Reducing policy gaps for more investment
June 28, 2013 00:00:00
Ferdaus Ara Begum
The budget, often termed as a critical economic policy tool for the government, is a blueprint of overall funds that the government will spend on various sectors and the kinds of taxes that would be levied to generate the funds. In turn, a budget system that functions well is crucial to developing sustainable fiscal policies and economic growth. In many countries, economic problems are exacerbated by weak budget systems and faulty budget choices. Given its wide-ranging implications, a budget is customarily the subject of much scrutiny and debate.
The recently announced budget for 2013-14 fiscal by the government has received wide attention and has been critically evaluated by different quarters. Experts, academicians and international organisations have termed the growth projection for the upcoming fiscal as being 'overly optimistic'. One of the basic building blocks towards achieving a high GDP (gross domestic product) growth rate is increased investment. To achieve 7.2 per cent growth rate in FY 2014, leading to 8.0 per cent growth by 2015, the government has emphasised on manufacturing and organised services sectors in the proposed budget. Investment ratio to the GDP will have to be increased by 8.0 per cent by the end of the planned period to the level of 32.5 per cent. Increased thrust on investment and export has become primary pre-conditions to reaching the targets laid out in the Sixth Five-Year Plan (SFYP).
For several years now, the country's investment growth has remained nearly stagnant. The budget speech indicated the increase in public investment, accounting for the growth in total investment from 24 per cent in 2012 to 26.5 per cent in 2013. This is a positive signal with the government increasing its expenditure on physical infrastructure. However, at the same time, private investment spree should also be positive. The macro policies of Bangladesh have already been praised for its broad macro policy environment and for shaping up the policy framework to attract foreign investments. The question remains as to why expected investment is not coming into the country despite the favourable macro policies. A plausible reason could be the existence of a mismatch between macro and micro policies, with huge gaps that cannot be bridged due to complex bureaucratic tangles, causing stringency in implementation.
The Business Initiative Leading Development (BUILD) has been involved in presenting apposite budget recommendations to the government on issues that relate to the business community. Through the national budget for FY 2012-13, more than a dozen recommendations from BUILD were accepted by the government. BUILD had solicited numerous recommendations from its partner organisations - Dhaka Chamber of Commerce and Industry, Metropolitan Chamber of Commerce and Industry and the SME Foundation. Considering the budget constraints, BUILD presented the most pertinent recommendations to the government after careful analysis. The budget speech for FY13-14 also incorporated some of the recommendations advocated by BUILD to the National Board of Revenue and to the Prime Minister's Office.
The budget speech mentioned that existing tax holiday facilities would be extended from June 2013 to June 2015 with a view to providing incentives to new industries and creating employment berths. This decision echoes the electoral pledges of the present government of enhancing investment and creating employment. However, gradually and proportionately tax holiday facilities and the period would be decreased. As per draft Finance Act 2013, in Dhaka and Chittagong divisions, excluding Dhaka, Narayanganj, Gazipur, Chittagong, Rangamati, Bandarban and Khagrachhari districts, tax holiday (TH) has been extended for a period of five years beginning with the month of commencement of commercial production of the said undertaking, for the first and second year, rate of exemption is 100 per cent, for the third year it is 60 per cent, for the fourth year it is 40 per cent and in the fifth year it is 20 per cent. For Rajshahi, Khulna and Barisal divisions and Rangamati, Bandarban and Khagrachari, tax holiday has been extended for seven years beginning with the month of commercial production of the said undertaking and the allowed exemption will be reduced gradually with marginal months. Industries established in Dhaka, Gazipur ,Narayanganj or Chittagong would also be able to avail this benefit even if they are established under specifically referred clause in the Finance Act 2013.
In the budget speech, it is specifically mentioned that tax holiday will be allowed for 17 industrial undertakings and 17 physical infrastructures will be able to avail these benefits. For sectors like jute (15 per cent), fabric and dyeing (15 per cent), handicrafts (50 per cent tax rebates), specific rates are allowed. Tax rate for pelted feed for fish, shrimps and cattle has been reduced from 37 per cent to 3.0 per cent. This policy is a major shift from the earlier one. This move by the government is praiseworthy, as it is expected to encourage investment in agricultural sector, with agriculture alone contributing to about 19 per cent of the country's GDP.
Through the implementation of the budget for FY13-14, infrastructural projects are also expected to get a boost as the government is willing to extend tax holiday benefits to 17 different types of physical infrastructural facilities. For each year, the tax holiday policy has been revised including the lists of sectors allowed to avail these benefits. Setting up of industrial plants is a long-term undertaking, with firms requiring significant time to come into operation commercially. A special grace period is often required for infrastructural projects. However, in order to get tax holiday benefits of FY 2013-14, the project has to be established within the fiscal year which may be to an extent impossible for some specific ventures.
Some power generation projects have also been given full exemption for corporate tax for 15 years while other taxes such as VAT, import duties for machinery and spares are exempted for 12 years and a maximum of 10 per cent tax benefits for the capital invested are also allowed since some years. While these measures can be deemed as positive steps, in order to make it feasible for firms to avail these benefits, the project's starting time should not be restricted within the current year. Often bureaucratic steps and regulatory barriers take up much time; in effect, these excellent policy benefits remain utilised.
