The government is considering scrapping value-added tax on electricity just months after introducing it, amid concerns that the tax would increase the burden on consumers.

The Ministry of Energy, Water Resources and Irrigation said on Monday that Energy Minister Biraj Bhakta Shrestha and Finance Minister Swarnim Wagle had reached an in-principle understanding on Sunday to remove VAT on electricity.

Shrestha also confirmed that discussions were underway to reverse the tax.

“There was public dissatisfaction over this as well. Discussions were already underway about withdrawing it,” Shrestha told Kantipur on Monday. “The government is now discussing its withdrawal. The Finance Ministry needs to take the proposal forward, after which the Cabinet will decide whether to withdraw the VAT.”

The government introduced VAT on electricity through the budget for the current fiscal year, imposing a five percent rate on household consumers and 13 percent on other users.

The move brought more than 2.6 million household consumers into the tax net, according to Nepal Electricity Authority data cited by the utility’s spokesperson Rajan Dhakal.

Of the household consumers, 1.998 million use up to 20 units a month, 421,000 use 21 to 30 units and 615,000 use 31 to 50 units. Another 1.075 million consume 51 to 100 units, 1.089 million use 101 to 250 units, and 442,000 consume more than 250 units.

The government had defended the tax as a way to raise resources for energy infrastructure.

At a press conference on May 31, shortly after the budget was presented, Finance Minister Wagle said the 5 percent VAT on electricity consumption above 50 units was introduced to help finance infrastructure development in the energy sector. It was the first time electricity had been subjected to VAT in Nepal.

Stakeholders, however, have questioned the logic of raising revenue for infrastructure by taxing electricity consumption. They have also warned that exempting consumption up to 50 units could encourage consumers who use only slightly more than that threshold to keep their consumption within the limit, while the tax would simply increase costs for those who cross it.

Wagle had earlier said the government could review the tax if it made electricity bills unaffordable. Speaking in the House of Representatives on June 19, he said the government was studying whether VAT should instead apply only to consumption above 100 or 150 units.

“Currently, those consuming up to 50 units do not have to pay it. We are studying whether to impose the tax only above 100 or 150 units,” Wagle told Parliament. “Before the tax comes into effect from July 17, we will move towards that.”

But the arrangement remained unchanged in the Economic Act 2026 and in the VAT collection directive for electricity services issued by the Inland Revenue Department. A public notice issued by the department on Monday also retained the provision exempting consumption up to 50 units while applying VAT above that threshold.

No formal decision has yet been made to remove the tax, although a minister said the issue had also been discussed in recent Cabinet meetings.

The government has already reversed another tax introduced this fiscal year. Less than a week after imposing a 5 percent equity tax on education and health services, Prime Minister Balendra Shah announced on social media on July 21 that it would be withdrawn. The Cabinet formally decided to scrap the tax the following day.

Shrestha has since been pushing for the withdrawal of VAT on electricity.

On July 29, the Nepal Electricity Authority board, chaired by Shrestha, formed a committee led by Anshukiran Shahi to review electricity tariffs, including the possibility of introducing seasonal pricing to reduce the impact of VAT on consumers.

The committee has yet to submit its report.

“We are still studying the issue. There were floods and other incidents in the meantime, and we were occupied with those,” Shahi said. “We will submit the report soon.”

The VAT issue also created confusion over electricity bills issued after the tax came into force.

The authority faced criticism after adding VAT to bills for electricity consumed in June, even though those bills were issued after the new fiscal year began. The authority sought clarification from the Inland Revenue Department.

In a public notice on Monday, the department said electricity consumed up to July 16 would not be subject to VAT even if the bill was received on or after July 17. Electricity consumed before July 17 was classified as an essential item under Group 2 of Schedule 1 of the Economic Act 2026 and was therefore exempt from VAT, it said.

The authority subsequently said it would adjust the amounts in bills issued in August.

Stakeholders say applying VAT to electricity, while exempting the first 50 units, could raise costs for consumers and place a greater burden on middle-income households. They also warn that the threshold could encourage more consumers to keep their usage within 50 units and distort consumption patterns rather than simply raising revenue.