In the early 1990s, Nepal set its foot on a bold journey to reshape its economic future. The newly-elected Nepali Congress (NC) government back then embraced a liberal market model, ushering in a series of measures to open and modernize the economy. It was a time of great promise and profound change. By the mid-1990s, the impact was unmistakable: the economy was growing at nearly 8% a year, and per capita income was rising by over 2.5%.

Now, more than three decades later, Nepal is once again at a critical crossroads. But this time, small policy adjustments will not be sufficient. A fundamental rethinking of the economic model is urgently needed. Despite various demand-side interventions, such as lowering interest rates and increasing government spending, these measures have proven insufficient. Economists, policymakers and business leaders now agree: Nepal's economy requires deep structural reforms.

There are valid reasons for this. The economy, which was once buoyed by remittance inflows, credit expansion and land monetization, has slowed significantly over the past two years following the Covid-19 pandemic. Job creation has remained unsatisfactory, and growth rate has dropped, from a long-term average of 4.5% to an average of just 2.9% in the recent years. Even 4.5% growth rate is insufficient for meaningful economic transformation. Without fundamental structural changes, even reaching past averages has become a daunting challenge for Nepal. If Nepal fails to generate high and sustainable economic growth by creating entrepreneurial and domestic employment opportunities and reducing youth migration, it risks turning a demographic advantage into a demographic crisis. Nepal is also becoming vulnerable to macroeconomic instability, worsened by the external sector and a growing reliance on imports.

Without an average growth rate of at least 6-7% over the next two decades, Nepal risks remaining trapped in the lower-middle-income category. Achieving and sustaining such growth will require a radical transformation of the economy through the second phase of structural reforms. This is the core message of the High-Level Economic Reform Advisory Commission that recently submitted its report to the government.

The commission, led by former Finance Secretary Rameshore Khanal, was formed following the formation of the KP Oli-led government in response to prolonged stagnation and growing pressure from the private sector to address the country’s deep-rooted economic challenges and propose actionable solutions. “Economic reforms are an ongoing necessity, as the nature of the economy is continually shaped by social attitudes, demographic shifts, technological advancements, natural disasters, and global economic changes. Reforms are essential not only to seize new opportunities but also to mitigate emerging risks. Nepal now stands at such a juncture, where the urgency for significant reforms is clear,” the commission stated in its report.

The report calls for an economic development policy to "create economic opportunities, encourage their growth, and foster an economy where all sectors and classes can equally compete for these opportunities." It is essential to prioritize economic development in an equitable and inclusive manner, ensuring the implementation of economic policies as outlined in the Constitution, it added.

The commission has argued that the root cause of these challenges is structural. In other words, the problem is not just about weak demand—it is about how the economy is built and how its key institutions function. Issues like low productivity, inefficient allocation of capital and insufficient private sector confidence need long-term, foundational solutions. As such, the report advocates for a transformative economic strategy that goes beyond short-term fixes.

In calling for a reset of the economy, the commission is not simply suggesting tweaks to existing policies. It is urging a strategic overhaul—one that restructures how growth is generated, how government finances are managed, and how Nepal adapt to changing domestic and global scenarios. At its core, the Khanal commission’s message is that Nepal cannot rely solely on traditional levers of monetary and fiscal policies. The time has come for deep, structural change. The 447-page report prepared by the high-level reform commission offers a comprehensive and sobering analysis of Nepal’s economic stagnation. It outlines the key weaknesses plaguing the economy, explains why these issues emerged and provides both immediate and long-term recommendations for recovery. Central to the report is the recognition that sectoral economic policies cannot succeed without enhancing the institutional capacity and credibility of public institutions.

The slowdown, according to the commission, stems primarily from weakened domestic consumption and declining overall demand. Contributing factors include sluggish bank lending, a sharp fall in real estate transactions, savings trapped in distressed cooperatives, stalled commercial loan recovery and a crisis in the construction sector. Structural flaws—most notably, the disproportionate flow of financial resources into real estate and imports rather than the productive sector—have been identified as major long-term impediments to growth.

To address these challenges, the commission has recommended a series of reforms. These include urgent policy adjustments, repealing or amending more than a dozen outdated laws, and strengthening public institutions through better governance and capacity-building. It also calls for liberalizing investment policies, accelerating critical infrastructure projects and resolving the crisis that the cooperative sector is undergoing. Restoring private-sector confidence and encouraging both domestic and foreign investment have been emphasized in the report as essential steps toward economic revitalization.

