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The government’s announcement in the upcoming fiscal year’s budget to impose a 5 percent VAT on electricity sales has generated optimism among energy developers. The provision is expected to significantly reduce the construction cost of hydropower projects and open new avenues for private sector investment.

Following the government’s announcement that a 5 percent value-added tax (VAT) will be levied on consumers using more than 50 units of electricity per month from the next fiscal year, discussions have begun over its implications. While consumers will have to bear an additional tax burden, the arrangement is seen as a major relief for hydropower producers.

The long-standing demand of energy producers for either VAT refunds or VAT adjustment has effectively been addressed through this new provision. With VAT now applicable on electricity sales, all hydropower projects will need to register for VAT. This will allow developers to offset the 13% VAT paid during project construction - on items such as cement, steel rods, machinery, and consultancy services - against the VAT collected from electricity sales.

According Deputy General Secretary of the Independent Power Producers’ Association, Nepal (IPPAN), this arrangement could reduce project costs by around NPR 15 to 16 million per megawatt on average. Lower project costs mean quicker returns for investors and improved bankability of projects.

Although the tax on electricity sales has been criticized from the consumer’s perspective, it has been described as a historic relief for energy producers. It is expected to enhance the competitiveness of Nepal’s hydropower sector and further attract private investment.

Consumers argue that while the measure to reduce hydropower project costs is positive, the benefit of adjusting VAT paid during construction should ultimately be passed on to consumers. They say the current arrangement instead adds a 5 percent financial burden to monthly electricity bills.

They further argue that it is unacceptable to impose additional VAT even on electricity generated within Nepal using domestic resources and private investment.

While reforms in the energy sector, investment promotion, and cost reduction are necessary, consumers say policies should be balanced and consumer-friendly so that the direct impact does not fall on their wallets.

urjasanchar