SME Foundation proposes preferential tax regime for small businesses

The SME Foundation has proposed the introduction of a comprehensive Preferential Tax Regime (PTR) for the country's micro, small and medium enterprises (MSMEs).

The proposal has been submitted to the National Board of Revenue (NBR) ahead of the 2026-27 national budget.

Mohammad Jahangir Hossain, General Manager of the SME Foundation, told TBS that existing tax benefits for the SME sector relating to income tax, VAT and customs duties are currently scattered across different laws and statutory regulatory orders (SROs).

He said that bringing these incentives together under a single Preferential Tax Regime would make the system easier for entrepreneurs to understand and follow.

"We want all tax and VAT benefits relevant to SMEs to be brought under one framework. This will help entrepreneurs understand their tax obligations without unnecessary complexity," he said.

What the PTR proposal includes

The SME Foundation has recommended issuing a separate law or SRO titled Preferential Tax Regime for MSMEs, creating a distinct taxation framework for the sector.

It said any amendments to the law or rules should be made during a specific period each year in order to ensure policy stability.

The proposed separate tax structure for MSMEs includes partial or full exemptions, for a fixed period, on taxes and VAT related to raw material imports, exports, withholding tax and local sales.

It also proposes lower tax, VAT and duty rates over the following years to improve competitiveness, along with minimum tax exemptions for the first 10 years for new SMEs.

Another recommendation is the introduction of a simplified annual VAT return based on turnover.

The foundation also urged the NBR to adopt a rational and standardised definition of MSMEs in line with the National Industrial Policy 2022, and incorporate it into income tax, VAT and customs laws so that the sector can be properly identified and supported through tax administration.

Call for a unified framework

Bangladesh currently does not have a full-fledged PTR framework for SMEs. Although there are some scattered incentives in tax, VAT and customs laws, these often create confusion for entrepreneurs in practice.

Jahangir Hossain said small entrepreneurs generally do not maintain complete accounting records, which often creates difficulties in dealing with tax authorities.

"For this reason, a simple system is necessary," he said.

He added that help desks or support centres could be established at the upazila level to assist SME entrepreneurs with bookkeeping and tax compliance.

The proposal also suggests involving university students and professional bodies in the support process.

SMEs dominate Bangladesh economy

According to the Economic Census 2024 conducted by the Bangladesh Bureau of Statistics (BBS), the country currently has 11.70 million economic units, employing around 30.6 million people directly and indirectly.

The census shows that CMSMEs account for 99.92% of all economic units and 77.87% of total employment in the country.

By business size, micro and cottage industries dominate the economy.

There are 6.63 million micro enterprises, accounting for 56.67% of total units, while 4.53 million cottage industries make up 38.74%.

Small industries represent 4.20%, medium industries 0.31%, and large industries only 0.08%.

Need for a tolerable tax system

Jahangir Hossain also said SME entrepreneurs are under pressure due to the current global situation, energy shortages and rising production costs.

"We want a tolerable tax structure for at least 10 years so they can survive and gradually come under the tax net," he said.

According to the SME Foundation, a coordinated PTR would improve transparency in the tax system, help bring informal businesses into the formal economy, and create new momentum for industrialisation.

Other proposals

The foundation also proposed allowing manufacturing SMEs with annual turnover of up to Tk5 crore to submit tax returns every six months instead of monthly.

For businesses with annual turnover between Tk1 crore and Tk5 crore, it recommended introducing a slab-based fixed tax.

It further proposed reducing withholding tax rates to 2% as a single rate for supply of industrial raw materials and other goods, replacing the current rates of 3% on industrial raw material supply and 5% on consumer goods supply.

Entrepreneurs seek grace period

Esrat Jahan Chowdhury, Founder of TULIKA, a jute goods manufacturer and exporter, told TBS that high tax pressure from the beginning makes it difficult for new entrepreneurs to expand their businesses.

"If new businesses face multiple taxes and VAT obligations from the start, entrepreneurs struggle to decide whether to grow the business or simply comply with regulations. Many become discouraged," she said.

She added that a grace period is essential for new entrepreneurs so they can gradually organise themselves.

Esrat, who received the Best Micro Entrepreneur of the Year award from the SME Foundation in 2022, also said monthly VAT return filing is extremely difficult for small entrepreneurs.

"In many cases, delays result in fines, and informal costs also arise. If returns could be submitted every six months, it would be far more business-friendly," she said.