Clear Tax Laws Needed For E-Commerce Business

Nepal’s digital economy has been growing at an expeditious rate, fundamentally changing how business is conducted today. As internet access expands to more Nepalis, more prefer to conduct business through this new mode. A recent report by Nepal Telecommunications Authority revealed that about 22.8 million Nepalis have access to the internet, showing the explosive potential digital economy carries.

Digital business operations in Nepal

Today, Daraz, Pathao, Foodmandu, and Food Mario have become household names in big cities like Kathmandu. With their entrance and expansion in the market, we have seen a steady evolution in technology and businesses. Nepal Rastra Bank revealed that an astonishing 112,706 e-commerce transactions worth Rs. 8.2 billion were made during one single month in 2020. It is safe to assume that we are fastly leaving behind the world of traditional purchase methods. The Business-to-Business (B2B) operations that conduct business between two or multiple firms and Business-to-Consumer (B2C) operations that operate between Business to Consumer, more popularly practiced by Daraz are predominant and ubiquitous models of e-commerce practice in Nepal. The growing popularity of these digital firms shows how they are becoming more a norm than an exception. Moreover, digital business operations have also paved an opportunistic path for online advertisement that connect business houses with potential consumers. Digital businesses operations have widened scope to not only Nepali companies but also foreign businesses to market their products via Nepal’s IP address.

How are these businesses governed

The back-to-back lockdown due to the pandemic has accentuated the e-commerce importance. However, these businesses, most of which lack physical presence, earn millions paying either minimal taxes or no taxes. Businesses have evolved. But the Nepali tax regime and governance have not. The latter therefore needs to catch up with the former. Despite massive growth and acceptance, the sector is still largely unregulated. No laws govern Nepali e-commerce businesses except some elementary rules such as mandatory registration and verification from the Office of Company Registrar. For example, we still have an Income Tax Act dating two decades back (Income Tax Act, 2058) that has failed to acknowledge the existence of online businesses. The IT Act classifies taxable income and taxable businesses under four different headings: 1) Business; 2) Employment; 3) Investment; and 4) Windfall Gain. The Act excludes any form of online business from its definition. In the absence of proper governing laws, numerous businesses are not guided properly and are left out of the tax bracket. This is especially true for businesses that are run exclusively online through popular social media portals. Registered businesses suffer the consequences of competing with businesses that have no formal format. The government response to fill this loophole has been slow; recently, it introduced a bill to regulate e-commerce operation but the bill has failed to see any daylight. Online advertisements using Nepal’s IP address Except for popular services like Daraz, Foodmandu, Urban Girl, registered under the laws of the country, there are detectable non-resident as well as the resident companies that avail online services from the country’s IP addresses. Noticeable examples include many local online papers that are operating with or without registration that receive considerable numbers of likes and views. As the most viewed daily papers online, resident and non-resident companies put their advertisements on their web platforms, helping them earn important revenues. Most of these commissions, however, are not taxed because of the lack of specific laws that govern foreign online advertisements using country’s IP address. Likewise, Facebook and Instagram have become easy platforms for people to start an online page that deliver news, goods or services without registration. Users of these social sites can find various advertisements from local and foreign companies that are made through the country’s IP addresses; however as in the case of online papers, the revenue earned by people using these social sites through foreign/local advertisements or sale of goods remain largely untouched. The earned income is directly proceeded into individual account without being taxed.

What is needed

First and foremost, a clear understanding of how e-commerce works and how it is changing the economy and creating value is necessary. Once authorities understand the full extent of its impact can they begin to update the existing tax law or introduce new laws that can govern the sector. The definition of e-commerce/online businesses needs deliberation and incorporation in the Income Tax Act. Similarly, the provision of Tax Deduction at Source (TDS) needs to be more specific so as to cover services that involve resident and non-resident companies and people. Since the digital economy has rendered physical presence useless and unnecessary, the definition of permanent establishment needs to be broadened. Furthermore, it is necessary to identify how digital non-resident companies are availing services to Nepali IP users from Nepal. These companies need to be brought under the tax domain under Nepal's taxation laws. The definition of taxable income and taxable businesses need to be defined in a broader sense. To avoid any unnecessary burden and double taxation or charges on a single transaction of goods and services, it is necessary to determine whether the services availed by these businesses, the income generated, or the online transactions made is to be charged.