Overview
Nepal lies in between the most populous countries
of the world, India, and China and maintains very
good economic rapport with her neighbors, which are
also trading partners with huge potentials for Nepalese
exports. Nepal and India maintain more than 15 agreed
trade and transit points. Likewise, a number of trading
points are available for overland trade with Tibet
and ARC.
While Nepal has preferential trading arrangement with
India, she has very close economic ties with China.
Other close neighbors of Nepal are Bangladesh and
Pakistan. Nepal and Bangladesh have already started
bilateral trade through land route.
Nepal along with Bangladesh, Bhutan, India, Maldives,
Pakistan , Sri Lanka and Afghanistan form the South
Asian Association for Regional Cooperation (SAARC).
These countries are heading to free trade area under
the SAARC framework.
Nepal, under its present liberal economic regime,
has given a dominant role to the private sector. FDI
is encouraged in all types of industries and infrastructure
projects, except defense and security. In the last
15 years a number of new joint-venture banks, merchant
banks, insurance companies have come up.
A number of private airlines dominate the domestic
air transport services. A number of state-owned enterprises
have been privatized and the process is continuing.
Nepal currency has been made fully convertible for
current account transactions. Licensing and quantitative
restrictions at the trade front have been forsaken.
Bonded warehousing and duty draw-back have been made
effective to encourage and facilitate industries
Now let’s have a look at the different aspects
important if we want to invest anywhere.
Arbitration
Statutorily available for settlement of dispute between
parties. In case of non-settlement of a dispute concerning
foreign investment via the Department of Industries,
the matter can be taken to arbitration for settlement.
Arbitration is governed by the rules of the UN Commission
for International Trade Law (UNCITRAL). The place
of arbitration will be Kathmandu. Investment disputes,
in case of industries with fixed assets of more than
500mio rupees, may be settled as per conditionalities
laid down in the foreign investment agreement.
Bilateral agreements
Nepal has signed bilateral investment treaties with
India, UK, Germany and Norway. OPIC is free to operate
in Nepal without restriction. OPIC is empowered to
offer its "extended risk guaranty" facility
to prospective U.S. investors in Nepal. Nepal is also
a member of the Multilateral Investment Guarantee
Agency (MIGA), which it joined in 1993.
Bottlenecks of investment
Improvements are there but significant problems remain.
These problems include a lack of direct access to
seaports, difficult land transport, lack of trained
personnel, scarce raw materials, inadequate power,
insufficient water supply, non-transparent and capricious
tax administration, inadequate and obscure commercial
legislation, and unclear rules regarding labor relations.
Buying power
With a per capita income of $279 makes per year Nepal
is one of the world's poorest countries.
It’s agriculture contributes 39% to GDP but
employs 76% of the working population. In the last
five years the average real GDP growth was less than
5% per annum.
Corruption
Most foreign investors have identified pervasive corruption
as an obstacle to maintaining and expanding their
direct investments in Nepal.
FDI
Indian ventures hold 32% of the total FDI, U.S. holds
9.9%. China, Norway, Japan, South Korea and Germany
are also prominent.
Foreigners are free to establish and own business
enterprises and engage in all forms of business activity
with the exception of defense industry, real estate,
security printing, trekking and travel agencies, business
and engineering consultancies, and legal and accounting
services. A hydropower policy announced in October
2001 was expected to boost the flow of foreign investment
into the hydropower sector of Nepal. However, political
instability, a deteriorating security environment,
a lengthy and cumbersome licensing process, and the
failure to finalize an electric power trade agreement
with India, the only potential market for any exportable
electricity produced in Nepal, all contribute to the
indifferent attitude shown by foreign investors towards
investing in Nepal’s hydropower.
The Foreign Investment and Technology Transfer Act
1996, eliminates the minimum investment requirement,
clarifies rules relating to business and resident
visas, exempts interest on foreign loans from tax,
and gives contract terms precedence over Nepali law
in investments valued at more than Nepali rupees 500
million (USD7.0mio).
Foreign investors are required to obtain licenses
for manufacturing or service sector investments, and
each license request must be considered individually.
