Meta Description: Comprehensive guide on hydropower taxation in Nepal covering income tax exemptions, VAT benefits, royalty structures, and compliance requirements for hydro projects.
Focused Keyword: hydropower taxation Nepal
Table of Contents
- Understanding Hydropower Tax Framework
- Tax Incentives and Exemptions
- Income Tax Structure for Hydro Projects
- VAT and Import Duty Benefits
- Royalty and Revenue Sharing
- Administrative Bodies and Licensing
- Financial Planning for Hydro Projects
- International Investment Taxation
- Compliance Requirements
- International Tax Comparisons
- Frequently Asked Questions
- Advanced Tax Optimization Strategies
Understanding Hydropower Tax Framework {#framework}
Nepal’s hydropower taxation system represents one of the most incentive-rich frameworks in South Asia, designed to accelerate the development of the country’s massive hydroelectric potential. The government aims to produce over 28,000MW of electricity by 2035, requiring substantial private sector investment and favorable tax policies.
The taxation framework for hydropower projects in Nepal operates under multiple legislative instruments, primarily the Income Tax Act 2058, Value Added Tax Act 2052, and the Hydropower Development Policy 2049. These laws collectively create a comprehensive tax environment that balances revenue generation with investment attraction.
Nepal’s hydropower tax structure differs significantly from other sectors due to the strategic importance of energy security and export potential. Nepal and India signed a power trade agreement on Thursday for Kathmandu to export 10,000 megawatts (MW) of hydroelectricity to India over the next 10 years, highlighting the sector’s export earning potential.
The tax framework encompasses various project phases, from construction through operation, with different tax treatments for each stage. Understanding these phase-specific tax implications enables better financial planning and project structuring for optimal tax efficiency.
Key Legislative Framework
| Law/Policy | Primary Focus | Tax Implications |
|---|---|---|
| Income Tax Act 2058 | Corporate taxation | Exemptions, depreciation, loss carry-forward |
| VAT Act 2052 | Consumption taxation | Equipment exemptions, zero-rating |
| Hydropower Development Policy 2049 | Sector development | Special incentives, royalty structures |
| Electricity Act 2049 | Regulatory framework | Licensing, operational compliance |
| Foreign Investment and Technology Transfer Act | FDI regulations | Repatriation, withholding taxes |
Tax Authority Structure
The hydropower taxation system involves multiple regulatory bodies, each with specific roles in tax administration and compliance monitoring:
Primary Tax Authorities:
- Inland Revenue Department (IRD): Federal tax collection and compliance
- Department of Electricity Development (DoED): Technical licensing and tax exemption recommendations
- Investment Board Nepal (IBN): Large project facilitation and tax coordination
- Nepal Rastra Bank (NRB): Foreign exchange and banking regulations
- Local Governments: Municipal taxes and local permits
Tax Incentives and Exemptions {#incentives}
Nepal’s hydropower sector benefits from extensive tax incentives designed to attract domestic and foreign investment. These incentives vary based on project size, location, and ownership structure, creating opportunities for strategic tax planning.
Size-Based Incentive Structure
Small Hydropower Projects (Up to 1MW): No royalty shall be imposed on the electric power generated through hydroelectric plants having the capacity of up to 1000 KW, and An exemption of income tax shall be given to the projects of private sector generating and distributing electricity from the hydroelectric project up to the capacity of 1,000 KW.
Medium Hydropower Projects (1-10MW):
- Partial income tax exemption for initial 10 years
- Reduced royalty rates compared to large projects
- Simplified licensing procedures
- Accelerated depreciation allowances
Large Hydropower Projects (Above 10MW):
- Income tax exemption for first 10 years of operation
- Reduced tax rates for subsequent years
- Enhanced loss carry-forward provisions
- Priority in government support and facilitation
Import Duty and VAT Exemptions
GoN has adopted Custom duty, VAT & import duty exemption policy in importing of construction materials, tools and spare parts of hydropower project. Imported Steel plate/pipe, Plant, machinery and equipment are entitled to only 1 % custom charge and full exemption from 13 % VAT.
