In the budget for Fiscal Year 2026-27, Finance Minister Dr Swarnim Wagle has quietly introduced a multi-rate Value Added Tax (VAT) system through the back door.
On one hand, the Finance Minister stated that the government would conduct a study on introducing multiple VAT rates. On the other hand, he simultaneously arranged for a 5 percent VAT rate to be immediately implemented on electricity consumption and ride-sharing services.
We asked tax expert Chartered Accountant (CA) Sheshmani Dahal whether the Finance Minister had misled the public. Dahal offered a diplomatic response: “We can only say for sure after the regulations are issued and we see exactly how it has been implemented.”
On page 5 of the budget speech, under the section ‘introducing reforms aimed at establishing a stronger system and laying the foundation for comprehensive development’ in fiscal year 2026-27, Finance Minister Dr. Wagle stated: “(f) We will form a high-level recommendation committee to study the relevance of a multi-rate Value Added Tax system and submit recommendations.”
However, under the heading “Voluntary Compliance and Expansion of the Tax Base,” the minister also announced: “A concessional rate of Value Added Tax has been imposed on electricity consumption exceeding 50 units per month sold to final consumers.”
The business community has been demanding a multi-rate VAT system for years. Previous governments, however, lacked the courage to implement it. After the Gen Z movement of September 8-9 and the landslide election victory of the Rastriya Swatantra Party (RSP) on March 5, which secured nearly a two-thirds majority, many expected the party and its Finance Minister Dr Swarnim Wagle to take a bold decision on the issue. Yet, for reasons unknown, the minister appears to have opted for a shortcut approach.
Dahal raises a counter-question: “What if the study eventually concludes that a multi-rate VAT system is not suitable for Nepal?”
This gives rise to two serious questions.
First, since there is no existing legal provision for a ‘concessional VAT rate,’ why did the Finance Minister present such a measure to the sovereign Parliament?
Second, should household consumers, who increased electricity consumption in line with government policy continue following that policy or not?
“This issue should have been clearly presented as part of the package, or it should have been explicitly stated in the budget,” Dahal says.
Furthermore, a new debate will emerge over whether electricity is a luxury or an essential commodity.
Until now, Nepal had only two VAT rates: zero percent and 13 percent. Following the budget now, there are effectively three VAT tiers: zero percent, a concessional VAT rate of 5 percent, and the standard 13 percent rate. This is because the budget explicitly states that VAT on electricity consumption and ride-sharing services takes effect immediately.
The government has incorporated a three-tier VAT structure through the Economic Bill 2083 by amending Section 7 of the VAT Act 2058. Subsections (1A) and (1B) have been added after Subsection (1). The bill states: “Notwithstanding anything contained in Subsection (1), the Government of Nepal may, by publishing a notice in the Nepal Gazette, establish multiple tax rates not exceeding the rate prescribed under Subsection (1), and may specify the goods and services to which such rates shall apply.”
The fiscal year 2024-25 budget had already introduced free electricity for households consuming less than 50 units per month. The recently presented Economic Survey, which highlights that electricity access has reached 99.1 percent of the population, portrays it as one of the government's major achievements. Against this backdrop, the decision to impose a 5 percent VAT on consumers using more than 50 units has led to accusations that the government is now seeking to generate revenue from electricity users.
Meanwhile, President of Nepal Ujyalo Party and former Energy Minister Kulman Ghising has demanded the immediate withdrawal of the government's decision to impose VAT on electricity consumption exceeding 50 units.
Ghising argues that the move undermines consumer welfare, hampers energy transition goals, and discourages the national campaign to increase the use of domestically produced clean energy.
He further alleges that the government is effectively punishing consumers at a time when it should be encouraging electricity use for cooking through electric stoves, water heating, and other household purposes.
According to Ghising, most customers consuming more than 50 units per month are ordinary middle-class households. Imposing tax immediately beyond this threshold would increase monthly expenses for millions of families, make Nepali kitchens more expensive, negatively affect living standards, and potentially drive consumers back toward imported LPG gas.
Moreover, has Finance Minister Dr Wagle, who is often portrayed as a champion of the middle class, actually presented a budget that primarily benefits the upper-middle and upper classes by imposing a 3 percent Education Equality and Health Equality Fee on all fees charged by schools, colleges, and hospitals?
CA Dahal believes: “The government appears to have deviated from the basic principles of taxation. While claiming to have introduced broad tax reforms, it seems increasingly dependent on indirect taxes rather than direct taxes and is moving toward a comparatively regressive tax system.”
According to taxation principles, direct taxes are generally considered more equitable, while indirect taxes are regarded as relatively regressive.
Direct taxes include income tax, property tax, and capital gains tax. Under these taxes, those with higher incomes pay more, reflecting the principle of “taxation according to ability to pay.”
Indirect taxes include VAT, excise duties, and customs duties. Under such taxes, rich and poor consumers pay the same tax rate when purchasing goods and services.
For example, a person earning Rs 30,000 per month pays 13 percent VAT when purchasing a mobile recharge worth Rs 1,000. A person earning Rs 300,000 per month pays the same 13 percent VAT on the same recharge. Because the rate is uniform, a larger proportion of the poor’s income goes toward taxation.
Consequently, as the share of direct taxes declines and indirect taxes increase, the tax system becomes more regressive and departs from the principle of taxation, according to ‘ability to pay.’
How much will taxes on education, healthcare, and electricity affect ordinary citizens?
Economists classify these sectors as ‘socially essential services.’ Nepal’s Constitution of 2015 even recognizes education and healthcare as fundamental rights.
Therefore, higher taxes on education lead to increased school fees, make private colleges and universities more expensive, and raise the financial burden on middle-class and lower middle-class families. Over the long term, this can hinder human capital development by increasing the cost of producing skilled manpower.
Similarly, higher taxes on healthcare services and medical supplies increase treatment costs. Health insurance premiums may also rise. The greatest burden falls on senior citizens, people with chronic illnesses, and low-income households.
Electricity, meanwhile, is not a luxury item but a basic necessity for Nepalis. Taxing electricity increases household utility bills, raises production costs for industries, and increases expenses for small businesses. The effects spread throughout the economy.
For example, when a small retailer faces higher electricity bills, product prices tend to rise. When industrial production costs increase, consumers ultimately pay more for goods. Economists describe this phenomenon as a source of ‘cost-push inflation.’
Dahal says it is surprising that such measures have appeared in the budget of a highly regarded economist serving as Finance Minister, given the expectations many people had.
In this way, by reducing the upper threshold of income tax relief while increasing taxes on education, healthcare, and electricity, the burden of taxation is shifted onto lower- and middle-income groups through consumption, while tax relief appears to benefit primarily higher-income taxpayers.
Therefore, Dahal fears that the government is moving away from the principle of ‘taxation according to ability to pay’ and toward a more regressive tax system.
Watch the video interview with tax expert CA Sheshmani Dahal on Nepal Khabar’s ‘Tatkalai’:
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