This document summarizes research conducted on Kirana Pasals, which are small retail shops in Nepal. The research found that Kirana Pasals face significant regulatory burdens that prevent their growth. They must register with multiple government agencies, comply with various regulations around pricing, packaging, and labeling, and pay high taxes relative to their small profits. Accessing financing is also difficult due to the documentation requirements of banks. These regulatory burdens stem from a lack of clear definition of what constitutes a Kirana Pasal and the need to register with multiple agencies. The report recommends clearly defining Kirana Pasals and designating a single agency for registration to reduce these burdens and allow the shops to more easily formalize and potentially grow their businesses

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Economic Freedom has demonstrably remained at
the core of prosperity as shown by the Economic
Freedom of the World Report released by The
Fraser Institute and the Index of Economic Freedom
released by The Heritage Foundation annually. Nepal
has always ranked on the bottom half of both the
indices and for a long time in its history has remained
a nation struggling with slow economic growth,
poverty and poor quality of life for its people. At
the same time, developing economies like Nepal
are characterized by the ubiquity of micro, small
and medium scale enterprises demonstrating the
entrepreneurial nature of the population and their
struggle to earn a living. Therefore, examining the
relationship between the economic freedom and
this ubiquitous entrepreneurship promised a better
understanding for finding ways that could lead Nepal
towards prosperity. For us at Samriddhi, The Prosperity
Foundation, this was a very exciting task.
As people who have lived here all their lives, we
had often noticed that Kirana Pasals, small mom and
pop stores that adorn every street faced building.
They rarely grow to become medium or large-sized
operations, like department stores or supermarkets.
This observation called for this quest to find out
what prevented the growth of these independent
businesses run by entrepreneurial and hardworking
people and if it had anything to do with economic
freedom.
Using both primary and secondary data sources, this
research was conducted over the period of six months
(April – September 2013) and it helped us understand
an economic phenomenon which is part of the daily
life of most Nepalese and yet, has rarely been studied
before, let alone from the lens of economic freedom.
During the course of this research, we reached out
to more than two hundred and fifty Kirana Pasals
and asked them to tell us their story. We also used
a structured questionnaire asking them questions
related to ‘Nature of the Shop’, ‘Enterprise Operation
and Growth’, ‘Registration’, ‘Finance’, and ‘ Profit
Generation and Distribution’
For the purpose of this research, Kirana Pasals were
defined as micro or small enterprises that sell fast
moving consumer goods, have basic infrastructure
and use simple technology. The Industrial Enterprise
Act (1992) of Nepal characterizes such retail shops
under Small Service Industries. Enterprises with fixed
asset of value less than or equal to 30 million rupees
are designated under Small Industries in this act.
Growing one’s business means an unexpected
growth in regulations for Kirana Pasals. When
Kirana Pasals consider growth, it means adding more
value to products already being sold, adding the
variety of products being sold (which include imported
goods involving customs), falling under a higher tax
bracket and so on. A simple example that came up
during the research was of selling a local food item
Introduction
Economic Freedom Matters
Does Economic Freedom Affect Kirana Pasals in Nepal?
SUMMARY REPORT
September, 2013
Samriddhi, The Prosperity Foundation

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– beaten rice. Generally, beaten rice is sold right out
by the sack in the shops in weights as demanded by
customers. However, for ease and protection from
dust and other factors, many owners started pre-
packaging the beaten rice in plastic bags in standard
weights such as 500 grams, 1 kg, 2 kg and so on.
However, this invited another regulatory compliance
of labeling the packets. The shopkeepers that came
up with this innovative idea were actually persecuted
by the Standards department for not labeling the
packets. This is a simple example that shows that
as Kirana Pasal owners consider growing, there are
many issues of formalization, standardization, taxes
and other regulatory and non-regulatory issues.
The Kirana Pasal Story
Given current regulatory environment, survival
of the business is a more pressing concern
than growth for Kirana Pasals. Being a formal/
legal entity is important for Kirana Pasals to survive
and grow. However, in the current regulatory
environment, being legal is difficult. Enterprises are
required to register with Department of Cottage and
Small Industry, Department of Commerce, Inland
Revenue Department, and Municipality/ Village
Development Committee. As these authorities
don’t share information on registrations with each
other, enterprises are required to be registered with
each one separately. The required documentation
and processes differ for registration with each
authority and this makes the process of formalisation
cumbersome and costly. The laws and regulations
that are applicable to Kirana Pasals are scattered
across several acts, regulations and rules and are
enforced through several government agencies (List
of the laws, government departments in the detailed
report).
