1. Concept of VAT, Input VAT and Output VAT
Value Added Tax (VAT) is a tax charged at every stage of the supply chain on the value a business adds. In Nepal the standard rate is 13%. The final burden falls on the consumer, while each registered business only pays the tax office the difference between the VAT it collects and the VAT it has paid.
Input VAT is the VAT a business pays on its purchases of goods, assets and services used for the business. Output VAT is the VAT a business charges its customers on sales. The business sets off input VAT against output VAT and deposits only the balance.
charges VAT
VAT-registered
pays VAT
2. Net VAT Payable: Worked Example
ABC Suppliers buys laptops from a supplier and sells laptops to a customer. The business pays VAT on the purchase (input) and collects VAT on the sale (output).
| Particulars | Amount (Rs) | VAT 13% (Rs) | Total (Rs) |
|---|---|---|---|
| Purchase of laptops (Input VAT) | 80,000 | 10,400 | 90,400 |
| Sale of laptops (Output VAT) | 1,00,000 | 13,000 | 1,13,000 |
| Net VAT payable = 13,000 − 10,400 | 2,600 |
If input VAT is higher than output VAT in a month, the excess is carried forward as VAT credit (or refunded where the law allows).
3. What Counts as Input VAT
Input VAT means VAT paid on purchases made for the business. It falls into three groups:
- Goods bought for sale (trading stock or raw materials).
- Assets bought for the business (furniture, machinery, computers).
- Expenses incurred for the business (internet, rent, repairs and similar services).
| Taxable purchase | Category | Value (Rs) | VAT 13% (Rs) |
|---|---|---|---|
| Computer | Goods for resale | 80,000 | 10,400 |
| Furniture | Asset for business | 1,00,000 | 13,000 |
| Internet | Business expense | 10,000 | 1,300 |
| Total input VAT | 24,700 | ||
4. Three Types of Credit
| Type | Applies to |
|---|---|
| Full credit | Resale goods, business assets and expenses |
| Partial credit | Passenger-carrying vehicles (40%) |
| No credit | Beverages, alcohol, vehicle petrol, entertainment |
5. No Credit: Non-creditable Purchases
Input VAT paid on the following cannot be set off against output VAT:
- Beverages and soft drinks
- Alcohol and alcohol-mixed drinks (for example raksi and beer)
- Petrol used for vehicles
- Entertainment expenses
Example: ABC Suppliers buys beverages worth Rs 1,00,000 and pays VAT of Rs 13,000.
| Nature of ABC Suppliers' business | Credit on Rs 13,000 VAT |
|---|---|
| Buys and sells beverages (main business) | Allowed in full |
| Any other business | Not allowed (Rs 13,000 becomes part of cost) |
6. Partial Credit: Vehicles (40%)
For vehicles with more than two wheels (automobiles), the credit depends on what the vehicle is used for. Vehicles that carry passengers get only 40% of the input VAT as credit. Vehicles that carry goods get 100%. Two-wheelers (motorcycles, bicycles) are not treated as automobiles for this rule.
| Vehicle | Credit allowed |
|---|---|
| Two-wheelers: motorcycle, bicycle | Full credit (not an automobile) |
| Goods-carrying: truck, single-cab pickup | 100% of input VAT |
| Passenger-carrying: bus, double-cab pickup | 40% of input VAT |
Example: ABC Metal Suppliers purchased the following. The uncredited VAT is added to the cost of the vehicle.
| Vehicle | Price (Rs) | VAT 13% (Rs) | Credit (Rs) | Cost (Rs) |
|---|---|---|---|---|
| Motorcycle | 3,00,000 | 39,000 | 39,000 | 3,00,000 |
| Single-cab pickup | 50,00,000 | 6,50,000 | 6,50,000 | 50,00,000 |
| Double-cab pickup | 70,00,000 | 9,10,000 | 3,64,000 (40%) | 75,46,000 |
7. Proportionate Credit
A business that makes both VAT-able and non-VAT-able (exempt) sales cannot claim all its input VAT. It can claim credit only in proportion to its VAT-able sales.
| Type of business | Credit on input VAT |
|---|---|
| Only non-VAT-able (exempt) sales | No credit |
| Only VAT-able sales | Full credit |
| Both VAT-able and non-VAT-able sales | Proportionate credit |
Example: ABC Suppliers buys raw materials for Rs 10,00,000 and pays VAT of Rs 1,30,000. Vatable sales are Rs 35,00,000 and non-vatable sales are Rs 25,00,000.
- Credit = 1,30,000 × 35,00,000 ÷ (35,00,000 + 25,00,000) = Rs 75,833
- Not creditable = 1,30,000 − 75,833 = Rs 54,167 (added to cost)
8. When and How Often Credit Can Be Claimed
| Question | Rule |
|---|---|
| How many times? | Once only for each purchase |
| Until when? | Within 1 year from the date of purchase |
Keep the tax invoice and record the purchase in the purchase book. A purchase not claimed within the allowed period loses its credit and the VAT becomes a cost.