Equally important is the call for fiscal discipline. The commission has urged the government to raise revenue collection, while curbing unchecked expenditure, warning that the widening gap between low income and high spending is unsustainable. Beyond these macroeconomic measures, the report has outlined specific interventions in key sectors such as physical infrastructure, urban development, energy security, education, health, and research and development. Additionally, the commission has underscored the need to reduce barriers and expand opportunities in agriculture, forestry, land use, mining, water resources, tourism and information technology—all sectors with high potential for sustained economic development.

Economist Keshav Acharya praised the report for its clarity and depth, noting its effectiveness in identifying the root causes of economic malaise and providing actionable solutions. “It effectively highlights the issues that require attention, including the specific laws that need to be amended to revitalize the economy. Overall, it is a well-crafted report offering comprehensive insights into the economic challenges Nepal faces,” he said.

Overhauling existing political financing model of political parties and candidates relying on private donations, the Khanal commission has proposed that the government provide state grants to nationally recognized parties based on specific criteria. It has also suggested allowing parties to receive donations through the banking system—with strict conditions and limits, while banning individual candidates from accepting donations during elections. “The current practice of personal donations or self-funded campaigns pressures politicians into corruption,” the commission said in its report. Additionally, it has proposed that parties (not candidates) manage campaign funds within the Election Commission limits, with the Auditor General auditing their finances.

According to economist Posh Raj Pandey, the issue of state funding for political parties, which has been discussed for a long time, should now be addressed. “The increasing corruption linked to political party funding is a serious concern. Introducing state funding for political parties could help address this problem,” he said, adding that it is essential to amend the relevant acts to ensure effective implementation.”

The Khanal commission has proposed repealing the Act Restricting Investment Abroad, 1964, and replacing it with the Foreign Investment Regulation Act. This new law would define the sectors open for foreign investment, set clear investment limits and establish transparent approval and monitoring mechanisms. The commission has argued that allowing Nepali businesses to invest abroad could strengthen international networks, raise the global profile of Nepali brands and increase the competitiveness of domestic industries.

The proposal to open outward FDI, however, is not new. In 2009, Dr Baburam Bhattarai raised the issue during his tenure as the finance minister. While the proposal was shelved due to a balance of payments crisis, it reflected a growing interest among the private sector in international opportunities. The commission has recommended a phased and conditional approach. Under the proposed legislation, firms with a proven track record of exporting goods or services would be eligible to invest abroad. Companies could invest up to 25% of their average annual export income from the past three fiscal years. In high-potential sectors like tourism, hotels and restaurants, such ceiling would be higher-up to 50% of their paid-up capital.

The commission has also proposed designating the Office of Investment Board Nepal (OIBN) as the secretariat responsible for granting approvals for foreign investments. The government would also need to sign double taxation avoidance agreements with countries where Nepali entities are investing.

Advocate Semanta Dahal said the commission has proposed a Big Bang reform, and that its recommendations are undeniably progressive. “Among the commission’s recommendations are forward-looking measures on taxation, outward FDI and improving the ease of doing business. The proposal for a single registration system for businesses is one such progressive step," he added.

Repealing Archaic Laws

For decades, the private sector has been stifled by a web of outdated laws that view economic activity with suspicion rather than support. The commission has proposed a sweeping overhaul—the repeal of 15 archaic laws and the introduction of eight new ones.

The commission has concluded that Nepal’s business laws are not just unfriendly to enterprise, but also hinder growth. Excessive state interventions, overlapping regulations and arbitrary government powers have created an environment where compliance is cumbersome and uncertainty the norm. “Some laws have outlived their purpose, while others are so vaguely worded that they can be weaponized against businesses. Worse still, certain statutes give authorities unchecked power to impose burdensome rules at will,” the report states. Among the most contentious laws recommended for repeal is the Black-Marketing and Other Social Offenses and Punishment Act, 1975. Long criticized by the private sector as a tool for bureaucratic overreach, it has frequently been used to harass businesses under the pretense of enforcement.

