Problematic Aspects of Industrial Enterprise Bill

– This article was originally published by Ashesh Shrestha in the Himalayan Times on the August 11, 2019.

The House of Representatives has registered the new Industrial Enterprise Bill which will soon be tabled for discussion in the parliament. The Bill in its preamble states that it aims to create investment friendly environment in Nepal, facilitate production of goods and services, creation of job opportunities, optimal utilisation of available resources, promotion of exports and create a robust economy.  The bill has some positive facets such as the provision of one stop service centre and use of electronic medium for the purpose of registering business and obtaining permits. While provisions like this facilitate businesses and attract investments, there are several provisions in the bill which might have deleterious impact on various industries and overall business environment.

Article 24 of the bill has made provisions of tax benefits and discounts for various industries on the basis of type and size of the business. Providing tax benefits to some specific industries might lead to distortionary effect as the resources can get concentrated into these sectors. The industrial sectors which are actually productive might receive less investment as tax benefits received by other sectors make them relatively less profitable. Additionally, large industries investing one billion rupees and employing more than 500 people will get 100 percent income tax exemption for the period of 5 years and 50 percent income tax discount for next 3 years. The logic providing such tax discounts might be to promote the industries which produce in large scale and generate higher employment opportunities. However, data from various sources show that most of the jobs in Nepal is created by small industries. When the large industries receive tax benefits, it becomes even difficult for small industries within the same industrial sector to compete with these large industries.

Article 39 of the bill mentions that if industries which are in operation for a minimum of 5 years from date of its establishment are operating in less than 30 percent of its capacity  and incurring loss for past 3 consecutive years because of various exogenous factors, they will be classified as sick industries. Such industries will get various unspecified exemptions and facilities if deemed viable for bringing back into sound operation. This particular clause is problematic in a sense that in a market economy, innovative enterprises which progresses in the same pace as the evolving market and are more adaptive to consumer’s requirement survive and grow. Whereas, the enterprises which cannot do so, become obsolete and go out of business.

Market rewards the innovators and punishes the businesses which lag behind. Government by protecting the industries incurring losses will only prolong their survival. These industries are eventually bound to die. Therefore, government by providing additional benefits to these industries will only be wasting its resources which could be utilized in productive sectors.

The Industrial Enterprise Bill should not offer privileged provision for faltering enterprises with exemptions and facilities just because their dire status is purely the consequence of external circumstances. The lawmakers concerned about the long-term Industrial and economic welfare of the economy should primarily understand the fundamental principle of free market.

Clause 54 of the bill specifies that Cottage, Medium and Small industries making an annual transaction of more than 15 crore rupees have to allocate 1 percent of the net profit for purpose of Corporate Social responsibility (CSR).  Likewise, sub-clause 7 of the clause 43 details that if any of the enterprises falling within the criteria fails to allocate the specified proportion of the annual profit towards CSR, such enterprises are liable to pay a fine of 1.5 per cent of the annual profit in the first fiscal year and additional 0.5 per cent in the subsequent years.

The reason behind incorporating such provision in the bill might have sprouted from the idea that businesses have responsibilities towards society where they are operating. Therefore, they should contribute a certain amount of money for welfare of the society. But this is something that should be left to the corporations to do voluntarily. Voluntary contribution to the society should be commended and, in many circumstances, rewarded as well but it should not be forced. Businesses already make contribution to Gross Domestic Product (GDP) of the country. They also create employment opportunities. Moreover, they pay taxes which are used for the betterment of the society as a whole. All these things are already a significant contribution to the society. Hence, the provision whereby the businesses have to mandatorily contribute a part of their profit for CSR and punishing them for not doing so is not justified.