Its high time the parliament prioritise legal reform to vitalise the economy and lift private sector confidence
--BY SAGAR GHIMIRE
The Nepali economy is currently experiencing one of its worst periods. Most economic indicators suggest that a crisis is looming. Economic growth, which averaged 4.9% between 2009 and 2019, contracted to 2.2% in 2020 for the first time in 30 years. While there has been some recovery, the economy still faces significant vulnerabilities that hinder high and sustainable growth.
The Covid-19 pandemic has only exacerbated the structural issues that hinder economic growth in Nepal. Job creation remains low, and there is a significant infrastructure gap. The high cost of finance has eroded the capacity and competitiveness of the domestic manufacturing sector.
The Covid-19 pandemic has exposed the vulnerabilities of Nepal's economy. The economy started to stumble with a slight drop in remittances for a few months. The slump in tourist arrivals, disruption of economic activity, and falling investment and exports have all put a strain on the economy. Most economists agree that the country is heading towards an economic crisis. Poor performance of various indicators also suggests that further serious economic trouble is looming. If policymakers or the government fail to respond in time, the economy will plunge into a crisis. Economists say this is the ideal time to give the much-needed impetus to the economic reform that the country desperately needs.
The confidence of private sector leaders is so low that they have threatened to protest against the economic downturn. Economic reform will not only prevent the economy from falling off the cliff, but also guide the country towards a path of high and sustainable private-sector-led growth.
To achieve this, the revision of economic and business laws should be the starting point. According to private sector umbrella organisations, there are over two dozen laws that need to be rewritten or revised, and another half dozen new business laws that need to be drafted and introduced. These laws have hindered private sector investment. Business leaders say that the reform is expected to ease regulations for doing business and stimulate private sector investment in the country.
"The economy is contracting and heading toward crisis. This should serve as a wake-up call for political leaders to prioritise the economic agenda,” said Anjan Shrestha, vice president of the Federation of Nepalese Chambers of Commerce and Industries (FNCCI). “All laws related to the business and economy should be reviewed first. Those which impede the private sector’s investment and growth or economic development must be revised. The legal reform would help in creating an investment-friendly environment, raise private sector confidence and create an atmosphere where the profit is respected or celebrated,” he added.
The recent election of a new House of Representatives and the subsequent formation of a new government not only reflect the fresh mandate of the people but also mark the end of a long-standing political deadlock and instability that have become the defining features of Nepal’s politics.
Political leaders have consistently prioritised other issues over economic concerns. The current ailing condition of the economy reflects their ignorant attitude toward the economic challenges of the country. Economic issues have rarely been a focus of intra-party or inter party political meetings or consultations in the past five years. The House, which was dissolved and reinstated twice by the Supreme Court, did not pass any significant economic or business laws. Only a dozen laws related to business and the economy were amended during the entire five-year term of the parliament. Those amendments too were marginal, not as required. The parliament was largely ineffective beyond the formation of governments. The Covid-19 pandemic further slowed reform efforts that could have made Nepal a more attractive investment destination.
But is the business as usual going to work? There is a broad consensus that it will not be sufficient if there is a genuine desire for reform. However, there is a lack of willingness and determination at the political leadership to take bold initiatives for the reform. Now is the time to move forward with the reform process. One potential starting point could be the review of business and economic laws and regulations in the country.
While the previous parliament was occupied by political horse trading, the newly elected House should prioritise economic and business legislation. Private sector leaders say that the new government and parliament should not make any delay in responding to the current economic challenges by amending old laws, scrapping obsolete legislation, and enacting new laws that stimulate private sector investment and revitalise the economy. To do this, the government should collaborate with the private sector to identify laws that need to be drafted or revised, and hold consultations with private sector organisations. Legal reform will pave the way for the private sector to thrive and help bring the teetering economy back on track. The parliament should also activate its various committees to expedite the passage of these laws.
Krishna Prasad Adhikari, Vice President of Confederation of Nepalese Industries (CNI), said that the private sector is desperately waiting for the legal reform that is a must to unlock the private sector potential.
