-Shristika Neupane
With its implementation, the Industrial Enterprises Act 2020 has paved the way for decentralizing the authority to the provincial governments. Under this directive, the state assembly of Province no.1 enacted the “Provincial Industrial Enterprises Act” on August 19, 2020, by putting together necessary arrangements inside the bill. Industrial Enterprises Act 2020 is anticipated to bring in several reforms for an investment-friendly environment by encouraging business growth and increasing the ease of doing business in the Province.
The act has some positive aspects, such as the initiation of One Window System and electronic medium for registration. The Act has also taken initiatives to provide tax incentives for the manufacturing sectors. However, there are several provisions in the act that might have undesirable consequences on various industries and businesses. Certain sections from the act have been analyzed below along with recommendations.
Although the Act provides jurisdiction to the provincial government for the registration, renewal, and regulation of the industries, Industries listed under Schedule-1 require prior approval from the federal authority. For instance, if an industry has its working area in two or more provinces, it is mandatory to register with the federal government after registering at the provincial level. This will add to the compliance requirement, time, and cost required to fulfill the legal procedure for registration.
The act further illustrates that respective local authorities shall regulate Micro, Cottage, and Small industries as prescribed by the provincial law. However, there is still a lack of clarity on the services provided by the local authorities among entrepreneurs. Small businesses of certain categories must register at the Office of Small and Cottage Industries (According to Private Firm Registration Act). This will add to frustrations and confusion among entrepreneurs. For instance, an entrepreneur starting an enterprise at Letang would need to come to the Office of Cottage and Small Industries situated in Biratnagar to register his/her business after getting approval from the local government.
While categorizing industries based on the Nature and Industry sector, the Act has widened the scope of information, broadcasting, and communication technology, including data centers, internet service providers, industry related to web portals, and web designing services. It has also covered the e-commerce business providing services to the people using an electronic medium, wholesale and retail service businesses, food court, catering, and waste-water treatment plants.
The logic behind industry registration is to provide a higher degree of standard for safeguarding public health. For instance, ferocious metal industrialists require some mechanism to ensure:
Security of the workers from possible risks during the manufacturing phase,
Protection of the environment from potential discharges
Protection from any danger that a consumer may face.
Nonetheless, wholesale and retail services, food court, catering, e-commerce, web design service, etc., do not require a higher degree of standard. Such procedures will only raise the transaction cost involved in setting and operating a business.
Even though the Act permits the production of goods and services through contract manufacturing, it explicitly restricts permission to produce primary goods through it and sanctions the contract manufacturing arrangement only for auxiliary goods. Barring foreign investors from manufacturing the primary products in Nepali firms goes against the international trend of contract manufacturing. The global trend reveals that multinational companies enroll in a market through contract manufacturing and allow new companies to produce their goods. Later the parent or international companies themselves come into manufacturing if they feel certain about the country. Such restrictions will disincline many foreign investors and cast off the producers of Fast Moving Consumers Goods (FMCG). In addition to that, the act has not presented specific criteria to distinguish between primary goods and auxiliary goods, which will only give bureaucrats opportunities for bribery and encourage unhealthy activities.
The provincial ministry shall make recommendations to the Government of Nepal for the necessary exemptions, facilities, or concessions provided by the prevailing Income Tax Law and Federal Industrial Enterprises Act to the industries registered under this Act. It will likely hinder small businesses in claiming the exemptions and custom duty refund as the recommendations process to the Government of Nepal would undoubtedly take a long time and plenty of administrative hassles. Such vague processes will discourage entrepreneurs from claiming incentives.
The Act has listed enterprises that have been currently running at the capacity utilization of 30% or less and operating at a continuous loss for three consecutive years as sick industries. Such Industries shall be declared as sick industries only if they are running for five years and not shut down because of mismanagement or intention but due to matters beyond their control. The provision to resuscitate and restructure such industries by offering unspecified nature of exemptions and facilities.
Entrepreneurship is the ability to perform in order to take benefit of opportunities generated by innovation and new inventions. We can take the example of Netflix, which has overthrown disc rental and traditional media industries. Photography companies whose businesses are widely superseded by modern smartphones. Hence, it is prudent to shut down industries if they are sick merely due to external circumstances. Closure of infirm units would benefit the country’s economy as the government and financial institutions shall be released from backing up sick units financially. The closure may cause temporary unemployment, but the investment made from the insolvency funds would generate other avenues for employment.
Henceforth, amendments of such provisions are necessary for the holistic upliftment of the nation’s industrial sectors and overall economic scenario.
