NOTE 3 | APRIL 2013
Note 1 | APRIL 2012
in brief 1 Million Members Contribute Creating a More Efficient Taxation $35 MillionSystem to Nepal’for s Social Security Fund Nepal
The establishment of the Social Security Fund is part of a major labor market reform designed to create an environment which facilitates enhanced investment and productivity, with simultaneous benefits for entrepreneurs and the work force of the country. Since its introduction in June 2011, the Social Security Fund has collected Nepalese rupees 2.83 billion ($35 million) from workers, All government businesses inand Nepal aresector required to be aregistered with the private to provide social safety net for Inland workers,Revenue addressing one the keya areas of contention labor relations in Nepal. The Department andofobtain Permanent AccountforNumber. Additionally, businesses Environment, Relations Industrial Security Group withBusiness a turnover of NepaliLabor rupees 2 millionand or more need to be Working registered with of Value Nepal Business Forum called fortoa comply need towith establish a Social Security onand Added Tax. Businesses thus have the schedules of filingFund returns September 30, 2010 to address this issue. The recommendations of the forum submissions for VAT and Tax Deductable at Source. Currently, around 21 percent, were endorsed through the budget speech 2011/12 and June 2011 marked that is 97,480 out of 447,7301, of the total tax registered businesses have to be the official introduction of the Social Security Fund of Nepal. Since then, the compliant both the tax regimes. fund haswith been created with the contribution of one percent payroll tax each from the employers, employees and government for retirement and retrenchTill May the of tax returns an additional burden ment2011, benefit tofiling the employees. Theand fundsubmissions is mandatedposed to provide social security to businesses as it required multiple visits to the tax office every month. As per services to the workers to compensate in the areas of workplace accident, the Income Tax Act health 2058 (2002), all deposits from Tax Deductable at Source reproductive and health insurance scheme through Social securityand tax VAT initiated Fiscal Yearin2009/10. were to beinsubmitted twice, the first submission within the 15th and the second within the 25th day of the subsequent month. This was a big administrative and financial burden on the businesses as they needed to invest 34 days every year for paying these taxes.
Tax compliance costs go down, efficiencies risehuman withdignity reform and
Benefitting Employers, Employees and the Economy
This issue was raised at a Nepal Business Forum working group meeting at the Federation of Nepalese Chambers of Commerce and Industry on September in Nepal, though very limited, has of a this tremendous con- for 30, Social 2010. Security They highlighted the inconvenience andbeen burden system poses cern with the Constitution of Nepal 1992 and the Interim Constitution of Nepal businesses, and submitted a recommendation to the government for possible 2006 emphasizing social as a fundamental Social meareduction in the number of security times they are required to right. submit taxessecurity in a year. sures were first introduced with security benefits related to disability, old age, poverty and the like.ofThe annuallyof allocates ru- of Under the leadership thegovernment Secretary, Ministry Finance,about and Nepalese the President pees 10 billion for health benefits and Nepalese rupees 12 billion for old-age the Federation of Nepalese Chambers of Commerce and Industry, the Business and disability through the Ministry of Health and Ministry of Federal Affairs and Environment Working Group of Nepal Business Forum identified that tax payments Local Development respectively. The labor market of Nepal largely consists could made more by allowingis businesses to pay multiple taxes on of abe formal sector in efficient which employment almost stagnant and an informal thesector, same day. Governmentunregulated of Nepal responded to to thisdetermine, recommendation whichThe is unorganized, and difficult but has by a growing labor force. Labor forces in both these sectorstodo not receive manyfrom reducing the number of times an organization is required submit these taxes social benefits and frequent strikes been called 2011/2012, to press for such 34 to 22. security The decision was taken during the have National Budget allowing by the labor/employees. The on SSF will all these TDSservices and VAT payments to be made the address same day. This issues. has reduced the administration and logistics cost of tax compliance on businesses and has possibly Figure 1: Timeline saved the private sector over $ 4.83 million (Nepali rupees 362.25 million). Concept initiated for Social
Law drafted and
protecting all Nepalis from risks through the The reduction ❝ provision of a social security fund in the required is the need of the hour in Nepal. number of visits ” for taxMinistry payment Mr. Suresh Man Shrestha, Secretary, of Labor and Employment. from 34 to 22 per year is a measure which has Formalization of SSF the benefitted private sector. The concept of Social Security was brought forward This shows the commitment of NBF in Clause 285 of the Budget Speech of 2066/67 members to introducing reforms (2009/10) under the heading “Improving Social Security and thatEthics” help which reducestates: the cost of doing
business andlike improve investment Social security measures old age the allowances, disability climate and single women allowances, pension in general. With active have gradually been expanded. In order to expand it I am further inpublic-private the future, study on dialogue, levying social security tax will beconfident conducted..that Until such arrangements we will see many such have been made, a proposal to levy one percent tax reforms leading improved business on the first slab of the taxablean income of salaried people hasenvironment been made. in Nepal.
