1.0 Background Reality:
Bangladesh has been doing significantly well in terms of economic growth over the years, surpassing most of the comparator countries in the world while comparing based on the key economic indicators. The journey of this very steady and strong growth trajectory has been achieved despite a very low Foreign Direct Investment (FDI) (~0.5% to GDP), Tax to GDP ratio (less than 10%) and poor ratings in the ease of doing business index (168th out of 190 economies, when measured last time). This has been possible because of an extraordinary resilience mindset of Bangladeshi people, large contribution from manufacturing sector, exports (largely from RMG sector) and service sector creating several million low-skilled jobs, which resulted in increasing private consumption and growing middle class as well. However, this situation may not be sustainable in this VUCA world, hence ignoring the cause for insignificant contribution of FDI or low Tax to GDP ratio or poor rating in ease of doing business maybe very costly for Bangladesh unless we initiate immediate measures to explore tapping all the missing opportunities in those areas.
Low contribution of FDI will come first as one of the biggest missing opportunities for Bangladesh as we have been continuously ignoring it, which could make a shift change towards our journey to be a Developed Nation by 2041 as envisioned by our Hon’ble Prime Minister, the daughter of the Father of the Nation, Bangabandhu Sheikh Mujibur Rahman.
So, what are the reasons for very low FDI in Bangladesh, why FDI to GDP ratio is so poor or what further achievement Bangladesh could make if it’s FDI contribution was similar to comparator country like Vietnam (6.15% to GDP in 2019). Before finding answers as to what are the roadblocks for FDI in Bangladesh, we need to understand the existing dynamics on the fiscal policies of Government in terms of revenue budgeting process, tax management system and other factors, which may have been the reasons for very poor FDI in Bangladesh.
2.0 Existing Dynamics :
A. Fiscal policies on revenue budgeting process:
In Bangladesh, the annual budget is prepared by the Ministry of Finance and presented to the Parliament for approval each year generally during the first week of June, which is passed by end of June for implementation from the next fiscal period starting from 1st July. This annual budget is divided into a revenue budget and a development budget. The revenue budget pays for the normal functioning of the Government and is intended to be fully financed from domestically generated sources.
The fiscal year 2021 revenue budget was based on anticipated receipts of about Tk. 3,890 billion, or approximately US$45.2 billion, which is approximately 11% of GDP. Out of the total revenue budget,tax revenues accounted for almost 89% i.e., Tk. 3,460 billion where contribution of direct tax is Tk. 1,050 billion (30.3%), VAT is Tk. 1,280 billion (37.0%), Supplementary duty is Tk. 545 billion (15.8%) and Customs duties is Tk. 380 billion (11.0%)
Out of total tax revenue budget, the National Board of Revenue (NBR) collects the maximum tax revenues. For the fiscal year 2021, it amounts to Tk. 3,300 billion i.e., almost 95% of the total tax revenue budget, which has been formulated by NBR based on historical data and estimated growth projected for the next year. When we talk about historical data as a base for crafting the tax revenue budget of NBR, here comes all the issues. For example, our direct tax revenue collections are highly dependent on withholding taxes (~61% of total direct tax revenue).
B. Existing tax management system:
In Bangladesh our tax management system has not been fully automated or digitized. In other words, we follow mostly an analogue system for managing our taxes. We all know managing taxes through analogue system has inherent limitations and tax dodgers always take advantage of this. Consequently, there has been an extremely a large number of eligible taxpayers not paying their taxes properly, which indicates one of the key reasons as to why our Tax GDP ratio is so poor. All these, while creating huge doubts on the overall tax management system, also creates mistrust between taxmen and taxpayers. This is because, in the absence of an effective tax management system supported by automation, taxmen generally blame all the taxpayers irrespective of whether they’re compliant or non-compliant, and on the other hand compliant taxpayers see this as they are being discriminated by introducing higher tax rates through fiscal laws and harassed through excessive charges or arbitrary assessments.
C. Number of eligible taxpayers vs actual taxpayers:
Based on the 2020 budget speech of the Hon’ble Finance Minister, the number of persons capable of paying taxes was around 40 million and in FY2020-2021 the number of persons filed tax return was around 2.54 million i.e., only around 6.3% of the eligible taxpayers filed their tax returns and paid their taxes accordingly. This gives an idea of the noncompetitive environment faced by any compliant investors in Bangladesh.
3.0 How the Existing Dynamics Contributing Towards Impediment of FDI in Bangladesh:
A. The fundamental principles followed for revenue budgeting process:
• There is no consistency in the revenue policies. Almost every year, there are fundamental changes made for the sake of increasing Govt. revenues.
• Govt. follows cash method while crafting revenue budget based on historical data. Hence, what has been collected in the last fiscal year, that is considered a base and a mindset is already there that “no change” is to be made there which will result in decreasing tax revenues, irrespective of whether there are valid reasons or rationalization required.
• Direct tax collection systems are heavily depended on withholding tax (WHT) mechanism (~61% of total direct tax revenue). The principles that a portion of legitimate taxes shall be collected through WHT is often ignored, as there are numerous examples where we can see, WHT are much higher than the legitimate tax liability and due to minimum tax provision, the assessee cannot get refund of the excess tax paid. All compliant taxpayers have to absorb/bear this additional load of WHT for the sake of continuance of their operation as it is simply impossible for the vendor to afford it. This raises question on the very fundamentals whether income tax is applicable on income or payments.
