DOI sitting on applications worth around half a billion rupees
KATHMANDU, Nov 11: With the Nepal Rastra Bank (NRB) halting foreign exchange facility to various businesses since the past few months, many firms, especially those with foreign investments, are facing difficulty in making payments to their suppliers for the purchase, repair or renewal of their software programs bought from international companies.
The central bank's recent decision to make a recommendation letter from regulatory agency 'concerned' mandatory for such foreign currency exchange facility has left nearly half a dozen companies, including at least three multinationals, in confusion.
The new 'hassle' comes at a time when the private sector has for long been complaining of red tape in foreign investment. Due to the absence of a “designated regulatory agency” to oversee the software sector in Nepal, these companies have approached the Department of Industry (DoI) for recommendation letters for the exchange facility. According to the DoI, it is sitting on such applications worth nearly half a billion rupees since the last few months. The DOI has not issued even a single recommendation since the enforcement of the new rule.
Most of the applications are from multinational companies like Dabur Nepal Pvt Ltd, which want to make payments for the purchase or maintenance of SAP [system applications and products], a software program that allows businesses to track customers and business interactions.
The delay in getting the exchange facility has not only become a hassle for investors, but it could also hit the operations of many companies. “Our purchase orders, payments and all operations are linked to our software supplied by international vendor,” said a representative of a multinational company that Republica met at the DoI.
“If we fail to make the payments on time, they will stop providing services and this could hit our operations,” he added.
However, the DoI has refused to provide the recommendation letters saying it is not the regulatory agency for software services.
“The department is not a regulatory body for software-related matters. None of the existing laws, including the Foreign Investment and Technology Transfer Act 2019 and the Industrial Enterprises Act, 2016, has any provision allowing us to issue a recommendation for foreign exchange facility for software-related payments,” said Binod Khadka, director at the DoI.
“Also, we don't have a mechanism to verify whether the payments are genuine. So, we have withheld the applications until a solution is found,” he added.
The reluctance by officials at the DoI to issue the recommendation letter seems to have stemmed from a fear of landing in hot water for any misuse of foreign currency by firms.
“What's the guarantee that the international payments being made are genuine and the purchases were made through competitive bidding and there is no intention to avoid tax liability?” questioned a senior official at the DoI. “A firm has been asking for payment approval worth Rs 10 million. If we approve the application, another firm might approach us for recommendation for payment of Rs 100 million? How do we verify whether the purchases were made through competitive bidding or at market rates,” said Khadka.
The international payment was not an issue until a few months ago as the NRB was providing the exchange facility to firms without a recommendation letter. However, the NRB enforced the requirement after the provision was introduced in the monetary policy for the current fiscal year 2019/20.
“We made a recommendation letter mandatory for such payments after a lot of payment requests started coming in and we could not verify whether they were genuine,” said Sarita Adhikari Bhatta, the head of Foreign Exchange Department at the NRB. According to Adhikari, the government should introduce a standard or rule to govern the procedure for the payment of software services.
Business leaders say that investors should not be made to suffer from the lack of policy clarity.
“Businesses have no option but to buy some of the software and consultancy services from international suppliers. The new measure to halt or delay the payment is another hurdle for foreign investors,” said Shekhar Golchha, senior vice president at the Federation of Nepalese Chambers of Commerce and Industry (FNCCI), urging the government to draft a regulation and approve the payments without delay.
IS IT DUE TO DEPLETION IN FOREX RESERVE?
Some in the DoI and private sector believe that the central bank's move to seek the recommendation for the international payments for software services is a 'knee-jerk' reaction of the central bank to a recent depletion in the country's foreign exchange (forex) reserve.
“It looks like the central bank, which is struggling to shore up forex reserves is passing the buck to others so that the international payment even of small amount gets delayed until the external sector position of the country improves,” said a senior official at the DoI.
According to the NRB, the foreign exchange reserves decreased to US$ 9.44 billion as of mid-September 2019 from US$ 9.50 billion as of mid-July 2019. While the balance of payment position of the country was in deficit in the last fiscal year, it slightly improved in the first two months of the current fiscal year 2019/20.
While investors say that they are being pushed from pillar to post to get approval for international payments, authorities say that the growing number of payment requests for software services also raises concerns about the risk of money laundering, profit shifting and tax avoidance by multinational companies in Nepal. “Some multinational companies are making payments for software services to their parent companies. Others could follow suit. This leaves us wondering whether it could be a tax-planning strategy,” said the senior DoI official. However, private sector representatives say that there is no possibility of tax evasion as the companies have to pay 15 percent TDS (tax deducted at source) for the payment of software services as well as reverse VAT. “However, the corporate income tax is up to 30 percent compared to 15 percent TDS,” added the senior official.