Nepal's vehicle assembly industry was established to support industrialisation, create jobs, reduce foreign exchange outflows through import substitution and develop technological capabilities.

Questions have subsequently been raised about whether these objectives are being achieved and how government tax concessions are being used.

Several business houses have established vehicle assembly plants and received tax and revenue concessions worth billions of rupees. Laxmi Motor Corporation, under the Laxmi Group and the official dealer of Hyundai vehicles, is among the companies operating an assembly plant in Nepal.

The Government of Nepal introduced a policy, primarily through the budget for fiscal year 2079/80, to encourage vehicle assembly. Industries importing parts in completely knocked-down (CKD) form and assembling vehicles in Nepal, rather than importing fully assembled vehicles, receive a 50% discount on excise duty and a 25% discount on customs duty. Companies establishing new assembly industries can also receive a corporate income tax discount of up to 40% for the first five years. For electric vehicles, parts are subject to a 1% customs duty.

The stated purpose of these concessions was to support domestic industrial development, increase the use of domestic labour and raw materials through value addition, and enable consumers to purchase vehicles at lower prices. However, the operations of companies such as Laxmi Motor Corporation have prompted questions about whether these objectives are being met.

Laxmi Motor Corporation established an assembly plant in Ramgram, Nawalparasi, in technical collaboration with South Korea's Hyundai Motor Company. Commercial production and sales of the Hyundai Venue and Creta assembled in Nepal began in June 2024 (Ashar 2081). The facility was formally inaugurated by the then Prime Minister Pushpa Kamal Dahal 'Prachanda' on May 10th, 2024 (Baishakh 28, 2081).

The company pays customs duty under the assembly industry concession, including a 25% customs duty and 50% excise duty discount compared with the taxes applicable to fully assembled vehicles at Nepal's customs points. The concession applies to imported parts, including engines and chassis, sourced from Korea or India for vehicle assembly.

The benefit received by consumers from these concessions has become a subject of discussion among the public and government bodies. Laxmi Motor Corporation claims that vehicles assembled in Nepal are up to NPR 900,000 (US$ 5,825) more affordable than imported vehicles. However, experts and stakeholders argue that the reduction is relatively small compared with the customs duty, excise duty and income tax concessions received by the company. They contend that the concessions should result in lower production costs and a greater price difference between locally assembled and imported vehicles, alleging that businesses pass on only part of the tax benefits while retaining a substantial portion as profit.

Auditor general's questions

The Office of the Auditor General has also raised concerns. Its 62nd report stated that tax benefits provided on imported CKD kits were being received by importers rather than consumers and called for a detailed investigation, citing a lack of the specified value addition.

The Department of Industry and the Department of Transport Management have established criteria for assembly industries under the CKD policy. An industry must achieve at least 10% domestic value addition through domestic raw materials or labour in its first year of production and increase this to at least 30% by the end of the fifth year. The policy also includes job-creation targets. However, according to Ministry of Finance officials, some assembly industries are not achieving the required levels of value addition and localisation.

Critics allege that the state is losing revenue when companies import parts from abroad and conduct limited assembly work in Nepal. Questions have also been raised about monitoring by the Department of Industry and scrutiny by customs and inland revenue authorities, including whether companies are complying with the conditions attached to the concessions.

Laxmi Group and Hyundai have previously faced tax-related scrutiny. The Large Taxpayer Office, Harihar Bhawan, Pulchowk, determined revised taxes for fiscal years 2072/073 and 2073/074 after finding alleged income tax and VAT evasion in Hyundai-related transactions. When Laxmi Intercontinental was asked to pay the determined tax, including interest and penalties, it appealed to the Revenue Tribunal.

The tribunal upheld a tax determination of NPR 933,536 related to VAT evasion. In the same fiscal year, the office also determined additional tax, interest and penalties after finding that the company had allegedly understated its actual income by approximately NPR 4 million. The tribunal upheld the VAT evasion finding related to Hyundai and ordered the reassessment of certain other amounts and penalties.

A few years ago, the Department of Commerce and Supplies reportedly sent a file to the District Police Office to initiate a case against Hyundai following an investigation into alleged tax evasion amounting to crores of rupees. The company faced allegations of evading revenue by importing more parts than required under a single pro forma invoice in the name of manufacturing vehicles in Nepal. Sources claim that the file was suppressed through alleged 'setting' arrangements involving political influence and financial inducements. The lack of action by regulatory bodies, including the Revenue Investigation Department and Customs Department, has led to questions about the influence of major business houses on Nepal's administrative system.

The allegations have prompted calls for a technical audit to determine whether companies are meeting the Department of Industry's 10% to 30% value addition requirements. Stakeholders argue that if companies are only assembling vehicles using imported materials, without adequate use of domestic raw materials or labour, the concessions should be reviewed and, where appropriate, revoked.

Goods imported as CKD or semi-knocked-down (SKD) raw materials should also be subject to inspection. A senior Ministry of Finance official stated that the Customs Department and Revenue Investigation Department should establish a joint monitoring mechanism to prevent the alleged import of more parts than required through a single pro forma invoice for additional trade and tax evasion.

According to the official, effective monitoring is difficult because of the significant influence allegedly exercised by Anjan Shrestha, president of the Federation of Nepalese Chambers of Commerce and Industry. Sources claim that Shrestha's network is obstructing the transfer of the benefits of the state's tax concessions to consumers, despite the concessions being provided on the condition that vehicles would be available at affordable prices.