Rate of capital allowances (tax depreciation) is a benefit separate from the provision of tax holiday. Additionally for qualifying for tax holiday, 30 per cent of the exempted income during tax holiday period needs to be re-invested and an additional 10 per cent of the exempted income needs to be employed to buy shares of companies listed on the stock exchange. Taxation issues, invariably, have serious impact on the return on investment. Loss-carry-forward provisions, capital allowances, investment allowances and investment credits all affect return on investment. A prudent investor calculates all these issues during the planning stage before opting for investment. Policy-makers need to bear in mind that if the package benefits are not attractive enough, investors will not be encouraged to invest in Bangladesh. While an investor benefits from tax holiday and other related incentives appear to be very attractive, uncertainty prevails in case of accruing practical benefits out of these policies, altogether.
Looking at a different case, one that involves extending turnover tax benefits for cottage, small and medium-size entrepreneurs, a study done by BUILD shows that this type of policy benefits is enjoyed by a very few small and micro units and the amount of revenue is also minimal. In FY 2009-10, the percentage of collection of the turnover tax in terms of annual revenue was only 0.00618 per cent. In FY 2010-11, the baseline was increased from 4.0 million to 6.0 million, but the percentage of total tax collection rather went down to 0.00390 per cent. In the FY 2011-12, the percentage of total collection was reduced to 0.00306 per cent (meaning 0.00084 per cent less from the earlier year) due to changes in the turnover tax rate. As per the review given by the SME Foundation, the yearly value of production under turnover tax in the FY 2009-10 was only Tk 1.17 billion, which went down to Tk 907.5 million in the FY 2010-11, but after the changes in the turnover tax rate, the amount increased up to Tk 1.16 billion. However, it is not enough in comparison to the number of firms which should be under the turnover tax system. Annual collection of turnover tax is really low, which means most of the small firms which are supposed to be enlisted as turnover taxpayers are not enlisting themselves to avail the benefits.
The scope of obtaining tax exemption has been significantly increased for FY 13-14. Considering the great contribution of SMEs to our economy, the government has raised the annual turnover exempted income limit from the existing level of Tk 7.0 million to Tk 8.0 million for the upcoming fiscal year. In addition, to assist small and cottage industries, tax exemption allowed on investment for plant, machinery, and equipment for up to Tk 2.5 million has now been raised to Tk 4.0 million and the annual turnover tax exempted limit has also been increased from the present level of Tk 4.0 million to Tk 6.0 million. Apart from this, the small and cottage industries will be able to get enlistment from their divisional offices instead of solely resorting to the Commissioner's Office in Dhaka. The previous system of submitting all the applications to Dhaka office resulted in much grievances of the private sector. It is expected that these measures would give a boost to the SME sector in terms of encouraging them to go for more investment.
BUILD study on turnover tax has revealed that there is a long list of non-eligible sectors which are not eligible for turnover tax benefits. The list is revised through the announcement of the new budget, along with modifications in the benefits and requirements of enlistment. For 2013-14 fiscal, a long list of products of non-eligible sector, which are not allowed to get exemption as cottage industries for paying VAT and Supplementary Duty has been announced through SRO 172/2013 of VAT. On the contrary, it would have been easier for cottage entrepreneurs if a list had been published containing the eligible sectors.
In order to qualify for turnover tax benefits, cottage industries will be regarded as those industries not registered with the Registrar of Joint Stock Companies (RJSC), whose investment for plant and machinery will not exceed Tk 4.0 million and revenue will not be over Tk 6.0 million. In the past, small industries were also included to qualify for getting these benefits. As per definition of the Industrial Policy, cottage industries will be those industries which have either the value (replacement cost) of fixed assets excluding land and building of less than Tk 0.5 million, or with up to 10 workers, including household members. Whether the turnover limit proposed in the recent budget will accommodate cottage industries to get these benefits and whether small industries will also be allowed to get these benefits remain ambiguous. Although the budget speech mentioned that the benefits would be allowed for both small and cottage industries, it is necessary to clarify these issues before the finalisation of the Finance Act 2013.
Enlistment criterion to avail this exemption has also become more stringent. Earlier there was a requirement to obtain approval from the Commissioner. Now the policy has been simplified to make it easier to get the enlistment approval from the Divisional Officer. The Divisional Officer, however, will also have the authority to cancel the exemption if there is any deviation from the policies. Before getting enlistment, there will be an investigation by an assigned Assistant Commissioner of the NBR, who will submit a report within ten days. Previously, the maximum allotted time for investigation was seven days. The extended benefits may be dismal because of tight policy restrictions.
Announced policies should be made as simple and as practical as possible, to eliminate the scope of bureaucracy and red tape. Continuity of policies is one of the pre-conditions for attracting investment. Policy-makers should ensure that implementation of policies is noteworthy and entrepreneurs are able to avail policy benefits. It is like a simple math; any small mistake within the whole process can act as a backlash, with repercussion on the ultimate outcome.
The writer is Chief Executive Officer (CEO) Business Initiative Leading Development (BUILD), DCCI. ceo@buildbd.org
