Also see the first Section of this other article which discusses some practical difficulties of DST implementation in Nepal: Digital Service Tax: It’s not so easy to implement yet
In the above posts, we discussed the meaning and the principle behind the Digital Service Taxes that are being introduced around the world with the objective of equalizing the taxation on the global income derived on digital services by the companies around the world.
The recent Digital Service Tax introduced under the Section 20 of Finance Act, 2079 still has now adopted a straightforward taxing mechanism for the Digital Services provided into Nepal through the economic significance test and it applies for both direct and indirect taxes.
Context to this Article
The previous posts (linked above) discussed on:
(i) the meaning of the digital services,
(ii) Current position of the digital economy from OECD’s definition of PE
(iii) Some approaches to tax the Digital Services
(iv) Countries that have implement Digital Service Taxes (DST)
(v) USA’s investigation and findings on the DSTs implemented by the countries
(vi) Administrative challenges in the digital economy
(vii) Worldwide adopted digital service structures to minimize digital tax burden
(viii) Features of the digital economy
(ix) The, then prevalent position of Nepal regarding the DST in Nepal
(x) DST in Nepal introduced by Finance Act, 2079
(xi) Amendment in VAT Act, 2052 for application of Indirect Taxes on the Digital Services
(xii) Nature of the Digital Service Tax in Nepal and its Meaning
(xiii) How does the direct and indirect tax apply in Nepal
(xiv) The rates of taxes and the threshold requirement
(xv) Comparison of the DST with Service PE definition
(xvi) Negative impacts of the Gross Basis Taxation like DSTs
This article resolves some confusions in previous articles: regarding the conflict with Service PE, DST provider with reseller representative in Nepal, Taxation of Business Profits under DTAA in NEpal and mainly how the threshold amount for the purpose of the DST is determined.
DST Procedures introduced by IRD
Recently, IRD has issued a separate set of procedures on the Digital Service Tax (Both Direct and Indirect) that provides registration process, applicability of the tax, basis of computation of tax, filing of returns, deregistration and so on.
The links to the procedures issued by the IRD are given below as per the notice:
Link to notice
Format for Online Registration Application
Link to Form
SOP for DST Registration issued by Revenue Department
Link to SOP
Some Important Concepts in the DST Procedures
Meaning of “Consumer”
The meaning of Consumer has a wide and far reaching meaning for the purpose of the DST regulation if we think about it.
Under Section 2(b) of the Procedure relating to digital service tax, 2079 BS (2022) and Section 2(a) of the Procedure relating to value added tax on digital service provided by non-resident person, 2079 BS (2022), the term “Consumer” is defined as: “Consumer” means a person who consumes goods and services having a normal place of abode in Nepal. Provided, a person who purchases goods and services by separate arrangement for business purpose or to use in business shall not be considered as consumer.
The definition has failed to clarify what is the meaning of “separate arrangement”. Does this mean that only the consumers in Nepal who obtain digital services from non-resident persons for non-business purposes are treated as “consumers” for the purpose of this Procedure? And what is the meaning of “separate arrangement”? Does arrangement mean the mode of transaction of digital services other than those defined in Section 2(g)? These two questions are very pertinent and yet not very clear in the DST procedures.
In my other post: Digital Service Tax: Now its here in Nepal – in the reseller representative heading – we had discussed how the DST taxes will apply if the foreign service provider has a reseller representative in Nepal. The post was written before the actual introduction of the DST Procedure in Nepal.
The international tax system reflects the principle that companies are not subject to a country’s corporate tax regime in the absence of a territorial nexus to that country. This is reflected in international tax treaties, which typically establish that a company need not pay a country’s corporate income tax unless it has a “permanent establishment” in that country. DSTs adopted by countries flip this rule on its head. Rather than limit the DST’s applicability to companies with permanent establishments in the particular country, the DSTs apply only to companies without permanent establishments in such countries. Thus, where there is already a permanent establishment of the foreign digital service provider in Nepal, the idea of applying the digital service tax doesn’t come into play. That is well covered by the meaning of the “foreign digital service provider” in the Finance Act, 2079.
However, the Finance Act has failed to provide that, the digital service tax doesn’t apply where the foreign digital service provider already has an agent or business representative in Nepal. Generally, the presence of the foreign company’s business representative or agent in Nepal creates a Service PE or Agency PE so this would altogether not be an issue in most cases. But in case where the company has no permanent establishment in Nepal and it resells its digital services through independent agent in Nepal, the present provision of the digital service tax under Finance Act, 2079 would allow the foreign service provider to skip its higher withholding rates under the Income Tax Act, 2058 through the application of DST under Section 20 of the Finance Act. There may be two views here:
(i) One view is that the drafters failed to foresee this situation, or
(ii) The other view could be that the tax laws of Nepal finally have accepted that the business profits of the foreing company who do not have PE in Nepal are not taxable in Nepal.
