Twenty-three years ago, the Government of Nepal recognised Information Technology (IT) as a priority sector with a vision to put Nepal on the world IT map by 2005. Soon after, the country underwent an energy crisis which made the ambitious vision seem like a flight of fancy. The end of the crisis in 2017 which concurred with the increase in access to internet has served as a backbone for the growth of the IT sector in recent years. The Covid 19 pandemic further accelerated the much-needed adoption of technology by people, businesses and government agencies painting an optimistic future for the IT industry in Nepal.
The IT industry of Nepal which largely comprises IT-enabled services, consulting and business processing outsourcing has the potential of enabling a structural transformation.
Structural transformation is the process of moving resources from low productivity to higher productivity and skill-intensive sectors to set economic development into motion. Until now, the largest export of Nepal has been commodities like oil and carpets. The addition of IT services will diversify the export basket and also reduce dependency on commodities for production and exports.
A special provision was introduced in the Finance Act to encourage export of IT services. Individuals and entities that have earned foreign currency during the financial year 2079/80 via an IT service business like business process outsourcing, software programming, cloud computing, etc will be taxed at the rate 1% down from 20% which used to be the applicable rate. Such tax concession can also be an effective tool in attracting inward foreign investment into the IT sector. However, this incentive has been introduced only for a specific year which is not very encouraging for long-term investment plan and technological development.
Another area that policy makers need to focus on to encourage the export of IT services is the opening up of outward foreign investment by IT companies. This policy change will bring numerous benefits to the Nepali IT sector. A closer geographical proximity to customers will generate a higher trust as well as widen the reach of the Nepali IT industry. This will also position companies at an advantage in accessing funds. Jurisdictions which have a thriving private equity market will offer a much wider pool of investors. Reasons like familiarity of corporate and business structures, corporate culture and time zones play a key role in investment decisions. Investors, for example in the United States, are more likely to invest in an entity located in the US market. International operations also provide an opportunity for the local IT businesses to participate in a more competitive market which will encourage innovation and better quality of services.
Removing barriers to investing should remain a focus of the government. A good place to start, with immediate effect, is to fast track investment clearance. I am compelled to recount a recent experience where it took over eight months for an existing foreign investor in an operating IT company to get regulatory clearance to inject further capital. Delays affect growth. This problem can also be solved by bringing foreign investment under the automatic route which the government is planning to introduce in the near future. Automatic route eliminates the requirement to obtain prior approval from government authorities thereby shortening the gestation lags.
Making it easier for Nepali diaspora to invest in the tech sector in Nepal can be another area that needs reforms. The current legal regime does not support Nepali diaspora (those who hold Nepali passports) to invest money from outside Nepal and repatriate the returns without having to go through the same approval route as a foreign investor. A policy to encourage Nepalis working and residing abroad to invest in Nepal should be introduced.
The generation, adoption and scaling up of technology requires technical skills. Growth in the Nepali IT sector will not come into fruition unless it is supported by skilled human resources. Nepal has the benefit of having a large youth population who are willing and enthusiastic about adopting technology unlike the generations before. It is imperative for the country to convert this enthusiastic young population into a talent pool.
Know-how is a big asset for the economy. Policies should focus on increasing investment in IT education as well as improving the quality of IT education in Nepal rather than caps on student seats. Investment in human capital especially of those transitioning into the most economically productive years will provide a strong foundation for the development of the IT industry. Likewise, institutional arrangements that facilitate dialogues between education institutes and private sector can help resolve problems of skills mismatches and create more employment in the sector.
While the IT industry is picking up some pace, there are areas that policy makers can work on to enable a thriving IT sector.