Background of Foreign Investment

u  According to Encyclopedia foreign investment means “flows of capital from one nation to another in exchange for significant ownership stakes in domestic companies or other domestic assets”. Typically, foreign investment denotes that foreigners take a somewhat active role in management as a part of their investment. Foreign investment typically works both ways, especially between countries of relatively equal economic stature.

u  The foreign investments in Nepal are `and administered by Foreign Investment and Technology Transfer Act (FITTA) 1992 and Industrial Enterprises Act (IEA) 1992. The Department of Industries (DOI) is the sole agency for administration and implementation of Foreign Investment & Technology Transfer Act in Nepal.

u  As per Decision of Government, minimum amount of FDI has increased to NPR 5 million for each investor.

The wave of change in the world economic order has affected all nations, big and small. In the process of adjusting the economy in line with these changes, neighboring countries have also adapted an open and liberal policy for strengthening their economic system. Accordingly, it is necessary for Nepal to introduce timely changes and reforms in various sectors of its economy to introduce dynamism in the process of economic development. In this context, it is opportune for us to make foreign investment attractive by framing a timely, liberal and open policy. In pursuance to this goal the government of Nepal has formulated foreign investment policy.

Accordingly, this policy document clearly explains the objectives of foreign investment, the forms of such investment, their procedural aspects, the facilities and concessions to be provided to them, the speedy and efficient administrative and institutional services to be made available through an one window system and such other aspects with the belief that implementation of this policy will lead to the import of capital, modern technology, management, technical skills, access to international markets, development of competitive attitudes and awareness about increasing productivity, and their help in the development of an industrial culture in the private Sector.

Objectives of Foreign Investment Policy 1992:

u  To build a strong and dynamic economy by generating additional opportunities for income and employment through expanding productive activities.

u  To increase private sector participation in the process of industrialization.

u  To increase productivity by mobilizing internal resources and materials in productive sectors and by importing foreign capital, modern technology management and technical skills.

u  To increase the competitiveness of Nepalese industries in international markets.

Forms of Investment

u  Equity investment made by foreign investors in the form of foreign currencies of capital assets and reinvestment of the income there-from.

u  Loans obtained in the form of foreign currencies of capital assets.

u  Use of rights, specialization, formulae processes and patents relating to any technology of foreign origin.

u  Use of foreign owned trademarks, goodwill. u  Use of foreign technical, consultancy, management and marketing

services.

Provision for Repatriation

Foreign investors who have received permission to invest in convertible currency can repatriate the following amounts outside Nepal at the prevailing rate of exchange:- u  The amount received by sale of the whole or any part of the equity investment.

u  The amount received as benefits or dividends from foreign investment. u  The amount received as payment of principal and interest on foreign loans.

u  The amount received under an agreement for the transfer of technology. u  The amount received as compensation for the acquisition of any property. u  Foreign experts, working in Nepalese industries with prior approval from countries

where convertible currencies are in circulation, shall be permitted to repatriate in convertible currency up to 75% of the amount received by them as salaries, allowances etc.

Facilities and Concessions

The following facilities shall be granted to industries established with foreign investment, without prejudice, to avail the additional facilities if any, available under the industrial Enterprises Act:

u  Interest income on foreign loans shall be taxed at a rate of 15% only. u  Royalties, technical and management fees shall be taxed at a rate of 15% only.

u  No income tax shall be levied on the income earned from exports. Income tax will be levied at 15% on the income earned from export.

u  Industries established with foreign investment are entitled to enjoy all the facilities and incentives including income tax facilities provided to the industries established with local investment under the Industrial Enterprises Act.

