Special Economic Zone in Nepal: Basic Guide to Establishing Industry in Special Economic Zone

SEZ: Special Economic Zone

SEZA: Special Economic Zone Authority

License Holder: Business having license to establish and operate industry in SEZ.

Special Economic Zone (SEZ) is an area designated by the government for establishing of industries that are incentivized with certain financial and tax benefits. Governed by a dedicated law “Special Economic Zone Act, 2073 BS” with intention to promote export and job creation. Industries established and operating within the designated Special Economic Zone enjoy certain benefits such as Income Tax Exemption, Dividend Tax Exemption, Value Added Tax Exemption, Rebate on Land Lease Rate and benefits on custom duty. The industries operating under SEZ are however required to export certain percentage of their production or service. The major objective establishment of SEZ is sustainable and planned industrial development by creating an investor friendly trade and investment environment, focusing to attract investment and modern technology, generating local employment opportunities, and promoting local value addition and export thereby contribute to reduce the overall national trade deficit.

Basically, interested investor can get a plot that is within the Special Economic Zone to establish industry and such industry functioning within the SEZ is subjected to various financial and tax benefits.

Regulating Authority:

The regulating authority of SEZ is Special Economic Zone Authority (SEZA) functioning under the Ministry of Industry, Commerce and Supplies. 

Regulating Laws and Regulations:

Special Economic Zone Act (the “Act”)

Special Economic Zone Regulations (the “Regulation”)

Currently operating Special Economic Zone:

There are currently two operating SEZ:

a)     Bhairawa Special Economic Zone

b)    Simara Special Economic Zone

1)    Prerequisite for setting up business in Special Economic Zone

a)     What kind of business cannot be established in SEZ?

Although both production and service-oriented business can be set up inside SEZ, Section 5 of the Special Economic Zone Act and Rule 22 of the Special Economic Zone Regulation does not allow follow industries in SEZ:

i)       Industry manufacturing cigarette and tobacco related products

ii)     Industry manufacturing Brandy, Cider, Wine, Beer and Alcohol related products

iii)    Industry manufacturing explosives

iv)    Industry manufacturing arms, ammunitions and ammos

b)    What is the minimum investment threshold?

Pursuant to Rule 23 of the Regulation,

For Local Investor: Minimum Investment of NPR 2,00,00,000/-

For Foreign Investor: In line with the minimum investment required pursuant to foreign investment law in Nepal, which currently stands at NPR 2,00,00,000/- (except for IT industries). The amount should be fixed capital.

2)    Setting up Business in SEZ

a)     Call for application submission by SEZA or Self-submission of Application

-    Whereas, the Regulation in Rule 24 does specify that SEZA through publishing notice in national daily shall call for application from investors for establishing industry in SEZ.

-    However, Rule 25 of the Regulation allows interested investor to separately submit application for establishment of industry in SEZ regardless of notice being published pursuant to Rule 24.

b)    Submission of Application:

-    Interested investor is required to submit application in the format prescribed in Schedule 4 of the Regulation to SEZA for License. 

c)     License Approval

-    Where the application is approved after examination by SEZA, SEZA is required to issue License within 7 days following submission of application by the investor.

-    The License Fee is NPR 25,000/- (Rule 27 of the Regulation)  

d)    Registration of Business, Industry, and FDI Approval (where applicable):

-    Following approval of license from SEZA, the investor is required to file for registration of industry pursuant to applicable law. Where such investment includes foreign investment, Investor is required to apply for Foreign Direct Investment (FDI).

-    Although Rule 31 of the Regulation requires the Investor to submit documents with the “One Stop Window” Service within SEZA for registration and approval of business within 7 days of obtaining license from SEZ, as the One Stop Window service is yet to be established, the investor are required to follow normal process for registering business and seeking FDI approval (where applicable).

e)     Agreement with SEZA

-    Following registration of business or industry and within 120 days of obtaining license from SEZA, Investor is required to enter into an Agreement in relation to establishment and operation of Industry with SEZA (Section 11 of the Act). Such Agreement’s content includes but is not limited to:

i)          Lease or rental amount to be submitted in lieu of utilization of the building, land or services (electricity, water, sewerage, management of waste etc) deemed necessary for the industry

ii)        Date of establishment and operation of the industry

iii)       Quantity of product to be exported by the industry

iv)       Matters related to transfer of technology (where the investment is foreign investment)

v)         Others matters as prescribed.

