The VAT regime for digital transactions is being revised by the government.

The value added tax (VAT) system for electronic (or digital) payments is about to be modified by the government.

According to a draft amendment by the government, charging Value Added Tax (VAT) to Payment System Operators (PSOs) and Payment Service Providers (PSPs) could actually discourage rather than promote electronic transactions.

The "clearing house" was taken off the list of services covered by the Finance Bill 2081 that were eligible for VAT exemption by the then-finance minister, Barshman Pun, on June 15, during his presentation of the budget for the fiscal year 2081/82 before the legislature. All PSPs and PSOs are now subject to VAT after the clearing houses were taken off the list.

Following this agreement, on July 1st, Phone-Pay and Nepal Clearing House (NCHL) would begin charging 13 percent VAT on the settlement fees collected during financial transactions.

Bank-run Payment Service Providers (PSPs) were not subject to VAT, but some PSPs were already registered for it. All digital transactions are now subject to VAT, though, as a result of the government's budgetary arrangements. Interbank and interdigital wallet transactions have therefore become costly.

Cashless transactions are rising in tandem with the growth of electronic payments. But there's no regulatory framework to support it.

This sum is deducted straight from the customer's account because banks are not registered to collect VAT. Clearing and settlement services providers NCHL and Phone Pay raised their rates by 13 percent starting on July 1.

After taxes, Phone Pay now charges Rs 11.30 paise for interbank financial transfers, compared to Rs 10 in the past. NCHL now charges Rs 9.4 paise instead of the previous Rs 8.

Following the government's imposition of VAT on digital payments, service providers such as phonepay, eSeva, Khalti, Connect IPS, and others raised their fees. Every time a user transfers more than 100 rupees to another user, Esewa and Khalti charge a 10 rupee fee.

Three such transactions per day or up to thirty transactions per month are free of charge; any more transactions incur a 10 rupee fee.

Since the implementation of VAT on the service charges of all digital transactions has impeded the growth of electronic payments and negatively impacted customers, the government is preparing to alter the VAT system.

According to sources, Prime Minister KP Sharma Oli has asked the Ministry of Finance to change the VAT system. Prime Minister Oli hinted that research was being completed to repay the VAT in a post he posted on the social media platform Facebook on Sunday.

The prime minister noted that Abin BK of Jajarkot, who conducts five or six transactions every day for 100 or 50 rupees, complained that he had to spend 60 or 70 rupees every time he had to pay an 11 rupees 30 paisa fee.

In the aforementioned Facebook post, the prime minister added that BK had proposed eliminating these fees, citing the fact that this is the reason they are spending an additional $1,200 to $2,200 a month.

"I'm talking about offering free modest digital transactions to the appropriate authorities. The Prime Minister said, "Please let the government know about your issues in this manner."

The Prime Minister stated that the VAT levied on small transactions should be eliminated because even minor ones are now conducted cashless owing to the ease of the Internet.

Bishnu Rimal, the prime minister's chief political advisor, similarly posted a request for recommendations on social media six days ago. He claimed that when a customer pays digitally for ten rupee biscuits, banks remove thirty rupees and add thirteen percent VAT.

Should such a fee be waived for transactions under 5,000? He said, "I want suggestions from everyone."

Cashless transactions are rising in tandem with the growth of electronic payments. There isn't a policy that supports it, though. As a result, the Ministry of Finance has likewise decided to alter this tax strategy.

Various solutions to abolish the additional tax are presently being studied, according to Ministry of Finance sources. Two solutions, according to officials, are being considered. One way to do this is to set up a system wherein the tax is not applied to transactions over a specific threshold, and another way is to set up a system whereby the tax is not applied to a specific number of transactions per day.

"The tax cannot be removed completely, but various options are being discussed so that small-scale digital payments are not discouraged," according to a source in the finance ministry.

There is a proposal to alter the current policy, which has increased the cost of service charges and placed additional financial pressure on regular consumers, to be submitted to the Council of Ministers.

The Value Added Tax Regulations will be changed, a Prime Minister's Office official has stated. Although the budget called for taxes to be imposed by altering the Value Added Tax Act in the Economic Act-2081, the Council of Ministers is currently trying to amend the regulations rather than the Parliament.

The government was advised by Nepal Rastra Bank to eliminate VAT following the imposition of a service charge on digital transactions.

According to Ramu Poudel, a spokesman for Nepal Rastra Bank, the rise in electronic payments will improve the transparency of the financial and economic systems and eventually aid in the expansion of government revenue.

According to Rashtra Bank, everyone should be able to conduct digital transactions because they are simpler, safer, and more transparent than cash transactions.

Spokesman for Rashtra Bank Poudel thinks it's time to talk about the topic of promoting digital transactions up to a point.

In his words, "it is better to encourage and promote digital business and make it accessible to everyone." He added that "when the business is recorded, it gets formality and in the long run it would contribute to the government's revenue."