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Strengthening investment facilitation measures

| Updated: May 27, 2022 20:35:42


Meghna Industrial Economic Zone beside the Dhaka-Chittagong Highway in the Sonargaon Upazila of Narayanganj district. —MGI Photo Meghna Industrial Economic Zone beside the Dhaka-Chittagong Highway in the Sonargaon Upazila of Narayanganj district. —MGI Photo

Investment promotion is effective only in a congenial investment environment. Without an appropriate business climate for investment, promotional efforts might make foreign investment less likely and can even be counterproductive. It is extremely difficult to convince an investor to return if he was disillusioned during his very first investment process. The disappointed investor is also likely to be vocal about his disenchantment and, so, discourage other potential investors. 

Foreign investors are highly allergic to: unpredictable regulatory framework, lack of transparency,  judicial complexities and inefficiencies, lengthy and discrete administrative procedures. weak protection of intellectual property, and unresolved property ownership.

So, the most essential pre-requisites for congenial investment environment are: one-stop services to simplify regulations and mandate a rapid response to investors,  simplified business registration requirements, quality human resource, streamlined administrative procedures, business friendly laws, regulations and administrative policy environment, investment financing with low transaction costs, and cost effective power, ICT and multimodal transport and communication infrastructure.

Besides these, appropriate mechanisms for enforcing Intellectual Property Right (IPR) and other legal rights and settlement of dispute are also important. 

In Bangladesh, it is, thus, necessary to rationalise, streamline and harmonise the trade and investment facilitation regime upholding the global principles of Most Favoured Nation (MFN) and National Treatment for both Foreign Direct Investment (FDI) and local investments. The investment facilitations should be harmonised with the "Common Investment Facilitations Measures" to provide all local private and public and foreign investments similar treatment without discrimination.

For instance, currently the private power companies are exempted from corporate income tax for a period of 15 years. But there should be normal direct tax which is the best global practice. Again, the companies are allowed to import plant and equipment and spare parts up to a maximum of 10 per cent of the original value of total plant and equipment within a period of 12 years of commercial operation without payment of customs duties, VAT (Value Added Tax) and any other surcharges as well as import permit fee, except for indigenously produced equipment manufactured according to international standards.  What is necessary is harmonisation of indirect taxes with general investment facilitations measures provided to local and foreign investors without discrimination.   

Currently, repatriation of equity along with dividends are allowed without any restriction. This should be allowed to all sectors in foreign investments without discrimination. 

Again, the instruments and deeds required to be registered under local regulations are exempted from stamp duty payments. The provision should be replaced with the general investment facilitations measures provided to all sectors in local and foreign investments and there should be no discrimination.   At present, foreign companies are exempted from the requirements of obtaining insurance/reinsurance only from the national insurance company, namely Sadharan Bima Corporation (SBC). Private power companies are also allowed to buy insurance of their choice as per requirements of the lenders and the utilities. It will be better if all requirements for insurance coverage are harmonised with the general investment facilitation measures provided to  all sectors and both to the local and foreign investors.    

The   avoidance of double taxation in case of foreign investors are now allowed on the basis of bilateral agreements. Instead, the policy should be 'pay tax where earned'.

Currently, the government is promoting Special Economic Zone (SEZ) to attract foreign direct investment (FDI). It is important to understand which measures are WTO consistent or green measures. The measures imposed by non-governmental organisations, including incentives to businesses located in SEZs are green measures subject to condition. WTO disciplines do not apply to measures applied by private sector organisations, such as private SEZ operators, unless they are carrying out a governmental directive or the benefit is funded by government.

Exemption of exported products from indirect taxes is also a green measure.  Indirect taxes are sales, excise, turnover, value added, franchise, stamp, transfer, inventory and equipment taxes, border taxes, and all taxes other than direct taxes and import charges, as per Agreement on Subsidies and Countervailing Measures (SCM) of the WTO.

Again, goods stored in SEZs are exempted from duties and indirect taxes.  Zones outside the "customs territory" of the country where they are physically located are recognised by multilateral agreement (WCO Revised Kyoto Convention, Specific Annex D, chapter 2) and customary international law. Duties and indirect taxes are normally not applied in these "free areas".

Non-specific subsidies, including generally applicable tax rates imposed by national, regional and local government authorities are also green measures. Subsidies are non-specific if they are based on objective criteria or conditions and eligibility is automatic. Nation-wide programmes are non-specific. National programmes limited to designated regions, or a limited number of enterprises are specific. However, generally applicable tax rates are non-specific. 

It is also necessary to determine the SEZ-related measures that are WTO-illegal or red measures.

Direct subsidy contingent on export performance (e.g., cash payments are given by government based upon export performance) is prohibited by SCMA Article 3.1(a) and Annex I(a).   The same Article also prohibits currency retention scheme involving a bonus on exports. It is to be noted that SEZ exporters are allowed to retain foreign currency based on export performance. Internal transport and freight charges are more favourable for export shipments than for domestic shipments (if mandated by government) is not allowed under the said agreement of WTO.

Provisions by the government regarding domestic inputs or services for use in the production of exported goods on terms more favourable than for production of domestic goods  are prohibited, if the terms are more favourable than those commercially available on world market. For instance, if the government provides electricity and other utilities for businesses in an SEZ at lower rates than for businesses outside the SEZ, this will be a violation of WTO provision. Again, if the government limits or prohibits imports from the SEZ for domestic consumption ( i.e., consumption in the non-SEZ portion of the territory) and/or imposes export requirements, the prohibition will not comply with the WTO.

If domestic goods are given preference over foreign goods by government directive, that will violate a number of provisions. For example: an SEZ is required by government to use domestic inputs when manufacturing goods are for export. This kind of preferential treatment of domestic goods is prohibited by GATT Article III. SCM Agreement, Article 3.1(b) also prohibits subsidies contingent upon the use of domestic over imported goods.

Fees or taxes on imports or exports exceeding the cost of services provided by government is another prohibited issue. Example: a customs processing fee imposed by government in connection with SEZ operations exceeds the cost of the services rendered.

There are many more provisions of prohibitions and the country needs to analyse those carefully before putting in place the measures to facilitate investment.

 

Manzur Ahmed is Adviser, Federation of Bangladesh Chamber of Commerce and Industry (FBCCI). 

[email protected]

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