Discounted rates of tax in place of tax holiday facility for industries

Editorial: Financial Express

The government, as announced by the Finance Minister in his budget speech, has done away with the tax holiday facility. It was in place for many years for the newly set-up industries. From now on, the industries to be set up in 51 productive sectors between July 01, 2009 and between June 30, 2012, would be subjected to discounted rates of tax, starting from 5.0 per cent in the first year to 15 per cent in the fifth year. A statutory regulatory order (SRO) to this effect was issued by the National Board of Revenue late last week. And the industries to be established in the less- developed districts, namely, Rajshahi, Khulna, Sylhet, Barisal and three hill districts — Bandarban, Rangamati and Khagrachhari–will be entitled to even higher tax concessions.

Despite opposition from the trade bodies, one of the main reasons for the government to withdraw the tax holiday facility is its alleged abuse. Besides, a good number of units are found to be hiding facts about their financial performance as soon as they become eligible for paying tax. In many cases, these units start reporting losses. Thus, the very purpose of offering the tax holiday facility, which costs the government a substantial amount of revenue annually, gets defeated. However, there is other side of the story. The tax holiday facility is one of the major factors that have been encouraging the investors, local and foreign, to make investment in industries in Bangladesh. The Awami League (AL) during its earlier period of rule between 1996 and 2001 had decided to replace the tax holiday facility from 2001 with the discounted rates of taxes for newly set-up industries. However, the then finance minister late SAMS Kibria later revised this decision and announced an extension of the facility up to June 2005. Saifur Rahman, the finance minister of the immediate past BNP-led alliance government, too, in his budget speech for the fiscal 2004-05 had declared that the facility would no more be extended. Yet the facility received yet another extension, mainly due to pressure from the trade bodies, despite the fact the multilateral donors and the Revenue Reforms Commission in its final report had recommended for withdrawal of the facility.

There is no denying that the government has incurred revenue losses worth billions of takas because of the tax holiday facility, that was introduced to encourage investments in various sectors of the economy. The discounted tax rates that have been made effective from July 01 last for newly established industries in some selected sectors of the economy are not much if considered in the context of the tax rates, starting from 30 per cent to 45 per cent, being paid by old industrial units, banks, insurance companies and other services organizations. Furthermore, the new government, as part of its policy to help the growth of domestic industries, has in the budget for the current fiscal provided a number of fiscal concessions, including reduced duty on raw materials. And if the industrial undertakings are export-oriented, they are entitled to more tax- and duty-benefits.

One has to accept the fact that the tax system of Bangladesh is highly exemption-ridden and a large part of the economy has remained outside the tax net. The country can ill-afford such exemptions and poor tax coverage. So, side by side with the efforts to expand the tax coverage, the government would have to be really serious about ensuring transparency, accountability and efficiency in the revenue administration.