Excise Duty in Nepal: Its Role in Revenue and Regulation

By: Bibek Joshi

Introduction

Excise duty is one of the oldest forms of indirect taxation in Nepal, levied by the Government of Nepal on the production, import, and consumption of specific goods and services within Nepal. Governed primarily by the Excise Duty Act, 2058 and Excise Duty Rules, 2059, this tax has played a central role in Nepal tax collection for decades.

Legal Framework

Excise duty in Nepal is administered under the Excise Duty Act, 2058, an Act enacted to amend and consolidate laws relating to excise duty, with the aim of enhancing revenue mobilization for the country’s economic development.

The Act has been amended several times, including through subsequent Financial Acts passed almost every fiscal year, which periodically revise duty rates and coverage.

Under this framework, a licence is required to manufacture, import, sell, or store excisable goods, and excisable goods remain subject to supervision at every stage of production, distribution and sale.

Objective of Excise Duty

The primary objective of Excise Duty is to generate revenue for the government and to regulate the consumption of goods that may be harmful to public health or the environment.

This is why products like cigarettes, alcohol, tobacco and items containing nicotine carry higher excise rates.

Physical Control System vs. Self-Removal System

Nepal’s excise administration operates through two distinct regulatory mechanisms, defined under the Excise Duty Act, 2058 and Excise Duty Rules, 2059:

Physical Control System

This is the stricter of the two mechanisms, under which the production, removal, import and export of certain excisable goods are carried out under the supervision and control of an excise officer or an employee designated by the Excise officer.

In Nepal, it is currently applicable for only a liquor industry, where recovery of Excise Duty and deposit of Excise Duty is at the time of release of goods from the factory.

Self-Removal System

Under this system, the producer or importer themselves assesses the excise duty owed, based on their own production or sales records, and pays it without requiring an officer’s physical presence at each removal.

Most excisable goods and services other than liquor fall under this system.

Under the system, the recovery of excise duty is at the time of issuing the invoice and deposit of Excise Duty shall be made within the 25th of the following month.

However, for cigarettes, tobacco, Khaini, Gutka, Paanmasala, with or without having nicotine, and other similar tobacco-related products, recovery of excise duty is at the time of issuing the invoice and deposit of Excise Duty is at the time of goods after approving requisition form.

Licensing and Fees

Regardless of which system applies, no enterprise may manufacture, import, sell, or store excisable goods without first obtaining a license under Section 9 of the Act.

The license must be obtained and renewed periodically under the Excise Duty Act, 2058.

Operating without a valid licence, transferring excise stamps without authorization, or removing goods before duty assessment can result in penalties, seizure of goods or cancellation of the license.

Why Excise Duty Matters

Excise duty serves several important functions in Nepal’s economy:

Revenue Generation

In FY 2081/82, excise duty collected by the Inland Revenue Department totalled approximately Rs. 122.03 billion, making up about 20.9% of the department’s total tax collection of Rs. 583.02 billion, making it the second largest revenue source after VAT.

Market Regulation

By taxing goods like alcohol and tobacco more heavily, the government discourages their consumption while still generating revenue from products considered to have negative externalities.

Administrative Efficiency

The physical control and self-removal systems allow the government to focus its tightest scrutiny on a small number of high-risk, high-revenue goods, while keeping compliance costs lower for the broader base of excisable products.

Conclusion

Nepal’s excise duty framework is anchored by the dual physical control and self-removal system and illustrates how a government can tailor tax administration to the risk profile of different goods rather than applying a single uniform approach.

With excise duty contributing roughly one fifth of the Inland Revenue Department’s total tax collection in FY 2081/82, it remains a vital fiscal instrument, one that continues to evolve Nepal’s broader tax reforms.

Sources

1. Excise Duty Act, 2058

2. Excise Duty Rules, 2059

3. Government of Nepal; Inland Revenue Department, Annual Progress Report 2081/82