Will higher taxes drive up RMG's yarn import reliance?

Bangladesh's vital spinning and textile mills are warning of a severe crisis as new fiscal measures in the FY26 budget threaten to erode their competitiveness and force garment exporters to increasingly rely on imported yarn and fabrics. Industry leaders fear these changes could weaken the country's largest export sector.

The proposed budget introduces two significant changes, sparking alarm: a 2% Advance Income Tax (AIT) on cotton imports, the primary raw material for spinning, and a 67% hike in Value-Added Tax (VAT) on locally produced yarn, increasing it from Tk3 to Tk5 per kilogram.

A 'suicidal decision' for a struggling industry

The Bangladesh Textile Mills Association (BTMA) has vehemently opposed these measures. In a letter to the National Board of Revenue (NBR) chairman on 1 July, BTMA President Showkat Aziz Russell branded the new taxes a "suicidal decision."

Infograhics: TBS

"The government has done this without any consultation with the stakeholders," Russell wrote, adding that the sector is already reeling from high energy prices, reduced cash incentives, and limited access to low-cost funds under the Export Development Fund (EDF).

With a massive $23 billion invested in the textile sector, industry insiders fear that if sourcing shifts to foreign suppliers, many spinning and weaving mills will face severe viability issues. 

"The new taxes will push mills toward a survival crisis," Russell warned. "We fear this could lead to a slow dismantling of the backbone that supports the country's largest export sector."

Local mills priced out as imports become cheaper

The direct consequence of these new taxes, according to industry experts, will be a significant increase in the cost of locally produced yarn, making imports more attractive for garment manufacturers.

Fakir Kamruzzaman Nahid, managing director of Fakir Fashions Ltd, a major garment exporter with approximately $600 million in annual RMG exports, illustrates the grim reality. Just two years ago, his company sourced 50% of its yarn locally; now, it's a mere 25%.

"In India, the price of yarn per kilogram is Tk285 in Bangladeshi currency," Nahid explained. "Including import costs, the total comes to around Tk295 per kg by the time it reaches our warehouse. But sourcing from local mills costs around Tk330 per kg. So, under what logic would we buy from local mills?"

He anticipates a further rise in imports if the new taxes are implemented. "If the new taxes drive yarn prices even higher, we may increase imports instead of buying from local mills," he stated.

Saleudh Zaman Khan, managing director of NZ Textiles Ltd, a leading textile mill supplying yarn to exporters, estimates that the 2% AIT on cotton imports alone will increase their annual costs by nearly Tk30 crore.

"For standard yarn, such as 7-count, the tax alone could raise the price by over Tk5 per kg," Saleudh said. "On the other hand, those selling to local entrepreneurs rather than exporters will have to pay an additional Tk2 VAT per kg, which would push their cost up by more than Tk7 per kg. As a result, their yarn prices will rise even more."

NBR's assurance vs. industry reality

NBR Chairman Abdur Rahman Khan, however, maintains that the increase in AIT should not lead to higher yarn prices. "The imposed tax can be adjusted at the end of the year based on the importer's profit calculations. So, the AIT should not lead to a rise in yarn prices," he told The Business Standard, adding that the NBR would issue a clarification in this regard soon.

This assurance offers little comfort to industry players. Saleudh Zaman Khan countered, "In reality, getting a refund from the tax department in Bangladesh is nearly impossible. So we will be left with no choice but to increase yarn prices."

While garment exporters can import raw materials duty-free, AIT, though theoretically adjustable, rarely sees practical refunds, say entrepreneurs.

Consumer impact and rising smuggling concerns

The repercussions extend beyond the industry to the everyday consumer. Textile mill owners who supply the local market warn that the new tax and VAT will inevitably lead to higher garment prices, directly affecting the cost of clothing for citizens.

"The prices of all garments will increase," said Khorshed Alam, chairman of Little Star Spinning Mills Ltd, who sells yarn for the local market. "However, clothing for low-income people—especially three-piece sets, lungis, vests, and towels—will become more expensive. This will put extra pressure on them."

Beyond price hikes, the industry also fears a surge in illegal activities. The widening price gap between local and imported yarn due to the new taxes is likely to fuel an increase in smuggling from neighbouring India and the sale of duty-free yarn and fabric meant for export in the open market.

Bangladesh's policies vs. India's incentives

Adding to Bangladesh's woes, industry leaders highlight a stark contrast in policy with neighbouring India, a key competitor. While Bangladesh has introduced policies that have increased pressure on its textile and garment sectors over the past three years, India has been providing various incentives to its textile mill owners.

Saleudh Zaman noted that energy prices in Bangladesh have tripled in the past five years, the Export Development Fund (EDF) has seen reduced low-interest loans with current rates at 14%, and labour wages have increased by 70%. Additionally, incentives have dropped from 4% to 1%, further burdening local producers.

In contrast, India offers a subsidy of 2 rupees per unit of electricity consumed for its textile entrepreneurs, capital subsidies as grants up to 40% from various states, and a 3.88% incentive on export value under the RoDTEP (Remission of Duties and Taxes on Exported Products) scheme.

"Thanks to these benefits, their entrepreneurs' production costs are decreasing, while our costs are increasing due to withdrawn benefits and new taxes, putting us at a competitive disadvantage," Saleudh lamented, alleging that "a vested quarter in the country is deliberately trying to destroy the textile sector through these tactics."

Looming crisis

Bangladesh's textile mills currently possess the capacity to supply 100% of the raw materials for knitwear and approximately 60% of the yarn needed for woven garments, following some $3 billion in new investments over the past four years. 

However, the surge in yarn imports by 39% in 2024, as per NBR data, underscores the growing reliance on foreign supplies. Without a policy reversal, the future of Bangladesh's textile sector appears increasingly precarious.