1. What does input VAT credit actually do?
VAT Act section 17(1): a registered person may deduct VAT paid or payable on goods or services imported or acquired in connection with that person's taxable transactions from VAT collected on supplies. Section 17(6) makes documentary substantiation a condition, not an optional audit formality. Sections 17(2)-(4) and the Rules limit the amount where purchases are restricted, partly used in taxable business or subsequently diverted.
Example: ordinary trading purchases. A registered trader buys eligible stock for NPR 200,000 plus VAT of NPR 26,000. During the period, its taxable sales generate output VAT of NPR 39,000. With valid documents and no other adjustments, net VAT payable is NPR 13,000: 39,000 minus 26,000. The credit is the NPR 26,000 tax, not the NPR 200,000 purchase cost.
Credit is not generally postponed until every item of stock is resold. Rule 39 permits eligible purchase/import credit through the return, while rule 40 allows inspection of stock and action where stock or taxable use cannot be substantiated. Unsold stock and a fictitious purchase are therefore different situations. A period with purchases but no sales can produce a credit balance rather than immediate cash repayment.
Examples use Nepalese rupees and assume genuine transactions, correct registration, timely claims and adequate evidence. The 13% rate used in ordinary examples is an assumption for those supplies, not a statement that every purchase carries 13% VAT.
2. Apply the legal tests before entering a credit
Section 17 and rule 39(1): establish who acquired the supply, its connection with taxable business, the prescribed evidence and the amount actually eligible. Registration is necessary for the ordinary credit route, but registration alone does not make every cost deductible.
| Test | What to establish | Common error |
|---|---|---|
| Correct taxpayer | The claimant acquired the supply and bears the relevant business cost. | Claiming another group company's invoice merely because both companies have the same owner. |
| Taxable-business connection | The goods or services support taxable supplies, including qualifying zero-rated supplies. | Treating exempt operations or a director's personal purchases as fully creditable. |
| Prescribed documents | A compliant tax invoice or the appropriate import and tax-payment documents support the claim. | Calculating a credit from a PAN-only bill or bank statement. |
| Restriction and proportion | Apply section 17(2)-(3), rules 40-41 and relevant specialised provisions. | Claiming the entire tax because the invoice is in the business name. |
| Timing and uniqueness | The document is within the applicable claim window and has not already been claimed. | Entering the same invoice again when the supplier resends it. |
Private-use example: a company pays for furniture delivered to a director's private home for personal use. Putting the company's PAN on the invoice does not establish a taxable-business purpose. If there is a genuine mixed business/private use, identify and substantiate the eligible part rather than calling the whole amount an office expense.
3. Which invoices and supporting records are needed?
Domestic purchases
Section 14, section 17(6), rule 17 and rule 39(1)(b): obtain the prescribed tax invoice. Verify the supplier's VAT status, the buyer's identity, invoice date and number, description, taxable amount and tax. Retain the original compliant record; authorised electronic invoicing is not excluded simply because it is electronic. Finance Act 2083 also revises section 14a's electronic-invoicing framework.
Rule 18(3): a recipient cannot claim section 17 credit from a simplified tax invoice. Rule 18(6) requires the supplier to provide a full rule 17 invoice when requested even for a smaller transaction. A till slip or payment receipt should not be assumed to be a full tax invoice.
Example: an employee purchases business supplies for NPR 5,650 including VAT of NPR 650. If the supporting document is only a simplified invoice, the buyer cannot claim NPR 650 from that document. Obtain a compliant full invoice; do not manufacture one or add VAT to a PAN-only bill yourself.
Match the invoice to the order, delivery or goods-received note, stock entry and payment. For services, keep the agreement, work product or completion evidence and the basis of the charge. These records answer different questions: an invoice describes the claim; delivery and service records show that a real supply occurred.
Purchases on credit: section 17(1) refers to VAT paid or payable. An unpaid balance on a genuine credit purchase is not, by itself, proof that no credit is available. Keep the agreed credit terms, supplier balance, receipt evidence and subsequent payment trail, and satisfy the prescribed document requirements. This is different from entering a fictitious supplier payable to support a fabricated invoice.
Imports and customs deposits
Rule 39(1)(c): goods imports require the import declaration, tax-payment receipt, invoice and relevant supporting documents. Only the VAT component is input VAT; customs duty, excise duty and other charges are not automatically VAT credits.
Example: an eligible goods import has a correctly determined customs VAT base of NPR 500,000 and VAT of NPR 65,000. The potential input credit is NPR 65,000, subject to the ordinary conditions. It is not NPR 65,000 plus every other customs payment.
