Key points of Budget 2025-26: Boosts tax incentives to drive innovation, sustainability

KATHMANDU: Finance Minister Bishnu Prasad Paudel, presenting the NPR 1.964 trillion budget for the fiscal year 2082/83 (2025/26) in a joint session of the Federal Parliament, announced revisions to tax rates across 42 measures to fund the ambitious budget.

The changes include increased taxes on cigarettes and alcohol, tax exemptions for startups and IT industries, support for women entrepreneurs, and modernized tax policies to align with global standards.

Key Tax Reforms and New Provisions:

Tax Law Modernization

VAT, Income Tax, and Excise Duty Review: Laws related to VAT, income tax, and excise duties will be revised to address international tax system changes and new business models.

VAT Multi-Rate Study: A study will assess the feasibility and practicality of implementing a multi-rate VAT system based on recommendations.

Non-Tax Revenue Updates: Non-tax revenue rates will be adjusted to reflect current economic conditions.
Industrial Protection and Investment Promotion

IT and Tourism Incentives: IT-based industries and hotels/resorts will be treated as special industries, receiving income tax and electricity tariff exemptions.

IT Service Exports: Income from IT service exports will enjoy a 75% tax exemption, while individuals exporting IT services from Nepal will pay a final 5% income tax.

Startup Tax Relief: Startups with annual turnovers up to NPR 100 million will be exempt from income tax for five years.

Timber Seasoning Industry: Machinery imports for timber seasoning will face a 1% customs duty, with other taxes and duties waived.

Organic Fertilizer Production: Imports of machinery for organic and natural fertilizer production will be exempt from customs duties and other taxes.

Sports Infrastructure: Imports of equipment for football, cricket, and multi-purpose stadiums will incur a 1% customs duty, with other taxes waived.

Green Hydrogen: Machinery imports for green hydrogen production will be fully exempt from taxes and duties, with producers receiving a six-year income tax exemption.

Solar and Wind Energy: Battery and equipment imports for solar and wind energy storage will face a 1% customs duty, with other taxes waived.

EV Charging Infrastructure: Machinery imports for EV charging machine production or assembly will incur a 1% customs duty, with other taxes waived, and a five-year income tax exemption for such industries.

Old Vehicles: Public and private vehicles over 20 years old or non-operational can have remaining income tax waived if the last two years’ taxes are paid.

Tunnel Boring Machines: Private sector imports of tunnel boring machines for road, irrigation, and hydropower projects will face a 1% customs duty, with other taxes exempted.

Transport Services: Transport service providers can deduct advance tax paid on vehicle rentals by individuals as an expense when calculating taxable income.

Retirement Funds: Approved retirement funds must now be mandatorily linked to the Employees Provident Fund, Citizen Investment Trust, Social Security Fund, or pension funds.

VAT and Excise Duty Compliance: Individuals failing to submit VAT or excise duty details can settle dues without interest, penalties, or additional fees.

Airlines and Ticket Agents: International airlines and air ticket agents registering for VAT and clearing dues will have interest, penalties, and fees waived.

Tax Arrears Settlement: Taxpayers who haven’t filed income returns can settle revised tax assessments to clear outstanding dues.

Digital Payments: VAT on clearing house services for digital payments has been abolished.

Agricultural Products: Advance income tax at customs points for food grains, pulses, fruits, and animal/dairy products has been eliminated.

Hearing Aids: VAT on hearing aids for individuals with hearing impairments has been removed.

Foreign Currency: Travelers entering Nepal can bring up to USD 5,000 in foreign currency or travelers’ checks, with amounts above this requiring declaration at customs.

Ambulances: The NPR 16 million price cap for tax-exempt ambulance imports has been removed.

Electric Vehicles: All taxes and duties on electric vehicles remain unchanged to promote their use and reduce environmental pollution.

Tax Base Expansion and Protection

Increased Duties on Sin Goods: Customs duties on imports of alcohol, beer, tobacco, and cigarettes have been raised, with some tariff adjustments and a modest increase in excise duties. The health risk tax scope has been expanded.

E-Invoicing: The electronic invoicing system will be expanded, with a broader central invoice monitoring system.
Tax Compliance: Voluntary tax participation will be encouraged through taxpayer education and legal compliance.

Digital Service Tax: The tax base for digital transactions will be expanded to include all digital services.
Tax Expenditure Rationalization: Tax exemptions and incentives will be updated to ensure a justified tax expenditure system.

Trade Facilitation and Service Delivery

Temporary Imports: Vehicles and transport equipment temporarily imported will face customs duties at entry points, but no additional fees (entry, route, or other) will be charged by federal, provincial, or local authorities.

EXIM Code Guarantee: The NPR 300,000 bank guarantee requirement for exporters/importers obtaining an EXIM code has been abolished.

Minimum Tax Removal: The requirement for taxpayers to pay a minimum tax even without taxable transactions has been eliminated.

Fast-Track Trade: Authorized business entities will receive fast-track facilities and on-site goods inspection services.

Customs Valuation: An automated international price trend database will replace reference pricing with a realistic automated valuation system.

Revenue Leakage Control

Bilateral Data Sharing: A system for exchanging trade data with neighboring countries will be developed to minimize revenue leakage risks.

Intelligence-Based Investigation: An intelligence-driven investigation system will be established to curb revenue leakage, with enhanced information sharing and joint monitoring among relevant agencies.
Revenue Administration Efficiency

Paperless, Contactless Services: Revenue services will transition to paperless, contactless, and faceless systems through specialization and capacity building.

Integrated Check Posts: Major customs points will see the establishment or upgrading of integrated check posts to reduce business costs and facilitate trade.

Business Process Reengineering: Internal revenue systems will undergo modernization to simplify processes and reduce compliance and collection costs.

Revenue and Customs Reforms: Revenue mobilization and customs modernization plans will be accelerated.
National Single Window: The national single window system will be expanded to streamline foreign trade.

These tax reforms aim to fund the NPR 19.64 trillion budget while fostering private sector growth, promoting sustainable industries, and modernizing Nepal’s tax system to align with global trends. However, effective implementation remains critical to achieving the projected revenue and economic growth targets.