Tax Holiday in Bangladesh

Tax Holiday
Tax holiday is allowed to industries subject to the relevant rules and procedures set by the National Board of Revenue (NBR). Presently, it is allowed for 5, 7, 9 and 12 years for industries set up in the developed, less developed, least developed and special economic zones respectively. The period of such tax holiday is calculated from the month of commencement of commercial production. The eligibility of tax holiday is to be determined by the NBR and the commencement of production is certified by the respective sponsoring agencies.

Tax Exemptions and Tax Holidays in Bangladesh

In the interest of industrialization and investment, tax holiday has been continuing in the tax regime of Bangladesh since her liberation in 1971. There are forceful arguments for and against continuing this facility. At present more than 2000 industries are enjoying tax holiday. The existing tax law permits, extension unit of an industry to be entitled to tax holiday. Such facilities of granting tax holiday have been found ineffective. A mechanism of internal transfer pricing could be arisen as a vehicle for perpetual tax holiday. As observed, the present income tax act is full of rebates and exemptions (Hussain, 1999). It is now needed to minimize and to come straight to a threshold of income, which is taxable. The present scheme of granting tax holiday has not been a very good experience. In FY 1999-2000, total number of tax holiday cases were 1531 and the estimated loss of revenue was about 250 crore taka (1 crore is 10 million) that was estimated at about 9.6 percent of total income-tax earnings of that year. The benefits of the tax holiday are being enjoyed mainly by the garment industries. Their growth has enhanced due to external factors. Even if the incentive of tax holiday were not given, the garment industry would have grown up and the state would have earned quite a substantial amount of revenue from the industry. Thus the revenue foregone does not appear to be fiscally efficient (Waresi, 1998). However this has not been able to foster industrial growth in different regions of the country. Such a perpetuating provision for tax holiday creates distortion in taxation mechanism and against the norms of equity and neutrality. It is thus important to restrict such unbound opportunities for the sake of better future of the country. Under the present arrangement any income accruing from poultry, fishery, livestock etc. is exempted from income taxes until June 30, 2005. This provision is being abused indiscriminately. A lot of black money is being laundered into the market through this mechanism. One potential remedy should be to allow an initial support to this sector then bringing back them under the purview of taxation.

Taxing new Industrial and Extension Units

In the interest of industrialization and investment, tax holiday has been continuing in the tax regime of Bangladesh since her liberation. The number of industries enjoying tax holidays is above two thousand and the existing provision gives incentives for the said industries a perpetual tax holiday for the extension unit of an industrial undertaking. It is said that the current facility of granting tax holiday to extension unit has been grossly abused. In many cases such tax holiday facility was availed for an artificially created extension unit without really setting up a new unit, by merely showing transfer of machineries of the existing unit to the said artificial unit. In some instances industrial undertakings on expiry of tax holiday usually set-up new extension units under tax holiday, where they divert their income of the taxable unit through a mechanism of internal transfer pricing in a bid to use the system as a vehicle for perpetual tax holiday. Since entire withdrawal of tax holiday and incentives for such new and extended units might be difficult for the government in the interest of rapid industrialization, there might have trade off in taxing such industrial undertakings at reduced rate.

Tax Holiday for newly established industrial undertaking, Tourist Industry and Physical Infrastructure facility set-up between the periods of July, 2008 to June, 2011 etc. in certain cases: [Section 46B]
A. Condition for Tax Holiday: Period of tax holiday has been further extended for 3 years beyond 30th June, 2008 in respect of industrial undertaking, tourist industry and physical infrastructure facility subject to following conditions:
i. ii. The undertaking is set up in Bangladesh between 1st July, 2008 and 30th June 2011; Act of Parliament having head office in Bangladesh or (ii) a company defined under Companies Act 1913 or 1994 having subscribed & paid up capital of not less than Taka 1,000,000 on the date of commencement of commercial production; The undertaking is engaged in: [Section 46(B), Para # 2] The Industrial Undertaking in the production of textile, jute, high value garments (Overcoats, jackets & suits), pharmaceuticals, melamine, plastic, ceramics, sanitary, providing on commercial basis, physical infrastructure facilities; Tourist industry as defined in the explanation to Section 46; 3

iii.

iv.

30% of the tax exempted income to be invested in the same undertaking or for a new industry during the period of exemption or within one year of expiring tax holiday period. An additional 10% profit has to be invested each year within 3 months of closing the income year purchasing shares of listed companies in Bangladesh;

v.

The undertaking is not formed by splitting up or by reconstruction or reconstitution of an existing business or by transfer to a new business of any machinery or plant used in Bangladesh at any time before commencement of the new business; An application shall be filed with the Board for approval of the undertaking within 6months from the end of the month of commencement of commercial production or operation, and the undertaking must be approved by the Board;

vi.

