Nepal the world itself is enough to describe the country. Nepal we know the most beautiful place in the entire globe, full of natural resources, The Great Himalayas, birthplace of Lord Buddha and the native land of Gorkhas. But as far as the economic status is concerned it could be said that most backward country in the World. As per the latest report of United Nations, Nepal is among the Least Developed Countries and also leading the list. It is a landlocked country and it plays a vital role in development of a country and likewise it’s becoming blockage of economic rise.
Presently as per latest Population Census, the population of the country is 26,494,504 with the moderate growth rate of 1.35% per annum. The Finance Minister of Nepal had announced the budget of Rs. 517.24 billion for the Financial Year 2070/71 B.S. The Government had expected the annual growth rate @5.5%(5% PY) while the annual inflation rate is expected to be around 8% against 7.7%. Presently the main source of Budget is Custom Duty, Tourism, Foreign Donations etc.
Nepal generally welcomes Foreign Direct Investment (FDI) in all sectors due to acute dearth of resources for infrastructure financing. In country like Nepal FDI generally don’t face about money but directly or indirectly it is also transfer of technologies from technology rich country to technology deficient country, transfer of managerial skill and leadership too. FDI is generally flowing at low rate in Nepal. As per the World Investment Report in the financial year 2009-2010, in South Asia inflow of FDI per year is about USD 39 billion this is mainly due to rise of inflows in India. Among the other South Asian countries Nepal is receiving the lowest amount. In past few years the progress of inflow of foreign investment is growing upward but due to financial crisis along with debt crisis in the world the investment gets setback a bit.
The flow of foreign investment in Nepal accelerated when it was liberalized to invest in banking sectors in the year 1985. Further the Foreign Investment & Technology Transfer Act, 1981 as amended in1992 made platform for foreign companies to setup their units in Nepal and foreign companies like Unilever, Dabur etc started their units here. Further FITTA restricts the foreign privately owned companies to nationalize but the government does not interfere towards fixation or control of prices of industrial products. Except the industries producing products that directly affects the security and public health like Gunpowder, Bank Notes, Mint industries, cigarette, tobacco including chewing tobacco etc. do not required to get special permission and license in order to start the business the can start their industries after getting registered with respective department.
There are given some incentives to foreign investors in order to attract the FDI, some important incentive schemes are;
ñ Income received from exports is free from income tax.
ñ In case of production oriented units (other than cigarette, bidi and alcohol), energy based industries, agro industried, mineral exploration industries and forestry based industries (other than saw mills & catechu) income tax is exempt for 5 years from the date of commencement of commercial production.
ñ In case of national priority (like pharmaceuticals, hotel & resort, computer software, hospital & nursing home, herbs farming, fruit processing industries etc.) industries income tax is exempt for 7 years.
ñ Specified industries, like tourist, service and construction industries, are eligible for exemption from income tax for a period of 5 years on the recommendation of the Industrial Promotion Board and upon publication in the Nepal Gazette.
ñ Industries are entitled to a reduction in tax rate on each income tax slab by 5 percentage points.
ñ Industries established in remote, under developed and less developed areas, other than cigarette, bidi, and alcohol industries, are entitled to an additional tax exemption of 50 percent, 20 percent and 10 percent; and in respect of excise duty, 25 percent, 15 percent and 10 percent, respectively.
ñ Industries are entitled to deduct one-third of the value of the fixed assets investment as depreciation allowed under income tax law.
ñ Industries established as Public Limited Cos. with a minimum of 15 percent of shares distributed to more than 100 persons are entitled to a 5 percent reduction in corporate income tax.
ñ Industries in operation which diversify production through re-investments or expand installed capacity by 25 percent or more or modernize technology or develop ancillary industries either in the same industries or in other industries are entitled to set off 40 percent of the value of the new fixed investment in computing taxable income. Such definitions may be made in one year or in installments within a maximum period of three years.
ñ Industries which invest in modern plant , machinery and equipment which will control environmental pollution are entitled to deduct 50 percent of the investment so made as deductible expenses in computing taxable income.
ñ 10 percent of the gross profit is allowed as a deduction against net income on account of expenses connected with technology or product development and skill enhancement
ñ Dividends declared from investments made in industry are exempt from income tax.
ñ 5 percent of the gross income would be allowed as a deduction in computing net income on account of donation made for the improvement of schools, colleges, universities, hospitals, religious places and other social welfare activities.
ñ 5 percent of the gross income will be allowed as a deduction in computing net income as expenses on account of expenditure incurred on advertisements for the promotion of products or services and for miscellaneous expenses.
ñ Industries (other than cigarette, bidi, alcohol, saw mill and catechu) using 90 percent or more domestic raw materials in production, shall be entitled to 2 years tax exemption in addition to the tax exemption provided for production oriented, energy based, forest based and mineral exploration industries. This concession shall not apply to industries specified as national priority industries.
ñ Industries which provide direct employment to 1000 persons or more shall be entitled to an additional 2 year exemption from income tax.
In spite of these incentives opted by Government of Nepal, the total FDI is about USD 92 Millions only. It is the serious concern that Nepal ranked 136 out of 141 countries globally ranked by U.S. Commercial Service. The foreigners seek the favorable environment to invest their money but in our country that is not provided by the government. Unstable political environment, lack of industrial security, direct political movement under industrial sectors are the main reasons behind the low inflow of FDI. For example the Surya Garment was shut down due to violent strike by labour association under different political parties due to which many of the workers lost their job which have direct influence in unemployment and adverse economic growth, this is only the example other industries had also shut down their factories due to unsecured environment.
The government should go through the benefits of FDI in Nepal. In poor country like Nepal capital requirement for big projects can not be meet by our own resources though we saw the oversubscribed applications for shares of Arun Valley Hydro Project but that is not enough and it is also unsure whether in future such huge investment would flow. There is lack of modern scientific technologies which are very expensive to opt but when we invite foreigners to finance our projects they could provide that at low rate, also we can ask them for share of technology only. The unemployment rate of the nation is also high which is due to lack of sectors providing employment. Every day around 20000 Nepali citizen migrate to gulf countries like UAE, Qatar, Saudi Arab etc. because they could not find the right potential employer in homeland. The government should seek their view either they want to get migrated for employment or not, the answer will be No but they also disclose that they’re fed up with system and lack of opportunities here.
In order to welcome FDI and create opportunities here, the government have to opt some remarkable steps like Provide industrial security, Manage Political stability, Formation of new constitution as fast as possible etc. Also the government should reserve the some extra rights towards foreign investors so that they can not create monopoly here. There should be separate Labour Welfare Department and law governing the issues of Labour and employees of the nation. The direct involvement of political parties into industries cause production in industries and more likely there would be fulfillment of their interest only.
As a Chartered Accountant student, we have to support the nation as we’re the present and future of nation. We always have to sought about what we can do for nation from our position. We could be the part of nation building.
Let’s do something for good of nation.
Source:
- Industrial Enterprises Act, 1992
- Foreign Investment & Technology Transfer Act, 1981 as amended in 1992
- World Bank Data center
- US Commercial Service
- South Asia Watch on Trade, Economics & Environment (SAWTEE)
- Central Bureau of Statistics, Nepal
(Submitted by Umesh Rijal a CA student from Nepal currently residing in Laxminagagr New Delhi)
