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Startups In Nepal: Key Policy Considerations

B360 January 31, 2024, 3:04 pm
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Promoting a conducive business environment in Nepal requires well-defined policy guidelines, tax incentives, and robust legal and regulatory systems. Despite the burgeoning entrepreneurial ecosystem, the absence of a comprehensive definition for startups within existing laws poses a challenge. 

The current framework, articulated in the Startup Enterprise Loan Scheme Procedure, 2079 (Procedure), identifies startups as enterprises employing novel innovations and creative ideas operated by entrepreneurial groups. These entities are engaged in development, production, operation and distribution of goods, services or processes with the potential for significant progress. Clarifying and enhancing the legal framework is imperative to foster the growth of startups in the country.

The Procedure delineates a range of sectors, including but not limited to agriculture, forest-based enterprises, tourism promotion, science and technology, IT-based ventures, health and education-related initiatives, automobile industry, and businesses focused on waste management and environment. These sectors serve as permissible domains for startup industries to establish and operate their businesses. 

The Procedure outlines eligibility criteria for startups to apply for concessional loan scheme, focusing on factors such as registration and operation duration (not more than seven years), limited paid-up capital (up to Rs 50 lakhs), a maximum of 10 employees, fixed capital constraints (excluding land and building) capped at Rs 2 crores, gross annual income restricted to Rs 50 lakhs. Further prerequisites include utilising information technology, dedicating at least 5% of the budget for product development and registration of intellectual properties. 

The draft Startup Policy published by the Ministry of Industry, Commerce and Supplies also replicates the same criteria, although the policy remains under discussion and has not enacted. 

With specific reference to startups, the government, in its 15th five-year plan for fiscal year 2076/77 to 2080/81, first outlined the establishment of a fund to support setting up startup businesses, providing them with concessional loan facilities. In fiscal year 2076/77, the annual budget initially allocated a budget worth Rs one billion for concessional loans to startups based on projects. This allocation for concessional loans was continued in subsequent budgets, earmarking Rs 50 crores as seed capital for startups. In the budget speech of 2078/79, the government announced establishing a one-window policy for registration and renewal of startups, policy-level facilitation for foreign direct investment (FDI) in startups, and creation of a challenge fund of Rs one billion. Furthermore, in the subsequent years’ budget programmes, seed capital programme persisted, along with concessional loan facility-based specific criteria. Additionally, arrangements were in place to secure capital through venture capital funds, and establishing business incubation centres in all provinces was initiated. Finally, in the current budget, the government announced the establishment of Kathmandu Incubation Centre and to build an entrepreneurial ecosystem where Private Equity and Venture Capital funds (PEVCs) will be incentivised to invest in startups. For that purpose, the government has allocated Rs 1.25 billion support to startups for this fiscal year. 

Despite repeated announcements in annual budgets, the establishment of challenge funds, incubation centres and business accelerators are yet to materialise, posing a significant challenge for startup businesses in Nepal, particularly in accessing finance. Lack of policy-level coordination and a dedicated legal framework to facilitate startups in Nepal is a primary hindrance. Inaccurately categorising startups can lead to confusion in distinguishing them from other micro, medium and small enterprises (MSMEs). It will affect the preferential treatment concerning benefits, concessions and facilities crucial for startups. Consequently, a distinct classification for startups in the Industrial Enterprises Act is necessary. 

Regarding tax benefits, while the Income Tax Act 2058 has introduced tax holidays for startups with an annual turnover of up to Rs 10 million based on innovation and technology on their income for the first five years from the commencement of transaction, the Inland Revenue Department (IRD) has not defined the criteria for availing this tax exemption. 

Establishing a distinct classification of startup businesses is pertinent, especially concerning the infusion of foreign investment, including of non-resident Nepalis (NRNs), into startups. Existing constraints, such as sectoral restrictions, minimum foreign investment threshold, and absence of operationalisation of automatic routes for foreign investment in startups, impede the entry of international funds. Moreover, the inflexibility within various laws reduces the traction of startups to PEVCs in terms of entry and exit rights, including limitations in securities laws for achieving Initial Public Offerings (IPOs). To enhance regulatory oversight, exit procedures for foreign PEVCs should be regularised, aligning with domestic funds through registration and regulation by the Securities Board of Nepal (SEBON). 

Policy level changes in vital sectors, including national agriculture, telecommunications, biotechnology, industrial, transportation, information technology, are essential for fostering the growth of startups. The establishment of a dedicated one-window policy for registration, renewal, operation, annual compliance completion and cancellation is imperative to alleviate multiple regulatory challenges they face. Additionally, implementing a streamlined process for fast-track business incorporation and exit mechanisms is crucial. Relaxed labour law compliance is also required. For instance, a waiver to comply with Social Security Fund registration requirements for startups in the initial years would be beneficial. Furthermore, the current framework places emphasis on tech-based startups, neglecting entrepreneurs who aspire to establish businesses in traditional sectors in Nepal. The government should exercise prudence by facilitating all entrepreneurs, including those in non-tech-based ventures.

As Nepal stands on the brink of graduating from Least Developed Country, the significance of a significant contribution from startups and MSMEs to the country’s GDP cannot be overstated. To facilitate this transition, there is a pressing need for cross-sectoral liberalisation and strategic measures aimed at enhancing access to finance for startups. Key considerations include permitting FDI investment in startups, providing seed capital and tax subsidies, establishing challenge funds, offering grants and concessional loans and introducing startup bonds akin to energy bonds. Additionally, setting minimum criteria for eligibility for fundraising through IPOs, encouraging impact investing, including climate financing options, are crucial steps that can contribute to the survival and growth of startup businesses in Nepal. These measures collectively pave the way for a thriving entrepreneurial ecosystem, playing a pivotal role in economic development journey of Nepal beyond the LDC status. 

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MARCH 2024

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