VAT waiver planned for potential recycled clothing backward industry

To encourage garment manufacturing from recycled fibres, the government is considering withdrawing the existing 7.5% value-added tax (VAT) on the collection of textile waste by spinning mills in the next fiscal year.

The concept of circular fashion, which primarily relies on recycled fibres, has gained significant attention globally in recent years, including in Bangladesh.

The Bangladesh Garment Manufacturers and Exporters Association (BGMEA) had previously requested the National Board of Revenue (NBR) to withdraw VAT and other taxes imposed on such waste.

Currently, the market for this type of waste in the country is about $400 million.

BGMEA Vice President Shahidullah Azim welcomed this initiative.

"It is possible to manufacture $5 billion worth of clothing from recycled fibres. As a result, a huge amount of foreign exchange spent on yarn and fabrics could be saved," he told The Business Standard.

Additionally, the waste generated during the spinning of fabrics from man-made fibres is also going to be exempted from VAT at the production stage.

According to finance ministry officials involved in budget formation, Finance Minister AHM Mustafa Kamal may propose such measures through the finance bill in the upcoming national budget to support the recycling industry as a backward linkage of the garment sector.

Bangladesh, the world's second largest garment exporter, is also second in cotton imports. Around 75% of clothes in Bangladesh are made of cotton.

According to research conducted by the Circular Fashion Partnership, a cross-sectorial project led by Global Fashion Agenda, in 2019, Bangladesh produced approximately 5,77,000 tonnes of waste from the readymade garment industry and fabric mills, of which 2,50,000 tonnes, accounting for almost half of the total, were 100% pure cotton waste.

Based on the findings of the Circular Fashion Partnership, if 100% cotton waste was recycled within Bangladesh, imports could decrease by around 15%.

According to sources in the National Board of Revenue (NBR), there is currently a 7.5% VAT imposed on the sale of waste cotton and fabric waste. The same VAT rate is applicable to man-made fibre fabric waste as well.

According to industry insiders, several big companies – including Beximco Limited and DBL Group – have already invested in the country with the aim of producing recycled fibre.

DBL Group started producing recycled fibre two years ago.

MA Rahim Feroz, vice chairman of DBL Group, told TBS, "The whole world is now encouraging the production of recycled clothing. In this case, if the government exempts VAT, it will have a positive impact on setting up industries."

This initiative is part of a broader government plan to grant tax exemptions to emerging and promising industries, while also considering reducing tax benefits for industries that have already gained some strength.

VAT exemptions for several local industrial sectors are set to expire this year. But the government plans to extend the tax benefits for some home appliances, including blenders, juicers, and pressure cookers, for another two years. Washing machines, microwave ovens, and electric ovens can also avail themselves of the same benefits.

The tax exemption facility for ICT and computers is likely to be extended for another three years.

The VAT-free threshold for the production of handmade biscuits is being raised from Tk150 to Tk200, and for cakes, it is being raised from Tk250 to Tk300. As a result, these producers will receive some benefits.

Production of coconut copra waste used as animal feed may also be exempted from VAT. Apart from this, VAT exemption can come for the production of optical fibre cables and anti-malaria and anti-tuberculosis drugs.

Additionally, there is a possibility of withdrawing the advance tax on the import of agricultural machinery such as paddy transplanters, dryers, sprayer machines, and potato planters. Moreover, advance tax may also be withdrawn on the import of aircraft engines, turbo engines, aircraft machinery, various types of containers, and solar-powered water distillation plants used for purifying sea saltwater.

To further encourage the local elevator and escalator industry, the duty on the import of elevators may be increased to 15% from the existing 5% as part of safeguarding them.

Two or three big companies are likely to greatly benefit from this. But by being dependent on imports, construction costs may increase.

The total tax incidence on imports may be increased from the current 15% to 43% in order to protect local cashew nut shelled producers.

The electric switch and socket manufacturing industry may continue to benefit from the reduced rate on raw material imports.

However, to safeguard local power equipment and parts manufacturers, the import facility for certain types of PHC, SPC, PC pile, and SPC pole at a reduced rate may be cancelled.

In order to protect the local industry, there is a possibility of increasing the import duty on software from 5% to 25% and imposing a 15% VAT. Additionally, the existing customs duty on the import of electric panels may be raised from 1% to 10%.

The government is also likely to withdraw the import VAT on ethylene glycol, which is used as a raw material in the production of polyester fibres and for antifreeze formulations. This list also includes Terephthalic acid and hot-rolled stainless steel in coils.