WORLD  TRADE  
ORGANIZATION   
WT/TPR/S/257/Rev.1 
19 April 2012  
 
(12-2070) 
Trade Policy Review Body  
   
 
  
 
TRADE POLICY REVIEW 
 
Report by the Secretariat 
 
NEPAL 
 
Revision 
 
 
 
 
This report, prepared for the first Trade Policy Review of Nepal, has been drawn 
up by the WTO Secretariat on its own responsibility.  The Secretariat has, as 
required by the Agreement establishing  the Trade Policy Review Mechanism 
(Annex 3 of the Marrakesh Agreement Establishing the World Trade 
Organization), sought clarification from Ne pal on its trade policies and practices. 
 
Any technical questions arising from this report may be addressed to 
Ricardo Barba (tel:  022 739 5088) a nd Zheng Wang (tel:  022 739 5288). 
 
Document WT/TPR/G/257/Rev.1 contains the policy statement submitted by 
Nepal. 
 
 
 
 Nepal WT/TPR/S/257/Rev.1 
 Page iii 
 
 
CONTENTS 
  Page 
SUMMARY   vii 
 (1)   ECONOMIC ENVIRONMENT  vii  
 (2)   INSTITUTIONAL FRAMEWORK  vii  
 (3)   TRADE POLICY INSTRUMENTS  viii  
 (4)   SECTORAL POLICIES  x  
I.  ECONOMIC ENVIRONMENT 1  
 (1)   INTRODUCTION  1  
 (2)   TRADE AND ECONOMIC DEVELOPMENTS  1  
 (i)   Main economic developments 1  
 (ii)   Trade performance 3  
 (iii)   Supply-side constraints as reflect ed in sectoral performance 6  
 (iv)   Investment 10  
 (3)   OUTLOOK  10 
II.  TRADE AND INVESTMENT REGIMES 12  
 (1)   THE INSTITUTIONAL FRAMEWORK  12  
 (2)   TRADE POLICY FORMULATION AND IMPLEMENTATION  12  
 (3)   POLICY OBJECTIVES  13  
 (4)   TRADE AGREEMENTS  15  
 (i)   Participation in the WTO 15  
 (ii)   Preferential trade agreements 15  
 (5)   INVESTMENT FRAMEWORK  18  
 (6)   AID FOR TRADE  21  
 (i)   Overview 21  
 (ii)   Donor dialogue and coordination on aid for trade 21  
 (iii)   Supporting institutional capacity to manage aid for trade 22  
 (iv)   Recent and planned aid-for-t rade support to Nepal 23  
 (v)   Results of aid for trade and outlook 26  
III.  TRADE POLICIES AND PRACTICES BY MEASURE 28  
 (1)   MEASURES DIRECTLY AFFECTING IMPORTS  28  
 (i)   Customs procedures, valuation, and rules of origin 28  
 (ii)   Trade facilitation 30  
 (iii)   Tariffs 30  
 (iv)   Other duties and charges (ODCs) 35  
 (v)   Contingency measures 36  
 (vi)   Import prohibitions, restrictions, and licensing 37  
 (2)   MEASURES DIRECTLY AFFECTING EXPORTS  38  
 (i)   Customs procedures 38  
 (ii)   Certificate of origin 39  
 (iii)   Export prohibitions, licensing, and restrictions 39  
 (iv)   Export charges and levies, and rebates 40  
 (v)   Duty drawbacks 40  
 (vi)   Export facilitation 41  WT/TPR/S/257/Rev.1 Trade Policy Review 
Page iv 
  
  Page 
 (3)   M
EASURES AFFECTING PRODUCTION AND TRADE  41  
 (i)   Taxation and tax incentives 41  
 (ii)   Special economic zones 44  
 (iii)   State monopolies, state trading, price controls, and essential commodities 44  
 (iv)   Public enterprises (PEs) and privatization 45  
 (v)   Standards and other technical requirements 48  
 (vi)   Government procurement 52  
 (vii)  Competition policy 53  
 (viii)  Intellectual property rights 53  
IV.  TRADE POLICIES BY SECTOR 57  
 (1)   AGRICULTURE AND RELATED ACTIVITIES  57  
 (i)   Main features 57  
 (ii)   Agricultural policy 59  
 (2)   MANUFACTURING  63  
 (i)   Main features 63  
 (ii)   Manufacturing policy 64  
 (3)   SERVICES  67 
 (i)   Overview 67  
 (ii)   Financial services 68  
 (iii)   Telecommunications and postal services 72  
 (iv)   Transport 74  
 (v)   Tourism 76  
REFERENCES   79 
APPENDIX TABLES  81 
 
