<!-- Start of picture text --> Larger Investments of LKR 300 ‐ 2,500 million (USD 2.3 million – 18.9 million) are subject to 6‐12 year tax<br>holidays<br> Manufacturing: boats, pharmaceuticals, tyres and tubes, motor spare parts, furniture, ceramics, glass ware or<br>other mineral based products, rubber based products, cosmetic products, food products produced of locally<br>cultivated products, construction materials, electronic goods and any project of light or heavy engineering<br> Exports : non‐traditional export goods (all products other than black tea, rubber, coconuts and latex)<br> Services: All services that qualify for tax holiday under a smaller investment bracket (except for creative<br>work)<br> Agriculture (food and industrial crops, horticulture, animal husbandry)<br>Import‐substitution:<br> A 5‐year tax holiday is granted to enterprises engaged in production of certain items to replace imports<br>subject to the following investments: a) cement ‐ USD 50 million, b) milk powder USD ‐ 30 million, c)<br>pharmaceuticals ‐ USD 10 million and d) fabric – USD 5 million.<br>Upon expiration of tax holidays, investors are subject to a rate of 12% (unless mentioned otherwise below)<br>Reduced Tax Rates and Open‐ended Exemptions<br>Manufacturing:<br> Manufacture of animal feed and handloom products as well as petroleum exploration are taxed at 12%<br> Profit from domestic sales of locally manufactured garments and bags made out of materials supplied by<br>export‐oriented companies that export at least 60% of their products is taxed at 12%<br> Profits in foreign currency by manufacturers of textiles, leather products, footwear and handbags from<br>supplies made to foreign purchasers that establish headquarters in Sri Lanka are exempt from tax<br> Manufacture and distribution of organic fertilizer is exempt from tax<br>Services:<br> Operation of storage facilities, development of software, supply of labor and education services is taxed at<br>10%;<br> Construction work and supply of services to exporters is taxed at 12%<br><!-- End of picture text --> Sources: Bangladesh Income Tax at a Glance 2014‐15; Bangladesh Income Tax Manual Part 1; India Income Tax Act 1961; Pakistan Income Tax Ordinance Act 2001; and Sri Lanka Inland Revenue Act, No. 10 of 2006.

# _<u>Preferential schemes for specific types of firms</u>_

In South Asia, tax liabilities often differ by type of firm (domestic vs. foreign, publicly vs. non‐publicly traded company, new vs. old, small vs. medium or large). These policies distort business environment and discourage fair competition. In India, corporate tax rates differ by type of ownership: domestic companies are subject to a tax rate of 30 percent while foreign companies are taxed at 40 percent.<sup>10</sup> Such policies clearly discourage FDI. In Bangladesh, companies listed at stock exchange are subject to a reduced tax rate of 27.5 percent, while all other companies are subject to a rate of 35 percent.<sup>11</sup> This regime likely aims to promote development of capital markets, however it effectively discriminates against most domestic companies.

New firms are subject to tax holidays in all countries of the region if engaged in targeted economic activities (Table 3 above) or located in lagging regions and special economic zones (Table 5). The effectiveness of this policy is questionable as few firms make much profit in the first years of operation. Short term tax holidays benefit highly profitable firms that would invest even without special tax preferences and create incentives for engaging in activities with a quick return on investment. Long term incentives will put existing firms at a disadvantage. Furthermore, tax preferences for new firms are prone

> 10 India Ministry of Finance.2014. Finance Bill 2014.

> 11 Bangladesh National Board of Revenue. 2014. Income Tax at a Glance 2014‐15

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