Tourism entrepreneurs worried as Chinese airlines threaten to halt flights to Nepal over VAT dispute on air tickets

POKHARA, June 18: Tourism entrepreneurs in Nepal are worried as Chinese airlines have warned that it will stop flights to Nepal if the VAT provision on air tickets is not removed. These entrepreneurs, who are looking to tap the potential of Chinese tourists to revive the ailing tourism industry in the country, believe that any decision by Chinese airline companies to halt flights to Nepal over the VAT row on air tickets could deliver a significant blow to the country's tourism sector.

Pom Narayan Shrestha, chairman of the Pokhara Tourism Council (PTCC), said that China has expressed dissatisfaction after the implementation of VAT on air tickets. "Nepal's tourism sector has high expectations from Chinese tourists. The arrival of Chinese visitors is slowly gaining momentum. However, China's warning about potentially stopping flights to Nepal has added to the concern," said Shrestha. "If flights from Chinese destinations to Nepal are stopped, it will have a significant impact on Nepal's tourism sector."

Recently, Pokhara's tourism businessmen launched promotional campaigns in various Chinese cities to increase the arrival of Chinese guests. They were optimistic that the campaign would boost the number of Chinese visitors. “However, due to the VAT on air tickets, it seems that flights from China will be affected," said Shrestha, "This has disappointed the businessmen. The government should take immediate steps in this regard."

According to the Nepal Tourism Board, the number of Chinese tourists entering Nepal in the first five months of 2024 (January-May) was 46,671. Before the COVID-19 pandemic, the number of Chinese visitors in 2019 was 169,543, the highest ever recorded. In 2023, the number of Chinese tourists entering Nepal stood at 60,878.

The government introduced VAT on air tickets in the budget of the current fiscal year 2023/24, with the provision taking effect last October. The tourism entrepreneurs have complained that airfares have become more expensive due to this new provision. They argue that the additional tax has increased the financial burden on air passengers, forcing potential tourists to look for other destinations.

Businessmen stated that not only domestic but also international air passengers are affected by the additional burden of VAT. They mentioned that foreign guests from third countries are being diverted to other destinations as the increased cost of air travel to Nepal has made it less attractive.

Businessmen have been saying that guests coming from China, a neighboring country from which Nepal expects more foreign visitors, have opted for other destinations due to the expensive airfares. A tourism businessman from Pokhara, who recently visited China for promotional purposes, said that Chinese businessmen complained about the increased cost of air travel to Nepal due to the VAT imposed on airfares.

Nepal's tourism sector relies heavily on Chinese and Indian visitors, and Pokhara has been expecting an increase in guests from these countries. Tourism businessmen in Pokhara argue that with sufficient support from domestic and Indian guests, supplemented by Chinese visitors, the business can be sustained even if the number of tourists from other countries decreases.

However, Pokhara's tourism sector has been concerned about not receiving as many Chinese guests as expected. Hariram Adhikari, president of the Nepal Association of Tour and Travel Agents (NATTA) Gandaki, said that the warning from China about stopping flights to Nepal due to the VAT on airfares has heightened these concerns.

"The Chinese airliners also want to fly to Pokhara. However, the Chinese companies are not willing to come to Pokhara because of the VAT," said Adhikari, "It was expected that the provision of VAT would be removed in the next fiscal year's budget. However, it has only made the airfare more expensive."

China has recently written to the government to remove the provision of VAT on air tickets. On Sunday, a discussion was held between representatives of the Ministry of Foreign Affairs, Ministry of Finance, Inland Revenue Department (IRD), Nepal Rastra Bank, and Civil Aviation Authority of Nepal (CAAN).

According to Gyanendra Bhul, information officer of CAAN, following the discussion, the Ministry of Finance and the IRD have been asked to further study the issue to find a solution. Chinese airlines are not registered for VAT in Nepal due to double registration for VAT in both China and Nepal.

Bhul said that Nepal has signed a Double Taxation Avoidance (DTA) agreement with China, which stipulates that the Chinese company should pay VAT in Nepal. "The air treaty agreement between the two countries should resolve this dispute. However, China has now requested to remove this VAT provision," he added.