Favorable Conditions, Markets in Bangladesh

Bangladesh can be considered as a rapidly emerging market pushed forward by its export industries: exports have grown by 40 % in the period from July 2010 to January 2011. This is remarkable in a time when most economies are still suffering from the effects of the global financial crisis. The main products responsible for this growth are knitwear and woven products, together responsible for over three-quarters of Bangladesh’s exports. Interestingly, the fastest growing sector in this period was shipbuilding (with almost 1,400 % growth).1 Apparel exports increased mainly because of the shift of international buyers from China to Bangladesh; due to the increasing costs of production in China, this country has a decreasing competitiveness, and significantly it is losing market to Bangladesh.2 The other opportunity that promises to strengthen Bangladesh’s position further is related to the new rules of EU’s Generalized System of Preferences (GSP), in particular the changed Rules of Origin, which are in place since the 1st of January 2011. In the frst two months of 2011 this has already resulted in a rise of exports of garment products.3 In addition, Japan is also planning to adjust its trade rules in favor of least developed countries (including Bangladesh) from April 2011.

The shift towards Bangladesh could have been much larger were it not for the energy crisis in particular the inability of the grid to meet the demand. As a result of the regular power outages potential new ventures are being deferred and private sector job creation is stalled; in addition, some reports indicate that Chinese, Taiwanese and Korean investors are delaying concrete plans to build factories in Bangladesh, especially in Export Processing Zones (EPZs), until the energy crisis is being solved, although the energy situation in EPZs is better than elsewhere.4 The government has announced plans to deal with the energy shortage on a priority basis, but progress seems slow. The political situation is currently quite stable, although the image of the country as an investment destination could be damaged if labor unrest and hartals fare up once too often.

Bangladesh as an emerging market ofers a number of favorable conditions to Dutch and other frms for doing business: it has a series of cost competitive advantages, it ofers a large domestic market and it has a strategic location near to the fastest growing economies of the world. At the same time, the main constraints will also be identifed. This chapter will be concluded with a brief indication of selected niche markets which deserve special mention..

Favorable Conditions 

Bangladesh is a cost competitive investment destination in several respects. Firstly, it offers a young, industrious workforce with the lowest wages in the region, and English is the second language after Bengla. Secondly, industrial estates, offices and housing for foreigners in the country are often cheaper than in other South and South East Asian countries. Thirdly, Bangladesh enjoys tariff-free access to the European Union (through EU’s Generalized System of Preferences, GSP), Canada, Australia and Japan. Fourthly, it has a proven export competitiveness that can be illustrated as follows:

- Bangladesh offers some of the world’s most competitive fiscal and non-fiscal investment incentives.

- Bangladesh offers the most liberal FDI regime in South Asia, allowing 100% foreign equity with unrestricted exit policy, easy remittance of royalty, and repatriation of profits and incomes.

- Bangladesh offers export-oriented industrial enclaves, Export Processing Zones (EPZ) with infrastructural facilities and logistical support for foreign investors. Bangladesh has recently embraced a more flexible and competitive economic zones regime with the enactment of the Economic Zones Act 2010 which paves the way for private economic zones.

- The Foreign Private Investment (Promotion & Protection) Act 1980 provides protection for investments made in Bangladesh

Lastly, in itself the energy prices in Bangladesh are the most competitive in the region; however, currently there is a shortage of electricity and gas supply (and a stop on new connections) which the government is trying to counter on a priority basis.

Recent international ratings are generally quite positive on Bangladesh’s economic potential (cf. Box 1.1). Also rather positive are the national indices and rankings concerning governance, gender and well being, but the rankings for Dhaka on livability, people risk and social networking are extremely low. With about 160 million inhabitants and a middle class that is rapidly growing in size compared to the other classes, there is an increasing domestic demand for example for consumer goods.

Bangladesh is strategically located near the emerging economic giants, India and China, and near to the ASEAN markets.At the same time, some economic data prompt a cautious outlook. Firstly, Bangladesh has the lowest FDI infow in South Asia (0.8% of GDP). Secondly, the country continues to add 2 million people to its labor force every year and unemployment is currently at 8% while underemployment is much higher.

