Nepal makes significant progress in Doing Business 2019 as it has been ranked 94th position from 110 last year among 190 economies worldwide. The country moved up by 16 spots in the Doing Business Index of 2020 and succeeded in entering the group of first half of countries with better business environment. The Ease of Doing Business Report has been published every year by the World Bank Group since 2003. This index is taken as a serious reference by the investors before they make investment decisions abroad.
“Improvement in the Doing Business will definitely boost investor confidence but the majority of the indicators out of ten which represent the whole process of business are poor when compared to the overall ranking,” said Rameshwore Khanal, former Finance Secretary, “Some of the indicators that are critical for attracting investment are not only poor but have even worsened when compared to the previous year such as starting business, property registration and paying taxes.”
The Ease of Doing Business Report is prepared based on the perception survey of the private sector based on ten indicators related to the different processes of the business cycle: starting a business; dealing with construction permits; getting electricity; registering property; getting credit; protecting minority investors; paying taxes; trading across the borders; enforcing contracts and resolving insolvency (exit).
Nepal has made significant progress in two indicators: getting credit and trading across borders which played a significant role in improving the overall ranking of the country. Credit expansion of the country was improved as the country has developed Credit Information Bureau (CIB) as an effective organisation. The CIB provides information of borrowers to banks and financial institutions or lenders. It has minimised credit risk or loan default rate, multiple financing and misuse of credit. CIB’s effective role has also helped expand access to credit. All 28 commercial banks are listed with CIB to receive information of borrowers prior to issuing loan. The information includes the borrower’s capacity for loan repayment, credit history, existing loans, etc. Likewise, 11 national-level development banks, 20 regional development bank, 26 finance companies and 88 microfinance institutions are registered with CIB. Under the getting credit index, Nepal is at 37th position among 190 economies.
Similarly, the country ranked 60th under cross border trade facilitation index. Access to credit and trade facilitation are the most competitive indices among the total aforementioned 10 indices. Operation of the Integrated Check Post (ICP) in Birgunj has played a critical role to improve score in trade facilitation. The ICP came into operation from April 2018.
According to the Ease of Doing Business Report, Nepal has reduced the time and cost of export and import by opening the ICP Birgunj at the Nepal-India border which caters to 60% of Nepal’s foreign trade. After operation of ICP, the time to import border compliances was reduced from 58 to 11 hours, while time to export border compliance was cut down from 30 to 11 hours. Along with operation of ICP, the government has also eased construction permit of godowns (warehouses) which has reflected in the slight improvement of another index.
The report, however, has said that the country made starting a business more difficult by introducing an online employee registration with in-person follow-up for social security. Former Secretary Khanal has said that entry or starting business, taxation and property registration are critical for investment where Nepal’s performance was observed to be poor in 2019. “When an investor comes to invest in Nepal, it takes years for him to acquire land and get permission to construct the structure for setting up an industry,” Khanal also opined.
Nepal’s Global Ranking since last few years
(Source: World Bank)
Out of the ten indicators being used to gauge the performance in the report, Nepal has improved in five, two are stable and three have further worsened. In South Asian economies, Nepal ranked in the third position after India and Bhutan.
To improve Doing Business Index the government needs to address multiple issues, some are regulatory and some are procedural issues, according to Mahesh Bhattarai, Under Secretary at the Office of the Prime Minister and Council of Ministers.
“The government needs to amend Company Act, Secured Transaction Act, Public Procurement Act, Financial Bills and Building Codes to address the issues where we are lagging behind in Ease of Doing Business,” Bhattarai said adding, “Commercial Bench in district courts are also been sought to expedite cases related to business.” He further shared that duplication of taxation must be resolved. However, former Secretary Khanal has said that it is not only the issue of double taxation, the government has started customs valuation based on the reference value which has been considered a regressive move from the already practiced GATT valuation system along with customs modernisation. In recent years, the valuation system adopted by the government caused multiple hassles at the customs point in early clearance of goods.
“Making tax payment systems simplified through the use of digital technology is in the offing. Once we go digital, paper work hassles will be reduced. We want to make most of the government system faceless in the near future. If we are able to do all these things by May 2020, we will further improve our ranking next year”
Dr. Yubaraj Khatiwada,
Doing Business Report 2020 ranks Nepal at 94th position that makes Nepal among the first half of the countries having better business environment. It is a significant progress and we are encouraged to do much better in subsequent times. We have already started improvements in various sectors which largely determine how the environment for doing business will be dictated towards improvement. We are open to suggestions from the private sector and stakeholders in drafting the regulation, developing procedures and enforcement of issues. We know legislation is never enough. Any legislation if not properly followed by regulation and procedures will not work properly. The real test of the pudding is in its eating; the private sector should feel the ease in doing business, otherwise whatever laws and procedures we simplify will not make much sense.
