Is the existing tax structure discouraging investors?
The Business Standard team caught up with some prominent business leaders and economists to learn more about the issues and explore potential solutions
At a recent pre-budget meeting organised by the Dhaka Chamber of Commerce and Industry, "Pre-Budget Discussion 2024-25: Expectations of Private Sectors," on 10 March, business leaders attributed the failure to achieve expected foreign direct investment to the inconsistent policies of various government institutions, including the National Board of Revenue (NBR).
They also criticised the complex tax system, absence of automation, high taxes and tariffs, limited flexibility in tax adjustments, heavy reliance on import taxes, and the lack of a business-friendly environment as major obstacles to business and investment.
The Business Standard team caught up with some prominent business leaders and economists to learn more about the issues and explore potential solutions.
Keep updated, follow The Business Standard's Google news channel
Foreign investors lose heart due to our tax issues
Shams Mahmud/ Former president, DCC
Our existing tax regime has many contradictions. For example, my company is a publicly listed company, so I pay corporate tax on my earnings, yet I also have to pay taxes on the dividends I give. Our tax policy states that adjustments will be made later, but in reality, that does not happen.
We also have to pay advanced tax. Sometimes, if I sell a product at a discount, I incur a loss, but I have already paid my taxes and that is not adjusted later.
When investors consider FDI, they prefer EPZ. However, there are policy contradictions there as well. For example, it is said that you can import capital machinery and spare parts for those machines duty-free.
However, a Statutory Regulatory Order (SRO) from NBR lists the types of spare parts that can be imported duty-free; you have to pay taxes for the rest. There are around 10,000 parts per industrial machine. And since technology is changing fast, the parts are changing as well.
Those who will invest in Bangladesh in the future will bring the latest energy-saving machinery, as energy costs are quite high. On the other hand, we are also thinking about value addition through higher-end products, which will also require highly specialised machinery. The Harmonised System (HS-Code) doesn't cover these items. So, what is the list of parts based on?
So importing parts for such sophisticated items means paying taxes on them. If not, the product will not be realised, which means the machine will remain broken, harming the business.
What is an SRO? In your budget, you mentioned a number of products as taxable, but later, you realised you had missed some products, so you issued an SRO including those products. A high number of SROs discourage FDI.
Today, he can avoid import duty, but tomorrow, an SRO will come declaring the product taxable, which is disheartening for businesses. You only need an SRO when you didn't form your policy properly the first time. Now, you are trying to plug that gap. We have been asking NBR to fix this for a long time.
The biggest issue here is that business people are not consulted while preparing the list, and the people who prepare the list are not specialists. If you ask a football player to prepare a news article, they might be able to do that, but it won't be proper. This is the issue with the list.
Whenever foreign investors come here to do their homework and learn about the tax issues, they lose heart.
The current tax rate for non-listed companies is 27.5%, yet I have to pay taxes all throughout the production process. Whenever I am making a local purchase, I am paying taxes on my employee's salaries, on my personal income, and even on the dividends I give. None of which is adjusted. If this issue is not fixed, lowering corporate tax even to 10% won't make any difference.
The current chairman and members have been nothing but cooperative. However, people working at the grassroots are not that business-friendly, as they are being handed unrealistic targets that they are trying to meet through any means possible. This is something that needs to be addressed immediately and all relevant stakeholders must be involved in the decision-making process.
Shams Mahmud, Managing Director, Shasha Denims Ltd & former president of DCC.
This article was transcribed by TBS's Nasif Tanjim based on a telephone conversation with Shams Mahmud.
A simplified tax policy will automatically increase the government's tax revenue
Faruque Hassan/ Former President, BGMEA
Our tax net should be broadened to include new sectors. Although our tax net is quite well-spread, there are many companies that can and should pay taxes, yet they are not included in the tax net.
When some individuals or companies face a higher tax burden, it poses a risk of corruption. They may seek to evade taxes by resorting to unfair and unlawful means. Additionally, corrupt tax officers may exploit this opportunity to line their own pockets instead of contributing to the government's revenue.
Therefore, the tax rate should be reduced while increasing the number of taxpayers. There are many other sectors that are eligible to pay tax; they should be included in the tax net. In this way, the government can generate more revenue without imposing a new tax burden on existing sectors. Therefore, I believe that the corporate tax rate should be reduced.
The tax rate for our export-oriented industries is fairly adequate, and industry stakeholders are content with it. However, our tax structure becomes complicated due to other taxation procedures, which creates opportunities for tax evasion through murky and convoluted paperwork and bureaucratic issues.
Simplifying such complicated procedures, streamlining the tax structure, and reducing red tape will enable individual taxpayers to pay taxes without hassle, ultimately increasing government revenue.
Whenever a new industry is established, it generates employment opportunities, attracts investment, and boosts the economy. Therefore, more incentives should be provided to new industries.
Another important aspect is reducing heavy duties on raw material imports, as this raises production costs, ultimately affecting investors and consumers alike. By reducing these duties, we can increase production, lower prices for consumers, and boost sales, thereby automatically increasing government revenue through higher turnover.
Therefore, efforts should be made to make raw materials more accessible to ensure higher production. This can be achieved by reducing duties and tariffs. Moreover, tax and duty reductions should be provided for producers who source their raw materials domestically.
This will significantly enhance the value of our industry and economy.
Otherwise, we risk relying solely on imported finished goods, causing our local industries to miss out on opportunities for growth.
Faruque Hassan is the former president of the Bangladesh Garment Manufacturers and Exporters Association (BGMEA)
This article was transcribed by TBS's Shadique Mahbub Islam based on a telephone conversation with Faruque Hassan.
All countries around the world have their own tax refund systems. Why not us?
Dr Ahsan H Mansur/Director, PRI
We have reduced the corporate tax rate in the past three years, but it is still higher than that in India. We can reduce it a bit more. But what is more important is that we can not make the most of it. This is because of tax withholdings.
It is very frustrating that there is still no refund mechanism in place. All countries around the world have their own tax refund systems. Why not us? This is why we can't receive the benefits we should. Sometimes, they do excess with deduction allowance, too. They disallow what is legitimate.
On top of these factors, what does more harm to the entire taxation system is corruption. The system is not automated yet, which leaves room for corruption. Without money, you do not receive the necessary documents for your business.
Our study at PRI found that the average import duty is high, but note that it's not applicable for raw materials. This gives rise to effective protection.
I think this is an opportunity to revise the taxation laws now. Currently, our country's tax collection system is mostly negotiation-based. It lacks proper monitoring and thus provides no accountability for taxpayers. We have to make the monitoring system mechanical. Different teams should collaborate and there must be written documents for everything. Power in the hands of one individual body is problematic.
Dr Ahsan H Mansur is an economist and director of the Policy Research Institute of Bangladesh (PRI).
This article was transcribed by TBS's Ariful Hasan Shuvo based on a telephone conversation with Dr Ahsan H Mansur.
