The Nepal Civil Aviation Authority (NCAA) has decided not to pay Rs 2.25 billion to a Chinese construction company that built Pokhara Airport, after reports highlighted tax exemptions granted to the firm.

The Auditor General’s 60th report and the Public Accounts Committee report noted corruption related to tax exemptions. The airport, constructed under a Chinese loan, was built by China CMSM Engineering Company, which received exemptions from customs duties, tariffs, and value-added tax totaling Rs 2.224 billion.

Recently, the government published a notice in the Nepal Gazette regarding tax exemptions for contractors working under MCA Nepal, funded by U.S. aid. The Cabinet used its authority under Section 18(1) of the Finance Act, 2082 to grant income tax exemptions for the fiscal year 2082/83 to companies registered in Nepal or having a permanent establishment while working under the MCC Compact. The notice was published in the Gazette on Kartik 20, 2082.

This decision has sparked criticism on social media, with some accusing the government led by Sushila Karki of favoring foreign companies. Many are questioning the fairness of granting tax exemptions to MCA Nepal while local taxpayers face scrutiny.

MCA Nepal responded, stating that the tax exemptions were part of the original agreement with the Government of Nepal and the MCC Compact. They cited Section 2.8 of the MCC Compact, which explicitly mentions tax exemptions and their conditions. MCA Nepal added that all companies working under MCA in Nepal are eligible for income tax relief, and similar exemptions were applied in previous fiscal years.

Construction Industry View:
Ravi Singh, president of the Construction Entrepreneurs’ Federation, said that tax exemptions are common in global tenders and aid-funded projects. However, he noted that for Pokhara Airport, the tender did not initially mention tax relief, and later exemptions may appear as arrears. Singh also clarified that income tax should only be paid once in a single country according to standard rules.

Auditor General’s Comment:
Officials from the Auditor General’s office noted that if tax exemptions had been mentioned in the tender, they would have been valid. However, for Pokhara Airport, exemptions were decided after the tender, creating the appearance of unpaid dues.

Ministry of Finance Statement:
A senior official confirmed that MCA Nepal received exemptions according to the MCC Compact, calling it a standard procedure, not a new issue.

Tax Exemptions Under MCC Projects

The MCC Compact allows exemptions on customs duties, VAT, and internal taxes for imported materials and income earned by companies working under MCA Nepal. However, Nepali employees working under MCA do not receive tax exemptions.

Some ongoing MCA projects eligible for tax exemptions include:

• Lapsiphedi–Ratamate–New Hetauda 117 km, 400 kV Transmission Line (contracted to Ashish–Bojlar Company)
• Ratamate–New Damauli segment (contracted to Angelic–Skipper JV)
• New Damauli–New Butwal segment (contracted to Vaiba–Salsar JV)
• New Butwal Substation (contracted to Linson India)
• Transmission lines and substations contracted to Techno Electric Engineering and Transrail Lighting

These companies are eligible for income tax exemptions as per the MCC Compact agreement.