9. Credited Goods No Longer Used for Business
If goods on which input VAT credit was claimed stop being used for the business (for example, sold or taken for personal use), the business must pay VAT again as if it had sold them at the prevailing market price.
10. Second-hand Goods
VAT paid on buying second-hand (already used) goods for the business can be claimed as credit.
11. Goods in Stock at Registration
A business that has just registered for VAT may hold goods on which VAT was paid before registration.
- Apply to the tax office within 15 days of registration.
- Goods covered: stock held at registration, with bills (showing VAT paid) of up to 1 year.
- Credit is adjusted after the tax office gives approval.
- Credit for capital expenditure cannot be adjusted under this facility.
12. Goods Lost, Damaged or Expired
Input VAT on goods that are lost or destroyed can be adjusted if the loss is caused by fire, theft, accident, damage or destructive activities. The taxpayer must apply to the tax office within 30 days.
Expired goods: the period in which the goods expired decides the last date for the adjustment.
| Goods expired during | Complete the adjustment by |
|---|---|
| Shrawan to Ashoj | 25 Kartik |
| Kartik to Push | 25 Magh |
| Magh to Chaitra | 25 Baisakh |
| Baisakh to Asar | 25 Shrawan |
Insured goods: where the goods are insured, the adjustment is linked to the compensation received. Read the exact clause in the Act before applying.
13. Chapter Summary at a Glance
| Situation | Treatment of input VAT |
|---|---|
| Resale goods, business assets, business expenses | Full credit |
| Beverages, alcohol, vehicle petrol, entertainment | No credit (full credit if it is the main business) |
| Goods-carrying vehicles and two-wheelers | Full credit |
| Passenger-carrying vehicles | 40% credit |
| Both VAT-able and exempt sales | Proportionate credit, adjusted yearly in Asar |
| Only exempt sales | No credit |
| Time limit | Once, within 1 year of purchase |
| Second-hand goods | Credit allowed |
| Stock at registration | Apply within 15 days; credit after approval |
| Credited goods no longer used for business | Pay output VAT on market price |
14. Short Answers
Q1. What is input VAT?
VAT paid by a registered business on purchases of goods, assets and services used for its business.
Q2. What is output VAT?
VAT charged by a registered business on its taxable sales.
Q3. How is net VAT payable calculated?
Net VAT payable = Output VAT − Input VAT.
Q4. Which purchases give no credit?
Beverages, alcohol, petrol for vehicles and entertainment expenses, unless dealing in them is the main business.
Q5. When is only partial credit allowed?
For passenger-carrying vehicles, where credit is 40% of the VAT paid.
Q6. What is proportionate credit?
Credit limited to the share of VAT-able sales in total sales, for a business with both VAT-able and exempt sales.
Q7. What happens if credited goods stop being used for business?
The business pays 13% VAT on their prevailing market price.
15. Exam Tips
- Always show the formula first: Net VAT = Output VAT − Input VAT.
- Write the cost of an asset as price + VAT − credit claimed. Uncredited VAT is always part of cost.
- Learn the "main business" exception to the no-credit list; it is a favourite short question.
- For vehicles, first decide: two-wheeler, goods-carrying or passenger-carrying.
- For proportionate credit, show the formula and each figure; method marks are given.
- Remember the dates: 15 days (registration stock), 30 days (loss), 25 Shrawan (Asar adjustment), 1 year (credit period).
16. Practice Numericals
Q1. Goods bought Rs 5,00,000 + VAT, sold Rs 8,00,000 + VAT. Find net VAT payable.
Input VAT = 65,000. Output VAT = 1,04,000. Net VAT payable = 1,04,000 − 65,000 = Rs 39,000.
Q2. A garment trader buys beverages for office guests worth Rs 2,00,000 + 13% VAT. How much credit is allowed?
VAT = 26,000. Beverages are non-creditable and this is not the main business, so credit is nil. Cost = Rs 2,26,000.
Q3. Input VAT Rs 2,60,000; vatable sales Rs 40,00,000; non-vatable sales Rs 10,00,000. Find the credit.
Credit = 2,60,000 × 40,00,000 ÷ 50,00,000 = Rs 2,08,000. Not creditable = Rs 52,000.
Q4. A double-cab pickup costs Rs 40,00,000 + 13% VAT. Find the credit and cost.
VAT = 5,20,000. Credit at 40% = 2,08,000. Cost = 40,00,000 + 5,20,000 − 2,08,000 = Rs 43,12,000.
Q5. A laptop (credit claimed) is now used personally. Market price Rs 60,000. What VAT is payable?
13% × 60,000 = Rs 7,800.
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