Until September, Ramesh, a Kathmandu-based software engineer in his late 20s, worked for the Nepali IT company CloudFactory (Sprout Technology Services Pvt Ltd), paying a 30% tax on his income to the federal government each month. Then, he joined a similar role for a foreign startup, working remotely from Kathmandu.

Because of a recently introduced government incentive, Ramesh’s taxes dropped to just 1%. “Although I have a similar job [now], I have more cash in hand,” Ramesh, who asked to use a pseudonym to avoid hurting his future job prospects, told Rest of World.

Introduced in July, the  new 1% tax rule applies to people who earn “foreign exchange by providing services based on software, electronic services, business process outsourcing or similar information technology outside Nepal.” 

Prior to the tax, tech workers earning from overseas employers fell into a gray area, with little clarity on the provision under which they should be taxed. Many parked their earnings outside Nepal or used informal channels to keep their income tax-free. But the gray area also meant workers were unable to obtain a tax clearance certificate: an important document required for purposes such as applying for visas, and investing in or starting businesses, among other things.

The new tax scheme formalizes the work of many of Nepal’s tech workers. But local entrepreneurs say the policy also encourages techies to work for remote companies, which makes competing and retaining good-quality talent more difficult. Some entrepreneurs worry that this trend could stifle the growth of the local tech industry in the long term.

“These days, we are under pressure to secure short-term financial resources to retain employees by providing increments,” Roshan Bhattarai,  CEO of Kathmandu-based Proshore Nepal, which provides software development services, told Rest of World. At least one executive Rest of World spoke to for this story said their company had found a workaround by asking their foreign stakeholders or sister entities abroad to pay their workers so that they can benefit from the new 1% tax regime.

The scheme was introduced to encourage citizens who were making money from overseas jobs to pay taxes locally and increase the government’s income, Raju Pyakurel, information officer at Nepal’s Inland Revenue Department, told Rest of World. “This is crucial as we are facing a foreign currency crunch,” he said. Nepal has been dealing with a forex crisis due to low tourism revenue amid the pandemic and a decline in remittances from workers abroad.

By 2021, the Himalayan nation had a $648 million local IT industry, which contributed 2.2% to its GDP. The sector includes legacy firms like CloudFactory, Fusemachines, F1Soft, and Leapfrog, which provide traditional IT services such as business process outsourcing and software development to overseas clients, and younger startups that have been sprouting in and around Kathmandu.

Chandika Bhandari, president of the Kathmandu-based Leapfrog Technology Nepal, which focuses on product engineering, data engineering, and AI, told Rest of World that encouraging techies to work for foreign firms will make it hard to build big, legacy enterprises in Nepal.

“We also need big, established companies in Nepal that can adapt along with newer generations.”

“[The] demand and supply should and will set the appropriate [labor] prices in the market and businesses that can’t attract talent with competitive pay will get punished,” Bhandari said in a comment to Rest of World. “We see how companies like Microsoft, Google, Amazon, and Tesla have played an important role in retaining the intellectual capacity (not property) of American society. That’s why we also need big, established companies in Nepal that can adapt along with newer generations.”

Nepali tech companies already have a limited talent pool to work with, Biswas Dhakal, president of F1Soft, one of the pioneers of digital financial services in Nepal, told Rest of World. Dhakal said that such an uneven tax regime would only add a layer of difficulty. “The government should provide incentives to this ever-growing industry with vast potential to make it competitive in the global market,” Dhakal said.

Local entrepreneurs also told Rest of World that the new policy promotes gig work at the cost of full-time employment with large companies, which can be risky for the country’s workforce. “As I am a freelancer, the company I work for can fire me anytime,” Ramesh said, acknowledging the risk he has taken to save on taxes. “I also don’t have any social security. But I have a fatter paycheck, I think I can manage the risks.”

Dhakal added that companies like his offer mentorship and training on the latest technologies to local talent, which they would miss out on if they focus on contract work for foreign players. “That’s not possible for people who work solo,” he said. “They can’t learn from their team members.”

According to information officer Pyakurel, the government may be open to revisiting the new program, but it might be some time before local tech players get any relief. “If the policy is hurting IT companies, we are always ready to study its impacts and revise it during the next fiscal year,” he said.