Input VAT That May Be Restricted or Disallowed in Nepal

Common reasons for restriction

Credit may fail because the supplier or invoice is invalid, the purchase was not received, it serves exempt activity, it is private, or the law restricts that category. Separate these reasons because the correction and evidence differ.

Vehicles, entertainment and mixed-use costs

Do not rely on a general assumption that every business-labelled cost is creditable. Review the current statutory restrictions and the actual use of vehicles, hospitality, accommodation and employee-related expenditure.

Capital assets still need a use test

Machinery, buildings and equipment can support taxable activity, exempt activity or both. Capitalisation in accounts does not automatically decide VAT credit. Keep asset location, use and allocation evidence.

Create a blocked-credit register

Record invoice, supplier, amount, reason for restriction, legal reference and accounting treatment. This prevents the same disallowed VAT from being claimed later through an unreconciled ledger.

A practical control to retain

The accounting entry should preserve the gross cost even when VAT credit is blocked. Decide whether disallowed VAT belongs in expense, inventory or asset cost under the applicable accounting policy, then reconcile that amount with the blocked-credit register. Review recurring vendors and expense categories quarterly; repeated restriction can affect purchasing choices and budgets, not merely the VAT return prepared after the money has been spent.

For accountants, business owners and vat return reviewers, the sign-off should answer the guide's four core questions in writing: Not every VAT amount on a bill is creditable. Purpose and actual use are central. Specific statutory restrictions must be checked. Mixed-use assets need defensible treatment. Record who checked those answers, the source date and any unresolved fact. If a later invoice, contract or Schedule amendment changes one answer, reopen the classification or return treatment instead of silently carrying the old assumption forward.