  Nepal WT/TPR/S/257/Rev.1 
 Page v 
 
 
CHARTS 
  Page 
I. ECONOMIC ENVIRONMENT 
 I.1 Composition of merchandise trade, 2003 and 2010 5 
I.2 Direction of merchandise trade, 2003 and 2010 7 
I.3 Sectoral pe rformance, 2008 8 
 
III. TRADE POLICIES AND PRACTICES BY MEASURE 
 III.1 Average applied MFN and final bound tariff rates, by HS section, 2002/03 and 2011/12 33 
III.2 Distribution of MFN tariff rates, 2002/03 and 2011/12 33 
III.3 Tariff escalation by 2-digit ISIC industry, 2011/12 34  
IV. TRADE POLICIES BY SECTOR 
 IV.1 Main manufacturing industries, 2006/07 and 2009/10 64 
IV.2 Tariff protection in the manufacturing sector, 2010/11 67 
 
 
TABLES 
 
I. ECONOMIC ENVIRONMENT 
 I.1 Selected economic indicators, 2003-11 2 
I.2 Balance of payments, 2003-11 3 
I.3 Sectoral performance, 2003-11 9 I.4 Overview of foreign direct investment, selected years 10 
 
II. TRADE AND INVESTMENT REGIMES  
II.1 Main trade-related legislation 13 
II.2 BIMSTEC, fast and normal tracks for trade liberalization 17 II.3 Aid-for-trade support, 2002-09 24 
 
III. TRADE POLICIES AND PRACTICES BY MEASURE  
III.1 Customs declaration documents 28 
III.2 Tariff structure, 2002/03, 2008/09, and 2011/12 31 
III.3 Tariff exemptions, 2010/11 35 
III.4 Tax collected at the border, 2002-10 36 III.5 Products banned from importation 37 
III.6 Imports requiring a licence or permission 38 
III.7 Products banned from exportation 39 III.8 Tax revenue, 2005-11 42 
III.9 Income tax  42 
III.10 Essential commodities 45 III.11 Performance of public enterprises, 2009/10-2011/12 46 
III.12 Disinvested, dissolved, and liquidated public enterprises, 1992-2008 47 
III.13 Notifications on sanitary and phytosanitary measures, October 2011 50 III.14 IPR legislation  54 
III.15 Registration and renewal fees, 2011 54 
  WT/TPR/S/257/Rev.1 Trade Policy Review 
Page vi 
  
    Page 
IV. TRADE POLICIES BY SECTOR 
 
IV.1 Area, production and yield of principal food and cash crops, 2005-11 58 IV.2 Livestock production, 2005-11 59 
IV.3 Agricultural credits and collection, 2005-11 61 
IV.4 Restrictions on imports of agricultural products, 2011 62 IV.5 Incentives provided in th e manufacturing sector, 2011 65 
IV.6 Selected telecommunication indicators, 2005-11 73 
IV.7 Selected tourism indicators, 2005-10 77  
 
APPENDIX TABLES 
 
III. TRADE POLICIES AND PRACTICES BY MEASURE 
 AIII.1 Unbound tariff lines under the 2011/12 tariff schedule 83 
AIII.2 Customs duty on goods exported from Nepal 85 
AIII.3 Exemptions from VAT 89 
AIII.4 Goods and services subject to zero VAT rate 91 
AIII.5 Excise duties, 2011 92 
 