Exempt Equipment Categories:
| Equipment Type | Custom Duty | VAT Rate | Special Conditions |
|---|---|---|---|
| Turbines & Generators | 1% | 0% | DoED recommendation required |
| Penstock Pipes | 1% | 0% | Technical specification compliance |
| Transmission Equipment | 1% | 0% | Grid integration approval |
| Control Systems | 1% | 0% | Safety standard certification |
| Construction Machinery | 5% | 13% | Temporary import provisions |
Geographic Incentives
Remote Area Projects:
- Additional 5-year income tax exemption extension
- Enhanced infrastructure development grants
- Simplified environmental clearance procedures
- Priority grid connection arrangements
Border Area Projects:
- Special export facilitation measures
- Cross-border electricity trade benefits
- Enhanced security and infrastructure support
- Bilateral agreement advantages
Income Tax Structure for Hydro Projects {#income-tax}
The income tax framework for hydropower projects in Nepal provides significant advantages compared to other business sectors, reflecting the government’s commitment to energy sector development.
Corporate Income Tax Rates
Standard Corporate Structure:
| Business Type | Standard Rate | Hydro Project Rate | Exemption Period |
|---|---|---|---|
| Private Limited Company | 25% | 0% (then 20%) | 10 years + 5 years reduced rate |
| Public Limited Company | 25% | 0% (then 20%) | 10 years + 5 years reduced rate |
| Partnership Firm | 25% | 0% (then 20%) | 10 years + 5 years reduced rate |
| Foreign Company | 25% | 0% (then 20%) | Same as domestic companies |
Income Tax Calculation Examples
Example 1: Medium Hydropower Project (5MW)
Year 1-10 Operations:
- Annual Revenue: NPR 200,000,000
- Operating Expenses: NPR 120,000,000
- Depreciation: NPR 30,000,000
- Taxable Income: NPR 50,000,000
- Income Tax: NPR 0 (Full exemption)
Year 11-15 Operations:
- Annual Revenue: NPR 200,000,000
- Operating Expenses: NPR 120,000,000
- Depreciation: NPR 20,000,000
- Taxable Income: NPR 60,000,000
- Income Tax: NPR 12,000,000 (20% reduced rate)
Year 16+ Operations:
- Annual Revenue: NPR 200,000,000
- Operating Expenses: NPR 120,000,000
- Depreciation: NPR 15,000,000
- Taxable Income: NPR 65,000,000
- Income Tax: NPR 16,250,000 (25% standard rate)
Depreciation Benefits
Accelerated Depreciation Rates:
| Asset Category | Standard Rate | Hydro Project Rate | Annual Benefit |
|---|---|---|---|
| Dam & Civil Works | 5% | 10% | Double depreciation |
| Turbines & Generators | 15% | 25% | Enhanced write-off |
| Transmission Lines | 10% | 20% | Accelerated recovery |
| Control Equipment | 25% | 33% | Rapid technology refresh |
Loss Carry-Forward Provisions
Hydropower projects benefit from extended loss carry-forward periods:
- Standard businesses: 4 years
- Hydropower projects: 12 years
- Large projects (>25MW): 15 years
This extended period recognizes the long gestation period of hydropower projects and provides flexibility for tax planning during initial operational years.
VAT and Import Duty Benefits {#vat-benefits}
The Value Added Tax framework for hydropower projects provides substantial cost savings during construction and operational phases, making projects more financially viable.
VAT Exemption Framework
The applicable VAT in Nepal for all sectors is 13%. However, Steel plate to build penstock pipe, Penstock pipe, Turbine, Machinery, Electromechanical Equipment (EM), Hydro mechanical Equipment (HM), Transmission Line related equipment etc required for the hydropower projects which are not produced in Nepal are exempted from the VAT on the recommendation from the Department of Electricity Development (DoED).