Although, investments below Nepali rupees 1bn (USD14.1mio)
are referred to the Department of Industry for action
without the involvement of the IPB, in reality, such
investment proposals invariably go to the IPB. Foreign
investors frequently complain about bureaucratic delays
and lack of transparency in procuring investment licenses.
In most cases, one to six ministries other than the
Ministry of Industry review the business proposal
and give an opinion prior to consideration by the
IPB.
Licensing of new investments can be time-consuming.
Some foreign investors have reported that the licensing
process requires a good lawyer and great patience.
The law mandates, however, that the IPB is bound to
make a licensing decision within 30 days, provided
all necessary information has been submitted.
There is no local content or export performance requirement.
There is no requirement that nationals have to own
a stake in a venture or that the share of foreign
equity is reduced over time or that technology is
transferred.
FDI in tourism and power can be 100% FDI or up to
25% through portfolio investment through purchase
of stocks in the Nepal Stock Exchange.
Financial Institution
Besides Nepal Rastra Bank, the Central Bank of Nepal,
there are thirteen commercial banks and two development
finance corporations. Besides providing banking services,
commercial banks provide industrial term loans and
short term working capital to businesses and industrial
enterprises. There are 44 finance companies and 29
co-operatives with limited banking authority. Likewise,
13 insurance companies are providing services in Nepal.
Credit is generally allocated on market terms, although
special credit arrangements exist for farmers and
rural producers through the Agricultural Development
Bank of Nepal.
End 4.04 the Nepali Banking system assets reached
USD3.5bn At present there are no resident or non-resident
foreign commercial banks that have standing credit
limits for loans of a maturity of more than one year.
Implementation of policies
Although the Government of Nepal (GON) is open to
FDI, implementation of its policies is often distorted
by bureaucratic delays and inefficiency. Still mid
2004 there were 905 FDI projects in Nepal, worth USD
1.7bn.
Progress has been made to allow private operations
in sectors that were previously government monopolies,
such as telecom and civil aviation. Licensing and
regulations have been simplified,
There is often a wide discrepancy between the letter
of the law and the law's implementation. Foreign investors
constantly complain about complex and opaque government
procedures and a working-level attitude that isn’t
really helpful
Labor
Nepal has an easily trainable, intelligent work force.
Unskilled labor is cheap and abundant. Semiskilled
and skilled labors are generally available in sufficient
number. The government has established technical institutions
to develop skill in civil, electrical, electronics,
air conditioning /refrigeration, general mechanics
and auto mechanics. Training programs are also geared
to industrial and vocational training in woodworking,
metalworking, leather working, general fittings, tailoring
and so on. The programs on entrepreneurial and management
development and the colleges of higher learning provide
educated manpower for managerial positions.
The labor cost of Nepal is low. Work hours are 8 hours
a day and 48 hours a week with a half hour lunch break.
Permanent workers are entitled to 13 days of public
holidays, 15 days of sick leave with pay or half pay.
Female employees are entitled to 52 days paid maternity
leave but all these employee benefits and facilities
vary depending from the organization. The retirement
age in Nepal is 55 but in some cases, it can be extended
to the age of 60. Most of the offices in Nepal are
closed Saturdays.
Law sector
Foreign investors in Nepal face a non-transparent
legal system. Firms complain that basic legal procedures
are neither quick nor routine. The bureaucracy is
generally reluctant to accept legal precedents.
Copyright Act was passed in August 2002. The Act includes
all types of electronic and electrical audio video
materials, provision for penalties and provision of
confiscation of the sold and published unauthorized
materials. As per this act the offender will also
have to pay compensation claimed by the copyright
holder.
But enforcement is weak, with the result that much
of the software and most sound or video recordings
now circulating in Nepal have been pirated.
The revised copyright act is not yet to the level
required for trade-related intellectual property rights
necessary under the WTO. Revisions are likely, as
Nepal acceded to WTO in April 2004.
The Electricity Act defines special terms and conditions
for investments in hydropower development.
Patent registration is valid for only 7 years and
can be extended twice for a total period of 21 years.
In addition, Nepal does not automatically recognize
patents awarded by other nations.
Trademarks must be registered in Nepal to receive
protection. Once registered, trademarks are protected
for an period of seven years. Enforcement is very
poor.
Labor, health, and safety laws exist but are not properly
enforced.
