PAN, VAT and Tax Basics for Small Businesses in Nepal

PAN stands for Permanent Account Number, a unique tax identification number issued by the Inland Revenue Department. It is how the tax system recognises you or your business. Almost any formal money activity touches it: invoicing clients, opening a business bank account, registering as a Daraz seller, getting an eSewa or Khalti merchant account, or paying business income tax.

There are personal PANs and business PANs. For a registered business, you obtain a PAN in the business's name after registering the firm. Getting a PAN does not by itself make you a VAT taxpayer; many small PAN-registered businesses are not VAT-registered at all. PAN registration is free.

VAT (Value Added Tax) is a tax added on top of the price of most goods and services, charged at a standard rate of 13% in Nepal. A VAT-registered business adds VAT to its sales, collects it from customers, and passes it to the government, while claiming back the VAT it paid on its own purchases. It then files VAT returns regularly.

The key distinction: PAN is your identity in the tax system and is needed by basically every business; VAT is a separate registration that you only take on once you cross a turnover threshold or choose to opt in. A small shop can run perfectly legally with a PAN and no VAT registration until it grows.

VAT registration becomes mandatory once your annual turnover crosses the prescribed threshold. As a widely-cited rule, the threshold has been around NPR 50 lakh per year for businesses dealing in goods, and around NPR 30 lakh per year for services or mixed (goods plus services) businesses. Turnover is generally measured on a rolling 12-month basis, and you are expected to register within a short window (commonly 30 days) after crossing it.

These thresholds are set by tax law and can be revised, so check the current figures with the IRD before assuming. Note also that some categories of business are required to be VAT-registered regardless of turnover, and some goods and services are VAT-exempt. If in doubt about your category, ask a tax professional rather than guess.

Separate from VAT, your business profit is subject to income tax. For a sole proprietorship, business income is generally taxed in the owner's hands, and very small businesses may fall under simplified or presumptive turnover-based tax schemes that the IRD provides to make compliance easy for tiny operators.

The practical takeaway is that you should expect to file an income tax return each year and pay tax on your profit. Keeping clean records of your sales and your allowable business expenses is what lets you calculate profit correctly and avoid overpaying. A local tax advisor can tell you which scheme and rates apply to your size and sector.

You do not need accounting software to start. You need a consistent habit. Record every sale and every business purchase with the date, amount, and a short description. Keep receipts and bills in one place, physical or photographed, and reconcile against your business bank and wallet statements regularly.

Good records do three things at once: they make tax filing fast and accurate, they show you whether you are truly making money, and they are the evidence a bank wants when you apply for a loan. Start with a notebook or a free spreadsheet, and move to a billing app once your volume grows.

Late filing and late payment attract penalties and interest, and unregistered-but-required VAT can attract fines per tax period, so calendar your deadlines. The IRD operates an online taxpayer portal for many filings, and your local tax office handles in-person matters.

Doing your own basics is fine when you are small, but as soon as you cross into VAT, take on employees, or your numbers get complex, a modest fee to a registered accountant or tax consultant usually pays for itself in avoided mistakes and penalties. Think of it as insurance, not an expense.