Industry Tax Exemptions & FDI Incentives in Nepal by Sector

Fiscal incentives for industry in Nepal are not contained in a single statute; they are spread across four principal laws and administered by two main agencies. The Industrial Enterprises Act, 2076 (2020) — commonly abbreviated IEA — sets out the industry classification and the headline exemptions in Chapter 5 (notably Section 24). The Income Tax Act, 2058 (2002) carries the operative concession rates and holiday periods, most of them in Schedule 1. The Special Economic Zone Act, 2073 (2016) governs SEZ-located units, and the Foreign Investment and Technology Transfer Act, 2075 (2019), or FITTA, governs foreign direct investment (FDI) and repatriation.

Incentives are keyed to how an industry is classified. The IEA classifies industries by scale (micro, cottage, small, medium, large) and by nature (for example, energy-based, manufacturing, agro and forestry-based, mineral, tourism, information and communication technology, and infrastructure industries). A separate category of 'national priority' and 'special' industries attracts the deepest concessions. On top of the sector tier, three further multipliers apply: the geographic development tier of the district, whether the industry is export-oriented, and whether it operates inside a Special Economic Zone.

Because reliefs stack conditionally, the effective benefit for any single enterprise depends on the combination of its sector, location and export share. The Department of Industry (DoI) under the Ministry of Industry, Commerce and Supplies registers most industries and certifies eligibility, while the Inland Revenue Department (IRD) under the Ministry of Finance administers the actual tax computation. This article summarises the durable, headline rules; because rates and cut-off dates are revised through the annual Finance Act, investors should confirm current figures with the IRD or DoI before relying on any specific number.

The starting point is the corporate rate. Nepal's normal corporate income-tax rate is 25%, but 'special industries' — broadly, manufacturing industries other than those producing tobacco and liquor — are taxed at a concessional 20%. On top of that lower base rate, the IEA (Section 24) and the Income Tax Act layer further percentage exemptions tied to the industry's nature, so the same enterprise can benefit from more than one line of relief.

Manufacturing (special) industries receive a 20% exemption on the applicable tax rate. Infrastructure industries — roads, bridges, tunnels, ropeways, railways, airports and similar — get a 40% exemption on income earned from the investment. Industries producing and processing local tea, dairy products from milk, and textiles (garments) receive a 50% exemption on the income tax rate. Fruit-based brandy, cider and wine producers established in specified less-developed areas receive partial concessions for a defined term.

Technology and knowledge industries have their own track. Software development, data processing, cyber-related services and industries inside a technology park or IT park receive a 50% income-tax exemption; IT industries established in a designated IT park may enjoy a fuller holiday for their initial years. The energy sector is the most generous: hydropower and other renewable-energy generation, transmission and distribution projects that begin commercial operation by the statutory cut-off (mid-April 2024 / the end of Chaitra 2080 under the version in force) receive 100% income-tax exemption for the first 10 years and 50% for the next 5 years. Mineral, petroleum and natural-gas extraction industries meeting the cut-off receive 100% exemption for 7 years and 50% for a further 3 years.

Nepal deliberately steers industry toward its poorer districts by scaling the income-tax exemption to the geographic development tier. The country's areas are grouped, for this purpose, into 'least developed', 'undeveloped' and 'less developed' categories, and a special industry established in one of these areas earns a large exemption on the tax otherwise payable for a defined initial period — typically up to 10 years from the start of commercial operation.

The headline percentages are steep. A special industry set up in a least-developed area receives a 90% exemption on the income tax otherwise leviable for the qualifying period; in an undeveloped area the exemption is 80%; and in a less-developed area it is 70%. These are among the deepest location incentives in the region and are intended to offset the higher logistics and infrastructure costs of operating away from the Kathmandu Valley and the central Terai corridor.

Fruit-based alcohol (brandy, wine, cider) producers established in least-developed and undeveloped areas receive smaller but still meaningful concessions — commonly cited at 40% and 25% respectively for the same term. Because the classification of which districts fall into which tier is set by regulation and can change, and because the qualifying period runs from the date commercial operation begins, investors should confirm both their district's current tier and the applicable start-of-operation window with the Department of Industry before modelling returns.

Export performance and job creation both unlock additional relief. Special manufacturing industries that export their production qualify for an extra rebate on the tax rate applicable to export income — commonly an additional 5% (with a larger rebate where export earnings are especially high), stacked on top of the concessional 20% base rate. This is designed to improve the competitiveness of Nepali-made goods in foreign markets and to earn foreign currency.

