Garment Manufacturing Business in Special Economic Zones

Introduction

Special Economic Zones (SEZs) in Nepal provide structured frameworks for garment manufacturing enterprises seeking to establish operations with tax incentives and regulatory benefits. The Government of Nepal designates SEZs under the Special Economic Zone Act, 2076 BS (2020 CE) to promote industrial development, foreign investment, and export-oriented manufacturing. Garment manufacturers operating within SEZs benefit from customs duty exemptions, income tax holidays, and simplified administrative procedures. This article addresses the legal requirements, procedural steps, and operational guidelines for establishing garment manufacturing businesses in Nepal’s SEZs during 2026.

Legal Framework for SEZs in Nepal

The Special Economic Zone Act, 2076 BS (2020 CE) establishes the legal foundation for SEZ operations in Nepal. The Act defines SEZs as geographically demarcated areas with separate customs boundaries where businesses operate under special regulatory and fiscal regimes. The SEZ Policy, 2072 BS (2015 CE) outlines government objectives to attract foreign direct investment, generate employment, and develop export-oriented industries. The Board of Investment (BOI) administers SEZ operations and issues licenses to eligible enterprises. Garment manufacturers must comply with the Foreign Investment and Technology Transfer Act, 2075 BS (2019 CE) and obtain necessary registrations from relevant authorities.

Designated SEZs for Garment Manufacturing

Nepal operates several designated SEZs across different regions to facilitate garment manufacturing operations:

SEZ Name	Location	Primary Focus	Status
Birgunj SEZ	Parsa District	Textiles and Garments	Operational
Janakpur SEZ	Dhanusa District	Garment Manufacturing	Operational
Nepalgunj SEZ	Banke District	Textiles and Apparel	Operational
Bhairahawa SEZ	Rupandehi District	Garment Production	Operational
Kathmandu SEZ	Kathmandu Valley	Manufacturing and Services	Operational

Eligibility Requirements for Garment Manufacturers

Garment manufacturing enterprises must meet specific eligibility criteria established by the Board of Investment:

The applicant must be a registered company under the Companies Act, 2063 BS (2006 CE) or a partnership firm registered under the Partnership Act, 2053 BS (1997 CE).
The enterprise must demonstrate minimum investment capacity as specified in the SEZ Policy, 2072 BS.
The applicant must obtain clearance from the Department of Industry regarding environmental compliance and labor standards.
The business must commit to export-oriented production with minimum export targets as defined in the SEZ agreement.
The applicant must provide evidence of technical expertise and manufacturing capability in garment production.
The enterprise must secure land or facility allocation within the designated SEZ boundaries.

Application and Licensing Process

Step 1: Pre-Registration and Documentation

Applicants must prepare comprehensive documentation before submitting applications to the Board of Investment:

Completed application form as prescribed by the BOI.
Certificate of incorporation or partnership registration.
Detailed business plan including production capacity, product specifications, and export projections.
Financial statements and proof of investment capital.
Environmental impact assessment report prepared by certified professionals.
Land ownership documents or lease agreements for SEZ facility allocation.
Technical specifications of machinery and manufacturing equipment.

Step 2: Application Submission

Applicants submit complete documentation packages to the Board of Investment office:

Applications must be submitted in English or Nepali language with certified translations where applicable.
The BOI conducts preliminary review within 15 days of application receipt.
Applicants receive notification regarding document completeness and any additional requirements.
The BOI may request clarifications or supplementary information during the review process.

Step 3: Evaluation and Approval

The Board of Investment evaluates applications based on established criteria:

Technical feasibility assessment of the proposed garment manufacturing operation.
Financial viability review and investment capacity verification.
Environmental compliance evaluation and sustainability measures.
Export potential assessment and market competitiveness analysis.
Employment generation capacity and skill development contributions.
The BOI issues approval or rejection decision within 30 days of complete application submission.

Step 4: License Issuance

Upon approval, the BOI issues an SEZ enterprise license:

The license specifies operational parameters, investment commitments, and export obligations.
The license validity period extends for 10 years with renewal options.
The licensee receives customs clearance documentation and tax exemption certificates.
The enterprise registers with the Inland Revenue Department for tax purposes.

Tax and Fiscal Benefits

Garment manufacturers operating in SEZs receive substantial tax incentives under the Special Economic Zone Act, 2076 BS:

Benefit Category	Details	Duration
Income Tax Holiday	100% exemption on corporate income tax	5 years from commencement
Customs Duty Exemption	Zero duty on imported raw materials and machinery	Throughout operation
VAT Exemption	Value-added tax exemption on imported inputs	Throughout operation
Excise Duty Exemption	Exemption on excisable goods for export	Throughout operation
Reduced Tax Rate	50% reduction on corporate income tax	Years 6–10 of operation

Operational Requirements and Compliance

Manufacturing Standards

Garment manufacturers must maintain compliance with international quality and labor standards:

Production facilities must meet ISO 9001 quality management system standards.
Manufacturing processes must comply with environmental standards established by the Ministry of Environment, Forest and Climate Change.
Workplace safety standards must adhere to the Labor Act, 2074 BS (2017 CE) and Occupational Safety and Health Act, 2075 BS (2018 CE).
Product quality must meet international garment manufacturing specifications and buyer requirements.

