Tax Deduction and Accounting for Freight Expenses

Reverse VAT Deduction

All businesses, whether VAT-registered or not, must file Reverse VAT at 13% when making payments for freight charges or vehicle rental to non-VAT-registered transport businesses or individuals.

However, if the payment is made to a VAT-registered transport business or individual, Reverse VAT filing is not required as the payment is processed through a VAT invoice.

For imports, the freight charge from the customs point to the warehouse is subject to Reverse VAT. For exports, the freight charge from the warehouse to the customs point is not subject to Reverse VAT.

The amount collected under Reverse VAT must be deposited under Revenue Title No. 33317 within 25 days after the end of the month at the respective revenue office.

The deposited VAT amount should be recorded in the purchase account, where the VAT paid on purchases and the freight expense should be claimed under taxable purchases.

If an individual registered only with PAN (not VAT) files Reverse VAT, the entire amount (including VAT) can be deducted as an expense for income tax purposes.

Failure to deposit the Reverse VAT on time results in 15% interest and an additional 10% penalty.

Withholding Tax (Source Deduction)

When making freight payments to a VAT-registered person, 1.5% of the amount must be deducted as withholding tax.

For non-VAT-registered persons, 2.5% must be deducted as withholding tax.

The deducted tax must be deposited within 25 days after the end of the month, along with an e-TDS filing.

Failure to deposit the withheld tax on time incurs 15% annual interest.

Failure to file e-TDS on time results in an additional 2.5% annual penalty on the TDS amount.

Invoice Requirement for Freight Expenses

Waybills and delivery notes are not considered invoices, so expenses based on these documents cannot be deducted for income tax purposes.

For freight charges exceeding NPR 2,000, a VAT invoice mentioning the PAN number must be obtained.

If the payment is made to an individual vehicle owner who is not a registered business, the individual’s PAN number must be mentioned on the receipt.