Tax holiday is not always the devil
Tuesday, 18 March 2008
Masih Malik Chowdhury
THE impact of tax holiday on development, in this country, has been misconceived, misinterpreted or underestimated by the vested groups, especially the donors or those who want Bangladesh to sustain itself on others' surmise, not on its own mechanism.
Tax holiday is a widely used fiscal measure to promote industrialisation for development -- the prerequisite for full employment of all resources to ensure optimum benefit for the economy. Bangladesh can never be and never was an exception to it.
The 'development partners' exerted political influence on successive governments due to weaknesses of the regimes. However, nobody asks, how they are dominant partners in a situation where a major part of the funding requirements for the Annual Development Programme (ADP) comes now from domestic resources. But such partners are most vocal against tax holiday and many policies that are otherwise in the interests of the country. Why then the elected governments in succession could not heed to popular demands with respect to fiscal policies. The expressed and implicit pieces of advice from the multilateral capital donors have been the deterrents and hurdles to our sustained national development. Stipulations for releasing new aid funds were, thus, instrumental to cancellation or withdrawal of a number of otherwise incentive-oriented fiscal packages for the investors, actual and potential. One may argue, how the donor agencies could influence the decisions of the governments on such incentive packages, as they do not have any authority. While the World Trade Organisation (WTO) has opened the floodgates for all imports to Bangladesh, the country has been failing to extract the benefits for the economy out of globalisation for technical reasons.
Bangladesh paved the way for others to benefit out of its economy but could not reap the same from others for itself. So it is getting increasingly dependent on imports rather than on production and manufacturing. The lesson it gives requires Bangladesh to get into a limited protective regime somewhat like the Indian and South American economies. Bangladesh needs to run on its own, instead of opening itself to others' dictation, forgetting the needs of the people.
The elected governments did not always listen to such unnecessary dictations. The incumbent government is behaving differently. It listens more to the donors and their representatives, often against the peoples' interest. They tend to forget it is a People's Republic. The anti-corruption drives could not show the results to match the publicity they were given. The legal battle between the government and the alleged corrupt persons is taking a new colour. When the two former Prime Ministers (PMs) are being charged for alleged irregularities, their deputies with serious allegations against them are free to do whatever they like. The favoured continue to own and enjoy flats, cars, apartments, land, markets or malls and wealth undisturbed. These groups are buying new cars and houses as they are not being arrested for unknown reasons. On the other hand, the economy is facing problems.
No government, without popular base, can probably withstand the pressures to salvage an economy from a slide. We heard about syndicates causing price-hike and about land grabbers during the elected regime. But for the drive against select groups by the Anti-Corruption Commission (ACC), no action has been taken against the others. The more recent price-hikes have shaken the lives of people more than ever before. It has affected not only the poor but also the relatively better-off people. The low paid and other low income groups find it difficult to afford the basic necessities. The government looks perplexed and visionless with its drive against corruption. The masses got no benefits. The business syndicates, land grabbers, the corrupt departments and service providers are no less active than before.
Now the tax holiday for industrial and business ventures is enjoyed by related undertakings in a few sectors and areas like those of textiles, high value readymade garments, melamine products, plastic products, ceramics and sanitary ware, steel from iron ore, fertilisers, insecticides and pesticides, computer hardware, residential hotels with three star or more facilities, petro-chemicals, basic raw materials of drugs, chemicals and pharmaceuticals, agricultural machinery, ship building, boilers & compressors, textile machinery, physical infrastructure, sea or river ports, container terminals, internal container depot (ICD), container freight station (CFS), LNG terminal and transmission lines, CNG terminal and transmission lines, gas pipelines, flyovers, large water treatment plants and supply through pipe lines, waste treatment plant, solar energy plants export processing zones etc. This facility can be enjoyed by other industrial undertakings only upon notification or specification by the government.
Textile industries are within the tax holiday regime, though the units that would qualify for it is not defined. Textile means any phase of this industry. Its phases conclude spinning, dyeing and finishing and as such an industry at any phase is entitled to tax holiday. This means it does not have to be a composite textile mill to qualify for tax holiday. But many applications for tax holiday from separate-phase units like spinning, dyeing and finishing are reportedly not given the tax holiday facility by the National Board of revenue (NBR). Their tax holiday applications were rejected on the plea that the unit was either spinning, dyeing or finishing and not a composite mill.