The commission has also recommended the government to scrap the Revenue Leakage (Investigation and Control) Act, 1995. It has argued that its provisions are redundant, as existing tax and revenue matters are already covered elsewhere. Its continued existence has allowed for duplicate investigations, and repeated scrutiny of businesses. The commission has recommended that such cases be addressed under more balanced frameworks such as the Consumer Protection Act and the Competition Promotion and Market Protection Act, 2008.

Other laws recommended for repeal include: the Private Forest Nationalization Act, the Administrative Procedures (Regulation) Act, which has been criticized for granting the government sweeping, unchecked authority that disrupts business operations, the Compensation Act, and the Birta Abolition Act. One of the most significant proposed repeals is the Act Restricting Investment Abroad, 1964. In light of recent efforts to liberalize foreign investment, this law is not only outdated, it contradicts the government’s new policy direction which permits Nepali businesses to invest overseas.

Alongside repeals, the commission has proposed new legislation to modernize the country’s economic frameworks. A key proposal is the Intellectual Property Rights Protection Act which will consolidate and update existing patent, trademark and copyright laws. This would align Nepal’s legal regime with global norms and protest Nepali innovations at both home and abroad. The commission has also suggested the government to join international agreements like the Madrid System and the Patent Cooperation Treaty to support these reforms.

Other proposed laws aim to fill critical regulatory gaps. The Construction Materials Management and Regulation Act would provide oversight of sand, stone and gravel extraction thereby ensuring sustainability and minimizing environmental harm. The Public Warehousing Act and Credit Information Reporting Act would streamline logistics and financial transparency.

According to Prakash Kumar Shrestha, a member of the commission, Nepal must make better use of its natural resources. “While Nepal has made significant progress in hydropower development, other resources—such as construction materials and minerals—remain largely untapped. Greater efforts are needed in these sectors,” he added. Shrestha also highlighted the export potential of forest resources, arguing that strategic use of these assets could help reduce imports, boost exports and foster a more self-reliant economy.

The Regional Development Plans (Implementation) Act is another law slated for repeal. The enactment of the Settlement Development and Land Integration Act had rendered this law redundant. It has also proposed introducing a new Urban Development Act. Additionally, the commission has recommended repealing the Social Practices Reform Act, 1976 and the Act to Provide for the Enhancement of the Circulation of Nepali Currency, 1957 both of which are now entirely obsolete. The Financial Intermediary Institutions Act, 2055, too, is set to be repealed since the institutions it govern no longer exists.

The commission has also recommended amending the Drug Act, 1978 while calling for the repeal of both the Immovable Property Requisition Act, 1956 and the Land Acquisition Act, 1977. It has suggested drafting a new legislation to replace them.

Stopping the Shuffle

The government’s ability to deliver public services effectively and implement policies in a timely manner has been consistently undermined by its failure to uphold the principle of placing "the right person in the right place”. This misalignment has led to poor institutional performance, compounded by ongoing political instability that has disrupted leadership within government bodies and weakened their overall capacity. A key issue is the frequent transfer of secretaries and other officials, which has weakened ministry-specific expertise and institutional memory. It is now common—rather than exceptional—for a secretary to be shuffled across multiple ministries within just five years.

Equally concerning is the lack of a consistent, merit-based system for assigning responsibilities. Not only senior officials, but employees at all levels are routinely shuffled between ministries, diluting specialized knowledge and hampering performance. This trend has been detrimental in critical ministries such as: Industry, Commerce and Supplies; Labor, Employment and Social Security; Culture, Tourism and Civil Aviation; and Federal Affairs and General Administration. These ministries play vital roles in negotiating economic and trade agreements, supporting private sector growth and advancing local governance. The frequent trasfers of bureaucrats has not only affected ministries but also hindered the development of expertise within constitutional bodies.

The commission has recommended measures to strengthen institutional stability and efficiency. It has proposed that federal ministry secretaries serve at least two years before transfer, with no more than one transfer during their tenure. To foster ministry-specific expertise, employees should remain in a ministry for at least five years before being transferred, and should not be reassigned within the same ministry before completing two years. For public construction projects, the project team, including project heads and technical staff, should remain in place until completion to ensure continuity and effective oversight. Similarly, secretaries at the provincial level should also serve a minimum of two years before bring transferred, and a two-year tenure should be a prerequisite for promotion to the federal secretary.

