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Nepal and Foreign Investment

With the expectation to supplement domestic private investment through foreign capital flows, transfer of technology, enhancement in management skills and productivity and to get into the global market, Nepal finally opened its door for foreign investment by adopting the most liberal economic policies.

The Government of Nepal has also created a competitive and investment friendly environment by making the administrative procedures simple and easy and also providing attractive incentives and facilities to the foreign investors making Nepal one of the safest and suitable business destinations in the world.

The law of Nepal also assures the security of investments against nationalization. Besides this, Nepal being a member of Multilateral Investment Guarantee Agency (MIGA) assures the foreign investors against non-commercial risks like currency transfer, breach of contract, war and civil disturbances in the country. As of July 2004, according to the statistics of foreign investment division of Department of Industry, there are about 905 foreign direct investment projects in Nepal that worth approximately
US$ 1.65 billion. These projects in the sectors like Agriculture/Forestry; Manufacturing; Energy; Construction; Mineral; Tourism and other Service related industries have generated employment opportunities to almost 95,000 people in Nepal. India, USA, China, UK, Norway, Japan, South Korea and Germany are the leading countries with highest number of projects in Nepal.

Any investor can establish an industry or a project in Nepal with the approval and permission of the Department of Industry under His Majesty’s Government of Nepal. In order to obtain the permission, the foreign investor should first submit an application to the Department. There are various forms of foreign investment like shares, loans, etc. either in joint venture or cent percent foreign. Almost every sector in Nepal is open for investment like manufacturing, energy, tourism, mining, agro based industries. But cottage, arm and ammunition industries; explosives and atomic energy; real estate; poultry and fisheries; and some other sensitive industries directly relating to public health, environment and defense are a few exceptions for foreign investment.

The potential foreign investor is granted six months non-tourist visa for the feasibility study. Until the investment of a foreign investor is retained in Nepal, he/she and his/her dependents will be granted a business visa. If an investor makes a lump sum investment of US$ 100,000 or its equivalent in a convertible currency and as long as he/she retains investment in Nepal, he/she is granted a residential visa along with his/her dependents.

Some incentives and facilities accorded by the Government to foreign investors:
No income tax on (a) dividends (b) export earning (c) interest earned on foreign loan.

Reimbursement of (a) customs duty and sales tax on raw materials meant for industrial use (b) sales tax and excise duty levied on products sold to Export Promotion House (c) the customs duty, sales tax, excise duty and premium levied on raw materials, etc. used for production by an export industry (d) excise duty, sales tax and premium levied on any product and customs duty, excise duty and sales tax levied on the raw materials, auxiliary raw materials, etc., used for the production of goods sold within the country in foreign currency (e) customs duty, sales tax, excise duty and premium levied on inputs used for production of intermediate goods to be used for the production of exportable goods including refund on the sales tax and excise duty paid on intermediate goods on the basis of the quantity of exports within sixty days from the date of export (f) excise duty or sales tax or both to the industry using duty-and tax-paid raw materials, chemicals and packing materials.

A deduction of (a) 40 % of the value of new additional fixed assets from taxable income to industries which diversify production through reinvestments or expanding installed capacity by 25 % or more or modernize technology or develop ancillary industries (b) up to 50 % from the taxable income for the investment made on process or equipment for non-pollution (c) 10% from gross profit that goes for technology or product development and skill enhancement (d) 5% or less of the gross income, spent on publicity and promotional services, hospitality and any other similar permissible expenses.

15% of income tax on income earned as technical fees as well as royalty.

Exemption of tax, duty and fee on the products, machinery, equipment, tools and raw materials used by an export industry.

Capitalization of pre-operating expenses incurred for skill development and training.

An additional of 10 % rebate on income tax to any industry providing direct employment to 600 or more Nepalese citizens.

No royalty on captive power generation for the industry's own use and no double sales tax on the raw materials and products.

Apart from all these, a foreign investor can employ an expert or technical personnel in the foreign investment project from his/her particular country upon the permission of the Labor Department and these experts can remit up to 75% of their income in convertible currency.

About Nepal
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 excellent trading partners with huge potentials for Nepalese exports. 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 and Sri Lanka are the seven member countries of South Asian Association for Regional Cooperation (SAARC). The SAARC nations have a Preferential Trading Arrangement and are heading to free trade area under the SAARC framework.

The labor cost of Nepal is comparatively very low. Semiskilled and skilled laborers are plenty so as the unskilled laborers who generally work for 8 hours a day and 48 hours a week with a half and hour lunch break which is moreover known as tiffin break. The wage and salary of any of these groups is also lower than in any other developing countries. The 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 from one organization to the other. 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 and Sundays like the Government organizations; Banks; Diplomatic Corps, etc. but others work from Sunday through Friday – six days a week.

Banking Service
The Central Bank of Nepal - Nepal Rastra Bank, the two indigenous commercial banks - Nepal Bank and Rastriya Banijya Bank, other joint venture and commercial banks and financial corporations provides loans and full fledged services. The commercial banks also determine the open market exchange rate. There are insurance companies also providing insurance services.

Scope for foreign investment in Hydro Power
Nepal has a huge potential of hydro power that comes to about 83,000 MW out of which 43,000 MW is economically viable. Until now, Nepal has not been able to exploit much of its potentiality and the people in Nepal still face severe power shortages. In order to harness and develop hydropower, private sectors were involved to carry out small and medium sized hydro power projects. Similarly the government is encouraging private foreign investment in this sector. A number of projects for feasibility studies and development has also been recognized which are as follows:

Hydro Power Projects identified for Feasibility Study
Khimti Khola - 2 (27 MW)
Lower Arum (308 MW)
Kali Gandaki - 2 (660 MW)
Burhi Gandaki (600 MW)
Tila River (203 MW)
Naumure (245 MW)
Tama Koshi - 3 (287 MW)
Upper Trishuli (300MW)
Mai Loop (60 MW)
Tama Koshi - 2 (207 MW)
Upper Marshland - 3 (121 MW)

Hydro Power Projects identified for Development
Chameliya (30 MW)
Budhi Ganga (20 MW)
Kabeli - A (30 MW)
Arun - 3 (402 MW)
Kankai (60 MW)
Likhu - 4 (51 MW)
Dudh Koshi - 1 (300 MW)
Tamur - Mewa (101MW)
Rahughat Khola (27 MW)
Andhi Khola (176 MW)
Upper Arun (335 MW)

Scope for foreign investment in other areas/sectors
Tourism also avails high scope for foreign investment opportunities. As of the July 2004 statistics of Department of Industry, there are about 218 foreign direct investment projects in this sector.

As of July 2004, there are 14 projects under Agriculture and Forestry. Medicinal and Aromatic Herbs; Flower and Vegetable Seeds; Floriculture and Sericulture; Processing of Spices, Coffee; Fruits and Dairy Products; Vegetable and Mushroom Farming and Tea comes under this sector.

Mineral that includes Stone and Limestone; Talc; Silica; Dolomite; Iron-ore; Oil and Natural Gas needs to be further explored. There are 3 foreign direct investment projects in this sector.

Areas like Computer Software Development; Leather and Textile; Pharmaceutical; Electronic and the Service Industries also carry high possibilities of foreign investment. As per the same statistics of July 2004, there are 435 Manufacturing; 15 Energy Based; 17 Construction and 203 Service Industries related foreign direct investment projects in Nepal.

Although the Government of Nepal is open to foreign direct investment with all its liberal policies, sometimes its implementation policies seems unclear with the bureaucratic delays and inefficiency but it should not be considered as an obstacle towards the foreign investment in Nepal.

Article by editor

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