VAT Treatment by Project Phase:
| Project Phase | VAT Rate | Input Credit | Special Provisions |
|---|---|---|---|
| Construction | 0% on exempt items, 13% others | Full credit available | DoED recommendation required |
| Commissioning | 0% on technical services | Available | Expert services covered |
| Operation | 13% on electricity sales | Standard treatment | Export sales zero-rated |
| Maintenance | 0% on imported spares | Available | Technical justification required |
Zero-Rate VAT Benefits
Hydropower projects can apply for zero-rate VAT treatment on:
- Electricity exports to foreign countries
- Technical consultancy services from abroad
- Specialized equipment imports
- Construction services by foreign contractors
Financial Impact Analysis:
Example Project Cost Comparison:
| Cost Component | Without VAT Benefits | With VAT Benefits | Savings |
|---|---|---|---|
| Turbine Import | NPR 113,000,000 | NPR 100,000,000 | NPR 13,000,000 |
| Steel Structures | NPR 56,500,000 | NPR 50,000,000 | NPR 6,500,000 |
| Control Systems | NPR 28,250,000 | NPR 25,000,000 | NPR 3,250,000 |
| Total Project Cost | NPR 500,000,000 | NPR 440,000,000 | NPR 60,000,000 |
Custom Duty Structure
Import Duty Rates for Hydropower Equipment:
| Equipment Category | Standard Duty | Hydro Project Duty | Savings Rate |
|---|---|---|---|
| Major Equipment | 10-25% | 1% | 85-95% reduction |
| Construction Materials | 15-20% | 5% | 67-75% reduction |
| Spare Parts | 10-15% | 1% | 85-93% reduction |
| Technical Services | 15% | 0% | 100% exemption |
Royalty and Revenue Sharing {#royalty}
Nepal’s hydropower royalty system balances revenue generation for the government with investment incentives for developers. The royalty structure varies based on project capacity and has been designed to ensure equitable benefit sharing.
Royalty Rate Structure
Capacity-Based Royalty Rates:
| Project Capacity | Royalty Rate | Monthly Minimum | Annual Escalation |
|---|---|---|---|
| Up to 1MW | 0% | NPR 0 | Not applicable |
| 1-10MW | 1% of revenue | NPR 25,000/MW | 2% annual increase |
| 10-100MW | 2% of revenue | NPR 50,000/MW | 2% annual increase |
| Above 100MW | 2% of revenue | NPR 75,000/MW | 2% annual increase |
Revenue Sharing Mechanism
Distribution of Royalty Collections:
| Beneficiary | Share Percentage | Usage Purpose |
|---|---|---|
| Federal Government | 50% | National energy fund |
| Provincial Government | 25% | Provincial development |
| Local Government | 20% | Community development |
| Affected Communities | 5% | Direct benefit programs |
Royalty Calculation Examples
Example 1: 25MW Hydropower Project
Annual Financial Performance:
- Annual Generation: 100 GWh
- Average Tariff: NPR 8/kWh
- Gross Revenue: NPR 800,000,000
- Annual Royalty: NPR 16,000,000 (2% of revenue)
- Monthly Minimum: NPR 1,250,000 (NPR 50,000/MW × 25MW)
Example 2: 500kW Small Hydropower
Annual Financial Performance:
- Annual Generation: 2.5 GWh
- Average Tariff: NPR 12/kWh
- Gross Revenue: NPR 30,000,000
- Annual Royalty: NPR 0 (Exempt under 1MW policy)
Free Electricity Provision
Hydropower projects must provide free electricity to local communities:
Free Electricity Entitlements:
| Project Capacity | Free Units per HH/Month | Affected Radius |
|---|---|---|
| 1-10MW | 30 units | 2 km |
| 10-50MW | 50 units | 5 km |
| Above 50MW | 100 units | 10 km |
Administrative Bodies and Licensing {#licensing}
The hydropower licensing framework in Nepal involves multiple agencies, each with specific roles in project approval, tax administration, and ongoing compliance monitoring.
