VAT-Exempt & Zero-Rated Goods and Services in Nepal: Reference List

Nepal levies Value Added Tax (VAT) at a single standard rate of 13% on most goods and services. But two categories fall outside that charge: VAT-exempt supplies, listed in Schedule 1 (Anusuchi 1) of the Value Added Tax Act 2052 (1996 AD), and zero-rated supplies, listed in Schedule 2 (Anusuchi 2). At the checkout both look identical, because no VAT rupees are added to the price. The real difference is invisible to the buyer and sits with the seller's input VAT.

A zero-rated supply is still a taxable supply, just taxed at a rate of 0%. Because it is inside the VAT system, the supplier can claim back (as input-tax credit) all the VAT paid on the purchases, raw materials and overheads used to make it, and can obtain that credit as a cash refund. Exports are the classic example: an exporter charges no VAT to the foreign buyer yet recovers every rupee of VAT built up along the supply chain, so Nepali goods leave the country free of embedded VAT.

An exempt supply, by contrast, is outside the VAT net. No VAT is charged on the sale, but the supplier also cannot reclaim the VAT paid on inputs. That input VAT becomes a real cost, which the exempt business either absorbs or bakes into its price. A hospital, a school or a farm selling exempt output therefore pays hidden VAT on its electricity, equipment and supplies that it can never recover. This is the single most important distinction for anyone asking 'is X VAT-free in Nepal?' — free to the customer is not the same as costless to the seller.

There is also a registration consequence. A business dealing only in exempt supplies is generally not required to register for VAT at all, whereas a business making zero-rated supplies is registered, files VAT returns, and typically runs a refund position with the Inland Revenue Department (IRD).

Schedule 1 of the VAT Act 2052 groups exempt goods and services into broad classes, and the Finance (Economic) Act updates the fine detail almost every year. The list below sets out the principal statutory groups; where the schedule says a category applies only to items 'notified by the Government of Nepal in the Nepal Gazette', the precise scope is fixed by ministry notification rather than by the Act itself, so specific products can move on or off the list.

Broadly, the exempt groups cover essentials and merit goods: unprocessed basic foodstuffs, primary agricultural production and inputs, notified medicines and health and veterinary services, notified education services, aids for persons with disabilities, most local passenger transport, books and cultural material, certain professional and personal services, financial and insurance services, land and building transactions, and betting, casino and lottery activities.

Because the schedule keys many entries to 'unprocessed' or 'notified' status, processing or packaging can change the answer. Fresh, unprocessed food is exempt, but the same food processed, branded and packaged for retail is often standard-rated. The category tables below break the groups down so you can check where a given item is likely to sit.

The largest, most consumer-relevant block of exemptions is food and farming. Unprocessed staples — paddy and rice, wheat and flour, maize, millet and other cereals, pulses (dal), fresh vegetables, fresh fruit, fresh fish, fresh meat, milk and eggs — are exempt, so the everyday shopping basket of a typical Nepali household carries no VAT. Edible oil, drinking water, firewood and kerosene appear in the basic-necessities group as notified items.

The exemption is deliberately tied to the primary, unprocessed form of the product. Once produce is significantly processed, canned, branded or otherwise transformed into a manufactured food product, it can fall outside Schedule 1 and become standard-rated at 13%. This is why a sack of raw rice is VAT-free while some processed, packaged and branded food items are not.

Agricultural inputs receive parallel treatment to keep farming costs down. Live animals, seeds, plants and saplings, and chemical and organic fertiliser are exempt, and certain agricultural machinery and equipment are exempt or concessionally treated where the Gazette so specifies. Because these input exemptions are heavily driven by annual Finance Act notifications, farmers and agri-dealers should confirm the current year's list rather than rely on memory.

Merit services that the state wants to keep affordable are exempt under Group 4 of Schedule 1. Health services and medicines notified by the Government of Nepal in the Nepal Gazette are exempt, as are veterinary services. In practice this keeps hospital and clinic charges and most pharmaceutical sales out of VAT, although the phrase 'as notified' means the precise list of exempt medicines and medical services is set administratively and should be checked against current notifications.

