compliance for Nepali Businesses - VAT Returns and Reporting

Understand the VAT System You Are Reporting Within

Before any return is filed, the accountant needs a clear picture of where the business sits in Nepal's VAT framework. VAT at 13% applies to taxable supplies of goods and services. A separate category of supplies is exempt - basic agricultural produce, certain education and health services, and other items listed in the schedules to the VAT Act - and exempt supplies carry no output VAT but also block input credit on related purchases. A third category is zero-rated: exports leave Nepal at a 0% rate, yet the exporter retains the right to claim input credit on the inputs that went into those exported goods. Misclassifying a supply between these three categories is the single most common source of an incorrect return.

Mandatory registration under the VAT Act 2052 is triggered by transaction volume, not profit. The threshold for businesses dealing in goods or manufacturing is higher than the threshold for service providers, and certain categories - importers, and dealers in alcohol, tobacco, and petroleum products - must register regardless of turnover. Because these thresholds are revised periodically through Finance Acts and IRD notifications, confirm the current figures with the IRD or a tax professional rather than working from a remembered number. PAN and VAT can be registered together in a single combined submission on the IRD's Taxpayer Portal at ird.gov.np - a business does not need to complete PAN first and return separately for VAT.

Once registered, the obligations are continuous. The business must charge 13% on every taxable sale, issue a compliant tax invoice for each transaction, maintain the prescribed sales and purchase registers, and file the VAT return on the schedule the IRD assigns. Knowing which schedule applies - covered in Step 4 - is foundational, because the entire compliance calendar depends on it.

Build the Purchase and Sales Registers Correctly

The VAT return is only as accurate as the two registers behind it. The sales register records every taxable sale: invoice number, Bikram Sambat date, customer name, customer PAN for business-to-business transactions, taxable value, and the 13% VAT charged. The purchase register records every purchase against which input credit will be claimed: supplier name and PAN, the supplier's tax invoice number, the BS date, taxable value, and the input VAT paid. Output VAT total minus eligible input VAT total gives the net VAT payable for the period. That arithmetic is simple. The difficulty lies in completeness and eligibility.

Completeness means every taxable transaction in the period reaches the register before the return is built - no cash sale left in a separate notebook, no supplier bill sitting in a drawer. Eligibility means only input VAT that the law permits is claimed. Input VAT on purchases used exclusively for exempt supplies is not recoverable. A business making both taxable and exempt supplies must apportion input credit on the ratio of taxable to total supplies. Input VAT on entertainment and certain other categories is not claimable at all. An overstated input credit claim is among the higher-risk audit triggers the IRD monitors.

A practical discipline that survives IRD scrutiny: reconcile both registers to the general ledger before the return is prepared, not after a notice arrives. The output VAT in the sales register should tie to the VAT output ledger; the input VAT in the purchase register should tie to the VAT input ledger. Where the registers are built independently of the books, that reconciliation rarely happens, and the gap surfaces during assessment when it is most expensive to explain.

Meet Tax Invoice and E-Billing Obligations

Every taxable sale must be backed by a valid tax invoice. The invoice must carry the seller's name and PAN, a sequential invoice number, the transaction date in Bikram Sambat, a description of the goods or services, the taxable amount, VAT calculated at 13%, and the total payable. For business-to-business sales, the buyer's PAN must appear as well. An invoice missing any required element is a defective invoice: it does not support the buyer's input credit claim, and it exposes the seller to penalties at assessment. In our experience, defective invoices are found in volume during VAT audits precisely because they are issued by hand under time pressure at the counter.

Beyond ordinary tax invoices, the IRD operates a mandatory electronic billing regime for businesses above specified turnover. These businesses must issue fiscal receipts through IRD-approved billing systems that transmit transaction data to the IRD, and a compliant fiscal receipt carries an IRD verification reference that distinguishes it from an ordinary invoice. Customers can verify a receipt against IRD records, including through IRD-linked digital channels. Because the e-billing turnover has been lowered repeatedly, a business approaching mid-level turnover should confirm its obligation with the IRD rather than assume it is exempt.

The retention rule is firm. Original tax invoices, purchase invoices, and the supporting VAT registers must be maintained for at least five years and produced on IRD request. Businesses that scan and discard, or that keep records only in an accountant's personal spreadsheet, struggle when an assessment reaches back across multiple periods and the original documents cannot be located.

File on the Correct Schedule - Monthly or Trimester

Nepal's VAT system has two filing schedules, and confirming which one applies to the business is foundational. Businesses with annual transactions above the prescribed threshold file monthly; businesses below that threshold but above the registration threshold file on a trimester basis - three times per fiscal year. The IRD assigns the applicable schedule based on declared transaction volume, and a business whose turnover grows past the monthly-filing threshold should confirm whether its obligation shifts. The exact threshold is set under the VAT framework and is subject to revision through Finance Act provisions, so verify the current figure with the IRD before assuming a schedule.

For monthly filers, the VAT return and any net payment for each Nepali month are due by the 25th of the following month - the Shrawan return by 25th Bhadra, the Bhadra return by 25th Ashwin, and so on. For trimester filers, Nepal's fiscal year divides into three four-month periods, each with its own deadline:

• 1st trimester - Shrawan through Kartik: return due by 25th Mangsir
• 2nd trimester - Mangsir through Falgun: return due by 25th Chaitra
• 3rd trimester - Chaitra through Ashadh: return due by 25th Shrawan of the following fiscal year

The return itself is submitted electronically through the IRD Taxpayer Portal at ird.gov.np using the business's PAN-linked credentials. It summarizes total output VAT on taxable sales, total eligible input VAT, and the net VAT payable. Where input VAT exceeds output VAT, the surplus credit carries forward to the next return; a cash refund is available only in specified circumstances and requires a separate application plus an IRD audit of the claimed period, so it is never automatic. File the return even in a period with no transactions - a nil return is still a filing obligation, and a missing nil return is recorded as non-filing.

Avoid the Mistakes That Attract IRD Notices

Across assessments we have handled, the notices cluster around a short list of avoidable errors. Filing on the wrong schedule - a trimester filer treating the obligation as monthly, or worse, a monthly filer who falls a return behind. Input credit claimed on exempt-supply purchases or entertainment expenses, inflating the credit and inviting an adjustment. Sales register totals that do not reconcile to the books, so the filed output VAT differs from the ledger. Tax invoices missing the buyer PAN on business-to-business sales. And late filing, where the penalty and interest under the VAT Act compound with every missed period until the arrears dwarf the original liability.

The common thread is not negligence. It is the manual cycle itself: registers rebuilt by hand each period, figures re-keyed from one system to another, and a deadline that arrives while the team is mid-month-end. The fix is structural rather than a matter of working harder - the return should flow from the same posted transactions that produce the financial statements, not from a parallel set of records assembled separately at period end.