Econ-ity » Blog Archives

Tag Archives: laws

‘Special’ no more?

SEZIndustrial growth, has, for long been seen as a premise for development in Nepal. While many among us have shown concerns over the state of industrial relations in the country and the not-so-strong-hold of law over issues, the idea that once made it to the headlines and now watches from the sidelines has been the formation of Special Economic Zones (SEZs). There was a time when recommendations for the betterment of industries in the country resounded with the proposition of SEZs. Totally commercial areas, especially established for the promotion of foreign trade, SEZs are meant to have more liberal economic laws in comparison to the laws of the land. Specifically delineated enclaves treated as foreign territory for the purpose of industrial, service and trade operations, SEZs come with features like relaxation in customs duties, a more liberal regime in respect to other levies, foreign investments and other transactions. Overall, it provides for special tax subsidies, fully facilitated buildings and physical infrastructures with all necessary services, necessary procedural service systems through a one door system, establishment of an export oriented industry and bringing in of FDI and modern appropriate production technology.

Keeping this and the endless recommendations in mind, the Government of Nepal (GoN) adopted the concept of Special Economic Zone (SEZ) to attract foreign and national investments for the establishment of industrial and business units. It formed Special Economic Zone Project (SEZP) on 2060/10/15 under Ministry of Industry, Commerce and Supply (MOICS) to formulate laws, rules and regulation, implement planning, design and construction of Special Economic Zones throughout Nepal. Special Economic Zone Ordinance-2005 and related rules were also formulated in accordance. The Ministry of Industry has also identified 10 areas to be developed as Special Economic Zone.

Said to be the first one, SEZ in Bhairahawa initially brought much hope to the industrialists. It was supposed to be have been completed by February, 2014. Alas, it hasn’t been. The construction in Bhairahawa is in a limbo after the contractor refused to complete it citing that the project has yet to clear out the payment worth NRs. 20 million for the works already finished. Looks like even ‘special’ zones are forgotten with time in this country.

And then there is the bill on SEZ, long under consideration. The government last year had decided to operate SEZ issuing a formation order after efforts to formulate an act had failed. The bill was opposed by the ruling party when the then government had tabled it in the parliament in 2008. The bill includes provisions like ban on workers inside SEZ to get into politics, and strikes, mass meetings, and working as a cadre of any party, and will implement the system of No Work No Pay.  This adds to the already existent financial burden.

The delay in the implementation of the project, whatever the endless reasons are, has meant much despair to the industrialists. For now, the SEZs seem far from meeting their three-fold objectives of attracting FDI, increasing exports and accelerating the country’s economic growth; those seem secondary—they better be set up first. Or before long, like everything else, they won’t be the priority anymore

Anita Krishnan

About Anita Krishnan

Krishnan holds dual degrees--in law and sociology. Currently, she works as a Research Associate at Samriddhi, The Prosperity Foundation.

Published by:

When being INFORMAL comes with incentives

faulty incentives' systemNepal’s economy is largely informal; informal sector here comprises of a group of production units that form part of the household sector as household enterprises or equivalently, unincorporated enterprises owned by households. Much likely, such units have limited capital investment and are a subsidiary activity of the owner. Their activities are not regulated under any legal provisions and/or they do not maintain any regular accounts. In Nepal, a good chunk of production and consumption is contributed through such informal sector activities. The sector also contributes to much of the income generation through employment thus providing means of livelihood to millions of Nepalese. Kirana Pasals that are small mom and pop shops selling groceries and fast moving consumer goods form a major segment of this informal economy in Nepal.

What makes these shops informal can be attributed to an endless list of reasons—a primary reason being that informality to these shops means a much better deal than choosing to formalize their operations. Given, the informal sector helps during economic crisis. But the fact that the benefits of informal employment may not be sufficient to achieve an acceptable standard of living as informal employment rarely comes with social protection, good working conditions and adequate wages cannot be ignored for long. But in our case, the scenario of choosing informal as opposed the formal begs to not be changed until a few things are set straight.

First in the list being the registration of these Kirana Pasals. Such shops are required to register at four different places; these fall under the jurisdiction of six major government agencies and they are subjected to 15 major laws and policies. Given their size and monetary weaknesses, these shops have less capacity than larger firms to navigate through the complexities of regulatory and bureaucratic networks. When formalized, the government has rights to inspect them and close them down if regulations are violated—here regulations are manifold and are more often than not subjected to interpretation and discretion of the official thus allotted for the job. Generally, Kirana Pasal owners are aware of few of those laws that are applicable to their businesses but there always remain minuscule provisions and clauses which the businesses would not be in compliance with, simply because of the volume and scattered nature of those regulations, which keeps the business always on offence. And as De Soto rightfully said, “informal economy is a by-product of over regulation and bureaucracy in the formal economy” and unless we do away with such hurdles there seems to be not enough hope for such small ventures to grow or even formalize their operations.

