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Policies & Regulations

Source: Nepalese Legal Provisions on Hydro-Power Development, HMGN Ministry of Water Resources.  

[To...Power Purchase Agreement,Foreign Investment,Sellling of Electricity,Royalty,Income Tax,Custom, Sales and Excise,Foreign Exchange,Export]  


Summary of Incentives

The royalty for small hydro projects is only NRs 100/kW ($US1.46/kW) a year and 2 % of the average sales price for the first 15 years of plant operation. Afterwards, the royalty rises to NRs 1000/kW ($US)14.6 / kW and 10% of the average sale price.  

Water use fees are very low in Nepal and do not exceed $150 per annum.  

Private Sector hydro projects producing more than 1000 kW, such as the Nyadi Project, are exempted from income tax payments for the first 15 years. Only a 1 % customs duty is charged on imported SHP equipment and spare parts provided that these are not manufactured in Nepal. Import licence fees and sales tax are not levied on such equipment. Foreign investors may repatriate their profits in convertible currency.  

Note: 71.0 rupees = ($US)1  

License Requirements

In order to develop a project, a study license must be first obtained from Department of Electricity Development (DOED). Once a detailed feasibility study has been completed, a generation, transmission and distribution license may be requested. DOED must decide whether to give the license within 120 days. The license shall be for not more than 50 years. During the license period, the project shall not be nationalised.  

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Power Purchase Agreement (PPA)

A Power Purchase Agreement must be negotiated with the NEA if the power is going to be sold to the national grid. Electricity may be sold at a rate not greater than that giving a 25% dividend on share capital. The private investors may depreciate all the investment made for hydropower development in order to turn over the investment in an average of 25 years. All profits from foreign investments may be repatriated in convertible currency.  

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Foreign Investment

There are no constraints on investment for projects relating to generation, transmission and distribution of hydroelectricity. One hundred percent foreign investment is permissible as are partnerships with government and local private sector companies. Projects established with more than 50 percent of the total investment by foreign company shall automatically be transferred to His Majesty’s Government after the expiry of the time prescribed in the licence (maximum of 50 years). No compensation shall be given by the Government for it. However, if the investor company desires to purchase such hydroelectricity plants from His Majesty’s Government it may do so.  

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Selling of Electricity

Electricity from the project may be sold independently of the NEA, in part or in totality to the NEA or the entrepreneur may use the system of the NEA to transmit electricity generated by himself to a third party.  

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Royalty

The producer of electricity shall pay as royalty a sum of NRs 100/kW ($US1.46/kW) per annum and 2% of the average sale price per unit (kW hour) as royalty up to the period of 15 years starting from the date of commercial production. After the completion of fifteen years from the date of commercial production, the producer shall pay the government a sum of NRs 1000 ($US14.6) per kW per annum and ten percent of the average sale price per unit (kW hour) as royalty. No royalty shall be paid by the private sector, if it transmits and distributes electricity by purchasing it from the electric system of NEA.  

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Income Tax

  1. Hydroelectric project, constructed with investment of the private sector, producing more than 1000 kW shall be granted exemption from income tax for a period of fifteen years starting from the date of its commercial production. 
  2. Any private entrepreneur, who constructs electric substation, and transmits and extends the distribution lines shall be granted exemption from income tax for a period of ten years. 
  3. If the private companies take on contracts for the purchase, operation, maintenance and management of the hydroelectric plant or transmission and distribution lines under the ownership of His Majesty’s Government, such companies shall be granted exemption from income tax for a period five years. 
  4. The income tax shall be less than ten percent of the corporate income tax which the government imposes from time to time. 
  5. If the investor reinvests in the hydroelectric project in order to diversify the project or to expand its established capacity by twenty-five percent or more, or to modernise the technology or to develop the subsidiary industry, such investor may deduct an amount of fifty percent of the new additional fixed asset, from the taxable income of such hydroelectric projects. Such deduction may be made at a time or from time to time within three years. 

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Customs, Sale Tax and Excise-Duty

Customs duty and sales tax shall be levied at the prevailing rate on the import of construction equipment, machinery tools and their spare parts required for operation and maintenance if they are produced and sold by local industries. Only one percent of the customs duty shall be levied on the import of goods if they are not produced in Nepal. Import licence fee, sales tax etc. shall not be levied thereto.  

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Facilities Relating to the Exchange of Foreign Currency

  1. All facilities concerning exchange of foreign currency shall be provided to the foreign individual, firm or company who invests in the construction of project for generating, transmitting and distributing the electricity at the private sector under the foreign investment and single door policy. 
  2. If foreign currency is required for repayment of loan or the interest thereon or repatriation of the investment which was invested as a loan or share capital for the hydroelectric project, His majesty’s Government may make the foreign currency available to such private entrepreneur at a prevalent market rate of exchange. 

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Export of Electricity

If the electricity produced in the country is to be exported to a foreign country, it shall be done in accordance with the agreement made between His Majesty’s Government and the exporter. While exporting the electricity an export tax as prescribed by His Majesty’s Government shall be levied on such export.  

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For more information, please contact our ledco office in Kathmandu.
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