Trade and Investment

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Foreign Investment

Nepal has adopted most liberal economic policies since 1990. The country is open for foreign investments. Investor-friendly trade, including, investment and repatriation policies have been adopted and several laws have been passed. Accordingly, Nepal has created a competitive and investment friendly environment by simplifying administrative procedures and offering various incentive packages for foreign investors in order to making Nepal a safe and suitable business destination in the world.

Permission

No permission is required to establish industries other than those that are defense-related and sensitive to public health and environment.

One Window Committee

To avoid hassles and delays, an one-window committee has been set up to provide facilities and concessions statutorily granted.

Forms of Foreign Investment

Foreign Investment constitutes 'investment in equity, reinvestment of earnings derived from foreign investment within Nepal, foreign loans or loan facilities.

Technology Transfer

The Foreign Investment and Technology Transfer Act, 1992 defines " Technology Transfer " as any transfer of technology under an agreement between an industry and a foreign investor for:

1. Use of any technological right, specification, formula, process, patent or technical know-how of foreign origin;

2. Use of any trademark of foreign ownership;

3. Acquisition of any foreign technical, consultancy, management and marketing service.

Areas Open For Investment

Foreign investment is welcomed in Nepal in every sector of the economy with a few exceptions, such as cottage industries, arms and ammunition industries, explosives and gunpowder, real estate, atomic energy, poultry, fisheries, sericulture and some small tourism related industries.

However, there is no restriction in the transfer of technology even in those that are specified above. Nepal welcomes foreign investment both as joint venture or as 100 percent foreign. Broadly, manufacturing, energy, tourism, mining, agro-industries and services are open for foreign investment.

Repatriation of Dividends and Capital

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.

Foreign Technical Personnel

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 percent of their earnings in convertible currency.

Security of Investment

Nepal is a member of Multilateral Investment Guarantee Agency (MIGA) since 1994. MIGA provides guarantees to foreign investors against non-commercial risks, like currency transfer, expropriation, breach of contract and war and civil disturbance in the host country. Besides this, the Nepalese laws sufficiently guarantee the security of investments against nationalization.

Arbitration

Arbitration is statutorily available for settlement of dispute between/among parties. In case of non-settlement of a dispute concerning foreign investment in the presence of Department of Industries, the matter can be taken to arbitration for settlement. Arbitration is governed by the rules of the United Nations 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 five hundred million rupees, may be settled as per conditionalities laid down in the foreign investment agreement.

Incentives and Facilities

Incentives and facilities accorded are:

1. No income tax on export earning;

2. No income tax on interest earned on foreign loan;

3. An income tax of 15% only on income earned as technical fees and/or as royalty;

4. Reimbursement of customs duty and sales tax on raw materials meant for industrial use;

5. Reimbursement of sales tax and excise duty levied on finished products and sold to Export Promotion House;

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

7. A deduction of 40 percent of the value of new additional fixed assets from taxable income to industries which diversify production through reinvestments or expanding installed capacity by 25 percent or more or modernize technology or develop ancillary industries;

8. A deduction of up to 50 percent from the taxable income for the investment made on process or equipment for non-pollution;

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

10. A deduction of 10% from gross profit that goes for technology or product development and skill enhancement;

11. No income tax on dividends;

12. Deduction, not exceeding 5 percent of the gross income, spent on publicity and promotional services, hospitality and any other similar expenses allowed;

13. An additional 10 percent rebate on income tax to any industry providing direct employment to 600 or more Nepalese citizens;

14. Reimbursement of the customs duty, sales tax, excise duty and premium levied on raw materials, etc. used for production by an export industry;

15. Further, reimbursement of the 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 kingdom in foreign currency;

16. Reimbursement of 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. The sales tax and excise duty paid on intermediate goods are also refundable based on quantity of exports within sixty days from the date of export;

17. Reimbursement of excise duty or sales tax or both to the industry using duty-and tax-paid raw materials, chemicals and packing materials;

18. No royalty on captive power generation for industry's own use;

19. No double sales tax on the raw materials and products of any industry.

Visa Arrangements

A non-tourist visa will be granted to the potential investor for a period of six months to undertake 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 US Dollars 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.

Market

India and China, the two countries with common border with Nepal, are the most populous in the world, with which, Nepal maintains very good relations. Nepal has preferential trading arrangement with India and very close economic ties with China. Both these countries are excellent trading partners of Nepal and hold huge potential 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, ARC.

Bangladesh is another close neighbor of Nepal, which has 127.5 million people. Nepal-Bangladesh distance at the nearest point is only 18 Kilometer. Nepal and Bangladesh have already started bilateral trade through land route. Pakistan is another neighbor of Nepal having 135 million people. Nepal, Bangladesh, Bhutan, India, Maldives, Pakistan and Sri Lanka are seven member countries of South Asian Association for Regional Cooperation (SAARC). SAARC members have a combined population of 1291.54 million. These countries have a Preferential Trading Arrangement and are heading to free trade area under the SAARC framework.

Labor Force

Nepal has an easily trainable, intelligent work force. Unskilled labor is cheap and abundant. Semiskilled and skilled labors are 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.

