The expectation of Start-Ups in Nepal

Apr 12, 2020

The expectation of Start-Ups in Nepal

Yesterday, I was waked up early in the morning with a call from a chartered accountant. He was recently qualified and has just started his startup business a year ago. He was concerned with the lockdown impact on his start-up business. He is just about to convince his angle investor for the capital injection and at the nick of time the business got completely shut down. He was worried for his venture. I started wondering how, these business and youth like him, will have courage to stand again.

Today many youths are venturing into innovative start-ups. Thinking about materializing their dream through these startups itself is a paramount task in Nepal as we have limited market and a cumbersome legal process and again thanks to these natural, political and man-made calamities that occurs every four to five years in our country either in the form of earthquake, political change or Pandemic that have always created Nepal a difficult place to do business.  

The start-up in Nepal (mainly that uses technology) has to invest a lot of time, money and energy on changing the attitude and habit of Nepalese either be it a customer, vendors, service provider or government agencies. The world is all behind these start-ups and growth of these start up can really contribute to the society and the economy. 

The call from this guy started striking in my mind and started thinking what is the situation of these startup in neighboring country and the recognition of their role by the government. 

 

The South Asian Scenario

Indian government looks proactive in recognizing the importance of these startup. They have prepared the 19-point Action Plan, organized by the Department of Industrial Policy & Promotion (DIPP) that focuses both on restricting hindrances and promoting faster growth of startups so as to build a strong eco-system to nurture innovation and empower Startups under the flagship START UP INDIA. 

Similarly, Bangladesh has also institution called Startup Bangladesh, a dedicated institution that facilitates funding, mentoring, academic programs, networking, coworking space and legal and Intellectual Property Right Support.  

 

The Pakistan Government had introduced startup Pakistan under Kamyab Jawan Startup Pakistan Program which aims to create a startup ecosystem in Pakistan by providing training to one million youngsters with entrepreneurial potential. By the end of 2023, Startup Pakistan Program envisions more than 10,000 startups in Pakistan.

The Ministry of Digital Infrastructure & Information Technology, currently being operated under the Digital Infrastructure and Information Technology Division, Ministry of Defense, Sri Lanka has introduced Startup Sri Lanka. Its mission is to transform Sri Lanka through technology and entrepreneurship by providing support to the tech community and accelerate the growth of Sri Lankan startups and freelancers.

Even Bhutan has established Startup Center under the Department of Cottage and Small Industry, Ministry of Economic Affairs with funding support from the Government of India. 



Scenario of Nepal

Government of Nepal is far behind in establishing a dedicated institution to support start up in Nepal. The government of Nepal is interested in introducing “Prime Minister Employment Programme” a cash distributive scheme under Ministry of Labour to create employment rather than developing a proactive institution to promote startups. Although widely publicized and declared in the budget speech of 76-77 and introduced in Finance Act that ensured to provide relief to the tech-based rider sharing start-up like Pathau and Tootle with tax relief, it just turned into some hoax just because of the bureaucratic words used in the Act.  

The start-up in Nepal is doing on their own. Its high time that start up in Nepal needs institutional support. The world economy is almost into depression and most Nepalese residing both within and outside Nepal is going to lose their jobs. These are surely expected to create pressure to the economic growth of Nepal and remittance flow. 

 

What can be done ahead

We don’t expect much from the government. However, there are ways to facilitate these start up. Specially the local government can streamline the way they operate with the help of these start up. The startup in Nepal do not expect the huge financial package from the government as we all know our government is always sort of fund. 

However, there are actions that can be undertaken that facilitates startup and ultimately the Nepalese Economy without must investment. 

 

Recognize Startups and devise a clear definition for startups.  

The most confused impression I get with anyone about start-ups is that it is only tech based. But start-ups can go beyond technology.  Major difference between start up and entrepreneur is that start up grow beyond their solo founder. The government needs to recognize the importance of the start-up and devise a clear definition of start ups so that benefits, concession and facilities directed towards startups does not fall into the bureaucratic pitfalls.     

