Export Processing Zone or EPZ, is basically a customs area where any person or organization can import plant, machinery, equipment and other materials required for the manufacture of various export products without any duty fee. In addition, EPZs offer benefits such as free trade conditions, one-stop documentation and registration facilities, and long-term tax holidays. EPZs are often established in places conducive to global trade, such as seaports, airports, and border areas. Any local or foreign individual or corporation may conduct export business in such locations by undertaking manufacturing operations and importing duty-free material for export purposes. In Bangladesh, 8 EPZs have been established under the Bangladesh Export Processing Zones Authority, or ‘BEPZA,’ and the government intends to build 100 economic zones under the Bangladesh Economic Zone Authority (BEZA). According to BEPZA data, cumulative exports from the country’s EPZs since its inception to 2020 were around 81 (80.5 billion) billion dollars. Prior to the Corona pandemic, moreover, more than 5 lakh (5,21,500+) people were working in the country’s EPZs. But how do these EPZs, which are vital to the country’s foreign trade, actually work?
Overview of EPZ
The concept of EPZ or Export Processing Zone originated in the 19th century from the free trade zones of countries and territories like Hong Kong, Singapore, and Gibraltar. Some of the free trade zones at the time allowed imports and exports to be ‘customs free,’ enabling various items to be manufactured and re-exported. Although such places are inside a country’s geographical territory but are regarded foreign territories, the country’s usual tax and import tariffs are not applicable there. EPZs have been used to attract foreign investment to developing countries since the 1930s.
Despite the fact that the first EPZs were founded in Latin America, the first free trade zone was established in the United States in 1934. Later, other nations around the world began to provide low-cost and trained labor to build and invest in EPZs, as well as reduced restrictions. As a result, investors are becoming more interested in investing in EPZs in both developed and developing countries. These investments have compelled host nations to adopt cutting-edge technologies in order to boost production efficiency and the industrial supply chain. UNCTAD published a report in 2015 that said there are now more than 4,500 export processing zones operating in more than 130 countries worldwide.
Bangladesh Export Processing Zones Authority or BEPZA, Bangladesh’s first official exporting body, was established in 1980 to create, develop, and manage industrial zones, such as EPZs, and to attract foreign investment to help boost the country’s industrialization, exports, and employment. The journey of EPZ in Bangladesh started in 1983 with the establishment of the first EPZ in Patenga, Chittagong on the basis of a law enacted by the Parliament in 1980. Bangladesh currently has two export processing zones in Chittagong, one in Dhaka, Narayanganj, Nilphamari, Comilla, Pabna and Bagerhat, making a total of 8 such zones. Besides, it has been decided to build three more EPZs at Gaibandha, Jessore and Patuakhali, where land acquisition is already underway. Besides EPZ, there is also an economic zone at Mirsarai in Chittagong under BEPZA. According to BEPZA, the total investment in EPZs in Bangladesh till 2020 was more than 5.2 billion.
So far, BEPZA has approved 549 industries with different EPZs, of which 475 are operational and the remaining 74 are still under implementation. According to the BIDS Research Almanac 2017, employment in these EPZ areas increased by 19 percent from 1983 to 2015. According to Bangladesh Bank data, the total number of local employees in EPZs of Bangladesh till the fiscal year 2019-20 was 4 lakh 61 thousand 480 people, and the number of foreign employees was 2214 people. According to BEZPA’s Annual Report for FY 2019-20, the total export volume from 8 EPZs in Bangladesh in that year was about $7.5 billion, and in FY 2020-21 it was about $6.49 billion.
On the other hand, under the Bangladesh Economic Zones Act, 2010, the Bangladesh government formed the Bangladesh Economic Zones Authority, or ‘BEZA,’ to build economic zones in all potential and undeveloped areas of Bangladesh. Although the aims of the government-established ‘BEZA’ and ‘BEPZA’ are relatively similar, there are some differences in the activity of these two organizations. The ‘BEPZA’ EPZs solely manufacture items for export. The ‘BEZA’ economic zones, on the other hand, do create items for both domestic and foreign markets. To be recognized as a developed country under Vision 2041, the Bangladesh government intends to establish 100 industrial zones by 2030, employing at least 10 million people.
How Does It Work?