Likewise, high value RMG and computer hardware are misnomers in the list of units to qualify for tax holiday. High value garments have not been defined. Any RMG is of high value as it is exported.
The computer hardware is not produced here and the very purpose of tax holiday in the area is misleading. Data processing can be included in the list in the budget for the next fiscal.
Interestingly, all export processing zones (EPZs) enjoy tax-exempted facility but many export-based industries located outside these zones do not qualify for tax holiday. Many industries in EPZs do only augment the net export value marginally as they import raw materials, in high value, either through back-to-back letter of credits or otherwise. Again textile machinery imports enjoy tax holiday though they include all machinery for each phase of the industry.
Residential hotels qualify for tax holiday but not below those with three-star facilities. Hotels of acceptable standards at district levels should be brought under tax holiday facility to promote this industry as at the district level where hotels of three-star facilities are not economically sound investments. Alternatively this requirement could be lowered to include hotels with 100 rooms or five floors, or hotels having car parking and symposium halls could be in the tax holiday list. This would help promote investment at the district level, encouraging the entrepreneurs to go for new investments. This could help diversify and widen the location of hotel industries, say in the Monga-affected places or the coastal belt to promote income-generating activities in different places.
The banks, not financing agriculture-based industries, should be required to extend credit to agriculture as a pre-fixed portfolio. The monitoring arrangements in the banking sector should be strengthened and proper investment guidelines should be given to the banks to follow. This will help achieve the desired national objectives. The impact of new investment ventures needs to be evaluated to see whether or not tax holiday facility is helping to create new jobs and enabling the economy to enjoy its purported benefits.
Tax holiday should help attract investments in new sectors to generate income, create employment, increase GDP, reduce idle liquidity, step up circulation of money and reduce cost of fund and discourage unproductive cash accumulation. This facility should be provided on the basis of domestic needs. It should be operational on the basis of a clearly-set sector-wise priority for generating employment opportunities. It should be provided to industries that replace imports and promote exports. Tax holiday facility needs also to be extended to the industries open to micro-level capital market investors.
The writer is a chartered accountant and ICAB council member
THE impact of tax holiday on development, in this country, has been misconceived, misinterpreted or underestimated by the vested groups, especially the donors or those who want Bangladesh to sustain itself on others' surmise, not on its own mechanism.
Tax holiday is a widely used fiscal measure to promote industrialisation for development -- the prerequisite for full employment of all resources to ensure optimum benefit for the economy. Bangladesh can never be and never was an exception to it.
The 'development partners' exerted political influence on successive governments due to weaknesses of the regimes. However, nobody asks, how they are dominant partners in a situation where a major part of the funding requirements for the Annual Development Programme (ADP) comes now from domestic resources. But such partners are most vocal against tax holiday and many policies that are otherwise in the interests of the country. Why then the elected governments in succession could not heed to popular demands with respect to fiscal policies. The expressed and implicit pieces of advice from the multilateral capital donors have been the deterrents and hurdles to our sustained national development. Stipulations for releasing new aid funds were, thus, instrumental to cancellation or withdrawal of a number of otherwise incentive-oriented fiscal packages for the investors, actual and potential. One may argue, how the donor agencies could influence the decisions of the governments on such incentive packages, as they do not have any authority. While the World Trade Organisation (WTO) has opened the floodgates for all imports to Bangladesh, the country has been failing to extract the benefits for the economy out of globalisation for technical reasons.
Bangladesh paved the way for others to benefit out of its economy but could not reap the same from others for itself. So it is getting increasingly dependent on imports rather than on production and manufacturing. The lesson it gives requires Bangladesh to get into a limited protective regime somewhat like the Indian and South American economies. Bangladesh needs to run on its own, instead of opening itself to others' dictation, forgetting the needs of the people.
The elected governments did not always listen to such unnecessary dictations. The incumbent government is behaving differently. It listens more to the donors and their representatives, often against the peoples' interest. They tend to forget it is a People's Republic. The anti-corruption drives could not show the results to match the publicity they were given. The legal battle between the government and the alleged corrupt persons is taking a new colour. When the two former Prime Ministers (PMs) are being charged for alleged irregularities, their deputies with serious allegations against them are free to do whatever they like. The favoured continue to own and enjoy flats, cars, apartments, land, markets or malls and wealth undisturbed. These groups are buying new cars and houses as they are not being arrested for unknown reasons. On the other hand, the economy is facing problems.
