Demystifying Nepal’s Digital Services Tax: Balancing Regulation and Innovation

When the Oli government abruptly banned 26 social media platforms on September 4, it attempted more than just a digital clampdown, it triggered a generational backlash. For Nepal’s Gen Z, the move symbolized growing state overreach in online spaces.

The government defended the ban as a measure to combat misinformation and promote accountability. However, critics argued it was an attempt to stifle dissent under the guise of regulation. The proposed Media Council Act and Social Media Bill would grant the state sweeping powers to remove posts and silence critics. The Asia Internet Coalition representing global tech giants like Meta, Google, Apple, and Amazon warned that such directives violated international norms and endangered freedom of expression.

Public outrage reached its peak after protests on September 8 left 19 young people dead, forcing then-Prime Minister KP Sharma Oli to resign. His successor, interim leader Sushila Karki, reversed the ban soon after.

Ironically, many of the banned companies were already registered in Nepal and paying taxes, including VAT, to the Inland Revenue Department (IRD). Yet, new compliance rules required them to re-register with the Ministry of Communications and Information Technology (MoCIT), further complicating matters.

Understanding the Digital Services Tax (DST)

As Nepal’s internet use continues to rise now reaching over 13.5 million social media users, or 43.5 percent of the population the need to integrate digital platforms into the formal tax system has become urgent. Globally, countries have introduced Digital Services Taxes (DST) to ensure fair contributions from multinational tech firms. India, for instance, imposes a 6 percent equalisation levy, while Pakistan charges 5 percent on offshore digital services.

Nepal followed suit in 2022 under Section 20 of the Finance Act 2022/23, mandating a 2 percent tax on digital transactions by non-resident companies earning over Rs3 million annually from Nepali consumers.

Initially, only a handful of companies registered. But by January 2025, 20 major players including Apple, Google, Microsoft, TikTok, and Netflix had complied. According to the IRD, these firms collectively paid Rs410 million (around USD 3.1 million) in DST and VAT in the fiscal year 2023/24. The previous year, eight companies recorded Rs700 million in transactions within five months of implementation, contributing Rs109.4 million in taxes.

Despite this progress, enforcement challenges remain. Some officials have repeatedly urged companies to register, reflecting gaps in policy clarity and administrative coordination.

A Way Forward

While Nepal’s DST is a step toward a fairer digital economy, inconsistent policymaking and reactive decisions such as the temporary TikTok ban risk undermining investor confidence. The government must prioritize consistency, consultation, and transparency.

Creating a multi-stakeholder advisory council on the digital economy could be a practical solution. This body would include representatives from government, industry, and civil society to ensure balanced decision-making. Strengthening the IRD’s capacity through better digital tracking tools and data transparency such as a public dashboard would also enhance accountability.

Public education campaigns and recognition for top taxpayers could further promote voluntary compliance among digital service providers.

Ultimately, Nepal’s path to a sustainable digital economy depends on cooperation, not confrontation. Sudden bans and rigid regulations only deepen mistrust. The Gen Z protests serve as a reminder that open dialogue, fairness, and respect for digital freedoms are the true foundations of a progressive digital future.