EPZs are primarily governed by the government’s ‘open door policy’. Open Door Policy refers to facilities such as reduced or zero duty fees and tax relief provided by the government which are mainly used to attract investors for foreign trade, investment, and foreign loans. As a result, investors have the opportunity to provide adequate flexibility in conducting business in EPZ areas, including duty exemptions. For example, if a person wants to set up a garment factory in Narayanganj, he has to pay tax and duty fee according to the domestic import-export duty structure of Bangladesh for importing raw materials and exporting finished goods. On the other hand, if he sets up a garment factory in the Adamji EPZ area of Narayanganj, he will be able to import the required materials and export the finished goods without paying any duty fee or tax. Although these EPZ areas are established within the geographical area of a country, the areas are not subject to any of the prevailing taxes or duties of the country as they are considered as foreign lands.
Investment in these areas is classified into three types: A, B, and C. Type-A investments are 100 percent foreign investments, including those of Bangladeshi descent as well as international citizens. Type-B investments are often made in a joint venture between a Bangladeshi firm and a foreign company. Then again, Type-C category investments are 100 percent held by Bangladeshi firms.
In order to set up a manufacturing unit in an EPZ area, one must first have to go through a number of paperwork processes, including a letter to BEPZA’s executive chairman and an investment-related project proposal in EPZ.
|1.||Letter addressed to Executive Chairman.|
|2.||Project Proposal for investment in concerned EPZ.|
|3.||Proforma Invoice of Machinery and equipment to be imported.|
|4.||Copy of Money Receipt of purchasing the Project Proposal Form.|
|5.||Memorandum & Articles of Association along with Certificate of Incorporation duly attested by the Registrar, Joint Stock Company & Firms of Bangladesh.|
|6.||Bank solvency certificates of the sponsors/Directors.|
|7.||Copies of passport of sponsors/ Directors.|
|8.||Manufacturing Process of the products.|
Once the paperwork is completed, investors are given the option of choosing a rent and tariff structure based on the location of the EPZ. EPZs basically provide the option to rent ‘Land’ or a ‘Standard Factory Building.’ When a company or organization rents land, it must build a factory before it can begin manufacturing. A Standard Factory Building, on the other hand, is an already existing building in an EPZ where manufacturing activities can be started only by importing machinery. The cost of land in the Chattogram, Dhaka, Comilla, Adamjee, and Karnaphuli EPZs is $2.50 per square meter per year, while the cost of a Standard Factory Building is $2.75 per square meter per year. Other EPZs have their own rent structures as well.
|Name of EPZs||Rent of Land / Yearly||Rent of SFB / Monthly|
|Mongla, Ishwardi, and Uttara EPZ||1.40 USD||1.60 USD|
|BEPZA economic zone||2.75 USD||3.50 USD|
Following the identification of the investment, rent, and location, the government agency ‘BEPZA’ offers several fiscal and non-fiscal incentives to investors. Fiscal incentives provide businesses with “monetary benefits” such as tax relief and discounts. Non-fiscal incentives, on the other hand, are benefits that have no monetary value.
Under fiscal incentives, in addition to the 5 to 7 year tax holiday, a number of incentives are provided, including duty free import benefits for machineries, equipment and finished goods.
|• Tax Holiday of 5-7 years|
|• Duty free import of machinery, equipment & construction materials.|
|• Duty free import of raw materials.|
|• Duty free export of finished goods.|
|• Relief from double taxation.|
|• Exemption from dividend tax for tax holiday period.|
|• Taking and offering subcontracting are allowed both inside and outside EPZ.|
|• Sale of 10% finished products except garments to Domestic Tariff Area (DTA) is allowed.|
|• Sale of 10% defective finished goods to DTA is allowed subject to approval of a committee.|
|• Sale of 10% surplus raw materials to DTA is allowed.|
On the other hand, under non-fiscal incentives, foreign and local investors will not have any investment ceiling and will be given a number of incentives including acquiring 100% foreign ownership.
|• No ceiling on foreign and local Investment.|
|• 100% foreign ownership permissible.|
|• Full repatriation of profit, capital & establishment.|
|• Foreign currency loan from abroad under Off-Shore Banking Unit (OBU) facilities.|
|• Non-resident Foreign Currency Deposit (NFCD) allowed for ‘A’ type industries.|
|• Operation of FC accounts by ‘B’ and ‘C’ type Industries allowed.|
After completing all of these activities, the investor will be able to establish a factory in the designated area, import the necessary materials, manufacture the product, and export the finished goods to other countries around the world. This is fundamentally how EPZ executes Establishment and Export Processing operations.