The Budget Speech of 2068/69 (2011/12) also has provision under Clause 147 “Massive Employment Mr. Rameshwor Khanal,and Generation through Public, Cooperative Private Sector” which Advisor states: Economic to the
Prime Minister and
Social Security Fund will be implemented from next fiscal yearFormer for the benefit of contributor Co-Chair of theworkers in order to compensate them in workplace accident, Working Group on Business maternity care and health insurance scheme through Environment, Labour Relations Social security tax initiated in Fiscal Year 2009-10. Contribution of employees and the government will and Industrial Security be ensured through the formulation of Social Security Act in the next Fiscal Year.
Security Tax through submitted at the Ministry Secretary Secretariat established This Budget reform was part of under a Revenue broader set of economic and tax reform measures that Speech 2009/10 of Law and Justice in 2012 of MOF on Oct. 25, 2010 in August 2011 the government has initiated to improve the investment climate in Nepal. The aim Contributors: of these reforms is to reduce administrative burden, broaden the tax base, and - Mr. Krishna Babu Joshi, Contributors: improve operations for Nepalese companies. Other tax reform initiatives include Mr. Krishna Monitoring Evaluation & Consultant Babu Joshi,&Monitoring Evaluation, NICRP Issue raised and Social Security Fund Regulations Endorsement through recommendation made on & Secretariat in Budget Speechtax in SME tax reform, enhancement ofapproved the Riskcreated Based Audit system, appeal reform, Ms. Akira Dhakwa, NBF Associate - Mr. Gopal Tiwari, NBF Secretariat Coordinator Sept. 30, 2010 at the NBF to March 2011 June 2011 the process tax incentives expedite reform, Marginal Effective Tax Rate benchmarking, and the first ever - Ms. Akira Dhakwa, Consultant, NBF Secretariat Tax Compliance Cost Survey in Nepal.
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Role of the Nepal Business Forum The issue was raised by the Federation of Nepalese Chambers of Commerce and Industry through the Business Environment, Labor Relations and Industrial Security Working Group of Nepal Business Forum which is co-chaired by the President of FNCCI and the Finance Secretary. As the private sector has identified labor issues as one of the key constraints to private sector development in Nepal, FNCCI have been actively involved in trying to improve labor relations. Lack of a social safety net was identified as one of the barriers to the implementation of more flexible employment contracts. The group reviewed how to speed up operationalization of the fund and its operational modality and this helped to catalyze its establishment. According to the Working Group decisions, the fund would be established and managed by a committee who would carry out a detailed study and link the issue of social protection to Labor Law Reform. The Committee was also charged with carrying out further consultations and dialogue between the government, unions and private sector. Following the recommendations, a committee was formed, chaired by the Revenue Secretary from the Ministry of Finance, to implement the Social Security Fund. This committee also supported the forum’s decision on the need for separate Social Security Funds to
provide social security to the labor and employees of the public and the private sector. Using the authority given in the Section 2 of The Administrative Procedures Act, 2013 (1956), a Social Security Fund (Management and Operations) Regulations 2067 (2011) was prepared by the Committee and finally approved by the cabinet on March 21, 2011 (2067 Chaitra 7) and published in the Nepal Government Gazette. The recommendations from Nepal Business Forum were finally endorsed in the Budget Speech of June FY 2011/12. The fund is mandated to provide social security services wherein the contribution of employee and the government was ensured through the formulation of Regulation. The government has been currently mobilizing financial resources for the fund by imposing 1 percent social security tax on all employees working in the formal sector and bearing the operational cost of the fund.