Secondly, empirical results have demonstrated that firms rank taxation as among the most severe obstacles to the long-term success of their enterprises. Likely, the shops in Nepal (if formalized) face a disproportionate burden from tax in comparison to larger firms. Those with turn over greater than 2 million rupees or income greater than two hundred thousand rupees are eligible to pay VAT tax of 13% and Corporate tax rate for Private Limited Co., Limited Co., Partnership Firm in the retail sector – a total of 25%. In many cases, not having books or audited accounts may result into the amount of tax to be paid being established by the tax official based his judgment, making use of a variety of indicators, including the observed standard of living of the entrepreneur. This might result in very high tax rates for enterprises.

Thirdly, there are standards that shops have to abide by. As much as the shops would be willing to do so in the light of protection of consumer rights, here too, the inability to bring in efficient intervention leads to losses on the part of the shop owners.

With problems as such to be encountered in terms of wishing to bring the shop into the formal stream, it seems that it is in the light of their own well-being that most decide to cling to their informal operations. Until and unless the aforementioned hurdles are done away with, the shops will remain informal because being so has more incentives than choosing to be otherwise.

Anita Krishnan

About Anita Krishnan

Krishnan holds dual degrees--in law and sociology. Currently, she works as a Research Associate at Samriddhi, The Prosperity Foundation.

Published by:

So why don’t kirana pasals grow? – One finding

m_IMG_6776Ever noticed how the ubiquitous Kirana Pasals (mom-and-pop stores), always stay put, selling the same things, retaining the same size, same location for years and years, never growing into some mini-marts or the likes? One needs very little capital and the stores can be operated without much expertise in management or technology making it a luring business for the lower and middle class families. But despite toiling for over 14 hours a day, year in and year out, they just don’t seem to grow. Turns out, registration, which is the first step towards gaining a legal status for any enterprise is one of the contributing factors.

In Nepal, Kirana Pasals fall under the purview of fifteen different Acts and six government agencies. These stores need to be registered at four different institutions – municipality or VDC, Ministry of Commerce and Supplies, Ministry of Industry and Ministry of Finance. Ambiguous drafting of laws and regulations complimented by lack of easy access to the information pertaining to these statutory requirements results in huge costs in terms of financial resources, time and energy. Given the volume of business that these stores carry out and the access to information, figuring out the range of approvals and documentations required to operate under full compliance of these central, regional and local laws becomes costly. The related authorities do not share the information on registration of a kirana pasal with each other, therefore requiring an entrepreneur to deal with each institution separately.

When people open up an enterprise, there is a propensity to grow. Some entrepreneurs voluntarily and some without knowing all regulatory compliances, however, end up operating in the informal environment. Growth in kirana pasals means making a transition into a bigger store, preferably a mini-mart, selling imported goods, hiring employees, using modern technologies and so on. To be able to deliver these services, entrepreneurs need to invest additional capital. Therefore, growth in this business means having easy access to finance. The very fact that these entrepreneurs operate informally bars them from accessing finance. As a result, they cannot grow. Growth for informal enterprises also means that they become more visible to monitoring institutions and this provides perfect disincentive to not grow beyond a certain size.

World over, Kirana Pasals have contributed largely to mobilizing human resource, availing several vital goods to local markets, fostering competition and reducing the income and social inequalities. At a time when brain-drain has been popularly viewed as a major hindrance to Nepal’s growth, kirana pasals signify entrepreneurial spirit in people. But operating under informal environment means that these enterprises cannot grow; their property rights cannot be secured by the law; they cannot access finance and can never rise above subsistence. Big informal economy also means that the country loses out on garnering domestic revenue. Something as simple as registering the store poses serious challenges to the formalization and expansion of the business itself.

The best move in favor of these entrepreneurs would be, then, to shorten the registration process. While we have been clamoring for one-window policy for foreign investments, the same could be applied for kirana pasals – go to one office in town, submit your application and you are formalized and good to go. All the institutions whose purview the kirana pasals fall under need to develop a mechanism of sharing information between themselves as they have better understanding of the regulations. Less cumbersome regulatory procedures incentivizes micro and small entrepreneurs to join the formal economy thus opening up an avenue for them to grow.

Akash Shrestha

About Akash Shrestha

Akash Shrestha is Coordinator of the Research Department at Samriddhi, The Prosperity Foundation where his focus areas are petroleum trade and public enterprises. He also writes newspaper articles, blogs and radio capsules, based on the findings of the studies conducted by The Foundation.

Published by: