Formalization of the digital economy is becoming challenging, increasing cases of illegal transactions
लगानी न्यूज
Kathmandu. Illustration 1: Only 240 e-commerce businesses in Nepal are listed in the Department of Commerce. About 700 businesses that have gone through the process are yet to be listed and no government agency has any information about the number of such businesses that have not gone through the legal process.
Illustration 2: Only 21 foreign companies dealing in electronic services are registered in Nepal. Although the company with an annual turnover of less than Rs 30 lakh is exempt from e-service tax, it has not been investigated which company has a turnover of more than Rs 30 lakh and which is less. They are completely outside the tax net.
Illustration 3: Transaction of crypto and other virtual assets is illegal in Nepal. However, investigations are underway on the suspicion that more than six hundred and fifty such transactions took place in the last five years alone. It is suspected that not only tax evasion but also money laundering, hundi and capital flight activities are suspected from such transactions.
These three examples above show that the regulatory and managerial mechanisms of the state are far behind in the race of digital transformation of economic activities in Nepal.TAG_OPEN_div_143 Although the country has adopted a policy to promote the digital economy, the old methods and processes made by keeping the physical world at the center are not supporting it to give it the right direction and speed.
The rapid expansion of information technology is questioning not only the structure of the world economy but also the basic philosophy of the tax system. Traditional international tax systems, based on concepts such as borders, physical presence, and permanent institutions, have failed to keep up with the realities of the digital economy. Digitalization is no longer just one sector of the economy, but deeply embedded in all economic activity. Still, the challenges that digital business models bring to the tax system are different and more complex than traditional businesses. Massive transactions without a geographical presence, reliance on intangible assets, user data and participatory value creation have complicated the question of which country should have tax rights.
The tax challenges of the digital economy are in both direct and indirect tax areas. On the indirect tax side, there is a problem in the collection of Value Added Tax (VAT) and GST on the transaction of cross-border businessmen with consumers. In this context, consensus on destination principles and the development of a simplified collection mechanism can be considered positive progress. However, the challenge of direct tax does not seem to be solved yet. In particular, there is a lack of international consensus on the nexus (basis for taxation), profit sharing and income classification. Nepal has not yet fully formalized this area.
Nepal introduced the concept of Digital Service Tax (DST) in 2079 BS. As per the provision, DST will be levied at the rate of two percent on the transaction value of the electronic service provided by a non-resident person to the users in Nepal and the transaction value of the data collected from the users in Nepal. This system has reached the review stage within three to four years of its implementation. The Inland Revenue Department (IRD) has stated that it is preparing to adopt a system of taxation of electronic transactions based on the concept of ‘significant economic presence’.
Currently, there are only 21 foreign companies under the purview of DST.TAG_OPEN_div_135 According to the Digital Service Tax Work Procedure, 2082, the electricity service provided to the users in Nepal and the total sum of the data collected from the users in Nepal is up to Rs 3 million annually. However, the tax administration does not know which companies have a turnover of less than or more than Rs 30 lakh. Dilip Gautam, chief tax administrator at the Large Taxpayers Office, said that no study has been conducted to find out the number of companies other than those registered with the DST in Nepal.
} Similarly, the study has not been done to find out whether the tax amount paid by the registered companies matches with the actual transactions made by them or not. “We don’t have a mechanism to check which companies have done how much kind of electronic service transaction in Nepal. The tax is determined on the basis of the details of the transactions provided by the registered company. But we don’t have information about the transactions of the unregistered companies,” Gautam told RSS. Although the companies providing electronic services are exempt from tax on annual transactions of less than Rs 30 lakh, they have not been able to register them.
The use of TAG_OPEN_div_131Virtual Private Networks (VPNs) is another challenge in this area. It is only when the service is provided using the Internet Protocol address within Nepal that the amount of transaction from which service provider is revealed. However, Prakash Poudel, director of the Inland Revenue Department, says that it is difficult to bring VPNs under the ambit of regulation.