The commission has also highlighted weaknesses in the revenue administration due to lax entry standards and insufficient training. Currently, entry-level employees are allowed to join the revenue service regardless of academic field, undermining the system’s ability to conduct technical analyses. This has led to poor decision-making on serious tax matters and inadequate review of taxpayer submissions. To address this, the commission has recommended stricter entry criteria. For assistantand officer-level positions, only candidates with degrees in accounting, commerce, business science, tax policy or economics should be eligible. Officer-level employees should also undergo six months of basic training before deployment. This training should cover the interpretation of the Income Tax Act, Value Added Tax Act, Excise Duty Act, Customs Act, and technical aspects of tax administration. Additionally, employees assigned to a department for the first time should serve for a minimum of five years before being transferred. All posts, up to the level of Joint Secretary should be classified under the revenue group.

Acharya said although the commission has recommended enhancing the effectiveness of public institutions, the urgent need right now is to save resources. “As per the spirit of federalism, the size of expenditures must be reduced. The reports from the Kashi Raj Dahal-led Administrative Reorganization Commission, the Dilliraj Khanal-led Expenditure Review Commission, and the National Assembly’s report on reducing expenditures should be ruthlessly implemented by the government for efficient resource management,” he said. “The central government should not have more than 12 to 15 ministries. We must reduce the number of departments and their staff accordingly. With 60 percent of the state powers already transferred to the provinces and local levels, there is no need for a large workforce at the central level. The federal government must now focus on strengthening the provincial and local governments.”

Spend Smarter, Not Bigger

Nepal’s public finance in recent years has been marked by ambitious, expansionary budgets. However, resource constraints and weak implementation capacity have limited the government’s ability to use fiscal policy effectively to stimulate economic activities. With ballooning recurrent expenditures, sluggish capital spending and persistent revenue shortfalls, the government has failed to maintain a balanced fiscal approach.

The consequences are clear—weak public investment has failed to stimulate demand, while half-finished bridges and idle road projects stand as monuments to opportunity cost. Since 2018/19, growth in total government spending across federal, provincial and local levels has remained in single digits. Capital spending, the lifeblood of economic progress, has fared even worse: after shrinking by 1.4% in 2021/22, it rebounded by a mere 7.6% the following year.

The stagnation stems from structural imbalances. On one side, recurrent costs—especially interest payments and ballooning social security obligations—are consuming ever-larger slices of the fiscal pie. These fixed obligations leave little room for development spending or performance-based incentives for civil servants. On the other, revenue growth remains anemic, and the burden of debt servicing grows heavier each year. Caught in this fiscal squeeze, the government is forced to scale back its development ambitions while struggling to complete ongoing infrastructure projects. This pressure exposes deeper systemic flaws. Infrastructure projects routinely overshoot deadlines and suffer cost overruns, with some becoming perpetual liabilities that yield little return. The Khanal commission’s findings highlight the unchecked expansion of social security programs, often with duplicate benefits and weak coordination. Even more troubling is the mismatch between debt servicing and fund utilization: federal loans accrue interest while grants sit idle in provincial and local accounts.

To address this issue, the commission has recommended anchoring budget planning in fiscal realism. Budget size should be based on revenue mobilization, the potential for receiving foreign aid and implementation capacity, not political wishes. According to Acharya, since Nepal has been readjusting its budget size annually during mid-term reviews, it was essential to advise the government against presenting an overly ambitious and bloated annual budget. With social security spending growing rapidly, the commission has called for urgent reforms to ensure sustainability. It has recommended reducing or eliminating overlapping schemes offered by provincial and local governments, and targeting benefits more effectively through national ID and digital verification systems. It has also recommended expanding contribution-based programs.

In line with the 2018 Public Expenditure Review Commission’s recommendations, the Khanal commission supports administrative restructuring to curb wasteful spending. It has proposed that loans be reserved exclusively for high-return projects. The commission has suggested that federal disbursements to sub-national governments should occur only after funds are spent, and that all provincial and local expenditures be tracked through a unified account system for better oversight.

The commission has also recommended excluding small and medium-sized provincial and local projects from the national budget, prioritizing high-impact, time-bound projects instead. To streamline planning and avoid duplication, it has recommended creating a unified project bank accessible to all government tiers. Likewise, the commission has proposed that employees managing projects should not be transferred mid-project and should receive a “prosperity allowance”—a percentage of their annual salary—if projects are completed on schedule.

