Restrictions on tax holiday may be relaxed a little

The current budget barred industries from enjoying tax holiday if they sold products to their sister concerns.

But the National Board of Revenue (NBR) now mulls that such industries may be given the privilege if they made commercial transactions among associate enterprises at market prices.

"To prevent misuse of tax holiday through internal transfer pricing, I propose to make provision for considering transaction between associate enterprises as a disqualification for tax holiday," Finance and Planning Minister M Saifur Rahman had said in his last budget speech.

The restriction imposed in the current fiscal hit both local investment and joint ventures, investors said.

Only 124 applications seeking tax holiday for newly set-up industries were submitted to the NBR between July and April of the current fiscal, sources said.

On the other hand, the number of applications seeking tax holiday during the corresponding period of the previous fiscal was 350.

"The restriction on tax holiday adversely affected Foreign Direct Investment (FDI) and joint ventures," a leader of the Foreign Investors Chamber of Commerce and Industry (FICCI) said.

Major chamber organisations including the FICCI and the Metropolitan Chamber of Commerce and Industry (MCCI) have long been demanding withdrawal of the restriction.

In the budget for 2002-2003, the government imposed a restriction on tax holiday for the companies resorting to transactions among associate enterprises.

An entrepreneur, who sets up a new textile mill or any other industrial unit, is barred from enjoying the tax holiday facility if they make any transaction between the associate enterprises, according to the regulation.

Under the system, a textile mill owner who is also the owner of garment industries is not eligible for tax holiday once he sells textile products to his own garment industries.

In the face of widespread cheating by a group of entrepreneurs, who used to show a price lower than the actual market price at the time of transactions between their associate enterprises, the restriction was imposed in the last budget.

The government has decided to withdraw the restriction on condition that commercial transactions between associate companies will be made according to market prices.

As a consequence of the restriction, the pace of industrialisation has slowed down considerably, investors said.

New industries get five to seven years' tax holiday. The offer will remain valid until June 2005.

It is not clear whether the government will re-introduce tax holiday for the extension units of an industrial undertaking in the next budget.

The government withdrew the provision of tax holiday for extension units in the last budget on account of corruption.

From January 1972 to April 2003, about 2,000 industries have been given tax holiday, sources said.