Starting next fiscal year, a 2 percent digital service tax will be charged on services provided over the internet to Nepali consumers by non-resident persons.

Electronic services such as gaming, video, music and app downloads, streaming services, cloud services and other services are taxable if the annual turnover exceeds Rs2 million.

"Digital service providers such as YouTube, Facebook, Twitter, Netflix and others will have to register in Nepal from July 17, the beginning of the new fiscal year 2022-23," said Raju Prasad Pyakurel, information officer at the Inland Revenue Department and director of the Taxpayer Service Section.

He refused to offer any details as to what step the government would take if such foreign e-businesses refuse to register.

The guidelines on Digital Service Tax issued by the Inland Revenue Department under the Ministry of Finance will come into effect from Sunday, July 17.

“This move is intended to bring foreign service providers into the country’s tax net,” said Pyakurel. “We have been receiving informal queries from several service providers about the new law.”

The 183-day rule is one of the criteria used to determine non-citizens for tax purposes, according to the Income Tax Act 2002.

“This is the beginning,” Pyakurel said. “There are some provisions to fine those who fail to pay taxes on time. But this does not mean the government is trying to constrict social media usage. We want to bring non-citizens providing their services into the tax system.”

The 59th annual report of the Office of the Auditor General unveiled on Wednesday states that Nepal has not been able to collect taxes from different apps that are providing digital services in Nepal from abroad since they are not identified and registered in the country.

Since they provide their services in Nepal, they need to be taxed under the country’s laws.

A huge amount of money goes out of the country for using various apps such as YouTube, TikTok, Google Meet, Zoom and Microsoft Teams, among others, according to the audit report.

“In the absence of a legal gateway to pay the operators of such applications, payments are being made through Paytm, PayPal and credit cards by using the international electronic payment medium.”

According to the new guidelines, digital services include advertisement service; films, television, music, over the top (OTT) and other media services based on membership; data archive service; cloud service; gaming service; mobile application related service; online marketplace and things and services provided through it; data and photo download service; education, consultancy, skill development and training service; and e-book, e-library and e-paper services, among others.

“Digital services provided to Nepali consumers” refers to those services provided inside Nepal, meaning the billing address is in Nepal; if payment is done through a Nepali bank account or through any tools operated by an institution authorised by law.

This also includes payments made through debit card, credit card or any other medium issued by a Nepali bank or any other institution authorised by law or if the service is being received by using an Internet Protocol Address located in Nepal and those services received by using a SIM card with a Nepal telecommunication code or landline.

A taxpayer who pays taxes as per the new guidelines will not have to pay taxes as per the Income Tax Act 2002.

The department has also implemented the working guidelines on value added tax applicable to digital services for non-resident persons.

According to the guidelines, a non-resident person providing digital services inside Nepal and having an annual transaction of more than Rs2 million is required to pay 13 percent VAT.

The digital service tax should be paid through an online medium within three months of the end of the fiscal year.

If the tax is not paid by the stipulated deadline, a 15 percent fine will be charged, according to the guidelines.

Industry insiders say the guidelines introduced to raise taxes should not regulate social media and curtail freedom of expression.

“While it is important to bring digital services under the tax net, any such guidelines should not be used to limit social media platforms or undermine freedom of speech and expression,” said Taranath Dahal, executive chairman of Freedom Forum, a civil liberty group that advocates free speech.

"There were doubts about the government’s intention when it launched the Information Technology Bill three years ago," said Dahal. “The government should remove all provisions that curtail freedom of expression in the Information Technology Bill and pass it as soon as possible.”

The Information Technology Bill, which was passed by the parliamentary Development and Technology Committee in December 2019 and has remained idle in Parliament since then, has also provisioned social media companies operating in Nepal to be registered locally and pay taxes on the income they make from Nepali customers.

Last February, the Ministry of Communication and Information Technology prepared a directive which gave unlimited powers to the Department of Information Technology to control social media, its operators and users.

Most of the provisions in the draft were similar to those in the controversial Information Technology Bill.

“The bill is still in Parliament. A rule was needed to bring foreign digital service providers under the tax system,” said Prem Sharan Shrestha, director general at the Department of Information Technology.

“While the immediate intention of the government in bringing the guidelines seems to be collecting taxes from foreign digital service providers, we still suspect its intention is to strictly regulate social media platforms,” said Rastra Bimochan Timalsena, an advocate who also runs a YouTube channel named Random Nepali. "Nepal is not a big market for foreign digital service giants. However, the question is about the hassles they would potentially face to be registered in Nepal.”

"And what if they don’t agree to be registered? Will they be banned or allowed to continue their service?” he questioned.