Education services notified in the Gazette are exempt, which is why school and college tuition and core educational services generally do not carry VAT. Educational and cultural material sits in a separate group: books, newspapers, periodicals and other printed matter are exempt, along with certain artistic goods and museum entry, reflecting a policy of keeping learning and culture accessible.

Goods designed for the use of persons with disabilities are exempt under a dedicated group, reducing the cost of assistive appliances and aids. As with health and education, the operative detail can be narrowed or widened by notification, so an item that is broadly 'health-related' is not automatically exempt unless it falls within the notified scope.

Passenger transport is exempt under Group 6, but with an important carve-out: air transport and, as notified, certain long-distance vehicle services are excluded from the exemption. Everyday local and public passenger transport is therefore VAT-free, while airline tickets and some long-haul services are treated differently. Goods transport (freight/cargo) is a taxable service and is not covered by this passenger exemption.

Financial and insurance services are exempt under Group 9, a treatment common to VAT systems worldwide because the 'value added' in core banking and insurance is hard to measure transaction by transaction. Interest, core banking services and insurance premiums generally fall outside VAT, though fee-based and clearly identifiable service charges can be treated differently. Postage stamps and postal services also sit in this group.

Two further blocks round out the schedule. Land and building transactions — the purchase and rental of land and of residential buildings — are exempt under Group 10, subject to the Act's conditions, which is why residential rent and land sales do not attract VAT (separate registration, capital-gains and property taxes may still apply). Betting, casino and lottery activities are exempt from VAT under Group 11 because they are taxed under their own separate regimes rather than through the VAT chain.

Schedule 2 lists the supplies that are taxable but at a rate of 0%. Under Section 7 of the VAT Act 2052, the schedule is short and centred on exports and export-equivalent transactions. The three core limbs are: goods exported outside Nepal; services supplied outside Nepal; and goods and services supplied in a way that earns payment in convertible foreign currency. In addition, supplies to certain privileged bodies — such as United Nations agencies and diplomatic missions accredited to Nepal — and specified supplies to and within Special Economic Zones (SEZs) are treated at 0% under the Act and related rules.

The purpose of zero-rating exports is to make Nepali goods and services competitive abroad by ensuring they leave the country entirely free of Nepali VAT. Because the exporter charges 0% output VAT but has paid input VAT on materials, energy, freight and services, that input VAT would otherwise be stranded. Zero-rating solves this by allowing the exporter to reclaim the input tax in full — the mechanism that generates the large VAT refunds seen in Nepal's export sectors.

This is exactly why the exempt/zero-rated line matters for input recovery. Both charge the customer no VAT, but only zero-rating (Schedule 2) preserves the right to recover input VAT. If exports were merely exempt rather than zero-rated, exporters would carry unrecoverable input VAT and Nepali goods would be more expensive abroad — defeating the policy.

For a registered VAT taxpayer, output VAT (collected on sales) is offset against input VAT (paid on purchases), and only the net is paid to the IRD. When input VAT exceeds output VAT — as it structurally does for a zero-rated exporter — the taxpayer is in a credit position. The Act's refund mechanism then allows that excess to be recovered.

For exporters, whose sales are zero-rated, an immediate refund route is available because there is little future output VAT to absorb the credit; the IRD is required to process an exporter's refund claim within 30 days. For other taxpayers in a continuous credit position, the excess is first carried forward and set against VAT payable over the following months, and a refund can be claimed after the credit has persisted for the statutory period (broadly, four consecutive months of continuous credit); non-exporter refunds are to be processed within 60 days. Late refunds attract interest payable by the government.

None of this is available to a purely exempt supplier. Because exempt output sits outside the VAT system, there is no output VAT and no right to input credit or refund — the input VAT is simply a cost. A mixed business making both taxable and exempt supplies must apportion its input VAT, recovering only the portion attributable to its taxable (including zero-rated) activities. Always confirm current thresholds, notified lists and procedural time limits with the IRD, because the Finance Act revises these details annually.