In the budget for the current fiscal year 2025/26 made public on 29 May 2025, the government had introduced some special provisions for the information technology sector. These included recognizing the IT sector as a special industry and granting exemptions on income tax and electricity tariffs; providing a 75 percent tax exemption on income earned from exporting IT services; and declaring that individuals who sell IT services abroad while residing in Nepal would be subject to only 5 percent tax, which would be final. These announcements were made by the then Finance Minister Bishnu Prasad Paudel.

In the previous fiscal year 2024/25, the then Finance Minister Barshaman Pun had declared that year as the starting point of Nepal’s “IT Decade.” A target was set to export information-technology services worth Rs 3 trillion within 10 years and to create employment for 1.5 million people.

Experts in the information-technology sector say that although the government has been announcing major plans in recent years by prioritizing the IT sector, their implementation has not materialized. Gaurav Raj Pandey, president of the Nepal Association for Software and IT Services Companies (NAS-IT), says, “There are ample opportunities in the IT sector. However, problems have arisen because the policies introduced by the government have not been implemented effectively.”

Although the government has introduced tax-relief programs for the information-technology sector, businesses have not been able to benefit from them. Abhaya Poudel, treasurer of NAS-IT, says, “Companies have had to keep running to government offices because the value-added tax (VAT) that should be refunded on software exports has not been returned.” According to him, the VAT that IT companies are supposed to receive back amounts to around Rs 400 million.

Poudel says that for this very reason, companies with foreign investment are facing difficulties. Pandey adds, “The parent company tells us to run the office using the money that should be received from the government, but here the government does not even return the funds it is supposed to refund. Because of this, managers of large companies have not been able to perform effectively.”

India’s aggressive policy

At a time when Nepal has not been implementing the policies it formulated for the information-technology sector, neighboring India has changed its policies in a way that also seeks to attract foreign IT companies that could potentially come to Nepal.

Through its budget for fiscal year 2026/27, announced on 1 February 2026, India has adopted a policy aimed at making a major leap in the technology sector. It has put forward new proposals with plans to attract major IT industries from around the world to India. Large IT companies headquartered in Europe and the United States have been operating by setting up subsidiaries in countries where office operations and labor costs are cheaper. When such subsidiaries provide software to their parent companies, problems often arise in determining the value of those products. Even though they are part of the same company, because the production occurs in a different country, the country where the subsidiary is located tends to treat it as a sale and claim tax on it. This had also been a subject of dispute in India for a long time.

Nepal also has a legal provision for safe harbor in the fields of taxation, finance, and technology, but the rate has not yet been determined.

However, through this year’s budget, India has set a margin of 15.5 percent on IT exports of up to INR 20 billion for companies related to the information-technology sector. Previously, such a facility was available only up to INR 3 billion. This provision of fixing a margin is known in the fields of taxation, finance, and technology as a “safe harbor margin.”

Now, if an IT company based in another country opens a subsidiary in India and develops software at a cost equivalent to INR 10 million, it will determine the price by adding a 15.5 percent profit margin. The government will claim tax only on that declared 15.5 percent profit. In this way, tax disputes regarding the income and profit earned by the subsidiary are resolved. With such a stable tax policy, large companies may be attracted to India.

However, a similar dispute has been ongoing in Nepal for a long time. Nepal also has a legal provision for safe harbor in the fields of taxation, finance, and technology, but the rate has not yet been determined.

Let’s look at an example of a tax dispute in Nepal. The US-invested company Cotiviti Nepal, which exports software from Nepal to the United States, was accused of evading Rs 513.5 million in value-added tax. In the Nepali month of Chaitra 2080 BS (mid-March to mid-April 2024), the Department of Revenue Investigation (DRI) filed a case against the company at the High Court, Patan. The case is currently under consideration. Surprisingly, during the course of the investigation, the High Government Attorney Office in Patan found that government officials working in the DRI had unlawfully granted tax exemptions to the company, causing losses to the state, and recommended that the Commission for the Investigation of Abuse of Authority (CIAA) investigate those same government officials.

The Cotiviti case has left foreign-invested IT companies in Nepal in a wait-and-see position. Many companies are waiting to see what the court’s decision will be, says Binod Dhakal, former president of the Federation of the Computer Association of Nepal (CAN Federation) and an engineer. “The IT sector may be able to pay more taxes than other sectors. But instead of policies that facilitate business, problem-causing policies prevail. The Cotiviti case has scared many IT companies,” he says.

After this case, IT businesspeople report that Cotiviti started reducing staff in Nepal and began operations from India. Chiranjibi Adhikari, vice president of the CAN Federation, says, “Frustrated by Nepal’s opaque and complicated tax laws, many companies are in the process of shifting out of Nepal. Cotiviti has already started operations from India.”

“The IT sector may be able to pay more taxes than other sectors. But instead of policies that facilitate business, problem-causing policies prevail. The Cotiviti case has scared many IT companies.”

Senior chartered accountant Shesh Mani Dahal says that India has introduced a clear policy to attract IT industries. “This policy can draw IT industries to India. Companies that could have come to Nepal may instead set up in India. Nepal should also set the safe harbor margin lower than India’s,” he says.

Another chartered accountant, Umesh Raj Pandey, says, “If large IT companies operate offices in Nepal, the government will already collect substantial indirect taxes. There is no need to impose unnecessary direct tax burdens.” Foreign currency enters the country through these companies. Large IT companies pay higher salary scales to employees, generating income tax revenue for the government. The government also collects taxes from various expenses incurred by these employees in their daily lives.

Opportunity exists, but there is no priority

A study by the Institute for Integrated Development Studies (IIDS) revealed that in 2022 alone, Nepal exported IT products and services worth USD 515.4 million (equivalent to Rs 68.5482 billion at the exchange rate at the time). This software was exported from Nepal despite the absence of policy incentives, branding efforts, or direct government support for software exports. The study also showed that the IT sector contributed about 1.4 percent to Nepal’s total gross domestic product (GDP) and accounted for 5.5 percent of foreign currency reserves.

This means that there is ample opportunity in Nepal’s IT sector if clear policies and promotion are in place. As stated in the previous fiscal year, there is no inherent problem in exporting IT services worth Rs 3 trillion over 10 years and providing employment to 1.5 million people. The main challenge, however, lies in policy formulation and its implementation.

Countries like Vietnam, the Philippines, and India have achieved economic growth in recent years largely due to the IT sector. Abhaya Poudel, treasurer of NAS-IT, says this progress was possible because those countries offered tax exemptions for IT outsourcing. He adds, “They provided tax breaks for Business Process Outsourcing (BPO) and Knowledge Process Outsourcing (KPO). Today, they are among the leading software-exporting countries. In Nepal, corporate tax should be less than five percent.”

IT businesspeople have complained that the Nepal government does not trust local IT companies. Pandey says, “When the government issues tenders, it creates conditions that favor only foreign companies. This shows a lack of trust in Nepali firms. Currently, Nepali companies are even providing software to Boeing. There should be a policy requiring software up to Rs 100 million to be purchased from Nepali companies. For software beyond that, 40 percent should belong to Nepali firms.”

He also says that to promote the IT industry in Nepal, it is necessary to establish an IT Promotion Board with the participation of the private sector.