Apparel exports: Government to reduce source tax on cash incentives

The government is set to give a tax waiver to prop up the country's apparel export sector, which has experienced negative growth in the first six months of the current fiscal year.

The authorities are likely to lower the source tax on cash incentives from 10 percent to 5 percent as part of the government's initiative to promote the readymade garment (RMG) industry.

The waiver is, however, unlikely to leave a major impact as RMG exporters as a whole will be relieved from paying an estimated Tk365 crore.

Finance ministry sources told The Business Standard that the government is likely to issue a gazette notification in this regard within the next week.

The sources said Md Mosharraf Hossain Bhuiyan, former chairman of the National Board of Revenue (NBR), had signed the gazette notification and sent it to the Bangladesh Government Press for immediate publication.

The authorities took the step based on the decisions made at a tripartite meeting of garment manufacturers, the commerce ministry and the NBR headed by the commerce minister on November 6 last year.

The same month, Prime Minister Sheikh Hasina had tasked Commerce Minister Tipu Munshi with identifying the reasons behind the declining export growth, the problems in the garment industry, and take steps to resolve those issues.

In a recent letter, the Internal Resources Division (IRD) of the Ministry of Finance informed the prime minister that the government has allocated Tk7,325 crore for the cash incentives. At the same time, the authorities also estimated that Tk730 crore would be realised from this sector as 10 percent tax at source in the fiscal year 2019-20.

If the authorities pay heed to the apparel exporters' demands to slash the rate of source tax to 3 percent on cash incentives, then the income tax realisation target will not be fulfilled in the current fiscal year, the letter mentioned.

The government had fixed Tk325,600 crore as the NBR revenue target for the fiscal year 2019-20, of it Tk115,588.16 crore from income tax, according to the revenue board. The source taxes make up a paltry 0.22 percent of the total revenue target.

The IRD, however, recommended that the government may reduce the tax rate to 5 percent accepting the request of the Bangladesh Garment Manufacturers and Exporters Association (BGMEA), which will be effective from the date of publishing the gazette notification, the letter mentioned.

Sources from the Prime Minister's Office said they received the letter last month as a summary of justification to reduce the rate of tax at source on cash incentives on apparel export.

When speaking with The Business Standard, BGMEA President Rubana Huq welcomed the government initiative.

But she also said, "Any kind of tax on incentives is punitive and previously the rate was only 3 percent. We had demanded zero percent tax because we have falling exports. There should not be any tax on incentives.

"That defeats the government's purpose to promote exporters."

Mohammad Hatem, first vice-president of the Bangladesh Knitwear Manufactures and Exporters Association (BKMEA), said, "The country's apparel industry is going through a tough time, which was evident in the closure of some factories in recent times.

"We need government policy support immediately, but we do not understand the bureaucratic red-tape prevalent in this issue."

Asked how the sector would benefit from such a small waiver, Hatem said the impact is felt at a personal level.

"Take for example a small importer who receives Tk1 crore incentive. If he has to pay Tk10 lakh from that as tax, it can become a significant burden," he said.

Bangladesh's overall export earnings in the first half of the current fiscal year have declined by around 6 percent to $19.32 billion compared to that in the same period last fiscal year.

During July-December in 2018-19, export earnings were $20.5 billion, according to the Export Promotion Bureau.

The apparel export earnings also declined by more than 6 percent to $16.02 billion in the first half of the current fiscal year, compared to that in the same period last fiscal year.

The readymade garments sector alone accounted for $34.13 billion in the last fiscal year, which was over 84 percent of the total export of $40.53 billion.