FDI in Bangladesh
...re placed under direct government control. However, the performance of most of these government-controlled entities was very poor, from both a financial as well as the management point of view, which has caused a continuing and growing financial deficit, and has resulted in considerable pressure from the international/multilateral donor agencies to force the Government to encourage private sector development and address the issues of privatization. A Privatization Board was set up in 1993 and entrusted with the overall responsibility of privatizing State Owned Enterprises (SOEs) that have been identified for privatization, whether small or large in size, profitable or loss making. However, progress in privatization has been very slowing on account of inefficient government efforts, lack of professional ability, labor union resistance etc, which has continuously hindered the process. Although, between 1976 and 1992, about 500 State-Owned Enterprises (SOEs) were sold out or returned to their former owners. In 1998, the Privatization Board prepared a list of 82 SOEs to be privatized during the 1998-99 fiscal year, including 17 jute mills, 17 textile mills, 20 steel, engineering and related units, 10 sugar mills and 7 chemical processing units. In addition, shares of 11 SOEs had been earmarked for sale to the public. The Board failed to meet any of its targets, with not one SOE privatized in 1998 and only two SOEs privatized in 1999. Now the list has been reduced to 50 SOEs. Of the 50 enterprises identified for privatization by the Privatization Board during 1998/99, very few were privatized due to the lack of commitment by the political leadership, as the scheduled elections in 2001, and the general resistance from the bureaucracy and the labor unions of the SOEs. Industrial activity is still dominated by a large number of inefficient public sector enterprises, which stifle the potential for greater economic performance, with particularly poor performances of state owned enterprises (SOEs) in the jute, textile, power and fertilizer sectors. The Privatization Board has so far handed over only 11 state-owned enterprises, with seven others at various stages of the process. Unofficially, many sectors are reserved at least in part for the government. Although occasionally the government has given way to the private sector, such as those for wheat and fertilizer imports and fertilizer distribution, parastatals have often stifled private sector initiatives and undermined legal and policy reforms. Often the licenses that are required for those businesses which compete with parastatals, such as banking and insurance, are very difficult to obtain. One particular negative effect that the SOEs continue to have on the private sector concerns wage settlements, where the private sector is forced to match the ever increasing wage settlements of the SOEs, if they are to keep their staff. For further information on privatization, see the sector profiles on energy and textiles. According to the IMF, the consolidated losses of non-financial SOEs rose from Taka 4.9 billion in 1997/98 to Taka 8.1 billion in 1998/99. So in recent years the government has attempted to reduce its involvement in industry and increase the role of the more efficient private sector. Hence the government's privatization efforts are regarded as a barometer of the official attitude towards the private sector. Although on paper, the Bangladesh Government has sold off a significant number of companies and shares, including about 38% of the country's jute milling capacity, 70% in textiles, 12% in sugar and food, 10% in chemicals, and 4% in steel and engineering, in practice it has still retained control of many firms. Privatized firms in these sectors continue to behave as if they were state run and are heavily regulated, with management still not being able to reduce employment payrolls. In several cases where the joint venture partners of foreign firms were originally nationalized at independence, those foreign firms have still been unable to persuade the government to sell them its shares at a fair market value. When privatization slowed to a virtual standstill in 1998, the Government then appointed a prominent businessman as Privatization Board Chairman. The lack of progress according to the most recent study by the IMF in March 2000 reflects the deep-seated inefficiencies and governance problems, including political interference, lack of managerial accountability and budget constraints. Vested interests and technical difficulties with respect to the valuation of the enterprises' assets and trade union militancy have also been important factors in slowing the privatization process. Hence at this time, no interest whatsoever could be found from any European or foreign investor in investing in this sector. However the annual status of privatization in Bangladesh is regularly monitored in the World Privatization Report, with a section on the status of privatization in Bangladesh being produced by Pangaea Partners, an American multinational licensed merchant bank, with offices in Bangladesh. III. TAXATION A. Income tax Income tax is administrated by the Income Tax Ordinance, 1984 and by the Income Tax Rules 1984. The Income Tax Department of the NBR is the apex body for matters relating to income tax. The submission of an income tax return is due by 31 December for companies and 30 September for entities other than companies. The income tax rates are: Personal Income Tax (Percentage) On first Tk 75,000 of total income Nil On next Tk 150,000 of total income 10 On next Tk 150,000 of total income 15 On next Tk 250,000 of total income 20 On the balance of total