Company Secretary as Independent Director

The concept of independent director (ID) remains of primary importance in protecting investors amidst a more demanding economic and regulatory environment. In Bangladesh, in particular, there is increasing recognition of the pivotal role of IDs - play in providing an independent, objective view and in balancing the interests of different stakeholders. It is not disputed that there has been an ever increasing role and importance of IDs to further strengthen the corporate governance (CG) of listed companies as they are the key to good CG. The need for quality ID is imperative particularly in light of the development of our economic globalization and recent examples of massive corporate failures which forces us effectively to play by a new set of rules to conform to globally accepted practices. That is, one that demands much greater integrity, transparency and accountability than in the past.

There have been substantial changes concerning CG rules, although each jurisdiction may emphasise different aspects of CG after taking into account the special features in its local community but one thing is certain across all jurisdictions: the increasing burden placed upon IDs of listed companies. Bangladesh is also not an exception to this. There have been significant changes in the Guidelines on Corporate Governance Practices and the introduction of the ID is one of them. The present revised Corporate Governance Guideline – ‘Comply basi's’ (BSEC, 3rd July, 2012) replaced the former Guideline of Corporate Governance – ‘Comply or explain basis’ (BSEC, 20th February, 2006). This recent change to the CG Guideline is evidence of the growing significance of independent directors to act as not only valuable strategic advisers in providing to the board valuable knowledge, expertise and experience but also corporate guardians of shareholders’ interests.

Independent directors’ requirement is gaining increasing significance and importance. The statutory framework exists with regard to appointment of ‘Independent Directors’. Such framework also prescribes certain qualifications and attributes to IDs that should be understood in the right perspective. However, boards of listed companies in Bangladesh are facing extreme snag on how to identify the right one as ID apart from how increasing demand for IDs will be met. Keeping this perspective in mind, one should consider the role of company/chartered secretaries (CS) as ‘independent directors’. How company/ chartered secretaries, by virtue of their knowledge and training is eminently to fit in the role of independent directors, is portrayed hereunder.

The Profile of a Company Secretary 

CS has important fiduciary and company law responsibilities. The CS is the nodal point for the Board to get feedback on the status of compliance by the organization in regard to provisions of the company law, listing agreements, BSEC regulations, shareholder grievances, etc. CS occupies a pivotal position in ensuring that their companies function in certain critical areas and such functions are value based. While accounting could be properly described as a mirror reflecting the entire face of the company and auditing could be considered as the function that adds credibility to what are stated in the financial statements. CS should function as conscience keepers. It is this role that would earn them an enviable position. It depends on individuals. It depends on his or her vision, the length and breadth of his or her profile, preparedness, presence of mind and involvement. So, it is very clearly that within an organization, a CS plays an important role, which is unique in nature. However, this is not the role that a CS as an ‘Independent Director’ is expected to do. ‘Independent Directorship’ is a different cup of tea. It is important to know what is expected of ‘Independent Directors’. This will help CS to cause a substantial shift in their role to become ‘Independent Directors’.

Company Secretaries as ‘Independent Directors’

According to BSEC Guideline, independent director shall be a knowledgeable individual with integrity who is able to ensure compliance with financial, regulatory and corporate laws and can make meaningful contribution to business [Condition 3.1 (i)]. The person should be a business leader/ corporate leader/ bureaucrat/ university teacher with economics or business Studies or law background/ professionals like Chartered Accountants, Cost & Management Accountants, Chartered Secretaries. The independent director must have at least 12 (twelve) years of corporate management/ professional experiences [Condition 3.1 (ii)]. In special cases, the above qualifications may be relaxed subject to prior approval of the Commission [Condition 3.1 (iii)].

Independence is a state of mind and it could change from time to time. In this perspective one has to see whether CS could add value to a company as its ‘Independent Directors’. While occupying the position of an ‘independent director’, a CS should not attempt to leverage his professional achievements to obtain any assignment for his firm or any entity in which is he is interested. He must understand that he should be able to speak out what he thinks about an arrangement. If he looks up to the company or its promoters or managers for favours, he cannot be independent in the true sense of the word. Experienced CS, will certainly have an edge over others. An experienced CS carries with him enormous amount of knowledge. In view of the position he would have occupied in his career as a CS of any large enterprise, he would have become so matured to understand not only what is obvious but also what is not obviously revealed. A CS has the unique distinction of having the required skills to analyze and understand the real import of an arrangement or transaction or proposal. A CS would be the best-suited person to keep his observations on the one side and consider the objectives and perspectives of the proposals or arrangements on the other side and consider them in the light of the letter and spirit of the applicable regulatory framework. He will be able to not only assist the Board in its decision making process but also add value. The ability of CS to understand the growing complexities of modern day business, their co-coordinating skill sets would help them become lead ‘Independent Directors’. As conscience keepers, Company Secretaries become the befitting professionals to lead as ‘Lead Independent Directors’.

