Opinion in lead

Unlocking Nepal’s IT services export

As Nepal aspires to develop its promising information technology (IT) industry into a thriving export sector, a series of support measures is required to overcome the impediments to attracting investment (including foreign investment) and human resources.

In the recently concluded Third Nepal Investment Summit, held in April 2024, information and communication technology (ICT) was one of the sectors that was promoted for foreign direct investment (FDI). Among the projects signed up by foreign investors in the Summit is an agreement to construct Nepal’s first-ever super cloud data centre in Ramkot, Kathmandu at an estimated cost of NPR 3 billion.

Despite the growth witnessed by Nepal’s IT sector, the FDI stock in the sector remains limited. As per the Survey Report on Foreign Direct Investment in Nepal (2021/22) by Nepal Rastra Bank, information and communication services make up 4.8 percent of the total FDI stock. The IT sector in Nepal is rapidly growing, driven by advancements in technology and the expansion of the gig economy. According to a report by the Institute for Integrated Development Studies (IIDS), in 2022, the total export value of IT services reached US$515 million, marking a 64.2 percent increase from the previous year. According to the report, IT exports, including those by companies and freelancers, increased by 80.5 percent and 55.2 percent, respectively. The report estimated that IT service exports were equivalent to 1.4 percent of Nepal’s GDP in 2022.

As per the World Trade Organization’s digitally delivered services trade dataset, Nepal’s total export of digitally delivered services (DDS) was valued at US$835.8 million in 2023, a significant growth from the export of DDS in 2010, valued at US$164.9 million. Nepal’s total import of digitally delivered services was valued at US$ 104.9 million in 2023. Considering the statistics from the World Bank Open Data, Nepal’s total ICT service exports (BoP, current US$) stood at US$ 117.9 million in 2022.

The Government of Nepal has also been particularly prioritizing IT and Business Process Outsourcing (BPO) due to their significant potential for exports. According to the Investment Board of Nepal, with around 5,500 Nepali graduates entering the IT sector annually, there is a substantial talent pool available, which makes Nepal attractive for establishing IT firms. To attract FDI, government of Nepal has amended policies specifically targeted at the IT sector. In the fiscal year 2023/24, the government removed the minimum threshold for FDI in the IT sector while the minimum requirement for other sectors is still NPR 20 million. In addition, the government announced a 50 percent income tax exemption for the income earned by IT-related services exports (like Business Process Outsourcing, software programming, cloud computing, etc.) for the next five fiscal years. Furthermore, IT Parks operating within Special Economic Zones (SEZ) are entitled to additional exemptions applicable to industries in those zones.

Recent tax controversies concerning the IT industry—such as the Cotiviti Nepal case—and issues faced by internet service providers in paying their suppliers in foreign currency have also sent a negative message to investors. Cotiviti Nepal was accused of leaking a significant amount of money, totalling NPR 10.36 billion, allegedly due to suspected evasion of value-added tax (VAT) and income tax. The incident highlighted communication gaps within Nepali regulatory bodies and dampened the mood of the investment summit, shifting focus from business opportunities to doubts about Nepal’s investment climate. This controversy could be damaging to Nepal’s reputation as a reliable investment destination and raised concerns about the government’s commitment to agreements. Investors’ trust could be significantly harmed, making both local and foreign investors reassess their commitments. The incident underscored the need for immediate changes and a renewed commitment to transparency and integrity.

Despite its great potential, Nepal faces several challenges in its IT service exports. To ensure seamless IT service exports, Nepal should focus on improving infrastructure with reliable electricity and internet, establishing IT parks, and increasing the number of data centres to strengthen the IT industry’s capacity. Equally important is creating capable and skilled human resources required for the IT industry. Human capital development is essential through capacity building and upskilling programmes. Nepal grapples with a shortage of skilled human resources in the IT sector, as academic institutions often lack the capability to produce talent that can compete globally. Addressing these challenges is crucial for Nepal to fully utilize its IT capabilities. Policies should avoid double taxation, introduce tax credits, and enact data protection laws. Promoting innovation through startup initiatives and learning from global successes is very important.

Ms. Shrestha is intern at SAWTEE. This article was published in Trade, Climate Change and Development Monitor, Volume 21, Issue 04, April 2024.