Why incentives fail to attract FDI?
Md. Joynal Abdin
The Daily Independent on June 22, 2010
Bangladesh is a land of opportunity with cheap hardworking labour force, low utility charges, two sea ports, long-term tax holiday, 100 per cent repatriation facility, and easy access to largest regional market to India and China. Besides, there are monetary and non-monetary incentives available in Bangladesh for foreign direct investment.
There are many investment incentives in the country such as:
Tax exemptions: Generally five to seven years’ tax exemptions are available for many business investments. However, for electric power generation tax exemptions are provided for up to 15 years.
Duty: No import duty is applicable for export-oriented industry. For other industries it is 5 per cent ad valorem.
Income tax: Double taxation can be avoided in most cases as the country benefits from many bilateral investment agreements. Exemptions of income tax up to three years for the expatriate employees in industries are specified in the relevant schedules of the income tax ordinance.
Remittances: Facilities for full repatriation of invested capital, profits and dividends are the norm in most situations.
Exit: An investor can wind up an investment either through a decision of an annual or extraordinary general meeting. Once a foreign investor completes the formalities to leave the country, he or she can repatriate the net proceeds after securing proper authorization from the central bank.
Ownership: Foreign investors can set up ventures, either wholly owned or in joint collaboration with local partners.
Investing in the stock market: Foreign investors are allowed to participate in initial primary offerings (IPOs) and rights issues without any regulatory restrictions. Also, incomes from dividends are exempted from payment of tax.
Incentives and facilities for the investors: Industries are eligible for tax holidays for the following periods according to the location of the establishment. The period of tax holiday is calculated from the month of commencement of commercial production or operation of the industrial undertaking.
The eligibility of a tax holiday is to be determined by the National Board of Revenue (NBR). The tax holiday facility is applicable to industries set up in Bangladesh before June 30, 2000.
Accelerated depreciation in lieu of a tax holiday is allowed at the rate of 80 per cent of actual cost of machinery or plant for the year in which the unit starts commercial production and 20 per cent for the following years. The rate of depreciation is 100 per cent for years specified by the NBR.
Concessionary duty on imported capital machinery Import duty at the rate of 7.5 per cent ad valorem is payable on capital machinery and spares imported for initial installation or BMR/BMRE of the existing industries. The value of spare parts should not, however, exceed 10 per cent of the total cost and freight value of the machinery. Out of this, 7.5 per cent rate of duty payable, export-oriented industries and industries in the underdeveloped areas, may enjoy a further concession of the import duty in the following manner:
Value Added Tax (VAT) is not payable for imported capital machinery and spares. Duties and taxes on import of goods which are produced locally will be higher than those applicable to import of raw materials for producing such goods.
Special incentives are provided to encourage non-resident Bangladeshis for investment in the country. Non-resident Bangladeshi investors will enjoy facilities similar to those of foreign investors. Moreover, they can buy newly issued shares/debentures of Bangladeshi companies.
A quota of 10 per cent has been fixed for non-resident Bangladeshis in primary shares. Furthermore, they can maintain foreign currency deposits in the Non-resident Foreign Currency Deposit (NFCD) account. Encouraging export-oriented industries is one of the major objectives of the Industrial Policy in place, and as such the government ensures all support and co-operation to the exporter as per the export policy.
Industrious low-cost workforce Bangladesh offers a well-educated, highly adaptive and industrious workforce with the lowest wages and salaries in the region. 57.3 per cent of the population is under 25, providing a youthful group for recruitment. The country has consistently developed a skilled workforce catering to investors needs. English is widely spoken, making communication easy.
Strategic location Bangladesh is strategically located next to India, China and ASEAN markets. As the South Asian Free Trade Area (SAFTA) comes into force, investors in Bangladesh will enjoy duty-free access to India and other member countries. Bangladesh has proved to be an attractive investment location with its 144 million populations and consistent economic growth leading to strong and growing domestic demand. Energy prices in Bangladesh are the most competitive in the region. Transportation on green compressed natural gas is less than 20 per cent of the diesel price.
Bangladesh enjoys tariff-free access to the European Union, Canada, Australia and Japan. In Europe, Bangladesh enjoys 60 per cent of the market share and is the top manufacturing exporter amongst 50 least developed countries. Bangladesh offers the most liberal FDI regime in South Asia, allowing 100 per cent foreign equity with unrestricted exit policy, easy remittance of royalty, and repatriation of profits and incomes. Bangladesh offers export-oriented industrial enclaves with infrastructural facilities and logistical support for foreign investors. The country is also developing its core infrastructures, including roads, highways, surface transport and port facilities for a better business environment.
A largely homogeneous society with people living in harmony irrespective of race and religion, Bangladesh is a democratic country enjoying broad bi-partisan political support for private investment.
The legal and policy framework for business is conducive to foreign investment. Special incentives & facilities in EPZ area Fiscal incentives:
1. 10 years tax holiday
2. Duty free import of construction materials
3. Duty free import of machineries, office equipment and spare parts etc.
4. Duty free import and export of raw materials and finished goods
5. Relief from double taxation
6. Exemption from dividend tax
7. GSP facility available
8. Accelerated depreciation on machinery or plant allowed
9. Remittance of royalty, technical and consultancy fees allowed
10. Duty & quota free access to EU, Canada, Norway, Australia etc.
With all these features why Bangladesh is performing poorly, a question often asked by many. This is because bureaucratic red tapes, poor infrastructure, extortions, power and energy crisis and long complex procedures of starting a business.
The offer of wholesale incentives to multinational companies (MNC) for investment in the country is actually disserving the country’s interest and undermining the essence of a policy that should attract higher foreign direct investment. So, we should change the existing policy prioritizing the areas of national interest for offering incentives.