But now that the DST procedure has finally been introduced – it seems – unfortunately that the Revenue Regulators in Nepal have taken a third even more absurd view. Since the definition of the consumer excludes the person who “purchases goods and services by separate arrangement for business purpose or to use in business” from the definition of a “consumer” – it could very well mean that:
(i) The consumer for the purpose of the DST are only the persons who obtains the digital services for non-business purposes from non-residents, and
(ii) The person who obtains digital services from non-residents for business purpose are not under the purview of the DST and they have to abide by the normal withholding taxes requirement under the Income Tax Laws
If this is true – it is a midway solution adopted by the Revenue Authorities in Nepal. On the one hand this exclusion from the definition of the consumer (i) applies DSTs in the purchase of the digital services for non-business purpose by residents of Nepal from non-residents and on the other other hand (ii) the exclusion of the person who obtains digital services for business purpose will be subjected to the normal withholding taxes under the Income Tax Laws.
Meaning of “Digital Service Consumed in Nepal”
Under Section 2(g) – in providing the definition of “transaction”, the procedure provides that digital service provided by a non-resident person to consumer whose place of supply is considered Nepal if any one of the following conditions is satisfied: –
(1) Service is received within Nepal,
(2) Billing address is in Nepal,
(3) Payment is made through accounts maintained in banks or payment instrument operated by licensed institution or entity of Nepal,
(4) Payment is made through debit card, credit card or similar type of payment instrument issued by banks or licensed payment provider institution or entity of Nepal,
(5) Service is received by using internet protocol address in Nepal,
(6) Service is received by using a SIM card having the country code of Nepal or landline telephone of Nepal.
Meaning of “Digital Services”
The meaning of “digital services” has been provided in three separate Acts/Procedures
Procedure relating to digital service tax, 2079 BS
Procedure relating to value added tax on digital service provided by non-resident person, 2079 BS & VAT Act, 2052 BS
Section 2(k): “Digital service” includes following services whose delivery essentially requires information technology and provided automatically through internet with minimal human intervention: –
Section 2(k): “Digital Service” includes following services whose delivery essentially requires information technology and provided automatically through internet with minimal human intervention:-
So the difference seems to be in points (9), (11) and (12).
E-book, E-Library and E-newspaper (under pt 12) are specifically exempted from Indirect Taxes (i.e VAT) under Group 7 of Annexure 1 of the VAT Act 2052 so that is not included in the definition of the digital services for the purpose of Procedure relating to value added tax on digital service provided by non-resident person, 2079 BS & VAT Act, 2052 BS.
Educational services (under pt 11) are exempted from indirect taxes under Group 6 of Annexure 1 of the VAT Act 2052 when they are provided by schools and universities – so the complete exclusion of it from the DST Procedure for VAT and VAT Act in defining the digital services does not make sense.
Regarding the Sale of data collected from resident persons of Nepal (under pt 9) – it’s quite odd that it is not included in the definition of “digital services” in DST Procedure for VAT and VAT Act. Laws regarding digital products are literally being changed or reinterpreted all the time nothing is constant but as of now – looking at the existing provisions of VAT Act and DST Procedures for VAT – this should have been included under the purview of the digital services and applied indirect taxes on it. As more and more of the world goes digital, the question of whether or not to charge sales tax on digital products plagues more business owners. Similar could be the reasoning for excluding the “sale of data” from the definition. An interesting omission but my view is that “sale of data” should be subjected to indirect taxes as well as it is not specifically excluded from application of VAT under Annex 1 of the VAT Act, 2052.
There is one interesting trend in the application of indirect taxes in the sale of digital services. One of the trends we notice is that there is differentiation between digital products that you download to your own device and digital products that you access online but don’t download. So in this logic, you could buy and download a movie on a site like Amazon and pay indirect taxes on it, or “rent” it for a limited period of time on Amazon Prime Video and not pay tax on it.
DST Rate and DST Threshold
Digital service tax will be levied at the rate of two percent (2%) on the transaction value (excluding the indirect taxes applicable in Nepal) of the digital service provided to the consumers of Nepal by non-resident persons.
