The government has repeatedly expressed its commitment to attracting foreign direct investment (FDI) into Nepal. However, many of its policies send a contradictory message. Excessive direct and indirect taxes, coupled with political and administrative hurdles, often discourage investors from entering the Nepali market. Frequent labor disputes and policy uncertainty further undermine investor confidence.
The situation has become so challenging that even domestic investors are increasingly frustrated with the government’s approach. If local entrepreneurs are struggling to operate and expand their businesses, attracting foreign investors becomes even more difficult.
A clear example is the aviation sector. Last year, the government imposed a 13 percent Value Added Tax (VAT) on air tickets, increasing travel costs and affecting the competitiveness of Nepal’s aviation industry. As a result, many long-haul travelers have begun flying from cities such as Delhi, Bagdogra, and even Dhaka in Bangladesh, where international airfares are often lower.
This year, the government introduced 13 percent VAT on aircraft and its spare parts. Consequently, domestic airlines have suspended plans to acquire new aircraft because the additional tax has significantly increased costs. Such taxes do not exist in neighboring countries like India and China, placing Nepali airlines at a competitive disadvantage.
For a landlocked country such as Nepal, air connectivity is essential for linking the nation with the global destinations directly. Tourism, one of Nepal’s largest sources of foreign exchange earnings, depends heavily on a strong aviation sector. Yet only two Nepali airlines operate international flights with a combined fleet of just seven aircraft, while 27 foreign airlines serve Kathmandu. This imbalance allows foreign carriers to dominate the market, resulting in substantial outflows of foreign currency.
If Nepal had a larger international airline fleet, a greater share of airfare revenue would remain within the country. Therefore, the government’s priority should be to facilitate and encourage domestic airlines to expand internationally rather than burden them with additional taxes.
At a time when domestic investors are struggling under an increasingly heavy tax burden, it is unrealistic to expect significant inflows of FDI. Before introducing new policies, the government should carefully study the successful investment models of neighboring countries, as well as economies such as Hong Kong, Singapore, and Dubai, which have created highly investor-friendly environments.
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