The Nepal government has been providing a large amount of economic concessions annually through tax exemptions. The Ministry of Finance has stated that approximately Rs 2.5trn are provided in tax exemptions per year.
Tax exemptions are given in various ways. These include exemptions provided by the relevant laws, the Income Tax Act, the Value Added Tax Schedule, and the annual Economic Act. In particular, there is a practice of providing tax exemptions on value added tax and customs duties in grant or loan agreements under bilateral or multilateral foreign aid.
As mentioned in the 62nd Annual Report of the Auditor General, 2025, Section 18 of the Economic Act, 2023 provides for the Government of Nepal to reduce, increase, or partially or completely exempt from revenue the rates of fees, charges, duties, or taxes imposed by the prevailing law. Similarly, Section 14 and Section 15 of Schedule 1 of the Economic Act, 2023 provide for full or partial exemption of customs duties. According to the Customs Department's data system, it appears that Rs 79.87bn was exempted from customs revenue in 2023/24.
According to the details received from the Ministry of Finance, customs duty and value added tax of Rs 4.87bn were exempted from importing goods under the SAFTA facility. In addition, as per Section 18 (2) of the Finance Act, 2023, the Ministry of Finance has granted revenue exemption of Rs 20bn on import value of Rs 34bn to various ministries, departments, local levels, and corporations, including Rs 6bn, in the last four years. Similarly, as per Section 18 (3), it appears that revenue exemption of Rs 7bn has been granted on goods and goods worth Rs 43bn, subject to the terms of the project development agreement, for projects implemented with foreign loans or grants.
Pointing out that the Ministry of Finance has not kept updated records of the items and amounts exempted from revenue on materials and equipment imported into the facility, the Accountant General has suggested, “The exemption should be granted only if the master list is approved by the relevant project before inviting bids and whether the goods and goods imported into the facility were used in the same project or not. There should also be monitoring and since the scope of revenue exemptions is increasing, its impact should be analyzed and the integrated data of revenue exemptions should be presented to the parliament to promote transparency.”
In addition to the exemptions, the Ministry of Finance and its subordinate bodies have yet to recover Rs 435.22bn in revenue and principal and interest on loans that exceed the limit. Out of this, the revenue arrears are Rs 254.4bn, of which Rs 123.80bn (48.73 percent) have been filed for judicial review by taxpayers, so a large portion of the arrears are under consideration by judicial bodies. The government has been saying that the principal and interest on loans and investments made by public corporations, committees, boards, cooperatives and local levels that exceed the limit is Rs 181.18bn. The Accountant General has been saying that the amounts that exceed the limit, principal and amount, and revenue arrears should be recovered through legal procedures. Stakeholders say that due to non-payment of revenue, apart from the exemptions given by the government, the country is also facing an uncomfortable situation due to additional budget expansion in the education and health sectors.
The government has been giving tax exemptions to target groups as an incentive. According to Pandey, spokesperson for the Ministry of Finance, the main reason for giving tax exemptions is the provision given by the law and the constitution. “The purpose of this is to encourage any industry or business. In addition, incentives are also provided to certain classes and groups. Some exemptions are provided for tricycles and motorcycles used by people with disabilities,” he said. “This system of giving tax exemptions is not to benefit any specific person but is based on the law. Schedules have been placed in the Value Added Tax Act. Which classify taxable, non-taxable and zero-taxable transactions.”
Former Revenue Secretary of the Ministry of Finance, Ram Sharan Pudasaini, suggests that the annual tax exemptions have been misused to some extent and that it has increased inequality, suggesting that tax refunds and budget grants should be used instead. “The government is providing annual tax exemptions worth nearly two and a half trillion rupees through laws and various economic acts. This amount of tax exemption is excessive and there is no control and monitoring over it, which may have led to increased misuse,” he said.
Pudasaini also raised questions about the effectiveness of the tax exemptions currently being given. He commented that there is no analysis, audit or monitoring of whether the justification and purpose of the tax exemptions have been fulfilled and whether the benefits have reached the target group or not. Pudasaini noted that the current technology of granting tax exemptions by decision of the Ministry of Finance or the Council of Ministers is not right and suggests that tax exemptions should be given only in a very limited, targeted, short-term manner and especially in connection with investment and job creation.
The government currently does not have an account of the amount of exemptions given by the schedule of the Value Added Tax Act on daily consumer goods, such as pulses, rice and green vegetables.
Stakeholders have been saying that the state is losing a large amount of revenue annually through tax exemptions. External donor agencies such as the World Bank and the International Monetary Fund (IMF) have also shown concerns regarding the large amount of tax exemptions.
An IMF study has suggested reconsidering the system of tax exemptions given in Nepal on a large scale, says Tanka Prasad Pandey, spokesperson for the Ministry of Finance.
“There are many such long lists of tax exemptions. In the past, there was no exact calculation of how much the government was giving such exemptions. However, the IMF has studied this issue and mentioned detailed details in its report. The study suggests reconsidering the system of tax exemptions given in Nepal on a large scale,” he said.