Annual transactions up to NPR 2 million of a non-resident digital-service provider provided to “consumers” resident in Nepal will not be subjected to DST, however, if the amount exceeds NPR 2 million, the entire transaction amount shall be taxed. Income Tax as per Income Tax Act, 2058 shall not be applicable on the transaction on which DST is provided.
As discussed above the meaning of “consumer” is not quite clear. So since the threshold for the application is tied up in the meaning of consumer – it brings the obvious question: Should only the purchase of digital services made by residents in Nepal be counted for the purpose of computing the threshold of the digital services?
Another silly problem that arises is regarding the computation of threshold for indirect taxes purposes. Although the amount of the threshold for indirect taxes under DST Procedure for VAT is NPR 2 million as well – the difference arises when the digital services that are not taxable for indirect tax purposes are excluded from computing the threshold. A set of transactions by foreign digital service provider may already cross the 2 million threshold for direct tax purposes but not cross for the indirect tax purposes – as some transactions – as listed above – are excluded from the purview of the indirect tax purposes. But since the scope of the DST is expected to be taxable way above the nominal threshold of 2 million this issue possibly will not be that pertinent.
Filing and Payment of DST and Sanctions
The DST Return for direct taxes should be filed by the non-resident within 3 months of the completion of the income year. Failure to submit the DST return for direct taxes within time will lead to the fee being levied at the rate of 0.1% per annum on the amount of taxes.
Similarly, the DST Return for the indirect taxes should be filed by the non-resident within 25 days from the expiry of the monthly tax period for indirect taxes. Failure to submit the DST return for indirect taxes within time will lead to the fee being levied at the rate of 0.05% per day on the amount of taxes or NPR 1,000 whichever is higher.
The timeline for the payment of the DST for both direct and indirect taxes is also set to be no later than the timeline for filing the return. Failure to pay the DST for direct taxes within time will lead to the fee being levied at the rate of 15% per annum on the amount of direct taxes and at the rate of 10% on the amount of the indirect taxes.
Composite Supply of Goods and Services
In computing the amount of the transaction for the purpose of the DST it shall include the value of both goods and services where the supply is of composite nature i.e. consisting of both goods and services in computing the amount of transaction. Example: providing online marketplace service and goods and services. So the value of the transaction of goods will also be considered as a part of the transaction for determining the transaction amount. The DST has widened the scope of its equalization taxes in the nature of DST to include e-commerce sales of goods and services provided by non-resident operators to customers resident in Nepal. DST is imposed at 2% on the considerations received or receivable by the non resident e-commerce operators. However, in case of supply of goods and services by the resident person through such a marketplace, the non-resident person should not include the same amount in transaction value.
Registration Process (Direct and Indirect Taxes)
Obtaining Registration Number and Timeline
Person liable to pay DST shall compulsorily register in Nepal and obtain PAN. Registration for PAN shall be done within 30 days from which transaction amount exceeds the threshold of NPR 2 million. Voluntary registration for PAN is permitted.
Documents to be Submitted for Registration
Application for PAN shall be made online in the standard format as per Annexure 1 of DST related Procedures 2022. The following documents are to be uploaded along with the application:
a) Notarized copy of the registration certificate of the company in the country of domicile in the English language.
b) Notarized copy of the registration certificate with tax authorities in the country of domicile in the English language.
c) Power of Attorney provided to authorized persons in English & Notarized copy of the passport of such person in the English language.
d) Photo of the authorized person.
e) Specimen signature of the authorized person.
f) Power of Attorney, if any given to a Nepali citizen as the authorized person to pay taxes and Notarized copies of the citizenship or passport.
Invoicing Process by Non-Resident Person
A registered non-resident person shall issue tax invoices electronically. Approval of the IRD is not required for such electronic billing. The invoice shall be issued at the earliest of service rendered or consideration received. All accounting of the transactions has to be done in Nepalese Rupees.
Application as per the format in Annexure – 4 shall be submitted to the tax office for cancellation of registration. The tax office shall inform the authorized person about the cancellation or reason for the noncancellation of registration within 3 months of receipt of the application.
Tax Assessment and Appeal
Tax officers can assess DSTs in case doubt arises that less tax liability has been determined by the taxpayers. If it is found that the transaction amount has been lowered or concealed in order to reduce tax liability. In case the person is not satisfied with the tax assessment of the tax officer, an appeal for administrative review can be made. If the person is not satisfied with the decision of the Administrative Review, an appeal can be made to the Revenue Tribunal.