NBR now plans to double taxes on motorbike, AC, refrigerator makers

Summary:

• NBR plans to double taxes for specific manufacturing companies by FY26
• Current 10% tax rate for manufacturers may rise significantly
• Policy changes conflict with promised tax benefits until 2032
• Higher taxes will increase product prices, burdening consumers
• Frequent policy changes discourage local and foreign investments

After increasing value added tax (VAT) and other taxes on more than 50 goods and services, the National Board of Revenue (NBR) now plans to double the existing tax rate for companies manufacturing motorcycles, refrigerators, air conditioners, and compressors, according to NBR sources.

Currently, these industries pay a 10% tax on their income and a 2% advance income tax (AIT) on the import of machinery, parts, and equipment, which was supposed to remain in effect until 2032.

But, sources from NBR have indicated that this tax rate could be doubled and may come into effect in FY26. To this end, the existing order could be canceled, and a new order may be issued this week.

The issue of doubling the tax rates has surfaced at a time when the VAT rate on electronics items has already been increased to 7.5% over the past two years, with discussions now underway to raise it to 15% in the upcoming budget.

However, if the AIT on imports is increased, the change will be effective from the day the order is issued, a senior official from the NBR's Income Tax Department, speaking on condition of anonymity, told TBS.

The NBR hinted at the tax increase in a press release last Saturday, which reads, "Along with VAT, various steps are being taken to widen the tax net."

Experts and industry insiders say that increasing taxes will put additional pressure on the country's motorcycle, refrigerator, and air conditioner industries, and ultimately, this burden will fall on consumers.

Syed Md Aminul Karim, former NBR member of income tax policy, told TBS, "If taxes are increased, this pressure will ultimately lead to higher prices, and companies will also face some pressure."

"However, the most important issue is that if the benefit granted until 2032 is suddenly canceled, it will once again highlight that Bangladesh's tax policy is not investment-friendly," he said.

"Investors made their investments based on the tax incentives, and frequent changes in policy send the wrong message to investors about Bangladesh," he added.

Mohammed Mesbah Uddin, chief marketing officer of Fair Electronics, a key player in the AC and refrigerator manufacturing market, told TBS, "With the ongoing increase in VAT and taxes, product prices will rise even further. On one hand, real income is decreasing due to high inflation, and on the other, continuous tax hikes are pushing up product prices. As a result, our sales are declining."

"Any further increase in taxes will raise product prices and make the market even more contracted," he added.

The issue of doubling the tax rates has surfaced at a time when the VAT rate on electronics items has already been increased to 7.5% over the past two years, with discussions now underway to raise it to 15% in the upcoming budget.

According to NBR sources, based on an order from 2019, the tax rate for motorcycle, AC, refrigerator, and compressor manufacturing companies was set at 5%. This was later increased to 10% by an order in 2021, which was to remain in effect until 2032.

Currently, corporate tax rate ranges from 25% to 27.5%.

In November, the International Monetary Fund (IMF) set a condition for the NBR to collect an additional Tk12,000 crore over the original target for the current fiscal year. Following this, the NBR began increasing VAT and taxes across the board to meet the revenue target.

NBR sources also revealed that increasing taxes on four types of products could generate an additional Tk1,000 crore annually.

Investment came considering tax benefits

Walton is a market leader in the country in manufacturing refrigerators, air conditioners, and compressors.

A senior official from the company, speaking on condition of anonymity, told TBS, "Our industry is tax-exempt under the hi-tech park scheme. However, if the tax rate is increased, it will be disastrous for the industry."

In the motorcycle sector, new companies like Honda, TVS, Hero, and Runner have started manufacturing in the country, with foreign investments also involved.

A senior official from Runner told TBS, "New investments were attracted primarily due to the long-term VAT and tax benefits."

Mohammed Mesbah Uddin, chief marketing officer of Fair Electronics, said, "The demand for air conditioners and washing machines is increasing in the country. However, the demand for refrigerators and other electronics products is declining."

He mentioned that in the past two years, companies like Singer, Sony, and Rangs have made new investments in the country.

He said, "The price of a local refrigerator has risen from Tk30,000 to Tk36,000. If taxes are increased again, the price will go up further. However, due to inflation, people's real income has not increased during this time."

"When inflation rises, people will first spend on food, and only after that will they consider electronics products," he added.

Investment to be discouraged

Snehasish Barua, a tax expert and managing partner of Snehasish Mahmud and Company Chartered Accountants, disagrees with the decision to cancel tax benefits that was granted until 2032.

"Considering the reduced tax rate benefits, many local and foreign investors have already invested. Now, if the rate is suddenly increased in the middle of the fiscal year, it will bring up the issue of policy inconsistency again," he told TBS.

"Frequent changes in policy discourage investors," he added.

Former NBR member Syed Md Aminul Karim said, "Due to revenue shortfalls, the NBR may be considering a blanket tax increase based on IMF recommendations. However, increasing taxes suddenly without any clear plan will disappoint investors."

He added, "After the tax increase, if other bottlenecks related to investment – especially in areas like ports, customs, and logistics – are addressed by improving efficiency, speed, and creating a more conducive business environment, it might be possible to offset some of the negative impacts."