The electricity VAT has become the test of the government's tax resolve

The Federation of Nepalese Chambers of Commerce and Industry (FNCCI), the country's largest business lobby, asked the government on 28 September to withdraw value-added tax on electricity. The levy was introduced in the budget for the current fiscal year, which began in mid-July. Within weeks it had become the clearest test of whether the government will hold to its revenue measures under pressure.

What the tax does

Electricity was previously exempt from VAT. Since this fiscal year, industrial and commercial consumers pay 13%, the standard rate. Households pay 5% on consumption above 50 units a month, a threshold that brought about 2.6 million household customers into the tax net, according to The Kathmandu Post.

There was confusion at the start. In late July, Kantipur reported that VAT would not be charged on bills for Asar, the last month of the previous fiscal year, and that amounts already collected would be adjusted.

The business case against it

The FNCCI's argument is that electricity is a basic input for manufacturing, trade and tourism, so a tax on it raises production and operating costs across the economy. In principle, VAT-registered firms can reclaim tax paid on inputs. The federation says that in practice many cannot. Businesses with VAT-exempt sales cannot claim the credit at all, and others face slow adjustment and refund procedures that tie up working capital.

It singled out energy-intensive industries, small and medium-sized firms, and hotels as the hardest hit. It warned that the cost would reach consumers through prices and could deter new investment and hiring. It asked the government to review the policy with the private sector and to simplify the credit and refund process.

A government of two minds

The cabinet has not spoken with one voice. On 21 September the energy ministry said its minister, Biraj Bhakta Shrestha, and Finance Minister Swarnim Wagle had reached an in-principle understanding to remove the tax. The energy minister cited public dissatisfaction. The next day the finance minister's secretariat said there had been no such agreement. The energy minister has said the finance ministry must bring a proposal before cabinet decides. A committee reviewing electricity tariffs has not yet reported.

Critics outside business have raised a different objection: that the 50-unit threshold encourages households to ration use to stay under it, which neither raises much revenue nor serves a country trying to sell more of its own hydropower at home.

A pattern of retreat

The dispute matters beyond electricity because of what happened in July. The budget imposed a 3% equity fee on charges at private schools, colleges and hospitals, meant to fund public services. Private education and health operators protested, and on 21 July Prime Minister Balendra Shah announced it would not be implemented.

The budget also kept corporate tax rates unchanged, a choice criticised by Yubaraj Khatiwada, a former finance minister, who argued that lower rates would do more to encourage production. The budget instead offered narrower incentives, such as a 50% exemption on IT export earnings, and set up a committee to study a multi-rate VAT.

What is at stake

A finance ministry that has already given ground once faces a choice. Dropping the electricity VAT would ease costs for industry and remove a grievance among urban households. It would also widen a deficit already put at Rs 657bn, and confirm to every interest group that budget measures are opening bids.

There is a middle course that both sides have hinted at: fixing the credit and refund system so that registered businesses genuinely recover the tax, while deciding separately whether households should pay it. That would answer the FNCCI's strongest point without conceding the principle that a broad tax base is better than a narrow one. The cabinet's decision will show which matters more to this government. For background on its wider relationship with business, see our report on the prime minister's courtship of business leaders.