The Kathmandu Metropolitan City has not collected tax on scrap materials such as iron, plastic, glass, animal skins and bones for the past two fiscal years. The move was intended to ease the tax burden on scrap traders. But even after Kathmandu waived the tax, scrap leaving the Valley is still taxed by Dhunibesi Municipality in neighbouring Dhading district.

Because Dhunibesi lies along the main highway out of the Valley, scrap trucks leaving Kathmandu are required to pay the tax to R&R Bhaleshwar Trade Concern, a contractor authorised by the municipality.

The practice extends beyond Kathmandu metropolis. Scrap collected in 19 local units across Kathmandu Valley and Kavrepalanchok passes through Dhunibesi on its way out of the Valley, and is taxed even when the local governments where it was collected do not impose a scrap tax.

These 19 local units include 11 in Kathmandu district, namely Kathmandu Metropolitan City, Kageshwari Manohara, Kirtipur, Gokarneshwar, Chandragiri, Tokha, Tarakeshwar, Dakshinkali, Nagarjun, Shankharapur and Budhanilkantha. Lalitpur has six local units, including Lalitpur Metropolitan City, Mahalaxmi, Godawari, Bagmati, Mahankal and Konjyosom. But scrap from Bagmati, Mahankal and Konjyosom does not normally pass through Dhunibesi. Three of Bhaktapur district’s four local units, Bhaktapur, Madhyapur Thimi and Changunarayan, have not contracted out scrap tax collection. Suryabinayak is the only exception. Scrap from Dhulikhel and Banepa in Kavrepalanchok also leaves the Valley through Dhading.

According to experts, the arrangement not only undermines the principle of a unified tax system but also raises questions about its legality.  “Once a tax has been paid at one point, goods should move freely between provinces or local governments,” said fiscal federalism expert Khim Lal Devkota. “You cannot tax them again elsewhere.”

Nepal’s Constitution explicitly bars local governments from imposing separate taxes, fees or charges simply because goods cross into another local jurisdiction.

Article 236 of the Constitution prohibits any obstruction, tax, fee or charge on the movement of goods or extension of services from one province or local unit to another. It also bars any discrimination in the movement of such goods or services.

Tax expert Rup Khadka said the current practice runs counter to that constitutional provision. “Contracting out tax collection is also flawed. We had a similar system with the old octroi tax, which was collected by private contractors.”

He said such arrangements had often led to collusion between contractors and the authorities awarding the contracts. “Contractors could charge whatever they wanted, and weak oversight left the system open to abuse,” he said.

Dhunibesi charges Rs3 per kilogram on iron scrap, which comes to Rs3.39 including VAT.

Local governments are empowered to set tax rates through their municipal assemblies. Kantipur’s enquiries with most local governments in Kathmandu Valley found scrap taxes ranging from Rs1 to Rs2 per kilogram.

Dhunibesi, however, appears to charge the highest rate among them.

Dhunibesi’s chief administrative officer, Binod Kumar Khanal, acknowledged that the municipality collects tax on scrap coming from other local units. “We awarded the contract to R&R Bhaleshwar Trade Concern for Rs30 million for three years. The agreement runs until mid-July 2027,” Khanal said.

According to a source at Dhunibesi Municipality, the company collects more than Rs2 million a day in scrap tax. “That comes to more than Rs60 million a month and roughly Rs1 billion a year,” the source said.

Kathmandu, Lalitpur stop collecting scrap tax

Kathmandu Metropolitan City has not collected scrap tax for the past two fiscal years, according to Bimala Koirala, deputy director at the metropolitan revenue department. “We decided there was no point in collecting the tax once scrap collection centres were no longer operating,” she said. “The municipal executive decided this and the wards were informed accordingly.”

In a notice published on November 15, 2024, the metropolis said it would no longer renew registrations for scrap collection centres from fiscal year 2024-25.

Kathmandu had previously awarded a three-year contract for scrap tax collection to Maruti Dhuwani Sewa for Rs81.1 million in 2021.