It has suggested that the government refrain from launching new projects over the next five years unless full funding is secured. Ongoing multi-year projects, including national pride initiatives, should be fast-tracked for completion within five years.

To curb inefficient spending practices, monthly reviews should be made mandatory for all infrastructure projects, and payments should be processed within 15 days of verified work completion—helping to prevent the common end-of-year spending rush. The commission has recommended discontinuing underperforming projects, while taking initiatives to prioritize production and marketing to boost GDP. Strategies should also be developed to maximize the use of existing infrastructure for economic growth.

Simplifying Business Registration

The private sector has long called for a unified business registration system. With the onset of federalism, the process has only become more complex as municipalities have begun demanding that businesses already registered with federal authorities also register locally.

Under the existing framework, firms registered under the Companies Act must register with the Office of the Company Registrar. Businesses established under the Private Firm Registration Act or the Partnership Act can register with the Department of Commerce, Supplies and Consumer Protection, the Department of Industries, the Department of Cottage and Small Industries, or the relevant provincial government department. And, non-profit organizations are registered with the District Administration Office under federal law.

This fragmented system has created confusion for entrepreneurs and enabled exploitation, with aspiring business owners uncertain about where to go for registration. The current system also allows businesses to register in multiple departments or locations, often to evade value-added tax or remain below the income tax threshold, which affects government revenue. Given this labyrinth, the Khanal Commission has proposed setting up a unified registration body. “Establish a single registration authority for all types of businesses, including private firms, partnerships and companies,” the commission said in its report. “This could be achieved by restructuring the Office of the Company Registrar into a unified business registration body.”

The commission has also recommended moving all registration procedures and the submission of necessary documents online. Additionally, it has suggested that businesses should be issued both a business registration certificate and an income tax permanent account number (PAN) together.

To ensure more accurate and streamlined registration, the commission has proposed making it mandatory to use the national identity card number of the individual owning the business when registering all types of firms. For companies, the number of the authorized representative should be used, and a system should be developed to track how many businesses are registered under a particular identity card number.

Further, it has recommended giving municipalities access to registration system. This would allow the municipality where the business’s head office is registered to view the business information online. To reduce barriers to entry, the commission also suggested making all types of business registration free of charge. Likewise, creating a system that links business registration with tax payment records is another recommendation made by the commission. The tax payment details from the Inland Revenue Office’s information system should be automatically transferred to the Office of the Company Registrar, ensuring seamless data integration.

The commission has also recommended removing the provision for business registration renewal. “If a business files income tax returns, this information will automatically update the status of the business, eliminating the need for renewal,” it added. The commission has also proposed starting an automated alert system. If a registered business fails to submit its income statement within the deadline, the concerned municipality will be notified through the Registrar of Companies’ online system, ensuring timely follow-up and compliance.

Unlocking Access to Foreign Capital

With Nepal receiving a sovereign credit rating, entering international capital markets is becoming increasingly feasible. Sectors like renewable energy, IT and export-oriented advanced manufacturing are expanding rapidly and require capital beyond what the domestic market can provide. The commission has suggested issuing Global Depository Receipts (GDRs) to broaden access to foreign capital. Companies listed on the Nepal Stock Exchange (NEPSE) can be allowed to issue GDRs and have them listed on foreign stock exchanges after completing the prescribed process. “Nepal Rastra Bank and the Securities Board of Nepal should formulate and implement procedures for issuing GDRs,” the commission said in its report.

GDR is a financial instrument that allows companies to raise capital from international investors by offering shares in global markets. It represents a bundle of the company's underlying shares, usually denominated in a foreign currency such as USD or EUR, and is traded on stock exchanges outside the issuer's home country. Depository Receipts (DRs) are traded on major stock exchanges in the US and Europe, as well as in Asian financial hubs like Hong Kong and Singapore. If a Nepali company seeks to raise capital through foreign stock markets, it must follow the standard procedures used by companies in other countries.

