Policy shift threatens investment in economic zones

Shamim Jahangir and Sohel Hossain Patwary

6th July, 2020 10:45:18 printer

Policy shift threatens investment in economic zones

•           PMO’s intervention sought

•           Billions of taka invested in EZs, expected to create 10 million jobs

•           VAT policies contradict govt’s promises

•           Complexity in bank loan facility worries investors

•           Restoring investor confidence vital to grab new opportunities in global trade

A deviation in the government’s duty and VAT policies coupled with a lack of easy access to bank loans is threatening the investment prospects in the Government Economic Zones (GEZs) that are expected to create over 10 million new jobs in Bangladesh.

Over two dozens local business conglomerates who invested in the GEZs expressed concerns over the newly imposed 15 percent VAT on land lease, a set of new complexities limiting access to bank loans and uncertainty over the continuation of privileges offered to the investors at the time of investing. 

In a letter to the Prime Minister’s Office (PMO), the business conglomerates appealed for the PMO’s intervention to address the challenges and obstacles faced by the investors.  

The letter drew attention to the new government policies affecting investment flow into the economic zones and jeopardizing the potential for creating millions of jobs in the country.

The Bangladesh Economic Zones Authority (BEZA), the agency implementing the government’s plan to establish 100 economic zones across the country, has already received investment proposals of around $20 billion from local and international investors.

However, local investors said they have lost their confidence after receiving letters from BEZA on a settled VAT issue, which will unexpectedly increase their investment cost in the EZ projects.

“Furthermore, we are also keen to enjoy the tax holiday as provided for industrial units regardless of the type of products manufactured in the EZs,” said the letter, adding that the investors are also facing an indefinite delay in handing over of plots by BEZA.

There are also uncertainties over obtaining facilities that have already been promised, the letter adds.

“Without the necessary infrastructures and utilities, it will be impossible for us to even start setting up our industries in the Economic Zones, let alone going into commercial production,” it said.

Sheikh Fazle Fahim, president of Federation of Bangladesh Chambers of Commerce & Industries (FBCCI), said transparent, predictable and consistent policy is a must to promote investment in the economic zones.

“The FBCCI always support legitimate demands of the business community,” he said.

Policy deviation causes unforeseen VAT burden for investors

Investors have voiced their concern over the 15 per cent VAT on land lease in the EZs – the decision was not communicated at the time of investing in lease rental.

Though there is a general obligation to pay VAT on commercial leasing, VAT demanded by BEZA falls within the exception of ‘VAT on Commercial Leasing’ under a previous SRO (Statutory Regulatory Order) issued by the government.

The investors said the SRO explicitly states the ‘leasing of factory or plant by the VAT registered manufacturing entity’ as VAT-exempted services.

The investors in EZs, being VAT-registered manufacturing entities, will solely use the leasehold properties for setting up factories.

“Therefore, the lease rental payment will not attract VAT within the purview of the exemption as provided under the above-mentioned circulars,” reads the letter with a request for an immediate withdrawal of such VAT.

At the time of investment in the EZs, it was made clear to the investors that regardless of the type of industries set up in EZs, they will enjoy a Corporate Income Tax Holiday for a period up to 10 years from the commencement of business.

Therefore, the investors requested that the government should not change any privilege accorded to the investors based on any category of products to be produced in the EZs.

Rather, the government should introduce new incentives from time to time to encourage new investment without withdrawing the existing incentives, the investors suggest. 

As per the Clause 24 of the Land Lease Agreement executed between BEZA and the investors, there is no bar in mortgaging the land, but at the time of default or at the time of transfer to the third party for any default, it will depend on the discretion of BEZA to allow the transfer.

Also, the banks and non-bank financial institutions (NBFIs) are reluctant to extend credit facility without a NOC (no objection certificate) from BEZA. Some of the banks and NBFIs don’t approve loans due to confusions in the wording of the land lease agreement and uncertainty over BEZA’s role in approving any future transfers.

Complexity in bank loan facility worries investors

The local investors also appealed to Bangladesh Bank (BB) to issue specific guidelines and directives to banks and NBFIs for simplifying the process for disbursing loans to industrial units operating in the EZs.

They recommended amending the format of lease agreements to allow the banks and NBFI, in case of default by any borrower, to freely transfer the mortgaged land to third parties.

Fearing of change in the incentive policies during the tenure of the investments, the investors also urged the government not to withdraw any incentives or impose any additional direct and indirect tax obligation on the investors after the investors decided to invest based on the incentive policy.

Contravention of this will not only create confidence loss on part of the investors but also prejudicially affect the financial viability of the investment, the letter to the PMO reads.

The investors also said with the huge industrialisation expansion expected in Mirsharai Economic Zone, the Chattogram port will not be able to meet the needs.

“Therefore, port work should start before asking for the balance payment of the land lease,” they said.

They also expressed concerns over the delay in the installation of the promised utility services such as power supply, gas supply, water supply, road connectivity in the EZs.

