Industrial Enterprises Act 2020 (2076) : A Brief Overview and Comparative Analysis

INDUSTRIAL ENTERPRISES ACT 2020 (2076): A BRIEF OVERVIEW AND COMPARATIVE ANALYSIS 

EXECUTIVE SUMMARY

• Industrial Enterprises Act 2020 (2076) (“IEA 2020”) is now the preeminent legislation guiding the registration, establishment, operation and regulation of industries in Nepal. Bringing in some significant changes and repealing the Industrial Enterprises Act 2016 (2073) (“IEA 2016”) just three years after its introduction, IEA 2020 has addressed various new regulatory aspects of industries boosting decentralisation and federalism into the industrial entrepreneurship of the country.
• IEA 2020 was expected to make reforms in order to establish an investment friendly environment and promote business growth and doing business in Nepal; especially as the IEA 2016 was heavily criticized for its relegating provisions that backlashed the expectations of business enthusiasts and industrialists.
• Having addressed various new issues, IEA 2020 has introduced new concepts, provisions and incentives, which has been welcomed by entrepreneurs across the country albeit with some reservations.

This article explores the major takeaways from IEA 2020 and the additions made to the previous legislation. To provide the audiences with the overview of the currently guiding industrial law, this write-up studies IEA 2020 from the business perspective.

A. INDUSTRIAL REGISTRATION AND REGULATION

1. Registering Authority: Power to Provincial Government:

With federalism already being implemented, IEA 2020 has also adopted the principles and has de-centralized the registration process by granting authority to provincial levels for registration, renewal and regulation of all industries except for the following:

1. Industry listed in Schedule-1 of the IEA 2020,
2. Industry established with Foreign Investment,
3. Industry based on subject matter stated in schedule-5 of constitution of Nepal,
4. Industry having it’s working area in two or more provinces,
5. Industry providing educational consultancy services in relation to diplomatic affairs.

However, the proviso provides that the Department of Industries (“DOI”), the federal authority, shall continue to be responsible for registration, renewal and regulation until the provincial governments make necessary arrangement through introduction of provincial laws.

IEA 2020 elucidates that industries based on atomic energy, manufacturing of radioactive materials, and Uranium related industry, shall be established and operated solely by the Government of Nepal.

To ease the registration process, IEA 2020 has amended a provision requiring the concerned authority to provide the applicant with 90 days for submission of any additional required documents, as compared to the 7 days limitation in IEA 2016.

2. Unit Industry vs Branch Industry:

IEA 2020 has introduced a new concept of unit industry, eliminating the concept, use and practice of branch industry. Any industry desirous of operating an industry or production at a different location from that of the main industry shall do so by registering a unit of the industry. IEA 2020 further requires every industry to register their existing branch industries as separate industries within a year of commencement of this legislation.

Registration of a unit industry shall follow the same process for registration of a new industry and the record of production, transaction and accounts shall be maintained in a unified form.

3. Issuance of Registration Certificate/ Timeline for Industry Registration:

Ensuring promptness, IEA 2020 has amended the provision relating to the issuance of registration certificate. The authority is mandated to issue the industry registration certificate within 5 days of submission of all required documents, in comparison to the 15 days provision in IEA 2016.

Though no one is allowed to run and operate any industry without registration as per the IEA 2020, IEA 2020 has provided an exception for micro industries. Anyone who would like to operate a micro industry may file an application for registration within a year of operation.

4. Filing of Complaint:

IEA 2020 has provided for a complaint mechanism, whereby an applicant may file a complaint to the ministry of industries of the concerned province within 30 days if the concerned authority refuses to register the industry.

B.COMPLIANCE

1. Environmental Compliance:

IEA 2020 has adopted some environment friendly measures addressing the industries’ responsibility towards environment protection. If an industry is required to carry out Initial Environment Examination (“IEE”) or Environmental Impact Assessment (“EIA”), it shall commence its establishment, operation and transaction only after completion of IEE or EIA and approval of the IEE or EIA report.

Also, if the industry is required to increase its capital or capacity, change its objective or location, then it shall do so only after conducting IEE or EIA as required by law. Industry registering authority may carry out inspection as per the need and issue directive orders or take actions or may refer to the related authority to take action.

Industries not required to conduct IEE and EIA should, during registration, are required to disclose grounds and reasons for the same along with the self-declaration that the industry will take appropriate measures to mitigate adverse impact on the environment.

