Legal and Practical Dimensions of Accounting Outsourcing in Nepal

-CA. Santosh Bista

The author is Member of ICAN currently serving as the Deputy Director at ICAN. He can be reached at: santosh.bistaa@gmail.com

 

Abstract

The article examines the legal and regulatory framework governing the accounting outsourcing industry in Nepal, with particular focus on the applicable provisions of the Companies Act, Income Tax Act, Value Added Tax Act, Foreign Exchange Regulations, Labour laws and Data Protection laws. It analyses the practical implementation of these laws, identifies existing compliance challenges and regulatory gaps, and evaluates the need for targeted legal and policy reforms to support the sustainable operation of accounting outsourcing businesses in Nepal. Based on these analyses, the article proposes reform-oriented measures and emphasizes the importance of coordinated collaboration among government authorities, professional bodies, and industry stakeholders to strengthen Nepal’s position as a credible and competitive outsourcing destination.

 

Key Words: Accounting Outsourcing, Legal and Compliance, Policy Reforms, Business Process Outsourcing, Knowledge Process Outsourcing, Income Tax Compliance

 

Background

Accounting outsourcing has emerged as a significant component of the global services economy, driven by cost efficiency, access to specialized expertise, technological advancements, and the growing need for compliance with complex international financial and reporting standards. Multinational firms increasingly outsource accounting, finance, and back-office functions to offshore and near-shore destinations that offer skilled human capital, robust digital infrastructure, and regulatory alignment with global practices.

 

In this context, Nepal has gradually positioned itself as an emerging destination for accounting outsourcing, supported by a young and capable professional workforce, increasing numbers of internationally qualified accountants, competitive cost structures, and compliance with international financial reporting and auditing standards. While Nepal’s outsourcing ecosystem remains at a developing stage with only notable firms enrolled in this sector as compared to established regional hubs such as India, Philippines and Bangladesh, Nepal holds substantial potential to deliver global service delivery to niche and high-value accounting and knowledge process outsourcing services, provided that regulatory clarity, Government support and enabling policy reforms continue to evolve.

 

Mode of Operation of Accounting Outsourcing Business in Nepal

Any accounting outsourcing firms who want to operate in Nepal can have following business modality for operation:

 

 

1. By Nepalese Individual

Case 1: For members of ICAN

Member of the Institute of Chartered Accountants of Nepal (ICAN)  having Certificate of Practice can register audit firm by fulfilling the process prescribed by ICAN in the Firm Registration Procedure (https://en.ican.org.np/site/show/firm-registration-procedure) and operate outsourcing business through audit firm registered at ICAN. Alternatively, they can operate outsourcing firm or by registering a separate company with outsourcing objective at the Company Registrar’s Office (https://ocr.gov.np/) or by registering a separate proprietorship firm or partnership firm with the Department of Industry or the Department of Cottage and Small Industries (DoCSI) ( http://www.dcsi.gov.np/).  

 

Case 2: For General Public

General public can operate accounting outsourcing firm by registering a proprietorship or partnership firm at DoCSI or by establishing a private or public Company at the Office of the Company Registrar by fulfilling the prescribed process.

 

1. By Foreign Outsourcing Companies

Option 1: Foreign Outsourcing Company can operate in Nepal by establishing a branch office in Nepal as per section 154 of the Companies Act, 2063.

Or,

Option 2: Establishing a company or investment in shares of a company in Nepal through Foreign Direct Investment (FDI).

 

1. By Foreign Individual

Foreign individuals can establish outsourcing company in Nepal by inducing FDI in Nepal.

 

As per notice published by the Ministry of Industry, Commerce and Supplies[1],  

The minimum threshold for Foreign Direct Investment (FDI) in Nepal is NPR 20 million. Foreign Investors shall obtain approval from the Department of Industry (DoI) for FDI.

 

Similarly, according to another notice published by the Ministry of Industry, Commerce and Supplies, FDI in the Information and Communication Industry including Business Process Outsourcing (BPO) and Knowledge Process Outsourcing (KPO) fall under the automatic route and the investors will automatically get the FDI approval certificate just after submitting the application through the online system https://imis.doind.gov.np/#/auth/login   operated by the DOI. Investors do not require prior approval of the Department of Industry for foreign direct investment in these industries.

