Tax Refund Claims Rise, Payouts Remain Low

Tax refund claims by taxpayers who say they have paid more tax than required have increased in recent years, but the amount refunded by the government remains significantly lower than the claims, according to data from the Inland Revenue Department (IRD).

The department’s figures show that while refund claims have risen sharply over time, the actual amount refunded has remained almost unchanged. Refunds have stayed at similar levels despite a steep increase in claims.

For instance, in fiscal year 2017/18, taxpayers filed refund claims amounting to Rs 5.6 billion, of which the government refunded Rs 4.59 billion. In fiscal year 2024/25, refund claims surged to Rs 23.04 billion, but the government refunded only Rs 4.84 billion, IRD data show.

Over the past 11 years, annual refund claims have ranged from Rs 3.06 billion to Rs 23.63 billion, while the highest amount refunded in any single year stood at just Rs 5.37 billion. IRD officials say delays in decision-making on refund-related files have contributed to the growing gap between claims and actual refunds.

Nepal follows a self-assessment tax system, under which taxpayers calculate and pay their own taxes. If a taxpayer pays more than the amount due, the tax office is required to verify the payment and issue a refund. Individuals and institutions entitled to tax refunds under prevailing laws and regulations can submit applications to the Inland Revenue Department or its subordinate offices.

Diplomatic missions and individuals or institutions exempted from tax under various laws and regulations are also entitled to refunds of advance taxes paid on goods and services they purchase, even though they are not required to bear the tax burden.

According to the IRD, in fiscal year 2024/25, diplomatic missions, diplomats and diplomatic agencies filed refund claims of Rs 526.21 million with the department. Of this amount, only Rs 455.88 million was refunded.

Data from offices under the IRD show a similar trend in refunds related to export-based activities and development projects. In fiscal year 2024/25, taxpayers and projects under export and project-based arrangements filed refund claims totalling Rs 22.52 billion, but the government refunded only Rs 4.39 billion.

The department said Section 25 of the Value Added Tax Act, 1996, requires the government to refund VAT paid by diplomatic institutions, diplomats and agencies recognised by the Ministry of Foreign Affairs if claims are filed within three years of the transaction date. The government approved and implemented electronic procedures for VAT refunds to diplomatic missions, diplomats and agencies on November 6, 2023, and refunds are being processed under these guidelines.

Why Refunds Remain Low

IRD officials attribute the low level of refunds to delays in decision-making, taxpayers’ failure to submit required documents on time, and non-compliance with procedures. An official at the department’s tax refund section said many claims do not follow the prescribed process, leading to delays and partial approvals.

According to the official, taxpayers must submit complete documentation, including correct bank details, and clearly justify their refund claims. Failure to do so often results in refunds being approved for less than the claimed amount. Taxpayers who complete all procedures but still do not receive refunds can seek legal remedies.

Some tax officials also say the income tax refund process remains cumbersome, contributing to delays. Although this issue has been raised repeatedly with higher authorities, they say little progress has been made. A high-level commission on tax system reform has also pointed out that Nepal’s tax refund process is excessively complex and has recommended reforms, but these have yet to be implemented.

Nepal provides VAT exemptions on several export-oriented goods, including wool, yarn, woollen carpets and related processes such as spinning, dyeing, washing and weaving.

President of the Nepal Garment Association, Pashupati Dev Pandey, said businesses generally do not face major difficulties in obtaining tax refunds. He noted that refunds may be delayed at times due to pressure on the government treasury, but such delays are usually not prolonged. He also said refund claims sometimes appear inflated because some exporters submit excessive claims in anticipation of receiving higher refunds.

“The delay happens occasionally due to pressure on the state coffers, but it is not a serious problem. Refunds are provided based on valid claims,” he said, adding that refunds are issued based on the VAT paid by industries.