Has the Business Climate Changed?

  11 min 30 sec to read
Has the Business Climate Changed?

The country needs to overcome a mountain of challenges to ensure that it has a vibrant doing business environment.


Ever since KP Sharma Oli assumed the prime ministerial post in February 2018, for the second time, he and several ministers of his cabinet have repeatedly expressed in foreign as well as domestic forums that ‘Nepal is open for business with lucrative investment opportunities’, and that ‘foreign as well as domestic investors should invest in the country without any feeling of hesitation.’ Over the past 16 months, the government has publicly made a plethora of promises to create a climate conducive for investments, an area in which Nepal has lagged behind for several years due the decade-long insurgency, protracted political instability, lack of effective policy-level support, outdated, unclear and often ambiguous policies, bureaucratic redtapism and cumbersome procedures.

The problems being faced by Nepali as well as foreign investors indicate that things have not been as rosy as claimed by the government officials. Several problems persist for domestic and foreign investors making it hard for them to do business in Nepal. Despite the government claims, a range of issues related to taxation, legal inconsistencies, procedural hassles, inadequacy of human resource, and lack of necessary infrastructure still discourage potential investors from making Nepal their choice investment destination.

The Ease of Doing Business (DB) Report, one of the flagship publications of The World Bank reflects the problems investors encounter while they look to invest in Nepal. In the Ease of Doing Business 2019 index, Nepal is ranked 110 among 190 economies, a slip from rank 105 in 2018. The report titled “Training for Reform” cited issues in taxation as the main reason behind the decline of Nepal’s position in the index.

Major problem areas
DB Report 2019 says, “Nepal made paying taxes more difficult through a 2017 labor act that introduced a labor gratuity, medical insurance and accident insurance paid by employers in a way that places a larger administrative burden on companies that already face considerable bureaucratic hurdles.” It adds that the labour gratuity is a particular burden as employers must file and pay it manually every month whereas the medical and accident insurance is paid annually.

According to the World Bank, this has an impact on the number of tax payments and time in hours to comply with tax obligations. Countries are ranked in the Ease of Doing Business index on the basis of scores obtained in 10 broad sub-indices that include Starting a Business, Dealing with Construction Permits, Getting Electricity, Registering Property, Getting Credit, Protecting Minority Investors, Paying Taxes, Enforcing Contracts and Resolving Insolvency. The World Bank uses a Distance to Frontier (DTF) score to gauge the performance of economies and the rank of each individual country.

Basically, DTF is scaled from 0 to 100, where 0 indicates the lowest performance and 100 the frontier. Among the 190 countries, Nepal ranked 158 in Paying Taxes which was the country’s lowest rank among the 10 indicators in the index.

The government has also gone on a tax hike spree, through which it has aimed to manage and finance its expenditures that have swelled massively after the implementation of the federal system of governance. Economists see this as something that will discourage investment. “A revenue shortfall is being seen and the government is, perhaps unwittingly, making Nepal an overtaxed economy,” says Dr Swarnim Wagle, former vice-chairman of National Planning Commission (NPC). According to him, there is a need to rein in unproductive spending making sure that it is aligned with the country’s absorptive capacity. “The government should look into how much revenue can be generated without overtaxing the economy,” he says.

Sluggish legislative reforms
There have been some attempts at legislative reforms such as formulation of new laws and amendments to some existing ones, rules and regulations with a view to make things easier for foreign and domestic investors. Days before the Nepal Investment Summit 2019, held on March 29-30 in the capital, three key legislations namely, Foreign Investment and Technology Transfer Act (FITTA), Special Economic Zone (SEZ) Act and Public-Private Partnership and Investment Act were endorsed by the Federal Parliament. Earlier in February, a meeting of the council of ministers endorsed the Hedge Fund Regulations, 2019 to provide safety against foreign exchange rate facility to foreign investors investing in specific areas of infrastructure such as hydropower, transmission lines, railway, metro and mono railways. Likewise, legislations related to labour and forests have also been amended with a view to instill confidence among investors.

However, there are still over a dozen economic bills stuck at parliament. Safeguards, Anti-dumping and Countervailing Bill, Bill to Amend and Unify Existing Laws Related to Industries and Business, Bill to Amend Land Act, 2021 BS, Land Utilisation Bill,  Information Technology Bill, Economic Procedures and Financial Accountability Bill and Bill to Amend and Unify Insurance Related Laws, among others, have not made noticeable progress. Also, the government hasn’t been able to sort out the unified intellectual property rights (IPR) law which has been one of the most sought after legislations, particularly by foreign investors.

According to a source at the Ministry of Industry, Commerce and Supplies, the draft of the IPR Bill still hasn’t been finalised, even after years of preparation. People close to the matter say that the draft of the proposed IPR Bill was scrapped in 2017 and the ministry officials started to prepare it from scratch. Both domestic as well as foreign investors say that they receive a low-level of protection of their intellectual properties here as the trademarks, patent and copyright are being governed by obsolete laws and regulations. Industrialists see the failure of the government and parliament to expedite the legal reforms and introduce business-friendly laws and policies as an impediment to doing business in Nepal. “Several necessary legislations are yet to be introduced. The laws that have been enacted recently have several problems that will add to our difficulties,” opines Jagadish Prasad Agrawal, chairman of Nimbus Group.

