Reforms Underway To Lure Investors

 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.