The Ministry of Finance announced the budget for the fiscal year 2080/81 (2023/24) on Jestha 15, encompassing a range of provisions aimed at different sectors. However, it is important to note that the allocation of provisions specifically dedicated to nurturing the start-up culture in Nepal seems to be relatively limited. Nevertheless, there are still a few provisions worth highlighting that have been aimed to promote and support the growth of start-ups in the country. 

Let's explore the following key provisions in that regard:

1. Allocation of Rs. 1.25 billion dedicated fund to Start-ups and establishment of Start-up educational center in Kathmandu. 

A start-up ecosystem will be established to foster novation and entrepreneurship within the nation. In order to cultivate entrepreneurial ideas and foster a culture of entrepreneurship, an education center will be established in Kathmandu to guide aspiring entrepreneurs in transforming their innovative thinking into viable businesses. Furthermore, Venture Capital and Private Equity Venture Capitals (PEVCs) will be actively encouraged to invest in start-ups. Foreign companies will also be encouraged to invest in novation and entrepreneurship initiatives. To support the growth of start-ups, a dedicated fund of Rs. 1.25 billion has been allocated.

2.  Establishment of a company with minimum authorized capital of Rs. 100 

A legal provision will be implemented allowing a minimum authorized capital of Rs. 100 during company establishment. Efforts will be made to simplify and streamline the online registration and cancellation processes for companies, ensuring an easier and more accessible procedure.

3. Zero fee on registration and capital increment  

 The registration and capital increment processes for companies will be exempt from any fees. 

4. Allocation of 1.20 billion to encourage young entrepreneurs in agriculture

In collaboration with local authorities, efforts will be made to encourage youth entrepreneurship in the agricultural and animal husbandry sectors. A young entrepreneur grant program will be established, with a dedicated amount of Rs. 1.20 billion allocated for this purpose. The small farmer entrepreneur development program will be expanded to various local levels, aiming to enhance financial access and promote entrepreneurship among young individuals in the agricultural sector. These initiatives seek to harness the potential of the youth workforce and foster development in agriculture.

5. Allocation of 1% of total budget on research, innovation and novation

A minimum of 1% of the government's overall budget i.e. around Rs. 1.3 Arba   will be allocated towards research, innovation, and novation. A dedicated fund has been created specifically for these purposes, with an amount of Rs. 1 billion allocated to this fund. Various programs initiated by the government will be incorporated into this fund. Additionally, the provincial and local governments will be encouraged to contribute to this fund. Furthermore, a separate unit will be established within the Ministry of Education, Science, and Technology to facilitate tasks related to novation, innovation, and research.

Positive Aspects 

The provisions mentioned above have the potential to boost the start-up ecosystem in Nepal. Allocating 1% of the budget to research, innovation, and novation can drive technological advancements and foster innovation nationwide. Involving local authorities ensures that funding is accessible to promote entrepreneurship and provide necessary resources.

Establishing a start-up ecosystem and education center can create a supportive environment for aspiring entrepreneurs to turn their innovative ideas into successful businesses. Encouraging investment from venture capitalists and private equity firms provides vital capital for start-ups, and the dedicated fund of Rs. 1.25 billion further supports their viability and sustainability.

Furthermore, waiving fees for registration and capital increment, along with a minimum authorized capital deposit of Rs. 100, reduces financial barriers and simplifies the process of setting up businesses. Streamlined online registration and cancellation procedures improve ease of doing business, saving time and creating a favorable entrepreneurial environment. 

The establishment of a young entrepreneur grant program with a dedicated budget of Rs. 1.20 billion enables aspiring young entrepreneurs to access financial resources and support for their agricultural ventures. This funding can be utilized for various purposes such as acquiring equipment, implementing innovative farming techniques, or developing value-added products. It encourages the youth to take risks and pursue entrepreneurial opportunities in agriculture, fostering innovation and driving economic growth in the sector.  Expanding the small farmer entrepreneur development program to various local levels is another positive aspect of this provision. By enhancing financial access and promoting entrepreneurship among young individuals, it helps to uplift small-scale farmers and empowers them to become successful entrepreneurs. This, in turn, improves their livelihoods, increases productivity, and contributes to overall agricultural development

Shortcomings 

Unfulfilled promises and ambiguities

While allocating the budget to start-ups and young entrepreneurs, there is indeed promise of much-needed financial support for establishing businesses. However, past experiences have shown that these promises often go unfulfilled, with start-ups not receiving the expected benefits. The root cause of this issue lies in the lack of clear guidelines and laws defining start-ups in Nepal. Without a well-defined framework, there are ambiguities surrounding the classification of start-ups, such as their age or operational status. This lack of clarity hampers the targeted distribution of incentives, resulting in powerful individuals with business connections gaining an advantage over deserving start-ups. The absence of transparent monitoring and evaluation systems further exacerbates the problem, leading to misuse of funds, corruption, and unequal opportunities.

Is the education center in Kathmandu the right hub for equitable growth ?

Moving on, the government's proposal to establish an education center in Kathmandu for start-ups raises the question of its true value. In reality, entrepreneurs in Kathmandu are already highly advanced and have abundant access to various resources. Concentrating the education center solely in the most developed city might inadvertently exclude aspiring entrepreneurs from rural or less-developed regions who are in greater need of support. Therefore, wouldn't it be more beneficial to prioritize areas with limited access to education and resources instead? By focusing on such areas, we can ensure that the benefits of the education center reach those who truly require it and promote a more equitable distribution of opportunities within the start-up ecosystem.

Why not embrace Domestic Investors for growth of Start-ups ? 

