NBR to review tax breaks to boost local industries

Infographics: TBS

The government plans to review, and possibly scale back, duty benefits on import of intermediate goods and industrial inputs that can be sourced locally in a bid to boost domestic manufacturing and backward linkage industries.

The National Board of Revenue (NBR) is working on a policy to scale back value-added tax (VAT) and duty benefits also for products assembled but not manufactured by local companies, said officials.

Cutting such fiscal benefits will strengthen the local manufacturing base and reduce reliance on imports, which will in turn lessen the strain on foreign exchange reserves, revenue officials said.

The NBR's initiative follows an earlier announcement made by its chief Abu Hena Md Rahmatul Muneem that the revenue authority would restrict tax benefits for imports of products that can be produced locally, such as office stationery and chairs. 

This will also help the revenue authority save on tax expenditures in terms of duty exemptions offered to selected industries, according to several revenue and customs officials. 

In the FY24 budget speech, the finance minister said tax expenditures in FY23 exceeded Tk178,000 crore – information technology, garments and textiles, economic zones and high-tech industries accounting  for about Tk10,000 crore in combined tax exemption. 

The NBR extended some benefits for local industries two years ago, largely to support the "Made in Bangladesh" initiative.

To develop the new tax policy that may be unveiled in the next budget or earlier, the NBR will classify products and services by sector and assess the country's overall production capacity and quality, they said.

Local companies may also need to meet a certain value-addition rate to qualify for tax breaks on imported raw materials.

While these measures may be tardy in arriving, analysts believe those are a step in the right direction demonstrating a commitment to reducing import reliance and boosting local industry.

A senior NBR official, speaking on condition of anonymity, told The Business Standard that the NBR's customs exemption wing recommended tightening tax breaks in early October after an audit report found that a company had improperly benefited from these concessions.

Based on the value of the companies, the customs exemption wing also advised introducing value-addition rates for companies to become eligible for tax breaks on imported products, he said.

"It should be illegal for manufacturing companies to exploit tax benefits by merely assembling products year after year. Furthermore, tax breaks for importing goods that are not locally available will not foster domestic manufacturing and backward linkage industries," the official added.

According to industrial entrepreneurs, ready-made garment and textile units in the industrial estates of the Bangladesh Economic Zones Authority (Beza) and Bangladesh Export Processing Zones Authority (Bepza) enjoy tax and duty exemptions for a wide array of goods, encompassing raw materials for electronics such as mobile phones, hi-tech products, refrigerators, air conditioners, motor vehicles, as well as intermediate materials, capital machinery, and heavy industry supplies.

While these benefits have existed for quite some time, local industries have emerged, yet they contend with unequal competition, they said.

Md Abdur Razzaque, president of the Bangladesh Engineering Industry Owners' Association, said, "The country now produces various electrical products, including electric motors, fans, cables, sockets, and motor vehicle spare parts, which are taxed at rates ranging from 18% to 48%, inclusive of VAT and source tax."

"In contrast, major industrial companies import these products as capital machinery with duty rates of 1% to 10%, hampering the local backward linkage industry's viability," he said, suggesting that restricting imports would be advantageous for the local industries.

Cost of tax breaks

According to NBR data, Tk10,000 crore in duty exemptions were granted on capital machinery imports in FY23. 

Similarly, Tk2,241 crore in duty exemptions were granted for mobile manufacturers in FY23, Tk5,700 crore for fridge and AC manufacturers, Tk1,000 crore for the textile sector, and Tk1,100 crore for industries under the Beza.

Besides, income tax and VAT concessions were given to various industries in Bepza and Beza.

The NBR has not yet precisely calculated the amount of VAT breaks that manufacturing industries receive annually, but its rough data suggests that the amount was equivalent to about Tk1.5 lakh crore in FY21 alone.

Experts say tax benefits should be given to support manufacturing with high local value addition.

Md Farid Uddin, former NBR member (customs policy) told TBS, "To strengthen local manufacturing and backward industries, the tax facilities should be streamlined to give more benefits to companies that add more local value."

"Some companies in Bangladesh have been given unfair tax exemptions which has created discrimination. China, Korea, Japan, and India have become manufacturing hubs because they have invested heavily in developing their own manufacturing capabilities. We cannot go very far by simply assembling imported parts," he said.

Citing an example, Farid Uddin said that Bangladesh was completely dependent on imports of Galvanised Plain (GP) sheets in the 1980s. However, the country now produces its own cold-rolled (CR) coil sheet, which is the raw material for the GP sheet.

Will it limit scope for quality inputs?

Currently, the mobile phone industry has a minimum value addition requirement of 20%, which is 30% for the fridge-air-conditioner makers. Specific rates are in force for several other industries, including automobiles. 

Renewing the policy would increase value addition, but it may also create difficulties in some industries, such as high-tech, by limiting access to quality raw materials and equipment, said industry insiders, asking for weighing the potential benefits and drawbacks of any such import restrictions before implementing them.

"Some food-grade components for refrigerators and the monitors and displays used by Samsung are not currently manufactured in Bangladesh, and imposing import restrictions could lead to shortages of high-quality products," said Mesbah Uddin, chief marketing officer of Fair Group. 

While this type of policy would help the local backward linkage industry, it may force companies to buy products or components that are not of quality the local factories need, he warned.

SM Shoyeb Hossain Nobel, additional managing director of Walton Hi-Tech Industries PLC, said there should be a significant difference in tariff benefits between manufacturers, assemblers, and importers based on the level of value addition. 

He felt that stakeholders should be consulted and their views should be taken into account in formulating policies.