In addition to this, the Agreement also includes:

i)               Name and address of the Industry

ii)             Investment Plan  

iii)           Incentives and services that the Licensee operating industry is set to receive

iv)            Validity period of the License and its renewal

v)             Insurance of the Industry

vi)            Fees payable to SEZA and the payment procedure

vii)          Conditions deemed to be considered as violation of the Agreement, and conditions which results in termination of the Agreement

viii)        Terms and conditions to be complied with while establishing, operating and managing the Industry

ix)            Where foreign employees are used in the industry, detail action plan for development Nepalese workforce with aim of replacing such foreign employees.

x)             Provision for Transfer of such Industry outside of SEZ.

f)     Following Agreement with SEZA, License Holder can commence construction and operation of business. Please note that some industries may require additional compliance such as IEE, EIA, approval from other regulatory authorities, etc. Industry should start operating only after getting all such approvals (Section 13 of the Act).

3)    License Period and Renewal:

a)     Based on the nature of the industry, the initial license period shall be for a maximum period of 30 years.

b)    Renewal

-    Submit application pursuant to Schedule 6 of the Regulation

-    Submit application 35 days prior to expiry of license

-    Can submit application for renewal within 15 days from expiry of license along with reason for delay in submission of application for renewal (additional charge of NPR 10,000)

-    For renewal, the industry is required to be operating in capacity of more than 30% of its total capacity.

-    Renewal for a period of 10 years at once

-    Renewal fee of NPR 10,000/- if application submitted within prescribed time, additional NPR10,000/- where the application for renewal is not submitted within prescribed time.

4)    Cancellation of License (Section 10):

a)     Failure to renew license within prescribed time period

b)    SEZA may cancel the license if the license holder does or causes to any of the following:

-    Does not sign Agreement with SEZA within 120 days from obtaining of License

-    Does not establish or operate industry within the time period prescribed in the Agreement with SEZA.

-    Does not follow the terms and conditions prescribed by the agreement, does not follow the Act and Regulation.

-    Abuses the benefits made available to the industry

-    Obtains benefits by providing false description

5)    Relocation of Existing Industry to SEZ:

-    The recent amendment to the SEZ Act allows industries that are operating outside of SEZ to get license are transfer industry to Special Economic Zone.

6)    Export Requirement:

As SEZ was established with the objective of increasing export capacity of Nepal, the industries (License Holders) operating within SEZ are required to export certain percentage of their products or service offered. The requirements are:

a)     For four years from the date of production: Export 15% of the annual production

b)    From fifth year and onwards: Export 30% of the annual production

c)      However, for a period of first three years, such industry is allowed to sell its products and services in the Nepalese Market.

d)    If the industry is going to sell its products or services in the internal market of Nepal, then the license holder shall prior to selling inform SEZA.

7)    Compliance Requirement:

a)     Share Transfer of Industry (Section 48 of the Act)

-    If any of the License Holder wants to sell or handover the share of the industry, in whole or in partial then the License Holder is allowed to do so.

-    Where such transfer or sell of share amounts to 50% or more then, prior approval from SEZA is required before transfer or sale of such share. 

b)    Amendment of Objective of the Industry

-    If the License Holder desires to change or amended the objective of industry then prior approval is required from SEZA.

c)     Increase in Working or Fixed Capital

-    If the License Holder increases industry’s working or fixed capital then, the License holder shall inform SEZA within 15 days of making such changes.

d)    Annual Report

-    License Holder is required to submit an annual report within 3 months from completion of each year. The annual report should contain quantity of goods and services exported along with income and expenditure of the industry.

e)     Determination of Production Capacity (Rule 35)

-    The License Holder is required to provide following information to SEZA for determination of production of the industry:

i)           Total Production capacity of the industry and any details about increase and decrease in production capacity

ii)         Data of raw materials imported

iii)       Total raw materials consumed

iv)        Details of good produced

v)         Any other details as required by SEZA.

The incentives and benefits provided to License Holder or industry established within SEZ is highlighted in another article. (Link: ……….)

With Lex Lab Corporate Advisors currently working with multiple industries (Both Domestic and Foreign) within Bhairawa Special Economic Zone and Simara Special Economic Zone, we hold expertise in obtaining license, compliance, and obtaining incentives and benefits provided to License Holder.

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