Difficulties in Starting a Business in Nepal

– This article was originally published by Ashesh Shrestha in the Himalayan Times on the December 23, 2018.

Achieving high level of income and prosperity is not possible without new investments and businesses coming into the market. Higher level of investments is positively correlated with higher level of income and employment generation. Hence, it is clear that facilitating new businesses which are trying to enter into the market is very important. But, if we look into the World Bank’s Doing Business Index 2019, Nepal’s performance in ‘Starting a Business’ category is in dismal situation.  Nepal ranks 107 out of 190 countries in Starting a Business. This shows that entrepreneurs face various difficulties while registering a new business.

1. Difficult to prepare Memorandum and Articles of Association

Currently, the entrepreneurs are not able to prepare Memorandum and Articles of Association (MoA and AoA) without professional help. Even though formats of MoA and AoA are available and provided by the government, entrepreneurs cannot use it themselves without any professional help from lawyers. As per the World Bank, entrepreneurs find it difficult to avoid mistake while preparing these documents themselves. It requires NPR 10,000 and takes 5 days for the preparation of these documents, which is a huge percentage of the total time and cost involved. Hence it is highly recommended that MoA and AoA is to be substituted with a single document which only requires entrepreneurs to fill basic information about the company, its shareholders and objectives. This could reduce the cost and time of starting a business significantly.

2. Redundancy in Application Procedure

Secondly, online filing of the documents and again having to present physical copy of the original documents is redundant.  This procedure could be reduced to a single step by making the registration at the Office of the Company Registrar (OCR) completely electronic. However, due to the lack of implementation of digital signature and electronic transaction, making the registration process completely digital has not been possible. If electronic registration cannot be immediately brought into implementation, the process of having to submit documents online should be entirely removed.

3. High incorporation fees

According to the World Bank, the incorporation fees is more than 10 percent of the per capital income of Nepal. Again, if we take World Bank’s figure, the total cost of company registration is NPR 19,780. The data obtained from Central Bureau of Statistics (CBS) shows that Gross Domestic Savings (GDS) per capital of Nepal is about NPR 15510. These figures show that an entrepreneur has to save for 14 months just to register a new company.

4. Excessive bureaucracy

One of the difficulties in registration of a business is bureaucratic hurdles. Excessive bureaucracy has led to increase in the time of business registration. Currently, multiple layers of tasks have to be conducted under the same government agencies. Entrepreneurs themselves have to move from one desk to another to get services from different government officials (like getting signatures and approvals). This has created a maze within the regulatory office. The service delivery mechanism is such that the entrepreneurs have to seek services from individual bureaucrats within the same government agency and not from the agency as a whole. As bureaucrats are responsible for providing services, this has created room for corruption as well.

5. Centralized Regulation

Centralized regulation is an important factor that has led to increase in overall cost of starting a business. Government agencies like OCR and DoI are centrally located and they do not have other offices operating outside of Kathmandu, and therefore, entrepreneurs outside Kathmandu have to come all the way to the capital city just for business registration. The cost incurred in travelling to and from Kathmandu and the cost of lodging during their stay in Kathmandu also adds up to the cost of starting a business. These costs sums up to be more than the fees payable for business registration.

6. Cumbersome post registration compliances

Businesses, especially micro and small ones are reluctant to register and are instead operating their businesses informally, not only because of the hassles faced by them while registering their business but also because of the various compliances to be met while operating the business. For example, there are regulations related to taxes which are very difficult to comply with. There are three different types of system of income tax under which income tax can be paid. The particular system to be followed depends upon the size of the business. The existence of multiple systems may create confusion, especially among the micro entrepreneurs because neither are they able to understand the category they fall into and the tax systems that they have to follow, nor are they financially capable to spend money on hiring an expert who could deal with these matters.

7. Lack of skilled human resource

The infrastructure for the implementation of digital signature which is the most important factor for electronic registration of businesses are in place at the government agencies responsible for business registration. But, these agencies lack skilled human resource for effective implementation of digital signature for full implementation of electronic registration.