Rule 48(3)-(4): where import valuation is unresolved and goods are released against a deposit, credit is not available before value is determined. That rule provides a separate one-year claim period from determination of value. A deposit receipt is not automatically evidence of final VAT eligible for immediate credit.
4. Taxable, exempt and common inputs
Section 17(3) and rule 40(3)-(5): directly attribute purchases first. VAT solely related to taxable supplies may qualify; VAT solely related to exempt supplies does not qualify through the ordinary credit route. Where a genuine common input cannot be directly linked, use the taxable-sales proportion of total sales under rule 40(4), subject to the alternative-method procedure in rule 40(5).
Worked example: assume the relevant business has NPR 600,000 taxable sales and NPR 400,000 exempt sales, excluding VAT. It incurs NPR 13,000 input VAT directly for taxable supplies, NPR 3,900 directly for exempt supplies and NPR 6,500 on genuinely common expenses. None is otherwise restricted.
| Input category | VAT incurred | Eligible credit |
|---|---|---|
| Directly attributable to taxable supplies | NPR 13,000 | NPR 13,000 |
| Directly attributable to exempt supplies | NPR 3,900 | Nil |
| Common inputs: 600,000 / 1,000,000 = 60% | NPR 6,500 | NPR 3,900 |
| Total | NPR 23,400 | NPR 16,900 |
Applying 60% to every purchase would wrongly reduce the directly taxable credit and allow part of the directly exempt credit. The proportion applies to the common pool after direct attribution and exclusions, not indiscriminately to the entire purchase ledger.
Annual reconciliation: IRD VAT Directives section 7.9 explains reconciliation in the Ashadh return, including adjustment of excess common-input credit already taken. A provisional period calculation must not become a permanent claim for the exempt portion. Reconcile the final annual ratio and earlier claims; a start-up with no reliable sales ratio may require the specific treatment described in the Directives rather than an invented percentage.
Zero-rated is different: a qualifying Schedule 2 supply remains a taxable supply at zero rate, unlike a Schedule 1 exemption. Related input VAT can therefore remain eligible under the ordinary rules. Zero rating does not override an express restriction or guarantee a refund; specialised electricity treatment also needs separate examination.
5. Restricted purchases and the main-business exception
Section 17(2) and rule 41: business use does not override an express restriction. The ordinary exclusions include specified beverages, alcohol/alcoholic beverages, petrol for vehicles and entertainment expenditure. The 2083 amendment adds a further category for persons supplying electricity to final consumers, discussed separately below.
Example: an accounting firm purchases petrol for its office car and soft drinks for client entertainment, supported by otherwise proper VAT documents. The connection with business does not by itself defeat rule 41's exclusions. Conversely, do not replace the legal list with an unsupported assertion that every fuel or every refreshment is prohibited. The VAT Directives distinguish packaged drinking water from the restricted beverage category.
Passenger automobiles: 40% of VAT, not 40% of the car's cost
Rule 41(2)(b) and its explanation: the automobile restriction concerns road-going passenger vehicles with three or more wheels. The VAT Directives explain the credit as 40% of the VAT paid. Vehicle classification and use matter; the passenger-vehicle restriction should not be mechanically applied to every goods vehicle or motorcycle.
Example: an ordinary taxable business buys a passenger car for NPR 3,000,000 plus VAT of NPR 390,000. Assuming wholly qualifying business use and no main-business exception, the restricted credit is NPR 156,000: 390,000 x 40%. It is neither NPR 1,200,000 nor the full NPR 390,000. The remaining NPR 234,000 is not input VAT credit.
Rule 41(3): where the registered person's main business is supplying the listed goods or services, the Rules provide an exception. A vehicle dealer buying cars as taxable resale stock is therefore different from a consultancy buying its office car. Establish the actual main business and purpose; the exception is not permission to claim unrelated private consumption. For electricity suppliers, also read the specific 2083 restriction and administrative guidance rather than assuming unrestricted credit from this general exception.
6. The 2083 electricity amendment: identify the correct person
Twenty-Eighth Amendment Rules, amendment rule 6: new rule 41(1)(e) restricts credit on goods and services purchased by a person providing electricity services to final consumers. The Gazette dated 2083/02/15 provides immediate commencement. IRD's Electricity VAT Directives, 2083, effective from Shrawan 1, 2083, explain application to the final-consumer supply segment and allocation where the supplier has different activities.
