Nepal’s tax law favors grants over investments for startup funding. A simple fix to Section 12(c) can unlock real capital. Here's how you can help.

Are you an entrepreneur struggling to raise early-stage funding?

An investor waiting for a better policy environment?

A diaspora Nepali who wants to back local startups but with fair tax treatment?

Then this is for you.

Because right now, one word in our tax law is making it harder for startups to raise capital and discouraging people like you from supporting them.

A Law That Meant Well, But Isn’t Working

Nepal is making strides in supporting innovation. Section 12(c) of the Income Tax Act 2058 was introduced to encourage individuals to fund startups by offering a tax deduction on seed capital.

But there's a big catch.

This benefit only applies if the money is given as a grant. If it's given as an investment, you get nothing, not even a tax break.

This single word "grant" has turned what could be a powerful incentive into a rarely used policy. And it’s costing Nepal’s startup ecosystem dearly. 

What the Law Says and Why It’s Flawed

Section 12(c) allows taxpayers to deduct up to Rs. 100,000 per startup (maximum five startups per year) only if the capital is provided as a grant.

If you:

• Invest Rs. 1 lakh in a startup: you get no tax relief
• Give it away as a grant: you get a tax deduction

No ownership. No returns. Just a tax write-off.

That might sound noble in theory but in the real world, it discourages the very people we need to support entrepreneurship.

A Real-Life Example Based on the Current Tax Rate in Nepal

Let’s say you earn Rs. 25 lakhs a year.

Here’s how your tax liability compares under the current tax rate in Nepal:

Would you give away Rs. 5 lakhs just to save Rs. 1.8 lakhs in tax?

Most people wouldn’t. And that’s the issue. The current setup makes logical investment behavior look financially irresponsible.

Why This Matters for Every Startup Business in Nepal

Founders aren’t asking for donations. They need real investors—people who bring money, mentorship, and a long-term stake in the venture.

While startup loans in Nepal exist, they’re not enough:

• Many startups aren’t ready for debt
• Loans come with repayment obligations
• Banks don’t usually fund early-stage innovation

What Nepal needs is risk capital and investors who are incentivized to provide it.

The Solution Is Simple

We’re not asking for new programs, subsidies, or complex regulations. Just a minor, surgical change in one clause.

Our Recommendation:

1. Replace the word “grant” with “investment” in Section 12(c)
2. Clearly define “startup” based on the Industrial Enterprises Act or an agreed national definition

This would:

• Encourage private investment in startups
• Unlock seed capital from professionals, NRNs, and private companies
• Finally align our tax policy with global standards

Why This Needs to Happen Now

The Inland Revenue Department (IRD) is currently accepting suggestions for the upcoming 2082/83 fiscal budget. This is our moment to push for this change.

I've already taken action and you can too. I’ve Sent the Email to IRD and other public stakeholders including MPs. Finance Ministry, Finance Committee of Parliament of Nepal as well as the Office of the Prime Minister and Council of Ministers. Will you do the same?

Here is the email I sent: 
 

I have also been posting about this regularly in Linkedin and here is my recent post. 

Here is How You Can Help Too (It Takes 3 Minutes)

Step 1: Copy & Send This Email

To: policyird@ird.gov.np
Subject: Recommendation to Amend Section 12(c) of Income Tax Act 2058

English Version:

Dear Sir/Madam,

I hope this message finds you well.

As part of the ongoing consultation process for the upcoming Fiscal Year 2082/83 budget, I would like to offer a policy suggestion concerning Section 12(c) of the Income Tax Act 2058. This section currently allows a tax deduction for seed capital provided to startups but only if such funding is offered in the form of a grant. And as a result, this provision is only limited to paper. 

While this provision signals the government's intent to support Nepal’s startup ecosystem, the limitation to grants significantly reduces its practical utility. Individuals and businesses are unlikely to give away substantial funds without the possibility of equity or return, particularly when considering the impact of the current tax rate in Nepal.

