Policy Promises vs. Implementation Gaps: Is Nepal Losing Ground in the IT Sector to India?

In the budget for the current fiscal year 2025/26 (2082/83 BS), unveiled on May 29, the Government of Nepal introduced several special provisions aimed at promoting the information technology (IT) sector. The government announced that the IT industry would be recognized as a “special industry,” with benefits including income tax and electricity tariff exemptions.

Former Finance Minister Bishnu Prasad Paudel declared that income earned from IT service exports would receive a 75 percent tax exemption. Additionally, individuals residing in Nepal and selling IT services abroad would be subject to a final tax of only five percent.

In the previous fiscal year (2024/25), former Finance Minister Barshaman Pun had declared the beginning of an “IT Decade,” setting ambitious targets: exporting IT services worth Rs 3 trillion over 10 years and creating 1.5 million jobs.

However, despite repeated announcements and policy commitments prioritizing the IT sector, industry experts say implementation has been weak.

Policies Announced, But Not Executed

Gaurav Raj Pandey, President of the Nepal Association for Software and IT Services Companies (NAS-IT), says the sector has enormous potential but suffers due to ineffective implementation of government policies.

“The IT sector has tremendous opportunities. But problems arise because government policies are not effectively enforced,” he said.

Although tax incentives have been announced, companies have not fully benefited. NAS-IT Treasurer Abhay Paudel points out that software exporters are struggling to receive refunds on Value Added Tax (VAT).

“Companies have to run from office to office to recover VAT refunds they are entitled to when exporting software,” he said. According to him, around Rs 400 million in VAT refunds remain pending for IT companies.

This has created serious challenges, especially for foreign-invested companies operating in Nepal.

Pandey explained, “Parent companies tell their Nepal offices to operate using funds receivable from the government. But when the government fails to release VAT refunds, it affects operations and performance. Managers of large companies are unable to meet targets due to such policy bottlenecks.”

India’s Aggressive Policy Shift

While Nepal struggles with implementation, neighboring India has introduced aggressive reforms to attract global IT firms including companies that might otherwise consider Nepal.

Through its 2026/27 fiscal budget, India significantly expanded its “safe harbor margin” policy for IT exports. Previously applicable to IT exports up to INR 3 billion (300 crore), the policy now applies to exports up to INR 20 billion (2,000 crore), with a fixed profit margin of 15.5 percent.

The safe harbor margin allows multinational companies operating subsidiaries in India to calculate profits at a predetermined margin (15.5 percent in this case), thereby reducing tax disputes. For example, if a foreign company produces software in India at a cost of INR 10 million, it can add a 15.5 percent margin and pay tax only on that declared profit.

This ensures tax clarity and eliminates lengthy disputes over transfer pricing, making India more attractive to global IT giants headquartered in Europe and the United States.

Nepal, although it has legal provisions for safe harbor rules in tax, finance, and technology sectors, has yet to determine specific rates leaving uncertainty for investors.

The Cotiviti Case and Investor Concerns

Tax uncertainty in Nepal is illustrated by the case involving Cotiviti Nepal, a US-invested company exporting software to the United States. In April 2024, Nepal’s Revenue Investigation Department filed a case at the Patan High Court alleging that Cotiviti evaded Rs 513.5 million in VAT. The case is currently sub judice.

Adding to the controversy, the High Government Attorney’s Office reportedly found that revenue officials themselves may have made unlawful decisions in granting tax exemptions to the company, and suggested investigation by the Commission for the Investigation of Abuse of Authority.

Industry insiders say the Cotiviti case has created fear among foreign IT investors. According to former CAN Federation President and engineer Binod Dhakal, many companies are waiting to see how the court rules before making further investment decisions.

“The IT sector can contribute more tax revenue than many other industries. But instead of facilitating growth, policies are creating obstacles. The Cotiviti case has frightened many IT firms,” Dhakal said.

Following the dispute, Cotiviti reportedly downsized operations in Nepal and shifted part of its work to India.

CAN Federation Vice President Chiranjivi Adhikari said, “Many companies are frustrated by Nepal’s opaque and complicated tax system and are in the process of relocating. Cotiviti has already begun operations from India.”

Economic Opportunity Remains Strong

Despite these challenges, Nepal’s IT export performance demonstrates strong potential.

A study by the Institute for Integrated Development Studies (IIDS) revealed that in 2022 alone, Nepal exported IT goods and services worth USD 515.4 million (approximately Rs 6.85 billion at the time). This was achieved even without strong policy incentives, branding support, or direct government backing.

The IT sector contributed about 1.4 percent to Nepal’s GDP and 5.5 percent to foreign exchange reserves.

Experts argue that with clear policies and consistent support, Nepal could realistically achieve its goal of Rs 3 trillion in IT exports within 10 years and generate 1.5 million jobs.

“The problem is not potential it is implementation,” industry leaders say.

Calls for Reform and Local Preference

Senior Chartered Accountant Sheshmani Dahal believes India’s new policy will attract companies that might otherwise consider Nepal.

“Nepal must set a safe harbor margin even lower than India’s to remain competitive,” he suggested.

Chartered Accountant Umesh Raj Pandey argues that large IT firms generate substantial indirect tax revenue through employee income taxes and consumption spending, and that the government should avoid overburdening them with direct taxes.

Industry leaders also complain that the government does not sufficiently trust domestic IT firms. Pandey noted that government tenders often contain conditions favoring foreign companies.

“Nepali IT firms are already providing software to global companies like Boeing. The government should adopt a policy requiring software purchases worth up to Rs 100 million to be sourced domestically. For larger contracts, at least 40 percent should be allocated to Nepali firms,” he proposed.

He also called for the formation of an IT Promotion Board with private sector participation to strengthen policy coordination and sector growth.

Regional Competition and the Way Forward

Countries like India, Vietnam, and the Philippines have experienced rapid economic growth partly due to tax incentives for IT outsourcing industries such as Business Process Outsourcing (BPO) and Knowledge Process Outsourcing (KPO).

According to NAS-IT Treasurer Paudel, Nepal should adopt similar measures and reduce corporate tax for IT firms to below five percent to remain competitive.

As India sharpens its policy framework and global IT companies seek tax certainty, Nepal faces a critical choice: effectively implement its announced reforms or risk losing investment and talent to more aggressive regional competitors.

The opportunity exists but without strong execution and investor-friendly clarity, Nepal’s IT ambitions may remain largely unrealized.