Refrigerators, ACs to get costlier this summer as NBR plans VAT hike

Just six months after doubling corporate tax on refrigerator and air-conditioner manufacturers, the government is set to raise the value-added tax on these products, cranking up the pressure on consumers as the scorching summer intensifies and the economy remains under strain.

Currently, refrigerators and air conditioners are taxed at a reduced 7.5% VAT rate at the manufacturing stage, a policy that the National Board of Revenue (NBR) now plans to increase to the standard 15%.

Similarly, VAT on mobile phone manufacturing, which is currently set at 5% and 7.5%, depending on local value addition, is expected to rise to 7.5% and 10%, respectively. The VAT on battery manufacturing is also likely to double from 7.5%.

Industry investors fear the new VAT hike, if implemented amid ongoing economic challenges such as currency devaluation and high inflation, could dampen sales further and manufacturers will, ultimately, pass on this to consumers.

NBR officials said these proposals will be presented to the finance adviser early next month, with final approval required from him and the chief adviser.

The move comes under pressure from the International Monetary Fund, which has been urging Bangladesh to phase out reduced tax exemptions, they said.

A senior NBR official, speaking on condition of anonymity, said the reduced VAT benefits for refrigerators, freezers, and air conditioners will expire in June.

"There are plans not to extend this exemption, meaning the VAT rate could shift to the standard 15%," the official told The Business Standard.

He added, "The IMF has stressed the need to cut back on VAT exemptions. Besides, these industries have enjoyed tax breaks for over 15 years and are now strong enough to stand on their own."

Since 2009, the government has offered VAT and tax exemptions to promote domestic industries. Until 2019, there was no VAT on refrigerator manufacturing, and VAT exemptions on component imports and local procurement still continue.

These incentives have helped transform Bangladesh's refrigerator market, which now sources nearly 95% of its units domestically.

Potential impact

Earlier in January, corporate income tax on refrigerator, freezer, AC, and compressor companies was raised from 10% to 20%, although these companies were initially given reduced taxes until 2032 through a government order. 

Several companies have since taken the issue to court, where the matter remains pending.

Mohammed Mesbah Uddin, chief marketing officer of Fair Group, said, "Over the past three years, refrigerator sales have seen a degrowth, although air conditioner sales have grown by about 12%. Meanwhile, mobile phone handset sales are expected to drop by nearly 30% this year."

If VAT rates are raised now, it could worsen the situation, he said, adding that this could negatively affect both industries and the broader economy.

According to Mesbah Uddin, consumers currently pay around 10% VAT on refrigerators and air conditioners – 7.5% at the manufacturing stage and 5% at the consumer level. 

"If the manufacturing VAT rises to 15%, the overall VAT burden on consumers would increase by around 5%," he estimated.

However, tax expert Snehasish Barua, managing partner at Snehasish Mahmud and Company, said the refrigerator and AC industries have received support for nearly one and a half decades. 

"They are now largely self-sufficient. It is time for the government to gradually roll back such tax exemptions," he suggested.

Market outlook

Once considered a luxury item, refrigerators have become a common household appliance, fuelled by increased electrification, growing purchasing power, and the availability of affordable locally-made units.

The refrigerator market is now valued at over Tk12,000 crore, with around 33–35 lakh units sold annually, growing steadily at around 10% per year. 

Local and foreign companies such as Walton, Jamuna Electronics, Vision Electronics (PRAN-RFL Group), and Singer Bangladesh dominate the market.

Meanwhile, air conditioner sales reached 6.2 lakh units in FY24, with a compound annual growth rate (CAGR) expected to be around 14%. 

Walton holds the largest share in the country's refrigerator market, though the company declined to comment on the potential VAT increase.

Electro Mart, another leading air conditioner manufacturer, markets its products under the GREE brand. Nurul Afsar, the company's deputy managing director, told TBS, "Currently, the price of a one-ton GREE AC is Tk59,200. If the VAT rate is doubled, consumers will face an additional Tk3,000 per unit."

He further said, "We had anticipated a rise in sales this year, but due to the relatively mild heat and a sluggish economic climate, sales have been slower than expected."

Air conditioners are no longer a luxury but a necessity, Afsar said, noting, "If the VAT increase were implemented gradually rather than all at once, it would be more manageable for consumers."

Mobile market struggles

The VAT burden on mobile handset manufacturers has been steadily increasing over the past three years, after a period of exemption. 

Recently, the NBR imposed a 5% VAT on manufacturers producing at least two local components and a 7.5% VAT on those importing entire components for mobile production. Now, VAT could rise by another 2.5% for both categories. 

Rezwanul Hoque, CEO of Transsion Bangladesh (a subsidiary of Transsion Holdings, which owns brands like TECNO, itel, and Infinix), told TBS, "Currently, the size of the grey market for mobile phones is nearly 50%. If VAT is increased without addressing the grey market, the price gap will widen, pushing consumers towards illegal imports."

He added, "Consumers will be forced to pay higher prices for locally manufactured handsets, while the grey market will flourish due to the price disparity." 

He further projected that smartphone sales, which reached approximately 7.9 million units in 2024, could drop by 20% this year due to the VAT hike and other factors.

Despite the pressures from the IMF to increase revenue, Rezwanul Hoque cautioned that raising VAT without curbing the grey market will not boost government revenue.

Fair Group's Mesbah Uddin warned that continuously raising taxes without addressing the grey market could threaten the local industry, potentially leading to further declines in sales.