No government, without popular base, can probably withstand the pressures to salvage an economy from a slide. We heard about syndicates causing price-hike and about land grabbers during the elected regime. But for the drive against select groups by the Anti-Corruption Commission (ACC), no action has been taken against the others. The more recent price-hikes have shaken the lives of people more than ever before. It has affected not only the poor but also the relatively better-off people. The low paid and other low income groups find it difficult to afford the basic necessities. The government looks perplexed and visionless with its drive against corruption. The masses got no benefits. The business syndicates, land grabbers, the corrupt departments and service providers are no less active than before.
Now the tax holiday for industrial and business ventures is enjoyed by related undertakings in a few sectors and areas like those of textiles, high value readymade garments, melamine products, plastic products, ceramics and sanitary ware, steel from iron ore, fertilisers, insecticides and pesticides, computer hardware, residential hotels with three star or more facilities, petro-chemicals, basic raw materials of drugs, chemicals and pharmaceuticals, agricultural machinery, ship building, boilers & compressors, textile machinery, physical infrastructure, sea or river ports, container terminals, internal container depot (ICD), container freight station (CFS), LNG terminal and transmission lines, CNG terminal and transmission lines, gas pipelines, flyovers, large water treatment plants and supply through pipe lines, waste treatment plant, solar energy plants export processing zones etc. This facility can be enjoyed by other industrial undertakings only upon notification or specification by the government.
Textile industries are within the tax holiday regime, though the units that would qualify for it is not defined. Textile means any phase of this industry. Its phases conclude spinning, dyeing and finishing and as such an industry at any phase is entitled to tax holiday. This means it does not have to be a composite textile mill to qualify for tax holiday. But many applications for tax holiday from separate-phase units like spinning, dyeing and finishing are reportedly not given the tax holiday facility by the National Board of revenue (NBR). Their tax holiday applications were rejected on the plea that the unit was either spinning, dyeing or finishing and not a composite mill.
Likewise, high value RMG and computer hardware are misnomers in the list of units to qualify for tax holiday. High value garments have not been defined. Any RMG is of high value as it is exported.
The computer hardware is not produced here and the very purpose of tax holiday in the area is misleading. Data processing can be included in the list in the budget for the next fiscal.
Interestingly, all export processing zones (EPZs) enjoy tax-exempted facility but many export-based industries located outside these zones do not qualify for tax holiday. Many industries in EPZs do only augment the net export value marginally as they import raw materials, in high value, either through back-to-back letter of credits or otherwise. Again textile machinery imports enjoy tax holiday though they include all machinery for each phase of the industry.
Residential hotels qualify for tax holiday but not below those with three-star facilities. Hotels of acceptable standards at district levels should be brought under tax holiday facility to promote this industry as at the district level where hotels of three-star facilities are not economically sound investments. Alternatively this requirement could be lowered to include hotels with 100 rooms or five floors, or hotels having car parking and symposium halls could be in the tax holiday list. This would help promote investment at the district level, encouraging the entrepreneurs to go for new investments. This could help diversify and widen the location of hotel industries, say in the Monga-affected places or the coastal belt to promote income-generating activities in different places.
The banks, not financing agriculture-based industries, should be required to extend credit to agriculture as a pre-fixed portfolio. The monitoring arrangements in the banking sector should be strengthened and proper investment guidelines should be given to the banks to follow. This will help achieve the desired national objectives. The impact of new investment ventures needs to be evaluated to see whether or not tax holiday facility is helping to create new jobs and enabling the economy to enjoy its purported benefits.
Tax holiday should help attract investments in new sectors to generate income, create employment, increase GDP, reduce idle liquidity, step up circulation of money and reduce cost of fund and discourage unproductive cash accumulation. This facility should be provided on the basis of domestic needs. It should be operational on the basis of a clearly-set sector-wise priority for generating employment opportunities. It should be provided to industries that replace imports and promote exports. Tax holiday facility needs also to be extended to the industries open to micro-level capital market investors.
The writer is a chartered accountant and ICAB council member