Policy consistency sought to help restore confidence

“We have already appealed to the PMO to make the policies transparent so that our investment becomes sustainable,” said DBL Managing Director M. A.  Jabbar.

Jabbar said he has already planned to establish nine industrial units in the EZ allotted to DBL to generate around 10,000 new jobs.

DBL Group has already received natural gas and electricity connections to operate the industries in Srehatta Economic Zone, Sylhet, he said.

“BEZA, Bangladesh Bank and NBR should be aligned to support the taxation, incentives and investment related policies of Economic Zone. Also our Economic Zone Policy should be comparative with our competitor countries,” said the MD of DBL.

The major EZ investors have been facing a liquidity crisis as the leaseholders fail to receive the credit due to a lack of policy support, he said.

“The intervention of the Prime Minister’s Office (PMO) or Bangladesh Bank (BB) circular is a must to ensure easy credit facility for leaseholders in the EZs. Otherwise, the government’s one-stop services for investors will not bring any real benefits,” he noted.

Call to tap into opportunities created by Covid-19

The Covid-19 crisis has created a lot of opportunities for Bangladesh as foreign investors have been allowed to invest in backward linkage industries here, DBL Managing Director M A Jabbar said, adding that this is the right time to take the right decision for boosting industrialisation in the country.

Vietnam, Indonesia and even India are working to create a better environment for investment, he said.

“If we fail to avail the opportunity, Bangladesh will fall lag behind from industrialisation” he added.

He said the inclusion of offshore financing in the single borrowing limit (SBL) is a major barrier to large investment in Bangladesh, which is why multinational financial Institutions are now unwilling to lend money to the investors.

Saying double taxation for holding company is another barrier, he said they are talking about the matter but there has not been any response from any government agencies regarding the issue.

“Due to these two major obstacles, country’s financial policy has been suffered and the government should pay attention in solving the problems for the sake of investment and employment generation,” the DBL Managing Director said. “We might not get the opportunity created by the COVID-19 after six months. We have to act fast,”

He said his company has already created 36,000 jobs and another 10,000 new jobs will be created in his nine new ventures in the EZ.

Echoing the same, Energypac managing director Humayun Rashid Chowdhury said the government should encourage the investors in the time of economic stalemate caused by COVID-19 to create new jobs.

“Malaysia is wooing the investors with furnished infrastructure. But after one and half years, the BEZA yet to confirm my plot at Mirsarai Economic Zone,” he said.

Demanding 30 years waiver of tax and VAT for encouraging industrial expansion, Humayun Rashid said the banks should come out from single party exposure system to provide loans.

He said his company has a plan to set up a container manufacturing industry in Mirsharai.

The government has established the special economic zones to fulfill three basic objectives — attract investment from home and abroad, employment generation and setting up of import substitute and export-oriented industries to reduce dependency on imports, said Ashraful Haq Chowdhury, vice-chairman of Bangladesh Economic Zones Investors Association (BEZIA) and Managing Director of Star Infrastructure Development Consortium Limited.

“The main goal of the initiative is to achieve sustainable growth,” he said, adding, the investors positively responded with the call of Prime Minister Sheikh Hasina to build new Bangladesh.

“We need no policy and incentives deviation from something that has been committed by the government. We urge the authority to complete the development works faster so that we can start our industry soon,” he added. 

Govt to discuss the issues raised by investors

Commerce Minister Tipu Munshi said they will hold the first task force meeting in the middle of July and will discuss the issues raised by the investors.

“I have assured the businesses that we will solve the problems on policy level deviation,” he said, adding that the recommendations from the investors will be placed to the Prime Minister for consideration.

The minister also said the government is now working on a long-term master plan to tap into the opportunities created in global trade during the Covid-19 situation.

BEZA chairman Paban Chowdhury also expressed frustration over the deviation in policies.

“We should concentrate on risk management through the introduction of different incentive and fiscal measures to boost private sector investment,” he said.

The country’s private sector investment has nearly halved in the immediate past fiscal due to Covid-19 crisis, he said. “The government should introduce lucrative incentive packages for private sector to help boost investment and job creation.”

Shafiul Islam Mohiuddin, a member of Investment Promotion Task Force, said consistency in policy is vital to maintain the confidence of the investors.

 “If there is no consistent policy on investment, the confidence of investors deteriorates, which hurts new investment,” he said.

About the newly-imposed VAT on leased land in EZs, Shafiul Islam said during the coronavirus crisis, it will not be wise to cause any discomfort to the businesses and entrepreneurs by imposing new burdens.

“Our focus should be on attracting new investment both from local and foreign sources for running the wheel of the economy and generating new jobs,” he noted.

“A large number of people have lost their jobs while many expatriates had to return to Bangladesh amid the global pandemic. New investments will help create new opportunities for skilled manpower,” he added.

Regarding the new VAT proposition and lease mortgage, Shafiul Islam said he has already talked with NBR Chairman and will discuss the issue at the investment task force meeting.


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