Japan will make its largest investment in Asia at Narayanganj Araihazar economic zone
Cash support on export, slashing motorcycle registration fee and faster customs clearance are among the perks the government has on the table for Japanese investors, who are planning to quit China and put their money somewhere else.
Relevant ministries have been given a week or two to quickly resolve the issues faced by Japanese firms operating here so that they can provide positive feedback on Bangladesh as a preferable investment destination than other Asian neighbours.
The instructions came on August 16 from the Prime Minister's Office which reviewed proposals of current Japanese investors who pointed out "inequalities" in terms of export support between local and foreign business entities.
For instance, the fully foreign-owned 'A' type companies in Bangladesh do not get cash incentives from the government against exports, including readymade garments. Japanese investors have proposed that export-oriented foreign firms should also get similar incentives.
Agreeing to the proposal, the Prime Minister's Office (PMO) has directed the finance ministry to provide foreign companies in Bangladesh with incentives at the same rate as enjoyed by local businesses from the next fiscal year.
India has also been on the race to hook Japanese investors leaving China. Leading Indian newspaper The Hindu reported last week that Commerce and Industry Minister Piyush Goyal had assured that a focussed group of key officials will resolve Japanese investors' concerns including those on logistics, Customs clearance, export procedures and quality issues.
Japanese investors pointed out that in neighbouring countries including India, motorcycle registration fee is below 10% of the unit price. Japanese investors have proposed reducing the existing registration fee from 22% to 10%.
The PMO has instructed the Road Transport and Highways Division to take necessary initiatives within seven days to bring down the motorcycle registration fee below 10% after discussions with the Finance Division.
Policymakers say that Bangladesh is working proactively to attract Japanese companies that have announced shifting away from China to other countries in the aftermath of the pandemic and the disruption of the global supply chain.
New Japanese investors would gather business intelligence from existing investors about the business environment in Bangladesh before deciding on making an investment here. Therefore, the government is prioritising solving issues relating to Japanese investors in addition to improving the World Bank's Ease of Doing Business Index.
On August 16, a meeting of the Bangladesh-Japan Public Private Joint Economic Dialogue (PPED), chaired by Principal Secretary to the PM Ahmad Kaikaus, discussed different issues faced by Japanese investors in Bangladesh and a decision was made to solve those on an urgent basis.
The meeting was attended by the Foreign Secretary, Finance Secretary, revenue board chairman and other top executives of various government ministries and agencies, including Bangladesh Investment Development Authority (Bida), Bangladesh Economic Zones Authority (Beza) and Bangladesh Export Processing Zones Authority (Bepza).
Bida Executive Chairman Md Sirazul Islam told The Business Standard that Japanese firms in China have decided to shift their investments elsewhere. Bida is therefore working with various government agencies to address issues raised by Japanese investors to make the business environment attractive in Bangladesh.
He said different initiatives have been taken to resolve the issues of the existing investors to make them happy and to pave the way for new investments.
Shafiul Islam Mohiuddin, a member of the commerce ministry task force to attract Japanese investors and also a former president of the Federation of Bangladesh Chambers of Commerce and Industry (FBCCI), told The Business Standard that 100% foreign-owned companies did not get any financial benefit from the Covid-19 stimulus package for paying salaries. If such inequalities are not removed then foreign investments will not be encouraged to invest here.
He said that it is urgent to deal with the issues of the Japanese companies doing business in Bangladesh on a priority basis to attract Japanese companies shifting away from China. This is because the existing companies will act as ambassadors for Bangladesh in bringing in new Japanese investments. The government is working to this end.
As of December 2019, around 300 Japanese companies were doing business in Bangladesh, with investments reaching $386 million. Just a decade back, there were 82 Japanese firms in the country.
Bangladesh will be a top choice for Japanese companies seeking to expand their businesses in Asia and Oceania in the next two years due to its high potential and profitability, according to a survey of the Japan External Trade Organization (JETRO).
About 70.3% of all Japanese firms in Bangladesh are mulling over an expansion while 23.4% would like to remain the same and only 1.6% are considering a reduction.
Currently, around 87 Japanese firms are considering shifting their businesses from China to other countries. The Japanese government will provide the firms with a $22.10 crore subsidy if they relocate to Bangladesh or India.
At present, a 1,000-acre economic zone (EZ), to be exclusively used by Japanese firms, is being developed in Araihazar upazila of Narayanganj. It is Bangladesh's first ever economic zone under the government-to-government initiative.
