Economic zone investors may face tax benefit cuts

• Currently, there is no import duty on capital machinery for industries inside EZs
• The government plans to impose 1% duty 
• Currently, there is no duty on the import of construction materials
• Now the government considers imposing regular tax
• Currently, there is no import tax on vehicles used by the economic zone industries 
• The government is likely to impose regular tax which is as high as 800%
• The government considers reducing VAT on land lease from 15% to 2% 

Investors in economic zones may lose duty and tax benefits to some extent as the government plans to remove the "disparity" with their counterparts investing elsewhere in the country. 

Currently, industries in the economic zones enjoy duty-free import of capital machinery but may face a 1% duty similar to other industries in the next fiscal year, according to finance ministry officials involved in the budget formation process.

Similarly, the industries might be required to pay all kinds of taxes on the import of construction materials that are currently tax-free. Additionally, their duty-free facility for vehicle imports is also likely to be withdrawn, resulting in industries having to pay regular duties, which can be as high as 800%.

The upcoming budget is likely to propose imposing VAT on supplies received by investors in economic zones that currently enjoy a waiver.

However, there is a possibility that the long-discussed value-added tax (VAT) on land lease in the economic zones may be reduced from 15% to 2%, the officials also said.

Investors believe that such initiatives may discourage both local and foreign investments.

"Such sudden changes are unexpected. It reduces investor confidence," said Rupali Haque Chowdhury, managing director of Berger Paints Bangladesh Limited, an investor in the Bangabandhu Sheikh Mujib Shilpa Nagar, the country's largest economic zone. 

"Investors are attracted by the government's various incentive commitments. However, a sudden increase in taxes will raise costs, potentially discouraging future investments," added the former president of the Foreign Investors Chamber of Commerce and Industry. 

To promote local and foreign direct investment and centralise the industrial units that had been scattered for a long time, the government established the Bangladesh Economic Zone Authority (Beza) in 2010.

The Beza is determined to establish 100 economic zones in the country which can potentially create direct and indirect employment opportunities for 10 million people and goods and services worth $40 billion will be produced from here.

According to Beza, the government has approved 97 economic zone sites. Of them, the development work of 29 economic zones is in progress while 10 economic zones have already gone into production. Investment proposals of $26 billion have been approved in all these economic zones. The approved investment proposals will create about 1 million new jobs. 

Almost eight companies are in commercial production and 70 industries are under construction. These industries provide employment to around 50,000 people and invested around $4.5 billion.

To attract investment, industries in economic zones enjoy VAT waiver in gas, water, electricity and fuel. It also provides tax exemption for the first three years of investment. Tax holiday benefits are provided for the next seven years.

Investors outside the economic zones have been raising objections about the disparity between the VAT and tax benefits provided to industries within the zones.

Farid Uddin, a former member of the National Board of Revenue, told TBS that, "If such an initiative is taken, it will be rational. Because there was discrimination with industries outside the economic zones."

However, a senior official of one of the leading private companies inside an economic zone, on condition of anonymity, told TBS, "Local and foreign investors are coming forward to set up industries in Beza because of such facilities. Because they took this decision after considering other options."

"Now someone will import capital machinery, or start the process. If such a decision is taken at such a time, it will be detrimental to the investors. This will definitely discourage investment," he added. 

However, he said, "There was no VAT on land lease at the time of investment. But later, the NBR imposed VAT. The VAT related to land lease is relatively insignificant compared to the proposed increase in expenditure in other areas, including new capital machinery."