Doing Business In Nepal

Nepal at Glance

Nepal is a landlocked country on the southern slope of the Himalayas, located between China in the north and India in east, south and west- two huge countries with vibrant economies. Politically, it has been designated as a Federal Democratic Republic since May 2008. The government and private sector institutions have been addressing issues such as reforming the financial sector, strengthening the private sector's capacity, streamlining the private sector's development agenda, finding solutions to double-digit growth issues, and increasing industrialization based on trade competitiveness. 

  • Location: 26º22' North to 30º27' North and 80º4' East to 88º12' East
  • Time Zone: GMT + 5.45 
  • Area: 147,181 Square Km.
  • Currency: Nepalese Rupee (NPR)
  • Official language: Nepali (English is widely used in business and profession)
  • Population: 26.49 million (Terai: 50.3%, Hilly: 43.0%, Mountain: 6.7%)
  • Growth Rate: 5.48% (As of 2014)
  • Population Density: 204 per Sq.Km 
  • Urban Population: 19.3%
  • Rural Population: 80.7%
  • Household Size: 4.88
  • Sex ratio: 94.2 (male per hundred female)
Religion

Nepal is officially a secular state. Hinduism is the main religious faith among the majority of the Nepalese people, with Buddhism the second largest faith by number of followers (Nepal is the birthplace of Lord Buddha). Other religious faiths such as Christianity and Islam co-exist peacefully and harmoniously in Nepal. A rich cultural heritage and diverse cultural traditions are special features of Nepal. Nepal is a multi-cultural, multi-religious and multi-lingual society. More than 100 ethnicity are represented in Nepal, and approximately 70 languages are spoken.
 

Comparative Advantage

Nepal is located between two of the world’s most populous countries, India and China, with easy access to both vibrant markets. It has significantly lower tariffs on imports as compared with India, which can make Nepal an attractive location even to Indian investors. Other advantages in Nepal are affordable labor, high profitability, low land cost, and an accessible bureaucracy. Nepal is also entitled to preferential treatment in a number of developed-country markets.

The natural as well as cultural assets of Nepal also offer a substantial opportunity to investors. The country has a range of climatic conditions– from tropical to sub-arctic. The topography is generally mountainous in the north, hilly in the middle, and near sea level in the south. Nepal grows various agriculture products, medicinal herbs, and high-quality tea. There is also a huge potential for hydropower- approximately 43,000 MW is technologically feasible.

Market Size and Access

Nepal is small in size and population, and its domestic market is limited. However, its special relationship with neighboring countries offers significant access to the largest markets in the region. Nepal also has easy access to the world market. SAFTA and SAARC have been introduced as platforms for the Nepalese market. In addition, Nepal joined the WTO on April 23, 2004 to get benefit from global rule based multilateral trading arrangement.

Information and Communication

At present, approximately 72% of the population has access to television services, 84% to radio broadcasting services. The number of telephone customers by mid February 2013 total number of telephone subscribers reached 19,615,076, of this the mobile users are more than 85%, with the telephone density of 74% of the population. There are six different telephone service providers. During this period, out of 489 FM stations licensed, 363 FM stations are operating. Likewise, 6,590 newspapers and magazines are published. 

Population and Workforce

The population of Nepal according to the 2011 Census is 26.494 million with an annual growth rate of 1.35%. The population is ethnically and culturally diverse. The economically active population is 56.96%.. Based on the classification of industry:

  • 73.9% work in the agriculture sector and
  • 26.1% are engaged in non-agriculture sectors.

Nepal is a labor-surplus country that supplies unskilled, semi-skilled, skilled and highly-skilled labor to various labor-importing countries. The Tribhuvan University and other private universities produce skilled human resources. In addition to university courses, various skill-development courses are presented by a number of private and public institutions under the Council for Technical Education and Vocational Training in various fields. There is no shortage of trained human resources.

Economy

Since the 1950s, Nepal has made progress toward sustainable economic growth, and the country remains committed to a program of economic liberalization. Agriculture remains Nepal's principal economic activity. This sector occupies almost one third of Gross Domestic Product (GDP) with about two third of country’s population are dependent in this sector. Contribution of this sector to GDP was 33.87 percent in fiscal year 2012/13, which is expected to remain at 33.10 percent in fiscal year 2013/14. In fiscal year 2070/71, the annual growth rate of agriculture sector is expected to be 4.72 percent at constant prices of 2000/01. Approximately 25% of the total area is cultivable; another 33% is forested and the rest is mountainous.

Rice and wheat are the main food crops. The lowland Terai region produces an agricultural surplus, part of which supplies the food-deficient hill areas. Real GDP at basic prices is estimated to grow by 5.2 percent in fiscal year 2013/14 against the target of 5.5 percent. Such growth rate in the previous fiscal year was 3.5 percent. Economic growth rate reached over 5.0 percent in fiscal year 2013/14 after last five years. There has been some progress in economic growth rate in current fiscal year due to favorable monsoon, gradual improvement in investment environment, the environment of political consensus and cooperation, among others.

Investment Climate in Nepal

The Government of Nepal (GON) is highly supportive of all investment. It aims to create social and economic systems that can provide reliable access to good-quality, basic necessities such as education, health, and food that can generate jobs, protect the environment, and eradicate poverty.

The GON and private sector organizations work well in tandem. Through sustainable economic development, the country is working toward political stability, peace building, trade facilitation and economic capacity building.

Industry

The GON has placed a high priority on industrial development in the country. To that end, the GON is focused on creating an investment-friendly environment, increasing employment, production and productivity, and substituting imports and minimizing the trade deficit by promoting export-oriented industries.

