'Unpredictable' tax policies could deter FDI, dampen investor confidence

Warn foreign investors in post-budget reaction

FE REPORT | Tuesday, 11 June 2024

The Foreign Investors' Chamber of Commerce and Industry (FICCI) says that Bangladesh's "unpredictable, inconsistent and unstable tax policies" could deter foreign direct investment (FDI) into the country.
"The government facilitated the establishment of 100 economic zones (EZs) for private sector industries," said the chamber's President Zaved Akhter while exemplifying the "unstable policies".
"But now it is withdrawing tax exemptions for units within these zones through a simple SRO [Statutory Regulatory Order], nullifying previous commitments," Mr Akhter said at a press conference in the capital on Sunday.
According to the FICCI president, this withdrawal of incentives from private EZs and high-tech parks, while maintaining them for government EZs, may erode investor confidence.
He said concrete confidence is the key for attracting FDI. "If confidence erodes, foreign investors will relocate to countries with more favourable policies."
The proposed national budget for 2024-25 removes several benefits for investors in private economic zones and high-tech parks who have not yet begun commercial operations.
The foreign investors' chamber noted that companies currently under construction or preparing for operation, as well as those in the pipeline, were attracted by the government's previous commitments. These companies may now consider moving to other countries with more stable FDI policies.
While FICCI commended the proposed national budget's focus to support the economy amid turbulent macro environment, the chamber labelled the 6.75 per cent GDP growth and 6.5 per cent inflation targets ambitious in nature.
However, they believe these goals are still achievable with an effective execution plan.
According to the budget, the proposed tax and customs reforms aim to increase revenue, reduce deficits and bolster investor confidence. However, FICCI suggested alternative and innovative approaches, such as sector-specific revenue analysis and expanding the taxpayer base.
The chamber welcomed the incorporation of their proposed amendments in the Finance Bill 2024, particularly the introduction of a prospective tax rate, which fulfils a long-standing demand from the business community.
"Maintaining these rates will allow businesses to plan and invest more effectively," said FICCI President Mr Akhter.
FICCI also acknowledged the proposed tax reforms in the 2024-2025 budget aimed at simplifying the tax system.
Despite appreciating the introduction of a 15 per cent income tax rate for private funds, FICCI aired concerns about the disparity by exempting public funds from taxation.
The chamber said this disparity could lead to unfair treatment between government and private sector employees.
The proposed budget forecasts a GDP growth of 93 basis points and a decrease in inflation by 150 basis points.
Mr Akhter said detailed implications of deficit financing, such as potential higher interest rates and the need for a balanced approach to ensure fiscal stability, are crucial.
FICCI voiced worry about the proposed increase in personal income tax rates.
Mr Akhter said this measure could be perceived as unfair by regular taxpayers and eventually incentivise tax evasion.
"Changes in tax brackets could discourage compliant taxpayers who feel penalised for their hard-earned income," he commented. "Besides, the retrospective application of this increase contradicts the NBR's current policy of promoting a predictable tax environment."
Therefore, FICCI recommended maintaining last year's rates for FY25.
Mr Akhter elaborated on the principle behind tax reform -- reducing tax rates while broadening the tax base -- to create a fairer and more efficient tax system.
Former FICCI President Rupali Haque Chowdhury too said abrupt changes in government policies and taxes could discourage foreign investors.
She said investors make decisions based on promised benefits and incentives. Removing these benefits sends negative signals and makes attracting and retaining FDI more challenging.
She added that neighbouring countries often offer more attractive incentives to attract FDI, making Bangladesh a less competitive destination. "Foreign investors compare available benefits across countries and may choose to relocate elsewhere."
At the press briefing, FICCI Consultant Snehasish Barua presented the key details of the finance bill. He spelled doubts about achieving a 6.5 per cent inflation target alongside a 6.75 per cent GDP growth projection.
An increase in both money supply and demand could lead to higher prices, he said, adding, "Demands need to be contained and price must be monitored."
Mr Barua said government borrowing might result in higher interest rates, discouraging private investment.
"We must increase revenue by expanding the tax net which will enable us to borrow less from the market," he said.
He recommended that the government prioritise managing spending, boosting revenue and implementing fiscal reforms.
"Increased export earnings, increased remittance and FDI are important to stabilise the foreign exchange rate," he added.

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