_<u>Location‐based incentives</u>_ Generous tax incentives are available to firms locating in special economic zones (SEZes) and less developed regions (Table 5). Bangladesh and Pakistan grant 10‐year tax holidays to firms based in special economic and export promotion zones. Until recently, India provided 15‐year tax holidays (with 100% tax exemption on export income in the first five years) for firms in SEZes. Starting from fiscal year 2011‐12, SEZ tenants in India are subject to the minimum alternate tax of 20%.<sup>15</sup> All four countries also provide tax holidays to firms located in less developed regions.

**Table 5. Location‐based Corporate Tax Incentives**

|**Country**|**Type of incentive**|
|---|---|
|Bangladesh| 10 year tax holidays for investments in export promotion zones made prior to December 31, 2011; for<br>investments made thereafter the following incentives apply – first two years – 100% tax exemption, third and<br>fourth years – 50%; and fifth year – 25% tax exemption<br> 10 year tax holidays for High Tech Parks and 100% exemption of taxes for all exports<br> 10 year tax holidays for new undertakings in target industries in Rajshani, Khulna, Sylhet, Barisal and Rangpur<br>divisions (excluding City Corporation area) and Rangamati, Bandarban and Khagrachari districts; 5 year tax<br>holidays for select districts in Dhaka and Chittagong divisions|
|India| 10 year tax holidays with 100% tax exemption are available for new firms that establish operations in the<br>Northeastern Region prior to April 1, 2017. Existing firms can benefit from the same tax incentives if they<br>increase the value of fixed capital investment in plant and machinery by at least 25%.|
|Pakistan| Firms located in Special Economic Zones enjoy a 10‐year income tax holiday<br> Firms established between July 1, 2014 and June 13, 2017 and involved in processing and preserving of locally<br>grown fruit are granted 5‐year tax holidays in Balochistan, Malakand Division, Gilgit Baltistan and FATA|
|Sri Lanka| Five year tax holidays are available for new firms in the Eastern Province and lagging regions subject to a<br>minimum investment of LKR 30 million (USD 229,000) before April 1, 2010. Upon expiration of the tax<br>holiday, firms are taxed at 5% in the first post‐exemption year, 10% in the second and 15% in the third post‐<br>exemption year.|

Sources: Bangladesh Board of Investment, Bangladesh Hi‐Tech Park Authority and Bangladesh Income Tax Manual Part 1; India Income Tax Act 1961; Pakistan Income Tax Ordinance 2001; Sri Lanka Inland Revenue Act, No. 10 of 2006 There is little evidence that location‐based tax incentives are effective. Many developing countries offer tax deductions and exemptions to enterprises based in Special Economic Zones, yet evidence from global studies shows that this type of incentives does not compensate for poor location or inadequate facilities nor does it improve the overall zone performance.<sup>16</sup> Furthermore, tax holidays often attract investments with short term horizon and do not benefit longer term projects that generate profits beyond the tax holiday period.<sup>17</sup> In South Asia, some special economic zones are occupied to full capacity and are doing well in terms of job creation and exports. This good performance is explained largely by quality infrastructure and convenient location close to ports, highways and major cities with skilled workforce. Such SEZes/EPZs do not have difficulty finding tenants and would do well even without special tax incentives. On the other hand, zones located in less central and disadvantaged locations remain under‐ occupied despite availability of tax benefits.<sup>18</sup>

> 15 Bakshi, Ishan. 2014. Why SEZs in India have failed. Business Standard, December 4, 2014. New Delhi, India

> <u>http://www.business‐standard.com/article/economy‐policy/fin‐min‐rejects‐tax‐breaks‐for‐sezs‐114112800861_1.html</u> 16 See, for example, James, Sebastian (2013)

> 17 World Bank. 2008. Special Economic Zones: Performance, Lessons Learned and Implications for Zone Development

> 18 See for example, Farole, Thomas and Gokhan Akinci (2011) for evidence on Bangladesh

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