Confusion over law forcing RMG makers to pay 15% VAT on port services

Highlights

• NBR on 13 June 2019 granted a 100% VAT exemption on port services
• But in the Finance Act of 2022, the VAT exemption benefit was withdrawn
• Chittagong Port has been imposing 15% VAT since 27 September 2023
• NBR official says the confusion will end soon

A confusion over a tax provision has been costing readymade garment exporters 15% VAT on services for over three months during imports and exports at the Chittagong Port. 

The tax, being levied on service charges such as container storage rent, unstuffing charges and river dues, causes an additional expenditure of over Tk1,000 per TEU (twenty-foot equivalent unit) container, apparel industry owners say. 

In two statutory regulatory orders (SRO) issued in 2019 and 2021, the National Board of Revenue (NBR) granted a 100% VAT exemption on port services for both imported and locally manufactured goods for fully export-oriented industries and export processing zones.

But in the Finance Act of 2022, the "zero" rate of VAT on services relating to "transportation of international transport services and supplies relating to loading on and unloading from ships" was withdrawn with effect from 1 July 2022.

On 4 July 2022, the Chittagong Customs, Excise, and VAT Division sent a letter to the chairman of the Chittagong Port Authority, requesting VAT collection on the two services. In accordance with the letter, the port authorities have been collecting the 15% VAT since 27 September 2023.

Apparel exporters say 15% VAT irrational

Garment factory owners say it is unreasonable to collect VAT despite the NBR's tax exemption in the SRO. Moreover, there is no involvement of local importers-exporters with port service charges. This relates to local agents of international transport operators or shipping agents paying terminal handling charges. But port authorities are collecting VAT from garment factory owners instead of shipping agents.

According to BGMEA data, approximately 45% of containerised goods imported through the Chattogram port consist of raw materials for the garment manufacturing industry. Besides, most of the export products are readymade garments.

BGMEA Vice President Rakibul Alam Chowdhury told The Business Standard that if the 15% VAT exemption on port services for the garment industry is not maintained, RMG exporters will lose competitiveness.

The VAT on port charges is a further blow to the garment industry, which is already facing challenges from the global economic slowdown, he said.

"At this critical moment, it is in no way feasible. Furthermore, it is not relevant to engage with garment factory owners. To sustain the viability of the garment export business, it is imperative to waive the collection of VAT on garment industry operations," said the BGMEA vice president.

On October 1, the BGMEA, led by its President Faruque Hassan, held an emergency meeting with the NBR to discuss the cessation of the 15% VAT. Subsequently, on 4 October 4, BGMEA First Vice President Syed Nazrul Islam sent a letter to the Chittagong Customs Excise and VAT Commissioner Syed Mushfequr Rahman requesting the suspension of the VAT collection. In this regard, the VAT commissioner on 30 October, sent a letter to the office of the NBR member (VAT policy) requesting its directive.

Syed Mushfequr Rahman told TBS, "According to the SRO, the 15% VAT is exempted, but the benefit was cancelled by the Finance Act. As there is a confusion on the matter, we sought the NBR's directive in this regard. We hope that we'll get an instruction from the revenue board soon."

Zakia Sultana, NBR member (VAT policy), told TBS, "We will send a clarification to the port authorities in this regard soon so that they keep the readymade garment export sector out of the purview of the VAT. As a result, the RMG exporters will continue enjoying the VAT waiver."

But other sectors will have to pay the VAT on services at the port, she clarified.