Conclusion 

Following the implementation of the revised CG Guideline, the independent directors are expected to play more important roles and have more responsibilities, as evidenced by their representation in the different board committees which are required or recommended to be set up, as the case may be. In an attempt to advance the pivotal role of independent director in CG, representation of company/chartered secretary as ID on board will definitely aid in improving the standards of CG. Besides the apparent benefits, the presence of company/chartered secretary (as ID) will strengthen the hands of the CEO in resisting the usual pulls and pressures to which the entities are subject to. Company/chartered secretaries who have the ability to visualize the complete ramifications of any arrangement or proposal or transaction would be able to function effectively. As ‘Independent Directorship’ is a coveted post, original application of mind is needed to occupy such positions. One must understand the nature of the job and train his thoughts accordingly. In order to be ‘independent directors’, company/chartered secretary have to be courageous and confident and their approach should be broad.
  

Money Laundering Regulations

In line with international initiatives and standards, Bangladesh promulgated the Money Laundering Prevention Act (MLPA), 2002. Subsequently, MLPA, 2009 was enacted to expand the definition of money laundering and coverage of the offence. To strengthen the AML/CFT regime of Bangladesh and meet the international standards, MLPA, 2012 was promulgated repealing the MLPA, 2009 and Anti-Terrorism Act (ATA), 2009 as amended in 2012 and 2013. Both Acts have empowered Bangladesh Bank (BB), thus Bangladesh Financial Intelligence Unit (BFIU) to perform an anchor role in combating money laundering and terrorist financing.

According to section  25 (2) of MLPA, 2012, if any reporting organisation violates the directions mentioned in sub-section (1) of section 25 of MLPA, 2012, Bangladesh Bank may impose a fine of at least BDT50,000 but not exceeding BDT2,500,000 on the reporting organisations. Additionally, Bangladesh Bank may cancel the license or the authorisation for carrying out commercial activities of the said organisation or any of its branches, service centres, booths or agents. Alternatively, the Central Bank shall inform the corresponding registration or licensing authority about the violation for the relevant authority to take appropriate measures against the organisation.

Exchange Controls in Bangladesh

Bangladesh operates an exchange controlled economy under the Foreign Exchange Regulation Act, 1947. All inward and outward remittances are regulated by the Central Bank of Bangladesh (that is, Bangladesh Bank). Foreign investor rights are protected under the Foreign Private Investment (Promotion   and Protection) Act, 1980 which ensures legal protection against nationalisation and expropriation. It also guarantees non-discriminatory treatment between foreign and local investment, and repatriation of proceeds from sales of shares and profits. Bangladesh Bank has outlined relevant procedures and formalities for all inward and outward remittance in its Guidelines for Foreign Exchange Transaction. The Guidelines cover the procedures for, among others:

• Foreign dealings in securities

• Remittance of royalty/technical assistance fees

• Foreign ownership

• Mergers and acquisitions

• Divestments

• Remittance of profit, dividends, capital gains

• Foreign and local borrowings

• Retention quota of exporters

Any transaction that has not been outlined in the Guidelines for Foreign Exchange Transactions must obtain specific approval from the Bangladesh Bank.

Bangladeshi ‘Taka’ (BDT) is convertible for current external transactions. Individuals or firms resident in Bangladesh may conduct all current external transactions, including trade and investment related transactions, through banks in Bangladesh authorised to deal in foreign exchange (Authorised Dealers) without prior approval from Bangladesh Bank.

Similarly, non-resident direct investment in industrial enterprise and non-resident portfolio investment through stock exchanges do not require prior approval of the Bangladesh Bank.

Remittance of post-tax dividends or profits on non-resident direct or portfolio investment does not require prior approval. Sales proceeds, including capital gains on non-resident portfolio investment, may also be remitted abroad without prior approval.

Prior approval from Bangladesh Bank is required for the repatriation of sale proceeds of non-resident equity investment in public limited companies that are not listed on the stock exchange, and private limited companies. In determining the repatriable amount, Bangladesh Bank works out the net asset value of the shares on the basis of audited financial statements as on the date of the sale and the net asset value is thus calculated is considered repatriable.