Employment-linked concessions reward industries that generate large-scale direct jobs for Nepali citizens. A manufacturing or IT industry that provides direct year-round employment to 300 or more Nepali citizens is entitled to a 15% reduction of the tax leviable on that year's income; providing direct employment to 1,200 or more Nepali citizens raises the reduction to 25%. Where at least a specified share of the workforce (commonly cited as 50% or more) consists of women, Dalits or persons with disabilities, an additional exemption — often cited at 15% — applies.

Scale-based reliefs also protect the smallest producers. Micro-industries registered and operating under the IEA are entitled to full income-tax exemption, and cottage and small industries can receive a 50% exemption on income from the sale of their own production for a defined period. Because export rebates and employment concessions can be combined with sector and location reliefs (subject to overall caps in the Income Tax Act), the eligibility certificate issued at registration is the practical anchor for what an industry can claim.

Industries that locate inside a Special Economic Zone receive the most complete package, governed by the Special Economic Zone Act, 2073 (2016) and administered by the Special Economic Zone Authority (SEZA) under the Ministry of Industry, Commerce and Supplies. Nepal's first SEZ, at Bhairahawa (Rupandehi, Lumbini Province), became operational in 2017; a second at Simara (Bara Province) has since drawn industries, and the government has allocated further sites (including Panchkanya, Dhangadhi and others) toward a planned national network.

The core SEZ income-tax benefit is a full holiday followed by a partial one. An industry established inside an SEZ receives 100% income-tax exemption for the first 5 years of operation and 50% for the years thereafter; for zones located in hill and mountain districts, the full-exemption period is extended to 10 years, again followed by a 50% concession. Dividend distributed by SEZ industries is commonly exempted for an initial period (often cited as 100% for the first 5 years and 50% for the next 3 years).

SEZ units also receive strong indirect-tax and customs facilities: value-added tax (VAT) relief on transactions within the zone and customs facilities on the import of plant, machinery, equipment and raw materials used for production. In return, SEZ industries carry an export obligation — they must export a substantial share of their output, a figure set by regulation and revised over time (originally 75%, later relaxed to 60%). Because these SEZ terms are set by the SEZ Act, its rules and periodic government notices, investors should verify the current export threshold and the exact holiday period with SEZA before committing.

Beyond income tax, Nepal reduces the up-front capital cost of setting up an industry through customs and VAT facilities on capital goods. Under the IEA and the annual Finance Act, machinery, equipment, tools and their spare parts imported by an industry for its own production process are generally subject to a concessional customs duty rate (historically a nominal 1% for many special industries), rather than the standard tariff applied to ordinary imports.

Value-added tax on plant and machinery is handled through VAT refund, deferral or exemption mechanisms rather than a blanket waiver: registered industries can typically credit or reclaim the VAT paid on eligible capital imports against their output VAT, and certain categories of machinery may be zero-rated or deferred at the point of import. For SEZ and fully export-oriented units, the position is more favourable still, with in-zone and bonded-warehouse arrangements that keep imported inputs and machinery outside the normal duty-and-VAT net until goods enter the domestic market.

These facilities are conditional and documented: they generally require that the goods be imported in the industry's own name, be used in its production, and not be sold or transferred without approval and payment of the foregone duty. Because the exact concessional customs rate and the VAT treatment for each category of machinery are set annually through the Finance Act and customs tariff schedule, the current-year rate should always be confirmed with the Department of Customs and the IRD.

For foreign investors, the decisive protection is the guaranteed right to take money out of Nepal. The Foreign Investment and Technology Transfer Act, 2075 (2019) — FITTA — explicitly guarantees repatriation. Under Section 20 of FITTA, a foreign investor may, after meeting tax and legal obligations, repatriate in convertible foreign currency the amount received from the sale of shares (in whole or part), profits or dividends earned on the investment, the principal and interest of any approved foreign loan, and amounts received under an approved technology-transfer agreement (royalties and fees).

Repatriation is procedural rather than discretionary: the investor obtains approval through the foreign-investment approving authority (the Department of Industry or the Investment Board Nepal for large projects), clears applicable taxes, and then the Nepal Rastra Bank (the central bank) provides the foreign-exchange facility for the actual transfer. FITTA also protects against expropriation without compensation, and SEZ and industrial units enjoy similar assurance against nationalisation.

FDI in Nepal is gated by two conditions that shape which incentives an investor can reach. First, a minimum foreign-investment threshold applies per investor — raised to NPR 50 million in 2019 and later eased to NPR 20 million, with information-technology industries exempted from any minimum. Second, foreign investment is permitted only in activities classified as 'industry' and not on the FITTA 'negative list' (which excludes areas such as certain primary agriculture, retail trading, personal services and mass communication). Once admitted, a foreign-invested industry accesses the same sector, location, export and SEZ incentives described above, subject to the ownership and sectoral limits in FITTA and its regulations.