Electricity Charges Subsidized but Burdened with 13% VAT

July 7, Kathmandu – Although the government has offered concessions on electricity charges to benefit farmers and the general public, a 13 percent VAT has been imposed on irrigation and drinking water electricity fees.

To reduce farmers’ expenses and promote agricultural production, the government has been providing electricity at subsidized rates. Electricity used for irrigation is exempt from demand charges and available at a concession rate of NPR 2.50 per unit. Up to a 50% subsidy is provided based on electricity consumption, which the Ministry of Finance disburses through the Nepal Electricity Authority.

Similarly, various provinces and local governments have been offering subsidies on irrigation electricity fees. The electricity charges for drinking water also enjoy concessional rates. Electricity used in community drinking water systems is exempt from demand charges, with consumers charged only NPR 4.20 per unit.

However, despite these subsidies, a 13% VAT has been imposed on irrigation and drinking water fees. Since July 16, residential consumers have been charged a 5% VAT while all others face a 13% VAT, the Inland Revenue Department has confirmed.

According to the Finance Act, the Inland Revenue Department has amended the VAT regulations and established procedures related to electricity VAT. Department Director Prakash Paudel stated that residential users consuming up to 50 units are taxed at 5% VAT, while all other consumers are charged 13%.

The Nepal Electricity Authority provides electricity for agricultural and irrigation purposes at NPR 2.50 per unit. Electric motors and pumps for irrigation benefit from lower charges compared to other consumers, encouraging farmers to switch from diesel and petroleum fuels to electric irrigation.

Although residential consumers consuming over 50 units pay a 5% VAT, a 13% VAT applies to electricity consumption for non-residential, industrial, agricultural, and irrigation purposes.

Particularly in the Terai and Madhesh districts, farmers extensively use electric pumps for underground water irrigation. The additional tax will increase their monthly costs. Lift irrigation is also gaining popularity in hill regions.

While the government aims to expand electric irrigation to reduce diesel consumption, the increased tax burden in these areas appears contradictory to policy. Given Nepal’s strategy to boost electricity consumption during the rainy season, raising taxes on irrigation electricity could discourage usage.

Thousands of farmers nationwide rely on electric pumps for irrigation, especially for rice, vegetable, and cash crop production areas where electric irrigation serves as a vital resource. Farmers have expressed concern that the added VAT on subsidized electricity will increase production costs and ultimately affect agricultural commodity prices.

The government plans to review the electricity tariff structure through the Ministry of Energy, Water Resources and Irrigation in response to the VAT imposition. Proposals include raising the VAT exemption threshold from 50 to between 100 and 150 units. However, even with such adjustments, a 13% VAT will still apply to irrigation and drinking water electricity charges.

Officials from the energy ministry indicated this measure could both encourage higher electricity consumption and provide relief to consumers. Discussions are underway to differentiate tariff rates for the rainy and dry seasons to provide appropriate consumer relief.

The Water Supply and Sanitation Consumer Federation has formally requested the government to exempt VAT and provide relief on electricity charges. Federation President Rajendra Aryal highlighted that the 13% VAT currently levied on water user committees and management boards warrants exemption for these entities as well.

The federation has submitted a memorandum to the Prime Minister and the Energy Minister, urging them to remove the 13% VAT on electricity charges collected from drinking water and sanitation institutions and to grant tariff concessions.

They noted that the United Nations General Assembly recognized access to drinking water and sanitation as a human right on July 28, 2010, while Nepal’s Constitution under Article 35, Clause 4 guarantees every citizen’s right to clean water and sanitation, thereby arguing against VAT imposition.

The federation also raised concerns that non-profit community organizations managing water supply and sanitation services are being treated like commercial entities by imposing the 13% VAT.

Due to the high electricity charges and VAT, water supply and sanitation consumer organizations are under significant strain. The federation has called for VAT exemption, lower charges than those for irrigation electricity, and improved access to safe, sufficient, and affordable water services. Currently, there are 45,000 such consumer organizations across the country.