Fresh 2.5-5% VAT looms over local mobile phone, electronics next FY

Infographic: TBS

The National Board of Revenue (NBR) is mulling over a revision of tax exemptions for local manufacturing sectors such as mobile phones, electronics and home appliances. These industries have been enjoying tax incentives for years and reached a self-sustaining level, NBR officials believe.

These sectors are subjected to a value-added tax (VAT) between 2.5% and 5% in the current fiscal year and they could face another 2.5-5 percentage points increase in the next fiscal year, said sources at the NBR.

While experts applaud the NBR's plan to review tax expenditures (tax exemption, deduction on individuals, businesses) to raise revenues and help industries become efficient, entrepreneurs fear this could hurt emerging local manufacturing industries.

An official from the NBR's VAT department, seeking anonymity, told TBS that the goal is to strike a balance between increasing revenue and continued growth for these industries.

"We are still in the planning stages and analysing existing tax breaks to ensure a change that would benefit all parties," said the official.

During several pre-budget meetings held over the past two months, NBR Chairman Abu Hena Md Rahmatul Muneem also hinted at similar measures.

"For industries that have achieved solid standing, support [tax exemptions] should gradually be tapered off," he said.

His statement implies that taxes (duty, VAT) on these industries may be imposed at the import stage, or existing VAT and taxes may see an increase.

A decade ago, nearly all mobile phones used in Bangladesh were imported. However, industry insiders said currently, over 95% of the demand is met by local manufacturing firms.

At present, over 12 companies are engaged in mobile phone manufacturing within Bangladesh. Leading global mobile manufacturers including Samsung, Nokia, Vivo, Xiaomi and Oppo have set up factories in the country.

Just two years ago, imported mobile phones incurred a total tax incidence (TTI) of 56%, which was around 15% for local manufacturers. VAT was initially applied at the sales stage in FY23 and at the manufacturing stage in FY24.

Currently, mobile phone production is subject to VAT ranging from 2% to 7.5% at the manufacturing stage, depending on local value addition capacity. The NBR sources suggest a likely increase in this VAT by up to five percentage points in the upcoming budget.

Thanks to NBR's policy support, various other local industries such as refrigerators, air conditioners, motorcycles, and lubricant oil have also flourished in recent years, reducing import dependence. These sectors may also see cuts in tax breaks.

Additionally, last year saw an increase in VAT from 5% to 7.5% at the manufacturing stage for various types of home appliances, including tableware, kitchenware, and hygienic toiletries. The NBR is now considering further hikes.

Other sectors facing 'tax hike'

The list of other sectors facing potential VAT hikes encompasses aluminium-made home appliances, sanitary ware, sunglasses, napkin tissues, facial tissues, hand towels, paper towels, and clinical bedsheets. Various plastic products may also be included in this list.

Furthermore, NBR sources said industries receiving tax benefits on imports may also witness reductions in these benefits.

The NBR official said, "We are presently in the process of collecting and analysing data. The proposal will be finalised, considering its impact on the sector, the nation's economy, and employment."

Sources said in addition to the tax department of NBR, the VAT and customs departments are also analysing tax exemptions. This analysis will determine next year's exemptions before the budget is finalised.

Entrepreneurs oppose, experts applaud

Mohammed Mesbah Uddin, chief marketing officer of Fair Group, one of the largest mobile phone manufacturers in the country, told TBS, "We are already grappling with a challenging situation caused by VAT imposition. Mobile phone sales saw a 35% decline in 2023, and sales continue to decrease this year as well. We need policies that ensure the industry's sustainability."

However, former NBR member Md Lutfor Rahman told TBS, "I would welcome the decision to withdraw the benefits. An impact analysis should be conducted on the companies that have received benefits assessing how much of this benefit has been passed on to the consumer and how much has been pocketed by the company."

Dr Ahsan H Mansur, executive director of the Policy Research Institute, said, "Tax exemption benefits cannot be sustained indefinitely. It would be a prudent decision to withdraw these benefits, which would also enhance revenue collection."

He said, "It is not just VAT, even in terms of taxes, the benefits should not be increased. Additionally, the tariff protection provided for imports should be curtailed."

"It is not only about VAT; the tax benefits for sectors reaching their end this year should not be extended either and import tariff protection should also be reduced," he added.

Economist Dr Syed M Ahsam, Professor Emeritus, Concordia University at a seminar in Dhaka this week, identified investment incentives given in the forms of rate rebates, tax holidays etc. as a major reason for the country's low tax base as corporate sectors enjoy more tax breaks than they pay in direct tax. In FY21, tax expenditure (foregone revenue in the name of tax breaks) amounted to 3.6% of the country's GDP on account of direct tax alone exceeding the revenue close to 2.6% of GDP, the professor said, citing NBR data.

Corporate income tax (CIT) expenditure exceeded the entire CIT revenue collection that year (68% of tax expenditure vs 60% share of CIT in direct tax revenue), said Prof Ahsan, who is also visiting professorial fellow at Bangladesh Institute of Development Studies. Pervasive use of investment incentives are mostly ineffective and subject to abuse, he pointed out.