Light engineering set to forge ahead faster, but problems remain

People linked to light engineering have warmly hailed the proposed budget as it has offered light engineering machine parts manufacturers a 10-year tax holiday, waived value added tax (VAT) on light engineering product manufacturers and addressed the need for technological skills development.

At the same time, they have urged the government to adopt effective measures to address the remaining challenges to help the sector grow to its full potential.

"We thank the government for the announced policy support to the industry. But there are many more problems to be solved in order to reach the goal," said Md Abdur Razzaque, president of the Bangladesh Engineering Industry Owners Association (BEIOA).

The tax holiday and clear VAT waiver are a significant step towards taking the light engineering sector way ahead, for it has unlimited potential and can surpass the country's readymade garments industry, observes Dr M Kamal Uddin, director of the Institute of Appropriate Technology at Bangladesh University of Engineering and Technology (Buet).

Policy changes will strengthen backward linkage

Light engineering product manufacturers will enjoy a 10-year tax holiday if they cater to factories with non-finished products or parts, said Finance Minister AHM Mustafa Kamal in his budget proposal.

Dr Kamal Uddin believes the tax holiday should attract investments for the local manufacturing of components of engineering industries such as automobiles and two wheelers, capital machinery, agro machinery, electrical and electronic products – which are considered thrush sectors.

Currently, only small and medium enterprises (SME) within the light engineering sector, like their counterparts from all other sectors, remain out of the income tax purview until their annual turnover crosses Tk50 lakh. The proposed budget raises the threshold to Tk70 lakh for SMEs led by women.

Abdul Matlub Ahmad, president of the Bangladesh Automobile Manufacturers and Assemblers Association (BAAMA), expects joint ventures in component and parts manufacturing. This will, he believes, help technology transfer.

Considering light engineering the product of the year, the National Board of Revenue exempted the industries from VAT in 2020, but the process to avail the waiver was so cumbersome that non-corporate light engineers barely enjoyed the opportunity.

The NBR, however, repealed last year's entire statutory regulatory order (SRO) and issued a new one that only would need VAT registration and regular return submission to avail a complete VAT waiver for light engineers who manufacture capital machinery and parts locally.

The previous SRO ordered unsophisticated small light engineers to register with several national level government offices like the Bangladesh Investment Development Authority, which was impractical, according to experts.

The country spends billions of dollars importing capital machinery, parts, various light engineering products or components.

If technological advancement and efficiency are ensured, the announced fiscal measures have the potential to help the light engineering sector grow significantly, as it has done in Taiwan and India, opines Dr Kamal, who has long been working for the development of Bangladeshi light engineering.

What is still missing?

BEIOA President Abdur Razzaque observes that the VAT waiver has come only for the light engineering manufacturers while repairing services by the sector are also saving a huge cost each year and repairing services are still subject to 15% VAT.

"Repairing services against public tenders should be subject to VAT, but this should not be applicable for the call-ready small repairing service enterprises," he said.

"In SME workshops, a few pairs of hands remain contaminated with garage ink all day and understandably these workshops cannot afford additional hands to calculate and pay VAT," said Abdur Razzaque.

He also demands the elimination of VAT on reselling of old capital machinery while these are VAT-exempted during imports as brand new ones.

The biggest concern for Razzaque and his fellow entrepreneurs seems to remain their uneven competition with low-cost imports.

He said capital machinery is subject to nearly zero taxes and duties at imports, but if a local light engineer manufactures the same or parts of the machinery they have to spend much higher on raw materials.

Necessary metallic raw materials used in light engineering facilities are still subject to around 40% taxes and duties and light engineers have to sacrifice their margin to stay afloat.

"We need raw material at 1% taxes and duties to compete," Razzaque said, adding, "otherwise we can compete with neither imports at the local market, nor with our counterparts from peer countries in export markets."

Abdul Matlub Ahmad says remarkable policy inspirations must flow through the field levels without which implementation will falter.

Razzaque feels the government and the industry's common goal for a vibrant Bangladeshi light engineering industry will also face hurdles unless the government ensures cost-effective solutions in terms of land in the specialised hubs, technology upgradation, process modernisation and further training for already proven brains.

A developing light engineering hub in Munshiganj is asking interested SMEs for Tk20 lakh for each decimal of land, while it is less than one-fifth at nearby plots outside the hub, says Razzaque, adding that light engineering SMEs cannot afford plots in the hub.    

Dr M Kamal is concerned about the financial health of small light engineers as they have suffered repeated shocks since the pandemic began.

"The light engineering sector should avail a special stimulus, as not more than 10% of them got stimulus loan support under their SME status," concludes the light engineering expert.