Tax holiday for private economic zones may continue

The government may backtrack on the proposed withdrawal of the tax holiday facilities for investors in private economic zones to encourage domestic and foreign investments, according to officials from the National Board of Revenue (NBR).

The authorities are reconsidering the decision to withdraw tax holiday facilities after the announcement in the proposed budget for the fiscal 2024-25 earlier this month caused frustration among investors, the officials say.

However, the final decision will be made after a meeting of NBR Chairman Abu Hena Md Rahmatul Muneem with Prime Minister Sheikh Hasina, they added.

Investors have welcomed the potential reversal, noting that withdrawing the tax holiday facilities would damage investor confidence.

Currently, investors in economic zones enjoy tax exemptions ranging from 20% to 100% for the first 10 years of production. While the proposed budget keeps these benefits for government economic zones, it cancels them for private economic zones.

Officials also indicate that it is unlikely the new duty imposed in the proposed budget on capital machinery imports for economic zones and hi-tech parks will be cancelled. Additionally, some other benefits for economic zone investors, which were cancelled in the proposed budget, are also unlikely to be reinstated.

During the time of investment, investors in private economic zones were assured there would be tax holiday benefits. If the tax is suddenly imposed, it will hurt their confidence.

Rupali Chowdhury, managing director of Berger Paints Bangladesh

Speaking to The Business Standard on condition of anonymity, an NBR official said, "Investors in private economic zones may enjoy the same benefits as those in government economic zones. If so, they can continue to enjoy the same tax holiday benefits as they currently do.

"However, this will be finalised after the NBR Chairman's meeting with the Prime Minister."

According to sources, the date of the meeting is yet to be fixed.

While investors have welcomed the government's plan to backtrack on the decision to scrap tax holidays for private economic zones, they have also urged the reinstatement of other facilities revoked in the proposed budget.

They called on the government to cancel the decision to impose duties on capital machinery imports for economic zones and hi-tech parks.

"During the time of investment, investors in private economic zones were assured there would be tax holiday benefits. If the tax is suddenly imposed, it will hurt their confidence," Rupali Chowdhury, managing director of Berger Paints Bangladesh and an economic zone investor, told TBS.

Rupali Chowdhury, also the former president of the Foreign Investors Chamber of Commerce and Industry (FICCI), said the decision to withdraw tax benefits on investment in new units of the same company and to impose duties on capital machinery imports should be reconsidered.

The Federation of Bangladesh Chambers of Commerce and Industry (FBCCI), the apex organisation of the country's businessmen, sent a letter to the Finance Minister on 23 June requesting the cancellation of the tax imposition on business establishments in the economic zones.

Additionally, after the proposed budget was presented in parliament, the Bangladesh Economic Zone Investors Association (BEZIA) met with the Finance Minister to demand the maintenance of existing tax benefits.

The plan to backtrack on revoking tax holiday benefits is a good move. At the same time, the existing zero-duty facility on capital machinery imports should also continue. We encourage foreign investors to invest here. But if these facilities are not available, neither local nor foreign investment will be attracted,

FBCCI President Md Mahbubul Alam

Md Mahbubul Alam, president of the FBCCI, said, "The plan to backtrack on revoking tax holiday benefits is a good move. At the same time, the existing zero-duty facility on capital machinery imports should also continue."

"We encourage foreign investors to invest here. But if these facilities are not available, neither local nor foreign investment will be attracted," he added.

The government has planned to establish 100 economic zones in the country, with 97 zones already approved. Of these, 68 are government-owned and 29 are privately owned. The government anticipates attracting around $29 billion in investments across these economic zones.

Currently, 11 economic zones are operational, comprising three government-owned and eight privately owned zones.

In addition to these, there are 13 hi-tech parks established in the country.

According to the Bangladesh Economic Zone Authority (BEZA), investments in economic zones have already surpassed $6 billion, leading to employment opportunities for 60,000 people.

Benefits revoked in the proposed budget

Currently, investors in economic zones receive a decade-long tax break starting from their first year of operation. This includes a full tax waiver for the initial three years, followed by an 80% waiver in the fourth year, 70% in the fifth, and 60% in the sixth year.

The waiver decreases by 10 percentage points annually thereafter, reaching 20% in the tenth year.

However, the proposal to abolish this benefit for private economic zones would subject companies to general tax rates ranging from 20% to 27.5% or higher on their income.

Additionally, foreign nationals employed as technical assistants in companies within economic zones currently enjoy a 50% tax exemption on their salaries for the first three years. Nevertheless, the proposed budget seeks to discontinue this benefit in the next fiscal year.

Furthermore, in the proposed budget, the tax holiday facility for establishing multiple units of the same company in government economic zones has been revoked. The budget also proposes the elimination of duty exemption on the import of capital machinery and spare parts for industries located in economic zones, replacing it with a duty of at least 1% or higher.

Additionally, tariff benefits on the import of equipment for economic zone development have been abolished.

Moreover, the duty-free vehicle import privilege for foreign investors in economic zones has been discontinued. The tax exemptions on dividends, capital gains, royalties, technical know-how, and technical assistance fees for companies incorporated in these zones, which previously lasted for 10 years, are also proposed to be cancelled in the upcoming budget.

Suman Bhowmik, general manager (Accounts) at Meghna Group, a prominent conglomerate that established four private economic zones, told TBS, "Reinstating some benefits is a positive step. However, the cancellation of many tax benefits will not help restore investor confidence."

He said, "The NBR must assure continuity of existing facilities for the future. Without such assurance, trust will not be regained."

Bhowmik added, "It has been challenging to face our foreign investors following the removal of all benefits in the budget."

There is pressure to reduce tax exemptions in preparation for Bangladesh's LDC graduation. Additionally, the IMF team has also recommended reductions in tax exemptions. As a result, exemptions for certain sectors have been rationalised.

A senior NBR official

Reason of benefits withdrawal

The International Monetary Fund (IMF) imposed a condition to reduce tax exemptions to boost tax collection as part of its $4.7 billion loan agreement with Bangladesh. Since then, the organisation has been closely monitoring compliance with these conditions over the past eighteen months.

The National Board of Revenue (NBR) has been gradually scaling back exemptions across various sectors for the last two years in alignment with IMF requirements.

According to NBR data, industries in economic zones and hi-tech parks collectively benefited from tax exemptions totaling around Tk4,022 crore in the fiscal year 2021-22.

A senior NBR official told TBS, "There is pressure to reduce tax exemptions in preparation for Bangladesh's LDC graduation. Additionally, the IMF team has also recommended reductions in tax exemptions. As a result, exemptions for certain sectors have been rationalised."

"However," the official clarified, "not all exemptions have been reduced or eliminated."