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FRIDAY, JUNE 20, 2025
Cement industry suffers tax shocks

Industry

Mahfuz Ullah Babu
30 January, 2020, 08:55 am
Last modified: 30 January, 2020, 12:20 pm

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Cement industry suffers tax shocks

Top manufacturer Crown Cement has already posted a half yearly loss owing to the tax adversity 

Mahfuz Ullah Babu
30 January, 2020, 08:55 am
Last modified: 30 January, 2020, 12:20 pm
The Crown Cement factory in Munshiganj. Photo: Mumit M
The Crown Cement factory in Munshiganj. Photo: Mumit M

The cement industry has started feeling the effects of the added 5 percent minimum tax imposed on the import value of raw materials since July 1 last year.

Following a plea to remove the minimum tax by cement manufacturers, the non-refundable advance income tax (AIT) was reduced to 3 percent, effective from January 1 this year. 

Furthermore, transportation of both raw materials and finished goods is also costlier now amid increased finance cost. A nearly 45 percent overcapacity also prevents cement manufacturers from increasing prices regardless of the cost scenario. 

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MI Cement Factory Ltd, popularly known as Crown Cement, has posted an unprecedented loss of Tk1.89 per share for the July-December period, owing to the tax adversity. 

Photo: Mumit M
Photo: Mumit M

The listed company on Wednesday posted a net loss of more than Tk28 crore for the first half of the current fiscal year. In the same period of the previous year, it had a net profit after tax of over Tk11.5 crore.

Crown cement shares plunged more than 8 percent to close at Tk38.6 following its disclosure of the half yearly loss, which has already surpassed the total profit of Tk25 crore it made last year.

Against a turnover of near Tk695 crore in the first half, the company's tax expenditure has increased Tk22.58 crore due to the new AIT policy, according to company officials.

Photo: Mumit M
Photo: Mumit M

They also suffered because of stiffer competition, increase in financing costs and decrease in income from fixed deposits. 

"But the main shock was from the newly added tax burden on import of raw materials," said Masud Khan, former CEO and current advisor to Crown Cement. 

"We were hopeful that the government would finally drop it and our accounts team had prepared the first quarter accounts accordingly. But later, when it remained the same for the first half of the fiscal year, we had to charge a tax cost of Tk9.77 crore for the July-September quarter alone. 

Photo: Mumit M
Photo: Mumit M

"Earlier, we posted a profit per share of Tk0.57 for the first quarter, but after adjusting the AIT burden, it turned into a losing quarter for us," Masud added. 

Md Shahidullah, vice president of Bangladesh Cement Manufacturers Association (BCMA), said Crown Cement's financial result is reflecting the pressure on entire cement industry.

For the cement industry, prior to the FY20 budget, the AIT was deducted during imports and later adjusted with the final corporate tax, if applicable. 

But the cement industry – because of its value added tax (VAT) structure – has not been enjoying the adjustment facility since the beginning of the current fiscal year and the AIT is an ultimate tax burden on companies' raw material imports. 

"Now it is added as an ultimate cost in the companies' profit and loss accounts," said Shahidullah, also the managing director of Metrocem Cement Ltd. 

The cement industry was hopeful that considering its significance and the tight margin situation, the government would lift the cost burden. But in December last year, the National Board of Revenue only reduced the AIT to 3 percent – still a big pressure for an industry facing stiff competition. 

Photo: Mumit M
Photo: Mumit M

Last year, the cement industry faced at least a 1 percent slump in pricing while costs surpassed that scale over the same period. 

Companies used to enjoy a Tk18 VAT exemption for carrying per tonne of raw material through lighterage vessels. This fiscal year, this exemption has been revoked, adding to costs. 

Besides that, 2019 was the year for stricter control of transporting Extra Load (XL) through highways, forcing companies to engage more trucks for carrying the same amount of goods. 

The increasing competition from heavily expanding industry giants makes the situation more difficult for cement manufacturers. 

"And now the companies have begun to post losses while other industry dynamics are also deteriorating," Shahidullah added. 

Photo: Mumit M
Photo: Mumit M

He added that mainly because of some megaprojects, the last half of 2018 was a high growth period in the cement industry. In the corresponding months of 2019, there was a demand growth, but not as high as previous years. 

"Our industry was growing at a double digit rate, but it came below 7.5 percent in 2019 and the last quarter was even more sluggish." 

Md Shafiqul Islam Talukder, the chief financial officer of Premier Cement Mills Ltd, told The Business Standard the average gross margin of the cement industry in the last couple of years has been around 15-16 percent, while the net profit margin was squeezed to single digit because of tough competition. 

"The AIT, in form of minimum tax on raw material imports pushed most of the companies in a dire position. A few can manage a nominal profit and many others are falling into losses now," he added.

Photo: Mumit M
Photo: Mumit M

His company managed to post nominal profit in the cement business for the first half of the current fiscal year.

Analysis by an equity research team at a top brokerage house estimates that if industry profitability does not increase significantly, it will be tough for companies like Crown Cement to avert an annual loss. 

They also mentioned that as the non-adjustable AIT has been reduced from 5 to 3 percent in January, the tax burden will be a bit lower. 

But further slowdown, increased cost of business or competition will add to companies' worries.  

The Bangladeshi cement market

According to the Bangladesh Cement Manufacturers Association, in the last seven years the cement market size increased by 139 percent to about Tk25,000 crore.

During this period, the production capacity of local cement companies increased by 131 percent, while demand rose by 106 percent.

At the end of 2019, the production capacity stood at 5.80 crore tonnes, while the demand rose to as much as 3.10 crore tonnes.

Photo: Mumit M
Photo: Mumit M

Of the locally produced cement, the government uses 35 percent, commercial developers use 35 percent, and individual-level small buyers use the rest.

From 2011 to 2019, the per capita use of cement increased by 97 percent to stand at 187kg. However, the country still lags behind the world average per capita use of 563kg.

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industry / cement

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