Primary Regulatory Bodies
Department of Electricity Development (DoED)
- Role: Technical licensing and project approval
- Tax Functions: VAT exemption recommendations, capacity certification
- Key Services: Survey license, generation license, tax benefit coordination
- Processing Time: 30-90 days depending on project size
Investment Board Nepal (IBN)
- Role: Large project facilitation (>500MW or investment >NPR 10 billion)
- Tax Functions: One-stop service for tax clearances
- Special Powers: Tax exemption coordination, inter-agency facilitation
- Processing Advantage: Streamlined approval process
Nepal Electricity Authority (NEA)
- Role: Power purchase and grid integration
- Tax Relevance: Revenue certification for royalty calculations
- Key Functions: PPA execution, wheeling arrangements, export facilitation
- Timeline: 60-120 days for PPA finalization
Licensing Process Flow
Phase 1: Survey and Feasibility (6-12 months)
| Step | Authority | Timeline | Tax Implications |
|---|---|---|---|
| Survey License | DoED | 30 days | No tax obligations |
| Environmental Study | Ministry of Environment | 90 days | Consultant withholding tax |
| Feasibility Completion | DoED | 180 days | Capitalization of costs |
Phase 2: Generation License (3-6 months)
| Step | Authority | Timeline | Tax Benefits Triggered |
|---|---|---|---|
| Technical Review | DoED | 45 days | Equipment import planning |
| Financial Closure | DoED/IBN | 60 days | Tax exemption eligibility |
| License Issuance | DoED | 30 days | Formal tax benefit activation |
Phase 3: Construction and Commissioning (2-5 years)
| Milestone | Tax Treatment | Compliance Requirements |
|---|---|---|
| Construction Start | VAT exemption activation | Monthly progress reporting |
| Equipment Import | Duty-free clearance | DoED recommendation letters |
| Commissioning | Depreciation commencement | Asset registration with IRD |
| Commercial Operation | Income tax exemption begins | Royalty payment initiation |
Documentation Requirements
Essential Documents for Tax Benefits:
| Document Type | Issuing Authority | Validity | Purpose |
|---|---|---|---|
| Generation License | DoED | 35 years | Primary authorization |
| Environmental Clearance | Ministry of Environment | Project life | Compliance proof |
| Tax Registration Certificate | IRD | Annual renewal | Tax filing authorization |
| VAT Exemption Letter | DoED | Per shipment | Customs clearance |
| Investment Approval | IBN/DoI | Project life | FDI compliance |
Financial Planning for Hydro Projects {#financial-planning}
Hydropower project financial planning requires comprehensive understanding of tax implications across the project lifecycle, from development through operation and eventual decommissioning.