According to the Commission, unlike direct FDI, GDR-based investment has minimal impact on foreign exchange reserves. In FDI, an investor withdrawing their investment can repatriate funds after paying capital gains tax. However, in the case of GDRs, since trading occurs in foreign markets, it does not affect Nepal's foreign currency reserves unless GDRs are converted into local shares and sold domestically. Some countries allow GDR-holders to convert their holdings into local shares, offering flexibility and potential benefits for investors. If such a conversion is permitted in Nepal, it could open additional opportunities, although it would require repatriation of foreign currency, similar to FDI exit transactions.

Currently, Nepal's laws do not permit equity issuance through foreign capital markets, and there are no provisions for GDRs in the Companies Act or other relevant legislation. Even if such a legal framework is introduced, implementation would take time, as companies would need to build strong reputations and meet stringent listing criteria. “Therefore, it is crucial to develop forward-looking legal provisions that enable GDR issuance, laying the foundation for future integration with global capital markets,” the commission said in its report.

Optimizing Market Resource Allocation

The inability to obtain accurate market information and reliable forecasts of demand and supply conditions has been a problem in Nepal. This problem extends beyond open markets into regulated sectors like banking, insurance and financial institutions. The number of companies has grown without proper market analysis, prompting periodic—and sometimes mandatory—merger policies to correct the imbalance. Neither the government nor private sector bodies have the capacity for market research and intelligence.

Another critical gap is the absence of a system to warn against overinvestment in saturated sectors. As a result, not only individual investors but also banks and financial institutions fail to take precautionary measures before committing capital. To enhance market resource allocation and capital productivity, the commission has proposed three key reforms: establishing an effective market research and information system, diversifying productive investment sectors, and guiding market incentives, including interest rate subsidies, to channel credit toward productive investments.

The commission has recommended that the National Planning Commission (NPC) establish an institutional system for collecting, analyzing and disseminating market data on productive sectors, such as agriculture, tourism and information technology. The NPC should periodically assess demand-supply imbalances and identify oversaturated industries to discourage further investment. Banks and financial institutions (BFIs) will be deterred from financing these red-flagged sectors. The commission has recommended allocating at least 60% of credit to productive sectors, prioritizing information technology, renewable energy and forest-based industries. To incentivize productive sector lending, interest rates for these loans should be set at least one percentage point lower than those for consumption loans.

For long-term financing, the commission has suggested creating a development bank to provide long-term loans to productive industries through public-private partnerships. Additionally, the commission has called for legal frameworks to support institutions that facilitate the issuance and underwriting of long-term loan instruments for productive industries and large commercial infrastructure projects.

Restructuring NEPSE

The Khanal commission has expressed skepticism regarding the proposal to establish a new stock exchange in the country. Instead, it has recommended restructuring the existing Nepal Stock Exchange (NEPSE). It has called for encouraging private sector participation and expanding NEPSE’s capital base. This has put the government, which has been advancing the licensing process for a new exchange, in a difficult position.

Although the commission has not explicitly opposed the idea of a new stock exchange, it has emphasized prioritizing NEPSE’s restructuring. It has suggested offloading government shares in NEPSE to the private sector to strengthen its structure and expand its capital base. While the commission remained silent on the need for a new stock exchange, it has suggested launching a commodity exchange, supported by the introduction of a Public Warehousing Act.

Another major recommendation is that hydropower companies should be allowed to issue Initial Public Offerings (IPOs) only after their projects begin production. Currently, these companies are permitted to issue IPOs about two years after construction begins.

Further recommendations include amending the Securities Act, 2007, and restructuring the Securities Board of Nepal (SEBON). The commission has proposed removing the representation of the Nepal Chartered Accountants Association, the Federation of Nepalese Chambers of Commerce and Industry, and the Ministry of Law from the SEBON board, while increasing the number of independent experts from one to two.

The Khanal commission has also recommended facilitating easier access for Non-Resident Nepalis (NRNs) to the secondary market. Specifically, it has proposed amending Sections 9 and 10 of the Foreign Investment and Technology Transfer Act, 2018, to allow NRNs to invest directly in the capital market using their NRN citizenship identity cards. It is also for allowing such investors to withdraw up to 50% of the amount invested in secondary market share purchases, limited to twice a year.

The commission has also called for reducing transaction fees for large-scale share trades. It has recommended restructuring CDS and Clearing Limited to ensure secure securities depository services by involving additional institutions alongside NEPSE. In light of controversies surrounding share issuance through premium pricing and the book-building process, the Commission has called for the establishment of a transparent mechanism to regulate these practices.

