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10. INCENTIVES AND SPECIAL REGIMES

General Tax Incentives

For attracting inbound investment, certain incentives viz. reduced corporate tax rate, tax rebate, and tax exemption apply to specified taxpayers subject to certain conditions. Where more than one incentive is available, the taxpayer can select the most beneficial option.

The incentives as amended by Budget 2020-21 are as follows:

Tax Holiday/Exemption

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The incentives as amended by Budget 2022-23 are as follows:

IndustryTax Exemption
Income derived by special industries rendering direct employment to more than 100 Nepali citizens in Karnali province and hilly areas of the far western region.100% tax exemption for the first 15 years starting from the date of commencement of commercial production.
Income derived from production, transmission or distribution of electricity produced from hydropower, solar, wind and biological substances within Mid-April 2027.100% tax exemption for the first 10 years starting from the date of commencement of commercial production and 50% exemption for the next 5 years.
Income earned by a reservoir or semi reservoir-based hydropower projects generating above 40 MW (reduced from 200 MW) of energy and managing financial closure by mid-April 2029 (extended from mid-April 2026).100% tax exemption for the first 15 years starting from the date of commencement of commercial production and 50% for the next 6 years.
Income derived by industries producing vaccines, oxygen gas or sanitary pads.100% tax exemption for the first 5 years starting from the date of commencement of production and 50% for the next 2 years.
Income from manufacturing or assembling four-wheel electric vehicles.40% tax exemption for the first 5 years starting from the date of commencement of the commercial production, for industries established within mid-July 2022.
Income derived from manufacturing of machinery, equipment, and spare parts for agricultural activities.100% tax exemption for the first 5 years starting from the date of commencement of production, for industries established within mid-July 2022.

Tax Rebate

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Special Economic Zones (SEZ)

SEZs may be established for industries engaged in exports. The government may prescribe any export processing area or any other area as an SEZ. The industries that may be established in an SEZ include manufacturing, tourism and entertainment, information technology, and agriculture industries which are environmentally appropriate, economically feasible, and export-oriented in a business sense.

Following incentives are provided to companies operating in SEZ:

  • Exemption from income taxes (see below), VAT, excise duty, customs duty, and local taxes;
  • Accelerated rate of depreciation; and
  • Repatriation of foreign investment.

The following income tax incentives are available related to companies operating in SEZ:

IndustryTax Rates and Incentives
Industries established in Special Economic Zone ('SEZ') in recognized mountain areas or hill areas100% exemption for up to 10 years and 50% rebate in subsequent years
Industries established in SEZ other than the above locations100% exemption for up to 5 years and 50% rebate in subsequent years
Dividends are distributed by industries established in Special Economic Zone100% exemption for up to 5 years and 50% rebate in 3 subsequent years
Income derived by foreign investors from investment in SEZ, including income from the use of foreign technology, management service fee, and royalty50% of the applicable tax rate

Incentive for Vaccine and Oxygen Industries

The import of machinery equipment required for the establishment of vaccine and liquid oxygen industry under an approved scheme is exempt from VAT and customs and, excise duties, for the financial year 2022-23.

Other exemptions

The duties on the import of construction equipment for reservoir or semi-reservoir-based hydropower projects producing above 200 MW of energy and managing financial closure by mid-April 2026, plant and machineries and allied parts, penstock, and steel sheets are reduced to 1%.

COVID-19 Emergency Measures

In response to the COVID-19 pandemic the following tax exemptions are available for small taxpayers for the financial year 2021-22:

  • 75% tax exemption for businesses with annual turnover of up to NPR 3 million; and
  • 50% tax exemption for businesses with annual turnover between NPR 3 million and NPR 10 million;