While discussing $4.5 billion loans sought by Bangladesh, the International Monetary Fund (IMF) has called for reducing tax exemption in all the three sectors - income tax, value added tax (VAT) and customs in the meeting of October 30, 2022 held in the NBR. IMF said, as compared to other countries, the tendency of tax exemption is high in Bangladesh.
Regarding the tax exemption facilities, the NBR officials informed the delegates of IMF that NBR has to provide this facility in several sectors for the growth of local industries. NBR also mentioned that different countries of the world also provide this facility. However, the tax exemption facility is being reduced gradually and very recently the NBR Chairman also reiterated the same statement. It is to state that in the last financial year, VAT exemptions have been cancelled or reduced in some cases at the manufacturing stage. NBR informed that this will continue next year as well.
In reference to the statement of the NBR Chairman, the paragraphs below have mentioned the exemption policies of some of the countries.
In India, corporate tax credits and incentives as reviewed on May 24, 2022 shows that with a view to providing a momentum to start-ups and to facilitate their growth in the initial phase of their business, retention of 100 per cent of the profits and gains derived by an eligible start-up from a business involving innovation development, improvement of products, processes, or services, or a scalable business model with a high potential of employment generation or wealth creation will be available. If certain conditions are met, a tax holiday is permitted on the profits earned by an undertaking engaged in some sectors, including, commercial production or refining of mineral oils, operating and maintaining a hospital in a rural area and so on. Besides, to encourage companies to locate high-value jobs associated with the development, manufacture, and exploitation of patents in India, the government has introduced a concessional taxation regime for income from patents.
The tax exemption regime of Vietnam, last reviewed on July 22, 2022 can give a guideline for Bangladesh. In respect of Vietnamese enterprises earning income from overseas investment, CIT paid in a foreign country or paid on behalf by its partner in the country receiving the investment (including tax levied on the dividend) is allowed to be creditable. Besides, business entities in Vietnam are allowed to set up a tax deductible R&D Fund. Enterprises can appropriate up to 10 per cent of annual profits before tax to the fund.
In Turkey, The investment incentive system comprises five investment models, two investment programmes, and 12 incentive elements. If a Turkish company has a shareholding in a foreign company, this dividend income is exempt from CIT, under certain conditions. Tax incentives and support mechanisms are provided to companies carrying out R&D, innovation, and design activities in Turkey.
Malaysia has a wide variety of incentives covering the major industry sectors. Besides, Malaysia has undertaken some very innovative schemes to make Malaysia a hub for foreign investments. Companies in the manufacturing, agricultural, and hotel and tourism sectors, or any other industrial or commercial sector that participate in a promotional activity or produce a promoted product may be eligible for either Pioneer status (PS) or investment tax allowance (ITA). PS is given special CIT rate. Incentive for relocating to Malaysia is a recent scheme in that country. In Malaysia, A 'principal hub scheme' enjoys special incentives. Also, 'Global Trading Centre scheme' enjoys a concessionary tax rate. International trading companies get special incentives. A VCC of Malaysia investing in a venture company (VC) will be given a deduction on the value of investment made in a VC until December 31, 2026.
In Singapore, there are various tax incentives available to taxpayers involved in specified activities or industries identified as beneficial to Singapore's economic development. Corporations manufacturing approved products with high technological content or providing qualifying services may apply for tax exemption for five to 15 years for each qualifying project or activity under the Pioneer Tax Incentive. In Singapore, 'Intellectual Property Development Incentive (IDI) scheme' was introduced to encourage the use and commercialisation of IP arising from R&D activities of the taxpayer. 'The mergers and acquisitions allowance' allows a write-off of 25 per cent of the value of qualifying mergers or acquisitions deals executed between April 1, 2015 and December 31, 2025. This incentive is available to companies that are incorporated, tax resident, and carrying on a business in Singapore. Another exceptional scheme is 'Headquarters schemes'. Depending on their level of economic commitments to Singapore, international headquarters can apply for various tax incentives, including tax exemption or concessionary tax rates on qualifying income. Another is 'Maritime Sector Incentive (MSI) scheme'. The MSI scheme is the umbrella incentive for the maritime sector. Incentives offered include tax exemption for shipping companies and a 10 per cent concessionary tax rate for international freight and logistics operators. 'Global Trader Programme (GTP)' is another scheme. International traders are taxed at concessionary rates of 5 per cent or 10 per cent on qualifying income from physical trading, brokering of physical trade, and derivative of trading income.
