Investment-Related Reforms in the Nepal’s Budget 2082/83
Investment-Related Reforms in the Nepal’s Budget 2082/83
1. Legislative Revisions in Investment and Industry Sectors
The national budget proposed comprehensive amendments to several key investments and industrial statutes, including the Industrial Enterprises Act 2020, Direct Sales Act 2018, Insolvency Act 2006, Labour Act 2017, Hedging Rules, Companies Act 2006, regulations governing the operation of industrial zones, Forest Act 2019, and the Land Acquisition Act 1977 the aim to modernize existing legislation and enhance alignment with current business practices. Notably, the proposed revision to the Companies Act is intended to simplify procedures related to company registration, operation, and deregistration.
Additionally, the Budget outlines the drafting of new legislation governing intellectual property and loan-related matters to strengthen the overall legal infrastructure supporting industrial and investment activities in Nepal.
2. Reform Priorities for Enhancing Investment Climate
a. Foreign Investment and Technology Transfer Act (FITTA) 2019 and Regulations
i. Streamlining Repatriation Processes: The current dual-approval mechanism requiring both the Department of Industry (DOI) and Nepal Rastra Bank (NRB) delays the repatriation of dividends, investments, and other funds. Removing DOI’s involvement and simplifying documentation would facilitate timely repatriation, thereby improving investor confidence.
ii. Easing FDI Restrictions in Retail Sector: FITTA restricts foreign direct investment (FDI) in retail activities. For manufacturing industries with FDI, the inability to import and sell complementary retail products is a barrier. Amending FITTA’s schedules to allow a limited scope of retail activity for such companies could promote operational flexibility.
iii. Clarifying and Adjusting Technology Transfer (TT) Definitions and Royalty Caps: Currently, FITTA allows a 5% royalty cap for the liquor industry, while its regulations impose broader caps (5%-15%) across industries. These discrepancies create compliance and operational hurdles. It is recommended to (i) harmonize the legislation and regulations, (ii) limit TT scope to core technological know-how, excluding services such as management or marketing, and (iii) increase the cap to reflect global business standards.
b. Industrial Enterprises Act (IEA) 2020 and Regulations
i. Removal of Capital and Capacity Expansion Approvals: Under current provisions, increasing capital or production capacity requires prior DOI approval, causing delays of up to six months. Eliminating these requirements would streamline business expansion and enhance industrial productivity.
c. Outward Investment Regulations
i. Amending Restrictive Legislation: To facilitate outward investments, the Act Restricting Investment Abroad 1964 must be repealed. Further, a notification under the Foreign Exchange (Regulation) Act 1962 should be issued to explicitly permit outward investments in high-potential sectors such as manufacturing and IT.
d. Hedging Rules 2022
i. Clarifying Risk Mitigation Mechanisms: Despite the enactment of revised hedging regulations in 2022, no project has benefited from hedging due to ambiguities and lack of a designated hedging entity. The regulation should be amended to establish a clear currency risk-sharing framework and expedite the creation of the Hedging Entity.
e. Labour Act 2017
i. Relaxing Foreign Employment Quotas: To attract high-value foreign investment, it is imperative to permit the hiring of skilled foreign professionals. The Labour Act and its directives should be amended to increase the quota of foreign workers and simplify work permit and visa procedures.
3. Development of Intellectual Property Framework
Nepal’s intellectual property (IP) laws, particularly the Patent Design and Trademark Act 1965 and Copyright Act, are outdated and lack provisions aligned with digital enforcement and international standards. Current enforcement is fragmented, with overlapping responsibilities among the DOI, Customs, and Police. Reforms proposed are:
Establishment of clear coordination mechanisms among enforcement bodies.
Revision in laws in compliance with the TRIPS Agreement, including explicit protection for well-known trademarks.
Enhancement of penalties for infringement and clarify procedural enforcement of IP judgments.
4. Amendments to Technology Transfer Regulations
a. Increasing Technology Transfer Fee Limits: The Budget proposed raising royalty and technology transfer fee thresholds through amendments to Annex 1 of the FITTR 2021. This would resolve inconsistencies between FITTA and its implementing rules and enable companies to fulfil international obligations efficiently.
b. Reinvestment of Technology Transfer Earnings Abroad: Amendments to the FITTA now permit outbound technology transfer by Nepalese firms. The FITTR should be further revised to outline the process for establishing branch offices abroad and reinvesting retained earnings. Revising the Act Restricting Investment Abroad 1964 is also essential to facilitate such international operations.
5. Encouraging Investment Company Formation
The Budget supports the formation of investment companies to mobilize capital for enterprise and infrastructure development. Currently, directives under the Companies Act 2006 and the DOI’s Notice on Terms and Conditions 2079 require:
· A minimum paid-up capital of NPR 1 Arba.
· Investment only in sectors permitted under FITTA.
· Investment limited to equity (excluding loans, bonds, etc.).
To foster greater participation, budget proposed
i. The paid-up capital requirement to be reduced.
ii. Sectoral investment restrictions to be relaxed.
iii. Investment scope be broadened to include various financial instruments.
6. Ensuring Policy Consistency and Investment Security
Policy instability remains a critical concern for investors. For example: IT-based export services that previously benefited from a 1% tax rate on taxable profits are now subject to 12.5%, reflecting inconsistency in fiscal policy. Sustained political stability and consistent policy application are essential to bolster investor trust and ensure predictability in the business environment.
7. Strengthening Credit Rating and Reporting Systems
Nepal’s credit reporting framework is fragmented and lacks a dedicated legal foundation. Provisions currently exist across:
· NRB Credit Information Bye-Laws 2001
· Unified Directives No. 12
· Nepal Rastra Bank Act 2002
· Various NRB circulars
Key issues include:
· Absence of a sovereign credit rating.
· Incomplete data utilization and lack of analytical insights in credit reporting.
· A credit bureau (KSKL) focused solely on negative reporting, with minimal value addition.
Legislative reforms to establish a comprehensive credit reporting framework and obtaining a sovereign rating from international agencies are vital steps toward improving Nepal’s financial reputation and access to global capital markets.
8. Development of Double Tax Avoidance Agreements (DTAAs)
The Budget envisions formulating a model DTAA to facilitate increased foreign investment and avoid instances of double taxation. Negotiations based on this model will be initiated with key partner countries. However, inconsistencies in judicial interpretation where courts have imposed taxes on non-residents in contravention of existing DTAAs highlight the need for legislative clarity to ensure proper application of these agreements. Similarly, the model Bilateral Investment Agreement adopted in April 2024 is expected to serve as a foundation for future international investment agreements.
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