Higher effective tax rate contributes to capital flight

A higher effective tax rate is driving away potential investors from Bangladesh, and it may contribute to capital flight and discourage reinvestments, businesspeople and analysts warned yesterday.

Despite the cuts in corporate tax rates, the imposition of a minimum tax and withholding taxes, especially at import stage, has created a higher tax burden for taxpayers and investors, they said.

"We have been paying around 40 percent effective income tax for the last 15-20 years," said AKM Fahim Mashroor, a former president of the Bangladesh Association of Software and Information Services.

He made the observation at a post-budget discussion at The Westin Dhaka hotel in Gulshan. The Policy Exchange Bangladesh (PEB) and SMAC Advisory Services Limited, a consultancy firm, jointly organised the event.

Mashroor said it seems that only the compliant firms are forced to pay higher taxes. "On the other hand, a vested group can whiten black money by paying 15 percent tax."

"This is unfair. Why will an investor invest in this country instead of resorting to capital flight?"

The entrepreneur warned that although the government reaps benefits in the short-term from the higher effective tax rate, it inspires capital flight in the long-run.

However, he welcomed the exemption extended to the IT sector.

The tax exemption facility for the software and information technology-enabled services sector has been extended by three more years to 2027.

While moderating the event, M Masrur Reaz, chairman of the PEB, said the proposed budget has undertaken some good steps like a smaller development budget, which may contribute to taming inflation.

"But the budget has not paid heed to ensuring a conducive business environment," he said, calling for steps to accelerate trade competitiveness.

Snehasish Barua, director of SMAC Advisory, said the National Board of Revenue has brought some changes to the Finance Bill which will bring about a paradigm shift in tax collections.

He cited the introduction of the prospective tax, saying this will offer some predictability. A lack of predictability in the tax system had been standing in the way of attracting foreign direct investments, he added.

Fazlee Shamim Ehsan, vice-president of the Bangladesh Knitwear Manufacturers and Exporters Association, urged the government to bring NBR officials who try to harass to businessmen under accountability.

Former NBR members Md Farid Uddin, Alamgir Kabir and Zakia Sultana and Chittagong Stock Exchange President Asif Ibrahim also spoke.