Industrial Enterprises Act 2016

New Legislation on Industrial Enterprises – Brief Highlights

January 31, 2017

Industrial Enterprises Act 2016 (2073 BS) (the “Act“) has been introduced with effect from November 22, 2016 repealing the Industrial Enterprises Act 1992 (2049 BS) (the “Previous Act”). However, certain provisions of the Act would be issued in the form of Regulation, which has not been formulated as of this date.

The Department of Industries (the “DOI”) continues to operate as primary implementing agency under the Act. The key provisions of the Act are set out below:

Industry Registration

The Act makes it mandatory for all the business activities falling under the definition of “industry’ to be registered as an industry.

Various registration requirements have frequently been cited as areas requiring reforms but the Act has missed this opportunity to re-evaluate the requirement of business registration. Further the Act does not have any new provisions which will assist reduction in cost of registration or doing business in Nepal.

Classification of Industry

•        The Act has given continuity to the general classification of industries on the basis of-(a) size of fixed asset investment, and (b) nature/sector of business. However, on the basis of size of fixed assets investment, the Act has newly added “micro industries” within the classification. Further, “Industries based on Information, Transmission and Communication Technology” has been added as a new classification on the basis of sector of business. The Act lists the industries falling within each classification and grants authority to the Industry and Investment Promotion Board to recommend to the Government of Nepal to alter the classification of industries.
•        The primary purpose of such classification appears to be the provision of fiscal and non-fiscal incentives on the basis of classification. However, such an approach is likely to create problem especially when a business in question does not fall under the category of “industries”. For example, previously the Government of Nepal has classified “investment business” as one of the categories of the industries and this category permitted foreign investment in Nepal. However, as the Act has not included such industry within the list, the DOI might take the view that foreign investment is not allowed in investment business; unless the same is notified by the Government of Nepal through Nepal Gazette.

Approval and Compliance Requirement

•        Multiple approval requirements have been imposed under the Act. For example, approval requirements are applicable for-(a) extension of the time period for bringing the industry into operation, (b) transfer of location of the industry, (c) liquidation of industry. Further, approval from Industry and Investment Promotion Board is also required for the registration of industry in which foreign investment approval has been granted by such Board. These approval requirements appear to be applicable to all kinds of industries irrespective of investment or sector of operation such as micro industries.
•        The Act has also provided for ongoing reporting and filing requirements. For example, each industry is required to notify certain details to the authorities upon bringing industry into operation and within 6 months from the date of expiry of the fiscal year. A notification is also required to be given to the authorities when the industries stop their operation. These requirements are sure to add cost of registration of business and satisfying ongoing compliance.

Environmental Compliances

•      Pursuant to the Act, industries should commence activity related to establishment and operation of industries only after completion of applicable environment studies. This provision provides for much needed clarity as there were certain practical difficulties where environmental clearance required prior to registration of the industry.

Corporate Social Responsibility

•       The Act makes it mandatory to allocate at least 1% of the annual profit (there is no clarity on whether it is to be calculated on pre-tax profit or post tax profit) to be utilized towards corporate social responsibility (the “CSR Requirement”).
•      The CSR Requirement is applicable to all (i) medium industries; i.e. industries having investment in fixed assets exceeding NPR 100,000,000 but less than NPR 250,000,000; and large industries; having investment in fixed  assets exceeding of NPR 250,000,000) and (ii) cottage industries and small industries having annual turnover more than NPR 150,000,000.
•       The fund created for CSR is to be utilized on the basis of annual plans and programs but in the sectors that are prescribed under the Act, however, such sectors are yet to be specified by the Act. The progress report of the utilization of the fund collected for CSR is required to be submitted to the relevant government authorities registered within three months from expiry of the financial year.

No Work No Pay and Restriction on Strikes

•        The Act has addressed the long standing demand of the industries seeking “No Work No Pay” provision and will most likely be helpful in addressing illegal strikes. The Act further restricts employees to carry out any strike which may affect the operation of an industry and its production.
•       The Labor laws provides right to strike without limitation (after completing notification and voting procedures) and is yet to be seen if the provision will assist in enhancing work environment, specially in manufacturing sectors.

Contract Manufacturing  

•        The Act clarifies that that the goods can be produced on the basis of the contract manufacturing arrangement entered between the producers of the goods. The concept also extends to supply of services.
•        This provision provides much needed regulatory clarity as the contract for manufacturing was undertaken on the basis of approval from the DOI on a case to case basis. The Act does not mandate prior approval of the DOI to enter into a contract manufacturing arrangement.
•        The Act also prescribes the provision where the contract manufactures can be provided exemption and benefit for providing of goods or services as per prescribed criteria to the export industries or export processing units. The Government is yet to issue notification related to such benefits and exemptions.

Incentives and Facilities to Industries

•        The Act has provided various fiscal incentives to industries, most of which were repealed after the introduced of the Income Tax Act 2002 (the “Income Tax Act”). The Income Tax Act was introduced with the concept that all tax related incentives will be covered by the Income Tax Act and Finance Act which is enacted every year. Generally, matters related to income tax, value added tax (VAT) and custom duty are governed by Fiscal Act.
•        In marked departure with this principle, the Act has introduced additional fiscal incentives. The manufacturing and export oriented industries enjoy most of the fiscal incentives. For example, the manufacturing industries (which excludes tobacco, alcoholic beverages, etc.) are entitled to 20% discount on the applicable tax rate (currently 20%) making the effective tax rate 16%.  The export income from export of goods are entitled to 25% discount making the effective tax rate from export income 15%. The exhaustive description of benefits is provide in Annex-I.
•        The Act provides statutory protection of changes in law in relation to benefits and exemption provided under the Act and other applicable laws. The stabilization provision states that no provisions shall be made to limit the benefits and exemptions prescribed under the Act and other applicable laws. This provision is introduced against the background that, stabilization provision was set-up mostly for infrastructure projects under the applicable laws but now all industries registered under the Act will be eligible to enjoy the benefits.

Offences and Sanctions

•      The Act has defined various non-compliances as offences and has also imposed sanctions. Offences that include; (a) operation of industry without registration, (b) failure to meet the reporting/filing requirement as set out under the Act, (c) misuse of facilities and incentives as made available under the Act, (d) non-fulfillment of the CSR Requirement, etc.
•        The sanctions under the Act include, (a) closure of industry, and (b) fine on the basis of types of industry. For example, a large scale industry is liable to fine ranging from NPR 100,000 to NPR 300,000 for operating without registration. Similarly, an industry is liable to fine amounting to 0.75% of the annual transactions for non-compliance with CSR requirement.
•        The sanctions are levied either on, (a) industry, or (b) responsible officer of the industry. The time limitation for filling an appeal against the imposition of sanctions is thirty-five (35) days. Such appeal can be filed at the concerned High Court.

Annex I

Fiscal Concessions for Different Industries

Note:

i.               Industries based on tobacco, liquor and kachha or kattha are not entitled to any of the exemptions or facilities listed above. However, such industries may deduct actual expenses incurred in business promotion activities including long-term welfare and benefit of employees or workers, in reducing or controlling pollution, re-processing of waste materials, in technologies and devices used reducing environment effects, in machine or equipment used for reducing power consumption, research and development expenses.

ii.              In case an industry qualifies for more than one exemption in respect to similar income from among those listed above, the industry is only entitled to one exemption. Such industry is entitled to select the applicable exemption.

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