This is not a rule denying every factory or office credit on its electricity bill. The Electricity Directives expressly illustrate an ordinary VAT-registered manufacturing customer's credit for electricity used in taxable production. Distinguish that customer from an electricity supplier serving household final consumers.
Practical contrast: a registered manufacturer paying documented VAT of NPR 1,300 on electricity used solely for taxable production examines the ordinary credit conditions. An electricity distributor's equipment used in its final-consumer segment requires the new restriction and the Directives' allocation analysis. These are not interchangeable purchases. A specialised supplier should reconcile rule 41 as a whole with the sector guidance and obtain a case-specific position where their interaction is disputed; guidance cannot override the Act or Rules.
7. Claim once, within the applicable period
Rule 39(2): an ordinary claim is made once, using an invoice or import document within the preceding one-year window. IRD VAT Directives section 7.3 explains claiming in the relevant period and catching an omitted claim within that window. It is not a new one-year period starting when the accountant discovers the document or closes the annual accounts.
Example: an eligible invoice is found two months after its issue and was never entered or claimed. Check the document window, enter the missing transaction correctly and use the proper return process. If a photocopy of an already-claimed invoice is found instead, the allowable additional credit is nil. Discovery does not revive an expired claim.
Keep an invoice-level credit register showing document date, supplier, VAT, eligibility adjustments and the return in which credit was taken. Where an already-filed return needs correction, follow the applicable correction procedure; do not silently rewrite its acknowledgement or assume an unrestricted right to amend any historic return.
8. Opening stock and imported services have separate evidence needs
Stock held when registration begins
Section 17(7) and rule 43: apply in Schedule 16 form within 15 days of registration for eligible opening-stock credit. Submit the stock details, tax invoices/import documents from up to one year before registration and other required evidence. Approval is required. The general one-year rule does not replace this 15-day application requirement.
For example, documented VAT of NPR 13,000 on eligible resale goods still held at registration may support an approved opening-stock claim. That does not entitle the business to claim every earlier rent, personal purchase or item already sold. Do not duplicate a stock credit in a later ordinary purchase entry.
Imported taxable services
Sections 8(2) and 17(5b), read with rule 39: a Nepal recipient can have a reverse-charge obligation even where a foreign supplier's invoice shows no Nepal VAT. A registered recipient's eligible credit requires the relevant invoice, tax-deposit evidence and taxable-business connection. A foreign invoice alone does not prove that Nepal VAT was paid.
Example: assume a registered business receives an imported taxable service with a correctly determined NPR 100,000 VAT base and properly accounts for and deposits NPR 13,000 under section 8(2). If the service is wholly for taxable business and is not restricted, that NPR 13,000 may support credit. An unregistered recipient cannot assume the same ordinary input-credit entitlement, and expected credit is not a reason to ignore the recipient's payment obligation.
9. Adjust credit when the underlying facts change
Returns, discounts and credit notes
Rule 20: a genuine price change or return requires a traceable credit/debit note identifying the original invoice, reason, amount and tax. The buyer must reconcile the resulting reduction of purchase VAT with credit already claimed.
Example: VAT of NPR 13,000 was claimed on a NPR 100,000 purchase. Goods worth NPR 20,000 are later returned, and the supplier issues a credit note for NPR 20,000 plus NPR 2,600 VAT. The buyer reduces its claimed input VAT by NPR 2,600 through the appropriate adjustment. The net credit attributable to the retained purchase is NPR 10,400, not NPR 13,000.
Missing stock, losses and a change of use
Section 17(4) and rule 40: stock that cannot be produced or substantiated as used in taxable business can attract a deemed-sale assessment at market value. A qualifying asset's diversion out of taxable use also requires examination of section 17(4), not an assumption that earlier credit can always be retained.
Section 16b and rule 39a: recognised loss/expiry cases have their own evidence and application procedures. The 2083 changes add natural disaster to the relevant loss provisions. For covered fire, theft, accident, breakage, natural disaster or destructive activity, rule 39a(1)(a)'s application period is 30 days from the event; expired goods use the separate scheduled deadlines. Do not treat an unexplained shortage, a profit-and-loss write-off or an unsupported destruction note as automatic relief.
10. What the amendments and administrative notices change
Use legislation ahead of an older explanatory paragraph. The consolidated VAT Act records deletion of section 17(8) by Finance Act 2082. The 2080 VAT Directives still reproduce the former provision on non-filers' credits and registration suspension. That passage is historical, not an unchanged current statutory rule. This does not excuse non-filing or remove the need to establish genuine purchases.
