IMAGE: SHUTTERSTOCK
NEPAL WANTS to become a digital economy. Its government has declared an Information Technology Decade and wants to quintuple the sector’s share of national output. Young Nepali firms export software and digital services at a faster clip than most South Asian peers. The potential for remote work in a country with high youth unemployment and an English-speaking workforce is vast. Yet these ambitions are being smothered by the state’s own greed. A punishing tax regime, which treats smartphones like luxury vices, means the digital revolution never leaves the capital’s coffee shops.
Consider the price of entry. To buy a basic internet-enabled phone in Nepal, a citizen must hand over a tax bill amounting to 71.4% of the device’s cost. This fiscal bludgeoning makes the average handset equivalent to a third of a typical monthly income. In Bangladesh the tax on such a device is zero. In India it is 3.1%. Nepal’s tax is higher than its levy on alcohol. The state treats a tool of modern communication and commerce with the same fiscal disdain as a bottle of whisky. For fixed broadband, the condition is the same: a thicket of sector-specific charges, from spectrum fees to a levy for rural development, help make a basic connection cost nearly 8% of average monthly income, well above regional benchmarks.
The effect is corrosive. Less than 50% of Nepali households use the internet. Just 15% own a computer. A mere 9.6% of firms make payments electronically. Nearly half of all formal businesses still do not have a website. For a sector that thrives on network effects and scale, that is a fatal anchor. Digital capital—computers, software and so on—accounts for less than 2% of the country’s total capital stock, a figure that has barely moved for years. The government sees the digital sector as a future revenue tap. By making it unaffordable, it ensures the tap will never be connected.
Such high prices expose a fundamental misunderstanding of how digital economies grow. Kathmandu’s policymakers imagine a simplistic pipeline: invest in some infrastructure, train some coders, watch exports boom and then tax the proceeds. The real world is messier. Digital adoption is a virtuous circle. Widespread, affordable access lets consumers pay for rides and goods online. That gives firms reason to build websites and digital payment systems. This activity creates data and demand, which attracts investment in better networks and cloud services. It allows freelance programmers to find global clients and gives call-centre workers stable jobs. Each stage feeds the next. Nepal’s taxes snap the circle at its first, most critical link: the individual user and the small business.
The infrastructural base is shaky enough without this self-inflicted wound. Nepal is landlocked and must buy international bandwidth from India and China, adding cost and vulnerability. Its mobile market is dominated by two operators, damping competition. The legal framework governing telecommunications is a relic from 1997, drafted before data became the lifeblood of economies. Fixed broadband reaches less than half the population. Even those who can get online face frequent outages; the average firm lost more than 2% of its sales to internet disruptions in a single year. In this environment the heavy duties on devices and data are not just a barrier but a declaration of priorities. Digital tools are luxuries to be taxed not necessities to be propagated.
There is a toxic irony at play. Nepal’s digital service exports have grown at an annual rate of over 12% for nearly two decades. The sector creates jobs that are less vulnerable to the remittance-fuelled boom-and-bust cycles of the wider economy. It confers a path for educated young Nepalis, who might otherwise seek work in the Gulf or Malaysia, to build careers at home. Firms like CloudFactory, a business-process outsourcer, started with three local developers and now employs hundreds. E-commerce platform Daraz has seen seller registrations explode. These are the sort of seedlings a developing economy should nurture. Instead the taxman seems determined to prune them back.
Officials will point to fiscal necessity. Government revenue needs are real. But this is a catastrophic misallocation of the tax burden. The 71% tariff on phones may garner some immediate rupees, but it forfeits a much larger future stream of income and growth. It is a policy that taxes potential. Every young person priced out of owning a smartphone is a potential freelancer, entrepreneur or skilled worker lost. Every small business that finds digital payments too costly stays trapped in a cash economy, invisible to formal finance and unable to scale efficiently.
The government’s own plans acknowledge the need for affordable access. Its Digital Nepal Framework and the proposed reform of the Rural Telecommunication Development Fund speak of bridging divides. Yet those initiatives are neutered by the treasury’s hunger. You cannot build a digital highway and then tax every car at 71% before it enters the on-ramp.
Comparisons with regional successes are illuminating. India’s digital explosion was catalysed by collapsing data costs and a proliferation of cheap smartphones. Bangladesh made a strategic choice to exempt handsets from duty, prioritising access over near-term revenue. These countries understood that the digital economy is a volume game. Its benefits—higher productivity, formalised transactions, job creation in services and so on—multiply as more people participate. Nepal has chosen the opposite path: high margins on a tiny user base.
The damage is seen in the brutal digital divide between the capital region and the rest of the country. In Bagmati province, which includes Kathmandu, nearly 60% of households use the internet. In Karnali, a poor western region, the figure is 14%. The tax policy entrenches these geographical and social inequalities, ensuring that digital opportunity stays the privilege of the urban elite.
Nepal’s options are narrowing. It can continue to view the digital sector as a cash cow to be milked with impunity, guaranteeing its stunted growth. Or it can see it for what it is: the single most promising engine for job creation and economic modernisation the country possesses. That would mean a painful but essential shift from taxing digital tools as luxuries to treating them as the core infrastructure of a 21st-century economy. The first step is to put down the fiscal hammer. The dream of a digital Nepal depends on it. ■
