E-commerce sector worried over VAT tripling

E-commerce businesses, already struggling with weak sales and dwindling capital, have expressed concern over the proposed tripling of value-added tax (VAT), which they say will erode their razor-thin profit margins.

The proposed budget for the 2025-26 fiscal year has raised the VAT on the margin of online sellers to 15% from 5%.

"We urge the government to reconsider the decision as it will be a big blow to the struggling sector, which has the potential to create several million new jobs, if taken proper care," Mohammad Sahab Uddin, former senior vice president of the E-commerce Association of Bangladesh, told TBS yesterday.

"The sharp VAT hike will further shrink the already narrow gross profit margins of online businesses. They cannot afford this burden, and as a result, another round of price hikes for online products is likely," he said.

With the high inflation hurting demand, online sales might falter, hurting tens of thousands of young e-commerce entrepreneurs and workers.

The higher costs negatively affect the viability of online businesses, according to Daraz Bangladesh, the largest e-commerce platform in the country. 

Around 95% of its sellers are small and medium enterprises, and they will be disproportionately harmed by the VAT hike.

The surged VAT presents a significant obstacle to e-commerce growth in the country and hinders our progress toward global competitiveness. Furthermore, considering the significant foreign investment in this sector in recent years, this change may threaten future investment, the company said.

"The VAT hike will be taxing a sector before it stands strong," said startup founder Waseem Alim, CEO of online grocery pioneer Chaldal dotcom.

According to him, e-commerce turnover is transparent due to its electronic data. At the beginning of mass online commerce adoption, e-commerce was mainly competing with the brick-and-mortar shops, barely under the radar of the tax authority, on the other hand.

Bangladesh significantly lags behind its peer economies in digital commerce that saves resources, time and money alongside boosting economic activities.

"Taking the VAT to the highest possible level is a signal to the startup founders and investors who do not bother investing in the already resource-starved sector operating in an economy with shrinking purchasing power, with almost no access to risk capital," Waseem Alim added.

Why e-commerce matters

"Bangladesh is infrastructure-poor, and e-commerce enables optimal use of the limited infrastructure," said Alim.

For instance, a delivery bike serving 50 customers a day means 50 fewer people on the streets.

"If done right, e-commerce could reduce pressure on urban infrastructure by 20% or more," he added. "That's not just a theoretical benefit — it's an efficiency that countries like China and Indonesia are already leveraging."

He pointed out that Bangladeshi startups, already facing a severe shortage of venture capital, cannot afford to burn through their limited resources just to survive and grow.

Alim said, "Digital businesses deserve state support — one way or another. E-commerce adoption doesn't happen magically. Countries that succeeded in this space invested heavily — between $70 and $200 per capita — in digital logistics, payment infrastructure, and fulfilment systems."

"In Bangladesh, the investment is less than $3 per capita. Instead of helping entrepreneurs bridge that gap, the proposed VAT hike seems to be widening it," he added.