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Who should get tax breaks?

  • Published at 02:36 pm October 10th, 2019
The true impact of tax havens
If we err, let us err with better entrepreneurs / Bigstock

How to bring in the investment and boost the economy

In developing countries, perhaps the most widely adopted method for promoting economic growth and development is tax breaks. 

In many countries, inducements are offered to specific enterprises in the form of reductions in or exemptions from import duties, while many others also excuse the duty on sales and property for a given period of time. 

The purpose of such incentives are essentially to allow for greater investment prospects that would generate revenue and create employment opportunities, which would in turn result in economic growth and development. However, tax incentive initiatives rightly face their share of scepticism over their effectiveness. 

We are forced to question whether or not the economic benefits of the initiatives’ resulting investments outweigh the revenue loss from investments that would have been made despite the incentives. Criticisms beyond the empirical difference in investment bring to light the arising inequalities and the effects on capital allocation of these initiatives. 

While the synergy between tax and non-tax factors remain important in order to improve the investment climate of Bangladesh, tax breaks aid both local and foreign investors by reducing their costs of production. This acts as a stimulant to investments made in Bangladesh and increases the flow of capital as it provides the nation with a competitive advantage, especially in sectors such as RMG and textiles, which generates over 12% of revenue for our GDP and in sectors such as agriculture, which allows the country to remain self-sufficient and benefits the low-income farmers.

The RMG and textiles industries in Bangladesh have seen a massive growth in terms of the number of factories and revenue generated over the decades. The government’s efforts in establishing special economic zones (SEZs), tax breaks on import duties and revenue, as well as allowing new entrepreneurs deferred tax policies and additional tax breaks all serve to prompt investment. 

This not only encourages local entrepreneurs to increase investments, but also provides a competitive edge in terms of location for increased Foreign Direct Investments (FDIs). 

Small and Medium Enterprises (SMEs) also receive tax exemptions at various stages. Start-up companies and other SME companies bring a range of both social and economic benefits, especially given Bangladesh’s advantages in being a developing country. 

We are often seen as an opportunity to pursue a high return investment with lesser business risk, and this greatly encourages investment. These companies should be willing to set up in regions with untapped resources and create further employment opportunities. A growing start-up community will significantly improve Bangladesh’s business environment through research and development, which allows the country to witness economic dynamism in the form of greater competition and driving creative innovation. 

According to the American Bureau of Economics, if corporate tax is reduced by 10%, it will result in investment increases worth 2% of the GDP of a country. Thereby, Bangladesh may definitely consider reductions in our corporate tax rates to attract more foreign investments and provide a rate that is comparable to our rivals in the industries as well as to our regional competitors. As evidenced by the RMG sector, Bangladesh will not only become a more lucrative location for investors, but its tertiary sector services are likely to benefit greatly from reductions in corporate tax. 

A corporate tax rate cut will result in increased retained earnings and investible liquidity for corporations which will in turn result in investment opportunities in terms of expansion of the firms, their project possibilities, and business opportunities within Bangladesh. This tax cut would benefit both local and multinational companies with operations in Bangladesh. The government can further support multinationals and flow of FDI into the country by reducing the withholding tax rates.

When proposing a deduction in corporate tax rates, the resulting revenue loss often becomes a point of discussion we cannot ignore. Different exemptions, tax rebates, and privileges provided to corporations in the country in combination with our inadequate public expenditure on health care, education, and other social sectors dampen the nation’s abilities in truly achieving the economic development we are striving to work towards. 

Bangladesh is currently generating about 68% of its tax revenue through indirect tax, which could be otherwise generated through income tax targeted at wealthier individuals who would not feel the tax burden as significantly. However, this is directly related to improving the country’s governance structure, ensuring transparency in wealth reporting, and integration of national transaction data bases.

While talking of tax breaks to incentivize poverty reduction through employment generation, one should be very cautious not to confuse social safety net programs with incentives for better performance through investment in technology and innovation. If we err, let us err with the better entrepreneurs. 

Mamun Rashid is an economic analyst.