Increased VAT on online sales commissions to put pressure on SME sector: Stakeholders

Highlights

• SMEs fear increased costs, lower sales
• Stakeholders call for reversal of increased VAT
• e-CAB proposes 0% VAT
• SME Foundation demands budget support

Amid the struggles the country's small and medium enterprises (SMEs) have already been facing for a long time, the government's recent decision to increase VAT on commissions from online sales from 5% to 15% has become a new challenge for SME entrepreneurs.

Stakeholders warn this move could negatively affect e-commerce activity and directly impact the SME sector, disproportionately hurting small businesses that rely on digital platforms to reach customers.

Most SMEs in Bangladesh use online platforms to sell their products due to lower entry barriers and wider market access. With the increased VAT, SME entrepreneurs fear a decline in online sales, reduced competitiveness, and rising product prices, ultimately pushing many SMEs into further crisis.

They urged the government to reverse the decision, which they say is not supportive of small businesses and will force them to raise product prices, which will ultimately affect consumers.

The SME Foundation also demanded that the VAT be reverted to its previous rate and has called for direct budgetary allocation to support small businesses.

Speaking to The Business Standard, Maqsuda Khatun, proprietor of Shabab Leather, said, "This VAT hike is not SME-friendly. Policy decisions here are often made without considering the realities faced by cottage, small and medium enterprises (CSMEs)."

She added that SMEs are already navigating a host of challenges, including global economic pressure, political uncertainty, rising raw material costs, limited access to technology, and a shortage of necessary funds. 

"Selling online is already tough for small entrepreneurs like us. We pay VAT on Facebook ads, compete with larger businesses, and often cannot afford physical showrooms. Instead of easing our path, new policies are making it more difficult," she said.

According to the preliminary report of the Economic Census 2024 by the Bangladesh Bureau of Statistics (BBS), a significant number of economic units have reported various challenges. 

Out of a total of 1,18,77,364 economic units, around 75,48,147 units have shared their difficulties. The most commonly reported issue was the unavailability of capital, cited by 86% of respondents. This was followed by lack of easy access to loans (34.41%), infrastructural problems (19%), and rising production costs (9.77%).

Anwar Hossain Chowdhury, managing director of the SME Foundation, told TBS, "Most SME entrepreneurs have not yet developed the capacity for mass production and marketing. Raising VAT at this stage will disproportionately affect them. E-commerce is a key selling tool for SMEs, and any additional burden here will be counterproductive. We recommend keeping the VAT rate at its previous level."

Md Sayed Ali, administrator at e-CAB, said, "Marginal entrepreneurs will be hit hardest. Thousands of our members have grown their businesses from scratch, and if they can't expand, the government too will miss out on potential tax revenues. Instead of restricting their growth, we should enable it. So, we think there should be 0% VAT on online commissions."

He also stated that e-CAB plans to present an economic rationale showing that reducing VAT to zero will not hurt government revenue in the long run. "It will instead promote inclusive growth and expand the tax base," he said.

SME Foundation seeks direct budget allocation

While the upcoming national budget proposes a Tk125 crore allocation to encourage women entrepreneurs and a Tk1,000 crore loan distribution plan targeting 10,000 CSME entrepreneurs, the SME Foundation argues that it receives no direct budget allocation despite playing a key role in SME development.

"We work closely with women entrepreneurs and understand their unique challenges and potential," said Anwar Hossain Chowdhury, calling for a separate budgetary allocation for the foundation.

Fahmida Khatun, executive director of the Centre for Policy Dialogue, emphasised that despite budget allocations, complex procedures often prevent small entrepreneurs from accessing funds. "We need to ensure streamlined access to financial support," she said.

Taskeen Ahmed, president of the Dhaka Chamber of Commerce and Industry, noted that while various tax exemptions are being withdrawn as part of IMF-driven reforms, there's no road map for the CMSME sector. "This sends a negative signal and risks sidelining one of the economy's most vital contributors," he said.