PAN vs VAT in Nepal: when a freelancer or small shop must register for VAT
PAN is the taxpayer ID everyone needs. VAT is a separate registration triggered at Rs 50 lakh turnover for goods, Rs 30 lakh for services. Here is which you need, and when.
A friend who runs a small interior-design studio crossed Rs 35 lakh in billings last year and kept issuing the same PAN bills she always had. Her accountant caught it in Asar: services over Rs 30 lakh meant she should have registered for VAT months earlier. She now owed 13% on invoices where she had never charged the client a paisa of it. The clients were not coming back to top up. The VAT came out of her margin.
The mix-up is common because PAN and VAT sound like two flavours of the same thing, and a lot of small businesses treat "I have a PAN" as the end of their tax setup. They are different registrations with different triggers. Getting the line wrong is one of the more expensive mistakes a growing freelancer or shop can make, precisely because it is invisible until the back-tax bill arrives.
PAN and VAT are not the same thing
A PAN is the Permanent Account Number, the unique taxpayer ID issued by the Inland Revenue Department. Registration is free. Almost everyone with income needs one: salaried employees (a personal PAN), and businesses (a business PAN for the firm). It identifies you to the tax system. It does not, by itself, make you collect any tax.
VAT is a 13% tax on the value you add when you sell goods or services. Registering for it is a second step, taken on top of a business PAN, and it changes your obligations: you charge 13% on sales, you issue VAT invoices, you file returns monthly, and you can reclaim the VAT you paid on purchases. Exports, including IT services sold abroad, are zero-rated.
So the question is never "PAN or VAT." It is "I have a PAN; do I now also need VAT?" For most small operators the answer is no, until a threshold says otherwise.
The threshold that triggers VAT
Two numbers decide it, based on turnover over the last 12 months:
| Business type | Mandatory VAT registration above |
|---|---|
| Goods (also vehicle rental, carriage) | Rs 50 lakh |
| Services, or mixed goods + services | Rs 30 lakh |
A third trigger sits alongside them: taking a business loan above Rs 10 lakh also requires registration. Once any trigger fires, you have 30 days to register.
One warning, because it bites people. A lot of websites, and even some law-firm pages, still quote Rs 20 lakh as the service threshold. That figure is outdated. The current service and mixed threshold is Rs 30 lakh. If you are reading a guide that says Rs 20 lakh, it has not been updated. The Rs 50 lakh and Rs 30 lakh figures are the ones in force for FY 2082/83, and the budget did not change them or the 13% rate.
The businesses that must register from day one
Turnover is not the only path. Certain businesses must register for VAT from the first transaction, regardless of how little they make, when they operate in a metropolitan city, sub-metropolitan city, or municipality. The list is long and updated annually, but the recurring names include:
- Liquor, wine, and tobacco
- Hardware, sanitary, electronics, furniture and furnishing
- Automobiles and motor parts
- Marble and dolomite, crushers, sand and stone
- Software and software development
- Educational consultancy
- Accounting, audit, and tax-consultancy services
- Catering, party palaces, restaurants with a bar
- Health clubs, discotheques, parking services
If you are a consultant or run a service business in this list, the Rs 30 lakh threshold does not protect you. You register on day one. One source-hygiene note worth knowing: this compulsory list lives in the VAT Rules and the annual Finance Act, not in "Schedule 1" of the VAT Act, which is actually the list of VAT-exempt items (rice, medicines, basic education, financial services). Several blogs confuse the two. Confirm your specific trade with the IRD rather than a forwarded PDF.
What changes when you become VAT-registered
The jump from PAN-only to VAT-registered is a real step up in admin, so know what you are signing up for.
| PAN-only | VAT-registered | |
|---|---|---|
| Bill issued | PAN / abbreviated bill | VAT invoice |
| VAT charged | None | 13% on sales |
| Returns | Income-tax return | Monthly VAT return + income tax |
| Input VAT | Cannot reclaim | Reclaim VAT on purchases |
VAT returns are filed monthly, within 25 days of the end of each Nepali month. Certain specified taxpayers can apply to file every four months instead. VAT due above Rs 10 lakh has to be paid by cheque or electronically, not in cash. Miss a filing and the charge is 0.05% per day or Rs 1,000 per period, whichever is higher.
The one upside of VAT registration is input credit: the 13% you pay on business purchases can be set against the 13% you collect on sales, so you only remit the difference. That is why some businesses register voluntarily below the threshold. It mostly pays off when your customers are other VAT-registered businesses that need a VAT invoice anyway. If you sell to ordinary consumers, adding 13% just makes you 13% more expensive than an unregistered competitor.
Freelancers and consultants: the special case
This is where most confusion lands, so take it slowly.
If you provide services, your VAT trigger is the Rs 30 lakh turnover line, unless your work falls in the mandatory list above (educational consultancy, accounting and audit, and software development all do, in city areas). Below Rs 30 lakh and outside the list, a PAN is enough.
If you export services, including IT or design work billed to foreign clients, those exports are zero-rated for VAT, so the VAT side is usually a non-issue. The thing freelancers actually trip over is a different tax entirely: foreign-currency freelance income received through banking channels is taxed at a 5% final income tax, deducted by the bank. Below Rs 40 lakh that 5% is full and final, with no return to file; above it you file a return. That Rs 40 lakh is an income-tax line, not a VAT threshold. The mechanics are in the freelance and side-income tax post and, for content earners, the creator income tax post.
The three numbers people confuse
Rs 30 lakh, Rs 40 lakh, and Rs 1 crore all float around freelancer and small-business tax talk, and they are not the same line.
| Number | What it actually is |
|---|---|
| Rs 30 lakh | VAT threshold for services/mixed; also the income-tax line between the simple D-01 and D-02 returns |
| Rs 40 lakh | Income-tax filing line for the 5% final tax on foreign-currency freelance income (not VAT) |
| Rs 1 crore | Income-tax turnover line for the D-03 return (not VAT) |
Only one of them, Rs 30 lakh, is a VAT figure. The other two are income-tax lines, and mixing them up is how people end up either over-registering or missing a real obligation. Filing the right income-tax return at each level is covered in the IRD online filing walkthrough. And none of this is TDS, which is income-tax withheld at source on your behalf, explained in the TDS post.
What you actually need to know
- A PAN is not VAT. Almost everyone needs PAN; only businesses past the threshold or in a mandatory category need VAT. Do not register for VAT you do not owe, and do not assume PAN covers you once you grow.
- Know your number: Rs 50 lakh for goods, Rs 30 lakh for services. Track turnover on a rolling 12-month basis and register within 30 days of crossing. The Rs 20 lakh figure you may have read is out of date.
- If you are a consultant in a city, check the mandatory list first. Accounting, audit, educational consultancy, and software work can require VAT from day one, regardless of how small you are.
Unsure whether your specific trade hits the mandatory list, or close to the threshold and wondering when to register? Email parjanya57@gmail.com.
This post is part of the Nepal Money Basics guide — the earn-more-and-reconcile-the-tax section.