 

A dedicated one window policy and institution for registration, facilitation, development, funding with simplification in patent, trademark registration

We have a Micro Finance Regulation and Promotion Department under Nepal Rastra Bank to promote Microlending and Investment Board dedicated for foreign investment to facilitate foreign investment above certain threshold. Although these institutions have their own issues, a dedicated one window policy and institution to deal with start-ups is an utmost priority to be at-least at par with our South Asian Neighbor. Most start-up starts with a creative idea and ideas cannot materialize if stuck under bureaucratic process. Therefore, a single-window where the start up business can register their business including tax registration and other licensing requirements as needed, submission of all details into single platform and even getting advices when required, need to be established. The same institution needs to facilitate registration in patent, trademark so that start up innovators do not need to move door to door of multiple government agencies.     



Facilitate easy entry and exit 

Easy entry and exit are key to any start up. The legal provision for start-up needs to facilitate easy entry and exist. This is where a clear definition of start-up is key. This requires relaxation even on the provision of company law for start-ups relating to registration, closure, share transfer etc. 

 

Relaxation on applicability of change of control provision of Income tax Act, Relief of tax on sweat equity, capital gain and write off benefit for loss of investment in Start-up 

Start up business grows when new investor invests in these start-ups. Investing in start-ups itself is a challenge be it an angle investor or a venture capitalist.  Therefore, to facility investment in start-ups relaxation on applicability of change of control provision (section 57) of income tax act and tax on sell of share of start-up (both for natural person and entity) needs to be introduced. The exemption to applicability of change of control can be provided such that it will be appliable only when the startup paid-up capital reaches certain threshold. Presently resident natural person has to pay 10% (effective) and entity has to pay 25% (effective) tax on gain on sale of shares. Further startup business widely usage the concept of sweat equity where service provider/employee provides service in return for equity of the company. However, presently tax is applicable to the service provider/employee even if s/he does not receive financial benefit. So, revision in the income tax so that tax on sweat equity is applicable only at the time of disposal of shares can facilitate startup to manage their burn rate (cash outflow) to a wider extent.  Further there remains some risk of loss in startup business. Allowance for write-off of such investment in start-up helps to take risk to the investors. 

 

Establishment of Innovation hubs and tie-up with reputed University 

To promote innovation; like our South Asian Neighbor, Nepal also needs to establish resourceful innovation hubs that can incubate innovations, run accelerator program, provide advisory and mentoring at various stages and link up with the professionals. Further, tie-up with reputed university within and outside the country helps in ensuring innovation into students and promotes Industry-Academia Partnership. Further, these institutions can setup a countrywide and cross-country incubator network.

 

Financing  

Hindrance to any startup is financing. How good is your idea, it cannot make money unless it is converted into business which requires financing? Setting up of POOL for investment by Government is widely used method across the world. However, success of these pool for investment is very hard to find. Therefore, the policy for investment needs to facilitate startup across all sectors. Major institutions which mobilize funds in Nepal includes Retirement Fund management Entity like Employee Provident Fund, Citizen Investment Trust, Social Security Fund, Insurance Companies, Re-Insurance Company, Mutual Funds, Funds, Various Funds under Nepal Rastra Bank and Nepal Government. Allowing these institutions to invest certain percentage of their portfolio into these startups can really bring a positive change in how our economy is working at present. 

 

Relaxed norms for public procurement through startups

Procurement of goods and service by the government institutions using online platforms/ delivery mechanism of start-ups also promotes these startups by supporting their business as the government undertake major procurement. Therefore, relaxed norms for public procurement through startups can really make a difference. 

 

Program like Annual incubator Grand Challenge 

Organizing an Annual startup fest (national & international level) where the government and private sector are part of the organizing committee can inspire innovative startups to excel through recognition and support.  

 

At the End

Our economy will be at the most difficult stage at the end of this lockdown and we all know the government will have very little resource. However, all actions of the government do not require financial support. The suggestion put forth in this article requires least or no major financial support from the government. But it requires strong support from all agencies of the government. Its high time for the government to facilitate entrepreneurs/start-ups which can help in speedy recovery of our economy by creating innovative ventures and employment opportunities. 

 

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 Arun Raut is the member of Institute of Chartered Accountant of Nepal and The Association of Chartered Accountant of Nepal. Mr. Raut is the partner of one of the chartered accountant firm in Kathmandu.