It won’t be an overstatement to say that Nepal holds
unique investment and business potential when compared to its neighbours and
global peers. However, it has been unable to perform well in terms of
attracting Foreign Direct Investment (FDI) while some of the large-scale
manufacturing industries in the country failed to prosper with a few meeting
untimely death.
The country has so far failed to capitalise on its
advantages of having one of the world's largest market access across the border
in the south – two Indian states Bihar and Uttar Pradesh have 350 million
people.
It has the facility of duty-free entry of hundreds of
products to China, India and European Union and enjoys the Generalised System
of Preference (GSP) in the market of the United States of America. Being a
Least Developed Country (LDC), it also enjoys other trade facilities as well.
Nepal also, probably, has the finest FDI case studies
like Unilever, Dabur Nepal, Surya Nepal, Ncell and Standard Chartered. For
Dabur and Unilever, Nepal is one of the best markets globally.
At the same time, the purchasing power capacity of
Nepali people improved significantly which created a base for the supply of
luxury goods like vehicles, electronics, branded clothes and other facilities.
With about 30 million people, the country itself is a market to reckon with.
Still the country has been unable to receive desired
amount of foreign investment. The prolonged political instability which
contributed to policy uncertainty, decade long armed conflict followed by
prolonged transition, and energy crisis resulted in investors shying away from
Nepal.
In order to change the investment rhetoric, in 2017 the
government organised Nepal Investment Summit which was able to draw the
investment commitment of about 14 billion US dollars, one third of which is in
the phase of realisation, according to the Investment Board of Nepal (IBN).
With the implementation of the federal constitution
three and a half years back and a government with two-thirds majority in place,
Nepal began to draw the interest of foreign as well as domestic investors. To build
an investment climate and increase the confidence of the investors, the
government has made some major legal reforms in the last few years. Endorsement
of the Public Private Partnership and Investment Act, Foreign Investment and
Technology Transfer Act, Industrial Enterprise Act, Company Act and Labour Act is
an effort to attract more investors to the priority areas like agriculture,
information technology, tourism, infrastructure and energy.
Public
Private Partnership and Investment Act, 2019
Recently formulated PPP and Investment Act
sets the way for the formation of an autonomous body to facilitate mega
infrastructure projects with FDI, and separate units of PPP and Investment. The
IBN is mandated to deal with the investment of over US$ 5.2 million and
hydropower projects of over 200 megawatt installed capacity.
Foreign
Investment and Technology Transfer Act, 2019
The
FITTA has revised the definition of 'foreign investment' and included lease
financing and investment in listed securities in secondary market. Foreign
investment can be made individually or collectively or by opening a branch
office or establishing a venture capital fund and contract manufacturing. It
has also paved the way for one-window service to the investors and reduced the
negative list.
Company
Act 2017
The Company Act has robust
mechanism to protect trademarks that refuses to register any company with a
name that is identical to a registered trademark. According to the act, a
public company can hold 100 percent shares of private company and vice-versa
without conversion. A Nepali citizen can be appointed as an agent or authorised
representative by a foreign company at its liaison or branch office in Nepal.
It also has the provision to buy back its own shares to protect itself from any
hostile overtake or to remove uneconomic units of shares.
Labour
Act 2017
Labour
Act gives flexibility in hiring for different terms as per the employer’s
requirements and adopts 'No work, no pay' principle. It has simplified the provision
for work permit to foreign nationals in executive and other positions. This law
has mandatory provisions of employment contracts for all types of employment,
and sets minimum wage per month at Rs. 13,450. Employers are required to have
accident insurance and health insurance policies for all employees.
Industrial
Enterprises Act, 2016
The
Industrial Enterprises Act has implemented 'No work, no pay' and restricted
illegal strikes. It has classified industries on the basis of size of fixed asset
investment and nature of business and allows import of goods from foreign
parent company for market development of new goods and employment of foreign
nationals in high-level managerial position.
This Act offers 20 per cent
exemption in income tax for manufacturing industries and 40 per cent discounts
on income tax for industries with investment in construction of roads, bridges,
tunnels, ropeways, railways, trams, trolleybuses, airports, industrial
structures and industrial complexes. Similarly, manufacturing industries other
than that producing brandy, cider & wine from fruits established in
underdeveloped, undeveloped and less developed regions are entitled to 90
percent, 80 percent, and 70 percent exemption respectively on income tax for
the first ten years from the date of operation.
