Nepal: Taxation on the Hydropower Sector in Nepal

Nepal’s river systems represent one of the country’s most significant yet underutilized natural assets. With some of the world’s steepest river gradients, Nepal has an estimated hydropower potential of approximately 83,000 MW on a theoretical basis; of this, around 42,000 MW is considered technically and economically feasible. To convert this potential into operational capacity requires substantial long-term capital investment. In response, the Government of Nepal has introduced fiscal incentives in its tax laws to promote hydropower development and attract domestic and foreign investors.

1. Tiered Income Tax Holiday

Standard Hydropower Incentive

Any person or entity that obtains a license for commercial production, transmission, or distribution of electricity from hydropower (including solar, wind, or bio-product) by Chaitra 2084 BS (14 April 2028 CE) is entitled to:

• 100% income tax exemption for the first 10 years from the date of commercial operation
• 50% tax rebate for the subsequent 5 years

Reservoir and Semi-Reservoir Projects

For reservoir or semi-reservoir hydropower projects exceeding 40 MW (including lower belt projects operated in tandem) that complete financial closure by Chaitra 2085 BS (15 April 2029 CE):

• 100% income tax holiday for the first 15 years.
• 50% tax rebate for the following 6 years.

Continuity of Benefits

For a licensed person who commenced commercial production before the implementation of the above concessions, the provisions applicable at the time of obtaining the license shall apply.

Beyond tiered statutory holidays, Nepal’s hydropower sector offers durable corporate tax incentives, a 15% rebate for Nepal Stock Exchange (NEPSE) listed entities engaged in generation or transmission and a 20% rebate for projects developed for eventual government transfer. The 'Single Concession Rule' mandates choosing one beneficial incentive per income stream to avoid overlap.

2. Accelerated Depreciation

Entities involved in constructing and operating power houses or generating and transmitting electricity may apply accelerated depreciation, adding one-third (1/3^rd) to normal depreciation rates for all asset categories:

3. Business Loss Carry-Forward

Hydropower generation, transmission, and distribution projects are classified as public infrastructure under Nepalese law and may carry forward business losses for up to 12 years, compared to the standard 7-year period for other businesses. However, losses incurred in a year where a 100% tax holiday applies shall not be carried forward beyond the end of the holiday period.

4. Indirect Tax Exemptions

Exemption from Value Added Tax (VAT) and Excise Duty applies to the import and supply of construction equipment, machinery, tools, and high-capacity batteries required for water, solar, and wind energy projects, including steel sheets used in equipment manufacturing.

Additionally, there is a specific VAT exemption for large-scale reservoir or semi-reservoir projects exceeding 200 MW that achieve financial closure by Chaitra 2082 BS (15 April 2026 CE). This expanded relief specifically covers explosives, penstock pipes, and steel plates.

Accessing these facilities is strictly contingent upon formal recommendations from the Department of Electricity Development (DOED), the Investment Board of Nepal (IBN), or the Alternative Energy Promotion Centre (AEPC), as applicable.

Reference/Citation

Income Tax Act, 2058 (2002 CE)

IRD, GON Value Added Tax Act, 2052 (1996 CE)

IRD, GON Excise Duty Act, 2058 (2002 CE) | IRD, GON 

Inland Revenue Department | Government of Nepal Ministry of Finance

www.ird.gov.np

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