LNG imports get VAT relief to ease mounting gas crisis

As industries struggle with an acute gas shortage, the proposed budget for FY26 has sparked cautious optimism by exempting liquefied natural gas (LNG) imports from the 15% value added tax (VAT). 

This move is expected to ease significant energy costs for both power generation and industrial output.

The budget reveals a clear policy shift towards increasing domestic gas supply and reducing the power sector's subsidy burden. 

Finance Adviser Salehuddin Ahmed announced a Tk22,520 crore allocation for the Ministry of Power, Energy and Mineral Resources for FY26, marking a Tk7,797 crore reduction from the previous fiscal year. 

Of this, the Power Division will receive Tk20,342 crore, while the Energy and Mineral Resources Division has seen its share doubled to Tk2,178 crore from Tk1,053 crore in the revised FY25 allocation.

"The government is prioritising resolving the ongoing gas crisis by bolstering domestic production," said Salehuddin Ahmed in his budget speech today. 

"The power sector's subsidy burden currently stands at 1% of GDP. If this plan is implemented, it could save over Tk11,000 crore," he added.

The adviser noted that the government would also review existing power purchase agreements and has already launched energy audits to reduce power generation costs.

For years, high taxes have inflated LNG import costs. Currently, the National Board of Revenue imposes a 15% VAT at both import and consumer levels, alongside a 2% advance tax and a 5% source tax, significantly raising prices.

Petrobangla estimates that removing this duplicate VAT and the advance tax could save Tk6,000-Tk6,500 crore – a sum that matches the government's annual LNG subsidy bill.

Energy Adviser Muhammad Fouzul Kabir Khan told The Business Standard, "We are giving lots of subsidies in the gas sector. The money we would save from the VAT cut will help to import more LNG to meet the growing demand of gas in industry and the power sector."

However, he added a note of caution. "If international LNG prices stay favourable, we could gradually phase out subsidies. Otherwise, the VAT cut alone won't be enough."

Boosting local gas production

The budget also outlines an ambitious plan to boost local gas production, aiming to lessen dependence on expensive imports. 

"We plan to supply 648 million cubic feet of gas per day (mmcfd) from domestic sources this year and extract an additional 1,500mmcfd by 2028," said Salehuddin Ahmed.

To achieve this, Bapex, the state-owned exploration company, will undertake a 270km geological survey, a 700km 2D seismic survey, and a 700 square km 3D seismic survey between FY26 and FY28.

Salehudding also reiterated plans to generate 30% of electricity from renewable sources by 2040. In the short term, a target of 3,400MW from clean energy sources has been set for 2028.

The twin focus on cutting power subsidies and ramping up local gas output comes as industries continue to grapple with unreliable gas supply and costly electricity generation. 

While challenges remain, especially with fluctuating global LNG prices, the VAT exemption and domestic gas exploration efforts represent a significant shift in Bangladesh's energy policy – aiming to secure affordable, reliable, and sustainable energy for the future.