In the contemporary world, micro enterprises are seen as vehicles for entrepreneurship, contributing to aggregate employment, production and national income. But there has been a growing recognition that micro entrepreneurs, sometimes, operate partly or wholly in the informal sector when they start their ventures. In the context of Nepal, 93% of the micro enterprises continue to work in the informal economy and constitute approximately 38% of the GDP, which has resulted in the burgeoning need to examine the characteristics and motives behind operating informally. All of this begs a question as to why these micro-providers opt to function informally in the first place. At a policy level, the enactment of Industrial Enterprise Act in 1992 instigated the motive to evade the cumbersome process of formalization. This act placed the small micro enterprises and the considerably large service enterprises into the same basket and imposed stringent regulations that not only proved to be costlier for the entrepreneurs, but deterred their involvement altogether. Excessive regulatory compliances, high entry fees and taxes, along with administrative delays upheld as the other few causes associated with circumventing formalization. In particular, the provision for registration in Nepal is tedious, to say the least. An entrepreneur who intends to register his/her business needs to bear the hassle and cost of visiting a multitude of government agencies. The lack of coordination between these agencies intensifies the entrepreneur’s plight, manifesting an inordinately high indirect cost and time. The tax regime guiding the service sector microenterprises further cripples the already dismal formalization process in Nepal. An entrepreneur is expected to pay business tax to the local authorities as well as income-based tax to the central authority. This again creates duplication of work. Moreover, the existence of multiple forms of tax system flusters the entrepreneurs. The policy disharmony is yet another facet that confuses the entrepreneurs. On account of the current transition of Nepal from a unitary to a federal structure, the provinces have been given exclusive power over business and trade. However, no provision directly addresses the micro or small enterprises fostering the need for policy enactment. Hence, we cannot discredit the fact that there exists series of loopholes in the existing administrative and legal provisions. Although, it is true that the informal sector is economically viable and does not bear the cost of taxes and regulatory provisions, studies have evidenced that formal firms are more productive as compared to the informal firms. Not only do these informal firms experience barriers to access finance, but they also face issues related to uninsured property rights and legal obstacles. The government also suffers alongside because of the loss in revenue that could have, otherwise, been collected in the form of tax from these informal enterprises. Formalization, as evinced, paves the ways for better credit facilities, improved infrastructure, and broader customer base that has an affirmative impact on the firm’s advancement. In order to corroborate formalization, we need to ensure that the existing policy and regulatory regimes must be made enterprise friendly. Based on this analysis, we attempt to propose workable recommendations to facilitate the formalization of the informal firms. To ease the registration process, a one-window service centre that enables submission of regulatory documents should be crafted. Besides, the authorities should leverage digital technologies and provide cost efficient, qualitative and timely services. A single system of taxation that addresses the entrepreneurs’ disorientation should be provisioned. To administer the inter-agency coordination failure, policies that ensure harmonization must be shaped. Similarly, with reference to the government restructuring, the existing laws need to be streamlined in favour of the federal structure; de-concentration of central agencies and empowerment the local government, at the same time, will ease the operations.
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LEAP-Liberating Service Sector