Scrap Unfair Taxes, Simplify Rules

The commission has acknowledged that Nepal’s personal and corporate income taxes are higher than in many other countries, while capital gains taxes remain comparatively low. It has warned that excessive taxation is stifling economic activity and weakening revenue mobilization. The commission, however, found the current tax exemption threshold reasonable, given the rising cost of living in urban areas. Additionally, a 1% social security tax applies to all salaried workers, though the government categorizes it as part of income tax collection and expenditure.

Business leaders have voiced concerns over the growing number of taxes imposed by federal, provincial and local governments, arguing that overlapping taxes were creating an unsustainable burden on businesses. To improve transparency in the tax regime, the commission has recommended embedding tax provisions in thematic laws permanently. "Frequent changes to exemptions and incentives in annual economic acts only create confusion. Stable tax rates—barring exceptional circumstances—are crucial for predictability and investment," the commission said in its report.

The commission also called on the need to curb tax evasion, suggesting that revenue could be boosted without raising rates by improving customs valuation, tightening border controls and enforcing invoice-based transactions. Among key reforms, the commission has proposed shortening tax audit periods from four to three years (under Section 101(3) of the Income Tax Act) to reduce compliance burdens, and exempting high-rise construction from consolidated property tax to spur investment. It has also proposed automatically adopting tax incentives in the Finance Act to prevent delays and halving penalties for unintentional errors (under Section 120(a)) to avoid punishing unintended mistakes.

Likewise, the commission has proposed revising Section 57 to ease unfair taxation on share transfers due to inheritance or family reasons and abolishing Section 95A, which taxes unrealized income—a practice deemed fundamentally unjust. It has suggested introducing anti-avoidance rules (GAAR) in the VAT Act to close loopholes and narrowing excise duties to only harmful goods (e.g., tobacco, alcohol) instead of broad consumer products. It has also suggested replacing the outdated practice of using reference prices for customs valuation with invoice-based pricing, supported by strong post-clearance inspections. Businesses submitting fraudulent invoices must face strict penalties to deter misconduct.

Tax authorities, according to the commission, must be held accountable for assessments made in bad faith or with incorrect calculations. It has suggested introducing legal provisions to penalize such practices, protecting taxpayers from arbitrary enforcement.

The Khanal commission has also called for strengthening the Revenue Tribunal with improved structure and higher authority, while suggesting scrapping of the Revenue Investigation Department—which duplicates the functions of other tax enforcement bodies—to streamline oversight.

Revisit Currency Pegging

The report submitted to the government includes one significant recommendation: revisiting the long-standing currency peg between the Nepali rupee and the Indian rupee. Experts agree that while the peg has historically helped Nepal manage external shocks and maintain stability, it is increasingly becoming a constraint on Nepal’s economic competitiveness. The issue is not simply whether to retain or abandon the peg but rather how and when to review and potentially adjust it to align with current macroeconomic realities.

The currency peg, fixed at IRs 100 equalling Rs 160 since 1993, has remained untouched for over three decades. This is unusual in global economic practice, according to Shrestha, a member of the commission. “Over the past 33 years, Nepal’s currency peg with India has remained unchanged. Globally, it is rare for a pegging arrangement to go without review for such a long period,” he added. This lack of reassessment, according to the report, has led to distortions in trade, misalignment in inflation rates and a gradual erosion of Nepal’s competitiveness in international markets.

Several experts pointed to the peg’s role in overvaluing the Nepali currency, making exports more expensive and imports cheaper, thereby worsening the trade imbalance. Economist Pandey called for revision in the peg. “While the peg has helped absorb shocks during times of crisis, it has also led to an overvaluation of the Nepali rupee,” he said, adding that this has had a direct impact on Nepal’s competitiveness as imports have been increasing, and exports are decreasing. Acharya agreed with Pandey and praised the report for making a bold recommendation. “The peg has not been reviewed since 1993, while the Nepali rupee has appreciated against the Indian rupee, hurting our competitiveness. Any change in the peg should be handled diplomatically and implemented gradually. We could set a reasonable timeframe, perhaps 10 years, before moving to an effective exchange rate,” he proposed. “Such a phased approach would allow Nepal to prepare its institutions and businesses for potential currency adjustments without risking economic instability.”