 Nepal WT/TPR/S/257/Rev.1 
 Page vii 
 
 
SUMMARY 
 
1. Nepal started to liberalize its trade and invest ment regime, unilaterally, in 1992 and became 
the first least developed country (LDC) to jo in the WTO through the full accession process in 
April 2004.  Since then, economic performance ha s not resulted in the strong development Nepal 
needs.  Key factors impeding higher rates of GDP growth include political instability (due to the 
transition process embarked upon after the internal conflict of 1996-2006) and supply-side constraints, 
notably  energy shortages, poor infrastructure, and labour strikes.  Recognizing the effective role of 
trade to achieve sustainable and inclusive economic  growth, and to establish the conditions to reduce 
poverty and improve the living standard of its people,  Nepal is taking further steps to create a more 
friendly business environment and help its exporters to become more competitive. 
(1) E CONOMIC ENVIRONMENT  
2. Nepal's real GDP growth rate averaged 4.2% pe r year during 2004-11.  It is still one of the 
poorest countries in South Asia with about 25% of the population living below the poverty line.  Moreover, lack of diversity of its  exports and heavy reliance on rem ittances from abroad (over 20% of 
GDP) make the economy very vulnerabl e to external economic shocks. 
3. Nepal's annual average inflation rate reached  double digits in 2009 mainly because of supply 
disruptions – general strikes, road closures, and cartelizing of essential goods and supplies, including 
food items – as well as swelling of domestic cons umption (over 90% of GDP) due to increased 
remittances inflows.  Prices in Nepal are also greatl y influenced by inflation in India since the Nepali 
rupee is pegged to the Indian currency. 
4. Nepal's fiscal management remains pr udent, and recently implemented revenue 
administration reforms have resulted in strong customs and VAT collection.  Consequently, the 
percentage of public debt to GDP declined from 59% in 2004 to an estimated 32% in 2011. 
5. Nepal's trade deficit more than quadrupled during 2003-10 because of weak export 
performance and buoyant imports.  However, high remittances from abroad led to current account 
surpluses during most of the period under review.  
6. Trade accounts for about 40% of GDP.  Nepa l has a narrow export basket, and its export 
market is concentrated in a few countries, led by India.  Between 2003 and 2010, the share of merchandise exports in GDP declined from 10% to 5% , while imports more than tripled, pushed by 
increased consumption due to higher remittances.    
7. Nepal attracts very limited FDI inflows, largel y due to the high cost of doing business and 
limited investment opportunities.  In addition, certain economic activities are reserved for national investors (e.g. fisheries, cottage (traditional) in dustries, travel agencies and consultancy services).  
Thus, a major objective of Nepal's economic polic y programme is to promote and encourage a 
transparent and fair business environment for both domestic and foreign investment, and to increase 
the role of the private sector in the development process. 
(2) I
NSTITUTIONAL FRAMEWORK  
8. Formulation and implementation of Nepal's trad e policy is the responsibility of the Ministry 
of Commerce and Supplies (MoCS), in coordination with other ministries.  The private sector provides inputs to trade policy formulation by commun icating its views either directly to the MoCS or 
through the Federation of Nepale se Chambers of Commerce and I ndustry and the Nepal Chamber of 
Commerce. WT/TPR/S/257/Rev.1 Trade Policy Review 
Page viii 
  
