Nepal’s Freelance Frenzy: Dollars and Dilemmas

-Subhekshya Ghimire

Ms. Ghimire ​​is a research intern at Samriddhi Foundation, an economic policy think tank based in Kathmandu. The views expressed in this article are the author’s own and do not represent the views of the organization. Author can be reached at Subhekshya Ghimire [email protected] 

The digital landscape has been a tangible space for Nepal’s economy to earn foreign currency. The IT service sector industry had an approximate valuation of USD 515 million in 2022. The sector is dominated by companies who export their services, and freelancers working in the global platforms. The total IT service export growth in 2022 was 64.2% compared to the previous year and freelancers grew by 55.2%. There are almost 66,509 freelancers providing services through various digital platforms. Freelancers working in the global digital platforms have more than doubled in the past 6 years and the same goes with the ones working with other means and tools. It is apparent that this sector has immense prospects of growth and along with it comes the need to set standards and jurisdictions to promote fair and equitable practices in the labor market.

The most popular contention among the freelancers despite the notable growth in the space remains the same— the problems with payment and fair practices. The average earning of a freelancer is estimated to be USD 4723 annually. The two most preferred methods to receive the earnings are bank transfers (83.8%) and remittance services (24.2%).

The banks get the amount transferred to the clients and have no obligation to ask for taxing requirements. So, registering the PAN cards and filing for taxes entirely falls upon the individual. According to the Finance Act of 2080, individuals receiving payments in foreign currency from outside the country for providing software or similar electronic services, multimedia or consultancy etc., are subject to a 5% advance tax deduction at the time of payment. The IIDS report states that among the respondents in their survey, 57.9% were unaware about the taxing policies in Nepal. Out of those who were aware, 18.9% paid taxes, 25.3% did not, and 55.9% chose not to answer. Only 9,400 individuals were registered as freelancers in the IRD database in the financial year 2021/22. 

In case of remittances, the earnings of a resident who is producing the services in the country itself principally should not be considered as remittance. Counting them as remittance undermines the nation’s production. It also exempts the freelancers of the taxes they are levied to pay.

Many freelancers are not accounting for any taxes and there is no interference unless it’s an amount substantial enough to be noticed by the tax department. Also, there is low incentive as they operate under a different tax bracket with a flat tax of 5%. They also have to pay additional charges as provisioned by the banks and wallets under the heading of service charges. Some even resort to illegal practices like “hundi” and “digital hundi” to evade taxation. It was estimated that around 10,000 individuals were involved in hundi businesses as of 2022. This impacts the tax revenue and also leaves freelancers cold if disputes arise. Almost 11.1% of them don’t receive their payments as mentioned in their contracts, but to act upon them, Nepal does not have a predefined set of laws and lacks the legal standing to defend their interests.

Operating as a freelancer informally denies freelancers the protection they are entitled to. Registering with the IRD and paying taxes recognizes them as a part of the formal economy. It provides them with a safety net if there are problems like contract breach and disputes between employee and the contractor. 

A fair and competitive ground is a necessity to ensure that all kinds of workers are incentivized to work. A discriminative tax bracket might undermine the growth of the formal economy as it establishes a major disincentive for those working for the locally registered companies. It also discourages the freelancers who are reluctant to pay higher taxes whilst earning in a smaller income bracket. For this, revision of the taxing mechanism seems like a viable option while also making the payment instruments simpler. The whole process of registering as a freelancer should be easier and they should be well aware of the policies made for them. Finally, when the freelancers are done with their part, it falls upon the governing body to ensure their rights by tailoring laws that fit the digital ecosystem.