 

Applicable Legal Requirement, Challenges and Reforms Required

Accounting outsourcing companies shall comply with a series of laws and regulations in Nepal. The applicable provisions of respective laws, practical challenges for complying with the laws along with suggested reforms are presented below:

 

1. Income Tax Act 2058 & Income Tax Rule, 2059

 

Applicable Legal Provisions

• Taxpayer Registration (Resident Natural person, Partnership Firm, Company, Foreign Permanent Establishment)
• Submission of Estimated and Annual Income Tax Return
• Submission of Income Return as required by Transfer Pricing Directive (Cross border-controlled transaction with associated entity exceeding NPR. 100 crores annually)
• Submission of TDS Return
• Payment of Installment Tax, Annual Income Tax and Tax Deducted at Source

 

Practicalities

• Frequent changes in Income Tax Laws through the Finance Act impairing predictability and investment decision
• Ambiguity regarding applicability of income tax in change in underlying ownership
• No provision of safe harbor rules, dispute resolution mechanisms etc. as adopted by other countries in case of Transfer Pricing
• Registration and collection of tax by government through multiple agencies

 

Reform Required:

• Stable Income Tax Policy
• Income Tax concession to Accounting and Finance Service Outsourcing Industry (Currently section 11 of Income Tax Act, 2058 provides 50% income tax exemption on income earned in foreign currency from export of IT services including Business Process Outsourcing, Software Programming and Cloud Computing.)
• Allow Accounting and Finance Service Outsourcing Industry to claim accelerated depreciation on depreciable assets purchased for establishing Accounting and Finance service outsourcing entity in Nepal
• No duplication in the collection of tax
• Amendment in Transfer Pricing Legislation (Incorporation of transfer pricing related provision in Income Tax Act rather than on Directive, provision of dispute resolution mechanisms, safe harbor rule etc.)
• Clarity regarding the applicability of income tax on changes in underlying ownership

 

1. Value Added Tax Act, 2052 and VAT Rule, 2053

 

Applicable Legal Provisions

• Value Added Tax at zero rate is applicable to services exported by a person residing in Nepal to a person residing outside Nepal who has no business transaction, business representative or legally recognized agent in Nepal.

 

Practicalities

• [2]On 31^st March, 2024, Department of Revenue Investigation (DRI) published a notice mentioning that it filed a case against Cotiviti Nepal Pvt. Ltd., a subsidiary of the U.S. based Cotiviti Inc., for alleged revenue leakage demanding NPR. 10,36,45,22,642. Out of which, NPR. 9,53,16,86,710 was related to Value Added Tax evasion. DRI contended that the service provided by Cotiviti Nepal Pvt. Ltd. to its parent company in USA (Cotiviti Inc USA) do not qualify for zero-rated export sales under Schedule 2 of Value Added Tax Act, 2052 and case was filled demanding VAT on service exported by Cotiviti Nepal Pvt. making it one of the largest tax evasion allegations against a single business entity in Nepal's history.

 

This action has created significant concern among a large number of companies in Nepal that have been exporting services for several years, as to whether the Inland Revenue Department (IRD) or the Department of Revenue Investigation (DRI) may initiate similar cases against them.

 

Reform Required:

• The Government should provide clear guidance on whether Value Added Tax is exempt on the export of services. If the language of the existing Value Added Tax Act is ambiguous and permits multiple interpretations regarding the imposition of VAT on exported services, the Act shall be amended accordingly to remove such ambiguity.

 

Further, the Government and other concerned authorities should conclude pending cases at the earliest , as prolonged uncertainty may discourage foreign direct investment in service-export industries. The relevant laws should be interpreted in a manner that promotes a conducive business environment in Nepal. Where necessary, the Act shall also be amended to align Nepal’s VAT regime with international best practices.

 

1. Foreign Investment and Technology Transfer Act, 2019

 

Applicable Legal Provisions

• As per section 3 and the Schedule, foreign investment is restricted in "Management, accounting, engineering, legal consultancy service and language training, music training, computer training" industry.

 

Practicalities

• Since foreign investment is not allowed on accounting sector and foreign investment exceeding 51% is not allowed in consulting services, large Accounting and Financing Outsourcing firms are unable to invest in Nepal. Due to this restriction, some entities have been making investments by mentioning business objectives other than accounting, though substantially similar in nature, at the time of company incorporation and providing accounting outsourcing related services.

 

Reform Required:

• Foreign investment should be permitted in Accounting and Finance Outsourcing Industry, particularly for entities that export substantial portion of services outside Nepal.

