Contract Manufacturing is a business arrangement in which a company, often referred to as the “contract manufacturer,” produces goods or provides services on behalf of another company, known as the “contracting party” or “brand owner.” Contract Manufacturing agreements delineate the terms and conditions governing the relationship between the contracting parties. They outline the specifications, quality standards, and quantity of the products to be manufactured and address pricing, payment terms, delivery schedules, and any intellectual property rights

1. Laws Governing Contract Manufacturing in Nepal

Industrial Enterprises Act, 2076 (2020) and Foreign Investment and Technology Transfer Act, 2019 (2075) have regulated various aspects of industrial activities, including contract manufacturing. Industrial enterprises are required to register with the Department of Industry, and the law prescribes provisions related to incentives, licensing, and compliance.

It sets the broader regulatory context within which manufacturing activities, including contract manufacturing, are conducted. Foreign Investment and Technology Transfer Act of Nepal specifically focuses on regulating foreign investment and technology transfer in the country and establishes a legal framework for foreign investors, outlining the procedures for obtaining approval and registration for foreign investment. It addresses issues such as repatriation of profits, dispute resolution mechanisms, and incentives for foreign investors.

2. Production Through Contract in Nepal

Section 50 of the Industrial Enterprises Act of Nepal outlines the provisions related to production through contract. Any industry already in operation upon registration under the prevailing law has the authority to produce components of its overall production or subsidiary goods and services essential for the industry, excluding its primary production. This production can be facilitated through contractual arrangements or sub-contracts with another industry.

It has been specified that if an industry, under the terms of a contract or sub-contract as described in subsection (1), produces goods or services meeting the prescribed criteria for an export industry in terms of quantity, it becomes eligible for incentives, exemptions, facilities, and concessions as per the regulations.

Section 50 of the Industrial Enterprises Act of Nepal extends its provisions to industries with foreign investment, allowing them to engage in production through contract. Any industry that incorporates foreign investment and is operational upon registration under the prevailing law is granted the authority to manufacture components of its overall production or subsidiary goods and services essential for the industry. Notably, the main production of the industry is excluded from this provision.

3. Requirements for Contract Manufacturing in Nepal

For an industry to engage in contract manufacturing for another export-oriented industry, it must adhere to certain conditions. Firstly, the contract manufacturing industry is required to be registered in compliance with the prevailing laws. Secondly, approval from the industry registration body is essential to authorize the production of goods or services.

Moreover, the trademark associated with the goods or services produced by the contract manufacturing industry should either be registered or the rights must be maintained. It is imperative that the production is confined to the sanctioned capacity of the producing industry.  Export-oriented industries that fulfill the criteria outlined in the aforementioned sub-section may be eligible for various incentives and concessions based on the quantity of goods exported.

4. Entitled Incentives for Export Industries Engaged in Contract Manufacturing

Export-oriented industries in Nepal engaging in contract manufacturing and meeting the criteria outlined are entitled to a range of incentives. The incentives include:

(a) Cash Incentives on Exports: Export-oriented industries fulfilling the specified criteria may receive cash incentives on their exported goods.

(b) Export Credit at Subsidized Rates: Eligible industries may access export credit at subsidized rates.

(c) Duty Drawback Facility: Industries engaged in contract manufacturing for export-oriented purposes can benefit from a duty drawback facility.

(d) Priority in Loan Investment: Export-oriented industries meeting the criteria outlined in the regulations are accorded priority in loan investment.

(e) Concessions on Taxes, Duties, Fees: The government extends concessions on various financial aspects, including taxes, duties, and fees.

(f) Concession on Import of Raw Materials: In order to support the production process, eligible industries may enjoy concessions on the import of raw materials.

5. Conclusion

Industrial Enterprises Act provides a legal framework for industries to engage in contract manufacturing, allowing them to produce certain components or subsidiary goods and services through contractual arrangements with other industries. Industries must register with the Department of Industry, adhering to provisions related to incentives, licensing, and compliance. Section 50 of the Industrial Enterprises Act outlines production through contract, extending its provisions to industries with foreign investment. Requirements include registration, approval, and trademark adherence. Export-oriented industries engaging in contract manufacturing may receive incentives like cash incentives, subsidized export credit, duty drawback, loan investment priority, and concessions on taxes, duties, fees, and raw material imports.