20% corporate tax cut can increase FDI 14 times: FICCI report

A 20% reduction in corporate tax has the potential to attract 14 times more foreign direct investment (FDI) to Bangladesh, while on the other hand, a 30% depreciation of the local currency could result in a 30% increase in customs duty.

These perspectives emerged from separate events in Dhaka on Sunday. 

The initial insight was shared in a study report at an event organised to celebrate 60 years of the Foreign Investors' Chamber of Commerce and Industry (FICCI). The second observation was presented at a programme by the Policy Research Institute of Bangladesh (PRI).

The FICCI report, "Catalyzing Greater FDI For Vision 2041: Priorities for Building A Conducive Tax System in Bangladesh", was handed over to Prime Minister Sheikh Hasina at the programme.

Foreign investors in Bangladesh said the reduction of the corporate tax in the country will play a role in increasing investment, and this will not lead to a decrease in revenue but rather an increase.

They explained that reduced tariff rates mean lower import costs for foreign investors who want to bring in raw materials or components for their production processes. This cost reduction enhances the attractiveness of investing in the country and paves the way for expanded market access for foreign companies, they said.

According to the report, if the current tax rate is reduced from 20 percent to an average of 24 percent by 2030, FDI can increase by 14 times in 2041. At the same time revenue collection may also increase by more than 6 times as compared to present.

The report indicates that if the tax rate is increased by 20% over the next 10 years compared to the present, then GDP may only increase by less than 6 times, and revenue collection may increase by less than 3 times.

Similarly, the report also shows how an investment-friendly tax environment is helpful in increasing FDI and revenue.

It has been clarified in the report that tax rate and tax environment play a supportive role in increasing FDI and tax collection in the long run. In other words, an increase in the tax rate may lead to a higher growth in both FDIs and revenue, while a reduction in the tax rate could result in an even greater increase in both.

In Bangladesh, the current corporate tax rates range from 20 percent to 45 percent. In the last three national budgets, the non-listed companies' tax rate in the stock market has been reduced by 2.5 percentage points.

The FICCI report says, "Taxation policies including corporate income tax rates, tax incentives and exemptions have a profound impact on foreign investors' decisions to invest in a particular country."

It also says, "While low tax rates may attract foreign businesses by enhancing after-tax profitability, tax incentives can further incentivize FDI inflows into specific sectors or regions. When high tax rates and complex tax systems may discourage FDI, potentially leading investors to seek more favourable jurisdictions. However, the relationship between taxation and FDI is multifaceted, extending beyond mere tax rates." 

Besides, the political stability that is needed to attract FDI has also come up in the report. It says, "To attract foreign investments, countries should adopt a holistic approach, addressing not only tax policies but also factors like political stability, infrastructure and market potential."

Apart from the tax rate, there are other obstacles in attracting local and FDI in Bangladesh, the report also shows.

TIM Nurul Kabir, executive director of FICCI, told The Business Standard, "There is a need to increase FDI and revenue collection in Bangladesh. This should be considered not only in the short term but also in the long term, and it has been highlighted in FICCI's report that how it can increase and be sustainable."

"If this is considered, it will have a positive effect on FDI and revenue collection in the long run," he said.

Dr M Masrur Reaz, chairman of Policy Exchange Bangladesh told TBS, "In Bangladesh, increasing investment and revenue collection are both necessary. The existing tax rate has been reduced, and it is possible to increase revenue collection with a conducive environment."