Export cash incentive cuts, VAT on mobile handsets planned

In preparation for the post-LDC era beginning in 2026, when cash incentives will no longer be permitted under WTO rules, the government has decided to gradually reduce cash incentives for exporters.

There is a proposal in principle to decrease cash incentives for exports by a range of 0.5 to 2 percentage points starting in the next fiscal year.

The government has also decided to impose value-added tax (VAT) on mobile handsets manufactured and assembled locally in the next fiscal year, commerce ministry officials said.

Infographic: TBS

A senior commerce ministry official familiar with the matter said, "Cash incentives will be phased out gradually to adjust to the WTO rules."

He said this strategic approach has been taken to ensure a smooth transition while continuing to support key sectors, including the readymade garment industry, which has significantly benefited from cash incentives over the past three decades.

In spite of this reduction move, certain sectors, such as man-made fibre, may still be included for cash incentives to facilitate foreign currency earnings through exports.

As part of efforts to increase revenue by cutting tax facilities to local industries which already gained strength over the past few years, the government has planned to impose a 5% VAT on locally-manufactured phones and increase that on locally-assembled ones to 5-10% from the existing 3-5% in the upcoming budget.

Finance Division officials said the finance minister, in his budget speech, may indicate a reset of the incentives. However, the Bangladesh Bank will officially announce the rate of cash incentives for the new fiscal year in the form of a circular in September.

Despite phasing out incentives, the Prime Minister's Office has already announced that the government will support exporters under different names even after transitioning to a developing country.

The commerce ministry is also reviewing how various developing countries, such as Vietnam, are subsidising its export sectors, said the officials.

In the current budget, the government has allocated Tk9,500 crore for export incentives or cash assistance. If the export amount increases, the subsidy amount will also increase.

According to data from the Bangladesh Bank, Tk6,069 crore has been disbursed in this sector until April.

A major share of cash assistance goes to the owners of the garment manufacturing industry, the country's main export sector.

In a pre-budget discussion with the finance ministry, Faruque Hassan, president of the Bangladesh Garment Manufacturers and Exporters Association, proposed increasing the incentive rate until the country's LDC graduation.

He said Bangladesh will no longer be able to provide cash incentives for exports after its graduation in 2026. Therefore, the incentive rate should be further increased during the period from now until LDC graduation to enhance the capacity of the readymade garment industry.

The government has been providing incentives or cash assistance for almost two and a half decades to encourage the country's exports. The list of products entitled to cash assistance has gradually expanded. In the current fiscal year, the government is providing cash assistance for the exports of goods from 43 sectors.

The government provides cash assistance ranging from a minimum of 1% to a maximum of 20% of export earnings. In the fiscal 2021-22, for the last time, the government included export goods from four new sectors.

Around 85% of the country's export earnings come from the garment sector. The government provides 4% cash assistance in this sector. Additionally, 4% cash assistance is also given as an additional facility to all small and medium industries, including the readymade garments sector, such as knits, knitwear, and sweaters.

The government is also providing 4% cash assistance for new products or market expansion. Special cash support of 2% in addition to 4% is given for textile exporters in the euro area. In addition, the government provides 1% special cash assistance to the readymade garment sector.

Export incentives are planned for new sectors  

Meanwhile, a meeting on export incentives or cash assistance for the fiscal 2023-24 was held at the commerce ministry on Tuesday.

A preliminary decision was made in the meeting to provide cash assistance to man made fibre or non-cotton garments, sodium silicate, crude oil produced from rice husk, tableware, tiles and sanitary ware.

In the meeting, the Bangladesh Tariff and Trade Commission was given the task of reviewing the rationale for providing cash assistance to these products. 

Mohammad Hatem, executive president of the Bangladesh Knitwear Manufacturers and Exporters Association, who was present in the meeting, told TBS that the government has decided to provide cash assistance to non-cotton garments. Apart from this, the Tariff Commission has been tasked with examining whether cash assistance can be provided in three other sectors.

Besides, in the meeting, the commerce ministry also agreed to give an additional 2% incentive to exports to EU countries such as Poland and Sweden in addition to the regular incentives. The Tariff Commission will also review this issue.

Mobile phones might get costlier yet again

The new VAT on mobile handsets is likely to be reflected on the finance bill, which will be tabled in the parliament on 1 June during the presentation of the proposed budget for FY24, sources at the finance ministry said.

Earlier in 2022, the government imposed 5% VAT on handsets at the trading stage which resulted in a hike in retail prices.

Industry insiders said if the changes in taxes on mobile phones are made final, the production costs go up and consumers, who are already burdened with higher inflation, will have to pay higher for the essential item.

"If VAT on handsets goes up, this burden will ultimately shift to consumers. It will reduce sales of mobile handsets, which may have a negative impact on investment," Snehasish Barua, a tax expert and partner of Snehasish Mahmud & Company Limited, told The Business Standard.

The country has been promoting local mobile phone manufacturers and assemblers for the last four years with tax facilities to help them grow fast. 

The possibility of lifting the benefits given to the handsets sector as well as others has also been discussed in recent pre-budget meetings between the revenue board and stakeholders. The NBR officials believe that facilities to the sectors that have already gained capacity should be cut to increase the tax-GDP ratio.

The International Monetary Fund (IMF) early this year approved a $4.7 billion loan to Bangladesh, as a condition of which, revenue contribution to GDP is to be increased by 0.5% in the next financial year.

Bangladesh was completely import-dependent for mobile phones until 2015. Later, assembly of handsets began. In 2018 and 2019, huge investments came in this sector.

Currently, the country has 14 mobile phone factories, including that of Samsung, Oppo, Vivo, Techno, Symphony, Walton, Lava, Xiaomi, Nokia and Realme. Of them, Walton is completely manufacturing handsets and the rest are assembling.

Overall taxes on local mobile handsets are currently 18-22% and it is 57% in the case of imported ones.

Mohammed Mesbah Uddin, chief marketing officer of Fair Group which manufactures Samsung phones, told TBS that local companies are now meeting 97% of the demand.

"Last year, after the imposition of VAT at the trading stage, the sale of sets has dropped drastically. The new imposition of VAT at the production stage will decrease it further," he added.

Mentioning that the sector received a good amount of investment in 2021-22, Mesbah Uddin feared that the investments will be at risk and foreign investment will be discouraged.

He said mobile phone handset sales in the country (including smart and feature phone sets) were around 3.5 crore in FY22, which might come down to 2 crore this year if VAT is increased, he added.

The country sees sales of mobile phones worth Tk15,000 crore per year, while investment in this sector is more than Tk5,000 crore, insiders said.