It is seen that there are thousands of Indian working in Nepal without work permit? Is work permit compulsion for Indian worker?
Work permits are basically required for all foreigners irrespective of the nationality of the foreigners. However, in practice, a large number of Indian workers are working in informal sectors and as laborers in the industries or retails businesses without obtaining work permits. While some argue that Indian nationals are not required to obtain work permits as their migration to and employment in Nepal are regulated by the Indo-Nepal Peace and Friendship Treaty 1950, there is no explicit provision under the Indo-Nepal Peace and Friendship Treaty 1950 and Nepalese labour laws waiving the requirement of work permits for Indian nationals. Regarding Indian nationals working in skilled technical posts, labour law intends them to obtain work permit which is a simple procedural formality with less charge to avoid any potential compliance risks. For example, in case of repatriating salaries by the foreign employees, the Nepal Rastra Bank does not allow repatriation of salaries without furnishing work permit and tax clearance.
In addition, Nepalese labour laws clearly places a restriction on the employment of non-Nepalese citizens in Nepal except for some permitted conditions. The definition of non-Nepalese citizen in the Work Permit Guidelines 2014does not exclude Indian nationals. Hence, Indian Nationals need work permit to work in Nepal irrespective of the duration of such work as skilled worker. In addition, the Treaty of Peace and Friendship Between The Government of India and The Government of Nepal 1950 ("1950 Treaty") provides "the Governments of India and Nepal agree to grant, on a reciprocal basis, to the nationals of one country in the territories of the other the same privileges in the matter of residence, ownership of property, participation in trade and commerce, movement and other privileges of a similar nature". Based on the 1950 Treaty, Indian nationals do not require any kind of visa to travel to and stay in Nepal as it provides the privilege of “movement”. However, the 1950 Treaty has not specifically included "work".
In light of above, the provision of Section 4A of the Labor Act prevails over the 1950 Treaty thereby requiring work permits even for Indian Nationals. The fees applicable for work permit for Indian nationals is only NPR 5,000 while the same is NPR 10,000 for nationals of other countries.
Is it possible for foreigners to be appointed permanently? If not for how long the foreigners could be employed as expat?
No. permanent employment is possible for Nepalese citizens only whereas, foreigners can only be employed on contractual basis subject to obtaining work permit. Nepalese labor law provides that an employee could be appointed permanently subject to the completion of his/her probation period unless he/she completes the continuous service period of one year i.e. two hundred forty days at work during a period of twelve months and, based on his/her efficiency, sincerity discipline, diligence towards work, punctuality etc. In addition,an employee may also be appointed under service contract by fixing a time period of their services and setting forth the remuneration, service condition, benefits and allowances, termination and the terms of services etc. However, analyzing the appointment tenure of expats and the intent of labor laws, expats cannot be appointed on a permanent basis.
Work permits are granted for the period as recommended by Ministry of Home Affairs and as per Section 4A of the Labor Act for a maximum aggregate period of 5 years for skilled technical positions and a maximum aggregate period of 7 years for highly skilled technical positions, however, in practice, work permits are granted for one year at a time and may be extended beyond above-mentioned aggregate period under special decision of Department of Labor for foreign nationals engaged in non-profit and charitable organizations on the basis of their special contributions.
Thus, the tenure as stipulated in the Labor Act is 5 years maximum term for skilled technical staff and maximum 7 years term for highly skilled technical staff not exceeding two years at one time. In general practice, even though an employer requests for 2 years' work permit at one time, the Department of Labour only issues work permit for one year (previously the Department of Labour used to issue of 6 months only) and if not renewed, employment contract may get terminated with the employer. However during that period, the organization requires to make arrangement for training Nepalese staff who can replace the expat staff after the expiry of tenure of expat staff. To ensure that an organization has been engaging a person, it requires giving detailed information about such engagement and training to the concerned governmental agency during the process of applying for work permits.
Hence, as foreign skilled expat may be appointed for a fixed period of time and their continuity is subject to the renewal of work permit which bars them to be permanent.
Can spouse of the foreigner on work permit of other special visa can work freely?
No, this is not possible in Nepal. Spouses or dependents of the foreign expats are seen to be engaged in various organization including multinational companies and INGOs. Spouses of dependents of foreign expats or any other person under official visa, business visa or non-tourist visa are also prohibited to work in Nepal and they also need to go through the same process as expats are hired.
Can foreigner work with other organization upon termination with previous employer but within the tenure of work permit?
Work permit processes in Nepal are facilitated by employers themselves. As the process of obtaining work permits directly relates to the employer's recruitment policies and the status of employer's compliance with labor laws, an employer is required to produce various documents and justification in support of work permit applications. Hence, work permits are granted to an expat upon the confirmation of job, facilities and compliances by an employer. The work permit Identity card (Green Card) thus requires details of the employer and the concerned employee's job position. Therefore, it shall be the duty of an employee to ensure that the proposed expat staff has not worked with other than the employer. The immigration law and labour law thus prohibit expat to use the work permit to the benefit of other employer. Hence, it shall be the duty of employer to inform to the Labor Department about the expat who has left the organization with valid work permit and non-tourist visa. Thus, change of employment invalidates the work permit received for prior employer.
Finally what could be the tax implication to the foreigners working in Nepal?
Foreigners should determine their residential status for each financial year, after they enter Nepal for the first time. Normally, a person becomes resident if s/he stays in Nepal for a period of more than 183 days in a financial year. If the foreigner is resident, principally he/she needs to declare his/her global income in Nepal and pay tax here. But if he is non-resident, he is subject to tax in Nepal sourced income.
Can foreigners be paid in the home country for the work performed in Nepal for whichever period? How the tax law regulates in these respects to those foreigners?
The foreigners can be paid in their home country. There is no restriction on this. But responsibility to pay tax in Nepal remains here for any work they perform in Nepal. This applies for both resident and non-resident expats and so is applicable even if the foreigner worked in Nepal for few days. Work done in Nepal is Nepal sourced income and irrespective of whether they are paid in Nepal or their head office, tax should be paid in Nepal. Practically, we are facing issues on this because of lack of administrative capacity of Nepal Government to implement these sourced based principal.
How could foreigners get benefit of double taxation avoidance treaty between Nepal and foreigners home country?
Nepal has a limited double tax treaty network, with only 10 countries. If the foreigners belong to one of the treaty country, they are required to pay tax in Nepal only if they are resident in Nepal or if the employer has a permanent setup here. Any tax paid in Nepal can be claimed as credit for their home tax liability based on double tax avoidance agreement. Several countries in the world give unilateral foreign tax credit for resident tax payer even if there is no double tax agreement. The expats should check this provision in their tax law.
What could be the consequences of not abiding by the legal formalities?
Failure to comply the conditions of laws, rules, and guidelines may end up being fined and facing other penalties and even closure of operation of an organization in the worst case. In case of expats, they may face work permit cancellation, rejection, rejection on entry, fine, expulsion/deportation and imprisonment as stated in the notice above. In addition, if an expat employee is hired in violation of the above-mentioned statutory formalities and procedures, the employer and the employee may face legal consequences under labor laws as well as the immigration law which include fine and prohibition of repatriation of salary or benefits.
(This is extract of an interview published in Nepalipatra on 31 August, 2016. The first part can be accessed here. Nepal Tax Online has a special package covering immigration and expatriate tax issues for subscription. Details are available in our pricing page under INGO-Premium.)