9. Nepal became the 147th Member of the WTO on 23 April 2004.  As part of its accession 
commitments, Nepal bound 99.4% of its tariff lines and made extensive commitments under the 
GATS.  It has not been involved in any dispute under the WTO Dispute Settle ment Mechanism, either 
directly or as a third party.  Since acceding to the WTO, Nepal has made very few notifications;  the 
authorities have requested help from the Secretaria t in this regard.  Nepal grants at least MFN 
treatment to all its trading partners. 
10. Nepal participates in two overlapping regi onal agreements:  the SAFTA (Afghanistan, 
Bangladesh, Bhutan, India, the Maldives, Pakistan , and Sri Lanka), and the Bay of Bengal Initiative 
for Multi-Sectoral Technical and Economic Coopera tion (BIMSTEC, with Bangladesh, Bhutan, India, 
Myanmar, Sri Lanka, and Thailand).  In addition,  Nepal has signed 17 bilateral trade agreements, 
notably with China and India.  
11. Recognizing the effective role of trade in tran sforming a traditional agrarian economy into a 
modern economy, Nepal adopted its 2009 Trade Polic y.  It is being implemented through Nepal's 
Trade Integration Strategy (NTIS) 2010, which, inter alia , aims to strengthen Nepal's capacity to 
benefit from trade-related technical assistance a nd aid for trade, and promote 19 priority export 
potential activities:  cardamom;  ginger;  honey;  lent ils;  tea;  noodles;  medicinal herbs/essential oils;  
handmade paper;  silver jewellery;  iron and steel;  pashmina;  wool products;  tourism;  labour 
services;  information technology and business process outsourcing services;  health services;  education;  engineering;  and hydro-electricity.  Other potential exports are:  sugar, coffee, dairy 
products, cement, and transformers. 
12. The NTIS also identifies needs for donor support to  address current constraints to trade and to 
help potential exports to flourish.  Support to th e trade agenda is being provided by bilateral and 
multilateral partners.  Recently, the Government, led by the MoCS, has started to improve donor 
coordination in Nepal's aid-for-trade agenda.  Nepa l's efforts to mainstream trade into its national 
process, improve donor coordination, and implem ent the NTIS priorities are supported by the 
Enhanced Integrated Framework, in particular th rough a multi-year project for enhancing institutional 
capacity. 
(3) T
RADE POLICY INSTRUMENTS  
13. Being a landlocked country, trading costs are partic ularly high in Nepal.  The transit of goods 
through India (mainly the port of Kolkata) to inte rnational markets imposes significant shipping costs 
and delays on Nepalese exporters.  On the othe r hand, the Customs Act and Regulation of 2007 
simplified customs procedures in Nepal.  Progr ess made in trade facilitation has also improved 
customs clearance. 
14. Nepal's tariff is relatively simple, as 99.3% of total lines are ad valorem .  Its average applied 
MFN tariff decreased from 13.8% in 2002/03 to 12.2 % in 2011/12, while the average final bound 
tariff is 26.3%.  Nepal applies no tariff rate quot as.  Upon its accession to the WTO, Nepal bound all 
but 54 tariff lines at the HS 8-digit level.  Th e authorities note that Nepal excluded these lines for 
revenue collection and envir onment protection reasons.   
15. Nepal's tax revenue relies heavily on taxes coll ected at the border by Customs because of its 
administrative convenience compared with other sour ces of revenue collection.  Nepal has eliminated 
a number of other duties and charges (ODCs) on imports, and the only remaining ODC – the 
agriculture reform fee – is levied on imports fro m India and the Tibet Autonomous Region of China, 
from where agricultural imports are exempted from tariffs.  Nepal WT/TPR/S/257/Rev.1 
 Page ix 
 
 
16. Nepal does not have legislation on contingency trade remedies;  nonetheless, draft legislation 
on anti-dumping and countervailing measures is unde r preparation.  Nepal has not applied any 
anti-dumping, countervailing, or safeguard measures. 
17. Import and export prohibitions a nd restrictions are maintained on a number of products, to 
protect national security, maintain public morals, and conserve exhaustible natural resources.  Some 
restrictions are applied to ensure the availabilit y of domestic raw materials, which are essential for 
domestic processing industries.  Other than for goods restricted from importation, there is no need for 
an import licence in Nepal. 
18. Nepal applies export taxes on some products;  a ccording to the authorities, these are applied 
to protect the environment, ensure food security, and discourage trade diversion to India.  These 
export restraints may not be the best way to ach ieve some of the Government's objectives.  For 
example, levying export tax on wood tends to di scourage the export of wood.  When demand for 
wood from other countries increases, the export tax on  wood tends to encourag e illegal wood exports.  
19. The Government promotes exports through vari ous channels (e.g. profits earned through 
exports are subject to an income tax rate at 15% , instead of the 25% general corporate income tax 
rate), and legislation to establish special econom ic zones and export processing zones is in the 
pipeline. 
20. Nepal has a complicated income tax system;  in  particular, corporate income tax rates vary 
depending on the lines of business.  Foreigners' in come and income from export-related activities also 
have different tax rates.  A standard 13% VAT is applied to most goods and services.  Some goods 
and services are exempted from VAT, while some are zero rated.  For the most part, the same VAT 
rate is applied to domestically pr oduced and imported goods and services. 
21. The authorities noted that privatization of pu blic enterprises has been  on hold since 2008.  
The Government acknowledges that public enterpri ses, in general, have performed poorly, and 
increasing the participation of the private sector could increase productivity, by improving efficiency 
and reducing the fiscal burden on the Government.  Ho wever, there has been no regular monitoring of 
the privatized enterprises.  Some enterprises have been closed after privatization, and others are 
operating with no increase in investment, producti on, and productivity.  Petroleum and petroleum 
products, and iodine salt are the only products under state tradi ng, managed by the Nepal Oil 
Corporation and the Salt Trading Corporation, respectively. 
22. Nepalese exporters find it difficult to compete in  global markets due to  weak standardization 
and conformity assessment infrastructure.  Nepal lacks an accreditation system and sufficient testing 
facilities.  Its traditional agriculture exports (such as  honey) have been subject to restrictions in the 
international market. 
23. Nepal's law on government procurement, adopted in 2007, also covers procurement by public 
enterprises; it gives a price preference of 10% to Nepalese products.  However, public procurement is 
inadequately monitored due to lack of trained staff and underfunded resources.  Among other major 
problems, procurement methods have not been defi ned, no procurement reporting system has been 
established, e-procurement system does not exist, a nd IT application has not been introduced.  Thus, 
compliance with the procurement legislation has been  limited, and there has been unfair competition.  
24. Nepal adopted a competition law in 2007, wh ich established the Competition Promotion and 
Market Protection Board.  However, the law does not apply, for example, to export business, and 
business relating to cottage  and small industries. WT/TPR/S/257/Rev.1 Trade Policy Review 
Page x 
  