China adopts the 'Predominantly Industry-oriented, Limited Geography-based' tax incentive policy. Key emphasis is placed on 'industry-oriented' incentives aiming at directing investments into those industry sectors and projects encouraged and supported by the state. The tax incentive policies mainly include and are applicable to both domestic and foreign investments. Enterprise using major raw materials gets tax facility. Enterprises purchasing and using equipment specified by the state for environmental protection, energy and water conservation, or production safety purposes are eligible for a tax credit of 10 per cent of the investment in such equipment.
In USA, various business credits are available to provide special incentives for the achievement of certain economic objectives. In general, these credits are combined into one 'general business credit' for purposes of determining each credit's allowance limitation for the tax year. The Inflation Reduction Act of 2022 (IRA), enacted on August 15, 2022 added new business credits, with various effective dates, that are part of the general business credit. Some are such as-- zero emission nuclear power plant credit, clean hydrogen production credit, qualified commercial clean vehicle credit, advanced manufacturing production credit, clean electricity production credit, clean fuel production credit. Besides, there are some other credits and incentives for federals.
Japan has extended schemes for tax credits and incentives for research and development (R&D) cost. Only large corporations increasing domestic investment would be eligible for salary increase tax credits. Establishment of a tax system to promote investment in innovative corporations is eligible for a special income deduction. Accredited corporations will be entitled to elect either a 30 per cent special depreciation rate or a 15 per cent tax credit where they invest in infrastructure to promote the introduction of 5G technology and where the corporations put such infrastructure into use. Japan also have 'Incentives for the revitalisation of local 'hubs' scheme'. A taxpayer is eligible for certain tax incentives if his business activitie relate to or expands certain kinds of operations in local areas (generally other than Tokyo, Osaka, or Nagoya).
Furthermore, in Australia, accelerated deductions are available for capital expenditures on the exploration for and extraction of petroleum and minerals. Also export-market development expenditure is available to eligible businesses seeking to export Australian-source goods and services.
Therefore, Bangladesh needs to make the strategies of exemptions and incentives in accordance with its aim and target, whether Bangladesh wants to implement Made in Bangladesh and more specifically by revitalisation of local 'hubs', wants to advance SDGs, wants to face LDC Graduation challenges, and makes advances in international market through R&D and other international schemes. Bangladesh can revise its schemes in accordance with global good practices.
There can be some recommendations for Bangladesh. Incentive in R&D and design activities and also in machines and equipment acquired for R&D and design activities is a must. Like many countries, a concessional taxation regime should be introduced for income from patents. Incentives for providing a momentum to start-ups and to facilitate their growth in the initial phase of their business. like in India, should be introduced. Special emphasis should be given to high potential of employment generation or wealth creation. Innovative schemes like Pioneer status (PS) and 'Incentives for relocating to Bangladesh' like in Malaysia can be adopted, or Intellectual Property Development Incentive (IDI) scheme, Headquarters schemes or Global Trader Programme (GTP) like in Singapore. Bangladesh can consider predominantly industry-oriented, 'imited geography-based' tax incentive policy like China. Bangladeshi enterprises earning income from overseas investment like in Vietnam should be incentivised. Capital expenditures on the exploration for and extraction of petroleum and minerals can be incentivised like in Australia. Bangladesh can consider 'innovative data utilisation plan' to promote the introduction of 5G technology like in Japan.
Barrister Khandoker M. S. Kawsar, Advocate, Supreme Court of Bangladesh and a Revenue law expert.