According to him, many of the newly enacted legislations have protectionist provisions that have created problems in the competitive business environment in the country. “The lack of coordination between the government and the private sector in terms of having a common ground for legislative reforms might be one of the reasons that the required laws have not been introduced,” says Agrawal.

Is the Upcoming Fiscal Year’s Budget any Better?  
The country’s business community members have expressed their disappointment over the provisions in the Federal Budget for FY2019/20 which they earlier saw as being positive. They had expected Finance Minister Dr Yuba Raj Khatiwada to take a pragmatic approach this time after the current fiscal year’s federal budget which has been considered as one of the most revenue-centric budgets in Nepal’s history.

Businessmen see the Federal Budget for FY2019/20 as no better in terms of taxation than the current fiscal year’s budget. “The upcoming fiscal year’s budget seemed balanced at first glance. We also welcomed it. But when the Finance Act was endorsed by parliament to pave the way for the implementation of the budget, the reality looked different,” says Kamalesh Agrawal, vice-chairman of Nepal Chamber of Commerce (NCC). According to him, some provisions related to taxation in the Finance Act like levying value added tax (VAT) on transportation of goods and mandatory requirement of a permanent account number (PAN)  from tax office to anyone receiving payments of over Rs 1,000 from business firms along with a hike in customs duty on the import of several products including essential items, like flour, will add to the cost of businesses which ultimately add to our difficulties in doing business. “VAT is levied on those areas that have value addition. Freight is a service business and there is no value addition in transporting goods. Instead, the government should have levied a service tax,” he says. Agrawal says that it has become very difficult for business firms to make payments to people who are hired temporarily such as labourers, electricians and plumbers as they don’t have PAN.

Nimbus Group Chairman Agrawal thinks the government has not given priority to the private sector in the Federal Budget for FY2019/20. “We had hoped for a good industrial and business environment after stability in the government. But things have not been as per our expectations. Its activities like sealing of factories in the name of inspection, allowing the continuation of syndicates and the leftist lean in formulation of policies has made us doubtful,” he says, adding, “These activities have given an impression that the government does not supports the country’s open economy.” According to Agrawal, there are not many arrangements in the upcoming fiscal year’s budget to enthuse the private sector. “There are some provisions for economic improvement in the budget. However, it is difficult to say at this moment if such provisions are  serious steps taken by the government for economic reforms or not,” he says.

Issues in FDI  
Investment Board Nepal has received 41 proposals for 31 investment projects showcased in the Nepal Investment Summit 2019. The two-day event saw investment deals amounting to USD 17.5 billion from both foreign and local investors. The government’s main aim in hosting this event was to send a message internationally that the country is open for business after the end of the prolonged political transition. Regardless of the claims made by the government that a favourable environment has been created for foreign investors to invest in Nepal, official data indicate that FDI inflow is actually on a steep decline. According to data published by the Department of Industry (DoI), FDI inflow decreased by 63 percent in the first eight months of the current fiscal year, compared to the same period of the last fiscal year. In the review period, FDI inflow amounted to Rs 11.25 billion, which was 34.9 billion in the same period of FY2017/18.

Experts urge for a change in the mindset of the people in the government and bureaucracy in order to attract more foreign investments in the country.  “Over the last 40-50 years, we have been lulled by easy money that comes from the donors. We need to be clear that the motive of any FDI is to earn profit and investments are not about charity. While investing here, foreign investors basically seek what specific advantages we offer to them that other countries don’t,” mentions Dr Wagle.  He is of the view that Nepal is yet to realise that there is a lot of competition for FDI in the South Asia region. “Not only have we to compete with neighbours like Bangladesh and India, we have to contend with states within India for FDI,” he says.

According to Dr Wagle, government authorities need to do more adequate homework and prepare better and have clearer views before inviting foreign investors.  “Sometimes we also get confused about the distinction between de jure and de facto, the things written on paper and things that actually happen in practice,” he says, adding, “We are pleased with ourselves for having a law passed from parliament but don’t give much importance to effective implementation of the laws and how our institutions like the Office of the Company Registrar, Department of Industry and central bank provide services as things like these matter a lot to the foreign investors.”

Effectiveness of One-Stop-Service Centre
The government during the Investment Summit tried to convince the investors that procedural hassles will be resolved once the One-Stop-Service Centre comes into effect. However, of the two such centres being planned, only one at the Department of Industry has come into operation.

The establishment of such centres would be instrumental in ending the painful procedural hassles investors are forced to face. Setting up such a facility has been one of the major demands of both foreign and domestic investors so that they would receive all necessary government services for paperwork and information under a single-window system. The government’s launch of the one-stop-service-centre at the premises of DoI on May 15 has so far failed to meet its objectives. At the moment, the situation at the centre, which houses the offices of 14 ministries, departments and the central bank can be described as chaotic and mismanaged at best, say service seekers.

According to them, almost all the offices at the centre haven’t started functioning as the staff at the offices are having no idea what their roles and responsibilities are.  Binod Prakash Singh, director general at DoI says that the department is working to ensure that all offices in the centre are operational by the end of Ashad. “We have held several meetings with the ministries and authorities concerned to kick start the one-stop-service-centre. The work couldn’t start earlier because the government agencies haven’t delegated their rights to the related offices,” he says. This clearly hints at the lack of preparation of such an important government facility. The other one at the Investment Board is yet to be established. The board officials said the centre will be set up only after the regulation of the Public Private Partnership and Investment Act is prepared.

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