Overview of Various Taxes and Duties

Corporate Income Tax is discussed in our earlier post. 

Personal Income Tax (PIT) 

Income tax provisions can be found in the Income Tax Ordinance 1984, the Income Tax Rules 1984 and all relevant notifications under the Ordinance. In addition to payment of tax at a specified rates, an individual is supposed to pay a surcharge if he/she has net wealth exceeding BDT22.5 million as shown in the statement of assets and liabilities. The surcharge is calculated on the amount of tax payable after deduction of investment rebate. An individual that has net wealth exceeding BDT22.5 million shall pay a surcharge.

Value Added Tax 

VAT is imposed on goods and services at the stages of import, manufacturing, supply, and trading. VAT is imposed on services provided in Bangladesh and also on the services rendered from outside Bangladesh. A uniform VAT rate of 15 per cent is applicable for both goods and services. A registered VAT taxpayer is entitled to claim back the VAT paid on purchase of inputs subject to compliance with the provisions of VAT laws. 15 per cent VAT is applicable for all business or industrial units with an annual turnover of BDT8,000,000 and above, except in the cases specified in VAT laws. Turnover tax at the rate of three per cent is levied where annual turnover is less than BDT8,000,000. Truncated rate also applies in the cases specified by VAT laws which have been determined on the basis of assumed percentage of value addition. A taxpayer paying VAT at the truncated rate will not be entitled to claim input VAT rebate. Under the 2015-16 budget, the tax is reduced to 0.1 per cent of turnover for the first three years for industrial undertakin.

Supplementary Duty (SD) is applicable as per the 3rd Schedule of the VAT Act, 1991, at the rates specified for particular goods or services. Exemption of VAT or imposition of VAT at zero per cent is regulated by Section 3 (Export or Deemed Export), Section 14 (goods/service declared by the government), 1st and 2nd Schedule of the VAT Act, 1991

Customs duty

Bangladesh levies customs duty on imports using the Harmonised Tariff System for tariff classification. Imports are generally taxed at the following rates, unless specifically exempted:

• Capital machinery: one per cent

• Basic raw materials: five per cent

• Intermediate raw materials and semi-finished products: 10 per cent

• Finished products: 25 per cent

Exports are generally exempt from customs duties

Supplementary Duty

Supplementary duty is levied on luxury goods imported into Bangladesh as well as non-essential or socially undesirable goods produced and supplied in the country. The rates vary from 10 to 500 per cent depending on the nature of the goods.

Foreign Direct Investment Policy

Its a liberal investment policy, there are very few restrictions on foreign ownership of businesses or property in Bangladesh.

FDI comprises an overwhelming part of the economy of Bangladesh in its contribution to Gross Domestic Product (GDP), export and domestic investment as well as overall economic growth. FDI inflows have traditionally been in the form of equity, reinvestment and intra-organisation acquisitions. While there are generally very few restrictions on FDI, private sector investment is prohibited in the following sectors: arms and ammunition, defence, forest plantation, extraction of reserved forests, nuclear energy, security printing and mining.

Furthermore, the following sectors will require investors to obtain licenses before they are able to commence business: banking, finance, insurance, telecommunications, aviation and broadcasting. Foreign investors that wish to acquire stakes in local companies will need to obtain approval from the Bangladesh Bank if the control of the business is subsequently transferred to foreign shareholders.

Government incentives

Alongside the incentives outlined in the tax section, the government provides cash assistance and other incentives for doing business in Bangladesh in certain export-oriented industries. Cash incentives are available in the following sectors, with different cash incentive rates:

• Textile

• Agro products

• Bicycle

• Crashed bone

• Poultry

• Light engineering products

• Liquid glucose used in agro product

• 100 per cent Halal meat

• Frozen shrimp & other fish

• Leather

• Ship export

• Finished leather

• Crushed leather

• Plastic pet bottle

• Jute products

Imports 

Bangladesh’s imports mostly comprise petroleum and oil (11 per cent of the total imports), textile (10 per cent) and food items (nine per cent). The import regime comprises: a banned list, a restricted list, freely importable items and certification requirements for all food products. All other permitted imports require a Letter of Credit Authorisation to be completed.