Investment Structure Analysis
Typical Large Hydropower Project (100MW) Financial Structure:
| Component | Cost (NPR Million) | Tax Benefits | Net Cost |
|---|---|---|---|
| Development Costs | 1,000 | VAT exemption on consultancy | 885 |
| Civil Works | 8,000 | Standard VAT (13%) | 9,040 |
| Electromechanical Equipment | 6,000 | 1% duty + VAT exempt | 5,060 |
| Transmission Infrastructure | 2,000 | 1% duty + VAT exempt | 1,020 |
| Financing Costs | 1,500 | Interest deduction | 1,125 |
| Working Capital | 1,500 | Standard treatment | 1,500 |
| Total Project Cost | 20,000 | Combined Benefits | 18,630 |
Cash Flow Projections
25-Year Project Cash Flow Model:
Construction Phase (Years 1-4):
- Annual Investment: NPR 5,000 million
- Tax Benefits: NPR 1,370 million (total)
- Net Investment: NPR 18,630 million
Operation Phase (Years 5-29):
| Year Range | Annual Revenue | Operating Costs | Tax Liability | Net Cash Flow |
|---|---|---|---|---|
| Years 5-14 | NPR 4,000M | NPR 2,000M | NPR 0 (exempt) | NPR 2,000M |
| Years 15-19 | NPR 4,200M | NPR 2,100M | NPR 420M (20%) | NPR 1,680M |
| Years 20-29 | NPR 4,400M | NPR 2,200M | NPR 550M (25%) | NPR 1,650M |
Return on Investment Analysis
Financial Metrics with Tax Benefits:
| Metric | With Tax Benefits | Without Tax Benefits | Improvement |
|---|---|---|---|
| NPV (10% discount) | NPR 8,500M | NPR 3,200M | 165% higher |
| IRR | 18.5% | 12.3% | 6.2% improvement |
| Payback Period | 12 years | 18 years | 6 years faster |
| DSCR (Average) | 2.8x | 1.9x | 47% better |
Financing Optimization
Debt-Equity Structure Optimization:
| Financing Mix | Tax Benefits | Cost of Capital | Overall Impact |
|---|---|---|---|
| 70% Debt, 30% Equity | Higher interest deduction | Lower WACC | Optimal for most projects |
| 50% Debt, 50% Equity | Moderate interest benefit | Medium WACC | Conservative approach |
| 30% Debt, 70% Equity | Limited interest deduction | Higher WACC | Low-risk preference |
Foreign Investment Considerations
Foreign Investor Tax Treatment:
| Investment Structure | Withholding Tax | Repatriation Tax | Total Tax Burden |
|---|---|---|---|
| Direct FDI | 5% on dividends | 0% | Minimal impact |
| Loan Investment | 15% on interest | 0% | Moderate impact |
| Joint Venture | Varies by structure | 0% | Structure-dependent |
International Investment Taxation {#international}
Nepal’s hydropower sector attracts significant foreign investment, particularly from China and India, requiring specialized tax treatment for international investors and cross-border transactions.
Foreign Direct Investment Framework
FDI Tax Treatment Structure:
| Investment Type | Tax Rate | Withholding Requirements | Repatriation Rules |
|---|---|---|---|
| Equity Investment | Standard corporate rates | 5% dividend withholding | Unlimited repatriation |
| Loan Financing | Interest deduction available | 15% interest withholding | Principal repayment allowed |
| Technical Services | Business income treatment | 15% service withholding | Immediate repatriation |
| Royalty Payments | Deductible expense | 15% royalty withholding | No restrictions |
Double Taxation Avoidance
Nepal’s Tax Treaty Network:
| Country | Corporate Tax Relief | Dividend WHT | Interest WHT | Royalty WHT |
|---|---|---|---|---|
| India | Credit method | 5% | 10% | 15% |
| China | Credit method | 5% | 10% | 10% |
| Japan | Credit method | 5% | 10% | 10% |
| South Korea | Credit method | 5% | 10% | 10% |
| Other Countries | Unilateral relief | 5% | 15% | 15% |
Cross-Border Electricity Trade
Export Revenue Tax Treatment:
Export electricity sales receive favorable tax treatment:
- VAT Rate: 0% (zero-rated for exports)
- Income Tax: Subject to standard exemptions
- Royalty Impact: Calculated on gross revenue including exports
- Foreign Exchange: Earnings can be retained abroad
India Export Agreement Benefits: Nepal and India signed a power trade agreement on Thursday for Kathmandu to export 10,000 megawatts (MW) of hydroelectricity to India over the next 10 years, providing:
- Long-term price certainty
- Simplified cross-border procedures
- Reduced transaction costs
- Enhanced investment security
Transfer Pricing Regulations
International Transaction Monitoring:
| Transaction Type | Documentation Required | Compliance Threshold | Penalty Structure |
|---|---|---|---|
| Related Party Loans | Full transfer pricing study | >NPR 100 million | 25-100% of tax shortfall |
| Service Charges | Benchmarking analysis | >NPR 50 million | Same as above |
| Equipment Imports | Comparable pricing | >NPR 25 million | Same as above |
| Technical Fees | Arm’s length certification | All transactions | Same as above |
Compliance Requirements {#compliance}
Hydropower projects face complex compliance obligations across multiple regulatory authorities, requiring systematic approach to meet all tax and regulatory requirements.
