If you're involved with the businesses of Bangladesh, or you're a startup enthusiast or an investor, you probably know that local and foreign investment in Bangladeshi startups has totaled around Tk 750 million over the past decade.
As an economy striving to build a strong and healthy startup ecosystem, it is inspiring. At the same time, it is not enough for an economy that consistently ranks as one of the fastest-growing.
According to the national budget of FY22-23, Bangladeshi startups will be enjoying the benefits of a sandbox starting this year. A sandbox in this context is essentially a safe space for businesses where they can experiment with their products and services under relaxed rules and regulations.
The proposed benefits include turnover tax cut, longer loss carry-forward time, removal of existing expense ceilings, no reporting obligations and amnesty from penalties. Startups must be registered with NBR to receive the benefits of a sandbox. New companies must be incorporated after 2017-18 and registered by June 2023.
This year's budget size is Tk 6.78 trillion in expenditure, with the education and technology sector making the second spot percentage-wise. Expenditures in this sector have increased by 14% from the previous fiscal year. Providing that all goes well, the sandbox benefits will be financed with a significant amount.
As we start reaping full benefits of the new policies, it is worth delving a bit deep into it to realise the full extent of it.
What's good: It has been universally acknowledged that cutting down the corporate tax rates is an effective way to nurture the ecosystem. Till date, the turnover tax rates for startups were at 0.6% which has now been reduced to 0.1%. This policy will likely reduce the barriers to entry and help existing startups to be more profitable.
With a reduced tax rate, a longer loss carryforward period, and more freedom to spend, startups get unimpeded time and space to grow. Losses are now allowed to be adjusted with profits for nine years in a row instead of six. Aside from providing a safety net, it will also allow businesses to plan their fiscal years better. The expense ceiling removal essentially means startups can now spend more on marketing their products, as well as research and development. With the money they have at their disposal, startups will be looking to hire talented people, and thus create more job opportunities in the country.
During the early stages of their business, young and new entrepreneurs are, reasonably so, unfamiliar with the various reporting requirements of authorities or regulators. By exempting this group from financial reporting responsibilities, more potential startups can be encouraged.
In eliminating reporting obligations except for tax returns, our policymakers prove that they're aware of the time-consuming bureaucratic processes that rob startups of the opportunity to concentrate elsewhere.
If we look at the example of India, the government introduced an initiative called Startup India to boost entrepreneurship, and the ecosystem in the country has been moving forward since then. According to Invest India, there has been approximately a 9x increase in the number of investors and 7x increase in total funding in the past few years. As of 2022, there are 103 unicorn startups there valued at a total $335 billion. Tax exemptions and compliance improvements were included in this Indian initiative, which is similar to the ones that our government has announced under the sandbox. That can undoubtedly be taken as a good sign.
What's concerning: The reporting exemptions come with a 'but'. Startups will be free from their reporting obligations if "they provide permanent access to its system or books to the income tax authority". For some businesses, the opportunity cost of not having to submit reports can raise privacy and autonomy concerns.
On the other hand, the decision to provide amnesty from penalties can create lethargy in compliance. This can lead to bad governance and a lack of accountability that may harm the ecosystem in the long run.
Another issue raised by local startups and investors alike is that of the definition of growth years. Growth years have been defined as the "five years starting with the year of incorporation or registration". Startup ecosystem players agree that five years are not enough for startups to grow.
Additionally, startups incorporated before 2017-18 will not be receiving sandbox benefits. While some argue that older startups, like Chaldal, Pathao or Shohoz are well established and do not need additional benefits, it is also worth noting that these businesses started out without these benefits in an environment where startups were relatively unknown.
Besides, the definition of startups is still somewhat ambiguous, according to some stakeholders. According to official sources, a startup cannot be a subsidiary of another holding company or have more than 50% of its shares owned by another company. This can be difficult to deal with since a lot of startups in the country have significant shares outside Bangladesh. Even though this might be a necessary safety measure for the government, it can effectively hinder foreign investments, which are already inadequate.
It is also worth noting that the inclusion of a gender aspect in startup policies is somewhat absent. A balanced economy supports and nurtures women's entrepreneurship. According to UNESCAP's Bangladesh Startup Ecosystem Assessment Report 2022, female entrepreneurs struggle to raise funds. Due to the majority of investors being men, women often face aggressive questioning and probing in fundraising. Many sociocultural barriers make it difficult for female-led enterprises to succeed, and our recent startup policies do not adequately address these issues.
What's yet to be done: First of all, it is important to have a clearly defined monitoring strategy to guard against misuse of facilities. Many relaxed rules and regulations, e.g. amnesty from penalties, may counterproductively prevent us from establishing a thriving startup ecosystem. The monitoring, needless to say, needs to be two-way, so as to make sure of proper implementation of the policies. It is crucial to remember that there is a journey between promised benefits and delivered benefits.
Secondly, while a sandbox is laudable, mainstream fiscal and monetary policies need to reflect the needs of startups for the holistic development of the ecosystem. To encourage entrepreneurship, there is already a government-backed venture capital fund called Startup Bangladesh, as well as the iDEA project and the Bangabandhu Innovation Fund. The benefits of all these initiatives and policies can only be realized through an integrated approach. Several private organizations have been working steadily for a while to build up the ecosystem, and the government must strengthen its partnerships and network with them.
For additional useful collaboration, Dr. Selim Rayhan, SANEM's Executive Director, suggests startups and economic zones partner to increase foreign investment into startups. Accordingly, there can be policies that allow authorities like BEZA and BIDA to work closely with startups. This recommendation is also supported by the Bangladesh Startup Ecosystem Assessment Report 2022, UNESCAP.
In his conversation with this author, Dr Rayhan also communicates the importance of regional cooperation for the development of the startup ecosystem. In the recent 7th Joint Consultative Meeting between India and Bangladesh, the two foreign ministers A K Abdul Momen and S Jaishankar agreed on expanding the bilateral strategic partnership in areas of startups, fintech, cyber security and AI. It is crucial for Bangladesh to make the most out of this agreement.
In order for the ecosystem to grow inclusively, standard policies that assist women and other minorities must be in place. The sandbox loses its credibility if it fails to provide the same safe space for all participants.
Lastly, as in any case, further research and learning are of the utmost importance. We can take a lesson or two out of the examples of India, Singapore or Indonesia. Detailed studies on why their startup scenes are making global headlines can positively affect ours.
In addition to policy considerations, there must also be strong collaboration between entities working to develop the ecosystem and startups. According to Minhaz Anwar, a pioneer of the Bangladeshi startup ecosystem and Chief StoryTeller at BetterStories Limited, Bangladesh needs a dedicated platform to facilitate standardization of the quality of the delivery, better policy recommendations and coordinated growth of the ecosystem.
The fact that our entrepreneurs are consistently making the Forbes 30 Under 30 list and securing more and more funding from around the world shows that Bangladesh is on its way to becoming an innovation hub in the south. In order to change the narrative of Bangladesh in global arenas, all parties must be on their A-game.There is great value in the government making efforts to be even more supportive than ever, because the ecosystem relies heavily on this government making good on its promises.
Tanjia Tasneem Adeeba is Research & Content Associate, BetterStories Limited
Betterstories Limited is a private sector initiative aimed at fostering socially-responsible and innovation-driven entrepreneurship in Bangladesh. tanjia@betterstories.asia
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