Facilities and Exemptions of tax of Industries

In order to give big press on to increase investment in the industrial sector and to attain
economic growth through production and export of goods and services Nepalese
entrepreneurs have been suggesting to the Gov't of Nepal to make suitable tax policy
reforms for export promotion for a long time. The government now seems to be serious
about facilitating exports by designing timely and suitable tax policy. However, this class
paper has not mentioned the policy provision on tax facilities and exemption as well as
concession.
The Gov't of Nepal has enacted several legal provisions relating to the facilities and
exemptions to the different industries and enterprises for industrialization and increased
investment for productivity of the nation. The main objectives of these legal mechanisms are
to collect the revenue, custom duty and income tax. Mainly the Income Tax Act (ITA), 2058
(2002 A.D.) is relevant to this topic. It is the umbrella act to collect the tax under the territory
of Nepal. However, the Income Tax Act, 2001 has provided facilities and exemption of tax of
industries. This act has provided the tax facility and exemptions into two categories
individual and professional/enterprises but IEA, 2076 has deals with the facilities and
concessions to be provided to the industries and enterprises only; any individual is not able
to get the facilities and concessions of tax under the provisions of Industrial Enterprises Act.
There are several legal provisions have provided different types of tax, tax facilities,
exemption and concessions, which are as follow;
(a) Income tax
(b) Customs duties
(c) Local taxes
(d) Other taxes
The main objective of ITA, 2058 is to make timely the law relating to income tax by amending
and consolidating it in order to enhance revenue mobilization by making the process of
collecting revenue effective for the economic development of the country.
Before discussion of the facilities and exemptions of industries, the most important part is
what is the taxable income and classification of income headings? It has provided by the
Section 5 of Income Tax Act, 2058; where as provided that the taxable income of any person
in any income year shall be equal to the amount computed by subtracting the amount, if any,
claimed pursuant to Section 12 or 63 from the grand total amount of assessable income of
each of the following income headings in that income year:
(a) Business,
(b) Employment, and
(c) Investment
"Organization entitled to enjoy exemption," is defined on section 2(s) entitled to enjoy
exemption is obtained the license from concerning department, which are as follow;

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(1) A social, religious, educational, or benevolent organization of public nature
established with non-profit motive,
(2) An amateur sports organization so formed with a view to promoting social or sports
related facilities that the organization or its members does not derive profits,
(3) A political party registered in the Election Commission,
(4) Village Municipality, Municipality, or District Assembly,
(5) Nepal Rastra Bank,
(6) Government of Nepal,
(7) An entity as prescribed and entitled to use tax exemption by an advance ruling issued
under Section 76,
In cases where any person has derived any benefit from the property of that organization
and the monies obtained from that organization except in making payment for the property
or the service provided by any person to that organization or in discharging functions in
consonance with the objective of the organization entitled to exemption, tax exemption shall
not be granted.
Under the ITA, 2058 has provided the Professional exemptions and facilities on section
11 (1) No tax shall be levied on an income earned by carrying on an agricultural business
by getting one registered as a firm, company, partnership and corporate body and on
agricultural income other than that earned from an agricultural business in the land as
referred to in clauses (d) and (e) of Section 12 of the Act relating to Land, 2021(1964).
Sub-Sect(2) of section 11 has provided that no tax shall be levied on the income of a
cooperative organization and saving and credit cooperative organization or institution,
which has been registered and operated under the Cooperatives Act, 2074 and which
carries on agricultural and forest based industries such as professional forest related
enterprises inclusive of sericulture and silk production, horticulture and fruits processing,
animal husbandry, dairy industry, poultry farming, fishery, tea gardening and processing,
coffee farming and processing, herbiculture and herb processing, vegetable seeds farming,
bee keeping, honey production, rubber farming, floriculture and production, leasehold
forestry, agro-forestry etc., cold storage established for the storage of fruits, agro-seeds,
pesticides, fertilizers and agricultural inputs (except those operated with mechanical
power). No tax shall also be levied on the dividends distributed by such organization or
institution.
Sub-section (3) of section 11 of ITA, 2058 has provided that tax shall be levied on the income
earned by any person from a special industry and information technology industry in any
income year;
Industry Tax levied
gives direct employment to 100 or 90% of the rate of tax leviable on the income of
more Nepali citizens throughout the that year
year