Labor and Employment Regulations

SEZ enterprises must comply with Nepal’s labor laws and international labor standards:

Minimum wage requirements as established by the Government of Nepal must be observed.
Working hours must not exceed 48 hours per week under the Labor Act, 2074 BS.
Employees must receive mandatory social security benefits through the Social Security Fund.
Child labor is strictly prohibited under the Labor Act, 2074 BS.
Freedom of association and collective bargaining rights must be protected.
Occupational health and safety measures must be implemented as per legal requirements.

Export Documentation and Compliance

Garment manufacturers must maintain proper export documentation and customs procedures:

All exports require proper customs clearance through designated customs offices.
Export invoices must include detailed product descriptions, quantities, and values.
Certificates of origin must be obtained from the Federation of Nepalese Chambers of Commerce and Industry (FNCCI).
Export data must be reported to the Department of Customs for statistical purposes.
Manufacturers must maintain records of all export transactions for minimum five years.

Infrastructure and Facility Requirements

SEZ garment manufacturing facilities must meet specific infrastructure standards:

Manufacturing buildings must comply with building codes and safety regulations.
Facilities must include adequate storage areas for raw materials and finished products.
Wastewater treatment systems must be installed to manage industrial effluent.
Electrical systems must meet safety standards and provide reliable power supply.
Transportation infrastructure must enable efficient movement of goods within and outside the SEZ.
Communication facilities must support business operations and customs procedures.

Environmental Compliance and Sustainability

Garment manufacturers must implement environmental management systems:

Environmental impact assessments must be conducted before commencing operations.
Waste management plans must address textile waste, chemical disposal, and water treatment.
Water conservation measures must be implemented to reduce consumption.
Energy efficiency programs must be established to minimize electricity usage.
Pollution control equipment must be installed and maintained regularly.
Annual environmental compliance reports must be submitted to the Department of Industry.

Renewal and Modification of SEZ Licenses

License Renewal Process

SEZ enterprise licenses may be renewed upon expiration:

Renewal applications must be submitted 90 days before license expiration.
Applicants must demonstrate continued compliance with operational requirements.
Financial statements and export records must be provided for review.
The BOI evaluates renewal applications within 30 days of submission.
Renewed licenses extend operational authorization for an additional 10-year period.

Modification of Operations

Enterprises seeking to modify operational parameters must obtain BOI approval:

Significant changes to production capacity require formal modification requests.
Changes in product categories must be approved by the BOI.
Expansion of manufacturing facilities requires environmental reassessment.
Modification requests must include updated business plans and financial projections.

Dispute Resolution and Legal Remedies

Disputes arising from SEZ operations are resolved through established legal mechanisms:

Initial disputes between enterprises and SEZ authorities are addressed through administrative procedures.
Unresolved disputes may be escalated to the Board of Investment for arbitration.
Legal disputes are subject to jurisdiction of Nepal’s courts under the Civil Code, 2074 BS (2017 CE).
International arbitration provisions apply to disputes involving foreign investors under bilateral investment treaties.

Frequently Asked Questions

What is the minimum investment required to establish a garment manufacturing business in an SEZ?

The minimum investment amount varies by SEZ and is specified in the SEZ Policy, 2072 BS. Applicants must demonstrate sufficient capital to establish manufacturing facilities and maintain operations for the initial period.

How long does the SEZ license approval process take?

The complete approval process typically requires 45 to 60 days from submission of complete documentation, including preliminary review, evaluation, and license issuance by the Board of Investment.

Are foreign investors eligible to establish garment manufacturing businesses in Nepal’s SEZs?

Yes, foreign investors are eligible under the Foreign Investment and Technology Transfer Act, 2075 BS. Foreign-invested enterprises receive equal treatment with domestic enterprises regarding tax benefits and operational procedures.

What are the export obligations for SEZ garment manufacturers?

Export obligations are specified in individual SEZ enterprise licenses. Manufacturers must achieve minimum export targets as agreed during the licensing process, typically requiring 80% of production to be exported.

Can SEZ enterprises sell products in Nepal’s domestic market?

Limited domestic sales are permitted under specific conditions. Enterprises may sell up to 20% of production domestically after paying applicable customs duties and taxes on domestic sales.

What happens if an enterprise fails to meet export obligations?

Non-compliance with export obligations may result in license suspension, penalty assessments, or license cancellation. The BOI may impose corrective measures or require remedial action plans.

Are there restrictions on the types of garments that can be manufactured in SEZs?

No specific restrictions exist on garment types. Manufacturers may produce apparel, textiles, and related products subject to quality standards and international labor compliance requirements.

Conclusion

Establishing garment manufacturing businesses in Nepal’s SEZs during 2026 requires compliance with the Special Economic Zone Act, 2076 BS and related regulations. Applicants must complete comprehensive application procedures, meet eligibility criteria, and obtain Board of Investment approval. SEZ enterprises benefit from substantial tax incentives, customs duty exemptions, and simplified administrative procedures. Manufacturers must maintain compliance with labor laws, environmental standards, and export documentation requirements throughout their operational period. The SEZ framework provides structured opportunities for garment manufacturers to establish export-oriented operations with regulatory certainty and fiscal advantages.