The rationale behind concessional treatment of agricultural income is questionable as the policy protects the source of income without differentiation between poor and wealthy farmers. The current policy provides disincentives for firms and individuals to move away from agriculture to higher productivity sectors. It also creates opportunities for tax evasion as taxpayers can abuse the legislation by declaring business income as agricultural income to avoid taxation.

**Table 2. Taxation of Agricultural Income**

|Bangladesh|Select agricultural activities are subject to tax exemptions: all income from poultry farming (up to June 30, 2015);<br>50% of income from the production of corn and sugar beet.|
|---|---|
|India|Agricultural income is not taxed by the federal government; only six states levy agricultural income taxes.|
|Pakistan|Agricultural income is not taxed by the federal government. At the provincial level, agricultural income tax<br>functions as a land tax levied on large landholders.|
|Sri Lanka|Agricultural income is taxed at a reduced rate of 10%. New investments in agriculture above USD 378,000 are<br>subject to 4 ‐12 year tax holidays depending on investment amount.|

Sources: Bangladesh Income Tax at a Glance 2014‐15; India Income Tax Act 1961; Pakistan Institute of Legislative Development and Transparency, 2011; Sri Lanka Inland Revenue Act, No. 10 of 2006 Within manufacturing and services, a number of economic activities are granted tax concessions as well (Table 3) **.** Tax holidays are the most common tax incentive in the region, used widely in Bangladesh, Pakistan and Sri Lanka. In Bangladesh, 5‐10 year tax holidays are available for about 20 industries (including exports of handicrafts, agro‐processing, pharmaceuticals and boilers<sup>8</sup> ). In Pakistan, five year tax holidays are granted to all new manufacturing firms. In Sri Lanka, most manufacturing and select service firms are subject to 4‐6 year tax holidays and a reduced tax rate of 12% upon expiration of the holidays if they invest over USD 378,000. Differential tax treatment of firms and industries distorts resource allocation decisions and discriminates investments that do not fall in the preferred type category.

India used to grant tax holidays to a number of economic activities but “grandfathered” most such provisions during 2010‐2013. Newly established 100 percent export oriented manufacturers or software producers as well as mineral oil refiners are eligible for 10 years of tax holidays if they commenced their operations prior to April 1, 2012. Exporters of handmade wood articles are eligible for similar tax holidays if they started their operations prior to April 1, 2010; and five year tax holidays are granted to new hotels established during 2008‐2013 and located close to World Heritage sites.<sup>9</sup> Grandfathering tax incentives for existing investors may be an effective compromise to push for corporate tax reform in other South Asian countries. While India’s reforms were a step in the right direction, the country continues to rely on tax deductions for certain industries and firms. In particular, select industries receive generous deductions for capital expenditures that equal or even exceed the amount invested.

**Table 3. Main Tax Preferences for  Manufacturing and Services**

|**Country**|**Tax Incentives**|
|---|---|
|Bangladesh|**Tax Holidays for New Firms**|
||Five to ten year tax holidays (depending on geographic location) are available for new firms in the following<br>industries:|

> 8 Bangladesh National Board of Revenue. Income tax at a Glance 2014‐15 ‐ ‐ <u>http://www.nbr bd.org/IncomeTax/Income_Tax_at_a_Glance_2014 15.pdf</u>

> 9 Ministry of Finance, India. Income Tax Department. Income Tax Act 1961 as amended by Finance Act, 2014

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