 

1. Nepal Chartered Accountants Act, 2053 & Nepal Chartered Accountants Rule, 2059

 

Applicable Legal Provisions

• Chartered Accountants, Registered Auditors and Accounting Technician in Nepal can provide audit services by obtaining Certificate of Practice and by registering audit firm in The Institute of Chartered Accountants of Nepal by complying with the provisions mentioned in Nepal Chartered Accountants Act, 2053 and Nepal Chartered Accountants Rule, 2059. Audit Profession is defined in Nepal Chartered Accountants Rule, 2059 as audit service provided in a professional manner and includes account related expert services provided by members of the ICAN.

 

Practicalities

• There is confusion among members of the Institute of Chartered Accountants of Nepal regarding whether the accounting firm registered at ICAN can provide accounting and finance outsourcing services. Due to this, most of the members of the Institute, who are engaged in Accounting and Finance Outsourcing, are providing such services through firms/companies other than those registered with ICAN.

 

Reform Required:

• Clarity should be provided on whether the audit firms registered with ICAN can provide accounting and Finance related outsourcing or not.

 

1. Foreign Exchange Regulation Act, 2019 (B.S.)

 

Applicable Legal Provisions

• The Act Restricting Investment Abroad, 1964, prohibits any person of Nepal from making investment abroad without prior approval of Government of Nepal.
• Section 10Ka and section 2(g4) of the Foreign Exchange Regulation Act, 2019 (after amendment introduced in 2081/12/28) has allowed company/corporation established in Nepal to invest in abroad for the purpose of establishing branch office or liaison office in foreign country.
• Section 9A of Foreign Investment and Debt Management Bylaw, 2078 of Nepal Rastra Bank allows the Information Technology Industry to invest abroad at higher amount of
  • i) 50 % of Average foreign currency earned in previous three years
  • ii) NPR 10 lakh

 

Practicalities

• Till now, only one IT company of Nepal (iDream Technologies Pvt. Ltd) has received approval from Nepal Rastra Bank to open branch office outside Nepal.

 

Reform Required:

• Accounting and Finance Outsourcing Industry in Nepal should be allowed to open branch office outside Nepal. It would help them to acquire business and do marketing activities for the firm.

 

1. Labor Act, 2074

 

Applicable Legal Provisions

• Probation Period: 6 months
• Work Hour: 8 hours/day, 48 hours/week
• Overtime: Maximum 24 hours/week, paid at 1.5 times regular pay
• Breaks: 30-minute break after 5 hours of work
• Minimum Wage: NPR 19,550/month 
• Annual Increment: Half-day salary for employees working for at least 1 year.
• Payment Terms:
  • Within 3 days for short-term work
  • At month-end for regular employees
• Social Security Fund: 20%
• Festival Allowance: 1 month's remuneration
• Medical Insurance: At least NPR 1 lakh (half premium to be paid by employer)
• Accidental Insurance: At least NPR 7 lakhs (fully paid by employer)
• Weekly Off: 1 day every week
• Public Holidays: 13 days (14 for women)
• Annual Leave: 1 day per 20 days worked
• Sick Leave: Fully paid for 12 days in a year
• Maternity Leave: Up to 14 weeks (60 days paid)
• Paternity Leave: 15 days fully paid
• Mourning Leave: 13 days
• In-lieu leave for working on holidays
• Leave Accumulation: 90 days annual leave, 45 days sick leave

 

Practicalities

• As the Knowledge Process Outsourcing (KPO) industry requires a high degree of remote work and flexible schedules, strict compliance with labour law provisions relating to working hours, overtime, and leave management can be operationally challenging.

 

Reform Required:

• Introduce sector-specific labour flexibility for export-oriented service industries by formally recognizing flexible working hours, remote work arrangements, and alternative overtime mechanisms, while ensuring the protection of fundamental employee rights.

 

1. Bonus Act, 1974

 

Applicable Legal Provisions

• All profit-making enterprises are required to allocate 10% of profit as employee bonuses and distribute them to employees. This provision is applicable to Companies, private firms, cooperatives, and other organizations operating under Nepalese company laws and Foreign-registered entities engaged in business, sales, or promotional activities in Nepal.

 

Practicalities

• As multinational corporations prefer performance-based incentives rather than mandatory profit bonuses, the provision of Bonus laws can be challenging.

 

Reform Required:

• Introducing flexibility in the Bonus Act to allow performance-based or contractual incentive schemes as a substitute for statutory profit-based bonuses, while ensuring minimum employee protection.