The Financial System of Bangladesh

The financial system of Bangladesh is comprised of three broad fragmented sectors:

• Formal sector

• Semi-formal sector

• Informal sector

The sectors have been categorised in accordance with their degree of regulation. The formal sector includes all regulated institutions, such as banks, non-bank financial institutions (FIs), insurance companies, capital market intermediaries such as brokerage houses, merchant banks and micro finance institutions (MFIs).

The semi-formal sector includes those institutions which are regulated but do not fall under the jurisdiction of the Central Bank, Insurance Authority, Securities and Exchange Commission or any other enacted financial regulator. This sector is mainly represented by specialised financial institutions, such as House Building Finance Corporation (HBFC), Palli Karma Sahayak Foundation (PKSF), Samabay Bank, Grameen Bank, Non-Governmental Organizations (NGOs) and discrete government programs.

The informal sector includes private intermediaries which are completely unregulated.

Capital markets

The Bangladesh Securities Exchange Commission (BSEC) is the primary regulator for all activities of the bourses and its members. The BSEC is a ‘Category A’ member of International Organisation of Securities Commission (IOSCO).

 With over 300 listed companies, the capital market of Bangladesh s considered to be one of the emerging markets in the context of the global financial system. The market has immense potential for the country’s industrialisation, development of infrastructure, in particular, and economic growth in general.

Bangladesh’s capital markets comprise the Dhaka Stock Exchange (DSE) and the Chittagong Stock Exchange (CSE), incorporated in 1954 and 1995, respectively. Some of main features of the market are as follows:

• Both Dhaka and Chittagong Stock Exchanges are members of South Asian Federation of Exchanges (SAFE), a forum in South Asia to promote the development of securities markets in the region

• Automated trading facilities have been available at both bourses since 1998

• The Central Depository Bangladesh Limited (CDBL) introduced its first electronic book entry in 2004 • Market intermediaries include 250 Trading Right Entitlement Certificate (TREC) holders of Dhaka Stock Exchange (DSE), 135 TREC holders of Chittagong Stock Exchange (CSE), 55 registered merchant banks, 17 asset management companies, and 10 custodians

Banking system

The banking system of Bangladesh consists of Bangladesh Bank (BB) as the Central Bank, six state owned commercial banks (SCB), two specialised banks (SDBs), 39 private commercial banks (PCBs) of which 31 are commercial PCBs, eight Islamic Sharia-based PCBs, nine foreign commercial banks (FCBs) and four non-scheduled banks.

Bangladesh Bank, as the central bank, has legal authority to supervise and regulate all banks and non-bank financial institutions. It performs the traditional central banking roles of note issuance and of being the banker to the government and banks. Given some broad policy goals and objectives, it formulates and implements monetary policy, manages foreign exchange reserves and implements prudential regulations and conducts monitoring thereof as they are applied to the entire banking system. Its prudential regulations include, among others: minimum capital requirements, limits on loan concentration and insider borrowing and guidelines for asset classification and income recognition. Bangladesh Bank has the power to impose penalties for non-compliance and also to intervene in the management of a bank if serious problems arise. It also has the delegated authority of issuing policy directives regarding the foreign exchange regime.

Under the financial sector reform program, a flexible interest policy was formulated. According to that, banks are free to charge/fix their deposit and lending rates, other than those related to export credit. Banks can differentiate interest rates up to three per cent. With progressive deregulation of interest rates, banks have been advised to announce the mid-rate of the limit (if any) for different sectors and the banks may charge interest 1.5 per cent more or less than the announced mid-rate on the basis of the comparative credit risk. Banks upload their deposit and lending interest rate to their respective website.

Insurance industry  

The insurance sector is regulated by the Insurance Act, 2010. The Insurance Development and Regulatory Authority (IDRA) was instituted on 26 January 2011 as the regulator of the insurance industry being empowered by Insurance Development and Regulatory Act, 2010 by replacing its predecessor, Chief Controller of Insurance. General insurance is provided by 45 companies and life insurance is provided by 30 companies. The industry is dominated by the two large, state-owned companies: SBC for general insurance and JBC for life insurance, which together command most of the total assets of the insurance sector

Investment management industry

Bangladesh’s asset management industry is very immature. Nevertheless, a stable economic outlook, political stability and growing population have attracted a number of global fund managers. The primary regulator for the industry is the BSEC which has, so far, licensed 17 asset management companies in the country. The asset management companies manage approximately BDT50 billion, comprising less than three per cent of the total market capitalisation. Asset management companies are authorised to act as issue and portfolio managers of the mutual funds which are issued under the SEC (Mutual Fund) Rules 2001.