During the research, we saw that 74.8 precent of
the Kirana Pasals surveyed were registered. However
not all of those that were registered were registered
with both the central authority (PAN) as well as
the local authorities (Municipalities, Village District
Committee). Some were registered only with the
central authority, whereas others were registered
primarily with the local authority. Of those that
were not registered, 31.1% showed intentions of
registering with these authorities in the near future
27.9% showed no intention of formalising their
institutions and 41% were undecided. Also a serious
issue is the minimum investment threshold Kirana
Pasals (and other businesses) need to make in order
to be able to start a business. This pushes small
entrepreneurs like those running Kirana Pasals
to not start businesses and when they do, to
stay informal and consequently, forever small.
Generally, Kirana Pasal owners are aware of few of
those laws that are applicable to their business but
there always remain minuscule provisions and clauses
in about two dozen laws and policies which the
businesses would not be in compliance with, simply
because of the volume and scattered nature of those
regulations, which keeps the business always on
offence. This acts not only as a hindrance to growth
but as a challenge in mere survival of Kirana Pasals.
As inflation grows in the country and prices of
commodities rise, especially during major festivals,
Pavitra Bajracharya, who started working in a kirana pasal from age 10, is now the owner of “The Right Mart” which
he aspires to franchise. He has opened number of kirana pasals in kathmandu for over three decades and he says
he called his mart the “Right” mart because in this business, he wanted to do everything right in terms of following
rules and regulations. But to his dismay, he says ‘it is just not possible’. He is also currently the chairman of nepal
retailers’ association and shares several experiences of having to rescue many kirana pasal owners when they are held
in custody for trivial reasons such as not having the price board hung on certain side of the wall.

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the government without heeding several market
factors, also jumps at fixing the Maximum Retail
Prices (MRP) of commodities generally based on the
rates provided by the subsidy receiving state owned
enterprise selling commodities. There have been
instances of Kirana Pasal owners being held by
government authorities for not selling under the
government designated prices. Mr. U Shrestha of
U. Shrestha Mart expresses how this affects a simple
Kirana Pasal business.
Taxes are also something which further suppress
the growth of Kirana Pasals, especially those
that are registered. According to the current tax
code, enterprises with an annual turnover of less than
NRs. 20, 000,000 are registered as having a Permanent
Account Number (PAN) with the Inland Revenue
Department(IRD).Currently,theKiranaPasalspayNRs.
5000 if located in Metropolitan or Sub Metropolitan
Cities, NRs. 2500 if located in Municipalities and NRs.
1500 if located in other areas than the above two.
Those with turnover greater than 2 million rupees or
income greater than two hundred thousand rupees
are eligible to pay VAT tax of 13% and Corporate tax
rate for Private Limited Co., Limited Co., Partnership
Firm in the retail sector – a total of 25%. As per the
tax code the first 200,000 rupees for single and first
250,000 rupees of income for couples is subjected to
no income tax. The next 100,000 thousand rupees
for singles and couples and next 2,200,000 rupees for
singles (next 2,150,000 for couples) are progressively
taxed at the rate of 15 and 25% for singles. Above
this, the income tax rate jumps to 40%.
For Kirana Pasals, most of them fall below the
annual turnover of Rs.20,00,00.00 threshold and
the estimated average profit that they make is 5
percentage.1
This implies that their annual income
is NRs.100, 000. According to the above stated tax
regime, these firms should actually be exempt from
any kind of taxation. However, in reality, these stores
are currently required to pay Rs.3, 500 annually as
tax which is 3.5 percentage of their annual income!
While other citizens that report income less than
a hundred thousand rupees are exempt from
1 Based on estimated calculation of our research and
estimations of Association of Retailers, Nepal.
Ms. Rupa dahal is 30 years old and she has been running a kirana store for 5 years now. She opened the store in order to
supplement her husband’s income, as he earns only a small amount of money. She takes care of household activities and sends
her kid to school in the morning and spends the rest of the day at the store. Her store is very small, selling only grains, cigarettes
and some chocolates. Her store is registered and pays regular taxes to the government. However, she feels that the tax rate is too
high. A lot of goods that she sells earn her a meager 25 paisa profit per unit and even in that she has to pay as high as 10% in
taxes, she says.

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income tax, these store owners are forced to
pay 3.5 percentage of their income as tax.