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gives direct employment to 300 or 80% of the rate of tax leviable on the income of
more Nepali citizens throughout the that year
year
gives direct employment to 500 or 75% of the rate of tax leviable on the income of
more Nepali citizens throughout the that year
year
gives direct employment to 1000 or 70% of the rate of tax leviable on the income of
more Nepali citizens throughout the that year
year
if the person gives direct employment to one additional 10% exemption shall be
hundred or more Nepali citizens throughout the provided
year including thirty-three percent from among
women, Dalits or persons with disability
a special industry has been operated in respectively 10%, 20% and 30% of the tax
remote, undeveloped and less leviable on income of the years for up to 10 years
developed areas, after industry starts its business production or
transaction
an industry is established with an investment of shall be provided with full income tax
more than 1000 million rupees and providing exemption for 5 years from the date of
direct employment to more than 500, such starting of its transaction and 50% for
special industry and tourism industry (except the 3 years afterwards
Casino)
Sub-section (3a) of section 11 of ITA, 2058 has provided that the exemptions shall be made
from the income tax in income of the industry established in special economic zone and
tax on dividends distributed by such industry as follows;
Industry Tax levied
industry established in special economic 100% income tax exemptions for ten years
zones mountainous district and hilly from the date of starting of its transaction and
district as specified by the Government of 50% afterwards,
Nepal, such special industry
The industry established in special economic zones 100% income tax exemptions for
in other area except that special economic zones five years from the date of
mountainous district and hilly district by the starting of its transaction and 50%
Government of Nepal, afterward,
Dividends distributed by the industry tax exemptions on such dividends 100% for
established in special economic zone, five years from the date of starting of its
transaction and 50% for three years
afterwards
Income by the foreign investors from foreign 50% in such income tax
technology or management service charge or
royalty in the industry established in special
economic zone
Sub-section (3b) of section 11 of ITA, 2058 has provided that;

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a person having transaction in The whole income tax shall be exempted for
exploration and excavation of the first seven years from the date of operation
minerals, petroleum product, of its transaction and 50% exemption shall be
natural gas and fuel continues the granted for three years afterwards.
commercial transaction till Chaitra of
2080 (mid-April of 2024),
Sub-section (3c) of section 11 of ITA, 2058 has provided that;
industry related to software development, data fifty percent exemption from
processing, cyber cafe, digital mapping income tax.
established in the zoological, geological, biotech
park operation and technology park specified by
the Government of Nepal by a notification in the
Nepal Gazette
Sub-section (3d) of section 11 of ITA, 2058 has provided that;
the licensed person or entity provided 100% income tax exemption for the first
commencing commercial 10 years after starting commercial production, and
production, transmission or 50% exemption for another 5 years afterwards.
distribution of hydropower till Such facilities shall also be available to electricity
Chaitra of 2080 (mid-March of generated from solar, wind and biological
2024) substances.

Sub-section (3e) of section 11 of ITA, 2058 has provided that;

tax exemption If tax is chargeable at the rate of 20% on an income of an individual
on income resident, 25% of that tax and if 30% is taxable, 50% of that tax and 20% of
earned from tax leviable on the income of an entity, 25% of the tax on income earned
export from export of goods produced by a production-based industry, after
deduction of the exemption under clause (a) or (b) of sub-section (3e) of
section 11
Sub-section (3f) of section 11 of ITA, 2058 has provided that;
income operation of a tram or trolley bus 40%
earned by any build and operation of a ropeway, cable car or sky bridge 40%
entity by construction and operation of road, bridge, tunnel road, tunnel, railway
doing ….. and airport 50%.
Sub-section (3g) of section 11 of ITA, 2058 has provided that;
production based, tourism service, hydropower fifteen percent exemption form the
generation, distribution and transmission entities payable tax
enlisted in securities market and the entities
mentioned in sub-section (3c)
Sub-section (3h) of section 11 of ITA, 2058 has provided that;