Manufacturing industry
established with capital investment of at least 1 billion Nepali rupees and
providing annual direct employment to more than 5 hundred individuals is
entitled to full income tax exemption for the first five years from the date of
operation and 50 percent income tax exemption for an additional three years.
Likewise, there is incentive for
the generation of energy, excavation and exploration of petroleum or natural
gas, tourism industry with fixed capital of over NRs. 2 billion, software
development, data processing and digital mapping industry and export-oriented
manufacturing industry. Any industry that exports Intellectual Property (IP)
created and registered in Nepal is entitled to a 25 percent exemption on
royalty income from export of such property.
The Act has exemption facilities
and concessions for Value Added Tax (VAT) and customs tariff for the
export-oriented industries, import of machinery and other industrial device. It
also has a provision to not to levy local taxes including Unified Property Tax
on industries operating inside the Industrial Districts (IDs) and additional
facilities to industries established inside the Special Economic Zones (SEZs)
of IDs.
Special
Economic Zone Act, 2016
Private sector is allowed to
establish, operate and manage the special economic zone upon obtaining of a
license. Based on the nature of the industry, the maximum validity period of
the license is 30 years and can be renewed for another 10 years if the industry
is utilizing over 30 percent of its capacity. Documentation
like preliminary environment examination, economic and commercial viability is
not needed to establish an industry in the SEZ. Foreign workers or employees
working in the industry shall take 70 percent of its total remuneration in
convertible currency outside Nepal instead of 60 percent.
Likewise, industry using up to 60
percent of domestic raw materials is entitled to receive 50 percent exemption
for the next 10 years while the others will get 50 percent exemption for the
next 5 years. Any industry that exports products or services, or sells its
products and raw materials to other industries in the SEZ will get zero VAT
facility. There are incentives for renting land and importing raw materials.
One-window
facility will be established at the SEZ which will include industry
registration, approval of foreign investment, company registration, provision
of services and facilities as per the SEZ Act, registration of Personal Account
Number (PAN), provision of certificate of production, passport processes, and
work permit approval. Strikes
and protests are strictly prohibited within the SEZ. The government has
announced various incentives and concessions for the establishment of
industries in the SEZ in hilly and mountain districts.
Environment
Protection Act, 1997
Proposed
projects cannot be implemented without getting Initial Environmental
Examination (IEE) or Environmental Impact Assessment (EIA) approved by
concerned body (in case of IEE) or Environment Ministry (in case of EIA).
Final
IEE shall be approved by concerned body within 21 days of receipt of complete
report. In case of EIA, concerned body shall forward the report to Environment
Ministry which shall then approve EIA within 60 days (additional 30 days if
required) of receipt of report. Projects must obtain pollution control
certificate from the government.
In
recent reforms, the government has scrapped the Supplementary EIA guidelines
and some of the criteria are relaxed. The criteria regarding change in number
of trees for determining the need for SEIA is removed. Similarly, duration of
disclosure of SEIA for public comments by Ministry was reduced from 30 days to
15 days.
Hydro
Related Laws
The
government has unveiled Nepal Electricity Regulatory Commission Act, 2017 that
envisions regulatory authority to regulate electricity generation,
transmission, distribution and cross-border power trade. It has floated Power
Purchase Agreement (PPA) rates of Ron of the River (RoR), Peaking RoR and
storage projects, including PPA in dollar currency for foreign investment
projects.
The
Memorandum of Understanding (MoU) on BIMSTEC Grid Interconnection and with
Bangladesh for the cooperation in power sector has created more business
potential. A Power Trade Agreement (PTA) signed between Nepal and India in 2014
has promoted government-to-government cooperation on a number of power sector
activities including transmission interconnections, grid connectivity, power
exchange and trading.
There
is income tax holiday for hydro, solar, wind and bio-fuel projects that start
production, transmission or distribution within April 12, 2024. Only 1 per cent
VAT and customs duty will be charged on import of construction equipment,
machineries and raw materials.
Published in The Rising Nepal on 29 March 2019.