income 25 Source: NBR. Note: The minimum tax payable will be Tk. 1,200. Form A of return of income tax under the Income Tax Ordinance, 1984 is available on the NBR web site. When applicable, the following documents must be submitted together with the form: - Auditor's certificate/audited accounts in the case of a company; - Statement of income and expenditure account/manufacturing, trading, profit and loss account and balance sheet in the case of other assesses; - Depreciation chart claiming depreciation as per Income Tax Law; - Computation of income according to Income Tax Law; - Statement of assets, liabilities and expenses. B. Corporate tax The corporate tax rate for industrial companies whose shares are publicly traded is 35 per cent. Companies whose shares are not publicly traded are subject to a corporate tax rate of 40 per cent. The tax rate on the income of all other companies, including banks, financial institutions, insurance companies and local authorities, is 40 per cent. Companies enjoying a tax holiday are required to invest 30 per cent of their exempted income within two years from the end of the tax exemption period in the undertaking or in a new industrial undertaking or in stocks and shares of a public company or in government bonds or securities. Return fields by public limited companies shall be accepted if accompanied by audited accounts and certified by a chartered accountant as to the correctness of total income of the assesses. The expenditure incurred by an employer in respect of the remuneration of a foreign technician is fully exempted from income tax subject to the stipulated conditions. Capital gains from the transfer of shares of public limited companies listed with a stock exchange are tax-exempt. In computing capital gain, deductions are made from the full value or sales proceeds or the fair market price, whichever is higher, of the capital assets. Dividend income in respect of shareholders other than companies is tax-exempt. This benefit, however, is not available to shareholders of private limited companies. Royalties and technical know-how fees received by any foreign collaborator, firm, company or expert are also tax-exempt. C. Other taxes Bangladesh has mostly replaced the former sales and excise taxes with the VAT, imposed at a flat rate of 15 per cent. VAT is not payable for imported capital machinery and spares. Excise duties still exist on items such as home-made biris (cigarettes), domestic textiles and bank services. A turnover tax is imposed on some small-scale activities which remain outside the purview of VAT. D. Tax holiday Tax holiday facilities are available for five or seven years depending on thelocation of the industrial enterprise. Dhaka and Chittagong Divisions 5 years (excluding three hill tract districts of Chittagong Division namely Rangamati, Khagrachhari and Bandarban designated as under-developed areas) Barisal, Khulna, Rajshahi and Sylhet Divisions 7 years and the three Chittagong Hill Tracts The period of tax holiday is calculated from the month of commencement of commercial production. A tax holiday certificate is issued by the NBR for the total period within 90 days of submission of application. This incentive applies to industries set up before 30 June 2005. Industries specified by the NBR for the purposes of exemption under the tax holiday scheme are: chemicals; drugs and pharmaceuticals (basic manufactures); insecticides and pesticides (basic manufactures); petrochemicals; wires and cables; agricultural machinery; boilers and compressors; tractors; machine tools and other capital equipment; the manufacture of trucks, cars, scooters, auto rickshaws and bicycles; shipping and repair; and diesel engines and internal combustion engines. Tax exemptions also apply to the exploration and extraction of mineral resources and the processing of agricultural products. IV. FOREIGN EXCHANGE: The Foreign Exchange Regulation Act, 1947 established the general framework to regulate certain payments, dealings in foreign exchange and the import and export of currency to the country. Additionally, the Guidelines for Foreign Exchange Transactions, 1996 of Bangladesh Bank compile instructions to be followed by Bangladesh authorized dealers and their constituents in transactions relating to foreign exchange. In 1994, Bangladesh’s domestic currency, the taka, was declared convertible for current external transactions. Bangladesh has two stock exchanges, the Dhaka Stock Exchange, established in 1954 and the Chittagong Stock Exchange, established in 1995. Both stock exchanges are conducted by a computerized automated trading system. The inter-bank foreign exchange market sets the exchange rates for customer and inter-bank transactions based on demand-supply interplay. Meanwhile, the exchange rates for Bangladesh Bank's spot purchase and sale transactions of United States dollars with authorized dealers are decided on a case by case basis. Bangladesh Bank does not undertake any forward transactions with authorized dealers, who are free to quote their own spot and forward exchange rates for inter-bank transactions and for transactions with non-bank customers. Remittances have become an important source of foreign exchange in recent years and currently exceed aid provided in the form of concessional loans and grants. Therefore, Bangladesh Bank has introduced a series of measures to facilitate the flow of both remittances of non-residents into the country as well as remittances originating from commercial activities of foreign-related businesses operating in Bangladesh or with a local counterpart. As part of these measures, the requirement of prior permission from the Bangladesh Bank has