Other Facilities

u  Facilities on Electricity- industries shall be given priority in the supply of electricity. No fee shall be charged if an industry generates electricity for its own use.

u  Relief from Double Taxation- For the purpose of avoiding double taxation on incomes of foreign investors Government of Nepal shall take necessary action to conclude agreements for the avoidance of double taxation with the countries of the concerned foreign investors.

u  Custom duty, excise duty and sales taxes levied on raw materials and auxiliary raw materials of export oriented industries shall be reimbursed to the exporters on the basis of the quantum of exports within 60 days from the receipt of the application for such reimbursement.

u  Industries exporting 90% or more of its total production are entitled to enjoy the same facilities provided to industries established in the Export Processing Zone. The bonded warehouse facilities shall also be continued.

u  In case an industry sells its product within the country in foreign currency, the excise duty levied on the quantity of sold and the custom duty, excise and sales taxes levied on the raw materials used in such products shall be reimbursed to such industry within 60 days upon the receipt of application of such reimbursement.

u  Custom duty, excise duty and sales taxes levied on the production of intermediate goods used in the production of exportable goods and sales tax levied on the production shall be reimbursed to the exporter on the basis of the quantity of goods exported within 60 days from the receipt of the application for such reimbursement.

u  Priority shall be given to arrange infrastructure facilities required for the establishment of industries.

u  Government land and land within the industrial districts shall be made available to industries for the establishment of industries on priority basis.

u  No intervention shall be made in fixing price of the products of the industry. u  No taxes shall be levied on machinery and equipment, raw materials and finished

exportable products of industries established within the Export Processing Zone.

Visa Arrangement

u  A non-tourist visa will be granted to a foreign investor or his authorized representative as well as their dependents to stay in Nepal for the period during which a foreign investor maintains his/her investment.

u  A non-tourist visa up to a period of six months shall be granted to any foreign investor who has come to Nepal to undertake research and study with the purpose of investing in Nepal.

u  If any foreign investor makes a lump sum investment equivalent to more than US$ 200,000 in convertible foreign currency, the investor and his/her dependants shall be granted permanent resident visa for the period he/she maintains his/her investment in the industry. No industries shall be nationalized.

Why Invest in Nepal ?

u  Nepal is a landlocked Himalayan nation with a population of just under 30 million. Located between India and China, two of the largest and fastest growing economies of the world, Nepal promise tremendous investment potentials. With liberal policies adopted by the Government of Nepal, it has attracted the attention of many foreign investors in recent years particularly in hydropower, agriculture, manufacturing, tourism and service. Below is a very high level synopsis for each of these sectors.

Hydropower Theoretically, Nepal has a capacity of 83,000 MW out of which 44,000 MW is said to be techno-economically feasible. Nepal’s baseline for electricity is hydro but less than 1 percent has been harnessed so far. Despite the huge potential, Government of Nepal has declared national energy crisis due to the mismatch between the demand and supply. Nepal Electricity Authority (NEA) has signed Power Purchasing Agreements (PPAs) worth 714.77 MW in 2011 for domestic consumption and many are under way. Also there is a huge potential of supplying generated power to India.

Tourism Nepal has a rich geography and has eight of the world’s ten tallest mountains, including the highest point on the Earth, Mount Everest. Also there are world heritage sites such as Lumbini (the birth place of Buddha), Chitwan National Park, Sagarmatha National Park, Pashupatinath, Swayambhunath, Bouddhanath, Changu Narayan, Kathmandu Durbar Square, Bhaktapur Durbar Square, and Patan Durbar Square. The influx of tourists is in increasing trend. According to Nepal Tourism Board, Nepal has seen more than 598,200 tourists in 2012, a 10 percent increase over 2011, making tourism one of the largest sources of revenue. As such, there is a huge scope for investment in hotels and resorts, eco tourism, religious pilgrimages and adventure sports.

Agriculture Although the major contributor to Nepalese GDP is agriculture, it relies heavily in traditional methods of farming. Despite the major labour force being engaged in agriculture (66 percent), Nepal is heavily dependent on other countries for its food supply. Low productivity is the stark reality. Domestic production is unable to meet the growing demand.