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industry established in remote and 40% and 25% exemption from income tax
underdeveloped area producing brandy, for 10 years from the date of
cider and wine based on fruits commencement of the transaction.
Sub-section (3i) of section 11 of ITA, 2058 has provided that;
Any person receiving royalty income from 25% exemption at the rate of income tax
exportation of intellectual property leviable on such income
Sub-section (3j) of section 11 of ITA, 2058 has provided that;
Any person receiving income from the sale 50% exemption at the rate of income tax
through transfer of intellectual property leviable on such income
Sub-section (3k) of section 11 of ITA, 2058 has provided that;
The industry related to tourism or the airlines full exemption for 5 years from the date of
company operating international flight commencement of the transaction and
established with capital investment of more 50% exemption at the rate of leviable
than 2000 million rupees income tax for 3 years afterwards
Sub-section (3l) of section 11 of ITA, 2058 has provided that;
special industry or industry related to tourism full exemption from the dividend tax
sector capitalizes its accumulated profit into leviable in distribution of dividends from
shares for increase in capacity of the same such capitalization
industry
Sub-section (3m) of section 11 of ITA, 2058 has provided that;
any company having the paid-up capital of 10% exemption from the leviable tax for
500 million rupees or more operating as a three years from the date of its conversion
private company converts into a public into public company
company and operate its transaction
Sub-section (3n) of section 11 of ITA, 2058 has provided that;
A domestic tea producing and processing 50% exemption at the rate of income tax
industry, dairy industry having transaction in leviable on the income earned from sale
milk products or textile industry of its products.
Sub-section (30) of section 11 of ITA, 2058 has provided that;
A health institution operated by a community 20% exemption from its taxable income
institution tax
Sub-section (3p) of section 11 of ITA, 2058 has provided that;
micro- full exemption from leviable income 10 for 7 years from the date of
enterprise commencement of its business or transaction; which is operated by a
woman entrepreneur full exemption from leviable income tax for
additional three years.
Sub-section (3p) of section 11 of ITA, 2058 has provided that;

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micro- full exemption from leviable income 10 for 7 years from the date of
enterprise commencement of its business or transaction; which is operated by a
woman entrepreneur full exemption from leviable income tax for
additional three years.
Sub-section (3q) of section 11 of ITA, 2058 has provided that;
any entity in any income year operates any 20% tax exemption from its taxable
project such as building and operation a public income.
infrastructure to be transferred to the Government
of Nepal or building a powerhouse, generation
and transmission of electricity
Sub-section (3r) of section 11 of ITA, 2058 has provided that;
Special industry established and 25 percent exemption from chargeable income
operated on industrial region or tax from the date of commencement
industrial village
Sub-section (5) of section 11 has provided that a person who is in a position to have more
than one exemption in respect of the same income pursuant to clauses (a) and (b) of Sub-
section (3) shall enjoy only one exemption chosen by him.
Sub-section (6) of section 11 has provided that notwithstanding anything contained in Sub-
section (3), in cases where any other person has used the properties used to operate the
industry referred to in clause (b) for the operation of the industry of the same type
previously, the period during which they have been so used shall also be reckoned, while
reckoning the time-limit referred to in that Sub-section.
Fiscal Concessions for Different Industries under the IEA, 2076
Provisions Relating to Incentives, Exemptions, Facilities or Concessions for Industries has
provided on chapter 5 j n k of IEA, 2076. Whereas Section 24 of has provided the provision
relating to the exemption of tax and provides concessions of the industries.
Income Tax Concessions
Industry Exemption and Concessions
Manufacturing Industries 20% exemption on the rate of tax imposed on the income
earned from such industries and additional 5% of the rate of
tax leviable on the income earned by it by exporting its
products
Industries investing in construction of roads, 40% exemption on the rate of tax
bridge, tunnel, Ropeway, Railway, Tram, imposed on the income earned from
Trolleybus, Airport, Industrial Structure and operation of such infrastructures.
Infrastructural Complex and bringing such
constructions into operation
Manufacturing industries except those 90%, 80% and 70% exemption on rate of
producing fruits-based cider, brandy or wine the income tax for up to 10 years from the
established in under developed, date of commencement of commercial
production or transaction

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undeveloped and less developed region
(prescribed on Annex-10 of the Act)
Manufacturing industries producing 40% and 25% of income tax exemption for up to
fruit-based cider, brandy or wine 10 years from the date of commencement of of its
established in least developed and transaction
underdeveloped region
a manufacturing industry producing and 50% exemption on the rate of income tax
processing local tea products, dairy leviable on the income earned by it from
industries dealing in milk products and the sale of its products
industries manufacturing textiles
on royalty income earned by any person 25% exemption on the rate of income tax
from exporting an intellectual property leviable
right
the income earned by any person from 50% exemption on the rate of income tax
selling by way of transfer of an intellectual leviable
property right;
Manufacturing 100% income tax exemption for first five years from the date of
Industries set up with commencement of business.
the investment of at 50% exemption on the income tax for next 3 years.
least 1 billion rupees Industries already in operation are entitled to the above stated
and providing direct exemption in case such industries enhance their installed
employment to more capacity by at least 25%, increase investment to 1 billion and
than 500 individuals provide direct employment to 500 individuals throughout the
throughout the year year.
Individuals or entities 100% income tax exemption for first 10 years
obtaining approval to 50% income tax exemption for next 5 years.
commercially generate, Such exemption is entitled to Solar, Wind and BioMass energy
transmit or distribute as well.
Hydroelectricity by mid- In case of industries that have already begun commercial
April 2024 A.D. production at the time of commencement of this Act, the
(Chaitra 2080 B.S.) exemptions applicable at the time of receiving approval would
be applicable.
Industries conducting research and 100% Income tax exemption for first 7 years
excavation of natural gas and fuel from the date of commencement of transaction;
commercially, if commence the 50% exemption on the income tax for next 3
commercial transaction by mid-April years.
2024 A.D. (Chaitra 2080 B.S.)
Industries relating to Tourism Sector 100% Income tax exemption for the first 5 years
established with the investment of from the date of commencement of commercial
above 2 billion rupees transaction
50% exemption on rate of Income Tax for next 3
years