Immediate Relief Program, 2011, Office of the Prime Minister and Council of Ministers 9. Industry, Employment and Labor Relations 9.7 Programs will be formed and thereby implemented related to working place accident, reproductive health and insurance of labors’ health from the Social Security Fund formed to use in social and economic interest of labors.
Operating Modalities Legal Framework
“The Social Security Fund is
not for economic activities, but for universalizing the social security throughout the country.” Mr. Kewal Bhandari, Executive Director, SSF Secretariat.
The government has adopted strategies with a view to effectively implementing peace and security system through providing state social security to all the social groups and sectors as well as through control of unwanted activities in the society. The laws currently facilitating and enforcing the good functioning of the institution include the Social Security Regulation 2067, the draft Social Security Act and the Labor Law. The proposed Labor Law is expected to finalize the share of contribution from the employers and employees. With the establishment of the SSF Secretariat, works related to physical and legal framework was initialized as a result of which a draft of
the SSF Act has been prepared. However in the absence of a parliament, the SSF Act is yet to be endorsed.
Fund Management and Organizational Structure
Since its endorsement in the Budget Speech, a Secretariat for the SSF has been established within the premises of Kathmandu District Development Committee and under the jurisdiction of the Ministry of Labor and Employment, located at Babarmahal, on August 29, 2011. The Secretariat is responsible for mobilizing, monitoring and communications of the fund from this location since FY 2011/12 (2068/69). The Secretariat is supported with an Executive Director, two Directors and four
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Figure 2: Organizational Structure
Ministry of Labour and Employment
Board of Directors
Section Officers with distinct duties and employs a total of 15 deputed staff at its office. To ensure efficiency in managing and operating the Fund, a tripartite management has been formed, chaired by the Secretary of Ministry of Labor and Employment and consisting 11 members.
Membership and Funding Sources
The fund currently has approximately one million declared members contributing to the fund, while 50 percent of the contribution is coming from the government, civil services, police and
“We are anxious and Board of Directors: 1. Chairperson- Secretary, Ministry of Labor and Employment 2. Member- Joint Secretary, Ministry of Finance 3. Member- Joint Secretary, Ministry of Labor and Employment Ministry 4. Member- Joint Secretary, Ministry of Law and Justice 5. Member- President, Federation of Nepalese Chamber of Commerce and Industries/ Representative 6. Member- President, Chamber of Nepalese Industries/Representative 7. Member- President, Nepal Chamber of Commerce / Representative 8. Member- President, All Nepal Federation of Trade Union/Representative 9. Member- President, Nepal Trade union Congress/ Representative 10. Member- President, General Federation of Nepalese Trade unions/ Representative 11. Member Secretary- Executive Director
army. The SSF Secretariat has scoped to bring about 1.8 to 2 million as members under its net. As stated in the regulation, all employees from the government and non government sectors have to deposit one percent of their taxable earnings. However, the SSF regulation also has provisions for funding from up to equal contributions of 10 percent each from the employers and the employees, bonus secured from the Labor Welfare Fund, voluntary deposits, amounts from the Government, foreign governments, multilaterals and others.
looking forward to the implementation of the SSF Act. However, the SSF Act and the Labor Law must be implemented together as this will benefit employers, employees and improve the overall industrial and labor relations.”
The Social Security Fund being newly established in Nepal will provide incentives to the employees of the private and public formal sectors. Its regulations and policies are being tailored towards bringing the workers to the social security net to increase their work performance significantly and provide social protection. Currently, a draft of the Social Security Act has been prepared and the Ministry of Labor and Employment has also prepared a draft bill for establishment, operation and management of Contributory SSF that, among others, makes it mandatory for employers of the formal sectors to enroll all employees in social security schemes introduced by the government.
