Over taxation bleeds the venture capital firms in Bangladesh

Experts concerned on Monday said that over taxation puts a bar in creating a venture capital (VC) eco-system which thus has stalled the growth of IT startups in Bangladesh.

During a seminar titled ‘Creating a Venture Capital Eco-system: Government’s role’, organized by the ICT division at the Software Technology Park in Karwanbazar, they said that at present the VC firm needs to pay tax on the fund, on the fund managers and on the company on which it invests.

They recommended the government to streamline tax law in such a manner that investors of the VC firms don’t need to pay triple tax.

Experts and the stakeholders have also asked for formulating law to regulate VC firms and enacting venture-capital fund rule to raise VC fund.

Presenting the key-note paper in the seminar, Dr Mahmood Hussain, Associate Professor of San Francisco State University (SFSU) said VC financed businesses have higher risk profile but with the potential for high returns.

He said that the capital that is provided by the VC firms are referred to as ‘seed capital’ since it helps in starting or growing the business. If a venture capital firm finds a business proposal to be profitable, it can invest in that idea.

“Time value of money is certainly considered by the VCs. They will not invest unless the expected rate of return is greater than that of alternative sources of investment or the market interest rate.”

He said that in Bangladesh, the source of fund of venture capitalists is a big challenge. “Borrowing fund from banks and financial institutions is not a desirable option because of the higher cost of fund. Besides, there are large risks associated with SMEs and equity investments accordingly.”

Prof Hussain said that VC does not mean only an investment in the form of equity to limited companies. VC is a risk capital and depending on the structure of the entity, the product may be in the modified form of equity without collateral.

The venture capitalists need the policy and regulation assistance in line with the modified equity of investment or quasi equity model like revenue sharing for proprietorship or partnership to emerge SMEs and secure the investment, he added.

Speaking on the occasion, Shameem Ahsan, Chairman of Venture Capital and Private Equity Association of Bangladesh (VCPEAB) said that there are number of problems regarding VCs in Bangladesh.

“There is no regulations that secure the investment of VC firms. New businesses generally do not have property, equipment, or collateral to secure the investment. Thereby, the high risk of investment deters the establishment and active participation of Venture Capitalists.”

Also, Shameem said, there is still an existing communication gap between venture capitalists and entrepreneurs which needs to be effectively bridged.

While delivering the speech as the chief guest, Zunaid Ahmed Palak, State Minister for the ICT Division said, from the ICT Division, they are thinking of forming a three tier pyramid to build am start-up eco system in Bangladesh.

At the top of the pyramid, there will be innovators who will contribute significantly to take the ICT sector forward. After that, there will be achievers who will have education in ICT and becomes CEO and CFO. At the bottom tier, there will be freelancers, who will be the main driving force of the ICT development.

“We are also thinking of creating a venture capitalist eco-system basing on the three-tier pyramid,” he said.

Shyam Shundar Sikdar, Secretary of the ICT Division, Shushanto Kumar Saha, Director General of Bangaldesh Computer Council (BCC), Bonomali Bhoumik, Director General of ICT Division, Tina Jabeen, Consultant of San Francisco based VC firm CPA, Jamil Azhar, Chairman of the trustee Board of Bangladesh University, Maliha Quadir, CEO of Sohoj.com and Shawkat Hossain, Managing Director of BD Venture Ltd were present among others on the occasion.

Faisal Mahmud