B. Period of Exemption: [Section 46(B), Para # 1] If the said undertaking is set-up in Dhaka and Chittagong divisions, excluding the hill districts of Rangamati, Bandarban, and Khagrachari; for a period of 5 years beginning with the month of commencement of commercial production or operation;
Period of Exemption Rate of Exemption

For the first two years (1st and 2nd year); For the next two years (3rd and 4th year); For the last one years (5th year);

100% of Income 50% of Income 25% of Income

If the said undertaking is set-up in Rajshahi, Khulna and Barisal divisions, and hill districts of Rangamati, Bandarban, and Khagrachari; for a period of 7 years beginning with the month of commencement of commercial production or operation;
Period of Exemption Rate of Exemption

For the first three years (1st, 2nd & 3rd year); For the next three years (4th, 5th & 6th year); For the last one year (7thyear);

100% of Income 50% of Income 25% of Income

C. Computation of Tax Holiday Income a) The profit and gain shall be computed under the head income from business or profession (section 28) b) Loss sustained in a tax holiday undertaking shall not be set off against profits of taxable units. Loss shall be carried forward to be set off against income from same undertaking in the following years, but not beyond tax holiday period; c) Only normal depreciation allowance, if any, shall be allowed; d) Any dividend distributed by a tax-holiday company to its shareholders out of its exempted profit shall not be exempt from tax; e) Capital gains earned by tax holiday undertaking shall not be exempt from tax; Income of the said undertaking resulting from disallowance made under section 30 shall not be exempted from tax;

Tax Holiday for Hospitals: [SRO 204-Ain/IT/2005 dated 6th July 2005] a) A newly established private hospital will be eligible for exemption of income for another 5 years subject to the following conditions: b) The hospital is owned by a company registered under the Companies Act 1913 or 1994; c) The hospital is established between the period 1st July 1999 to 1st July 2008 in the private sector; d) The hospital is housed in a building constructed on the companys own land; e) The hospital has number of beds (i) 200 beds in case of general hospital (ii) 50 beds in case of specialized hospital for heart, kidney and cancer patients; f) 10% of the beds must be kept reserved for treatment of poor free of charge;

New List of eligible sectors for Tax Holiday: [Section 46B]

(i) Industrial Undertaking Eligible for Tax holiday: (a) Active pharmaceuticals ingredient industry and radio pharmaceuticals industry; (b) Barrier contraceptive and rubber latex; (c) Basic chemicals or dyes and chemicals; (d) Basic ingredients of electronic industry (e.g. resistance, capacitor, transistor, integrator circuit); (e) bio-fertilizer; (f) Biotechnology; (g) Boilers; (h) Compressors; (i) Computer hardware; (j) Energy efficient appliances; (k) Insecticide or pesticide; 5

(l) Petro-chemicals; (m) Pharmaceuticals; (n) Processing of locally produced fruits and vegetables; (o) radio-active (diffusion) application industry (e.g. developing quality or decaying polymer or preservation of food or disinfecting medicinal equipment); (p) Textile machinery; (q) Tissue grafting; or (q) Any other category of industrial undertaking as the Government may, by notification in the official Gazette, specify. (ii) Physical Infrastructure Eligible for Tax holiday: (a) Deep sea port; (b) elevated expressway; (c) Export processing zone; (d) Flyover; (e) Gas pipe line, (f) Hi-tech park; (g) Information and Communication Technology (ICT) village or software technology zone; (h) Information Technology (IT) park; (i) Large water treatment plant and supply through pipe line; (j) Liquefied Natural Gas (LNG) terminal and transmission line; (k) mono-rail; (l) Rapid transit; (m) Renewable energy (e.g. energy saving bulb, solar energy plant, windmill); (n) Sea or river port; (o) Toll road; (p) Underground rail; (q) Waste treatment plant; or (r) Any other category of physical infrastructure facility as the Government may, by notification in the Official Gazette, specify.

Most industries abuse tax holiday facility in Bangladesh

AS MANY as 352 newly set-up industrial units availed tax holiday facility in the last four fiscal years, causing revenue losses worth about Tk 500 crores to the national exchequer. Under governments tax holiday facility, industrial units enjoy tax and duty exemption for a certain period of time. Such fiscal incentive is designed to promote industrial development. A recent survey conducted by National Board of Revenue revealed that 90 per cent of the industries that were granted tax holidays reported no profit after expiry of the tax incentive. These industries reported profit during the tax holiday period, because they did not have to pay taxes. But on expiry of their tax exemption period they report no profit, an official of the NBR pointed out.
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Bangladesh Tax Holiday Has Failed In Its Objectives

According to revenue officials in Bangladesh, a tax holiday scheme designed to encourage diversified and balanced industrial growth in the country has failed, and has merely served to encourage massive tax evasion. The scheme, which has been in operation since the late 1980s when the government first started to encourage private sector investment, relieves industries in certain areas of 35% tax for five to twelve years, and was created with the intention of stimulating an equal industrial growth in both the developed and under-developed areas of Bangladesh. Section 45 of the Income Tax Ordinance (1984) divided the country into four zones, with those in the Special Economic Zone and the least developed parts of the country receiving longer exemptions than businesses in developed areas. However, officials from the National Board of Revenue (NBR) recently revealed that over 65% of industries still base their operations in the metropolises and surrounding areas, and that companies based in the less attractive (but tax privileged) areas are usually diverted units of companies from the developed areas. 'The tax holiday has created tax heaven for the taxdodgers,' observed one official resignedly. Research shows that many of the units established in economically backward sectors show profits during the holiday period, and become markedly less profitable after it expires, leaving the owners to close them down and begin afresh under different names in order to take advantage of the tax amnesty again. The tax holiday scheme has been extended several times already, the last being in June 2000, when the government extended it for a further five years following demands from trade groups. However, the NBR now feels that enough is enough, and officials believe that the scheme should not be extended again, advising instead that the scope of accelerated depreciation should be broadened to check rising tax evasion in Bangladesh.