Tax exemptions for key industries to go, sweeping tax hikes planned

Infograph: TBS

Highlights:

• Tax exemptions withdrawn for key Bangladeshi local industries
• VAT, import duties, and corporate taxes set to rise
• Construction, e-commerce, and textile sectors face significant tax hikes
• Consumers expected to bear increased industrial tax burden
• Some sectors receive limited relief and targeted tax exemptions
• Source and turnover taxes adjusted across multiple industries

In a significant fiscal policy shift, the Bangladeshi government is set to withdraw numerous tax exemptions for key local industries in the upcoming national budget. These changes, anticipated to take effect from the next financial year, will substantially increase the tax burden on a wide range of sectors, from manufacturing and construction to e-commerce.

Sources within the Ministry of Finance and the National Board of Revenue (NBR) indicate that industries producing mobile phones, electronics, home appliances, toiletries, LPG cylinders, elevators, refrigerators, air conditioners, and compressors will face steep tax hikes. Locally produced cotton yarn and man-made fiber yarn will also be affected, alongside crucial raw materials used in construction and rebar production.

Construction sector will be hit too

The construction sector, vital for Bangladesh's economic growth, will not be spared. Manufacturers of duplex boards, coated paper, and cement sheets face higher VAT rates. Construction companies themselves are bracing for a VAT increase from the current 7.5% to 10%, a move projected to generate an additional Tk4 thousand crore in revenue.

The digital economy, particularly online product sales, is set to see a threefold increase in commission VAT, rising from 5% to 15%. This significant hike is expected to impact e-commerce platforms and sellers across the country.

Import duty concessions to reduce

Beyond VAT increases, the government plans to reduce import duty concessions on raw materials across at least 14 industrial categories. This will lead to higher tariffs at the import stage, further escalating input costs for manufacturers. Additionally, an advance income tax (AIT) of 2% is expected to be imposed on imports of 152 product types and raw materials, adding another layer of financial pressure. Corporate turnover tax rates are also slated for an increase, affecting a broad swathe of industries.

However, the budget will also extend limited tax benefits to certain businesses, including environmentally friendly product manufacturing and electric bike production.

Consumers will be losers

Professor Mustafizur Rahman, distinguished fellow at the Centre for Policy Dialogue, cautioned that these proposed VAT and tax hikes would increase pressure on industries, which would inevitably pass the burden onto consumers. "This will result in higher tax costs for them," he told The Business Standard. He also noted pressure to reduce tax rebate benefits for industries that have long enjoyed concessionary rates. To mitigate the negative impact, Rahman emphasised the need to focus on lowering the cost of doing business and improving logistics services.

The Finance Minister is expected to officially announce the budget and these tax measures on June 2nd, when the budget ordinance is also likely to be passed. The government aims to raise an additional Tk40,000 crore through these enhanced taxes and VAT in the coming fiscal year, targeting a total revenue collection of nearly Tk5 lakh crore.

Key sectors facing pressure

The textile industry faces some of the most concerning changes. Currently, local manufacturers of cotton yarn and man-made fiber yarn pay VAT at Tk3 per kilogram, which may rise to Tk5. Crucially, longstanding zero tax benefits on cotton imports are set to be withdrawn, replaced by a 2% advance income tax on imports. Furthermore, the corporate tax rate for the textile sector, presently at a concessionary 15%, may increase to a standard rate between 22.5% and 27.5%.

Khorshed Alam, chairman of Little Star Spinning Mills Limited in Savar, expressed grave concerns. "We are struggling to keep operations afloat amid a severe gas crisis. My mill currently runs at just 30% capacity due to shortages. Increasing VAT on yarn will likely force shutdowns," he told The Business Standard. Alam highlighted that while exports remain VAT-free, local weavers, who serve lower-income consumers, face rising VAT costs, pushing up overall clothing prices.

Other affected sectors include hardware manufacturers producing screws, nuts, bolts, electric line fittings, and pole hardware, who could see VAT rise from 5% to 7.5%. Online streaming and OTT platforms may encounter a new 10% supplementary duty.

Mobile phone manufacturing faces VAT increases from the current 2%, 5%, and 7.5% slabs to 4%, 7.5%, and 10% respectively, though these new rates will apply only for two years. Elevator manufacturers and producers of small appliances such as blenders, juicers, irons, rice cookers, and electric kettles will retain a 5% VAT until 2030. Manufacturers of washing machines, microwave ovens, electric ovens, and LPG cylinders may also see VAT increases. Soap and shampoo raw materials (LABSA, SLES) are expected to enjoy a 5% VAT exemption next year, but higher rates might return later.

Cigarette manufacturers will face a doubling of turnover tax from 3% to 5%, and the supplementary duty on imported cigarette paper may surge from 150% to 300%. Meanwhile, electric bike makers will lose their VAT exemption, now facing a flat 15% VAT. The same applies to manufacturers of refrigerators, freezers, air conditioners, and compressors.

Targeted tax relief measures

Despite the overall increase in taxes, some sectors and taxpayers may benefit from relief and concessions. Marginal taxpayers could see a modest increase in the deposit exemption threshold in banks from Tk100,000 to Tk300,000 per account annually, offering a small relief.

Value-added tax exemptions are likely to be extended for liquefied natural gas (LNG) imports, shifting VAT application from import to supply stages to maintain government revenue neutrality. Environmentally friendly industries, particularly producers of electric bikes and biodegradable products like plates made from leaves, flowers, and stalks, may receive preferential tax treatment.

Other exemptions under consideration include sanitary napkins, packaged liquid milk, ballpoint pens, and aircraft lease rentals for passenger transport. The supplementary duty on ice cream might be halved from 10% to 5%. Raw materials for sanitary napkins and diapers, hospital bed manufacturing equipment, and active pharmaceutical ingredient (API) production could retain VAT exemption until 2030.

Source tax and corporate tax adjustments

A 2% source tax may be introduced on imports of over 150 product types, including cotton, likely raising product prices. Cigarette manufacturers' source tax could increase from 3% to 5%, and the turnover-based source tax for many companies may rise from 0.6% to 1%.

Conversely, some sectors will see reductions. Mobile phone companies may enjoy lower source tax rates, while contractors' tax might fall from 7% to 5%. The agriculture sector could benefit from a halving of source tax on 27 products such as paddy, wheat, and potatoes from 1% to 0.5%.

Land registration taxes may decrease from 4%, 6%, and 8% to 3%, 4%, and 6%, respectively. The recycling industry may see raw material tax cuts from 3% to 1.5%, and gas distributors could receive source tax reductions from 2% to 0.6%. Oil refinery companies might see a drop from 2% to 1.5%. Internet service taxes may be cut from 10% to 5%, electricity bill payments from 6% to 4%, and mobile operator taxes from 2% to 1.5%.

An anonymous NBR official explained that these adjustments aim to address situations where companies currently pay source tax exceeding their actual profits, leading to significant refunds. "To address this, the government is recalculating sector-wise profit margins and adjusting source tax accordingly, which has led to increases for some and decreases for others," he said.