 

Other Challenges and Way Forward

 

Data Protection

Currently, Nepal does not have a standalone comprehensive data protection law similar to the European Union’s General Data Protection Regulation (GDPR). Although, there is Electronic Transactions Act, 2063; Privacy Act, 2075; Individual Privacy Regulation, 2077; National Penal Code, 2074 related to data protection. A comprehensive legal framework guiding lawfulness of data usage, right to data privacy, cross-border data transfers, data storage, reporting of data breaches, data protection impact assessments, and appointment of data protection officers is still lagging in Nepal. The Government shall focus on drafting laws and regulations to address such pertinent and crucial issues.

 

Tailored Insurance Policy for Professional Indemnity and cyber security

There is limited availability of tailored insurance products related to professional indemnity for BPOs with no availability of cybersecurity insurance for BPOs. Nepal Insurance Authority (NIA) has Bankers’ Indemnity Insurance Policy[3] however specific policy related to professional indemnity insurance and cybersecurity insurance has not been issued. Hence, NIA should develop an insurance policy related to professional indemnity and cyber security.

 

Conclusion

To foster sustainable growth in Nepal’s accounting and finance outsourcing sector, it is essential to establish a clear, stable, and predictable legal and regulatory environment for Business Process Outsourcing (BPO) and Knowledge Process Outsourcing (KPO). Investors’ decisions depend not only on financial and technical considerations but also on trust in the economy and governance systems. Key policy reforms recommended include a stable income tax regime, income tax concessions for service exports, accelerated depreciation on capital assets procured for initial set up, elimination of duplicate tax collection, and amendments to transfer pricing provisions. Additionally, clear guidance on Value Added Tax exemptions for export of services and resolution of pending tax cases are critical to reduce uncertainty and encourage foreign direct investment.

 

Further reforms should focus on enabling foreign investment in accounting and finance outsourcing, clarifying the scope of services that ICAN-registered audit firms can provide, and permitting BPOs and KPOs to establish branch offices abroad to expand businesses. Labour laws and bonus regulations should also be made flexible for export-oriented service industries, recognizing remote work, alternative overtime mechanisms, and performance-based incentives, while protecting employee rights. Most importantly, data protection and professional indemnity insurance policy shall be tailored to the business process outsourcing in Nepal. Collectively, these measures would enhance Nepal’s attractiveness as a reliable and competitive destination for accounting outsourcing services.

 

Reference

Inland Revenue Department, Government of Nepal. (n.d.). Income Tax Act [website]. https://ird.gov.np/category/incometaxact/

 

Inland Revenue Department, Government of Nepal. (n.d.). Value Added Tax Act [website]. https://ird.gov.np/category/valueaddedtaxact/

 

Department of Mines and Geology, Government of Nepal. (2019). Foreign Investment and Technology Transfer Act, 2019 (2075). https://dmgnepal.gov.np/uploads/documents/the-foreign-investment-and-technology-transfer-act-2019-2075pdf-9958-911-1688107036.pdf

 

Nepal Rastra Bank, Government of Nepal. (2019). Foreign Exchange (Regulation) Act, 2019. https://www.nrb.org.np/contents/uploads/2020/01/foreign_exchange_act_2019revised.pdf

 

The Institute of Chartered Accountants of Nepal, Nepal Chartered Accountants Act, 1997 and Regulation, 2061. https://en.ican.org.np/_browsable/file/general/Nepal_Chartered_Accountants_Act,_1997_and_Regulation,_2061,_Nepali.pdf

 

Ministry of Labour, Employment and Social Security, Government of Nepal. Labour Act, 2074 [website]. https://moless.gov.np/content/11121/11121-%E0%A4%B6%E0%A4%B0%E0%A4%AE-%E0%A4%90%E0%A4%A8-%E0%A5%A8%E0%A5%A6%E0%A5%AD%E0%A5%AA/

 

Nepal Law Commission, Government of Nepal. Bonus Act, 2030, Nepal Law Commission. https://lawcommission.gov.np/content/12144/12144-bonus-act-2030/

 

Department of Industry, Nepal. (2025, July 23). FDI Trends and Investor Guidelines 2025: A Gateway to Nepal (Navigating Trends and Regulation) “Where Global Investment Meets Opportunity”. https://doind.gov.np/uploads/notices/Notices-20250723121644561.pdf