Privatization
So far 14 state-owned corporations have been privatized,
7 have been liquidated and 2 have been closed. The
last privatization completed by the government was
back in January 2003. Out of the 14 corporations privatized
so far, foreign investors have taken over only two.
Rastriya Banijya Bank (RBB) and Nepal Bank Ltd (NBL),
are being prepared for privatization. In January 2003
a group of foreign experts took over the management
of RBB. and NBL.
Relations with government
Relationship-building in Nepal like in any other country
is essential to conducting business. Foreign companies
should use local representatives and agents. Supplying
government projects offers opportunities for large
volume sales, but requires an authorized local agent
or representative.
The Department of Industry (under the Ministry of
Industry, Commerce and Supplies) registers and classifies
foreign investments. It also serves as the secretariat
for the "One Window Committee," which manages
the income tax and duty drawbacks granted to some
foreign investments. Besides it facilitates corporate
registration, land transfer, utility connections,
administrative services agreements, and coordination
among various agencies.
The Investment Promotion Board (IPB), chaired by the
Minister of Industry, Commerce and Supplies, is the
primary government agency responsible for foreign
investment. The IPB is intended to coordinate policy
level institutions, to establish guidelines for economic
policies, to approve or disapprove foreign investment
proposals, and to determine applicable investment
incentives.
Repatriation
Foreign investors who have received permission to
invest in convertible foreign currency are permitted
to repatriate the following, outside Nepal, at the
prevailing rate of exchange:
1. Amount received by sale of the whole or any part
of the equity;
2. Amount received as profits or dividends;
3. Amount received as payment of principal and interest
on loans;
4. Amount received under an agreement for the transfer
of technology.
Restriction of Investment
The Land Reform Act of 1964 has put a ceiling of 16.4
hectares in the Terai (plain region), 2.7 hectares
in Kathmandu Valley and 4.1 hectares in the hills
other than in the Kathmandu Valley. Land is abundantly
available and could be purchased from owners.
Security
The risk of possible Maoist violence must be taken
into account by any foreign firm wishing to invest
in Nepal. Public demonstrations and strikes are popular
forms of political expression in Nepal and may occur
on short notice. These demonstrations are usually
non-violent and not directed at foreigners.
Tax
The Customs Act and the Industrial Enterprises Act,
as revised in 1997, establish invoice-based customs
valuations and eliminate many investment tax incentives,
installing in its place a lower, uniform rate.
Nepal employs tax incentives to encourage industries
to locate outside the Kathmandu Valley
Customs, sales tax, and excise duties are to be reimbursed
within 60 days on raw materials used in the production
of export items. However, these duty paybacks are
often extensively delayed.
Income in certain priority industries is taxed at
10% compared to the usual 20% rate.
The Electricity Act of 1992 allows developers of hydropower
an exemption from income tax for the first 15years
of a project's operation and a 10% reduction in income
tax for the remaining years. It also provides a flat
1% customs rate on all construction materials, equipment
and spare parts.
Trade and remittances
Nepal’s large trade and current account deficits
are offset by large service, transfer and capital
account surpluses. While the trade deficit is always
impressive its overall balance of payments is in surplus
due to large inflows of remittances from Nepalese
workers abroad. Foreign currency availability is up
to now no problem.
Transport
The only practical seaport for entry of goods bound
for Nepal is Calcutta in India, about 650 miles from
the border. The internal roads are of poor quality
and there is only one road leading from the south
to Kathmandu valley.
Visa
The Immigration Rules of 1994 describe visa regulations.
A non-tourist visa will be granted to the potential
investor for a period of six months to undertake a
study. A foreign investor and his dependents or authorized
representative and his dependents will be granted
a business visa until his investment is retained in
Nepal. An investor who makes a lumpsum investment
of USD one hundred thousand or its equivalent in convertible
currency is granted a residential visa for himself
and his dependents so long as he retains investment
in Nepal.
Foreign technical personnel can be employed by an
industry with the approval of the Department of Labor.
In such cases, arrangements should be made to train
counterpart staff in the technical / managerial positions
within a time frame. Foreign experts are permitted
to remit up to 75% of their earnings in convertible
currency.
FOR FOREIGNERS SETTING UP A BUSINESS IN NEPAL
|
