National 5 (Spotlight Weekly)

How To Attract Investors?

Nepal has a long way to go to emerge as an attractive investment destination, says a study

By BHAGIRATH YOGI

The Sri Lankan government offers full tax holiday for five years for all foreign investment ranging between SL Rs. 1250-2499 million. According to the Board of Investment of Sri Lanka, if the investment is above Rs. 5,000 million, full tax holiday is granted for ten years. Similarly, there is no import duty on capital goods during the project implementation period and no import tax on raw materials.

Garment products : Waiting to be exported

Unlike in Sri Lanka, prospective investors in Nepal, even if they want to face the six-year-old insurgency and small domestic market, would be turned away, in most of the cases, by bureaucratic hassles. Lack of consistency in written policies and implementation is considered a big hurdle for investors in Nepal, say industry people.

According to a "White Paper," brought out by Nepal-India Chamber of Commerce and Industry (NICCI), together with five other bi-national chambers, last month, government regulations and approach toward industries are prone to frequent changes in Nepal. Investors, therefore, are unable to take a long-term view on their investments and shift their endeavor toward businesses that have very short payback periods.

Obviously industrial units set up with a short-term vision cannot be expected to contribute to the national economy. Policies are made without taking the business community and investors into confidence; rather they are forced into them. They lack clarity and are often full of discrepancies and many interpretations can be made out of same law. There have been occasions when amendments have been made to different laws as soon as they are enacted, and on many instances different departments of His Majesty's Government interpret the law differently, keep aside the business community, said the report.

All this leads to loss of business confidence and shift of investment from good infrastructure projects and value-added industries to businesses requiring small investment and shorter gestation period. As a good example, the recent budget announced for FY 2002/03 clarifies that interest paid to banks and financial institutions even by a foreign controlled entity shall be fully allowed for deductions. A regulation to the contrary was provisioned in the new Income tax Act announced only three months ago.

Likewise, the new Income Tax Act and subsequent rule allowed deduction of all provisions for possible loan loss as specified by Nepal Rastra Bank. Now this deduction has been capped at 5 percent of the total loan outstanding. Taxing of export sales at the prevailing corporate tax rate against concessions provided earlier is another glaring example, where there is a mismatch between the industrial policy and fiscal policy of the government.

The Industrial Enterprises Act 2049 was enacted in the country with an objective to make arrangements for fostering industrial enterprises in a competitive manner through the increment in the productivity by making the environment of industrial investment more congenial, straight forward and encouraging for the sustained overall economic development of the country. It had made provisions to attract foreign direct investment and participation of the private sector in industrial growth by providing tax holiday periods for newly established industries, tax concessions, concession in customs duty, excise duty for setting of industries of priority, specialization etc. The prospects of promoting industrial growth in the country at a time when it is most needed has been curtailed at a stroke of a pen as most of such benefits provided to industries through the Industrial Enterprises Act has been repealed by addendum to the Act and the recent Income Tax Act, 2058, says the study.

"The performance of joint venture companies within the country itself is a message to the prospective investors," said Rohini Thapaliya, vice-president of the Nepal-German Chamber of Commerce and Industry (NGCCI), at an interaction program in the capital last week. "But, the cases of Indo Suez, Kodak and Nepal Battery don't present good examples for us." Added Narendra Kumar Basnyat, former president of the Nepal-USA Chamber of Commerce and Industry, "Return on capital is one of the most important issues for foreign investors. Fiscal policies prevalent in the country also play a major role in attracting the investors."

The "White Paper" commissioned by the bi-national chambers argued that there are no comparative advantages for any investor whether domestic or foreign to start a business in Nepal when viewed against the benefits available in adjoining states of India and Bangladesh. (See: Box) Worse, hassles related to duty drawback facility, provision of imposing duty on exports and practices like collecting tax on recycling of waste and packaging material are added drawbacks, said the study.

The one-window committee has become ineffective due to lack of co-ordination and competing priorities of the Ministry of Industry and Ministry of Finance. There is no exit policy for potential foreign investors. The fact that stock exchanges and securities market run on socialistic concepts; management control, issue of shares at premium of exits difficult. Foreign investments can be encouraged only if exit routes are clearly specified, said the study.