• Due to the minimum tax provision applied on gross receipts ignoring the actual income, sometimes taxes are to be paid even if there are losses. This is mostly painful for any startup company and also raises question on the very fundamentals whether income tax is applicable on income or receipts.
• If the overall revenue policies are reviewed, it will be identified that existing system supports trading business more than manufacturing business.
• There are numerous examples, where there is no difference on duty rates (i.e., basic duty and supplementary duty) whether it is used as ingredient in manufacturing operation or traded as finished goods.
• Under VAT laws, all the complexities are there if one starts manufacturing operation in Bangladesh. On the other hand, without making any investment, if anyone wants to do trading business in Bangladesh, it is a lot simpler and hassle free.
• Likewise, imposition of supplementary duty at local supply stage for locally manufactured goods, indirectly discourages investment in Bangladesh.
For corporate, the Effective Tax Rate is very high (additional 7% to 15%) compared to the Marginal Tax Rate, which is mainly due to inadmissibility of various legitimate business expenses, which are never highlighted in the Bangladesh Investment Development Authority (BIDA)’s Investment guide offered to the investors. Some examples of inadmissible expenses are given below:
• For Royalty, technical service fees, technical know-how fee BIDA guidelines allow remittance of 6% of turnover. Whereas as per Tax Law, only 8% to 10% of the profit are considered admissible expenses. Consequently, for a profit making company almost 50% to 70% of the Royalty, technical service fees, technical know-how fees become inadmissible, which increase the effective tax rates. On the other hand, for start-up companies who cannot make profit in the initial years, the entire expenses become inadmissible, adding to another burden on top of losses.
• As per Tax Law, there is inadmissible expenses due to excess perquisite. Any amount paid to employees as perquisite in excess of Tk. 550K per employees per year, is considered excess perquisite and the company has to pay taxes on the excess perquisite, although this is already taxed in the hand of employees. This is doubly taxed to the employer, and this is the way it has been applied.
• Inadmissible expenses due to promotional expenses exceeding 0.5% of the business turnover. Depending on the profitability the additional impact on the effective tax rate is huge.
C. Other Factors:
i. Uneven competition:
Currently, FICCI members are providing around 30% of the Government’s internal revenues, standing among top five revenue generating sectors across the country. As per the last tax card giving ceremony organized by Bangladesh Govt, it was seen that in most of the sectors, FICCI members were there among the top taxpayers, despite them not being in the top lists in terms of top line revenues. As per Registrar of Joint Stock Companies & Firms (RJSC), there are 110,000 entities registered with RJSC, which means among this 110,000 around 210 FICCI members are contributing this ~30% of the government internal revenue!! All these are evidencing a serious level of uneven competition faced by the compliant companies, i.e., mostly by the foreign investors and maybe because of this, the effective tax rates are comparatively higher in Bangladesh. The point is, all potential investors find all these during their feasibility study on any potential investments in Bangladesh and no investors would invest in Bangladesh if taxes are higher here than in competing countries.
ii. Ease of Doing Business:
When measured last time , we were ranked 168th among 190 economies in terms of ease of doing business, which we have been continuously ignoring by saying despite this, we have been doing good in Bangladesh. However, from investors’ point of view, we have to keep in mind that before making any conscious investment decision, all potential investors look into this factor seriously. Hence, unless we attempt to find out the root cause of such poor ratings, our attempts to attract foreign investment will be a failed venture only. The point is, if we do not look this through the eye of the potential investors, it will be a difficult exercise to find out these root causes.
iii. Poor enforcement of laws and regulations:
Apart from very poor tax compliances by a significant number of the capable taxpayers, there are rampant non-compliance of laws and regulations in marketing of products as well, which are posing serious threats to the existing foreign investors who made significant investment in Bangladesh. Infiltration of illegal parallel imports and marketing of non-compliant/counterfeit products upon non compliance of applicable laws and regulations are very common in Bangladesh and has been happening due to lack of enforcement of laws in front of all the regulators. Imported FMCG products marketed in Gulshan DCC1 Dhaka, Moulavi Bazar Dhaka and Reazuddin Bazar, Chattogram are live examples of such rampant lack of enforcement of laws, where violation of Import Policy Order, Customs Laws, BSTI Laws, Food Safety Laws, Breast-Milk Substitute Laws, Money Laundering Laws etc., are very common but no one bothers or dares to touch them. Potential foreign investors are fully aware of this.
iv. Industry voices are mostly ignored :
As part of the revenue budgeting process, Govt. invites different Chambers to share their views on various aspects of fiscal laws. As part of this, different Chambers provide many constructive proposals, which can create a conducive investment environment, however over the years these sessions have become a mere formality only, as most of the constructive suggestions are ignored. Similarly, enforcement of existing laws and regulations indiscriminately to ensure a level playing field has been a demand from all complaint investors, but it has been ignored taking a myopic view to protect small unscrupulous traders/importers only ignoring the bigger interest.
4.0 Concluding Remarks:
If we think, potential foreign investors are not aware of all these challenges faced by the existing foreign investors and continue to ignore these, we may have to pay a bigger price by giving away the opportunities to our comparator countries. Hence if we are serious about making a big leap in FDI, we may have to consciously acknowledge the challenges and try to make serious attempts to address those. For this, at first, we have to look at the issues faced by the existing foreign investors, who have been serving as the beacon for any future investment in Bangladesh.
Lastly, we’re hopeful, under the able leadership of our Hon’ble Prime Minister, the issues will be addressed soon for creating a highly conducive FDI environment leading towards our aim to eradicate poverty on the way to becoming a developed nation by 2041.