Labour Law in Bangladesh

In Bangladesh, employment is regulated by the contractual agreement between employer and employee. Other than the contract, the Bangladesh Labour Act 2006 (as amended in 2013) and Bangladesh Labour Rules 2015 govern the employment of ‘workers’. ‘Worker’ is defined under Section 2(65) of the Bangladesh Labour Act 2006 to mean “any person including an apprentice employed in any establishment or industry, either directly or through a contractor in whatever name referred to, to do any skilled, unskilled, manual, technical, trade promotional or clerical work for hire or reward, whether the terms of employment be expressed or implied, but does not include a person employed mainly in a managerial or administrative, supervisory role or managerial capacity.” The main issues covered in the Act include:

• Conditions of service and employment

• Employment of adolescents

• Provisions relating to health, hygiene

• Employee welfare

• Working hours and leave

• Wages and payment

• Wages boards

• Workers compensation for injury by accident

• Trade union and industrial relations

• Disputes, labour court, labour appellate

• Tribunals, legal proceedings

• Workers participation in companies’ profits

• Regulation of employment and safety of dock workers

• Provident funds

• Apprenticeship

• Penalties and procedure

Moreover, as per the Bangladesh Labour Act 2006, organisations which do not fall within the scope of the Act, cannot have any employee rules, regulations and benefits less favourable than those provided under the Act. Under the Bangladesh Labour Act 2006, read with Bangladesh Labour Rules 2015, any contracting agency which, on contract, supplies workers to different organisations in different posts has to obtain a license from the Chief Inspector.

Employment contract In Bangladesh, a letter of appointment is mandatory in the absence of a written contract. The terms of the contract are binding between the employee and employer, providing they do not contravene the provisions of the Labour Act. Typically, the letter of appointment or written contract will include:

• Working hours

• Salary

• Role title

• Nature of work

• Working time and leave

• Procedures for dismissal

Minimum wage

Wages and benefits of public sector employees are, determined by the government on recommendation from the Pay Service Commission. For the private sector, in certain sectors such as for workers in trade and industry the government through the Minimum Wages Board fixes the minimum wages. Otherwise, there is no regulatory body for the private sector to determine the wages and benefits.

On 5 December 2013, the government of Bangladesh issued the Gazette on Minimum Wages which defined a new wage structure for the readymade garment (RMG) industry with an increase of the gross monthly minimum wage from BDT3,000 to BDT5,300. No increases have been announced since.

Working time and leave 

As per the Bangladesh Labour Act 2006 (amended in 2013), no adult shall ordinarily be required or allowed to work in an establishment for more than eight hours in any day and more than 48 hours in any week.

No women shall, without her consent, be allowed to work in an establishment between the hours of 10.00 PM and 6.00 AM. Consent must be given in a prescribed form, as per the Bangladesh Labour Rules 2015.

Where an employee works in an establishment on any day or week for more than the hours fixed under Bangladesh Labour Act 2006, he shall, in respect of overtime worked, be entitled to an allowance at the rate of twice his ordinary rate of basic wage and dearness allowance and ad-hoc or interim pay, if any

The Bangladesh Labour Act 2006 (as amended in 2013) stipulates that any worker employed in a shop, commercial establishment or industrial establishment is entitled to one and a half days of rest per working week. Those employed in a factory are entitled to one day. Those employed in an establishment which is a road transport service are entitled to 24 consecutive hours of rest in each working week. This should not have any effect on wage allowances.

Annual leave

As per Bangladesh Labour Act 2006 (amended in 2013), every adult, who has completed one year of continuous service in an establishment, shall be allowed fully paid annual leave calculated as follows:

• In the case of a shop or commercial or industrial establishment or factory or road transport service, one day for every 18 days of work

• In the case of a tea plantation, one day for every 22 days of work • In the case of a newspaper worker, one day for every 11 days of work

Healthcare and benefits

Large local and multinational companies typically provide employees with private health care, car facilities, subsidised meals and other fringe benefits. Employers must also pay compensation to employees who suffer a personal injury arising out of and in the course of his employment. Most of the companies in Bangladesh provide provident and gratuity benefits to permanent employees. Provident funds are generally built through the contribution of both the employees and employers. Provident funds for ‘workers’ within the meaning of the Bangladesh Labour Act 2006 have to be as per the requirements set out in the said Act.