However, not all experts are ready for revision of peg immediately. Pokhrel cautioned that while the recommendation to revisit the peg is valid, Nepal must consider its heavy reliance on India for trade and raw materials. “Revising the pegging system at this point may have far-reaching effects, especially since Nepal’s trade is heavily dependent on India,” he said, warning that any abrupt change could backfire if the timing and broader trade relations are not factored in.

Pandey said there should not be a floating exchange rate. “Floating the currency is not a viable option due to Nepal's small economy, as it could invite speculative attacks,” he said, calling for periodic reviews based on economic fundamentals. The proposed review of the currency peg is also linked to broader capital account considerations. According to Shrestha, the liberalization of the capital account can help better understand Nepal’s economic position over time. “With Nepal gradually integrating into the global financial system, the rigidity of the current peg may become increasingly untenable,” he added.

Strengthening the Private Equity Market

Parallel to the push for outward FDI, Nepal is also exploring new avenues for alternative finance, such as private equity and venture capital (PEVC), to stimulate economic growth. While these financing tools have gained traction over the past decade, their potential remains still underdeveloped. The commission has called for regulatory reforms to expand alternative financing options and attract more foreign investment. It has proposed introducing new legal structures, such as the Limited Liability Partnership (LLP) Act, which would allow private equity and venture capital firms to register as LLPs. This would facilitate the growth of alternative finance and open new funding avenues for businesses that are underserved by traditional financial institutions, the commission said in its report. In addition to broadening access to alternative finance, the commission has recommended amendments to existing investment laws to allow government-backed funds like the Employees Provident Fund and the Citizens Investment Trust to allocate portions of their portfolios to PEVC. It has also suggested allowing banks to invest in these firms.

The commission’s report highlights the importance of expanding financing options to support early-stage businesses and encourage entrepreneurship. For this, it has recommended legal reforms to facilitate peer-to-peer lending, crowdfunding and the establishment of a derivatives market. These measures would not only provide businesses with more diverse funding sources but also encourage the growth of financial innovation. Likewise, it has called for regulatory changes to enable smoother exits for private equity and venture capital firms, allowing them to sell their investments once the investment period ends. It has also proposed slashing fees for fund management, registration and issuance to make these tools more accessible to investors.

Onus lies on the political leadership

Over the past 25 years, numerous commissions have been formed to revive Nepal’s economy, enforce fiscal discipline, and reform public expenditure and revenue systems. While these bodies have produced well-researched reports packed with recommendations, most of their suggestions have been ignored. The reports have been left to gather dust in government offices. A prime example of this is the Public Expenditure Review Commission led by economist Dr. Dilliraj Khanal. Formed after its announcement in the 2018/19 budget, the commission was tasked with making public spending more accountable and efficient. It submitted a detailed report with a clear roadmap for systemic reforms. Had the government acted on its findings, the chronic mismanagement of public funds could have been significantly reduced.

There are fears that the Khanal commission will meet a similar fate. Given the lack of political will in the past, such skepticisms are justified. Genuine economic reform requires honesty and strong leadership—qualities that Nepal’s ruling class has repeatedly failed to demonstrate. However, a recent decision to form a task force comprising three secretaries to draft an action plan for implementing the report shows some intent to implement the commission’s recommendations.

Advocate Dahal said the real issue is not the quality of recommendations but the absence of political determination. "The reforms of the 1990s were also considered ‘Big Bang’ changes, but they succeeded because of a stable government with strong commitment," he said. "Today, the question is whether there’s enough political capital to push reforms—especially when the government can’t even appoint a central bank governor without controversy."

The report, packed with actionable reforms for accountable governance and economic transformation, now faces the same critical question that has haunted countless such initiatives in the past. Will it be different this time? The upcoming fiscal budget may provide the first real answer. Traditionally, governments have used the annual budget announcement as their primary platform for major policy declarations. If the forthcoming budget incorporates substantive elements of the commission's proposals, it could signal a break from the past. The government formed a committee to develop a work plan for implementing economic reforms recommended by a high-level commission headed by Former Finance Secretary Rameshore Khanal.

(This news report was originally published in   May 2025  issue of New Business Age Magazine.)