Economic zones investors' plan go haywire as tax holiday ends, import duty imposed
In a move, surprising investors and businesses, the government has revoked the 10-year tax holiday previously granted to new investors in private economic zones and hi-tech parks in the new budget announcement.
The government's commitment to attract foreign direct investment (FDI) into the 100 economic zones being developed in collaboration with the private sector, has come into question after the budget announcement for the upcoming fiscal year on 6 June.
In a move, surprising investors and businesses, the government has revoked the 10-year tax holiday previously granted to new investors in private economic zones and hi-tech parks in the new budget announcement.
Businesses have expressed concerns regarding the potential impact of the latest fiscal measures on the viability of these economic zones as investment hubs and the prospect of boosting exports by $40 billion annually.
This tax holiday would still be available in state-established economic zones but to new investors only, according to separate notifications issued by the National Board of Revenue (NBR) on 29 May.
Moreover, investors have lost the zero-duty benefit on the import of capital machinery, components, construction materials, and raw materials from the upcoming fiscal year.
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Consequently, companies operating within these industrial enclaves will now face a 1% customs duty on both capital machinery and raw materials imports.
If factories in economic zones are developed by third-party companies, the customs duty rate will be 1%, and it will rise to 5% for hi-tech parks.
This policy shift has prompted investors in economic zones to call for government intervention to reinstate the previously enjoyed benefits.
They met the finance minister and NBR chairman on 12 June and argued that without these incentives, the country risks losing out on much-needed FDI which could impede the economic growth and industrialisation goals set by the government.
The recent changes in investment policies concerning economic zones convey to investors that Bangladesh's policy landscape lacks predictability
"The recent changes in investment policies concerning economic zones convey to investors that Bangladesh's policy landscape lacks predictability," said Mostafa Kamal, chairman of Meghna Group of Industries (MGI), which currently operates three economic zones and has obtained pre-qualification licences for a fourth one.
He told TBS the government's revenue from taxing new investments in the zones would be limited. For instance, if there is a $1 billion new investment in private zones, the NBR would collect Tk120 crore in taxes (based on a 1% tax rate on $1 billion, equivalent to Tk12,000 crore).
"The government can earn more by improving the ease of doing business and streamlining bureaucratic processes. The finance minister has assured us that he will bring this matter to the attention of the prime minister," he said.
Currently, foreign companies including TIC Manufacturing Bangladesh, TIC Industries Bangladesh, Sun Pharmaceutical, Siegwerk Bangladesh, Jotun Bangladesh, Ismartu Technology Bangladesh, Sika Bangladesh and Sakata Inks Bangladesh set up factories in the Meghna Industrial Economic Zone.
Bangladesh Economic Zones Authority (Beza) Executive Chairman Shaikh Yusuf Harun also believes that imposing a duty on capital machinery and raw materials imports is not a good decision.
"I will propose waiving it and I hope the government will take it into consideration," he told TBS.
What prompted NBR to change tax policies for EZs
A senior NBR official, speaking on condition of anonymity, said some existing industries have been exploiting these tax benefits by gaining approval from Beza as private economic zones and hi-tech parks.
If this continues, more existing industries may seek to be designated as economic zones and hi-tech parks in the future. The latest measures are intended to prevent the misuse of tax incentives and increase revenue from these sectors, he said.
Officials from the finance ministry and NBR said this initiative will help phase out the culture of tax exemptions and enhance the competitiveness of industries in preparation for the LDC graduation by 2026.
According to NBR data, in fiscal year 2021-22, industries in economic zones and hi-tech parks jointly enjoyed tax exemptions amounting to approximately Tk4,022 crore.
The government also plans to cut the direct tax expenditure by Tk15,000 crore in FY25.
According to NBR's recent statutory regulatory orders (SROs), existing companies will not be allowed to receive tax holiday benefits through mergers, demergers, or restructuring with new companies in government economic zones.
Also, the NBR notified that used machinery will not be permitted for reuse in factories within government economic zones.
Currently, investors in the EZs receive a decade-long tax break starting from the first year of their operations. They are entitled to a full tax waiver for the first three years, followed by an 80% waiver in the fourth year, 70% in the fifth year, and 60% in the sixth year. The tax waiver was intended to decrease by 10 percentage points each subsequent year, reaching 20% in the 10th year.
Additionally, foreign nationals working as technical assistants in companies within economic zones currently enjoy a 50% tax exemption on their salaries for the first three years of employment. However, this benefit will be discontinued starting next fiscal year.
Why investors are alarmed
Construction is bustling at Sirajganj Economic Zone, the country's largest private economic hub as investors aim to start production by early next year, breathing new life into the economy of the region.
Currently, 110 acres of land have been allocated to 15 companies for factory setup within the 1,041-acre zone located along the Jamuna River's west bank near Bangabandhu Bridge in Sirajganj.
Sheikh Monwar Hossain, one of the directors of Sirajganj Economic Zone Limited, told TBS, "Withdrawal of the promised benefits for the economic zone will erode investor confidence. Of the 15 companies allocated land, some were planning joint ventures with foreign firms. These companies will now lose interest in investing."
Suman Bhowmik, general manager (accounts) of Meghna Group, said, "Currently, there are seven foreign companies in the pipeline with investment proposals exceeding $150 million for the Meghna Group's two economic zones. If they do not receive the previously promised benefits, they won't invest. What do we say to them?"
Aparup Chowdhury, CEO of the Bangladesh Economic Zones Investors Association (Bezia), told TBS that these benefits were part of an agreement with the Beza, and their removal could undermine the purpose of private zones.
He warned that foreign investors might relocate to other countries if these benefits are withdrawn.
In a letter sent to the Federation of Bangladesh Chambers of Commerce and Industries (FBCCI) on 11 June, DBL Industrial Park Ltd's Managing Director and Bezia Senior Vice President MA Jabbar said, "The sudden imposition of duty will cause investors to withdraw their investments, adversely affecting the country's industrialisation."
He specifically requested taking the necessary steps to retract the taxation proposals outlined in the proposed budget.
The FBCCI has also sided with the investors. Its president Mahbubul Alam told TBS, "If these facilities are withdrawn, it will discourage foreign investment in these special zones and perhaps send the wrong message to foreign investors."
Mahbubul Alam proposed extending the previous facilities of 0% import duty for economic zones for at least five to 10 more years.
"The economic zones are not yet fully developed, and both local and foreign investors need assurances of long-term benefits to remain interested in investing," he added.
