Tax breaks crucial for big ICT investments

The revenue authority is facing calls to extend tax benefits for the information technology and information and communications technology-enabled services (IT-ITES) sector until 2030 in the upcoming national budget.

This recommendation, included in a recent letter to the National Board of Revenue (NBR), is meant to encourage long-term investment in the country's fastest-growing economic sector.

Current tax concessions, both value-added tax (VAT) and income tax breaks, are set to expire on June 30, 2024.

In a demi-official letter to the NBR, State Minister for the Ministry of Post, Telecommunications and ICT Zunaid Ahmed Palak said continuing these tax benefits for a few more years is essential. This, he believes, will be crucial for achieving the government's goal of earning $5 billion annually in foreign currency.

The IT sector has witnessed a remarkable growth trajectory. Annual export earnings have surged from $26 million in 2007 to $1.9 billion in 2023, creating employment opportunities for two million people.

The letter mentioned that prudent fiscal policies have attracted $950 million in investments from startups alone over the past decade.

While the IT-ITES sector has benefited from tax breaks in phases over the years, the International Monetary Fund (IMF) recently recommended that the NBR phase out these exemptions and impose taxes on the sector.

According to senior tax officials, a decision on imposing new taxes on IT-ITES companies, including local digital device producers, is yet to be made. This delay provides the companies with the scope for building capacity and meeting export targets, while also protecting existing investments.

State Minister Palak said local manufacturers, except Walton, currently lack the capacity to produce cellular phones thanks to a wide gap in tax rates between assemblers and manufacturers.

He proposed a tiered VAT structure in the upcoming budget for FY2024-25. This would see the VAT rate for local mobile phone assemblers increase from the current 5 per cent and 7.5 per cent to 7.5 per cent and 10 per cent respectively, while maintaining the 2 per cent VAT rate for manufacturers.

Mr Palak also proposed waiving the existing 5 per cent VAT on locally produced mobile phones at the business stage.

He argued the uneven application of VAT at this stage creates discrimination and an uneven playing field, jeopardising the survival of tax-compliant businesses.

He also recommended tax benefits for imports of lithium-ion battery packs, uninterruptible power supply (UPS) units, electronic power supply systems (EPSS), power supply units (PSUs), solar hybrid inverters, monitors (over 22 inches), point-of-sale (POS) devices, access control devices, digital door locks, drones and similar items.

"To make local manufacturers competitive with foreign products, waiving VAT on raw materials procured from the local market is now essential," he wrote in the letter.

Currently, local manufacturers pay a 15 per cent VAT at the manufacturing stage and advance tax on imported raw materials.

In 2019, the revenue board began phasing out tax benefits for local mobile phone manufacturers, imposing a minimal tax after deeming the sector self-reliant.

Enamul Hafiz Latifee, a trade and policy development economist with the Bangladesh Economic Association (BEA) and a research fellow at the Bangladesh Association of Software and Information Services (BASIS), argued that the International Monetary Fund's (IMF) recommendation seems misaligned with Bangladesh's long-term strategic goals.

"Implementing the IMF's suggestion could lead to the NBR imposing a tax rate between 15 per cent and 25 per cent, which would significantly reduce the competitive edge of Bangladesh's ICT sector in both domestic and international markets," he said.

While this policy might initially generate a temporary boost in fiscal revenue by around 0.8 per cent, it contradicts the national ambition of transforming into a knowledge-driven, advanced economy by 2041, he added.

Extending the tax exemption on Software and IT Enabled Services (ITES) until June 30, 2031, would align with the government's vision of transitioning Bangladesh into an upper-middle-income nation by 2031, he said, adding this goal is unlikely to be achieved without fostering a competitive domestic ICT industry.

The current domestic demand for software and ITES in Bangladesh is estimated at $1.5 billion. An abrupt and untimely shift in fiscal policy could jeopardise the sustainability of the local ICT sector, potentially leading to a heavy reliance on imports in this area.

This scenario would exacerbate existing pressure on the country's foreign exchange reserves, possibly leading to annual outflows of $1.5 billion or more.

"The IMF's recommendation appears to lack a comprehensive impact analysis specific to the ICT sector," Mr Latifee added. "Moreover, it seems they have not engaged in consultative discussions with stakeholders from the private ICT sector. This oversight raises concerns about the methodology and inclusivity of the IMF's policy formulation process."

Meanwhile, Dr Shams Uddin Ahmed, a former income tax member, cautioned the government against offering tax benefits to the IT and ITES sectors on a wholesale basis.

He said that while phasing out these benefits entirely may be premature given the country's upcoming challenges related to graduating to a middle-income country, a more cautious approach is necessary.

"There have been concerns that some companies have been claiming undue tax benefits by misrepresenting themselves as IT or ITES businesses," Dr Ahmed said. "To prevent misuse and money laundering, tax benefits must be offered only after thorough scrutiny."

[email protected]