"We not only lack competitive and comparative advantage, lack of appropriate policies have resulted into decline in investment," said Rajendra Kumar Khetan, second vice-president of the Federation of Nepalese Chambers of Commerce and Industry (FNCCI). "The political parties should address these issues in their manifesto during upcoming elections."

Studies say that the realization of foreign investment in Nepal used to stay at around 25 percent of the total commitment. But thanks to Maoist insurgency and political instability, it declined to only 10 percent of the total FDI commitment in the year 2000-01.

Officials say the government is really committed to do away with so-called `red-tapism' in the bureaucracy. "Our investment policies, in general, are liberal. Now, we are working on to make the One Window system more effective and service-oriented," said Dr. Shanker Sharma, member of the National Planning Commission.

According to Sharma, the Industrial Perspective Plan that is under formulation and the study of FDI issues will address current problems related to investment, both foreign and domestic. This year's budget speech has already talked about flexible labor laws and exit policy. The Nepal Rastra Bank has also introduced flexible monetary policy to help revive the economy. "Availability of power with the commissioning of Kali Gandaki A and mid-Marsyangdi and relatively good conditions of other infrastructure, Nepal still presents itself as a good investment destination," said Dr. Sharma. "The government will also address problems related to implementation of the new Income Tax Act and other tax laws."

Comparison of Facilities Provided by Nepal and Bangladesh

Nepal Bangladesh

Tax Holiday for New Industries : None (Nepal) 5 - 12 Years depending upon location of the industry (Bangladesh)

Tax on Export Income : Fully Taxed Tax Free

Customs on Export : 0.5% to 10% None, rather subsidy is given

Subsidy on Export : None Available in many items up to 25% of export value

Facility of Export Processing Zones : NA Very efficient EPZ comparable

to western countries

Domestic Market Population : 23 M 131 M

GDP : 6.0 B USD 47.1 B USD

Per Capita Income : 240 USD 370 USD

Growth Rate : 2-3% 5.9%

Access to Indian Market : By Air and Land and By Air, Land and Sea even

mostly limited to South and West India is accessible

Northern India

Access to Other Market : By Air or Land (transit Own Seaport allows direct shipment all

through India or over the world. Two International Airports

Bangladesh)

Labour : Cheap but unskilled Cheap, skilled and productive with

with pro-labor laws flexible and balanced labor laws

Implementation : Delayed and high cost Very easy and with no extra cost in case of EPZ. Otherwise it takes a little bit more time but reasonable.

Attraction : Tourism, Hydropower, Better Logistics and Access, Attractive

Developing economy and Investment Climate and existing huge

purchasing power, Access industrial base, Huge and growing

to North Indian Market Domestic market; good scale of

economy, Skilled labour, Better

Resources, Better Public-Private

Partnership, Hydropower and Petroleum Gas

Facilities given to a new industry in North Eastern States of India:

a. Income Tax : 100% exemption of Income Tax for first 5 years followed by 30% exemption in next 5 years. Industries in specified zones and growth centers receive 100% exemption for 10 years.

b. Excise Duty : Industries in specified zones and growth centers receive 100% exemption for 10 years Specified Industries (Plastic, Paper, Agriculture and Forestry Products, etc) enjoy 100% exemption for 10 years even if they are located elsewhere.

c. Sales tax : Total exemption for 10 years.

d. Transport Subsidy : Subsidy on freight to and from Siliguri to the industrial location on all raw materials, Plant and Machineries, and Finished Goods.

Facilities given to a new Industry in West Bengal:

a. Capital Investment Subsidy on investment made in fixed capital ranges from 15% to 25%.

b. Up to 50% of the interest liability is subsidized for a period of 5-7 years.

c. Up to 75% of contribution made towards Employees Provident Fund and retirement benefits are subsidized.

d. Up to 50% waiver of duties on purchase of land and building.

e. Additional subsidy for industries in IT, Electronics, Agro/Food processing, Hydropower, Biotechnology, Tourism, Hosiery, Jute and Agriculture implement.

f. Cheaper electricity rates for Industries

(Source: White Paper published by Bi-national chambers of commerce and industry in Kathmandu.)