Government Grants Major Tax Exemption to Dolma Impact Fund Before Terminating Mauritius Treaty; Revenue Loss Risks Raise Alarm

In a decision that has ignited sharp debate among tax experts and former revenue officials, the Government of Nepal has moved to end the Double Taxation Avoidance Agreement (DTAA) with Mauritius—but only after granting Dolma Impact Fund nearly NPR 880 million in capital gains tax (CGT) exemption, a move critics say could cost the state far more in the months ahead.

The Cabinet meeting held on Monday approved the proposal presented by Finance Minister Rameshwor Khanal to terminate the long-standing tax treaty. The decision, however, comes under intense scrutiny because the treaty, even after termination, remains valid for an additional six months—providing a window during which Dolma could seek additional tax waivers amounting to up to NPR 5 billion, according to a former Director General of the Inland Revenue Department (IRD).

A Tax Haven Structure and a Controversial Exemption

Dolma Impact Fund is registered in Mauritius, a jurisdiction widely categorized as a “tax haven” where companies face minimal or zero taxation. Under Nepal’s Income Tax Act, 2058, companies registered in such jurisdictions are liable to pay capital gains tax in Nepal unless at least 50 percent of their investment originates from residents of that country.

In Dolma’s case, only 0.25% of its investment originates from Mauritius, while 99.75% comes from outside Mauritius—making it, by law, fully liable to pay CGT in Nepal.

Despite this clear legal provision, Dolma was granted a special exemption. Senior revenue officials argue that this was done in a manner that undermines the intent of the Income Tax Act, depriving the national treasury of hundreds of millions of rupees.

Internal Resistance — and How the Decision Was Revived

This is not the first time such a proposal surfaced. Dolma Impact Fund had previously sought a “pre-ruling” from the IRD in mid-2024, asking whether capital gains tax could be waived. At that time, the IRD rejected the request, citing legal boundaries and lack of eligibility.

The proposal should have remained closed, but after political changes and new leadership at the ministry, the matter resurfaced.

Sources inside the IRD reveal that after the initial rejection, Dolma’s team, accompanied by Nepali chartered accountants, again approached the department demanding reconsideration—even though the legal 45-day period for pre-ruling had already expired, resulting in automatic rejection.

Revenue officials allege that ministerial pressure revived the previously rejected request, leading to a tax waiver granted on Asoj 28. This, they argue, set the stage for terminating the DTAA in a way that overwhelmingly benefits the foreign fund rather than the Nepali state.

How Previous Objections Were Overruled

Former Chief Secretary Ek Narayan Aryal had earlier refused to endorse a similar Cabinet decision, insisting that the tax exemption issue must first be corrected before terminating the treaty. He argued that annulling the treaty while granting tax waivers would set a dangerous precedent that allowed foreign entities to evade taxes legally owed to Nepal.

His refusal blocked the earlier attempt.
However, with Aryal’s retirement and the appointment of a new Chief Secretary, Suman Raj Aryal, the government pushed the decision through once again.

Even so, Chief Secretary Aryal has publicly stated that he will not support any decision that facilitates revenue leakage, stressing that the Ministry of Finance must clarify how Nepal will avoid future losses amounting to billions.

Legal Contradictions and Questionable Justifications

The Office of the Attorney General reportedly provided an opinion stating that Nepal could not levy CGT due to the treaty with Mauritius. However, tax experts question this interpretation, arguing:

• The Income Tax Act, as a domestic law enacted after the treaty, supersedes its provisions where necessary.

• The treaty cannot override explicit legal obligations imposed on companies registered in tax-haven jurisdictions.

• Dolma does not meet the residency-based investment threshold to qualify for exemption.

Critics allege that the Attorney General’s opinion, combined with NEPSE’s concurrence, was used to create an artificial legal basis for granting the exemption.

Why Terminating the Treaty After the Exemption Raises Red Flags

Analysts argue that the government could have simply terminated the treaty without granting the tax waiver. Doing so would have prevented any new exemption claims during the treaty’s six-month grace period.

Instead, by approving the tax waiver first and then terminating the treaty:

• Dolma receives immediate CGT exemption worth around NPR 880 million.

• The six-month validity period of the treaty enables Dolma to potentially secure additional CGT exemptions worth up to NPR 5 billion on pending or future transactions.

• The state treasury faces unprecedented revenue risks at a time when Nepal is already struggling with fiscal stress.

Former IRD officials describe the decision as “a coordinated maneuver engineered through political influence.”

A Governance Paradox Under the Gen-Z Government

The Gen-Z Government came to power promising strict governance reforms and a crackdown on corruption. Yet, experts point out the contradiction:

• A proposal rejected a year ago for violating tax laws

• Suddenly approved under a government that claims to champion transparency

• Resulting in unprecedented tax concessions to a foreign fund

This has raised questions about whether political influence or lobbying played a decisive role in the process.

Former IRD officials argue that the Dolma CEOs and their team had successfully used “access and persuasion” to influence high-level decisions in the ministry.

The Looming Fiscal Impact

If Dolma utilizes the six-month treaty window for further tax-free exits, Nepal could lose over NPR 5 billion in revenue, according to multiple former IRD chiefs.

At a time when:

• the government is struggling to meet revenue targets,

• capital expenditure remains sluggish,

• and borrowing is increasing,

such losses could deepen fiscal vulnerabilities.

The termination of the Mauritius DTAA could have been a strong statement of Nepal’s commitment to financial integrity and anti-tax-evasion reforms.
Instead, the manner and timing of the decision have triggered suspicion, controversy, and unanswered questions.

Chief Secretary Suman Raj Aryal has called for a clear explanation from the Ministry of Finance. Revenue experts warn that unless the decision is reviewed, Nepal may witness one of the largest tax leakages in its history—benefiting a foreign fund at the direct expense of Nepali taxpayers.