Toll manufacturing agreements in Nepal are contractual arrangements where one party manufactures goods on behalf of another using specified inputs, processes, or formulas, while ownership of raw materials and finished goods typically remains with the principal. These agreements operate within Nepal’s contract, industrial, and tax law framework.
Toll manufacturing has become increasingly relevant in Nepal due to rising cross-border trade, foreign investment, and cost-sensitive production strategies. It is commonly used in pharmaceuticals, food processing, FMCG, textiles, and export-oriented industries.
Unlike simple outsourcing, toll manufacturing involves complex questions of ownership, liability, intellectual property, taxation, and regulatory compliance. Without a properly structured agreement aligned with Nepalese law, businesses face risks such as tax reassessment, customs disputes, IP leakage, and regulatory non-compliance.
A clear understanding of toll manufacturing agreements and the applicable legal framework in Nepal is therefore essential for both domestic manufacturers and foreign principals.
Toll manufacturing is not regulated by a single statute. Instead, it is governed by a combination of contract, industry, tax, and customs laws, including:
Contract Act 2056 (2000)
Companies Act 2063 (2006)
Industrial Enterprises Act 2076 (2020)
Income Tax Act 2058 (2002)
Customs Act 2064 (2007)
Regulatory oversight may also involve:
Department of Industry
Inland Revenue Department
Department of Customs
Although often used interchangeably, the two are legally distinct:
Toll manufacturing: The principal owns raw materials, IP, and finished goods; the manufacturer provides processing services.
Contract manufacturing: The manufacturer may procure inputs and sell finished goods to the buyer.
This distinction has major tax and customs implications in Nepal.
In toll manufacturing:
The principal controls specifications and quality
The processor acts as a service provider
Title to goods usually never transfers to the processor
Correct characterization is essential to avoid misclassification as a sale.
A toll manufacturing agreement is a legally binding contract under which a manufacturer processes or converts materials supplied by a principal into finished or semi-finished goods for a processing fee.
Core elements include:
Defined manufacturing scope
Retention of ownership by the principal
Processing or tolling fees
Quality and compliance obligations
Toll manufacturing agreements are commonly used to:
Reduce capital expenditure on manufacturing facilities
Access specialized production capabilities
Optimize tax or customs positioning
Enable market entry without full-scale operations
In Nepal, they are particularly useful for export-oriented units and foreign-invested enterprises.
Nepal-registered companies or industries
Foreign companies (through Nepalese counterparties or FDI-approved entities)
Licensed industrial enterprises under Nepalese law
Valid company or industry registration
Sector-specific operational licenses (if applicable)
Tax registration (PAN/VAT)
Compliance with industrial zoning and environmental rules
Toll manufacturing agreement
Company registration certificates
Industry registration or approval
PAN/VAT certificates
Import/export licenses (if cross-border)
IP ownership documentation
Failing to clearly state ownership of raw materials and finished goods
Omitting IP protection and confidentiality clauses
Using generic service agreements instead of toll-specific contracts
Ignoring tax characterization risks
These errors often trigger tax audits or customs disputes.
Business and Tax Structuring
Determine whether tolling is appropriate under Nepalese tax and customs law.
Partner Due Diligence
Verify manufacturer licensing, capacity, and compliance history.
Agreement Drafting
Customize toll manufacturing agreement with Nepal-specific clauses.
Regulatory Registration
Register industry or amend existing approvals if required.
Operational Execution
Commence manufacturing under agreed specifications.
Ongoing Compliance
Maintain tax filings, customs reporting, and audits.
Toll fees are treated as service income for the manufacturer
No sale of goods occurs if ownership remains with the principal
Transfer pricing rules may apply for related parties
Toll manufacturing services are generally VAT-applicable unless exempt
Input VAT recovery depends on registration and documentation
Imported raw materials for toll manufacturing may qualify for duty suspension or adjustment if re-exported
Proper documentation is critical to avoid double taxation
Toll manufacturing involves indirect costs related to compliance, documentation, and banking, beyond the tolling fee itself.
| Cost Component | Indicative Impact |
|---|---|
| Tolling Fee | Negotiated per unit or batch |
| VAT on Services | Standard VAT rate (unless exempt) |
| Compliance Costs | Moderate |
| Customs Guarantees | Project-specific |
Costs vary by sector, volume, and regulatory treatment.
| Stage | Typical Duration |
|---|---|
| Structuring and Due Diligence | 2–4 weeks |
| Agreement Negotiation | 1–3 weeks |
| Regulatory Approvals | 2–6 weeks |
| Operational Start | After approvals |
Total setup time: Approximately 1–3 months
Toll manufacturing agreements should clearly define:
Contract duration and renewal
Termination for cause and convenience
Consequences of early termination
Return or disposal of materials and IP
Amendments must comply with Nepalese contract law principles.
Parties involved in toll manufacturing in Nepal must:
Maintain accurate inventory records
Comply with tax and VAT filings
Protect confidential information and IP
Allow regulatory inspections where required
Failure to meet these obligations can invalidate the arrangement.
Confirm ownership clauses are unambiguous
Align tax treatment with actual operations
Ensure IP protections meet industry standards
Verify compliance with industrial and customs rules
Obtain professional legal and tax review
These steps are critical for enforceability and audit defense.
A properly structured toll manufacturing agreement:
Reduces tax and customs risk
Preserves intellectual property
Clarifies liability and compliance duties
Enhances enforceability under Nepalese law
Poorly drafted agreements are frequently recharacterized by authorities.
Yes. Toll manufacturing is legally permissible in Nepal under contract, industrial, and tax laws, provided agreements are properly structured and compliant with regulatory requirements.
No. In toll manufacturing, ownership of raw materials and finished goods typically remains with the principal unless the agreement states otherwise.
Yes. Toll manufacturing fees are generally subject to VAT in Nepal unless a specific exemption applies under tax law.
Yes. Foreign companies may engage in toll manufacturing through Nepalese entities or approved foreign investment structures, subject to regulatory compliance.
Toll manufacturing is treated as a service arrangement, while contract manufacturing may be treated as a sale of goods, leading to different tax and customs consequences.
Yes. A written toll manufacturing agreement is essential to establish ownership, tax treatment, and enforceability under Nepalese law.
Toll manufacturing agreements in Nepal offer a flexible and commercially efficient production model when structured correctly. Understanding the underlying legal framework, tax implications, and compliance obligations is critical to avoiding regulatory risk and ensuring enforceability. Businesses should adopt a legally precise, well-documented approach to toll manufacturing arrangements.
This article is for general informational purposes only and does not constitute legal or tax advice. Laws and regulatory practices in Nepal may change. Professional legal and tax consultation is recommended before entering into toll manufacturing arrangements.
February 02, 2026 - BY Admin