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The Federation of Nepalese Chambers of Commerce and Industry (FNCCI) has urged the government to withdraw the value-added tax (VAT) imposed on electricity tariffs, warning that the measure is increasing production costs and putting additional pressure on businesses.

The private sector umbrella body has called for a review of the electricity VAT introduced in the current fiscal year 2026/27, as pressure grows from various sectors to scrap the tax.

Under the new provision, a 5 percent VAT is charged on domestic electricity consumption above 50 units, while industrial and commercial consumers face a 13 percent VAT.

FNCCI said electricity is a basic input for industrial production, trade and tourism, and that additional taxation on electricity directly affects production costs, operating expenses, cash flow and overall business competitiveness.

According to the federation, the impact is particularly significant for energy-intensive industries, small and medium-sized enterprises, hotels and tourism businesses, and firms operating on narrow profit margins.

Although businesses can claim input tax credits under existing tax provisions, FNCCI said many firms cannot immediately or fully adjust the VAT paid on electricity because of the tax adjustment and refund procedures, as well as the nature of their transactions.

FNCCI said this has placed additional pressure on working capital and could affect new investment, industrial expansion and employment generation. It also warned that higher business costs could eventually be passed on to consumers, contributing to further price pressures.

The issue has also drawn attention from the government. Last week, Energy, Water Resources and Irrigation Minister Biraj Bhakta Shrestha held discussions with Finance Minister Swarnim Wagle on removing VAT from electricity consumption.

FNCCI argued that at a time when Nepal is seeking to accelerate industrialization through greater domestic electricity consumption, import substitution and export promotion, higher energy costs could create additional challenges for private-sector investment and production expansion.

FNCCI also called on the authorities to ensure a regular, reliable and quality electricity supply and to reduce losses and damage to machinery and production caused by voltage fluctuations, sudden outages and other technical problems.

FNCCI has urged the government to consult extensively with the private sector before making a final decision on the electricity VAT. It also called for a simpler, more transparent and timely system for VAT adjustment and refunds.

The umbrella organization further requested that VAT collected on electricity be refunded, arguing that electricity should be viewed not only as a source of government revenue but also as essential infrastructure for industrial production, tourism development, employment generation and broader economic growth.