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industry related to the operation of a zoological, geological, 50% fifty percent
bio-tech park, and software development, data processing, income tax exemption
cyber-café and digital mapping established inside a
technology park and information technology park as specified
by the Gov't of Nepal by publishing a notice in the Nepal
Gazette.
Manufacturing Industries and 15% exemption on tax imposed on income of such
Information and Communication industries on that year,
Technology Industries (Additional 15% exemption on income tax on that year
employing 300 or more in case its employees from among Women, Scheduled
Nepalese throughout the years Caste and Disabled person)
Manufacturing Industries and 25% exemption on tax imposed on income of such
Information and Communication industries on that year,
Technology Industries (Additional 15% exemption on income tax on that year
employing 1200 or more in case its employees from among Women, Scheduled
Nepalese throughout the year Caste and Disabled person)
An industry other than a tobacco, alcohol and casino, entitled to 100% exemption on
if the industry capitalizes its accumulated profit in dividend tax leviable on such
shares for the expansion of the same industry or capitalization against the
another manufacturing, energy-oriented or distribution of dividends
agriculture and forest product-based industry
A cottage industry and small industry which are in entitled to 50% exemption on
operation upon registration at the time of the income tax leviable
commencement of this Act and which come in
operation upon registration under this Act with the
fixed capital of less than ten million rupees
an industry is entitled to deduction, for the purposes of income tax, of expenses made in
long-term interest or welfare activities for its labours and employees, such as life
insurance, health facilities, contributory social security, education and training, child
care center and sports and exercise for physical fitness
a manufacturing industry is entitled to deduction, for the purpose of calculating income
tax, of maintenance expenses, training expenses paid to such trainee workers if at least
10% of its total strength of human resources are trainee workers, and of expenses incurred
in development of production capacity of human resources in the industry
the systems and equipment preventing and controlling pollution or causing minimum
effects on the environment by recycling or reusing waste materials, and to making
depreciation by capitalizing the expenses exceeding the ceiling of adjusted taxable
income of such industry business in the beginning of the next income year;
an industry is entitled to deduction for the purpose of income tax of all expenses invested
in machinery or equipment contributing to reducing consumption of energy by enhancing
energy efficiency

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up to 50% of the adjusted taxable income of all industry business operated by that person
out of the expenses incurred in the enhancement of entrepreneurship, research and
development and creation of new technology for enhancing productivity of the industry,
an industry is entitled to deduction for the purpose of income tax of the expenses not
exceeding the prescribed ceiling incurred in market promotion, survey and
advertisement related to the industry business
an industry is entitled to deduction for the purpose of income tax of such expenses as
prescribed incurred for the protection of physical property of the industry and expenses
for net payment of premium for insurance thereof,
an industry is entitled to deduction for the purpose of income tax of the expenses incurred
by it in the protection in Nepal of an industrial property under an intellectual property
right registered in Nepal
an industry is entitled to deduction for the purpose of income tax of the fees paid for the
registration in a foreign country of an intellectual property right acquired by it for the
protection of such right;
one hundred thousand rupees or 5% of the adjusted taxable income of the industry for
that income year, whichever is less, out of the amount donated or gifted by the industry to
an entity enjoying tax exemption
Note:
1. 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 to reduce environmental effects, in
machines or equipment used for reducing power consumption, research and
development expenses.
2. 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.
Section 25 of IEA, 2076 has provided that Exemptions, facilities or concessions relating
to customs duty. An industry registered under this Act is entitled to the following customs
duty exemptions:
Exemptions, facilities or concessions relating to customs duty
Industry Benefits
All Industries VAT imposed on production is reimbursed if such goods are
exported, based on the quantity of export.
Industries not having The Government of Nepal may refund the amount of Duty
Bonded Warehouse or Drawback in export of goods after determining the aggregate
Passbook facility of costs incurred in import (Samadar) as prescribed in Nepal
Gazette.

