Nepal’s New Electricity VAT to Affect More Than 2.6 Million Households, Sparking Debate

More than 2.6 million Nepali households are expected to be affected by a new value-added tax (VAT) on electricity consumption from the next fiscal year, according to data from the Nepal Electricity Authority (NEA), as the government defends the measure as necessary to fund major energy infrastructure projects.

The provision, announced in Nepal’s budget for fiscal year 2083/84 (2026/27), introduces a five percent VAT on household electricity consumption exceeding 50 units per month. The policy has triggered intense debate among government officials, energy experts, former ministers and consumer advocates over its likely impact on consumers and the country’s broader electrification goals.

Millions of Households Expected to Pay VAT

According to NEA spokesperson Rajan Dhakal, more than 2.6 million residential customers currently consume more than 50 units of electricity each month and would therefore fall under the new tax regime.

NEA figures show that nearly 2 million customers consume up to 20 units monthly, while around 421,000 consume between 21 and 30 units and about 615,000 use between 31 and 50 units.

However, approximately 1.07 million households consume between 51 and 100 units per month, while another 1.09 million consume between 101 and 250 units. More than 442,000 customers consume over 250 units monthly.

The figures apply only to residential consumers and do not include industrial, commercial, community, irrigation or other categories of customers.

Government Says Additional Burden Will Be Minimal

Finance Minister Swarnim Wagle has defended the tax, arguing that the financial burden on ordinary households will be relatively small while helping generate resources needed to expand Nepal’s energy infrastructure.

According to the minister, households consuming between 51 and 150 units of electricity per month estimated at around 1.2 million households would face an additional monthly expense of up to Rs24 due to the VAT.

For households consuming between 151 and 250 units, many of which use air conditioners or fast chargers for electric vehicles, the additional monthly cost would range between Rs25 and Rs102, he said.

“The country needs to invest more than Rs85 billion in energy infrastructure over the coming years,” Wagle told a press conference. “The VAT will help create the financial resources necessary for those investments.”

The minister added that the government could review the policy if consumers face serious difficulties in paying their electricity bills.

Government Promises Consumers Will Not Bear Full Cost

Despite introducing the tax, Wagle has repeatedly stated that the government is exploring ways to prevent consumers from feeling the full impact.

The VAT will come into effect from mid-July 2026, the start of Nepal’s new fiscal year. Before implementation, the government says it is considering several options, including reducing electricity tariffs by an equivalent amount, providing compensation through electricity generated by state-owned projects, or adopting other mechanisms to offset the additional charge.

“We brought this sector into the tax net without increasing the burden on consumers,” Wagle said at a public event in Kathmandu. “This is a long-term policy that serves the country’s interests.”

The finance minister also made clear that the government has no intention of reversing the VAT decision.

“VAT on electricity is coming and the government will not step back from it,” he said, arguing that countries cannot sustain development solely through subsidies and free services.

Prime Minister Defends the Tax

Prime Minister Balendra Shah has also publicly defended the measure, saying revenue collected through the VAT would be used to upgrade transformers, substations and transmission lines across the country.

Speaking in Parliament, Shah argued that Nepal’s electricity infrastructure is not yet capable of supporting a rapid transition to an all-electric economy.

“If every household in Nepal started cooking entirely with electric induction stoves today, our transformers and substations would come under enormous pressure,” he said. “Building that capacity requires investment.”

According to the prime minister, the new tax will provide funds needed to strengthen the country’s electricity distribution system and prepare for rising demand.

Critics Say Policy Contradicts Electrification Goals

The government’s explanation has failed to convince many former energy officials and opposition politicians, who argue that taxing electricity consumption sends the wrong signal at a time when Nepal is encouraging people to switch away from imported fossil fuels.

Former Energy Minister Kulman Ghising warned that consumers may deliberately reduce electricity usage to stay below the 50-unit threshold, undermining efforts to increase domestic electricity consumption.

He also questioned the government’s claim that the tax would directly finance electricity infrastructure, noting that VAT revenues flow into the national treasury rather than directly to the Nepal Electricity Authority.

Ghising estimated that the government could collect around Rs420 million per month through the new tax.

“If the government requires additional resources for investment, it should explain that transparently,” he said. “It should not justify the tax by creating concerns about electricity infrastructure.”

Former Energy Minister and Rastriya Prajatantra Party chairman Rajendra Lingden also criticised the policy, arguing that Nepal should be making electricity cheaper, not more expensive.

“Nepal’s greatest energy advantage is electricity,” he said. “The priority should be increasing consumption, attracting industries and reducing dependence on imported fuel.”

Lingden warned that higher electricity prices would ultimately increase production costs for industries, which would then pass those costs on to consumers through higher prices.

Infrastructure Capacity Debate

The government’s assertion that transformers and substations could become overloaded has also been challenged by experts.

Ghising, who previously served as NEA’s executive director, said Nepal has already invested billions of rupees in transmission and distribution infrastructure.

According to him, substations with a combined capacity exceeding 14,000 MVA and distribution transformers with more than 5,000 MVA capacity are currently operational. High-voltage transmission lines of 132 kV, 220 kV and 400 kV are also in service, with additional projects under construction.

Consumers across the country already use electric stoves, water heaters, electric vehicles and charging stations, he noted, adding that electricity demand does not occur simultaneously at every location.

“The argument that the entire system would fail or that all transformers and substations would suddenly collapse is not realistic,” he said.

Concerns Over Inflation and Economic Impact

Former government officials have also questioned whether the measure qualifies as a genuine VAT.

Former Energy Secretary Anup Upadhyay argued that the new charge resembles a consumption tax rather than a traditional VAT because ordinary households cannot claim VAT refunds.

He warned that the policy could increase production costs, reduce electricity consumption and discourage industries from expanding.

“When electricity becomes more expensive, everyone ultimately pays the price,” he said.

Energy experts also point out that higher electricity costs could undermine Nepal’s strategy of replacing imported petroleum products and liquefied petroleum gas with domestically generated hydropower.

Former Energy Minister Pampha Bhusal described the policy as counterproductive at a time when global geopolitical tensions and energy market volatility have highlighted the importance of energy security.

“Instead of encouraging greater use of clean electricity in transport, agriculture, cooking and water supply, the government is making consumption more expensive,” she said.

Uncertainty Over Implementation

Questions also remain about how exactly the VAT will be applied.

Officials at the Inland Revenue Department say detailed implementation guidelines are still being prepared before the policy takes effect in July.

Current understanding suggests that residential consumers will be charged five percent VAT, while commercial and industrial consumers may continue to face the standard 13 percent VAT rate.

However, tax officials say final details will be clarified after consultations with the Nepal Electricity Authority.

The outcome of those discussions could determine how significantly the new policy affects households, businesses and Nepal’s broader ambition to increase electricity consumption while reducing reliance on imported energy.