Starting a business in Nepal comes with a myriad of questions! And one question that we get most is : "Should I register my company with PAN or VAT?" and "What are the benefits of VAT registration?" These questions are so common that we now tell them about this even before they ask. We would say that this could be the second most important concerns for the new business owners and entrepreneurs. Can you guess what takes the top spot? 

Well, the top concern seems to be finalizing the name of the company itself. And when there are many founders, then this is even more time taking. 

But don't worry, we're here to simplify everything. So, let's begin with the basics: 

What is PAN?

Permanent Account Number (PAN) is a 9-digit unique identification number issued by the Inland Revenue Office to every business entity, including sole proprietors, firms, NGOs, and nonprofits, during tax registration. It is mandatory for all income-generating activities, meaning opting out of PAN registration is not an option. A lack of PAN doesn't excuse tax liabilities; taxes and late fees must still be paid.

What is VAT?

Value Added Tax (VAT) is a tax levied on taxable goods and services, typically set at 13%. Businesses can opt to register for VAT voluntarily, but it becomes mandatory if their annual turnover surpasses the minimum threshold. This tax is applied at various stages of production and distribution, ultimately passed on to the end consumer.

Requirements for VAT Registration

1. Goods Turnover Exceeding Rs 50 Lakh Per Annum:
   • Example: If XYZ Distributor sells smartphones, laptops, and other electronic gadgets totaling Rs 60 lakh in sales over the year, VAT registration is mandatory.
2. Service Turnover Surpassing Rs 20 Lakh Per Annum:
   • Example: If ABC Consultancy Firm generates Rs 25 lakh in revenue from consulting services in a year, it must register for VAT.
3. Mixed Turnover of Goods and Services Exceeding Rs 30 Lakh Per Annum:
   • Example: If a store makes Rs 20 lakh in clothing sales and Rs 15 lakh from alteration services, totaling Rs 35 lakh in turnover, VAT registration is required.
4. Importing Taxable Goods Worth More Than Rs 10,000 at a Time.
5. Taking a Commercial Loan Exceeding Rs 10 Lakh Per Annum.

Advantages of Registering for VAT

Registering for VAT in Nepal offers tangible benefits:

1. Input Credit: VAT-registered businesses can claim input credit for VAT paid on purchases. For example, a small retail shop selling electronics can deduct the Rs 10,000 VAT paid on goods from the VAT collected on sales, reducing the overall tax burden and improving cash flow.
2. Enhanced Credibility: Being VAT-registered enhances a business's credibility with customers and suppliers, potentially leading to increased trust and better business opportunities.
3. Financial Benefits: VAT-registered service businesses benefit from a lower Tax Deducted at Source (TDS) rate of 1.5%, compared to 15% for non-registered businesses.

These advantages highlight the importance and value of VAT registration for businesses in Nepal. By default, businesses get registered for PAN at the time of tax registration, whereas VAT registration is a choice, becoming mandatory only if certain thresholds are exceeded. Deciding whether to register for PAN or VAT depends on your business and sales volume. However, understanding the perks of VAT registration can significantly benefit your business.

At Khatapana खातापाना, we're here to guide you through the process. Reach out to us, and we'll help you make the right choice for your business.