“We have been pressing the government and the political leadership for a long time for legal reforms. While some laws have been amended or changed, we want the new government and the parliament to revise them all in this parliament,” said Adhikari. “The legal reform will not only improve the business environment and attract investment, but also give a shot in the arm to the ailing economy.”
From tax-related laws to legislations governing company registration and foreign investment-related laws, the private sector has long been expecting the changes in over two dozen laws and regulations. Some of the laws like the Bank and Financial Institution Act, Nepal Rastra Bank Act, Industrial Enterprises Act and Foreign Investment and Technology Transfer Act were amended or introduced recently. Private sector leaders have expressed disappointment with the way some of these laws were passed. For example, the US Department of State said in its recent report: "Three laws directly affecting foreign investment (FITTA, PPP, and SEZ) were hurriedly revised and passed by Parliament but left little time for stakeholder consultations or transparency in the process." Both foreign and domestic private sector representatives often say that the Government of Nepal has not done enough to improve the business environment. The government should not hesitate to review these laws in response to the demands of the private sector.
Business Sector MPs
The entry of nearly a dozen representatives from the private sector in the parliament has increased expectations that the House will prioritise laws related to business and the economy. Binod Chaudhary, the only Forbes-listed billionaire from Nepal and chairman of Chaudhary Group, is one of them who has advocated for economic reform. Devi Prakash Bhattachan, the chairman of Prabhu Group which owns Prabhu Bank Ltd, is also now a member of parliament. There are other representatives from various business sectors who have promised to push legislation that is favourable to business and economic growth.
Private sector leaders have called on the government to prioritise the introduction of key business and economic legislation in the first session of the House. They argue that such discussions and debates in the early stages of the new House would signal that the country is committed to addressing its economic challenges through legal reforms.
Crucial laws that need revision
Though the private sector has been urging the government and the parliament to work on over two dozen laws, they say that some of them are crucial and hence need immediate revision.
Dr Swarnim Wagle, economist and a former vice-chairperson of National Planning Commission, said there are 24 to 48 laws that need to be amended, revised, scrapped or drafted. “There are some acts which need to be revised while some new laws should be introduced. This is something that the private sector has been demanding for the past few decades,” said Wagle, who is also the chairperson of the Institute for Integrated Development Studies (IIDS) - a South Asian policy think-tank based in Kathmandu.
“Not all of them require revision as demanded by the private sector who may have their own interest. But, if it is in the broader interest of the country, these laws must be revised.”
New Business Age presents some of the key business and economic laws that should be revised immediately:
Value Added Tax Act, 1996: This is one of the major laws that the private sector has been demanding for amendment. The main amendment sought in this law is the rate of the VAT itself. Though the single rate of VAT has been fixed at 13%, the private sector wants to have multiple VAT rates or the rates lowered to 10% if the single rate is retained. Removal of the deadline to get the VAT refund and restriction on including interest and additional payment for the tax assessment by tax officers are some other provisions that need to be included in the VAT Act.
Industrial Enterprises Act, 2020: Though it has been just three years since the passage of the Industrial Enterprises Act, industrialists and businessmen have been calling for amendments to some of the provisions in this law. As the law requires the deadline extension approval required to the industries failing to start production on time, private sector organisations are seeking amendment to limit such requirement to those industries who have benefitted from the facilities under this law. The law states that industries registered under this act are entitled to waivers, facilities and subsidies. However, other acts including the Income Tax Act pose a challenge for industrialists to claim such benefits. The amendment in the provision could end the interpretation confusion.
Environment Protection Act, 2019: Business leaders point out several provisions of the law on environment protection that have made doing business extremely difficult in Nepal. They say that it needs to be revised to ease the process of environmental impact assessment (EIA) and other requirements. From provisions of fines to blacklisting, the law has been an obstacle for the businesses and industries to set up their plants or projects in Nepal.
Consumer Protection Act, 2018: Going against the market economy, the Act still authorises the government to regulate the price of any commodity or service. The private sector wants to remove that authority from the government and allow the market to fix the price of commodities and services except for essential and injurious products. Similarly, the act also requires the trader or service provider to publish or keep a list of all products and services with their prices. Since putting the price list of every product is not possible, the law should be amended to remove such provision.
