In the Nepal’s governance landscape, the relationship between federal and provincial authorities plays a crucial role in establishing the business environment. As Nepal moved to federalism provincial governments are assigned with significant responsibilities. Nevertheless, troublesome situation arises, when the provincial authorities lack the necessary power that the central government has specified.
The absence of designated authority presents a number of difficulties for provincial government to establish a conducive environment for the business. Such challenges persist in the areas like taxation, registration, insolvency, contract enforcement, and dealing with construction permit.
Talking about Taxation, under their respective jurisdiction, different levels of government are designated with the authority to levy taxes. Motor vehicle, entertainment, and agricultural taxes lie within the purview of provincial governments. While the provincial governments shares the revenue generated from motor vehicle and entertainment tax with local government, agricultural taxes fall under their sole jurisdiction. However, as agriculture sector is often regarded as informal, low-income creation and irregular production sector, so the optimization of revenue from this sector is hampered.
The World Bank Report shows a critical need to reform Intergovernmental Fiscal Transfer mechanism and enhance their efficacy and introduce greater flexibility for provincial revenue generation. It draws attention to over-reliance of provincial governments on federal grants. Also, the increasing predominance of conditional grants over fiscal equalization has made the tendency even worse. The dependence on conditional grants further impedes provincial government’s autonomy in addressing local needs and creating favorable infrastructural development for business.
If we look at registering a business, one must navigate through a complicated maze of rules and process. The federal government oversees industries related to foreign investment, federal matters, atomic and uranium-based energy, academic consultancy services, diplomatic affairs, and industries operating in more than two provinces. . Other industries falling under the purview of provincial governments can be registered by the provincial-level bodies.
Businesses in Nepal can be registered as companies or firms. The firms can be registered at provincial and local levels. But, registering business as company poses a logistic challenges for entrepreneurs as they have to visit Office of Company Registration in Kathmandu
Nevertheless, the provision that mandated certain industries like cigarette manufacturing, microbreweries, and alcohol production to get prior approval from Department of Industry in Kathmandu, further complicated the registration process. This has added the compliance, time and resources required for business registration. Apart from this, patent and trademark registration is centralized process overseen by the Ministry of Industry in Kathmandu. The registration process can be significantly enhanced through the establishment of a one-stop center at the provincial level, ensuring seamless and efficient service delivery.
When the business has to close, the owner ought to go through yet another onerous process. According to World Bank’s doing business report, closing business in Nepal takes an average of 2 years. Hiring an inquiry officer and a liquidator is the first step while shutting a business. They make sure that the firm dissolves in an orderly manner, ensuring the interest of shareholders and creditors, and maintaining legal requirement.
In insolvency process, the liquidator plays key roles by selling the company’s assets, settling debts with creditors, and distributing whatever assets left to shareholders. In compliance with regulatory requirements, progress reports of insolvency proceedings must be submitted to the court and Office of Company Registration.
As outlined in the Cabinet Unbundling Report, the authority to make policies and regulations relating to the management of insolvent industries falls under the jurisdiction of provincial government. Nonetheless, companies intending to shut down have to notify a number of government agencies, such as the local municipality, Office of Company Registration, Ministry of Industry etc.
On the other hand, Businesses become less inclined to invest, enter into a long-term supply contracts, or engaging in business agreements as a result on onerous procedure of Contract Enforcement. The World Bank’s Doing Business Report mentioned that, in Nepal, enforcing a contract takes an average of 910 days, equivalent to approx. 2.5 years. The provincial government are still reliant on Contract Act 2056 enacted by central government, despite the authority being granted to formulate policies and regulations related to contract enforcement. This dependency has limited the autonomy of provincial government to streamline the contract enforcement process.
Furthermore, the process of obtaining a construction or building permit takes approx. 112 days according to the Doing business report. The construction permit is intricately guided by a framework comprising building bylaws, building codes, and the Building Permit Act 2055. These rules are crucial to guarantee organized and managed urban development in Nepal. Building permit Act 2055, made by central government provides a foundational structure for construction regulation.
The formulation of building by laws is delegated to municipalities, empowering them to customize regulations according to the local needs. On the other hand, central government established National Building code which sets comprehensive standards after the 2015 earthquake covering the requirements for seismic analysis and design of various building structures to be constructed in the territory of Nepal. However, the authority to make building code and building permit Act must be designated to the provinces as they have specific geological, environment and cultural factors that needs to be considered in building construction.
Therefore, empowering provincial government to enact their laws and policies is paramount for navigating the transition to federalism while also ensuring a better environment for business growth in province. The business sector undeniably plays a pivotal role in maximizing revenue generation within the province.. Federal government should enable provinces to better mobilize resources and make regulations according to the local need. This will also encourage accountability and better response to the local issues by the provincial governments.
