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
Approval and Compliance Requirement
Environmental Compliances
Corporate Social Responsibility
No Work No Pay and Restriction on Strikes
Contract Manufacturing
Incentives and Facilities to Industries
Offences and Sanctions
Annex I
Fiscal Concessions for Different Industries
A. Income Tax Concessions | |
Industry | Concessions |
Manufacturing Industries | 20% exemption on the rate of tax imposed on the income earned from such industries. |
Industries investing in construction of roads, bridge, tunnel, Ropeway, Railway, Tram, Trolleybus, Airport, Industrial Structure and Infrastructural Complex and bringing such constructions into operation | 40% exemption on the rate of tax imposed on the income earned from operation of such infrastructures. |
Manufacturing industries except those producing fruits based cider, brandy or wine established in Under Developed, Undeveloped and Less Developed Region | 90%, 80% and 70% exemption on rate of the income tax for up to 10 years from the date of commencement of commercial production or transaction |
Manufacturing industries producing fruit based cider, brandy or wine established in any Under Developed Region | 40% exemption on the income tax for up to 10 years from the date of commencement of business |
Manufacturing Industries set up with the investment of at least 1 billion rupees and providing direct employment to more than 500 individuals throughout the year | 100% income tax exemption for first five years from the date of commencement of business.
50% exemption on the income tax for next 3 years. Industries already in operation are entitled to the above stated exemption in case such industries enhance their installed capacity by at least 25%, increase investment to 1 billion and provide direct employment to 500 individuals throughout the year. |
Individuals or entities obtaining approval to commercially generate transmit or distribute Hydroelectricity by mid-April 2024 A.D. (Chaitra 2080 B.S.) |
100% income tax exemption for first 10 years 50% income tax exemption for next 5 years. Such exemption is entitled to Solar, Wind and Bio Mass energy as well. In case of industries that have already begun commercial production at the time of commencement of this Act, the exemptions applicable at the time of receiving approval would be applicable. |
Industries conducting research and excavation of natural gas and fuel commercially, if commence the commercial transaction by mid April 2019 A.D. (Chaitra 2075 B.S.) | 100% Income tax exemption for first 7 years from the date of commencement of transaction;
50% exemption on the income tax for next 3 years.. |
Industries relating to Tourism Sector established with the investment of above 2 billion rupees | 100% Income tax exemption for the first 5 years from the date of commencement of commercial transaction
50% exemption on rate of Income Tax for next 3 years Such Industries already in operation are entitled to the above stated exemption in case such industries enhance their installed capacity by 25%, increase investment to 2 billion. |
Tourism Industry including hotel, resort etc. established outside the metropolitan or sub-metropolitan area with the investment of more than 50 million | 100% Income tax exemption for the first 5 years from the date of commencement of commercial transaction
50% exemption on rate of Income Tax for next 3 years |
Industries related to software development, data processing, cyber café and digital mapping established inside technology park, bio-tech park and information technology park specified by Nepal Government by publishing notice in Nepal Gazette. | 50% exemption on tax imposed on income of such industries |
Manufacturing Industries and Information and Communication Technology Industries employing 300 or more Nepalese throughout the years | 15% exemption on tax imposed on income of such industries on that year
(Additional 15% exemption on income tax on that year in case the industry has 50% of its employees from among Women, Scheduled Caste and Disabled person) |
Manufacturing Industries and Information and Communication Technology Industries employing 1200 or more Nepalese throughout the year | 25% exemption on tax imposed on income of such industries on that year
(Additional 15% exemption on income tax on that year in case the industry has 50% of its employees from among Women, Scheduled Caste and Disabled person) |
Manufacturing Industries exporting goods or commodities produced | 25% exemption on the rate of tax imposed on the income earned. |
All industries | Expenses made by industries for long term welfare and benefit of employees or workers such as housing, life insurance, health facility, education and training, child care, sports etc. can be deducted for purpose of income tax.
Expenses made for equipment & technology used to reduce or control the pollution or re-processing or reuse of wastages can be deducted up to 50% of the adjusted taxable income of the same fiscal year. In case the expenses cannot be deducted in full the remaining amount is allowed to capitalize the depreciation on which may be claimed in the subsequent fiscal year. Expenses incurred for the machine or equipment used for reducing power consumption can be deducted for the purpose income tax. The costs incurred for increasing entrepreneurship, research and development and creation of new technology for enhancing the productivity of the industry can be deducted while calculating taxable income for an income year from business provided that such deduction does not exceed 50% of the adjusted taxable income from all business of the industry. In case the expenses cannot be deducted in full the remaining amount is allowed to capitalize the depreciation on which may be claimed in the subsequent fiscal year. |
Costs incurred in market promotion, survey and advertisement relating to the business can be deducted for the purpose of income tax.
