Nepali Times
Economic Sense
How to kill foreign investment


The Japanese Prime Minister came and went, but we are hard pressed to figure out what was actually achieved. No new Japanese companies said they are willing to invest in Nepal. And no wonder, maybe the Japanese had got a whiff of the gazette notification of 7 August of "An act to amend some Nepali acts".

act to amend some Nepali acts". With one fell swoop, the government has got rid of the only incentives foreigners investing in Nepal ever had. Gone are sops like tax holidays, now the taxman will not spare either dividends from investments
made in industry, or profits earned through exports.

The timing was all wrong, coming as it did even as a new Income Tax draft bill was being discussed. What sense does it make for our own the government
to tax exports so soon after winning that hard-fought attempt to scrap the four
percent special additional duty on Nepali exports to India?

Nepal led the way in South Asia providing extra benefits to foreign investors in the early 1990s, a move emulated by other countries in South Asia. The Industrial Enterprises Act and Foreign Investment and Technology Transfer Act were among the most investmentfriendly in the region and it was these that attracted the Lever, Colgate and Dabur to Nepal.

The new rules come at a time when joint-venture companies had begun voicing concern that Nepal's muchtouted low taxation rates were nothing but an illusion. Foreign industries are required to set aside 10 percent of profit as bonus and 5 percent more for employee housing. With the taxation on dividends, companies
will actually be shelling out half of the profits of the company.

The non-taxation of interest on income for foreign companies financing commercial borrowings had made at least some foreign financial institution ready to lend to Nepali companies. Nepal has no credit rating to speak of, and has to pay four to five percentage points over and above the going international lending rates.
Lenders add tax on interest income to their rates which means that the cost of capital will increase. This would make infrastructure more expensive where we have to resort to foreign loans.

The sad story, however, is not the government's attitude but the private sector's silence. Our own businessmen are quiet because they will benefit if foreign investors leave. The majority in the Nepali private sector has always resisted foreign competition: that is why we have yet to see an international insurance company or a global travel agency or international law firm.

Domestic players like to reward themselves more with profits obtained out of evasion of taxes rather than profits from business. Nepal has not been able to do much with industrialisation, it is trade has been our focus. Incentives were provided to give people willing to take risk and invest in industries with longer pay back period than trade. The new policy will make people think again.

Does the government even understand the repercussion of such a short-sighted decision? Or is it to busy smacking its lips in anticipation of the cash that will ensue? Where are the bilateral chambers of commerce? Where are the bilateral and multilateral donors? Why is everyone silent on this issue? Euro-orient, are you sure you know what you are doing?

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(11 JAN 2013 - 17 JAN 2013)