The government has officially recognized hotels and resorts as a manufacturing industry under the Industrial Enterprises Act, 2020, granting them concessions typically reserved for productive sectors. The change, which was announced through the budget for the fiscal year 2025/26 budget, promises hotels and resorts the same income tax and electricity tariff exemptions as other manufacturing industries.

Hotel entrepreneurs had been pushed for such recognition for the past many years, arguing that the hospitality sector, despite heavy capital investment and significant employment generation, was not being treated on par with other industrial sectors. With this policy shift, industry leaders say the sector has finally received its due.

“Now that we are in the manufacturing industry, we will get electricity at Rs 6–7 per unit instead of Rs 17, just like other industries,” said Binayak Shah, President of the Hotel Association Nepal (HAN). “This is more than a tax benefit; it is a recognition of our role in the economy.”

The Act had previously listed hotels and other tourism-related services in Schedule 6, placing them under the umbrella of the tourism industry, not as a core productive industry. While Schedule 8 defines 65 service-oriented sectors, including air transport, courier services and beauty parlors, hotels were surprisingly absent from the service category.

Certain types of tourism activities, such as adventure tourism, eco-tourism, trekking and wildlife reserves, were listed as national priority industries in Schedule 9. But the hotel sector had failed to get due recognition. The budget for the new fiscal year has addressed this gap by classifying hotels and resorts as manufacturing industries, which has practical implications for tax, electricity rates and access to financial services.

Legal Backing for Exemptions and Facilities

Officials at the Ministry of Industry, Commerce and Supplies argue that the legal groundwork for offering incentives to the hotel sector has long been embedded in the Industrial Enterprises Act itself. The Act, which outlines provisions for tax relief and other benefits to manufacturing industries, includes several clauses that now extend to hotels and resorts under their new classification.

Section 24 of the Act is particularly significant. Clause (a) offers a 20% exemption on income generated by manufacturing industries, while Clause (c) grants up to 90% income tax exemption for industries located in underdeveloped, less developed and remote areas—applicable for a period of ten years from the start of commercial operations. Even more important is Clause (h), which provides a complete tax holiday for five years to industries that meet certain thresholds—specifically, those investing more than Rs 1 billion and creating over 500 direct jobs. For tourism-related industries with investments exceeding Rs 2 billion, the same five-year full exemption applies, followed by a 50% income tax reduction for the subsequent three years.

Now that hotels fall under this productive classification, they are eligible for these provisions—long enjoyed by traditional manufacturing industries.

Hoteliers Welcome the Decision

Industry leaders see this decision as both symbolic and practical. Praveen Bahadur Pandey, Managing Director of Shangri-La Hotels & Resorts, said the policy finally aligns with ground realities. “The hotel business is no longer limited to a few urban centers. It is nationwide, contributing to both foreign exchange and domestic consumption. The sector’s recognition as an industry was long overdue,” Pandey said.

Shashikant Agrawal, Chairman of Everest Hospitality Group, agreed with Pandey, adding that tourism and hydropower are Nepal’s native industries. “This is a positive policy message. Albeit delayed, this is the right move,” Agrawal said. “The reduction in income tax and electricity tariffs will significantly boost operational sustainability.”

Although hotels had already been technically included in the definition of “industry” under the Industrial Enterprises Act, stakeholders say this new classification moves beyond rhetoric and provides tangible fiscal and operational advantages.

Previously, when hoteliers approached government offices for services or banks for loans, they were often told they were not a recognized industry. This undermined their access to loans, subsidies and utility benefits. “Now we can finally say we are a productive industry,” HAN President Shah said. “This classification helps not just with power tariffs and taxes—it improves our standing with banks, regulators and investors.”

Hotel owners argue that the high cost of electricity and taxation has made Nepal an expensive destination, hurting its international competitiveness. With the new incentives, hoteliers believe Nepal's tourism offerings can now become more affordable and globally competitive.

However, there still are different issues that need to be resolved. Industry leaders say VAT on air tickets and other travel costs continue to make Nepal an expensive destination for many tourists. They stress the need for a comprehensive tourism reform that goes beyond hotels to address the full value chain.

A Policy Shift with Long-Term Impact

The hotel industry's inclusion under the manufacturing sector is expected to usher in greater investment, employment and foreign exchange earnings. More importantly, it bridges a long-standing gap between policy and practice.

As Nepal looks to expand its tourism economy beyond Kathmandu and Pokhara, this move could be a turning point for hospitality development across the country, especially in underdeveloped regions where capital incentives and tax holidays can attract large-scale tourism infrastructure.

While implementation aspects remain to be seen, the announcement marks a watershed moment for Nepal’s hotel sector—one that could reshape how the country promotes, supports, and scales its tourism economy in the years to come.

(This article was originally publihsed in  July 2025 issue  of New Business Age Magazine.)