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Industries not having Raw materials or auxiliary raw materials as well as packaging
Bonded Warehouse materials that are not produced in Nepal can be imported by
approval exporting goods furnishing the required guarantees under prescribed
through existing Banking conditions and procedures.
Channel or Letter of However, in case of packaging materials not produced in
Credit or selling such Nepal, a recommendation is required from IRD to enjoy stated
goods in domestic market benefit.
in convertible currency customs duty on raw materials, subsidiary raw materials, and
packaging materials as required for production by an industry
is generally less by one level than customs duty on imports
of finished goods produced from such raw materials.
the Department certifies that such packaging materials are not
produced in Nepal and recommends for that facility;
Laboratories for Quality Custom Duty is levied in the minimum rate for the import of
Assurance machinery and scientific devices that are 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.
Industrial goods to be An industry producing intermediate goods used in industrial
exported goods to be exported is entitled to refund of the custom duty
paid by that industry on the produced goods based on the
quantity of export. Such an amount is not refunded if application
is not made for such refund within one year after the export.
According to section 26 that; notwithstanding anything mentioned in existing acts, no fees
or charges is levied on registration of micro industry pursuant to this Act. A micro-industry
which is in operation upon registration at the time of commencement of this Act and comes
into operation upon registration under this Act is entitled to full income tax exemption.

Section 27 has provided that Additional facilities for female entrepreneurs.

registered with the sole 35% on the fee or charge leviable on the registration
ownership of a female of that industry or firm under the prevailing law.
entrepreneur
an industry registered with the Entitled to 20% exemption on the fee or charge
sole ownership of a female leviable under the prevailing law on the registration
entrepreneur of an industrial property to be used in that
industry.
If a female entrepreneur intends The body operating such an area shall be given
to establish a new industry within priority to provide a space.
an industrial zone or industrial
village

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the sole ownership of a female An export loan may be provided as prescribed
entrepreneur requests for a loan through the banking system from a fund disbursing
for the purpose of exporting loans for female entrepreneurs on the basis of the
products, financial situation of the female entrepreneur.

Section 28 has provided special provisions on incentives, facilities and concessions for
industries operated in an industrial zone, industrial cluster, industrial corridor and industrial
village.

Section 29 has provided that additional facilities and concessions which, mentioned in
sections 24, 25, 26, 27 and 28, the following additional facilities and concessions may be
provided to the following industries:-

a forest product-based industry by Possessory right of a forest within any specific

specifying necessary terms area may be provided on bond or lease under
the prevailing law.
electricity generated by an industry for exempted from any fee or royalty payable on
its own purpose it under the prevailing law
intends to sell excess of electricity it may be sold at the rate set by mutual
generated by it for its own purpose consent under the prevailing law
export-oriented industries and such the Government of Nepal may, provide
industries as prescribed established in additional facilities and concessions by
a special economic zone or publishing a notice in the Nepal Gazette
governmental or private industrial zone
those industries of national priority or the Government of Nepal may, on
uses maximum amount of domestic raw recommendation of the Board and by a
materials, labour and skills or inventing notification in the Nepal Gazette, provide
technology or goods within Nepal additional facilities and concessions
industry in proportion to the time of non- the Government of Nepal may grant
supply of electricity, in such grounds exemption on demand charge being levied on
and by following such procedures as electricity tariff payable
prescribed
a cooperative, micro-enterprise, the Government of Nepal may provide such
cottage and small industry in the least grant and prescribed by a notification in the
developed area; Nepal Gazette as seed money
an industry in operation with foreign permission may be granted to by its principal
investment to import goods produced company abroad for a certain period on such
terms and within such ceiling as prescribed,
for development and promotion of market for
new goods
the manufacturing industries, the Government of Nepal may provide such
agriculture and forest product-based incentives, exemptions, facilities or
industries and minerals industries concessions, as prescribed
under subsection (2) of section 17, other
than tobacco and liquor industries
for the imports by micro, cottage and exemption may be granted on customs duty
small industries of novel technology
such as machinery and equipment

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for industries established in an the Government of Nepal may make special
industrial zone, product specific zone provisions in relation to incentives,
and industrial village;
exemptions, facilities or concessions,

industries established in the least the Government of Nepal may provide

developed, undeveloped and additional incentives, exemptions, facilities or
underdeveloped regions
concessions

Section 34 has provided that no industry registered under this Act may be nationalized or
expropriated. No industry may, except for a public purpose, be expropriated directly or
indirectly. If it is required to expropriate it for the public purpose, due process under the
prevailing law shall be fulfilled.

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