2.Approval of Investment Board:

The approval granted by the Nepal Investment Board (“Board”) for operation of industry listed in schedule 1 of IEA 2020 cannot be transferred, sold out or the ownership over it cannot be changed before the operation, or commencement of transaction. However, upon the death of the applicant before the operation or commencement of transaction, her/his legal heir may take upon such approval.

3. Notice of Commencement of Operation, Commercial Production or Transaction:

IEA 2020 requires an industry to commence its operation, commercial production or transactions within the time period specified in the industry registration certificate (generally within 1 year from the date of registration) and notify the registering authority, within 30 days of such commencement, about the commencement of operation, commercial production or transaction.

In the event where the industry couldn’t commence the operation within the specified timeline, the industry is required to apply for an extension by submitting an application 30 days before the expiry of specified time period.

Previously, failure of filing an application resulted in immediate closure of industry. However, IEA 2020 provides a leverage in this regard because upon the payment of fine for delay, the industry may submit an application to the authority within 6 months of expiry of time limit, stating the reasons for inability to submit the same within stipulated time.

4. Approval prior to change of location of Industry:

In order to change the location of an industry from one place to another, a requirement of prior approval from the registration authority is added in IEA 2020. Additionally, recommendation of the local government is required for such change of location.

5. Approval required for capital increment, capacity enhancement and addition to or amendment of the objectives:

IEA 2020 mandates prior approval from the registration authority in order to increase existing capital, enhance the capital and add or amend objectives. However, it is only for the industries other than micro industries, cottage and small-scale industries having fixed capital less than Rs. 10,000,000 (Ten Million). The authority, within 90 days, shall grant an approval upon following required procedures. However, if deemed necessary, the industry is required to conduct IEE and EIA, and have the report thus prepared approved in order to carry on with the change in capital, increment in capacity and/or amendment of objectives.

6. Submission of details:

The provision relating to “Null Details” has been added in IEA 2020. Industries will have to provide details even if they have not been in operation or have had no production and transaction for a whole year.

7. Notification of closure of industry:

Unlike the 7 days’ time limit specified in IEA 2017, the IEA 2020 requires the industry to notify the registration authority about the closure of industry within 30 days from the date of such closure or cessation of commercial production or transaction.

8. Responsibility to maintain record:

Registration authority is made liable for proper management of archives related   to the registration, renewal, change in name, transfer of ownership, increase in capacity, capacity enhancement, alteration of objectives, cancellation etc.

C. CLASSIFICATION OF INDUSTRY AND FIXED CAPITAL

In addition, IEA 2020 allows co-operatives to register an industry under their ownership. This opens up an opportunity for co-operatives to operate industries directly as they are restricted to invest in shares of any other companies.

As reinstated by IEA 2020, in calculation of the fixed capital of an industry, following assets are to be taken into account:

1. Any constructed or reformed physical structure on land, underground, on space, water or below water,
2. Any physical structure constructed above land (e.g. sewage, internal road, drinking water related infrastructure, water supply system)
3. Office, factory, building or store house of the industry,
4. Residence building constructed for officers and workers,
5. Electric supply and related equipment and system,
6. Machinery, equipments, tools and extra parts of such,
7. Means of transportation,
8. Office goods and equipments of capital nature,
9. Fixture and furniture,
10. Communication related equipments and system,

Other than aforementioned assets, following expenses shall be considered:

1. 1. Capitalized technical and inspection expenses,
   2. Pre-investment and preoperative expenses,
   3. Capitalized interest expenses,
   4. Expenses incurred in carrying out Initial Environment Examination (IEE) and Environmental Impact Assessment (EIA) prior to the operation of industry. (addition)

D. PROVISIONS RELATING TO INDUSTRY AND INVESTMENT PROMOTION BOARD

IEA 2020 has addressed the issue of conflict of interest to be considered, while conducting the Board’s meeting, among others. It requires the Board to conduct its meeting at least once every two months and anytime as per the need.

Under the function, duties and rights, the Board is additionally required to recommend government on issues relating to enhancement of industries and development of related policies. The Board is also required to give directions and create an environment of coordination between local and provincial level to attain upliftment and extension of industrial business.