Maternity benefit 

A woman is entitled to maternity leave of eight weeks before and eight weeks after the delivery provided she has worked with the employer for a minimum of six months prior to the delivery. No maternity benefit shall be payable to any woman if at the time of her confinement she has two or more surviving children. However, she will get leave if she is entitled to sick and/or annual leave. Thereafter, if further leave is required, the employer can grant further leave without pay. A government female employee is entitled to maternity leave of six months, twice during her job-life.

Probation

The maximum probationary period in Bangladesh is six months for workers operating in a role of a clerical nature and three months for other workers. The period of probation for skilled workers can be extended by an additional three months if it has not been possible to determine the quality of the work within the first three months.

Dismissal 

The termination of employment contracts can be done through discretionary termination, discharge, disciplinary termination or collective redundancies. Typically, to terminate a permanent employment contract unilaterally, a period of notice must be given. The employer must give 120 days’ notice, while the employee is required to give only 60 days’ notice. The period is shortened for temporary workers, whereby both employee and employer must only give 30 days’ notice.

Notice does not need to be given in the case of disciplinary termination on the basis of conviction for a criminal offence. For other disciplinary reasons, eg theft, fraud, habitual late attendance, negligent work or disorderly behaviour, the employee is given seven days to justify his misconduct. If the employee is unsuccessful in this, the employer is then obliged to call a hearing to determine whether the employee should be dismissed.

Social security 

Employees in Bangladesh are not obliged to contribute towards any social security funds. Companies satisfying the criteria set out in the Bangladesh Labour Act 2006 (as amended in 2013) must pay five per cent of their profits into a Workers Profit Participation Fund which is provided to all employees except those who are the owner, partner or directors who have been in employment with the said employer for a minimum of nine months.

Employment of non-resident :

Non-residents require a work permit to take up employment contracts in Bangladesh. This is subject to a number of conditions. Only residents of countries specified by the Bangladesh government can apply for work permits. Furthermore, employers cannot employ expatriates if there is a local expert available for the position. The number of expatriate employees in an industrial enterprise should not exceed 1:20 (foreign: local) ratio at any time during regular production. The ratio for commercial offices is 1:5 (foreign: local).

Prospective employers Prospective employers must be registered with the appropriate authorities (BOI) before they can employ expatriates. An initial work permit can be obtained for two years; this may be extended as reviewed by the relevant authorities.

To obtain a work permit, the prospective employer must file an application with the Board of Investment for an E-visa recommendation. Once received, the Bangladesh Embassy provides the employee with an e-visa which lasts three months. Once the individual arrives in Bangladesh, the employer must apply to the BOI for the work permit on behalf of the expatriate. This application will be filed alongside a number of documents, including: copy of the employer’s incorporation certificate, board resolution for the position of employment, contract, a copy of the advertisement for local recruitment and an encashment certificate of inward remittance of a minimum of USD50,000.

Trade unions

The Bangladesh Labour Act 2006 (amended in 2013) contains a number of provisions regarding the establishment of trade unions. Employees have the right to join and form a trade union primarily for the purpose of regulating the relations between employees and employers or between employees themselves. Employers shall have the right to form a trade union to regulate the relations between employers and workers or between employers. They are also free to join any trade unions of their choice.

Trade unions of employees and employers shall have the right to form and join federations and any such union and federation shall have the right to affiliate with any international organisation and confederation of employees’ or employers’ organisation.

Trade unions and employers’ associations shall have the right to draw up their constitutions and rules, to elect their representatives in full freedom, to organise their administration and activities and to formulate their programmes.

An application for the registration of a trade union shall be made to the Registrar of Trade Unions of the relevant area. A trade union of workers shall not be entitled to registration unless it has a minimum membership of 30 per cent of the total number of employees working in the establishment in which it is formed.

Overview of Corporate Income tax

Corporate Income Tax (CIT) 

Income tax in Bangladesh is administered under the Income Tax Ordinance, 1984 and the Income Tax Rules, 1984, as well as notifications made under said Ordinance.

Scope :

For the purposes of CIT, no major distinction is made between foreign owned companies and Bangladeshi-owned companies; although some companies may qualify for certain tax incentives depending on the nature of their business. Companies incorporated in Bangladesh and foreign companies registered in Bangladesh (eg branch offices) are tax resident. Tax resident businesses are taxed on their worldwide income, subject to International Financial Reporting Standards and any double taxation avoidance agreements that may be in place. Non-tax resident businesses are subject to tax on any income accrued in Bangladesh.