been waived for the following remittance-related operations: 1. Commercial remittances Opening back-to-back import letters of credit on account of manufacture exporters for their input imports as per prescribed input-output coefficients Issuing bank guarantee/performance bond on account of the merchandise exporters of Bangladesh in favor of foreign buyers Remittance on account of short weight, quality claim, partial shipment, etc., up to 10 per cent of realized export proceeds Payment of a discount not exceeding 10 per cent of the invoice value at there quest of the exporter where foreign importers refuse to clear goods due to discrepant documents, etc. Remittance of premia on foreign currency policies taken by Bangladeshi nationals while residing abroad; Remittance of premia on account of reinsurance; Remittance of “general average” collected from consignees in Bangladesh; Remittance of pre-shipment inspection fees; Remittance of bona fide expenses incurred by Bangladesh Biman and Bangladesh Shipping Corporation in foreign ports or stations; Remittance on account of charter hire of foreign ships; Remittance of purchase price of ships acquired by private firms or companies; Remittance of royalty/honoraria/fees to non-residents including foreign news agencies for features, articles, etc., subscribed by local newspapers/magazines; Advertising of Bangladesh commodities in mass media abroad. 2. Remittance by shipping lines, airlines, courier service companies Foreign shipping lines, airlines and courier service companies may send abroad, through authorized dealers, funds collected in Bangladesh towards freight and passage, after adjustment of local costs and taxes, if any. 2.2.1 Economic Policy in Recent Years The major problem for the last two governments in Bangladesh has been, how to achieve a sustained economic growth that will lead to employment, income growth and reduction in poverty, in a country where a large segment of the population live below the subsistence level. Since Bangladesh continues to be highly dependent on foreign aid flows, for both capital projects and for food aid, in order to feed the poor, the foreign aid donors have been able to persuade the government to follow economic policies that will encourage GDP growth, increase agricultural production and reduce Bangladesh's reliance on foreign aid. At the beginning of the 1990's, the government implemented a number of structural reform policies to strengthen fiscal and monetary management, to promote private sector development, to downsize the role of government and to liberalize the external trade and foreign exchange regimes, thus encouraging foreign investment. These policies have helped create a relatively stable macroeconomic environment, which has improved economic growth, savings and investment, which in turn helped to decrease poverty and has improved the social fabric of the country. All economic policies are packaged in five year plans, which have mostly failed in the past, due to their over-ambitious and often unrealistic objectives. Though in all fairness, it must be said that many external circumstances outside of government control, such as floods, political disorder, changes in global commodity and oil prices etc, coupled with poor economic management, have made the objectives difficult if not impossible to achieve. During the 1990s, most governments have promoted liberalization and encouraged market-based policies to raise growth, to encourage the private sector, down-size the role of government and encourage foreign investment. 2.2.3 Liberalization of the infrastructure The Government of Bangladesh in recent years has become fully aware that the infrastructure facilities of the country are seriously inadequate after many years of under investment in the energy, power, transport, roads, bridges and telecommunications sectors, and that considerable levels of new investment are now required. The government has also realized that they will only be able to achieve the necessary levels of investment through private sector capital, which would be necessary to supplement the limited funds that could be made available from domestic capital markets, funds from international finance institutions and aid agencies as well as internally generated funds. In order to support this policy of liberalization of infrastructure ownership, the Infrastructure Investment Facilitation Centre (IIFC) has been created to assist facilitation and realization of private sector participation. The IIFC, which has now been established as a private sector company, is supported by the Bangladesh Government and financially assisted by the World Bank with bilateral funding from Canada and the United Kingdom. The key objectives of the IIFC will be to introduce, facilitate and assist in any part of private sector participation which improves the infrastructure of Bangladesh. 2.2.4 Trade Liberalization Following independence in 1971, the Bangladesh Government initially adopted an inward looking growth strategy that relied on import bans, high tariffs, unrealistic exchange rates and quantitative restrictions, a policy which emphasized the promotion of import substituting industries to support domestic markets. However since the mid-1980s, Bangladesh has been opening up its economy by reducing tariff and non tariff barriers. This current policy of trade liberalization has already significantly eliminated a large number of quantitative restrictions as well as substantially reducing tariff rates, with maximum tariff rates being lowered from 40% in 1998/99 to 37_% in 1999/2000 and the number of tariff bands from 6 to 5. Also under the 1999/2000 budget, the structure of tariff rates will be simplified. One result of the trade liberalization has been the dramatic growth in exports of ready made garments, which in part, has been facilitated through several effective policy interventions by the Bangladesh Government as well as by preferential treatment offered to least developing countries, such as Bangladesh, by both the European Union through the generalized System of Preferences (GSP) and the United States through the Multi-fibre agreement (MFA). 