The Lands Act, 1964: This is an old law that restricts industries and businesses from owning or holding lands more than the limit set in the Act. However, industrialists say that the limit set by the Act should either be scrapped or increased. The current limit is inadequate and restricts industries to set up their plants or expand their operation. Similarly, there are also restrictions in terms of using the lands by the industries as collateral to obtain loans from banks and financial institutions (BFIs). Industrialists say that the Land Act needs to be amended to provide industries to own and utilise the land for their operations.
Revenue Tribunal Act, 1974: Private sector leaders say that the law requires taxpayers to pay a huge amount in deposits as guarantee for any appeal in the tribunal against the assessment of tax by the tax office in the tribunal. While a taxpayer is currently required to deposit 50% of the total assessed tax and fine, private sector organisations have been demanding that such a high amount of guarantee was burdensome for businesses seeking to file appeal on the tax assessment.
Revenue Leakage Act: As some provisions overlap those in other Acts like Customs Act and Income Tax Act, there is a need for an overhaul in the Revenue Leakage Act. The Act entrusts the investigation authority on any offences to an investigation officer who can take up to six months for the investigation. Such an investigation should be completed within two months. Businesses have long been suffering from delay in the investigation related to revenue leakage offences.
Money Laundering Prevention Act, 2008: While the law on money laundering was introduced to fight the illicit flow of finance in line with Nepal’s international commitments, many provisions have been criticised by the private sector. One of the key amendments sought by business leaders is related to the reporting entities who must report the suspicious transaction. The Act identifies even nonfinancial institutions or professionals as reporting entities to share information about the transactions of suspicious nature. However, business leaders say that non-financial institutions or people cannot fulfil the responsibility of the reporting entity as required by the law. The law also requires a reporting entity to have a compliance officer. But, all entities may not be able to afford the cost of hiring the compliance officer.
Black Marketing Act, 1976: The archaic law needs to be either scrapped or amended. The scope and definition of black marketing is so broad and ambiguous that the authorities can (mis)interpret any transaction or business as black marketing. The fine and penalty are very high for any offence. The government can fix the price of any good or service. Traders are required to maintain the price list of every product or service. Otherwise, they could be tried on the offence of black marketing. A business leader told New Business Age that the black-marketing Act is the Sword of Damocles hanging over their heads. As this law has been often used to ‘terrorise’ businesses, the private sector wants to get rid of this law altogether.
Act Restricting Investment Abroad, Essential Goods Protection Act, Essential Commodities Control Act and Liquor Act are some other laws that should be scrapped, according to the private sector leaders. The Confederation of Nepalese Industries (CNI) has come up with a list of six laws that need to be rewritten. These include Bonus Act, Patent Design and Trademark Act, Nepal Agency Act, Drugs Act and Public Procurement Act.
Not a cakewalk
While there is a long list of Acts that the new parliament needs to prioritise, achieving legal reform may be easier said than done. The composition of the House could pose a major challenge, as no single political party has a majority. The recent appointment of Pushpa Kamal Dahal of the CPN (Maoist Centre) - the third largest party in the parliament - as head of a new coalition government has raised concerns about the stability of the government. If one or two parties withdraw their support, the government could face difficulties. Any turbulence would also weigh on the parliament like in the past. The Nepali Congress, the largest party, is expected to remain in opposition, but their support will also be crucial for the legal reform to be successful. Ultimately, it is the responsibility of the government to table amendment Bills in parliament in order to move forward with the legislation.
Although lawmakers claim to be committed to actively working on legal reform, they have also cited political interference and instability as factors that have hindered their roles in parliament. In the past, economic and business Bills have often received less attention and discussion in parliament or parliamentary committees compared to other legislation.
Bimala Rai Paudyal, a Member of the National Assembly, has observed that there is less discussion on economic and business-related Bills compared to other legislation. "There are many instances where we have even rewritten the original Bills tabled by the government. But that's not the case with Bills related to business and the economy. The parliament cannot even change full stop or comma in the economic or business-related Bills,” she said. “Because, it is said that it would topple the government. Parliamentarians are disempowered in terms of formulating the economic or business laws. So, we cannot improve or make corrections in the economic laws even when we see any shortcomings. We need to empower the parliamentarians,”