Tax Rules for Pharmacies & Medical Shops in Nepal (2026 Guide)

Pharmacies sit in an unusual spot in Nepal's tax system — some products they sell are completely VAT-exempt, while others sitting on the very same shelf are fully taxable at 13%. Add presumptive tax eligibility and specific recordkeeping expectations from the IRD, and it's easy for a pharmacy owner to get the basics wrong without realising it. This guide sets out how VAT applies to medicines, what registration and record rules apply, and where the presumptive scheme fits in.

VAT-Exempt Medicines vs Taxable Items

Under Schedule 1 of the VAT Act, 2052, a defined list of essential goods — including most basic and essential medicines — is exempt from VAT entirely. This means no VAT is charged on the sale of these items, but it also means no input VAT credit can be claimed on the purchase of stock that falls in this exempt category.

Not everything on a pharmacy shelf qualifies, though. Items commonly sold alongside medicines — cosmetics, skincare products, health and dietary supplements, medical devices and equipment, and other non-essential items — are generally taxed at the standard 13% VAT rate. A pharmacy that stocks both categories effectively runs a mixed business for VAT purposes: exempt medicines on one side, taxable retail items on the other, and both need to be tracked and billed separately.

Registration Requirements for Pharmacy Owners

Beyond the standard PAN registration every business needs, a pharmacy must also hold the relevant drug licence from the Department of Drug Administration before it can legally sell medicines — this is separate from, and in addition to, your tax registration. On the tax side, if your pharmacy sells a mix of exempt medicines and taxable non-essential items and your combined turnover from taxable supplies crosses the applicable services/mixed-business threshold (commonly around NPR 30 lakh), VAT registration becomes mandatory for the taxable portion of your business.

A pharmacy dealing exclusively in Schedule 1 exempt medicines, with no taxable side-items at all, is not required to register for VAT purely on the strength of medicine sales. In practice, very few pharmacies operate this narrowly, since most also stock supplements, cosmetics, or medical supplies — so it's worth reviewing your actual product mix rather than assuming exemption applies across the board.

Presumptive Tax Eligibility for Small Pharmacies

A small, individually-owned medical shop may qualify for the presumptive tax (D-01) scheme on the income-tax side if it is run by a resident individual with only Nepal-source business income, annual turnover under roughly NPR 30 lakh, and taxable business income under about NPR 3 lakh. Under this option, you pay a fixed annual amount based on your local body classification — for instance, a higher fixed amount in a metropolitan city and a lower one in a rural municipality — instead of computing and filing full profit-based returns.

Remember that this presumptive option applies to income tax, not VAT. Even a pharmacy that is eligible for the fixed presumptive income-tax amount may still need to register for VAT separately if it stocks taxable items above the threshold, or may be exempt from VAT altogether if it deals only in exempt medicines. Treat the two questions — income tax regime and VAT registration — independently when assessing your obligations.

Recordkeeping Requirements Set by IRD

Because pharmacies handle a high volume of small, fast transactions, the IRD allows a practical shortcut for billing: retailers with high-volume over-the-counter sales, including pharmacies, may issue an abbreviated invoice for transactions up to NPR 10,000 under Rule 17(Ka) of the VAT Rules, 2053, rather than a full-format VAT bill for every small sale. This doesn't remove the recordkeeping obligation — it simplifies the paperwork at the point of sale while the underlying records still need to add up.

• Maintain a purchase register showing stock bought, split between exempt medicines and taxable items
• Maintain a sales register mirroring the same exempt vs taxable split
• Keep supplier invoices and distributor bills organised by month
• Retain drug licence and renewal documents alongside your tax records
• File VAT returns monthly if registered, and income tax returns as per your chosen regime

Practical Compliance Checklist for Pharmacy Owners

• Hold a valid drug licence in addition to your PAN and business registration
• Classify your product range into exempt medicines vs taxable non-essential items
• Register for VAT if your taxable-item turnover crosses the applicable threshold
• Use abbreviated invoices only within the NPR 10,000 per-transaction limit
• Keep purchase and sales registers split by exempt vs taxable category
• Reassess presumptive tax eligibility each year as turnover changes
• Renew both your drug licence and tax registrations on schedule

Frequently Asked Questions

Q1. Are all medicines VAT-free, or only essential ones?

Only medicines listed as essential/basic under Schedule 1 of the VAT Act, 2052 are VAT-exempt. Non-essential items commonly sold in the same pharmacy — cosmetics, supplements, medical devices, and similar products — are taxed at the standard 13% VAT rate. It's the product category that determines the treatment, not the fact that it was purchased from a pharmacy.

Q2. Does a pharmacy need to register for VAT?

It depends on your product mix. A pharmacy selling only Schedule 1 exempt medicines isn't required to register purely on that basis. But most pharmacies also stock taxable items like cosmetics or supplements, and once taxable-supply turnover crosses the applicable threshold, VAT registration becomes mandatory for that portion of the business.

Q3. Can a pharmacy use the abbreviated invoice for every sale?

Only for over-the-counter transactions up to NPR 10,000 under Rule 17(Ka) of the VAT Rules, 2053. Larger transactions still require a full-format VAT bill showing the standard invoice details.

Pharmacy taxation in Nepal hinges on one habit: keeping exempt medicines and taxable items clearly separated in your billing and stock records from day one. Get that split right, confirm your VAT and presumptive-tax status independently, and the rest of your compliance — invoicing, filing, and audits — becomes far more manageable.