A 2009 treaty lets Nepali-made goods enter India without customs duty. The next opportunity may lie in the less crowded western corridor of Nepalgunj and Bardiya

Every carton of Réal juice that leaves Dabur’s plant near Birgunj and crosses into Raxaul pays no basic customs duty. There is nothing clever or grey about it. It is the plain effect of the India–Nepal Treaty of Trade of 2009, under which goods manufactured in Nepal enter India free of customs duty and quantity limits, while Indian goods going the other way still pay Nepali duty.

Twenty-five years later, surprisingly few Indian manufacturers have followed that template. As tariffs, supply-chain resilience and cost pressures move up boardroom agendas, the Nepal route deserves a fresh look. It needs to be understood properly, though, because it is widely misread.

What the treaty actually offers

The preference is conditional. A product qualifies only if Nepali processing changes its tariff classification at the four-digit HS level and adds at least 30% of its ex-factory value locally. Four items (vegetable fats, acrylic yarn, copper products and zinc oxide) are capped by annual quotas. Alcohol, tobacco and foreign-branded cosmetics are excluded altogether.

Three more points are often missed. The waiver covers basic customs duty only, and IGST still applies at the border, although a registered buyer can usually claim it back. India’s rules of origin (CAROTAR), tightened in March 2025, put the burden of proof squarely on the Indian importer, who may be asked for the Nepali supplier’s cost data. And India has tightened the treaty before: the four quotas were introduced in 2002 after a looser regime produced import surges in exactly those products.

Where the money really is

The biggest misconception is that shifting production to Nepal saves customs duty in itself. It does not. A company making soap or biscuits in Uttar Pradesh pays no customs duty on its own output anyway. The gains come from four more specific sources.

First, imported inputs. If a key raw material comes from outside South Asia and carries a high Indian duty, converting it in Nepal into a genuinely different product takes that duty out of the cost. On reasonable assumptions, this can be worth 5–6% of ex-factory value, which is significant in an industry with margins in the low teens.

Second, tax. Nepal taxes manufacturing (“special”) industries at 20%, against India’s effective 25.17%. Plants in designated underdeveloped districts get concessions of up to 90% for ten years, and special economic zones offer five-year tax holidays.

Third, geography and costs. Birgunj, Bhairahawa, Nepalgunj and Biratnagar are next to Bihar, eastern and central UP and north Bengal, among India’s fastest-growing consumer markets. The Nepali rupee is pegged at 1.6 to the Indian rupee, so there is almost no currency risk. Nepal’s minimum wage is NPR 19,550 (about ₹12,200) a month. Nepal also now has surplus hydropower: it exported 3.88 billion units of electricity to India and Bangladesh in FY26 and earned NPR 29.32 billion from it.

Fourth, a second market. A Nepali plant serves 30 million Nepali consumers without facing Nepal’s import duties. That is why Britannia built a NPR 1.11 billion biscuit plant at Simara, why Unilever Nepal earned NPR 1.96 billion in net profit in FY 2024/25, and why Bikaji broke ground on a ₹50-crore snacks unit with the Chaudhary Group in October 2025. A factory that can sell in either country is much less exposed to a policy change in one of them.

The overlooked corridor: Nepalgunj and Bardiya

Most Indian investment in Nepal has gone to the central Terai around Birgunj and Simara, or to the Bhairahawa–Butwal belt. The western gateway of Nepalgunj, opposite Rupaidiha in Uttar Pradesh’s Bahraich district, has drawn far less attention, even though its infrastructure has improved sharply. An integrated check post at Nepalgunj, built with Indian assistance and inaugurated by the two prime ministers in June 2023, has been operating since May 2024. It brings customs, immigration, quarantine, food-testing and banking under one roof.

Trade through the crossing is still very one-sided. In the first five months of FY 2025/26, Nepalgunj customs recorded imports of about NPR 30 billion but exports of only about NPR 1 billion. For an exporter, that means a modern crossing with spare capacity, and return loads to India that should come cheaper than on busier routes.

The bigger draw is next door. Bardiya, the district immediately west of Banke, is listed in Schedule 10 of Nepal’s Industrial Enterprises Act, 2020 among the areas that qualify for location-based tax concessions. A manufacturing (“special”) industry there gets a 70% concession on the 20% tax rate for ten years from the start of commercial production, an effective income-tax rate of about 6%, compared with 25.17% in India. Banke itself is not on the list, so the practical model is a factory in Bardiya that ships through the Nepalgunj check post. Kailali, Kanchanpur, Dang and Surkhet are in the same category, which gives western Nepal a wider cluster of eligible sites.

The market logic is equally strong. The corridor opens onto Bahraich and the neighbouring districts of UP’s Awadh region, with Lucknow within reach: a large, densely populated and under-served consumer belt. Bardiya and Banke also have a farm economy suited to food, agro and herbal processing, and Nepalgunj has regular flights to Kathmandu. For a first-time investor, this corridor offers a tax position and a less crowded border that the central Terai no longer does.

A playbook for India Inc

For Indian manufacturers, the lessons can be summed up in five rules.

Choose products where the transformation is real. Herbal and agro-processing using Himalayan inputs, energy-intensive processes that benefit from hydropower, and brands that sell on both sides of the border are the best fits. Refining, blending and repacking are the worst: recent duty-free shipments of refined edible oil drew complaints from Indian refiners and tighter origin checks within months.

Appraise the project with the tariff benefit set to zero. If the Nepal plant earns its cost of capital from Nepali sales, tax concessions and lower costs alone, the duty waiver is upside. If it does not, it is a bet on policy staying the same.

Get the paperwork right from the start. Keep audit-ready costing records, make sure transfer prices between parent and subsidiary are consistent with the 30% value-addition calculation, and ensure the Nepali company is genuinely managed in Nepal.

Pick the location for the concessions, not just the highway. A site in a Schedule 10 district such as Bardiya, or in a special economic zone, can change the tax bill for a decade. Check eligibility before buying land.

Keep backup capacity in India. The September 2025 unrest across Nepal briefly shut Britannia’s plant and disrupted Dabur’s, and the 2015 border blockade is still remembered in Birgunj. Buffer stocks and standby capacity are part of the cost of doing business there.

The window is open

Nepal is more investor-ready today than it has been in years. The Rastriya Swatantra Party won 182 of 275 seats in March, a rare single-party majority, and Balen Shah became Prime Minister. The minimum foreign investment threshold has been cut to NPR 20 million. With remittances above a third of GDP and Gulf-based workers returning home, Kathmandu needs factory jobs. India already accounts for 32.8% of Nepal’s FDI stock, and 39% of that is in manufacturing.

The treaty is a development preference that India has renewed repeatedly because a stronger Nepali industrial base is in India’s own interest. Companies that use it for genuine manufacturing, as Dabur has, will find a durable advantage. Those looking for a shortcut will find that the rules tighten quickly. And for companies willing to look beyond Birgunj, the Nepalgunj–Bardiya corridor may be the best place to start.

THE NEPAL ROUTE IN NUMBERS
0%	Indian basic customs duty on qualifying Nepali-made goods
30%	Minimum local value addition, plus a change in HS heading
32.8%	India’s share of Nepal’s FDI stock (NPR 111.63 bn, mid-July 2025)
6%	Effective income tax for ten years on a manufacturing unit in Bardiya (70% area concession)
May 2024	Nepalgunj–Rupaidiha integrated check post begins operations
20%	Nepal’s tax rate for manufacturing industries (India: 25.17%)
1.6: 1	Fixed NPR–INR peg