The e-commerce sector within Nepal is not fully taxed.TAG_OPEN_div_129 According to the Department of Commerce, Supplies and Protection, 238 firms have been listed in the department to carry out electronic transactions. The number of firms doing such business but not getting listed is almost three times higher.
“About 700 firms have applied for listing. They could not be listed due to lack of documents and lack of process,” said Bharat Prasad Acharya, director of the department. Advertisement of goods and services through social networks without registration with any agency has not been brought under the purview of regulation. Director Acharya said that no action has been taken against anyone so far despite complaints of consumers being cheated by such e-commerce businesses that are not registered with any agency.
Now the method of buying goods through electronic means is becoming popular worldwide. Although the Electronic Trade (E-Commerce) Act, 2081 has incorporated the transactions done through electronic means within Nepal, it does not include the business from abroad. The Department of Customs itself accepts the possibility that the goods entering Nepal may be entering Nepal without properly evaluating the goods entering Nepal while purchasing directly from the international e-commerce site.
Import of goods and services through electronic means weakens the possibility of customs control and there is no physical presence of the firm. If the importer sells the service, he can adjust the VAT paid by self-declaration while importing. But if the importer is the final consumer, he is not willing to self-declare the import and pay tax.
However, Kishor Bartaula, information officer at the Department of Customs, claimed that the goods coming through postal and courier will come through customs clearance.TAG_OPEN_div_121 “There was a kind of arrangement for the luggage that the passengers themselves carried. But the goods coming through courier are subject to customs clearance,” he said.
TAG_OPEN_div_119 Not only goods are being traded but services are also being bought and sold through online. According to the World Trade Organization (WTO) data, Nepal’s digital services exports amounted to US$ 414 million in 2024. At the same time, the import of services provided by Nepal through digital means is equivalent to US $ 283 million. That is, Nepal’s exports are more than imports in this sector.
With the change in the way of business in recent times, the style of publicity has also changed. The number of online advertisements is increasing more than the old style of advertising. But the law in this regard has not been made yet. It has been more than two years since the Advertisement Board submitted the draft of the Act to the Ministry to regulate advertisements on social networks, but it has not been approved and implemented. Information Officer of the Advertising Board, Dilliram Subedi, said that there has been no study so far on the size of the market for online advertisements in Nepal and how much revenue the country is losing from it. “In the absence of laws, we have not been able to regulate online advertisements. It is also not clear how much it has turnover and how much potential revenue it has,” Subedi said.
Now the election campaign is done through social media. However, it has not been investigated whether such propaganda is within the ambit of the law. During the elections to the House of Representatives and State Assemblies, 2079, if you look at the advertisement ‘Meta Ad Library Report’ only from Facebook, you can see ‘sponsored posts’ (advertisements made by paying dollars) from about 6,000 pages and profiles. At that time, the Nepal Rastra Bank (NRB) had allowed the dollar card to spend only five hundred US dollars annually. But the Meta Ad library shows that most candidates have exceeded that limit.
TAG_OPEN_div_113 So far, there has been no investigation into how the candidates spent more dollars than the facilities provided by the Rastra Bank. But it seems that this kind of publicity has been involved in illegal hundi transactions. The ‘Study Report on Taxation in Online Business, 2079’ prepared by the then Nepal Revenue Advisory Committee, states that people have been paying money from abroad to purchase advertisement services on social networks and have been paying the amount to their relatives or friends in Nepal. ”
Various government studies have also pointed out that with the increase in the use of digital technology in Nepal, it is imperative to bring all the sectors related to it under the purview of registration, regulation and research.TAG_OPEN_div_111 The report of the High Level Suggestions Committee on Tax System Reform, 2080 BS has pointed out the need for continuous study and regular research to protect Nepal’s tax base due to the cause of electronic economy.