IEA 2020 has introduced provisions relating to the Provincial Industry and Investment Promotion Board (“Provincial Board”). In order to promote industries registered and operated in a province, IEA 2020 has listed out following functions, rights and duties to be exercised out by the Provincial Board:

1. 1. • Carry out regular analytical study pertaining to issues of overall industrial promotion of a province and urge provincial government to act on these issues,
      • To carry out necessary functions to implement policies on restriction of industrial pollution,
      • Overall analysis of status of provincial industrial development,
      • Act as a platform to hear the voice of industrialists in the province and help address the issues raised,
      • Carry out study, research and inspection on measures to increase local investment in industrial sector in the provincial region,
      • Carry out necessary activities to create a competitive, harmonious and coordinated industrial environment between public, private and other sectors.
      • Effect coordination between local and provincial level to enable industrial business development and expansion,
      • To refer to provincial ministry in matters of uncertainty created during implementation of industry-related federal law,
      • Coordinate with Board via ministry in matters related to services to be provided via one-stop service center,
      • Carry out other activities as required in relation to the advancement of the industrial sector.

E. INCENTIVES, CONCESSIONS, BENEFITS AND DISCOUNT

1. 1. • For industries other than tobacco-related industries, alcohol industries and casinos, if the accumulated profit is used in the expansion of the same industry or other manufacturing related or energy related or agriculture and forest products related industry, the profit percentage in the investment of such share capital shall be 100% tax exempt.
      • Cottage and small-scale industries in operation prior to the commencement of this Act, with the fixed capital of less than 10 Million, shall be subjected to 50% income tax exemption.

        1. Concessions on Custom Duty

        IEA 2020 has scraped off the provision allowing the industries exporting locally produced products to recover the amount equivalent to the Value Added Tax imposed in such production. Falling on the same line however, IEA 2020 provides that upon an application within a year, the industry exporting industrial goods, considering the exported amount, shall recover the customs duty charged in the intermediate goods.

        2. Other concessions

      • As compared to the previous provision of 100% income tax exemption to the Micro Entrepreneurship for its first 5 years of operation, the new Act has removed the time period, thus providing such micro businesses with cent percent tax exemption always.
      • Any firm, in addition to the pre-existing provision of industry, with the full ownership of female entrepreneurship, shall be subjected to the additional benefits provided to a female entrepreneur.
      • Added provisions in the additional facilities and concessions:
        • Manufacturing industries other than tobacco-related and alcohol-related industries, industries related to agriculture and forest products, excavation industries may be provided with incentives, discount, facilities and concession as provided by the government.
        • For micro entrepreneurship, cottage industry and small-scale industry, the custom duty levied in import of machinery, equipment, and machines for the increment in the potential of the industry may be exempted.
        • Special provision for benefits may be made for the industries operated in industrial zone, product specific zone and industrial community.
        • Additional benefits may be provided to the industries in underdeveloped, undeveloped and less developed regions of the country.
      • Concessions on land ceiling: In addition to an added provision on making necessary arrangements for coordination and facilitation in providing land to industries, IEA 2020 has introduced following new provisions in this aspect:
        • The industry which is allowed such concession to the land ceiling should use the exempted land only for the purpose for which the exemption is granted.
        • If the industry doesn’t abide by the above-mentioned provision, the Government of Nepal may issue a directory order requiring compliance.
        • If the Industry is found to not follow the directive order thus issued, the land thus exempted might be scraped by the government.
      • As provided by the Foreign Investment and Technology Transfer Act (FITTA) for industry based on foreign investment, IEA 2020 also disallows nationalization or requisitioning of an industry unless for a public purpose.

F. ONE-STOP SERVICE CENTER AND ITS FUNCTION, DUTIES, AND RIGHTS

With the purpose of easing out the tedious task of reaching out to multiple departments for various industry related authoritative tasks, One-stop service center has been introduced by IEA, 2016. However, it is only IEA 2020 which further listed out the functions, duties and rights of such a body in a comprehensive manner, which are as:

1. 1. • • Carry out tasks related to the administration of registration, approval, renewal, transaction approval, capacity enhancement and cancellation of a company, firm and industry (except insolvency),
        • Perform activities related to approval of foreign investment as per existing law,
        • Perform activities related to labor approval and work agreement as per existing law,
        • Perform activities related to visa as per existing law,
        • Evaluate IEE and EIA under existing legislation,
        • Act as a focal point for basic essentials for the operation of an industry,
        • Under the current legislation, perform activities related to approval of foreign currency exchange,
        • Provide permanent accounting number (PAN) as per prevailing legislation,
        • Ease the operation of bonded warehouse,
        • Perform various activities in order to ease the industrial business,
        • Perform delegated functions, rights and duties of Board,
        • Coordinate activities to provide approval for excavation and related activities for industries if required,
        • To accept the required documents for industry registration via electronic medium and develop an electronic system to monitor works between the authorities,
        • Provide necessary coordination and providing land above the ceiling required for industries,
        • If need be, provide approval on import or refer so to the concerned authority,
        • Establishment and operation of investment portal and provide investment related notifications and information via same,
        • Implement the directives and decisions issued by the Ministry and Board.

