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The government is poised to collect only Rs 4.27 billion in revenue by imposing the controversial value added tax (VAT) on household electricity consumption, while adding a heavy cost burden to the general public.

A preliminary study carried out by the Electricity Regulatory Commission (ERC) has reported that the government will collect around Rs 4 billion by slapping VAT on household electricity use. Through the budget announcement, the government has imposed a five percent VAT on consumption exceeding 50 units per month, while the rate for industries is up to 13 percent.

The government has been criticized for taxing household electricity instead of subsidizing rates to encourage consumption. Responding to criticism from various quarters, it is considering raising the exemption threshold to 150 units.

According to the ERC, the government would collect Rs 3.50 billion in VAT if the threshold is set at 150 units, compared to Rs 4.27 billion at 50 units.

Experts have suggested that if the government needs funds to construct transmission lines, it could implement an “electricity infrastructure fee” as an alternative model. There are also complaints that VAT could directly discourage the growing use of electric stoves and electric vehicles among the public.

The ERC has warned that the VAT provision could have multi-faceted impacts on the sector. These include higher prices of manufactured goods, as industries are expected to pass the tax burden on to consumers.

Likewise, the ERC noted that VAT will directly affect household budgets. Unlike industries, households will not receive VAT refunds. Instead, they will face higher costs for services such as hotels, hospitals, schools, street lighting, drinking water, and transportation.

The measure could also undermine national consumption targets. Nepal’s per capita electricity consumption is currently only about 450 units, while the government aims to raise it to 1,500 units within the next decade. To meet this target, consumption must more than triple. However, under the new provision, consumers are discouraged from using electricity due to higher costs.

According to the ERC, VAT will also affect Nepal’s international commitments. The country has pledged under its Nationally Determined Contribution (NDC) to replace liquefied petroleum (LP) gas and promote electric vehicles. The added tax burden could directly hinder these goals.

The ERC has further raised concerns about transparency in the use of VAT revenue. There is no guarantee that the additional tax collected from electricity will be spent on strengthening transmission and distribution infrastructure. Much of the money, it warned, could instead be diverted to bureaucratic salaries and facilities.

The Electricity Regulatory Commission Act, 2017 grants the ERC full authority to determine and adjust electricity tariffs. Imposing VAT on electricity automatically increases the financial burden on consumers. However, the Inland Revenue Department and the Ministry of Finance have added VAT directly to the final bill without considering the ERC’s approval or role, raising questions about the commission’s legitimacy, the ERC report stated.