Special Economic Zone (First Amendment) Act 2075: A review

Special Economic Zone (SEZ), as the name suggests, is a special area, poles apart from the rest of the country’s economic area, because of the differences in the business and trade laws. The aim of creating SEZs is to increase administrative and trade balance, business, employment and investment for the overall economic development.

The Government of Nepal (GoN) had first institutionalized the concept of SEZ in 2013 followed by the enactment of SEZ Act in 2016. The latest Special Economic Zone Act (First Amendment) 2075 Bill was introduced with the intention to bring improvements in the legal framework of business-related laws and implementation of the revised Act just in time for Nepal Investment Summit 2019.

The concept of an SEZ and its enactment sets out some major regulations, compliance requirements and incentives for the industries under the area of an SEZ, which have been briefly discussed below:

  • Authority

The primary regulatory and operational role of SEZs are given to the Special Economic Zone Authority, having their own sets of rights, responsibilities and duties as mentioned in the Constitution of the Authority.

  • Domestic Sale

The SEZ Act has made a provision of allowing the industries inside an SEZ to sell 100% of total production or service in the domestic (Nepali) market for the first year after the production starts. However, once the industries enter their second year, the mandates are different.

  • Export requirement

One of the major reasons for setting up SEZs is to promote trade; export is, thus, a major requirement for the industries under SEZs.  As per the Act, industries, from their second year of production, will be permitted to export 60% of their total production or service, which is in contrast with the 75% baseline in the previous Act. The reduction in the export limit has been made to account for the time needed to search the right international markets and meeting international quality certifications while ensuring sustainability in the domestic market through the remaining 40%.

  • Infrastructural setup inside SEZ

The GoN will look after the development, operation and management of the infrastructure, such as road, land, electricity grid connectivity, drinking water and others as such, for the industries inside the SEZs, in collaboration with the private sectors.

  • Rental charge

The government has reduced the rental charge for industries under SEZs. For instance, industries operating inside Bhairahawa SEZ currently pay a monthly rental charge of NPR 20 per square meter.

  • Tax incentive and benefits

Industries inside the SEZs are provided with the following exemption facilities on income tax and dividend as set out in the Act:

  • Customs Duty Exemption

Industries inside the SEZs get exemption on customs duty and other facilities on the following goods as per the recommendation made by the SEZ Authority:

  1. Necessary raw materials and auxiliary raw materials (including packaging materials) under bank guarantee
  2. Certified plants, machinery, machinery parts and tools.
  • Tax Exemption Facility on Dividend

The SEZ Act 2075 has made following provisions regarding dividend distribution for industries located under the SEZs:

Overall, decades have passed stressing on the need to reform policies and acts and their effective implementation for the overall economic growth. Years after the first institutionalization of the concept of SEZ in 2013 to prepare SEZ laws, relevant rules and regulations, the state of industrial growth remains somewhat similar, if not same. However, the current SEZ Act 2075 has addressed some of the major concerns although enough homework and discussion with stakeholders are still needed for its strong enactment. Policies and acts do not need fanfare from the government. Strong research, documentation, planning, implementation and support can help build SEZs and foster growth as desired.