TOP 10 IMPORTED AGRO COMMODITIES Fiscal Year: 2010-11 (Source: Ministry of Agriculture & Co-operatives)

COMMODITIES Value (in Rs) Total commodities 79.89 billion Vegetable products 21.72 billion Prepared foodstuffs 16.48 billion Edible oils 13.88 billion Cereals 5.03 billion Edible vegetables 4.36 billion Edible fruits and nuts 3.63 billion Live animals 2.37 billion Maize corn 2.27 billion Betelnuts 2.05 billion Dairy products 925 million

The geographical landscape is Nepal’s assets. For instance, within less than 100 km stretch, Nepal offers suitable places for Mango and Apple cultivation. Identification of cash crops/fruits/ live stocks and use of scientific methods for higher productivity is necessary. On the other hand, Nepalese tea, ginger, cardamom, lentils and sugarcane have a high demand in the international market. Further expansion in this sector is a viable option.

Manufacturing The GON has promulgated a new Industrial Policy 2010 to develop the industrial sector and to provide protection and facilities to investors. Similarly, the draft of a Foreign Investment Policy has been prepared. Industrialization is considered one of the most vital indicators of economic growth and prosperity of the nation. Therefore, the GON is committed in supporting industrialization by establishing industries based on agriculture and local resources in rural sector, and establishing and developing industrial zones in urban areas. Steel–rolling mills, cement, cigarettes, jute, sugar, tea, beer, carpets, garments, textiles, oilseed mills, and food mills are some of the most viable areas for investment in manufacturing and production industries in Nepal.

Service Although Nepal is categorized as a Least Developed Country according to the United Nations, there is a growing middle class. According to a study conducted by the Asian Development Bank (ADB 2010), based on a 2004 survey, Nepal had a middle and higher class population of 23.36 percent with a combined annual expenditure of US$10.72 billion in purchasing power parity (PPP) terms. The increasing trend of middle class opens up the avenue for further investment in education, hospitals and IT businesses.

Areas allowed for Foreign Investors

Foreign investors are permitted to own up to 100% equity share in any industries except the following:

u  Cottage industries (except industries using electricity more than 5 kW)

u  Personal service businesses (e.g. hair cutting, beauty salon, tailoring, driving training, etc.)

u  Arms and ammunition industries

u  Gunpowder and explosives

u  Industries related to radio-active materials

u  Real estate business (excluding construction industries)

u  Film industries (national languages and other recognized languages of Nepal)

u  Security printing

u  Bank notes and coins

u  Retail business (excluding international chain retail businesses with business in at least two countries)

u  Tobacco (excluding more than 90% exportable)

u  Internal courier service

u  Atomic energy

u  Poultry u  Fisheries u  Bee keeping

u  Consultancy services (e.g. management, accounting, engineering, legal services); (Maximum of 51% FI is allowed)

u  Processing of food grains on rent

u  Local catering Services u  Rural tourism

FDI Approval Process of Nepal

u  Once the applicant submits the application with required documentation at the registration unit, it goes to the Director General who then forwards it to the FDI Director.

u  The documents are assessed by the officers and staff at the FDI section.

u  The application is presented in the FDI approval committee. u  Copies of the project reports must be sent to the License Director and Technical Director

prior to the meeting. u  The members of the committee study the documents, discuss it objectively, and express

their concerns, if any.

u  Even if there are concerns expressed or other documents to be received, the applications are generally recommended for final approval with the condition that the concerns are addressed and the documents received.

u  Once these conditions are fulfilled, the application is sent to the Director General for final approval. It takes 5-10 days for FDI approval, from the application date.

Flowchart for Approval Procedure

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

Note: If the capital investment is more than NRs. 10 billion, the Investment Board can directly deal with the investor, and the procedure will be followed accordingly.

Prepared By:

T P ADHIKARI & ASSOCIATES, Chartered Accountants

For more information & query:

Contact at: T P ADHIKARI & ASSOCIATES Chartered Accountants 2nd Floor, 723/60, Anamnagar-32, Kathmandu G.P.O. Box: 10915 Ph: 01-4247917 Mob: 9851094055

Thank you…