ESCAP on SAARC: Scorecard on Fiscal Reforms and Investment Regimes

The Economic and Social Survey of Asia and the Pacific (1996) was released in mid-April by the regional UN organisation the Economic and Social Council for Asia and the Pacific (ESCAP). It provides an economic overview of Asian economies for 1995—albeit based on data provided by member governments. This year, ESCAP´s economists paid special attention to the role of the . private sector in economic development. Below, we present Survey´s compilation of fiscal and investment-related policies as they have evolved recently in the major economies of South Asia.

Direct Indirect Taxes

Bangladesh. Deregulation and lowering of tax rates were taken up in an aggressive manner. The highest marginal rate for individual taxpayers and registered firms was reduced significantly. The value added tax (VAT) system was strengthened. The exception limit of the wealth tax was raised. The income tax rate for publicly traded companies and other companies was reduced.

India. Reforms in the direct tax system concentrated on removing procedural complexities and incentive measures. A five-year exemption from income tax for industrial enterprises and power generation/transmission projects located in certain areas was enacted. A similar exemption has been granted in notified technology parks. Specific rules were introduced for the taxation of income and capital gains of foreign institutional investors. Exemptions of gift tax were increased and a system of modified value added tax was introduced and extended to cover many products.

Pakistan. Company tax rates were reduced. Exemptions were introduced or extended for capital gains on disposal of specified shares, and certificates, as well as for profits of certain types of Pakistani companies and from deemed income for bonus issues of own shares. Five-year tax exemptions were granted in respect of income of fruit-processing undertakings and individuals making toys. The withholding tax applicable to dividends paid by companies set up for power generation was reduced.

Sri Lanka. The process of rationalising the tax structure along with further measures to deregulate the economy continued. It was proposed that tax rates for all companies should be merged into a single rate replacing the existing regime with its different rates for small companies and for all other companies with a view to creating an atmosphere of non-discrimination. Tax credit for employees was increased. New enterprises engaged in exporting specified nontraditional products and services were granted tax concessions.

Deregulation of Interest Rates

Bangladesh. The process of deregulation began at the end of 1989. The interest rate structure was replaced by a matrix of interest rate bands for all deposit and lending categories. In March 1992, the bands on most lending categories were abolished.

India. Deregulation began in 1991. In October 1994, lending rates of scheduled commercial banks for credits of over 0.2 million rupees were freed. Rates were prescribed for credit limits below this limit to protect small borrowers.

Pakistan. From July 1985, banks switched from interest-bearing loans to Islamic modes of financing and rates of return based on a profit/ loss-sharing approach. Regular auctions of government debt were carried out to allow the switch between administered interest-rate settings and market-based interest-rate settings.

Foreign exchange repatriation

Bangladesh. 1991: foreign investors were not only free to remit profits but allowed to trade shares and transfer proceeds abroad without prior approval. 1992: the annual foreign exchange retention quota for exports increased from 2-2.5 to 10 percent of free-on-board export earnings. Goods with a high import content have a retention quota of 5 percent. No part of this quota may be used for investment abroad. Banks may remit the savings of expatriate personnel when these leave the country.

 India. 1991: all exporters and other recipients of inward remittances were allowed to keep up to 15 percent of receipts as foreign currency with banks out of the 60 percent share of the total amount surrendered at free market rates. 1992: foreign investors in the stock exchange were allowed to repatriate profits and exchange money at market rates.

Pakistan. 1991: permission was no longer needed to remit dividends and dividend proceeds. The government has lifted virtually all foreign exchange controls.

Sri Lanka. Most types of transactions can be remitted freely.

Access to domestic finance

Bangladesh. 1990: Individual banks were permitted to set interest rates with prescribed banks. 1992: Foreign investment companies could borrow working capital from commercial banks as term loans. Some interest-rate subsidies are available.

India. 1991: foreign companies had (unconditional) access to credit.

Restricted sectors for foreign direct investment (FDI)

Bangladesh. Four local industries are restricted: arms, nuclear energy, forestry and railways; and regulations on drug manufacturing effectively prohibit corporations from this industry. India. There has been a substantial cutback in areas reserved for public undertakings since 1991.

Pakistan. 1990: the Government cut down the list of sectors closed to foreign participation to two: defence and items subject to religious bans.

Sri Lanka. Five sectors are reserved: pawnbroking, moneylending, retail trade with capital less than USD 1 million, personal services other than tourism, and coastal fishing.

Foreign Ownership restrictions

Bangladesh. 1991: foreign private investment could be undertaken either independently or as a joint venture. 1991:100 percent foreign equity was allowed on all investments, not only those in special zones.

India. 1991: The ceiling on foreign ownership was raised from 40 to 51 percent in 34 designated high-priority industries. Other industries remained with a 40 percent foreign equity ceiling. Equity participation of up to 100 percent will be allowed in certain industries for companies wishing to invest over the long term.

Pakistan. Foreigners can now own up to 100 percent of the equity in business.

Sri Lanka. 1991:100 percent foreign equity was allowed.

Licensing/Approvals, rules and procedures

Bangladesh. No formal permission was required to set up a company with foreign investment.

India. 1991: the obligation to seek prior approval (i.e. a licence) for the expansion, acquisition and establishment of subsidiaries was abandoned. The Government has abolished all industrial licensing requirements except for 18 industries.

Pakistan. 1990: licensing was eliminated.

Sri Lanka. 1989: the Government abolished all industrial licensing requirements, quotas and controls, except in areas such as manufacturing ammunition, explosives, military vehicles and hardware, poisons, narcotics, alcohol, toxic and hazardous materials, and printing of currency. 1991: the free and automatic approval of foreign direct investment was introduced.

Performance requirements

Bangladesh, for all export items, the prior permission of the Bangladesh Bank to open back-to-back letters of credit has been waived as long as such exports conform to guidelines for adding domestic value.

India. The government has dispensed with local content requirements.

Pakistan. No formal local requirements apply.