Budget 2025–26: Question of sustainability for private investment

The budget for the fiscal year 2025–26, estimated at Tk7.9 trillion, is a contractionary one aimed at achieving realistic GDP growth and lowering inflation to 8%. A floating exchange rate has been announced, taking into account the relatively high foreign exchange reserves, currently at $27.4 billion. The budget presents long-term projections, extending in some cases up to 2030, indicating optimism about future economic growth.

However, the country is currently undergoing a transitional phase towards LDC graduation. This transition coincides with declining growth in agriculture (from 3.30% to 1.79%), a reduced investment-to-GDP ratio (29.38%), challenges related to achieving the SDGs, and uncertainties arising from reciprocal tariffs imposed by the US as well as non-tariff barriers enforced by neighbouring countries.

The budget outlines the introduction of the Bangladesh Single Window (BSW) and the services being offered through the One-Stop Service (OSS) platform by BIDA. However, Investment Promotion Agencies (IPAs) have yet to instil sufficient confidence among investors. One key concern remains the lack of uninterrupted utility services, without which industries cannot operate at full capacity. 

Although the budget mentions that there will be no hike in utility prices, it does not provide any assurance regarding the consistent supply of gas and electricity. Additionally, high interest rates, limited access to bank loans, and a deteriorating law and order situation are some of the discouraging factors affecting investor sentiment. Business entrepreneurs had hoped for a stronger commitment in this regard.

The budget has increased the advance tax for commercial importers from 5% to 7.5%. This will pose a significant constraint for SME entrepreneurs, who typically purchase raw materials from these importers. The cost burden is likely to be passed down, affecting the price of finished goods. 

Nonetheless, the announcement of a Central Bonded Warehouse dedicated to homogeneous SME entrepreneurs could prove beneficial, provided it is implemented swiftly. In the case of SMEs, the requirement for audit accounting in accordance with IFRS may be overly burdensome and should be reconsidered.

For e-commerce entrepreneurs, VAT on commission has been raised from 5% to 15%, a move that will severely impact emerging women entrepreneurs in the SME sector. This rate should be reduced back to 5%. It is also worth noting that, under the VAT and SD Ordinance 2025, the VAT exemption threshold has been reduced from Tk50 lakh to Tk30 lakh, and the turnover tax threshold has been lowered from Tk3 crore to Tk50 lakh. 

Start-ups and e-commerce ventures represent the future of the economy, and while the budget allocates Tk100 crore to a Start-up Fund, this amount should ideally be raised to at least Tk300 crore initially.

While the nation is making efforts to attract new investment, some of the budgetary directives appear counterproductive. For example, paragraph 113 mentions an increase in VAT on plastic manufacturing industries from 7.5% to 15%, and VAT on critical raw materials for the RMG and textile sectors, such as cotton thread and MMF, has also been increased. These changes will have an adverse impact on industrial growth.

A positive initiative has been introduced regarding the future adjustment of minimum tax applicable to sectors such as mobile phones, tobacco, and beverages (under subsection 6 of section 163 of the ITA 2023). However, the provision under clause 163(2) for 38 heads remains non-refundable, creating an ongoing burden on the private sector. 

The budget has reduced supplementary duty (SD) at the import stage for 442 items, mostly agricultural and livestock-related, such as cattle, goats, and sheep. Yet for some local industries, the SD on certain products has not been reduced—for example, the 5% SD on drinking water remains a barrier to growth in that sector.

Tax Deducted at Source (TDS) on cash subsidies for export proceeds and freight forwarders has now been made adjustable—a commendable step. The scope of this adjustability should be expanded further to encourage exports.

The perquisite limit for admissible expenses has been increased from Tk1 million to Tk2 million—a helpful measure that will simplify tax liability calculations for entrepreneurs.

The cap on royalty and technical know-how expenses (Finance Ordinance Clause 49) has been set at 6% of annual turnover or 15% of net profit, whichever is lower, in line with BIDA guidelines. This complex provision may dissuade foreign investors and should be revised to reflect actual net profits. TDS on intellectual property-based services has been reduced from 12% to 10%, aligning more closely with LDC graduation requirements.

Customs duty on 110 items has been proposed for withdrawal, and duties on 65 items have been reduced. However, the specific list has neither been published nor discussed with relevant stakeholders—something that must be addressed through prompt publication and consultation.

Supplementary duty at the import stage has been withdrawn on 662 products, and 100 items have been made duty-free, in keeping with the government's commitments. According to research by BUILD, out of 7,537 HS codes, 3,447 items fall under the highest customs duty band of 25%, which is maintained by Bangladesh Customs. This 25% band encompasses 45.74% of total HS lines, with 1,579 HS lines under the highest band falling within agriculture, livestock, and poultry sectors (HS Chapters 01 to 25). 

We remain unaware of the withdrawal of SD on such a large number of items, and its impact on domestic industries remains unclear. There is also room to reduce the highest customs duty on non-essential and unused items such as swine, live horses, and breeding swine.

The de minimis value has been increased from Tk2,000 to Tk4,000, which will facilitate the import of samples by exporters. Minimum/tariff values on 84 items have been withdrawn—an encouraging step towards LDC graduation and Trade Facilitation Agreement (TFA) compliance. Nevertheless, those affected by this change will require transitional support, and an actionable plan must be initiated immediately.

The budget has raised the tax-free income threshold for individual taxpayers. However, it simultaneously removes the 5% tax slab, which ultimately increases the tax burden, especially for fixed-income earners who may not benefit from the increased threshold.

Nonetheless, appreciation is due to the Finance Adviser for delivering a precise and focused budget that aims to address key macroeconomic challenges while presenting a long-term vision for growth.

Ferdaus Ara Begum is the CEO of BUILD, a public-private dialogue platform that works for private sector development.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard