FDI and Taxation: A Comparative Analysis of India and Bangladesh

This report presents a comparative analysis of how taxation influences Foreign Direct Investment (FDI) in India and Bangladesh. The research, guided by a specific research question and objectives, involved qualitative interviews with government officials from both countries. The study explores the availability and impact of tax deductions, the role of red tape in tax compliances, and the overall complexities of tax structures on FDI inflows. The findings reveal differing perspectives between India and Bangladesh regarding the significance of tax deductions and the impact of tax complexities. The report highlights the importance of addressing tax-related bottlenecks to maintain and attract FDI in a competitive global landscape. The analysis provides valuable insights into the interplay between taxation, government policies, and economic growth in developing economies.

Qualitative Interviews
Respondent 1: Government official from India
Q.1 Are special tax deductions available for the companies who bring in significant amount of foreign
currency within the country?
A: Yes, India has a framework of double taxation relief in special cases, especially for the non-
resident companies who bring foreign currency as well as considerable businesses and economic
growth in the country. India has developed a highly comprehensive tax treaty network with almost
all the eminent economies across the world and the companies of the countries, falling under these
treaties enjoy relief from double taxation and also are protected by the government of the country
from any kind of discretionary taxation. If the foreign companies are venturing in public good and
welfare sectors like education, power, transport, health or infrastructural development, then also
special subsidies and tax exemptions are applicable as per circumstances. However, the companies
need to obtain permission and fill up Form No. 10F to get these tax reliefs. Investors are also
generally free to wind up and leave the market after proper procedures. There are lucrative
ownership rights in many sectors for the foreign companies and investors.
Q.2 Are the various tax deductions given by the country yield significant bearing in attracting the
Foreign Direct Investment?
A: The FDI volume in India has been consistently increasing over the years. As per my knowledge the
FDI volume has increased to nearly $62 billion in 2017-2018, compared to approximately $60 billion
in the previous economic year. India also ranks ninth among the top countries receiving FDI in the
recent period. Some of this increase can be attributed to the deductions and attractive taxation
regime and tax havens in the country. However, there are also other factors like the industrial
growth, huge market, cheap productive resource and labor, which attract FDI with higher weightage
in the country.
Q.3 What is the status of the red tape in the tax compliances within the country?
Yes, there remain issues regarding the same. Although the current government has been trying to
attract investors and foreign companies in the country, through their “Make in India” regime,
however, if you try to see the ease of doing business in the country, India still ranks 130th out of 190th
in the most recent survey done by the World Bank. This is because there remain red tapes in many
aspects of taxations and government regulations, especially in the manufacturing sector and much
of the innovations and production in the country are dependent on the approval of the government
and the judicial systems.
Q.4 Do you think that the complexities in the tax structure of the country can significantly affect the
FDI that is brought into the country?
This is a difficult question to answer. Till now, in spite of the presence of several bottlenecks and tax
complexities, India has managed to pull huge volumes of FDI due to its huge and lucrative markets as
well as cheap and educated labor force. However, in the competitive world, with more developing
countries coming in and attracting foreign investors, India does need to emphasis on rectifying its tax
structures and eradicate the bottleneck to maintain its position.

Respondent 2: Government official from Bangladesh
Q.1 Are special tax deductions available for the companies who bring in significant amount of foreign
currency within the country?
To attract FDIs from different countries, the government of Bangladesh has been offering attractive
and most liberal investment policy framework for the last few years, especially to the entrepreneurs
in South Asia and also to other investors and entrepreneurs from other countries. The government
of the country offers, in general, five years to seven years tax exemptions to many of the foreign
businesses and firms who bring in FDI and business as well as employment opportunities in the
country. However, this can even extend till 15 years depending upon which sectors the investors
venture into. For example, the electric power generation sector of the country has a tax exemption
for 15 years at the most. Also, the export-oriented industries do not need to pay import duty and for
other industries it is a mere 5% ad-valorem. Bilateral investment agreements can also be formed to
avoid double taxation in many cases. In most of the cases there are facilities for full repatriation of
the invested capitals and the ownership structure for the investors are also highly attractive.
Q.2 Are the various tax deductions given by the country yield significant bearing in attracting the
Foreign Direct Investment?
Obviously, the liberal and pro-investment taxation system of the country and the changes brought in
the same in the recent periods, have contributed significantly in attracting FDIs in the country in the
recent period. As you can see, the level of FDIs in the country has increased substantially post 2010,
which I think can be substantially attributed to the liberalization of the tax and tariff frameworks and
the lucrative tax deductions introduced by the government in the recent period.
Q.3 What is the status of the red tape in the tax compliances within the country?
The overall taxation scenario in Bangladesh in the current period is satisfactory and much of the rigid
regulations and what you call as “Red Tape” taxation regulations, have been removed or mitigated
to a considerable extent to facilitate higher volumes of FDI inflow in the country. However, there still
remains several rigid hurdles which can hamper the ease of doing business in the country, as its rank
is pretty low in this aspect. The country ranks 114th in the aspects of new registration of start-ups
and it almost takes months for the companies to get electricity or to register properties. These can
have negative impacts on the country’s FDI statistics in the coming years.
Q.4 Do you think that the complexities in the tax structure of the country can significantly affect the
FDI that is brought into the country?
Bangladeshi government is working effectively and efficiently in removing any kind of unwanted or
unnecessary tax hurdles in its regulatory framework to attract FDIs in the recent periods and the
effects can also be seen as the inflow volumes of FDIs in the country can be seen to be increasing
substantially in the recent periods. In my opinion, if this continues, then the country will prosper
immensely and the tax structure of the country will not impede the FDI inflow in the country in any
way in the coming years. Bangladesh will join the league of highly developing countries soon.