While the government has made promises to support start-ups by encouraging the participation of private equity and venture capital firms (PEVCs), venture capitalists (VCs), and foreign direct investment (FDI), it is important to question why domestic individuals are not receiving similar attention. By focusing solely on these external sources of funding, there is a missed opportunity to tap into the potential of domestic investors.

Previously, there was a provision in the Finance Bill of 2078 that offered tax incentives for individuals investing up to 5 lakhs for the investment amount in five different start-ups. This provision had the potential to stimulate a significant influx of investment into the start-up ecosystem. However, the subsequent amendment in the provision, which converted investment into grants, has rendered it less effective. Granting money without the potential for a return on investment fails to incentivize individuals to contribute their funds. Instead, if the provision had maintained the investment aspect, imagine the impact if a significant number of people, let's say 1 lakh individuals, invested 5 lakhs in five different start-ups. The cumulative amount generated would be substantial and would benefit numerous start-ups in need of capital.

Moreover, an advantage of this approach is that there would be no set limit on the number of investments an individual could make. Unlike the current scenario where the government has allocated a fixed amount of 1.25 billion for start-up promotion, which may not suffice for all deserving start-ups, the investment approach would allow for a more extensive and sustainable source of funding. It could create a more inclusive environment, where start-ups with potential receive the necessary financial support, rather than limited funds being distributed through administrative channels.

Benefit vs. Chaos in exemption on registration and capital increment

However, instead of addressing the issue of encouraging domestic individual investment, the government has chosen to emphasize the exemption of registration and capital increment fees. However, the question remains: Does providing exemptions solely on registration and capital increment truly benefit nascent startups? While the intention may be to assist cash-strapped startups, what about wealthy startup owners? They also receive the same incentives.

For example, when comparing the registration process for a local startup versus one backed by the influential business group, both receive the same exemptions. However, after registration, the subsequent expenses incurred by both entities, such as license renewals and taxes, become identical. This implies that, regardless of size, all startups must pay similar fees once registered.

To level the playing field and enable startups to compete against those established by larger corporations, it would be beneficial to extend additional provisions beyond registration exemptions. These could include fee-free renewal for startups with capital less than 20 lakhs for a certain number of years, as well as tax exemptions during the initial years of operation. By implementing such incentives, startups would have a better chance of thriving in the competitive market.

Furthermore, while registration fees may not pose a significant burden for serious start-ups, providing free registration opens the door for potential misuse by individuals who exploit the system by opening multiple companies without any intention of operating them. This not only leads to a waste of resources but also undermines the integrity of the start-up ecosystem.

The impact of minimum authorized capital: unintended consequences

Moreover, the decision to set a minimum authorized capital of just Rs. 100 can have unintended consequences. It may result in companies artificially inflating their capital figures, which do not truly reflect their financial needs or investment capacity. This could create a strain on a company's financial structure, impeding its long-term operations and sustainability.

Suggestion:

In conclusion, while there is potential in the allocation of funds and other initiatives for start-ups, it is crucial to address the complexities and challenges highlighted in the preceding discussion to ensure their effectiveness. To achieve this, the government should focus on implementing the following recommendations:

Comprehensive guideline 

The government should prioritize the establishment of a comprehensive and well-defined guideline for start-ups. This guideline should address the ambiguities surrounding the classification of start-ups, their age, and operational status. By providing clarity, it will enable targeted distribution of incentives, preventing powerful individuals from taking undue advantage and ensuring that deserving start-ups receive the necessary support.

Comprehensive analysis prior to  the establishment of  educational center 

Before proceeding with the establishment of an education center, it is essential to conduct a comprehensive analysis. This analysis should consider the existing entrepreneurial landscape, availability of resources, and regional disparities. By understanding the specific needs of aspiring entrepreneurs in different regions, the government can ensure that the education center is strategically located and its resources are accessible to those who truly require them.

Inclusion of domestic investors in start-up ecosystem 

It is imperative for the government to focus on attracting domestic investors to the start-up ecosystem. While there has been emphasis on foreign investment, private equity, venture capital, and other external sources, the potential of domestic individual investors has been overlooked. To bridge this gap, the government should introduce measures that incentivize and encourage domestic individuals to invest in start-ups.One approach could be to reintroduce the provision from the Finance Ordinance of 2078, which offered tax incentives for individuals investing in start-ups. By reinstating this provision and ensuring its effective implementation, the government can create a favorable environment for domestic investors to contribute their resources and capital. This not only promotes a sense of ownership and participation but also increases the pool of available funding for deserving start-ups. By focusing on attracting domestic investors, the government can tap into the inherent potential and resources within the country. This approach not only diversifies the sources of funding but also strengthens the local economy and promotes a culture of entrepreneurship. It creates a win-win situation, where both investors and start-ups can benefit from each other's expertise, networks, and financial support.

Evaluation and monitoring of the funds 

A transparent monitoring and evaluation system should be established to track the progress and impact of funded initiatives. Regular reports should be published, providing insights into how the allocated budget is being utilized and the outcomes achieved. This will promote transparency, accountability, and public trust in the allocation and utilization of funds, mitigating the risks of misuse and corruption.

Proper guidelines related to the exemption and limitation of authorized capital. 

Regarding the exemption of fees on registration and capital increment, the government should introduce clear guidelines and terms. This will prevent the misuse of the provision by individuals opening numerous companies without any intention of operation. Additionally, there should be a limitation on the authorized capital to prevent companies from declaring irrational amounts. This will ensure that companies reflect their actual financial needs and investment capacity, avoiding strains on their financial structures in the long run.

By implementing these suggestions, the government can create a more conducive environment for the growth and success of start-ups in Nepal. It will foster transparency, fairness, and equal opportunities, enabling deserving start-ups to thrive and contribute significantly to the country's economic development.