Nepal’s export of juice, textiles, jute and cardamom, among other commodities to India received pressure and have shown a decline in the recent months due to changes in tariff structure in India’s GST that placed strict measures on imports, thus making exporting costlier for Nepal.

With this situation in place, cattle feed entered the race to stand out as one of the major contributors to Nepal’s export to India.

According to the Nepal Rastra Bank, Nepal exported Rs 2.41 billion worth cattle feed to India in the first half of the current fiscal.

However, Nepali cattle feed producing industries state that raw materials such as oil cakes are being exported to India under the ‘cattle feed’ category.

“Export of finished products (cattle feed) may not have increased considerably, but export of raw items (mustard oil cake, among others) has increased substantially,” says Anand Bagariya, Managing Director of a feed producing company called Nimbus Holdings Ltd.

Experts feel that there would be a gradual change in Nepali exports to India owing to the non-competitive nature of Nepal’s major export items to India (in the pre-GST regime) in the new tax regime.

International trade expert and former commerce secretary Purushottam Ojha also feels that Nepali exports to India are facing challenges with regard to sustainability.

“Following the Nepal-India trade treaty of 1996, which had provided more liberal framework in trade relationship, vegetable ghee and zinc oxide, among others became major export items to the southern neighbor,” says Ojha.

In this scenario, the experts feel both the countries should focus on competitive and a balanced trade.

While Nepal has two-thirds of its trade takes with India, the trade deficit between the two countries has been widening with the decline in Nepal’s export to India being inversely proportional to rising imports from India.

A Fall in Export

Nepal’s exports to India in the first half of current fiscal 2017-18 stand at worth Rs 23.07 billion against import of Rs 352.5 billion. While the import growth from India stood at 15 per cent in the review period, export growth to India stands at 13 per cent.

Nepal’s import concentration with India is increasing as it is comparatively cheaper to import goods from India compared to other countries due to fixed exchange regime between the two countries.

However, trade experts have said that the introduction of GST in India has provided an opportunity for Nepali exporters to diversify their trade because export to the Indian market has now become less competitive.

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The Government of India said this in its Gazette notification on October 27, 2017, wherein, it announced the removal of GST on supply of its services to Nepal and Bhutan in case of payments made in the Indian currency.

Though GST is not applicable on export of goods and services, it was exempted only for the payments that involve convertible foreign currencies.

With this, the cost of service exports involving cargo handling, transportation and container freight station became costlier. This turned into a burden for Nepalis, who usually transact with the Indian service providers in the Indian currency.

Following this, the Government of Nepal and the country’s private sector sought GST exemption on Indian service exports to Nepal.

In response, in the last week of September 2017, the Indian Government announced GST removal on Indian services involving transit operations such as shipment, transportation, insurance, container freight station and cargo handling charges, among others for Nepal and Bhutan.

Transit and cargo handling are among the major service imports Nepali traders get from India.

Decision Positive for Nepalis

According to Hari Bhakta Sharma, President of the Confederation of Nepalese Industries (CNI), the removal of GST would save Rs 10 billion per year on service imports for Nepali traders.

Rabi Shanker Sainju, Joint Secretary at the Ministry of Commerce Nepal, opines that the decision makes it easier for Nepali and Bhutanese traders to transact in Indian currency, which is widely circulated in both the countries.

The recent amendments to GST rules on the recommendation of GST Council of India will boost service exports from India to Nepal, Sainju added.

It’s noteworthy that the Nepal Rastra Bank also encourages Nepalis to make payments in Indian currency.

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In the wake of India’s GST regime, Nepali industries should focus on increasing competitiveness to tackle cheaper imports from India, says the Nepali industry community.

“Domestic industries should ramp up their competitiveness to tackle the cheaper imports from India,” said Shekhar Golchha, Senior Vice-President of the Federation of Nepalese Chambers of Commerce and Industry (FNCCI).

In an interaction programme titled ‘Goods and Services Tax in India: Implications for Nepal’, organized by South Asia Watch on Trade, Economics and Environment (SAWTEE), Shekhar Golchha noted that GST may also hit India’s Foreign Direct Investment (FDI) in Nepal as the GST system has lowered cost of doing business in India.

According to Golchha, Nepal’s plan to bring in Indian investment into the Nepali production sector would also be affected if the Nepali industry fails to maintain pace with India in minimizing cost of production.

Meanwhile, Economist Keshab Bhattarai from the University of Hull, London noted that Nepal need not worry about GST because the tax is exempted on export from India. However, he added that “cheaper import from the southern neighbor may ruin the country’s production base if we are unable to improve our competitiveness”.

Posh Raj Pandey, Executive Chairman of SAWTEE, said that GST has boosted Nepali exports to India. SAWTEE’s study on top 30 Nepali export items concluded that export tariff for the top 28 items will rise. It is noteworthy here that GST is applicable on export from Nepal.

Pandey also noted a possible rise in unauthorized trade between the two countries. “This may encourage smuggling of goods from Nepal to India,” he added.

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In response to Nepal’s concerns about the impact of India’s Goods and Services Tax (GST) and the additional charges it would bring in, officials of India’s Ministry of Commerce and Customs, and Central Board of Excise and Customs have clarified that the country would not levy GST on Nepal’s third country imports and exports through India’s seaports and custom points.

As part of an awareness program on GST, the Indian government organized a meeting in New Delhi for high level officials from Nepal and Bhutan. Shree Krishna Nepal, deputy director general of Department of Customs (DoC) led the Nepali delegation to the meeting.

After the GST implementation came into effect on July 1, 2017, service charges had increased for terminal handling, delays and detention during the freight movement between India’s seaports and the Nepal border and vice versa.

Dhaniram Sharma, the spokesperson for Inland Revenue Department (IRD), said that while Indian officials have agreed to Nepal’s proposal to keep the charges unchanged or capped at the pre-GST level, they are yet to decide on the working modality.

India currently accounts for two-thirds of Nepal’s total trade.

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