“A specialized structure should be immediately established in the Inland Revenue Department to study and investigate international taxation, value transfer, permanent establishment, study of sources of bodies and individuals and residents, study and research on international tax planning and evasion, and to collect and analyze information,” reads the committee’s report.TAG_OPEN_div_109
The Commission has also suggested to amend the laws and regulations to maintain harmony with the international system and fix tax rates by developing a mechanism for information exchange and cooperation with various countries to control the erosion of the tax base based on electronic transactions.TAG_OPEN_div_107 ।
Chairman of the High-Level Advisory Committee on Tax System Reform, Bidyadhar Mallik, said that the development of digital economy in Nepal should be immediately regulated and allowed to be expanded rather than revenue collection through formalization.TAG_OPEN_div_105
“They should be prioritized more on developing and increasing the use of business models rather than being suppressed by our legal and administrative regulations. Later on, they will be brought into our system. The infrastructure should be prepared,” he said. He stressed on the need of developing mechanisms to gradually formalize the knowledge-based economy by formulating a policy to promote knowledge-based economy.
Similarly, Mallik said that minimum tax should be levied on the data coming out of Nepal.TAG_OPEN_div_101 “We can track how much data has gone out of Nepal through various internet service providers and servers. It would be easier to formalize this sector if minimum tax could be imposed on the basis of the source of data,” he said. According to him, there is also a lot of administrative hassle in registering and paying tax to the companies doing electronic business in Nepal.
Increasing incidence of illicit trade
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According to the Strategic Analysis Report, 2025 (Strategic Analysis Report, 2025 Virtual Asset, 2025) released by the Financial Information Unit of Nepal Rastra Bank, the NRB has received information about 658 suspicious transactions in the last five years alone.TAG_OPEN_div_97 Transaction of virtual assets is illegal in Nepal.
Cryptos such as Bitcoin, Ethereum, stablecoins, utility tokens, and other tokenized assets are included in the virtual asset. It is used for trading, transferring, payment and investment.
According to the report, 13 such transactions and activities were reported in 2021, 173 in 2022, 138 in 2023 and 252 in 2024.TAG_OPEN_div_93 Similarly, the NRB has received information on 82 transactions and activities as of July 16, 2025. The Rastra Bank has been forwarding the suspicious transactions and activities received in this information to various agencies.
According to the report, in the last five years, the NRB has sent 232 to the Nepal Police, 115 to the Department of Revenue Investigation, six to the Department of Money Laundering Investigation, three to the Payment Services Department of the Rastra Bank and one to the Inland Revenue Department.TAG_OPEN_div_91
Basudev TAG_OPEN_div_89 Bhattarai, director of Nepal Rastra Bank and chief of the Financial Information Unit, said that the NRB had provided the information about the suspicious transaction to various investigative bodies and further investigation would be carried out from those agencies.
“We have provided the details related to the transactions of suspicious virtual assets to various agencies that came to our notice. Further investigation, prosecution of cases will be carried out in court and it will be confirmed whether such transactions have taken place or not,” he said.
Divided World
The digital economy has brought the global tax system to a historic turning point. But the world community is still in the process of finding common answers. The global approach to how to measure the value created by digital business models and how to make them taxable in which countries is divided. This division has further complicated the process of international tax reform.
In particular, the debate over whether or not user participation should be considered a source of value creation is at the heart of tax reform. If user data and engagement are considered the basis of value creation, then the current tax structure will not be able to take it into account. But doing so would require a redefinition of the traditional principle of balancing profits and economic activity, which many countries seem reluctant to do. In the midst of this uncertainty, some countries have started unilaterally implementing digital tax measures.
Measures such as online advertising tax, digital services tax, withholding tax, diverted profits tax have already been implemented in India, France, the UK, Australia, and other countries.TAG_OPEN_div_79 Various international studies have shown that while such unilateral measures may increase revenue in the short-term, they increase the risk of double taxation, trade disputes and tax wars in the long run. As a result, tax reform is no longer only a technical issue but also a multi-dimensional issue linked to national interest, revenue pressure and political decision.
The impact of digitalization is not limited to international tax laws.TAG_OPEN_div_77 The gig and partnership economy has changed the status of the taxpayer. While big data, platform collaboration, and digital nudge have the potential to increase tax compliance, blockchain and cryptocurrencies are also posing new risks to tax transparency. –Hemant Joshi/RSS
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