25. As an LDC, Nepal is not required to appl y the provisions of the TRIPS Agreement until 
1 July 2013.  It is preparing legislation on industria l property protection.  So far, there have been no 
cases of customs action in IPR enforcement at the border. 
(4) S ECTORAL POLICIES  
26. Agriculture accounts for 36% of real GDP and em ploys around two thirds of the labour force, 
mostly in subsistence farming.  W ith most of the country facing food  deficit, Nepal's key objective for 
the sector is food security.  Government assistance is  provided mainly through loans and structural 
policies (e.g. credit and support for general research  and extension services).  Nepal's simple average 
applied MFN rate on agriculture, hunting and fishin g is 9.7% and the final bound rate is 33.9%, 
leaving ample margin for increasing applied tari ffs.  Nepal does not have tariff-rate quotas on 
agricultural products, nor a system of guaranteed prices.  
27. Under the Agriculture Perspective Pl an 1995-2015, the Government aims, inter alia , to:  
increase factor productivity;  alleviate poverty, and significantly improve living standards through 
accelerated growth and employment; and transf orm subsistence agriculture into commercial 
agriculture. 
28. Manufacturing contributes only 6.1% to real GDP , reflecting Nepal's early stage of industrial 
development.  Under its Indus trial Policy 2010, Nepal aims, inter alia , to promote value-added 
industries, and increase production and productivity.  Nepal does not provide direct payments to any 
manufacturing industry.  Nonetheless, there are certa in incentives, such as inco me tax, VAT, excise 
duty, and customs duties exemptions or deductions  for certain industries.  According to the 
authorities, the purpose of these incentives is to  ensure balanced industrial development both 
regionally and sector-wise. 
29. The simple average applied MFN tariff on manufacturing is 12.3%, while the final bound rate 
is 26% leaving ample scope for increasing applie d MFN tariffs.  Some of Nepal's unbound tariff lines 
are on manufacturing products (e.g. cement).  The positive tariff escalation in some industries (e.g. food, beverages and tobacco, and te xtile and leather) provides higher le vels of effective protection to 
those industries than that reflected by the nominal rates.   
30. Despite having abundant hydropower resources, Nepal has not been able to generate enough 
electricity to match its demand.  Addressing its energy  shortages, therefore, is crucial for Nepal to 
achieve rapid and sustained economic growth. 
31. Services is, increasingly, a key sector of Nepal's economy in terms of contribution to real 
GDP (about 50%).  Nepal is a net importer of services.  Under the GATS, it undertook extensive 
market-access commitments, and included 77 subsect ors in its schedule.  Nepal also signed the 
Reference Paper on basic telecommunications.  
32. Since its WTO accession, Nepal has taken steps to address some of the structural problems in 
certain services activities, notably in banking where total foreign shareholding increased from 67% to 
80%, while foreign banks/financial institutions may open branches for wholesale banking since 2010.  Nepal is renowned worldwide as a tourist destination thanks to its  ethnic/lingual/social diversity and 
natural beauty.  Nevertheless, it faces key prob lems, notably poor infrastructure, limited air 
connectivity, and shortage of good quality acco mmodation and skilled manpower.  Some of these 
shortcomings are being addressed.  Further liberalizat ion of services should improve the efficiency of 
the economy as a whole and the competitiveness of  Nepalese exports, especi ally by reducing costs 
related to telecoms and transport.