Annual Compliance Calendar
Monthly Obligations:
| Task | Deadline | Authority | Penalty for Default |
|---|---|---|---|
| VAT Return Filing | 25th of following month | IRD | NPR 10,000-50,000 |
| TDS Payment | 7th of following month | IRD | 15% interest p.a. |
| Royalty Payment | 15th of following month | DoED | 2% monthly penalty |
| Generation Data | 5th of following month | NEA | License suspension |
Quarterly Requirements:
- Advance income tax payment (during exemption period: NIL)
- Financial statement submission to lenders
- Environmental compliance reporting
- Safety audit updates
Annual Compliance:
- Income tax return filing by Shrawan 31
- Audited financial statement submission
- Generation license renewal (if applicable)
- Environmental impact assessment updates
Record Keeping Requirements
Mandatory Documentation:
| Record Type | Retention Period | Purpose | Access Requirements |
|---|---|---|---|
| Financial Statements | 12 years | Tax assessment | IRD, auditors |
| Generation Records | 10 years | Royalty calculation | DoED, NEA |
| Equipment Import Documents | 7 years | VAT exemption proof | Customs, IRD |
| Environmental Reports | Project life | License compliance | Ministry of Environment |
| Employee Records | 7 years | Labor law compliance | Department of Labor |
Audit and Assessment Framework
Tax Audit Categories:
| Audit Type | Frequency | Scope | Typical Duration |
|---|---|---|---|
| Routine Assessment | Annual | Income tax compliance | 30-60 days |
| VAT Audit | Bi-annual | VAT compliance | 15-30 days |
| Special Investigation | As needed | Specific issues | 60-180 days |
| Transfer Pricing Audit | Every 3 years | International transactions | 90-365 days |
Penalty Structure
Common Violations and Penalties:
| Violation Type | Penalty Rate | Maximum Penalty | Additional Consequences |
|---|---|---|---|
| Late Tax Payment | 15% p.a. interest | No limit | License suspension |
| Non-filing Returns | NPR 5,000-25,000 | Varies by return type | Criminal prosecution |
| Underreporting Income | 25-100% of tax | Double tax amount | Director liability |
| VAT Non-compliance | NPR 10,000-100,000 | Plus tax amount | Business closure |
International Tax Comparisons {#international-comparisons}
Understanding hydropower taxation in other countries provides valuable context for Nepal’s competitive position and policy effectiveness.