G. SICK INDUSTRY

The added provision reads that if the investors agree to re-operate an infirm industry and apply for the same, upon proper study of capacity utilization and probability, the industry may be re-operated, by providing certain standards to be met.

H. OFFENCES AND PUNISHMENT

1. 1. • • Industries requiring prior approval under section 8 of IEA 2020, shall be subjected to 50% additional penalty.
        • Notwithstanding anything, industries registered and regulated by the provincial and local authority shall be penalized according to provincial or local law.
        • The fine shall be recovered as governmental remains.
        • Compared to prior legislation providing 15 days’ time limitation to submit the statement of defense, the Act repealing the time limit, provides for a reasonable chance to defend oneself.

I. MISCELLANEOUS

1. 1. • • • IEA 2020 introduces the Nepal Business Platform, which may be formed in order to overlook effective implementation of policy and laws related to industrial business, and to affect coordination between private and public sector, among others.
          • In the provision regarding industrial human resources, in the event where any hurdle is created in industrial operation and production due to a laborer, the industry owner shall not be compelled to provide such laborer with the payment for such period of closure of industry.
          • What can also be said as the unification of numerous funds provisioned under IEA 2016 such as micro, cottage and small scale industries’ development fund, venture capital fund, technology development fund, industrial investment protection and promotion fund, revival, re-institutionalization and management of sick industries’ fund, female entrepreneurship development fund, IEA 2020 officiates the operation of Provincial Industrial and Investment Fund as per provincial legislation. The amount collected in such fund through various means shall be mobilized in following sectors:
          1. Development of micro industry, cottage and small-scale industry.
          2. Technology development,
          3. Industrial promotion,
          4. Revival, re-institutionalization and management of sick industries,
          5. Female entrepreneurship development.
        • • IEA 2020 prohibits an industry from obtaining the benefits more than once as per the prevailing legislation. In order to ensure such, the Federal and the Provincial government are required to keep each other informed about the benefits provided to the industries under their authority.
          • Under the Corporate Social Responsibility (CSR), IEA 2020 provides an explicit provision for industries to allocate at least 1% of annual net profit (previously 1% annual profit) for CSR requirement. Also, IEA 2020 provides that the industries are required to submit their report on CSR within 6 months of completion of fiscal year.
          • IEA 2020 approves the use of electronic medium by the authorities in order to ease and simplify the administration process.
          • IEA 2020 has introduced the concept of Automated Approval Process in industrial operation.
          • The industry or the owner of the industry may provide anyone with the power of attorney.
          • Re-registration or extension of time limit

If any industry is unable to carry out its operation, initiate the commercial production or commence transaction within the stipulated time limit, it may submit an application to the concerned registration authority within 3 months of commencement of this Act.

The delay fine is as:

1. 1. • • 1. Micro-entrepreneurship: Rs. 5000 per year,
          2. Cottage and Small-scale industries: Rs. 15,000 per year,
          3. Medium-scale industries: Rs. 50,000 per year,
          4. Large-scale industries: Rs. 150,000 per year.

J. EXTENSION OF SECTORS

In the categorization of industries based on the nature of product and service provided, numerous additions have been made to the previous legislation. Currently trending businesses such as those carried out via electronic medium, i.e. e-commerce, business related to energy potentiality study, digital television network, agriculture tourism, business related to physical training and exercise, and other industries not incorporated under the previous legislation such as wholesale and retail business service, Internet service provider, waste-water treatment plant, etc are among the major sectors added.

ANNEX-1

ADDITION OF SECTORS IN SCHEDULE OF IEA (LIST OF INDUSTRIES)

Schedule-1: Approval requiring Industries

1. 1. • • 1. • Industry manufacturing Electronic Cigarettes (Vape),
             • Industry related to microbrewery,
             • Industry related to L.P.G. re-filling,
             • Industry manufacturing drone or providing services through drones,

Schedule-2: Cottage Industries

There has been no change, addition or reduction of sectors in this section.

