Thorough rehabilitation will be essential
Bangladesh now stands at 168/190 in the Doing Business 2019 survey, with eight notches of improvement. Our neighbour India improved 14 notches to become 63rd in the league table, while Pakistan jumped 28 notches to be placed at 108th.
Our lowest ranking scores were for registering property at 184th and enforcing contracts at 189th. These numbers merely just illustrate the deep-rooted problems faced by businesses in the form of regulatory ambiguity, distressed investment climate, and poor capital and financial infrastructure. On the other hand, our businesses are becoming large, with some going regional, if not global.
They not only need to fund their day to day working capital needs, most of them need equity capital to build business or expand existing business. The capital market of Bangladesh lacks the depth and liquidity that the economy demands. Market capitalization of listed domestic companies to GDP ratio is at 28.2%, while our nearest neighbours crossed 50% quite a long time ago, and developed markets are hovering around 110%. Product offerings in the market also lack diversity.
The debt market in the stock exchange is almost non-existent. Previously, the central bank and SEC tried listing treasury bonds in the exchange, which could have been a welcoming boost to institutional participation in the market. But that idea has also taken a backseat due to many bureaucratic bottlenecks. Bangladesh’s tax and regulatory framework is based on a complicated structure, leading to a loss of supervisory control and creating an easy space for perpetual non-compliance.
The ambiguity in the regulatory structure is a crucial factor in determining the behaviour of public companies. Abrupt announcements of new laws, or modification of existing laws without any consultation or public debate, absence of reliable guidelines coupled with a poor to non-existent grievance redress mechanism, all amount to demotivate firms, forcing them to look for less complicated alternatives outside of Bangladesh.
As per the ordinance read with applicable schedules of the Finance Act, the tax levied on a listed company’s total income is 25%. This could have been a very attractive incentive for the corporations to get listed in the stock exchange. But the dilemma lies somewhere else: Firstly, most taxes are collected as indirect taxes rather than direct taxes in Bangladesh and the current incentive structure focuses only on the direct tax part; and secondly, the enforcement of laws and regulations remains a challenge.
Whenever a company gets listed, they are in the limelight with a higher level of scrutiny from the public and the regulators, whereas, the non-listed companies can remain behind a curtain, and sometimes, even, use the existing system somewhat to their benefit. Then comes the cascading effect of taxes arising from multi-tier dividends, which is also a highly discouraging aspect of our regulatory structure.
There is no holding company structure in Bangladesh as per the current taxation rules. In practice, tax is deducted from funds each time it is invested in various subsidiaries and channelled through different tiers, before ultimately reaching the original investor. As a result of this “flawed mechanism,” most of the giant conglomerates are maintaining tax inefficient silo structures with several sister concerns.
Therefore, even if these conglomerates are to get listed, it will not necessarily be for the business which will be attractive to investors; it might very well be for the businesses which are facing challenges in terms of receiving funding from other sources. Unless Bangladesh is ready to follow suite and move away from the multi-tiered dividend imputation system and adopt a single-layered alternative, chances of further economic prosperity will only erode in the form of more firms listing abroad.
A lot of companies are considering Singapore nowadays to set up a proper structure for the existing businesses, and even get listed there somewhere down the road. Several business houses in Bangladesh are aspiring to become regional or even global companies. But meeting these aspirations, being a Bangladesh-based company, is turning out to be more challenging than it should be.
Capital movement is still heavily restricted by the central bank. This is also a major reason why global private equity funds are still not stepping into Bangladesh with their capabilities, even after knowing the tremendous growth potential this country has. To keep up with the fast pace of economic growth, it is pertinent that law-makers keep an open mind and a global view. Only by easing up capital regulatory environment and bringing in proper corporate governance can we attract more companies into our capital market.
The abovementioned factors only scratch the surface. Businesses still conduct operations amidst unreasonably high costs of borrowing, insufficient power facilities, widespread corruption, arduous outward remittance processes, complex tax calculation procedures, and unaccounted pre-incorporation expenses.
Notwithstanding the unwelcoming facets of our local business environment, I would like to be optimistic about our country’s ability to reverse its course of action, and efficaciously leverage our inherent capabilities to correct the imperfection in our systems. Our improvements in starting a business, getting electricity, and getting credit are examples of that.
Thorough rehabilitation will be essential, and could be achieved via reforms such as increased revenue mobilization, accountable automation systems that display transparency in tax payment trails, and remodelling of the international tax scheme.
If these factors are worked on diligently, we might soon enough be capable of providing internationally competitive investment platforms.
Mamun Rashid is a leading economic analyst in Bangladesh.