I respectfully recommend two specific improvements:

1. Replace or remove the word "grant" and allow seed capital provided as investment to also qualify for tax deduction. This would better align the provision with real-world investment behavior and unlock much-needed capital for early-stage businesses.
2. Define the term “startup” for clarity. If the government intends to rely on the definition provided through the recent amendment to the Industrial Enterprises Regulation, this should be clearly stated to avoid ambiguity during implementation. Here is more on the recent definition of the term startup: https://khatapana.com/blogs/441/government-finally-defines-startup-business-in-nep

To provide further clarity on this issue, I have prepared a detailed breakdown of how the current law affects taxpayer decisions and how minor tweaks could dramatically improve impact. You can access the full article here: https://khatapana.com/blogs/448/grant-or-investment-in-startups-to-lower-tax-rate-

I strongly believe that this small legislative adjustment could help channel domestic capital toward Nepal’s most promising startups—boosting innovation, employment, and economic growth.

Should you require further input, I remain at your disposal and would be happy to assist.

Warm regards,

Your Name

नेपाली संस्करण:

महोदय ,
नम्र निवेदनसाथ यो अवगत गराउन चाहन्छु कि आगामी आर्थिक वर्ष २०८२/८३ को बजेट निर्माण सन्दर्भमा आयकर ऐन २०५८ को दफा १२(ग) सम्बन्धी प्रावधानमा सानोतिनो संशोधनले पनि नेपालको स्टार्टअप क्षेत्रलाई उल्लेखनीय लाभ पुग्न सक्छ।

हालको व्यवस्था अनुसार, करदाताले स्टार्टअपलाई बीउ पुँजी अनुदानको रूपमा प्रदान गरेमा मात्र उक्त रकम करयोग्य आम्दानीबाट कट्टा गर्न सकिने व्यवस्था छ। यद्यपि यसले स्टार्टअपलाई सहयोग गर्न चाहने करदातालाई लगानीको सट्टा अनुदान दिन बाध्य बनाउँछ—जसबाट न त स्वामित्व प्राप्त हुन्छ, न लाभांश, न त भविष्यको प्रतिफलको सम्भावना।

नेपालमा प्रचलित आयकर दर (tax rate in Nepal) को सन्दर्भमा हेर्दा, यस्तो नीति व्यवहारिक छैन र दीर्घकालीन रूपमा स्टार्टअपलाई आवश्यक लगानी आपूर्ति गर्न सक्दैन।

यस सन्दर्भमा निम्न सुझावहरू राख्न चाहन्छु:

१. “अनुदान” भन्ने शब्दलाई “लगानी” वा “seed capital” मा पुनःस्थापन गरियोस्, जसले स्टार्टअपमा गरिएको लगानीलाई पनि कर कटौती योग्य बनाउनेछ।
२. “स्टार्टअप” को स्पष्ट परिभाषा राखियोस्। यदि सरकार हालैको औद्योगिक व्यवसाय ऐन को संशोधनबाट आएको परिभाषा मान्य मान्न चाहन्छ भने, सो कुरालाई स्पष्ट रूपमा उल्लेख गरिनु उपयुक्त हुनेछ।

यस विषयमा विस्तृत विश्लेषणसहितको यो लेखले प्रावधानको व्यवहारिक असर देखाउँछ र समाधान प्रस्ताव गर्दछ। कृपया निम्न लिङ्कमा उक्त लेख अवलोकन गर्नुहोस्: https://khatapana.com/blogs/448/grant-or-investment-in-startups-to-lower-tax-rate-

यो सानो नीतिगत सुधारले निजी क्षेत्रबाट स्टार्टअपमा लगानी आकर्षित गर्न सहयोग गर्ने, नवप्रवर्तनमा प्रोत्साहन दिने, र आर्थिक वृद्धिमा टेवा पुर्‍याउने विश्वस्त छु।

म तपाईँहरूको समय र ध्यानका लागि आभारी छु र आवश्यक परेमा थप सुझाव वा छलफल गर्न तयार छु।

धन्यवाद,
[तपाईंको नाम]

Step 2: Share This Article

Please share this article with:

• Founders
• CAs and lawyers
• NRNs and diaspora investors
• Your MP or local policymakers
• Your professional networks

And ask them to make similar recommendations. 

Let’s Not Miss This Moment

This isn’t just about fixing a line in a tax law—it’s about showing that Nepal is serious about supporting its innovators and job creators.

With one small edit, Section 12(c) can go from paper policy to real impact.

1. Send the email
2. Share the message

Let’s unlock investment for Nepal’s startup future on fair and rewarding terms

Sincerely

Kailash Panday
Fintech Founder | Chartered Accountant | Legal & Investment Policy Advisor
Founder, Khatapana | Managing Director, Nepal Invests
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