Other than tax related compliance, standardisation
is used an excuse to persecute Kirana Pasals on
every aspect possible. Government standardisation
includes weights, packaging and even published price
list. This is often used as a measure whenever there
is a political pressure from consumer groups after a
bout of inflationary pressure. As a populist symbol
of doing something, the government first tends
to target the most accessible victims, Kirana Pasal
owners, to pass the blame to these ‘evil middlemen’
who are apparently causing the inflation. Examples of
the beaten rice case and the published price display
case shared earlier in the paper aptly demonstrate
this phenomenon.
These ‘standardization’ raids also provide a rent-
seeking opportunity for government officials,
as claimed by Kirana pasal owners during our
interviews. A Kirana Pasal owner we interviewed in
Shankhamul, Kathmandu shared an encounter he
had with a bureaucrat at his own store.
It was seen during our research that the concerns for
Kirana Pasals were not so much large bribes to high
officials, rather numerous petty bribes to low level
officials. It was noted that, when undertaking
official work, Kirana Pasal owners were required
to pay ‘tea money’ to low-level officials to get
the processes done. From the survey data however,
we found that only 2% of our respondents engaged
in bribing government officials. Notwithstanding
some response inaccuracies due to the reluctance to
divulge correct information regarding partaking in
bribery, the limited number of official process these
shops undergo could account for the low involvement
in bribery of government officials choosing to
remain largely informal. As many of these shops are
registered with at least one authority, this data would
indicate that incidence of bribery during registration,
that is, during the process of formalisation and with
law enforcement bodies is low for Kirana Pasals in the
Kathmandu Valley at any given government agency.
However, being registered in each of the agencies as
required by the several scattered laws is another story
altogether!
Accesstofinancewasanotherissueofimportance
while learning about growth possibilities for
Kirana Pasals. The main source of capital for Kirana
Pasals is micro finance institutions, particularly part of
the cooperative model. However, the capital available
from micro finance institutions are limited and often
more expensive than loans from commercial banks
and other financial institution. While loans from
commercial banks charge an interest of 12 to 15
percentage, loans from micro finance institutions
cost within the range of 20 to 30 percentage and
in some instances even go higher. To get access to
loans from banks and financial institutions, owners
are required to submit various documents that are
rather complex for small entrepreneurs to produce.
Banks require documents like business plans, balance
sheets, rental contract, letter of approval from
municipality, tax documents, asset valuation and so
on. Since most owners/manager of Kirana Pasals
have limited capital and little formal education in
business, documents like business plans, balance
sheet are hard to produce. Those that operate their
stores from rented property don’t have formal rental
contract and work largely on an informal basis with
their landlords. The landlord often would not have
undertaken proper procedures and received proper
authorisation to rent out the property. As most of
these stores often don’t function in a fully formalised
manner, they face problems in presenting many of
these documents. Getting asset valuation is an equally
Mr. U shrestha of U. Shrestha mart grew his
business to the level of mini-mart from just
being a kirana pasal. He says, when you decide
to grow, there are things like packaging, hiring-
staff, etc. That lead to higher operation costs.
But government does not regard these facts
before setting price ceilings and complying with
such standards drags the profitability down
drastically.

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time and cost consuming procedure. The problem of
complex documentation is further coupled by the
requirement of collateral. The owners are required to
produce personal property as collateral. 75% of all
loans acquired by our respondents required personal
property to be placed as collateral. We found this to
be particularly true with smaller stores that don’t have
much personal property to draw on in the first place.
Barriers to exit are also barriers to growth as
when entrepreneurs fail, they have to have an
opportunity to wipe the slate clean and start
again. This is almost not an option for retailers
such as Kirana Pasal owners in Nepal. The World
Bank’s Doing Business Report 2013 ranks Nepal 121st
in the world in terms of ease of closing a business. As
per the report, a firm heading towards insolvency can
expect to lose 5 years of time, 9% of the estate as
costs and a gain of less than 25%. They could close
up operations but they would still be officially active.
This also creates problems in keeping up to date
information on these stores. Since it is more difficult
to exit the business, this serves as a major barrier to
registration of Kirana Pasals. If it is very difficult to get
out of the business, there is no incentive to register
the business in the first place.
Based on this preliminary analysis of Kirana Pasals in
Kathmandu, the regulatory environment pertaining
to registration, taxation and standardisation are
immediate areas of concern. In a country that
practices progressive taxation and espouses the
values of ‘social justice’ it is ironic to see the most
vulnerable strata of entrepreneurs being victimized
by regulations and bureaucracy simply to achieve
populist ideals of ‘doing something about middlemen
and inflation’.
