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Dhaka Tribune

Dr Atiur: Adverse tax environment behind low FDI inflow

He also recommends making an independent director as chairman of the board of directors to ensure good governance

Update : 25 Jan 2024, 12:38 AM

Former Bangladesh Bank governor Dr Atiur Rahman on Wednesday said that the country needs to improve its business climate if it wants to raise its foreign direct investment (FDI) and tax-to-GDP ratio.

He also cited unfavorable tax policy, slow penetration of technology and productivity issues as other key issues.

Rahman also recommended making an independent director as chairman of the board of directors to ensure good governance in private banks.

The economist made the remarks while presenting a keynote paper titled “Towards a Trillion Dollar Economy of Bangladesh Opportunities and Challenges” organized by the Foreign Investors' Chamber of Commerce and Industry (Ficci) in the capital.

Atiur said that the inadequate trade logistics and infrastructure, complex investment policy and business regulations, low productivity, lack of depth in the financial sector and unfavorable tax environment were key factors hindering FDI in Bangladesh.

While Bangladesh’s GDP growth has remained commendable, net FDI inflows show a declining trend. Between 2010 and 2022, Bangladesh’s average FDI inflows stood to be 0.9% of GDP, said the former central bank governor.

At the same time, India and Vietnam's figures were 1.7% and 4.6% respectively.

Bangladesh required more FDIs to stabilize foreign exchange rate right now which would help to decline inflation in the country, he stated in his keynote.

“We must strengthen financial sector governance and bolster overall business confidence. FDI inflows need to be bolstered to realize Bangladesh’s macroeconomic potentials, particularly to stabilize its financial balance.”

Favouritism

He also said that the current tax system tends to favor specific sectors, which prevents fairness and efficiency.

“The country faces lack of digitalization and modernization in tax process, retrospective application of policies and unpredictability, different ID number for same business, lengthy process of incentives, limited number of transfer pricing experts, absence of double tax avoidance agreement, reliance on paper-based return and in-person appeal filling processes add to complexities,” they keynote paper stated.

Higher FDIs would result in a stable foreign exchange rate, which in turn would help lower inflation, Atiur also said.

The paper also said that 33% tax reduction and effective tax reforms would increase both FDI and tax revenue significantly.

In this model, FDI could increase from $3.14 billion in 2022 to $51.4 billion in 2041 and tax revenue could increase from $34.44 billion in 2022 to $227.21 billion in 2041.

There is no alternative to bolstering FDI inflow. Increased inflow of FDI will also improve revenue mobilization, as Bangladesh’s tax-GDP ratio hovers below 10%,

A 1% point rise in FDI inflow corresponds to a 1.5% point increase in overall tax revenue for developing economics, he pointed out.

The emeritus professor of Dhaka University also said that as stabilizing foreign exchange rate was significant to reduce inflation, Bangladesh must ensure "smart economic diplomacy" to promote Bangladesh as an attractive investment destination.

Good governance must be ensured, and suggested the new government must take initiative to reduce loan defaults, make favorable policies to ensure ‘ease of doing businesses', Rahman added.

Speaking on the occasion, Ficci President Zaved Akhtar, said: “Bangladesh has huge economic headwinds, but we will not go far by worrying about them. We should rather be concerned more about the chances we miss when we don't try when the opportunities arisei n our country.”

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