1% import duty threatens foreign investment in economic zones: Stakeholders

Highlights:

• Beza to appeal to withdraw the duty
• Currently 97 approved zones in Bangladesh
• Proposed FDI in economic zones is $1.5 billion
• Zones employ 60,000 people
• 29 new zones under development
• Bangladesh aiming for 100 economic zones by 2041

Business leaders and stakeholders have expressed concerns that the government's proposed 1% import duty on capital machinery for all industries in economic zones will discourage foreign investment.

The Bangladesh Economic Zones Authority (Beza) announced its intention to appeal to the government for the withdrawal of the duty. The Federation of Bangladesh Chambers of Commerce and Industry (FBCCI) is also planning a similar appeal.

Among the voices expressing concern, Suman Bhowmik, general manager (accounts) of Meghna Group of Industries, highlighted the potential negative impact on foreign investment.

"We attract foreign investment by showcasing the benefits of economic zones. Many investors have come and more were interested, with investments in the pipeline. Now, if we tell them that the benefits we promised have been withdrawn, no foreign investor will come," he said.

Suman further said that the proposed duty eliminates the distinction between economic zones and other areas, diminishing the very benefits that initially attracted many investors.

He believes this policy will hinder planned industrialisation and discourage new foreign direct investment (FDI).

The Meghna Group currently operates three economic zones which house both domestic and foreign manufacturing. Additionally, the group has received approval for a new economic zone.

According to Beza, the anticipated FDI for economic zones is $1.5 billion. Beza currently offers a tax exemption on both capital machinery and construction materials for industries within its zones.

Beza Executive Chairman Shaikh Yusuf Harun told TBS, "There was no charge on capital machinery. But it has been proposed in the new budget to impose a 1% import duty. I will recommend that this be waived. I hope the government will consider it."

At a press conference on Friday, National Board of Revenue (NBR) Chairman Abu Hena Md Rahmatul Muneem said, "We have increased the duty to 1% for some capital machinery that was previously exempt to eliminate zero tax rates and boost overall tax collection."

Despite the NBR's rationale, business leaders expressed concern about the potential negative consequences.

Md Alamgir, secretary general of FBCCI, argued that the duty, even if seemingly small, would erode investor confidence.

"A mere 1% is insignificant. It could have been avoided altogether.  Investors in economic zones will perceive this as a reduction in benefits, which will decrease their confidence."

FBCCI President Mahbubul Alam announced plans to petition the government.

"We will appeal to the government to withdraw this duty. Many businesses have already invested in infrastructure within economic zones and are preparing to import machinery for production. Planned industrialisation requires offering more incentives, not fewer."

Dr Selim Raihan, executive director of the South Asian Network on Economic Modeling, criticised the proposed duty as a policy inconsistency.

"Capital machinery is a major investment component. To invest in Bangladesh, you need to import this machinery. Incentives are necessary to encourage investment in economic zones," he said.

He also said, "These tax changes are implemented in an ad hoc manner. Investors were attracted by the tax benefits of economic zones. Now they see their costs increasing. Such sudden changes discourage investment because they create policy instability. We urge the government to reconsider this and maintain the existing benefits for investors in economic zones."

Economic zone stats and government plans

According to Beza sources, there are currently 97 approved economic zones in the country, with 68 government-owned and 29 private. Out of these, 11 are operational, with 3 government-owned and 8 private.

There are also 29 new economic zones under development, split between 15 government and 14 private zones.

These zones currently house 50 operational industrial establishments, with a breakdown of 13 in government zones and 37 in private zones. An additional 53 establishments are under construction, with 36 in government zones and 17 in private zones.

Economic zones employ roughly 60,000 people, with the private sector accounting for 53,000 jobs.

Beza's long-term goal is to establish 100 economic zones nationwide by 2041. This initiative aims to generate employment for one million people and produce and export $40 billion worth of goods annually.

The recently presented national budget for fiscal year 2024-25 included a few proposals impacting economic zones. Finance Minister Abul Hassan Mahmood Ali announced a new 1% duty on used construction materials imported by developers for economic zone development.

"While a 0% import duty was previously offered on goods used in economic zone development, I propose this be changed to 1%."

The Minister also proposed changes to the import duty on vehicles used by businesses within economic zones.

"Previously, a 0% import duty existed for vehicles used by establishments in economic zones. I propose maintaining the import duty exemption but adding all other applicable taxes and duties."

The budget speech also outlined the government's plans to develop new economic zones. Development work is expected to begin soon in Gopalganj, Kushtia, Satkhira, Chandpur, and Pabna.

The Finance Minister reported that over 200 companies have been allocated land within the country's 29 economic zones. These companies have proposed investments totalling approximately $23 billion.

Of this proposed investment, $5.5 billion has already been invested in private economic zones, where 43 establishments are currently operational and another 70 are under construction.