2.2.5 Banking Reforms The financial services sector which remains underdeveloped, only contributing about 2% to GDP in 1997/98, with growth consistently lagging behind GDP growth throughout the 1990s, is dominated by Nationalized Commercial Banks (NCBs). However, the major programme to reform this sector, the Financial Sector Reform Programme, which was carried out between 1990 to 1996 has had only limited success as the whole sector is still plagued with lack of credit discipline, poor loan recovery procedures, corruption and inefficiency as well as chronic overstaffing, with the limited availability of credit and high costs constraining business expansion. Changes in the legal framework of the financial services sector during the 1990s, including amendments to the Financial Loan Courts Act 1990, the Bankruptcy Act 1997 and the Company Act 1997, are now expected to improve the loan recovery rate of the banks. Moreover, the reform programme, since April 1999, has given the Bangladesh Bank (Central Bank), more authority to supervise the management of both the private and public sector commercial banks and financial institutions, while the Government is now required to obtain advice and recommendations of the Central Bank before approving the appointment, dismissal or promotion of any chairman or director of any public sector bank or financial institution. V. INVESTMENT INCENTIVES The Government of Bangladesh has liberalized the industrial and investment policies in recent years by reducing bureaucratic control over private investment. Currently, major incentives for private investment are as follows. 1. Accelerated depreciation Industrial undertakings not eligible for a tax holiday can enjoy an accelerated depreciation allowance. Such an allowance is available at the rate of 100 per cent of the cost of machinery or plant if the industry is set up in the areas falling within the cities of Dhaka, Chittagong, Khulna and Narayangonj as well as in areas within a radius of 10 miles from the municipal limits of those cities. If industries are established somewhere else in the country, accelerated depreciation is allowed at the rate of 80 per cent in the first year and 20 per cent in the second year. 2. Import duty concessions Export-oriented industries and industries enjoy a further concession of the import duty in the following manner: • For 100 per cent export-oriented industries in underdeveloped areas, no import duty is charged in the case of capital machinery and spares. However, import duty of 5 per cent is secured in the form of a bank guarantee or an indemnity bond will be returned after installation of the machinery. VAT is not payable for imported capital machinery and spares. For export-oriented industries in developed areas, an effective rate of 5 per cent import duty is charged. Industries exporting a minimum of 70 per cent of the total annual production may submit a bank guarantee to the customs authority for 33.33 per cent of the total import duty payable at the rate of 7.5 per cent ad valorem. This bank guarantee will be returned after installation of the machinery and fulfilling the conditions of export. In this case the effective rate of import duty payable is 5 per cent ad valorem. For other industries in developed areas, an effective rate of 7.5 per cent import duty is charged. There is an effective rate of 2.5 per cent import duty for export-oriented industries outside developed areas. Other industries outside developed areas must pay an effective rate of 5 per cent import duty. 3. Incentives to foreign investment In Bangladesh, foreign entrepreneurs are entitled to the same facilities as domestic entrepreneurs in respect of a tax holiday, payment of royalty, technical know-how, fees, etc. As mentioned earlier, there is no limitation pertaining to foreign equity participation for FDI, i.e. 100 per cent foreign equity is allowed. Additionally, foreign investors are also entitled to the following: • Obtain full working loans from local commercial banks. The terms of such loans will be determined on the basis of the bank-client relationship; • Make portfolio investments in stock exchanges in Bangladesh; Tax exemption on capital gains from the transfer of shares by the investing company No restriction in issuing work permits to foreign nationals in Bangladesh. A multiple entry visa” will be issued to prospective foreign investors for three years. In the case of experts, a “multiple entry visa” will be issued for the whole tenure of their assignments Provision for transfer of shares held by foreign shareholders to the local shareholders/investor with the permission of the BOI and Exchange Control Department of Bangladesh Bank Foreigners employed in Bangladesh are entitled to remit up to 50 per cent of their salary and will enjoy facilities for full repatriation of their savings and retirement benefits. A foreign technician employed by a foreign company will not be subjected to personal tax for up to three years, and beyond that period the technician’s personal income tax payment will be governed by the existence or non-existence of an agreement on avoidance of double taxation with the country of citizenship Six-month multiple entry visa for prospective new...