Finance Act 2083 and the 28th Rules amendment: read the current supply classification, electronic-invoice provisions, natural-disaster changes and electricity restriction together. Older guidance cannot establish that a supply is permanently exempt or that a newly restricted input remains fully claimable.
IRD invoice notice published 26 Asar 2083: the attached notice reiterates rule 17's invoice-issuance obligation and warns of enforcement for non-compliance. It is an administrative reminder, not a circular allowing credit on any receipt or waiving section 17(6). Likewise, a portal accepting an entry is not a legal determination that the credit is valid. Apply notices and circulars within their subject, legal authority and effective period.
11. Supreme Court guidance: genuine supply must be supported
Bhatbhateni Super Market and Departmental Store Pvt. Ltd. v. Director General, IRD and others, Decision 11344, full bench, 2080/10/16: the majority upheld the disputed assessment and penalty concerning false/fictitious purchase invoices. Paragraphs 8, 13 and 15 explain the authority's evidential burden alongside the taxpayer's duty to substantiate actual transactions, including delivery and payment evidence, rather than presenting invoices alone.
The limit matters: the judgment contains a dissent favouring further investigation; that was not the majority disposition. It does not establish that every genuine purchase from a supplier who later becomes a non-filer automatically loses credit. Nor does it require eligible stock to be resold before ordinary purchase credit can be claimed.
The practical response is transaction-level evidence: supplier verification, invoice, goods/service receipt, stock or use records and traceable payment. The decision concerns historical transactions; current rates, deadlines and amendments must still be checked independently.
12. A useful month-end credit reconciliation
- Reconcile the purchase ledger to full tax invoices, import documents and tax-deposit evidence.
- Remove duplicate claims, non-VAT charges, private purchases and unsupported transactions.
- Directly allocate taxable/exempt inputs, apply restrictions and calculate eligible common-input credit.
- Check document-age limits, opening-stock approvals and credit/debit notes.
- Reconcile the eligible total to the return and opening/closing credit balance; schedule the annual mixed-use reconciliation.
Credit versus refund: eligible excess input VAT is ordinarily carried forward under rule 39(4). A cash refund requires the relevant section 24 and rule 45 conditions and procedure. A purchase invoice, return credit balance and approved refund are three different things.
Scope: ordinary input VAT credit for FY 2083/84, with selected specialised exceptions identified. Examples are illustrative and depend on their assumptions. A contested invoice, sector-specific restriction or historic assessment requires transaction-specific legal and documentary review.
Government References
- Inland Revenue Department: VAT Act, 2052, consolidated through Finance Act 2082.Sections 8(2), 14-17, 20, 24 and 29; particularly section 17(1)-(7). PDF pages 17-18 and endnote 72 record the operative credit provisions and deletion of section 17(8). Read with Finance Act 2083.
- Inland Revenue Department: VAT Rules, 2053, through the twenty-seventh amendment.Rules 17-18, 20, 39-41, 43, 45 and 48. In particular: full versus simplified invoices, one-time/one-year claims, direct attribution, common inputs, restricted purchases, opening stock and customs deposits. Read with the following amendment.
- Department of Printing: VAT (Twenty-Eighth Amendment) Rules, 2083, Gazette dated 2083/02/15.Amendment rule 1(2): immediate commencement; rule 5: natural-disaster addition in rule 39a(1)(a); rule 6: new electricity-related rule 41(1)(e).
- Inland Revenue Department: Finance Act 2083, published in the Gazette on 2083/03/30.Section 55, including electronic invoicing under section 14a, natural-disaster wording in section 16b and revised supply classification. Original Gazette PDF pages 23-26.
- Inland Revenue Department: VAT Directives, 2069, third amendment 2080.Chapter 7, especially sections 7.3-7.9: timing, proof, restricted inputs and annual apportionment reconciliation. PDF pages 115-124. Older section 17(8) discussion on page 132 is superseded by the deletion recorded in Finance Act 2082.
- Inland Revenue Department: notice on issuing bills/invoices, published 26 Asar 2083.Attached one-page notice reiterates rule 17 and enforcement of invoice obligations; it does not create an independent entitlement to input credit.
- Inland Revenue Department: Electricity VAT Directives, 2083.Effective Shrawan 1, 2083. Definition of final consumer and section 6, including the manufacturing-customer example and the final-consumer supplier allocation. Read subject to the Act and Rules.
- Supreme Court of Nepal: Bhatbhateni, Decision 11344, case 077-NF-0035.Full bench; decided 2080/10/16; Nepal Law Reports 2081, Poush, issue 9. Majority paragraphs 8, 13, 15 and 24; separate dissent distinguished.