“The SSF is being implemented with the coordination and involvement of the government,
employer and employees. The three schemes agreed by the state and the phase wise extension of the social security system to all has generated new hope to all parties concerned.” GEFONT
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SSF: Future Development and Improved Services The process for collecting funds under Social Security was initiated from FY 2009/10 (2066/67) and the Secretariat in collaboration with the Ministry of Labor and Employment are in the process of further improving the social security services for the better performance of workers in Nepal. The Secretariat is currently creating the required technical and administrative workforce, and making arrangements for legal and infrastructural framework for the secretariat. In addition, the Secretariat is in the process of developing insurance programs and designing an appropriate Management Information System. But much more needs to be done. Therefore, the Secretariat is seeking partners to support their various initiatives to strengthen to role of the Secretariat, including:
Key Achievements of the SSF Secretariat
• Collection of Nepalese rupees 2.83 billion under the Social Security Fund • Contributions of 1million declared employees • Preparation of a draft Social Security Act • Preparation of a legal and infrastructural framework • Design and evaluation of Social Security Schemes underway • Awareness raising initiatives geared at employers/employees
• Database Creation: To keep track of individual contribution and provide the incentives to the workers, the SSF Secretariat is creating a database outlining the individual contributions made by each employee and contributor. This effort is being initiated in the absence of an account head for handling social security tax, to prevent diversion to other government accounts and to speedup processing of benefits. • Inclusive social security net: Currently, the SSF had initiated pilot programs to include only employees of the formal sector. However, it will soon broaden its base and integrate other sectors like the informal sector and migrants in the social security net in its programs. The SSF law permits to include all sectors under this net, however, it has not been passed due to political instability and the government and concerned stakeholders are working towards its legal approval. • Integrated Fund Creation: The SSF is working to establish itself as the sole fund to provide social security benefits in Nepal by integrating the various benefits provided by the Ministry of Health and Ministry of Federal Affairs and Local Development. • Unique Beneficiary Identification and Payment Assurance System: The Secretariat is working towards bringing out a unique identification for the beneficiaries to assure their payments by exploring opportunities to work in collaboration with the Election Commission, Poverty Alleviation Fund, Ministry of Health and Ministry of Home Affairs.
IFC, a member of the World Bank Group, is the largest global development institution focused exclusively on the private sector. We help developing countries achieve sustainable growth by financing investment, mobilizing capital in international financial markets, and providing advisory services to businesses and governments. In FY12, our investments reached an all-time high of more than $20 billion, leveraging the power of the private sector to create jobs, spark innovation, and tackle the world’s most pressing development challenges. For more information, visit www.ifc.org.
SouthAsia Enterprise Development Facility aims to create opportunities and improve lives. SEDF is managed by IFC, in partnership with the UK Government and the Norwegian Agency for Development Cooperation. SEDF facilitates the growth of small and medium enterprises by helping to improve their access to finance through a supportive financial infrastructure, financial products development and strengthening of financial institutions; and providing business services to strengthen value chains. SEDF also helps businesses adapt to the impact of climate change. SEDF operates in Bangladesh, Bhutan, northeast India and Nepal.
ABOUT NEPAL BUSINESS FORUM Nepal Business Forum provides a platform for public-private dialogue which is aimed at accelerating and facilitating the reform process by providing the government and the private sector with a structured, transparent and result-oriented mechanism through which they can deliberate on investment climate issues, and jointly agree on reforms. NBF was created by an Executive Order of the Government of Nepal in May 2010. The
SouthAsia Enterprise Development Facility supported the Government to design NBF based on recommendations and lessons learned from earlier IFC involved public-private dialogue initiatives in a number of other countries. The institutional framework of NBF consists of three committees and eight sectoral Working Groups, supported by a Secretariat. At the apex is the High Level Business Forum chaired by the Prime
Minister, the Steering Committee is chaired by the Industry Minister, the Private Sector Development Committee is chaired by the Chief Secretary, and the eight Working Groups are co-chaired by Secretaries of various ministries and Presidents of business membership organizations. For more details, contact Mr. Gopal Tiwari, NBF Secretariat Coordinator at firstname.lastname@example.org