The new Industrial Policy 2010 was created to replace the Industrial Policy of 1992 with the primary objective of attracting domestic and foreign investments by improving the industrial environment, increasing industrial production and productivity, creating more employment opportunities, substituting imports through the promotion of export-based industries, and improving Nepal's balance of payment by minimizing the trade deficit.

The policy has already been approved and is in the implementation phase, while preparations for the approval of the Technology Transfer Policy 2010 are in process. Likewise, a Nepal Business Forum has also been constituted to promote an investment-friendly environment and to maintain mutual trust and understanding amongst government officials, private investors, and stakeholders.

Size of the Market

The principal attraction for foreign investors to Nepal is the size of the market. In 2012-13, Nepal had the gross national disposable income (GNDI) of NRs. 2,195,827 millions. At NRs. 95 to a dollar, this amounts to approximately $23113.968 million USD. Nepal's GDP is NRs. 1,701,194 millions, per capita GNDI in 2012-13 was $926 USD, and per capita GDP was $717 USD (CBS National Account, 2013-14).

Return on Investment (ROI)

Compared to other countries in South Asia, Nepal offers the lowest tax burden in the region. Some of the reasons for comparatively high ROI in Nepal include:

  • Huge investment potential in tourism, hydro-power, agriculture, and mine and mineral sectors;
  • Abundance of natural resources;
  • Maximum income tax rate of 25% and value added tax (VAT) of 13%;
  • Income tax exemption on profits from exports and interest income on foreign loans;
  • Tax rate of 15% on royalties and technical and management fees; and
  •  Customs, excise duties, and VAT levied on raw materials and auxiliary raw materials of export-oriented industries is reimbursed to the exporter on the basis of the amount of exports within 60 days of application.
Labor Practices

Labor practices of Nepal are guided by the Labor Act of 1992. The creation of a new labor law is in process, and is being drafted with input from regular bipartite discussions and consultations with trade unions and employers, and with tripartite consensus of the GON, employers, and trade unions.

Special Economic Zones

The GON formed the Special Economic Zone Project (SEZP) on January 1, 2004 under the Ministry of Industry, Commerce and Supply (MOICS) to: formulate laws, rules and regulations; implement planning, design and construction of Special Economic Zones throughout Industrial Statistics 2010/11 Department of Industry Nepal; and to carry out relevant works.

Non-discrimination

There is no discrimination between a Nepali and foreign investors, and among various foreign investors in matters of licensing, incorporation, tax, availability of visa, labor relation and repatriation.

Business Registration
PRE-Registration Procedure

Prior to making equity investment in Nepal or embarking upon the technology transfer agreements with a Nepalese company, foreign investor/s will have to obtain the approval for the same from the Department of Industries (DOI). 
However, for equity investor/s in a new venture, the foreign investor/s will have to perform following additional activities as well:

Incorporate the company at the Company Registrar’s Office
  • Register the industry at DOI
  • Registration at Inland Revenue Office to get Permanent Account Number (PAN)
  • Others, if applicable (such as Trademarks/design/patents)
Incorporating a New Company in Nepal 

Foreign Investment and Technology Transfer Act (FITTA) 1992 allows foreigners to organize either a private limited company or a public limited company. The incorporation/registration of the company is done by Company Registrar's Office (CRO) located at Tripureshwor, Kathmandu.

The companies are incorporated and registered under the provisions of the Company Act, 2006 as amended from time to time. The Company Act, 2006 has a provision for three types of companies, namely, Private, Public and Non Profit Distributing. 

"Private Limited Company" means a company which by its articles,

  • Limits the number of its shareholders from 1 to 50 excluding persons who are in the employment of the company.
  •  Prohibits any invitation to the public to subscribe for shares.

"Public Limited Company" means a company that, 

  •  Has the minimum number of 7 shareholders (and there is no maximum limit).
  • Offers shares and debentures to the public through a prospectus which complies with the requirements of the Companies Act 2006 and Securities Act.

A company can be formed as a public company or alternatively, a company which is incorporated as a private company can also be converted into a public company after fulfilling the requirements of companies Act 2006. 

The private and public companies are prohibited to organize proprietorship or partnership firms.
The par value of share should be NRs. 100 per share for both the private and public companies.

Learn more detail about company registration here (www.ocr.gov.np)

Industry Registration

After obtaining approval for foreign investment, the industry is required to be registered with the DOI within 35 days. If the registration cannot be done within the stipulated time, the investor will have to apply for the extension of the validity period. Therefore, once the company is incorporated, the investor has to apply for registration of industry at DOI. 

Learn more about Industry Registration her (www.doind.gov.np)

Permanent Account Number (PAN) Registration 

Any business entity, including industry that has to pay income tax or Value Added Tax (VAT) should obtain the PAN. The industry has to be registered with the District office of the Inland Revenue Department or Inland Revenue Office (IRO) before its operation. In order to get PAN, there is no fee or deposit imposed. 

PAN registration is essential for buying land, building and clearance of goods at custom office. Therefore, it is recommended that the companies are registered with IRO immediately after incorporation. For this, the company has to apply with an application form as shown in Income Tax Act and Rules along with the following documents:

Learn More about PAN Registration here (www.ird.gov.np)

Industrial Property Rights 

The industries using Trademark on their products can register their Trademarks with the DOI as per Patent, Design & Trademark Act, 1965.

Opening of Foreign Currency Account 

Foreigners and companies can open and operate foreign currency account in any of the commercial banks in Nepal. Export oriented industrial companies can also open Foreign Currency Account. Industries incorporated as 100 percent foreign owned or as a joint venture may also open a foreign currency account to deposit the equity share of the foreign party in convertible currency. This can be used only to import equipment and plants as well as other fixed assets necessary for the industry.

Bibliography

Procedural Manual for doing business in Nepal –Published by Department of Industry 

www.doind.gov.np

www.investnepal.gov.np

www.cro.gov.np

www.ird.gov.np