VAT refund process for USAID Projects in Nepal - Things one must know

USAID, United States Agency for International Development, operates in most of the countries under the bilateral agreement similar to Nepal. Ministry of Finance represents Government of Nepal as a counterpart on these agreements with USAID. Based on those agreements, projects/programs are generally managed as 1) Contract 2) Co-operative Agreement, and 3) Grant. Irrespective of nature of the project/program, one of the main clause of the bilateral agreement is tax exemption status.

Tax exemption status grants USAID projects access to Value Added Tax (VAT), Customs Duty, and Excise Duty refund on the tax paid by them on purchases or imports made for the project. USAID projects here are International NGO, national NGO, companies, and firms managing projects/programs for USAID under the contractual arrangement.

Let us now focus our attention on the Value Added Tax and how does it work for USAID Funded Projects. There is three status to be considered here:

1) An entity is registered in PAN such as International NGO, national NGO.

2) An entity is registered in VAT such as national NGO, companies, and firms.

3) An individual registered in the VAT.

Inland Revenue Department (IRD) had issued a guidance note couple of years back explaining the process of refund including the list of documents to be furnished along with the application for refund. You can see the same in the link below:

 https://ird.gov.np/Content/ContentAttachment/1019/ApplicationforRefundforDiplomatsandINGOs1172014101640AM.pdf

There have been few changes to the process and the nature of the documents that need to be furnished given the change in the organization structure of the IRD under the Federal System. We have tried our best to explain the same below:

1) Collect original stamped invoice from the vendor.

2) Upload VAT invoice in the IRD designated website. Please contact your tax payer's office for the username and password. You are required to submit an application to your concerned tax payer's office.

3) Submit stamped invoice along with the printed statement from the upload on the IRD website to USAID Nepal's office for review and verification.

4) USAID reviews the authenticty of the submitted documents and if there is no additional information requred, addresses the letter to Inland Revenue Department/ Tax Payer's Office to honor the bilateral agreement and refund the VAT.

5) Letter from USAID, original stamped invoice, printed statement from upload of IRD website, letter from the entity itself addressing IRD for VAT refund must be submitted to concerned Tax Payer's Office.

6) Copy of the Implementation letter signed by both Ministry of Finance (Government of Nepal) and USAID Nepal where the name of the project and the implementing agency is mentioned.

7) Copy of the agreement between USAID and implementing agency/individual

After the submission of the above documents, IRD verifies the authenticity of the VAT invoices. Verification is normally a cross-validation of whether or not the original supplier/vendor from whom the goods and services were procured have submitted the VAT return against the invoice subject to the claim.

Entity can actually log into the IRD website and know the status of their submissions. There will be message displayed as either "Approved" or "Rejected". If IRD database confirms submission i.e Approved, concerned Tax Payer's Office writes the cheque for the VAT refund, otherwise, those not matching with the database will be rejected and only the cheque will be issued for remaining matched invoices.

Isn't the process simple? However, it takes a lot of time for the concerned organization to gather all the documents for submission to IRD. IRD, in turn, takes a couple of months for the verification and issue the cheque. If you manage to get refunds within 6 months of the submission, we would say that's acceptable time frame.

Question normally comes into mind after reading the above paragraph.

1) What happens to the invoices before getting registered in VAT/PAN?

In case an individual or an entity can demonstrate sufficient evidence and furnish all the documents as listed in 1 to 7 above, IRD will refund the VAT. 

2) What about invoices issued to USAID by VAT registered Entity VAT/PAN?

We must note that VAT refund is on the purchase and import and not on the sale of goods or service to USAID. Hence, concerned registered entity or individual have to issue an invoice with VAT on it and it will be USAID who will be following the above procedure from 1 to 7 and claiming the refund from the Government of Nepal. So the question of zero VAT invoice or Invoice without VAT normally issued for VAT-exempt goods and service do not arise.

3) What happens to the invoices rejected by IRD?

Individual or an entity should follow up with the vendors/suppliers to submit the tax return and once a confirmation is received, reclaim all the rejected invoices again following list 1 to 7 above. In case, some of the vendor/supplier do not adhere to your follow up, we recommend you to initiate the blacklisting process against those suppliers/vendors. 

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