Schedule-3: Energy-oriented Industries

1. 1. • • 1. • Industry related to biogas energy,
             • Industry related to electricity energy co-produced by sugar industry,
             • Industry related to the study of energy potentiality,

Schedule-4: Industries based on Agriculture and Forest Products

1. 1. • • 1. • Production and storage of food products,
             • Industry related to hatching of chicken,
             • Milk production and processing of dairy products,
             • Industry manufacturing food grains for animals and birds based predominantly on agricultural yield,
             • Protection of botanical garden,
             • Operation and management of cold stores, and agricultural market,
             • Setting up and management of agriculture forest,
             • Production of cash crops,
             • Production of natural fibre products,
             • Wood industry including shaw-mill and furniture,
             • Wood-related industry like parquetting, seasoning, treatment plant, plywood, composite, board.
             • Industry related to non-wood forest products including paper, resin,
             • Production of mushroom, tissue culture, agroforest,
             • Cotton plantation, production and processing of cotton and cotton seeds.

Schedule-5: Infrastructure Industry (Construction Industry under prior legislation

1. 1. • • 1. • Waste-water treatment plant,
             • Private warehouse,
             • Infrastructure construction, arrangement and operation of installation of pipelines for fuel and gas supply,
             • Infrastructure construction, arrangement and operation of energy house and energy transmission line.

* The following sectors from previous Act have been removed from the schedule:

1. 1. • • 1. • Industry related to assembly and convention centers,
             • Industry related to sewage and passage of sewage.

Schedule-6: Tourism Industry

1. 1. • • 1. • Bar,
             • Trekking, paragliding, zip flyer, ultralight, sky walking, sky diving, and other adventurous games,
             • Construction and operation of cable car,
             • Industry related to Agricultural tourism,
             • Water park,
             • Museum.

*The new legislation has removed the industry related to operation of mountain flights from the schedule.

Schedule-7: Industry based on Information Technology, Communication Technology and Information Dissemination

Part A

1. 1. • • 1. • Knowledge process outsourcing (K.P.O),
             • Data center,
             • Digital signature certifying agency,
             • Web portal, web designing service, web hosting, online categorized advertising service,

Part B

1. 1. • • 1. • Internet Service Provider (ISP),
             • Mobile satellite phone operator service,
             • VSAT service,
             • Industry related to social networking, online message, video call, conference.

Part C

1. 1. • • 1. • Digital television network (DTTV)
             • Industry related to the production of documentaries.

Schedule-8: Service-oriented Industry

1. 1. • • 1. • Clinic, polyclinic, operation of rehabilitation house, physiotherapy clinic, Ayurvedic and other alternative hospitals,
             • Industry related to physical exercise, Yoga-meditation or training center,
             • Swimming pool,
             • Operation of cold storage,
             • Transport and cargo service,
             • Custom Agent service,
             • Industry related to general information dissemination service,
             • Water purification service,
             • Cinema hall including multiplex,
             • Theater including multiplex,
             • Industry related to e-commerce, industry business providing services to the general public via electronic portal (online or software or applications or other medium of similar nature),
             • Retail and wholesale business service,
             • Industry related to service of leasing machinery equipment,
             • Industry related to service business such as purification or processing of cut-to-length sheet, photo film, slitting, ball wiring assembly produced in nominal amount and importing finished goods in bulk and repacking,
             • Business related to clothing and yarn designing, yarn sizing, and printing on clothes (except weaving industry doing such for its own purpose),
             • Industry related to veterinary service operated as a business,
             • Service apartment,
             • Food court, catering, and mobile food stalls,
             • Service related to equipment repairing and installation, ready mix concrete, export house, technology and invention center, service relating to providing facilitated workspace.

Schedule-9: Industries of National Priority

1. 1. • • 1. • Infrastructure industry,
             • Industry related to manufacturing of shoes and slippers, thread manufacturing, livestock farming, fish farming, chicken farming, bee farming, floriculture, initial processing and manufacturing of rubber products based on local raw materials, industry producing medicine for snakebite, industry manufacturing artificial eye lens,
             • Industry related to information technology,
             • Industries established inside the Industrial village, Special economic zone, and industrial area built and operated by the private sector,
             • Industry manufacturing goods as listed on Nepal Gazette providing required standards with prescribed high price low weight/volume,
             • Goods and services producing industry specified by Nepal Trade Integration Strategy (NTIS),
             • Movie production.

ANNEX-2

Industrial development-based classification of districts