Capital gains

Every company is liable to pay tax at the rate of 15 per cent on the capital gains derived from transfer of capital assets and at 10 per cent on the capital gain derived from the transfer of shares of listed company.

Groups

Bangladesh tax laws do not specifically address the issue relating to tax on group consolidation. In practice, the members of a group are taxed separately.

Thin capitalisation 

All foreign borrowing by private sector industrial enterprises requires permission from the Board of Investment. Approval is subject to the fulfilment of a number of conditions namely:

• The debt-to-equity ratio must be within 70:30; this may vary as determined by BOI

• The fund cannot be used exclusively as working capital.

Losses

The Income Tax Ordinance 1984 provides for the offsetting of losses and carrying forward of losses under the relevant categories of income. Losses can be carried forward for six years. Unabsorbed depreciation can be carried forward for an unlimited time period.

Dividend income

Dividends paid to shareholders are subject to withholding taxes at the following rates:

• Resident/non-resident Bangladeshi company: 20 per cent

• Resident/non-resident Bangladeshi individual:10 or 15 per cent (subject to having twelve digit TIN)

• Non-resident non-Bangladeshi individual: 30 per cent

The rate of deduction of tax at source from the remittance of dividends to foreign investors is determined upon the consideration of the provisions of the applicable double taxation avoidance agreement. Tax credits are available regarding tax deducted at source.

Withholding tax 

Interest payments are subject to a withholding tax at a rate of 20 per cent if paid to non-residents; the rates for companies are listed above. Intellectual property royalties payable to non-residents are subject to a withholding tax at a rate of 20 per cent; this is the final tax settlement.

Administration

A company is obliged to submit an annual income tax return by 15 July following the income year or, where 15 July falls before the expiry of six months from the end of the income year, before the expiry of such six months.

Controlled foreign companies 

The profits of a foreign subsidiary are not required to be imputed to a parent company that is tax resident in Bangladesh.

Transfer pricing

The transfer pricing regulations in Bangladesh were enacted on 1 July 2014 by the Finance Act, 2014. Under these regulations, the pricing of any income or expense arising from international transactions between associated enterprises will need to be determined with regard to the arm’s length price principle applying the appropriate method(s) prescribed in Section 107C of the Income Tax Ordinance, 1984.

The most appropriate method or methods will be selected from the prescribed methods on the basis of the nature of transaction, the availability of reliable information, functions performed, assets employed, risks assumed or such other factors as may be prescribed. Every person who has entered into an international transaction shall provide, along with the annual income tax return, a statement of international transactions in the form and manner as may be prescribed. The statement of international transactions, to be provided under section 107EE of the Income Tax Ordinance, 1984, shall be in the form specified in Rule 75A of the Income Tax Rules, 1984, and signed and verified by the person responsible for signing the return of income under Section 75 of the Income Tax Ordinance, 1984.

Tax incentives 

The following tax incentives are available for companies:

• Newly established industrial undertakings and physical infrastructure facilities set up between the periods of July 2011 to June 2019 will enjoy exemption from tax at varying rates for certain periods

• Industrial undertakings engaged in the manufacturing of goods, not eligible for a tax holiday, set up between the periods of July 2014 to June 2019 outside the territory of City Corporation will enjoy exemption from tax at varying rates for certain periods

• Accelerated depreciation on the cost of machinery and plant is admissible for new industrial undertakings, set up between the periods of July 2014 to June 2019, in the first three years of commercial production at 50, 30 and 20 per cent respectively

• Exemption on income derived on the export of handicrafts for the period from July 2008 to June 2019

• 50 per cent exemption on income derived from export business

• Exemption on income derived from Information Technology Enabled Services or software development or Nationwide Telecommunication Transmission Network until 30 June 2024

• Exemption on income of Private Power Generation Companies

• Initial depreciation in addition to normal depreciation where any building has been newly constructed or any machinery or plant has been installed in Bangladesh after the thirtieth day of June, 2002

• Reduced tax rates are applicable for specific types of business and certain areas subject to conditions set forth in the relevant provisions of laws

• Rebate on the amount spent to perform specified CSR activities

• Avoidance of double taxation on the basis of bilateral Double Taxation Avoidance Agreements