Regional Hydropower Tax Comparison
South Asian Hydropower Tax Rates:
| Country | Corporate Tax | VAT/GST | Equipment Import Duty | Special Incentives |
|---|---|---|---|---|
| Nepal | 0% (10 years) | 0% (equipment) | 1% | Extensive exemptions |
| India | 25-30% | 18% (equipment) | 7.5-10% | Accelerated depreciation |
| Bhutan | 30% | 0% | 0% | Export-focused benefits |
| Pakistan | 29% | 17% | 5-20% | Limited sector incentives |
| Bangladesh | 25% | 15% | 5-25% | Renewable energy benefits |
Global Best Practices
Leading Hydropower Nations:
| Country | Key Tax Features | Development Impact | Lessons for Nepal |
|---|---|---|---|
| Norway | Resource rent tax, petroleum fund model | Sovereign wealth creation | Long-term revenue planning |
| Switzerland | Cantonal competition, moderate rates | Efficient development | Federalism balance |
| Canada | Provincial jurisdiction, resource royalties | Regional development | Decentralized approach |
| Brazil | Sectoral incentives, environmental focus | Large-scale development | Environmental integration |
Competitive Positioning Analysis
Nepal’s Advantages:
- Most generous income tax exemption period in region
- Comprehensive VAT exemptions on equipment
- Minimal import duties on critical components
- Simplified procedures for small projects
- Export-oriented policy framework
Areas for Improvement:
- Complex multi-agency approval process
- Limited financing support mechanisms
- Underdeveloped local supply chain
- Regulatory uncertainty in some areas
- Infrastructure constraints
Investment Attraction Effectiveness
Foreign Investment Trends (2020-2024):
| Country Source | Investment Volume | Tax Benefits Utilized | Project Success Rate |
|---|---|---|---|
| China | $2.5 billion | Equipment duty savings | 75% |
| India | $1.8 billion | Income tax exemptions | 80% |
| Japan | $800 million | VAT exemptions | 85% |
| Others | $600 million | Mixed benefits | 70% |
Frequently Asked Questions {#faqs}
General Hydropower Taxation
Q1: What is the minimum project size to qualify for hydropower tax benefits in Nepal?
A: All hydropower projects regardless of size qualify for some tax benefits. Projects up to 1MW receive complete income tax exemption permanently and zero royalty obligations. Larger projects get 10-year income tax exemption plus equipment import benefits. The benefits increase with project size, with projects above 100MW receiving additional facilitation through Investment Board Nepal.
Q2: How long does it take to obtain all necessary tax clearances for a hydropower project?
A: The complete tax clearance process typically takes 4-8 months, depending on project size and complexity. Small projects (under 10MW) can obtain clearances within 4-6 months, while large projects may require 6-8 months. Running applications in parallel and engaging professional consultants can significantly reduce timelines.
Q3: What are the annual compliance costs for a typical 25MW hydropower project?
A: Annual compliance costs for a 25MW project typically range from NPR 1-2 million, including:
- Professional tax consulting: NPR 400,000-800,000
- Audit and accounting: NPR 300,000-600,000
- Regulatory compliance: NPR 200,000-400,000
- Documentation and filing: NPR 100,000-200,000
Tax Exemptions and Benefits
Q4: Can hydropower projects claim VAT exemption on all imported equipment?
A: VAT exemption applies specifically to equipment not manufactured in Nepal, including turbines, generators, penstocks, control systems, and transmission equipment. The exemption requires DoED recommendation and customs clearance documentation. Standard construction materials and services are subject to regular 13% VAT, but input credits are available.
Q5: How is the 10-year income tax exemption calculated for hydropower projects?
A: The 10-year exemption begins from the date of commercial operation, not construction start. For projects with phased commissioning, exemption begins separately for each phase. The exemption covers all business income from electricity generation and sale, including export earnings. After the exemption period, projects pay reduced 20% tax for 5 years, then standard 25% rate.
Q6: What happens if a hydropower company shows losses during the exemption period?
A: Losses during the exemption period can be carried forward for up to 12 years (15 years for projects above 25MW). These losses can offset future taxable income even after the exemption period ends. This provision is particularly valuable for projects with high initial operating costs or debt service obligations.
Royalty and Revenue Sharing
Q7: How is royalty calculated for hydropower projects with varying generation?
A: Royalty is calculated monthly on actual generation revenue, with a guaranteed minimum payment based on installed capacity. For example, a 25MW project pays either 2% of actual monthly revenue or NPR 1.25 million (NPR 50,000/MW × 25MW), whichever is higher. Payments are made to DoED within 15 days of month-end.
Q8: Are hydropower projects required to provide free electricity to local communities?
A: Yes, projects must provide free electricity to households within specified radii of the project site. The quantum varies by project size: 30 units/month for 1-10MW projects, 50 units/month for 10-50MW projects, and 100 units/month for larger projects. This obligation continues throughout the project life and is separate from royalty payments.
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