Micro, Cottage, Small, Medium or Large? Nepal Business Classifications Explained

There is no single SME label for every purpose

People use “SME” as a convenient business label, but the legal test changes with the purpose. An industry-registration classification can use fixed capital. A bank may use a lending-policy definition. A tax provision may use turnover, nature of income or a special threshold. A procurement notice can set its own eligibility. Calling a business “small” in one conversation does not prove that it qualifies as a small industry for another benefit.

The safest habit is to ask: small for what purpose? Then read the exact statute, regulation, notice, loan product or tender document. This takes a few extra minutes and avoids a surprisingly common error—submitting a correct number under the wrong legal definition.

• Industry registration: begin with the Industrial Enterprises Act classification.
• Bank finance: read the lender’s current product or regulatory definition.
• Tax treatment: check the Income Tax Act/annual amendment and the relevant income or turnover condition.
• Procurement or grant: follow that notice’s own definition and documents.

Industry size under the Industrial Enterprises Act

Section 17 of the Industrial Enterprises Act, 2076 provides the core industry-size bands. A small industry is one other than a micro or cottage industry with fixed capital up to NPR 150 million. A medium industry has fixed capital above NPR 150 million up to NPR 500 million. A large industry has fixed capital above NPR 500 million. These are fixed-capital bands, not annual-sales bands.

A micro enterprise is more restrictive than simply “very small.” It requires all of the listed conditions: fixed capital excluding land and building up to NPR 2 million, the entrepreneur personally involved in operation and management, up to nine workers including the entrepreneur, annual turnover below NPR 20 million, and machine/energy capacity within the prescribed limit. Some industries requiring Schedule 1 approval cannot be treated as micro enterprises even if the numbers look small.

What counts as fixed capital?

For this Act, fixed-capital valuation is broader than the purchase price of a machine. The Act refers to physical structures and assets such as land/buildings and equipment, and also recognises specified capitalised technical, supervision, pre-investment, pre-operation and interest costs. The correct number is therefore a classification calculation, not merely a figure copied from an invoice or annual sales report.

That is why a growing business should revisit classification when it adds a factory, machinery, infrastructure or a new project phase. The Act provides a mechanism for an industry to apply to the registering authority where fixed capital changes. Do not wait until an incentive, reporting requirement or renewal asks for a classification that the business has not kept current.

Cottage is not just another word for micro

Cottage industry has its own character in the Act: traditional skill and technology, labour-intensive work, local raw materials/technology/art/culture, the specified power limit and the Schedule 2 list. A business can be small in ordinary language but fail the legal cottage-industry description. Conversely, a traditional producer may be a cottage industry even where a founder casually describes it as a micro business.

Before applying for an industry certificate, financing facility or incentive, create a short classification note showing the business activity, fixed-capital basis, worker count, turnover where relevant, power use and the programme whose definition is being applied. It is a practical document that makes later compliance and conversations with banks or authorities much easier.