Corporate tax reduction in India: What should Bangladesh do?

The Government of India recently announced reduction of corporate income tax rates. The highlights of the announced measures are:

* Reduction of tax rates for firms that do not seek any exemptions from 30 per cent to 22 per cent.

* For firms receiving incentives/exemptions, rates would be reduced from 35 per cent to 25 per cent

* Some new manufacturing companies incorporated in or after October 2019 which will start production before March 2023 will pay 15 per cent tax as against previous 25 per cent

The aforementioned tax reductions have been announced in the background of significant slowdown of India's economic growth which fell to 5 per cent in the quarter to June 2019, lowest since 2013. The objectives of these reductions are to provide stimulus to private investment from across the globe and improve competitiveness of domestic private sector. Analysts have commented that the newly announced rates are more competitive than those in Bangladesh and more or less at par with Thailand and Vietnam.

Headline tax rates are higher in Bangladesh than in most neighbouring Asian countries (table attached). However, it should be noted that there is a wedge between the headline rates and the effective tax rates. The existence of various fiscal incentives such as tax holidays, accelerated depreciation, specific reductions from gross earnings for income tax purposes and reinvestment allowances undercuts the headline rates. Nevertheless, the reductions in India may spur demand for tax cuts in Bangladesh.

In the above context the real policy issue is whether tax cuts would succeed in stimulating private sector investment which, as proportion of GDP (gross domestic product), has remained stagnant at around 22 per cent in Bangladesh during the last one decade. Research by various international organisations shows that the following actions are critically important for boosting private sector investment:

* Investment promotion authority such as BIDA in Bangladesh should establish direct contact with prospective investors and engage in discussions to appraise them of investment opportunities in various sectors.

* The promotion authorities should provide counselling services to facilitate approval process.

* Assistance should be provided to the investors in obtaining various permits such as environmental clearance and other permits.

* The regulatory framework for investment should be business friendly and transparent.

* There should be coherence among various policies which impinge on investment. Those policies relate to, among others, labour market, trade, exchange rate, bank credit etc.

* The administrative machinery should be honest and efficient to ensure minimisation of various hassles in business operations

* Educational system should produce graduates with adequate market relevant skills.

* There should exist high quality physical infrastructure including transport, telecommunications and ports.

* Political as well as macroeconomic stability should be ensured.

* Adequate energy such as gas and electricity at reasonable cost should be provided.

It is well known that Bangladesh suffers from considerable deficiency in many of the above mentioned areas. The position of Bangladesh in the Governance Indicators and Ease of Doing Business published by the World Bank is of particular relevance in this context. With regard to governance in 2017, among 12 Asian countries (Bangladesh, Cambodia, China, India, Indonesia, South Korea, Laos, Malaysia, Pakistan, Singapore, Sri Lanka and Vietnam), ten countries performed better than Bangladesh in respect of Rule of Law, Control of Corruption, Government Effectiveness, Political Stability and Absence of Violence; seven countries performed better in respect of Voice and Accountability and Bangladesh performed worst in respect of Regulatory Quality.

As regards Ease of Doing Business, Bangladesh ranked lowest among the 12 Asian countries in 2017. Its rank was 177 implying that 176 countries performed better. This indicator is based on 11 sub indicators which are: starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting minority interests, paying taxes, trading across borders, enforcing contracts, resolving insolvency and labor market regulation.

It would be unrealistic to expect any notable upsurge in private investment in Bangladesh until the country succeeds in bringing about substantial improvements in the indicators mentioned above. I am not suggesting that there is no case for reduction of corporate income tax in Bangladesh. However, should the government consider such a move, the decision has to be based on an objective assessment of the effective tax rate taking into account all the fiscal concessions offered to investors.

Dr. Mirza Azizul Islam is a former Adviser to the Caretaker Government, Ministries of Finance and Planning, and presently a Professor in BRAC University.