The Japanese Ambassador to Bangladesh Ito Naoki, in a recent meeting with Commerce Minister Tipu Munshi, said Japan will make its largest investment in Asia in the Araihazar economic zone. He proposed the formation of a joint working group to boost bilateral trade and investment.
Proposals from Japan and Bangladesh's initiatives
Factories in the country's Export Processing Zones (EPZs) are not allowed to export finished products in the containers they use to import raw materials through seaports.
Citing the issue, Japanese investors have asked the government to allow EPZ companies for a round use of the containers. The National Board of Revenue (NBR) has been asked to draft a policy in this regard within 10 days and send it to the PMO.
Wishing anonymity, a revenue board official who was present at the PMO meeting said the NBR has formed several sub-groups to implement the decisions. Revenue board officials also held meetings with concerned departments including Bepza on Tuesday.
Japanese investors said many Japanese companies are considering establishing their subsidiary offices and factories in Bangladesh. Japan has requested Bangladesh to revise the Free of Cost (FOC) import policy to accept the global business practice for the textile sector.
The existing import policy allows remittances to be sent through Telegraphic Transfer (TT) without opening letters of credit (LC) for imports of industrial raw materials and capital machinery. Remittance transfer of up to $2 lakh per year is allowed through TT for commercial import.
Japanese businesses have sought remittance transfer through TT after product delivery for commercial import. To provide that facility, the commerce ministry has asked for an amendment of relevant import policy within 15 days and to inform the PMO of this action.
Commerce Secretary Md Jafar Uddin said they were working on TT to transfer remittance for imports followed by the meeting at the PMO.
The Japanese have also proposed cancellation of the 10% service charge on generator use for companies in the export processing zones. Bepza has been instructed to cancel the charge within 15 days and keep the PMO updated.
Japan has also wanted the abolition of royalty remittances of up to 6% and simplification of the procedure for royalty remittances. The PMO has issued instructions on a resolution of the issue, while the guidelines for royalty remittances have been further streamlined.
Seeking project offices in Dhaka, Japanese investors said this will simplify transferring net profit as remittance to the parent companies upon project completion. The PMO has instructed Bida to draft guidelines in this regard within 15 days and send it for approval.
Bida Executive Chairman Md Sirazul Islam said respective ministries will implement the decisions taken at the PMO meeting. The PMO will oversee the implementations.
"Bida will do its part and we are working on it," Sirazul Islam told The Business Standard.
Japanese investors said it is difficult to dispose of old machinery, cars and facilities in order to introduce new ones in the export processing zones. Even if the process for disposal is done, tax payment is required according to invoice price for disposing. Therefore, many factories are forced to abandon the old machinery in their plots.
The PMO said that an inter-ministerial committee has been formed to suggest steps about such disposal after re-examining the existing procedure. The revenue board will finalize the procedure within one month and report to the PMO.
Commerce Secretary Jafar Uddin said, "Measures are being taken to implement the decision taken by the PMO to introduce free of cost import facilities only for foreign-owned companies and to dispose of old equipment and vehicles of EPZ-listed factories."
Japanese investors have also advocated for cancellation of mandatory bond licences for companies in the EPZ. Besides, they have proposed raising the validation period for bond licence to at least three years. The revenue board has formed a committee in this regard and will update the PMO within 15 days.
The annual salary increment for EPZ company employees is 5-10% of their basic payments. The Japanese investors have proposed cancelling the mandatory increment considering the inflation rate, skills of labourers and capacity of investors. Besides, they also want elimination of pay inequalities between EPZ factories and non-EPZ factories. Bepza will table the issue at its next wage board meeting.
The Japanese also pointed out double taxation issues to the government citing the case of the Kalna Bridge project. It said when the official development assistance (ODA) project owner paid the construction fee to the contractor for Kalna Bridge Project, value added tax and advance income tax were levied and deducted. They wished the removal of double taxation in that manner. The PMO said that the revenue board will resolve the double taxation issue immediately.
Japanese investors are also concerned with the current visa-on-arrival and immigration issues at Dhaka Airport. The home ministry said it will set up a dedicated immigration channel that will handle visa fee payments through cards at the airport.
The investors said customs clearance at seaport takes 16 days and eight days at the airports. They suggested improving services and the port management system. The PMO has tasked the revenue board with resolving the issue immediately.
Md Tanvir Hossain, general manager (Investment Promotion) of Bepza, said they were prioritizing the decisions made during the meeting with Japanese investors.
"Decisions on several issues have already been finalised, and the circular will be issued soon," he told The Business Standard.
Tanvir Hossain commented that resolving issues of Japanese investors will help ease foreign investment process in Bangladesh, and this will benefit the existing foreign firms in the country.