Wages and Salaries

The wages payable to workers in Nepal are comparatively very low. The low cost of living enables workers to offer their services at relatively low wages. The minimum wage rates set by the government are generally lower than the going wage rates for workers.

Salaries of middle management executives, technical grade officers, engineers and other professionals are generally lower than in other developing countries. Permanent employees are entitled for provident fund in which employees contribute 10 percent of their monthly salary and a matching contribution is made by the employer. Gratuities are payable to workers who serve more than three years.

Working Hour and Holidays

Normally, working hours are 8 hours a day, 48 hours a week. A break of half-hour is given. Continuous work does not exceed 5 hours. Overtime work is remunerated at the rate of one and a half times the normal wage.

In addition to 13 public holidays, permanent workers are entitled to one day's home leave for every 20 days, 15 days medical leave with half pay and one month special leave without pay every year. Female employees are entitled to 52 days maternity leave with full pay. Such maternity leave is granted only twice during the entire service period. The compulsory retirement age for workers is 55. However, in case of skilled workers, the retirement age could be extended up to 60.

Land

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.

Financial Institution

The Nepal Rastra Bank is the Central Bank of Nepal, Besides this, there are thirteen commercial banks and two development finance corporations. Industrial, agricultural and commercial credits are provided by these banks through their branches spread throughout the country and two development finance comprises. Besides providing banking services, commercial banks provide industrial term loans and short term working capital to businesses and industrial enterprises. Nepal Bank Ltd. and Rastriya Banijya Bank are the two biggest indigenous commercial banks with a wide network of branches in the country. Nine foreign joint venture banks-Nepal Arab Bank, Nepal Indo-Suez Bank, Nepal Grindlays Bank, Nepal SBI bank, Himalayan Bank, Everest Bank Ltd., Nepal Bangladesh Bank. Bank of Katmandu and Nepal bank of Ceylon- also provide full-fledged banking services. There are 44 finance companies and 29 co-operatives with limited banking authority. Likewise, 13 insurance companies are providing services in Nepal.

Exchange Rate

The open market exchange rate is determined everyday by commercial banks themselves.

Representative Offices

The Standard Chartered Bank, Citibank, American Express Bank and Union European de CIC maintain representative offices in Kathmandu.

Hydro-Power

Nepal has theoretical hydropower potential of 83,000 MW. of which 43,000 MW is economically feasible. As of 1997-98, Nepal is able to generate only 261.9 MW of electricity. Major Nepali rivers originate in the Himalayas, are snow-fed and perennial. Power in Nepal can be harnessed for transmission and distribution in the region, which at the moment, suffers from severe power shortages. Nepal initiated harnessing and developing hydropower through the involvement of private sector since early 1990s. For this, private-sector friendly policies were announced and a number of enactment were made. Because of the suitable legal and statutory framework, a number of small and medium-sized projects in power sector have been already started by the private sector and are at various stages of commissioning. Further, to make power sector more attractive for big private foreign investments, works have been initiated towards the improvements of existing Acts, Rules and Regulations.

In 2000, The Government of Nepal identified a number of projects for development as well as feasibility studies and has invited for the international participation in them. These projects and feasibility studies will together account for about 4550 MW of hydro-electricity.

List 1: Projects Available for Development (Category - A):

1. Chameliya (30 MW)
2. Budhi Ganga (20 MW)
3. Kabeli-A (30 MW)
4. Arun-3 (402 MW)
5. Kankai (60 MW)
6. Likhu-4 (51 MW)
7. Dudh Koshi-1 (300 MW)
8. Tamur-Mewa (101MW)
9. Rahughat Khola (27 MW)
10. Andhi Khola (176 MW)
11. Upper Arun (335 MW)

List 2: Projects Available for Feasibility Study (Category - B):

5. Khimti Khola-2 (27 MW) 5. Upper Trusuli-2 (300 MW)
6. Lower Arum (308 MW) 6. Mai Loop (60 MW)
7. Kali Gandaki-2 (660 MW) 7. Tama Koshi-2 (207 MW)
8. Burhi Gandaki (600 MW) 8. Upper Marsyangdi-3 (121 MW)
9. Tila River (203 MW)
10. Naumure (245 MW)
11. Tama Koshi-3 (287 MW)

NB:

1 Application to conduct the feasibility study of projects not listed and/or without any prior study but identified for developments by the applicants will be entertained based on the merit of the proposal.
2 The information will be made available for reference at the Internet address "URL:http//www.panasia.org.sg/nepalnet/wecs".

Macro-economic Policy

Nepal, under its present liberal economic regime, has accorded dominant role to the private sector. Foreign direct investment is encouraged in all types of industries and infrastructure projects, except defense and security. In 1990s, over a decade, 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. To make economy more competitive, across the board, tariffs have been lowered, a number of state-owned enterprises have already been privatized and the process is still being continued. Nepali currency has been made fully convertible for current account transactions. Licensing and quantitative restrictions in the trade front have been forsaken. Bonded warehousing and duty draw-back have been made effective to encourage and facilitate industries.