Lalitpur Metropolitan City has also not collected scrap tax since fiscal year 2023-24. It collected the tax for part of that year before a legal challenge stopped the process, said Sahajit Rai, director of its revenue division. “Rs70 million to Rs80 million was collected at the time, but we could not continue after a case was filed in court,” he said. “We issued another public notice in fiscal year 2025-26, but the court issued an interim order stopping further action. The case is still pending.”

Rai said the municipal executive would decide whether to collect the tax this fiscal year.

Only Kageshwari Manohara, Banepa and Dhulikhel have issued public notices inviting bids for scrap tax collection for the current fiscal year. Most of the others are tied up in legal disputes.

Suryabinayak Municipality in Bhaktapur has continued collecting the tax because it awarded a contract two years ago. It gave Time Fame Achievnes Enterprises a two-year contract worth Rs15.5 million a year. The contract runs until mid-December.

Last year, lawsuits were filed against Nagarjun, Dakshinkali, Gokarneshwar, Kageshwari Manohara and Chandragiri municipalities as they began the process of awarding scrap tax contracts. Those cases remain pending.

In fiscal year 2025-26, only Kirtipur and Suryabinayak awarded contracts for scrap tax collection. Kirtipur awarded its contract to R&R Bhaleshwar Trade Concern. That contract expired in mid-July, and the municipality has not invited new bids.

At present, Suryabinayak is the only municipality in the Valley where a scrap-tax contract remains active. 

Most other local governments said legal disputes were the main reason they had stopped collecting the tax. As a result, they are losing millions of rupees in potential annual revenue.

Mohan Prasad Marasaini, chief administrative officer of Dhulikhel Municipality, said the municipality had not awarded a scrap contract since 2017 until last year. “We awarded a contract for Rs600,000 last year, but that agreement has expired,” he said. “We have invited bids again.”

What does the law say?

Section 61 of the Local Government Operation Act 2017 allows local governments to levy taxes on herbs, scrap and livestock. In a ruling on a case filed in fiscal year 2017-18 by 26 petitioners, including Om Shree Suppliers, the Supreme Court held that taxpayers should not have to pay the same tax twice once a receipt has already been issued by one local government.

Sources familiar with the dispute say a pattern of litigation has effectively prevented most local governments from collecting scrap taxes while leaving Dhunibesi and Suryabinayak municipalities, and Bagmati Rural Municipality in a position to continue doing so.

Last fiscal year, Jaya Mahadev Trade Concern, Shyameshwar Trade and Suppliers and Sudarshan Rokaya filed a case against Lalitpur Metropolitan City’s scrap tax collection. Shyameshwar Trade and Suppliers and R&R Bhaleshwar Trade Concern sued Dakshinkali Municipality. Saroj Shrestha, president of the Nepal National Scrap Traders and Entrepreneurs Association, filed a case against Nagarjun Municipality.

Time Fame Achievnes Pvt Ltd sued Kageshwari Manohara, while Darpan Business Concern filed a case against Gokarneshwar Municipality.

All the cases are sub judice. The petitions challenged the process of awarding contracts for scrap tax collection.

Traders squeezed by the tax

Mukesh Prasad Sah, a scrap dealer in Balkumari, Lalitpur, said he has been unable to collect scrap for the past two years.

He blames the high tax imposed on scrap leaving the Valley. A 12-wheel truck can carry around 20 tonnes of baled scrap. At Dhunibesi’s rate, Sah has to pay Rs60,000 in tax, excluding VAT, per truckload.

“Buying, collecting and storing 20 tonnes of scrap costs more than Rs1 million,” he said. “Once you add the truck fare to Birgunj or Bhairahawa, the tax and other expenses, the total comes to around Rs200,000.”

Companies pay a maximum of Rs56 per kilogram for scrap, excluding VAT, he said. After all costs are accounted for, traders can lose between Rs50,000 and Rs100,000 on a single shipment, Sah said. “Even if the tax were made more reasonable, the business would still be viable,” he said.