Costs incurred for the security of the physical assets as prescribed and actual premium paid for insurance can be deducted for the purpose of income tax.
Costs incurred for the protection of industrial property in Nepal which is registered in Nepal can be deducted for the purpose of income tax.
25% exemption on the rate of income tax on royalty received from export of Intellectual Property created and registered in Nepal.
50% exemption on the rate of income tax on income earned from transfer or sale of intellectual property created by the industry.
Government of Nepal may reimburse the registration fee paid to register the intellectual property in foreign country for its protection in the manner as prescribed by Nepal Government.
Gifts or donations given to tax exempted organization can be deducted up to Rs. 100,000 or 5% of adjusted taxable income of the industry, whichever is less
The Government of Nepal may also provide other exemptions by publishing a notice in Nepal Gazette.
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Industries established inside Industrial Estate | Local Taxes including Unified Property Tax is not levied |
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.
B. VAT Exemptions | |
Industry | Benifits |
All Industries | VAT imposed on production is reimbursed if such goods are exported, based on the quantity of export. |
C . Customs duty Exemption | |
Industry | Benifits |
Industries not having Bonded Warehouse or Passbook facility | The Government of Nepal may refund the amount of Duty Draw Back in export of goods after determining the aggregate of costs incurred in import (Samadar) as prescribed in Nepal Gazette. |
Industries not having Bonded Warehouse approval exporting goods through existing Banking Channel or Letter of Credit or selling such goods in domestic market in convertible currency | Raw materials or auxiliary raw materials as well as packaging materials that are not produced in Nepal can be imported by furnishing the required guarantees under prescribed conditions and procedures.
However, in case of packaging materials not produced in Nepal, a recommendation is required from IRD to enjoy stated benefit. The Custom Duty levied in the import of such raw materials, auxiliary raw materials and packaging materials required for production shall be one level below the existing Custom Duty rate in import of finished goods using such materials. |
Laboratories for Quality Assurance | Custom Duty is levied in the minimum rate for the import of machinery and scientific devices that re being imported to ensure quality as well as such machinery and equipment imported by industries for research and development. |
All Industries | Custom duty is levied in the minimum rate on import of machinery, transformers, generators having a capacity of 10 Kilowatt and other industrial devices imported by an industry for commercial purpose. |
D . Customs duty Exemption |
Notwithstanding anything mentioned in existing acts, no fees or charges is levied on registration of micro industry pursuant to this Act. |
Micro Industries already under operation at the time of commencement of this Act are entitled to 100% income tax exemption for at least 5 years from the date of commencement of this Act. |
Micro Industries registered and operating pursuant to this Act are entitled to 100% income tax exemption for at least 5 years from the date of commencement of commercial transaction. |
E . Additional benefits for Female Entrepreneurs : Industries registered under the ownership of Female Entrepreneurs only are entitled to following additional benefits and concessions: |
35% exemption in existing Industry Registration Fees |
20% exemption in existing rate of registration of Industrial property used inside the industries |
Female entrepreneur shall be prioritized while allocating the areas inside Industrial Estate |
In case such industries require loan for exporting produced goods, export loan will be provided to the industry depending upon the financial status of the transaction of the industry. |
F. Other Exemptions and facilities |
Industries based on forest products can be given possessory right pursuant to existing laws over forest in any region through lease or other promissory guarantee under prescribed conditions. |
No fees or royalty pursuant to the existing laws shall be applicable in electricity produced by industry for its own consumption.
Such industry willing to sell surplus electricity to any other industry, may sell so pursuant to existing laws in the rate agreed upon by both parties. |
Government of Nepal may provide additional exemptions and facilities to export based industries and prescribed industries established inside Special Economic Zone or inside Government or Private Industrial Estate by publishing notice in Nepal Gazette. |
Government of Nepal may provide additional exemptions and facilities by publishing a notice in Nepal Gazette to National Priority Industries or industry making optimum use of domestic raw materials, labor or skill or industries established by inventing new technology or goods inside Nepal upon recommendation of Industries and Investment Promotion Board. |
Government of Nepal may provide exemptions in Demand Charge added in Electricity cost under prescribed conditions and procedures. |
Government of Nepal may provide aid assistance as seed capital to cooperatives, micro industry, small and cottage industries to establish industries inside Under Developed Region under prescribed conditions. |
Industries operating under Foreign Investment may be given approval to import goods produced by the head office located in foreign countries for production, market development and promotion of new goods for a prescribed period under prescribed terms and conditions. |
Disclaimer: This Pioneer Law Briefing may not necessarily deal with every important aspect of the subject matter. This Briefing is intended for general information only and not to be construed as legal or other advice.