Government Revenue Composition Shifts – VAT Leads with 33% Share, Non-Tax Revenue Declines Sharply

Nepal’s revenue structure has undergone a notable shift in the first two months of FY 2025/26, with Value Added Tax (VAT) emerging as the dominant contributor, while non-tax revenue has fallen sharply, according to the Ministry of Finance (MoF) and Nepal Rastra Bank (NRB) data. The overall government revenue stood at Rs 157.53 billion, down 5.3% year-on-year, signaling weaker income generation despite steady consumption and trade activity.

The data reveal that VAT collections accounted for 32.9% (≈33%) of total revenue, maintaining its position as the largest revenue source. VAT receipts grew 3.9% to Rs 52.14 billion, reflecting stable domestic consumption and improved tax compliance through electronic billing and monitoring systems.

Customs revenue, the second-largest contributor, rose 7.5% to Rs 35.39 billion, representing 22.3% of total revenue. The increase came from higher imports of industrial raw materials and consumer goods, following gradual trade normalization.

Meanwhile, excise duty revenue increased 14.4% to Rs 28.95 billion, contributing 18.2% to the total. The rise was driven by stronger domestic production and higher consumption of excisable goods, such as liquor, tobacco, and manufactured items.

However, income tax revenue fell by 8.5% to Rs 33.05 billion, lowering its share to 20.8%, mainly due to declining corporate profitability and slower business activity. The steepest fall was observed in non-tax revenue, which plummeted 66.3% to Rs 7.13 billion, reducing its share to just 4.5% from 12.5% a year ago. The decline is attributed to reduced dividends, royalties, and administrative fees from government enterprises and regulatory agencies.

Overall, Nepal’s total revenue and receipts (including other income sources) reached Rs 158.71 billion, marking a 6.4% year-on-year decline. Economists note that while indirect taxes such as VAT, customs, and excise remain strong, the heavy dependence on them underscores structural imbalances in the country’s fiscal framework.

They recommend diversifying revenue sources, reviving corporate and non-tax income streams, and strengthening public enterprise performance to achieve a more balanced and sustainable revenue composition in the coming quarters.