We must admit that when we were discussing the whole gamut of federalism, the first worry was cost of doing business because of tax burden, decision-making processes, regulations and others. In the second year of fiscal federalism, we have achieved a significant score in the Doing Business report. It means we have been successful in making the transition as short as possible so far as fiscal federalisation is concerned. In this regard, we must appreciate the efforts made by our parliamentarians who played encouraging role for the enactment of laws. We were able to bring dozens of laws within one year; it is not a simple thing to achieve. Countries have taken years and years to discuss tax policies, tax enforcement mechanisms, budget release process, resource sharing process, among others. We’ve done most of these in a year’s time. There are still some issues of double taxation and over taxation in some cases, but these are exceptional cases. On average, we have done much better. That is an encouragement to further successfully implement fiscal federalism.
There will not be any problem in taxation and firm administration from next year. In some of the cases, property registration and property right issues have held us behind. We are committed to make the processes easier.
Similarly, we have to protect the properties that are intangible in nature. We have to enact intellectual property law and amend company act and bring regulation for it. We also have to amend bankruptcy law and simplify the process of exit. The exit of any company must be made as easy as the entry.
Some of the things that are related to the private sector but not necessarily reflected to the Doing Bsiness index is infrastructure. When we do not have the proper infrastructure, it will increase the cost of doing business. We have to improve the quality of roads, end transportation syndication or there will be no competition among service providers. We must look beyond to facilitate the private sector like introducing Integrated Check Posts (ICPs). We have one ICP in Birgunj. We will be having one more in this fiscal in Biratnagar. We are equally concerned about completing the Bhairahawa ICP and Nepalgunj as early as possible to facilitate trade.
Similar would be in revenue measures. We want to do away with all the discretionary power in taxation to control corruption. The Fiscal Procedure and Accountability Act endorsed by the parliament would also apply to several other activities. In the coming years, every person in authority who has got some kind of responsibility and discretionary power must be accountable to the people, legal system and broader development of the community with which we are working. Making tax payment systems simplified through the use of digital technology is in the offing. Once we go digital, paper work hassles will be reduced. We want to make most of the government system faceless in the near future. If we are able to do all these things by May 2020, we will further improve our ranking next year.
“Contrary to the government’s promise of ‘One Stop Service Centre’, they are introducing additional windows, which increases the cost and time of doing business which erodes efficiency and competitiveness.”
Senior Vice President, FNCCI
Nepal has achieved significant progress in the Ease of Doing Business report which is good news for the private sector. We hope that the government will gradually resolve other hassles that incur cost of doing business and eroding the competitiveness of the private sector. Though we are excited about the improved business climate and the government’s announcement of country rating – and these are critical to bring in investment – yet the small and medium enterprises (SMEs) have been facing challenges in getting credit from banks and financial institutions (BFIs). The private sector has experienced cordial relations between employer and employee after the enactment of the new labour act. However, the provision of social security scheme introduced recently increases the cost of business. We would like to request the government to address the practical issues of the social security scheme.
The government should look into the issues raised by the private sector. In tax dispute, the taxpayer is compelled to deposit 50% of the disputed amount as guarantee if the firm wants to file a court case in tax dispute with the tax administration. This provision has been hindering the private sector to file court cases which is legal right guaranteed by the Constitution in tax disputes. The private sector expects clarity in laws and consultation with the private sector while formulating laws and regulations. Similarly, the government should know that the enforcement of the rules and regulation without groundwork and capacity enhancement of the regulatory institutions creates trouble for the business community. For example, business firms were allowed to pay consultancy charges while hiring foreign consultant after taking approval from the Nepal Rastra Bank but the government recently changed the rule and urged businesses to take approval from the Department of Industry without developing the standard operating procedure (SOP) and developing the capacity of the concerned institution. As a result, many applications are pending since long. It is contrary to the government’s promise of ‘One Stop Service Centre’ as they are introducing additional windows, which increases the cost and time that erodes efficiency and competitiveness.