Therefore, based on the research and analysis
presented forward, we propose the following
recommendations that are easy to follow and
implement:
Milkyway Shopping Mart is a kirana pasal in shankhamul, kathmandu. During our interview, he recalled that a lady from
one of the monitoring departments walked into his shop and asked for special discounts. When she was denied of such
preferential treatment, she said that she worked with the monitoring office and even threatened to send a monitoring
team just because the storeowner did not yield to her initial request. The storeowner refused to offer her any special
treatment. From this experience, this entrepreneur drew a conclusion that the regulatory bodies are looking to take
unfair advantage of the entrepreneur like himself and reiterated that they have created such a business environment
where small and medium entrepreneurs just cannot make a decent living. It is very hard to even lawfully toil in nepal,
he added.

6. 1. WHAT IS KIRANA PASALS?
The biggest regulatory burden perhaps stems from
the fact that there is no clear definition in the
regulatory regime of what constitutes a ‘Kirana Pasal’.
Therefore, any reform geared towards Kirana Pasals
growth needs to start with a clear definition of what
constitutes a ‘Kirana Pasal’.
2. WHERE TO REGISTER?
The second step in reform requires defining a one
agency that records the registration of Kirana Pasals.
The fact that these agencies require to register in
multiple agencies naturally render them informal even
if they are registered with any one particular agency.
Such an agency should be a decentralized body such
that Kirana Pasals have an easy access to it. Any other
government agency that requires this information
can easily tap into the database of this one agency.
In Nepal, the Municipality in urban areas and the
Village Development Committee (VDC) in rural areas
seem to be the most feasible option under the current
governance structure. As long as the registration
requirement is limited to being registered with this
one particular agency, it would be easy enough for
these entrepreneurs to understand and comply. This
would also make them formal thereby rendering them
the benefits of being a formal enterprise.
3. HOW MUCH TO PAY AS TAXES?
The taxation regime currently in place seems to be
in conflict with itself. While a plethora of regulations
under income taxation requires Kirana Pasals to be
tax exempt, another regulation requires them to pay
3.5 percentage of their income as tax. During the
course of this research many shop owners expressed
willingness to follow tax regime if it were simplified.
Therefore, reforming the tax code and reducing it to
simply have all Kirana Pasals pay 1 percentage of their
annual profits as tax would widen the tax bracket and
also help Kirana Pasals operate legally. This kind of
regime can be administered through the Retailers’
Association such that the tax procedure is simple
and facilitated by the association and any kind of
shopowner can comply without having to hire brokers
and lawyers to deal with the taxation complexity that
exists today. This would also facilitate their growth.
4. WHAT STANDARDS TO FOLLOW?
Kirana Pasals that we reached out during this research
were also happy to comply with standards as long
as they were rational standards. It would be highly
presumptuous to imply that a government bureaucrat
who has never operated a Kirana Pasal would
be better able to fix standards for Kirana Pasals.
Therefore, Retailers’ Association which is more than
happy to take up this job could function as a voluntary
standards organization and issue certification to Kirana
Pasals that are willing to comply with its’ standards.
This would benefit the consumers in providing them
with assurance on the quality of the product they are
buying at the price that they are willing to pay and
also decrease the arbitrariness of persecution based
on random standards set by bureaucrats.
5. WHERE TO GET THE INVESTMENT
TO GROW?
One of the primary issues of concern for Kirana Pasals
is access to finance for being able to expand. In order
to deal with this problem, one area to work in is to
ease up regulations to establish insurance for Kirana
Pasals. The Cooperative Model is a round-about way
of approaching this problem. However, if the insurance
industry regulations eased up, the risk associated
with this sector would also be minimized. This would
then provide an incentive for commercial banks to
enter this market and provide loans on the basis of
business plans rather than on collaterals. This requires
reforming the regulation of directive lending as well
which is not necessarily achieving any of its intended
consequence but instead is perversely providing
added benefits to micro finance institutions which do
not get transferred to the ultimate beneficiaries that
it is intended for.
6. HOW TO EXIT?
Exit rules need to be simplified especially those
pertaining to tax. The Kirana Pasals should be able
to exit with relative ease as they have very less assets
and should have the provision to declare bankruptcy
when the enterprise fails. This would allow these
entrepreneurs to move on from sunk enterprises while
freeing up resources in the economy. This requires a
major overhaul in the exit regulations of Nepal.
P.O. Box. 8973 NPC 678 | 416, Bhimsengola Marga, Minbhawan Kharibot, Kathmandu, Nepal
Tel.: (+977)-01-446-4616 / 448-4016 | Fax: (+977)-01-448-5391 | Email: info@samriddhi.org | www.samriddhi.org
For more, see detailed report.