VAT from large firms falls Tk402cr in H1 FY25

Highlights: 

• VAT collection from cement, hotels, medicine, cigarettes, gas sectors fall
• NBR officials noted the decline in LTU-VAT revenue is rare
• Industry insiders attributed the decline to economic slowdown, July uprising, inflation
• However, VAT from banking, insurance, beverage, and mobile phone sectors see rise

Value-added tax (VAT) collection from large firms — including cement, hotels, pharmaceuticals, cigarettes, gas, and consumer goods — saw a year-on-year decline in the first half of FY2024-25 (FY25), a trend that revenue officials say they have not witnessed in at least a decade, except for the Covid year.

Industry insiders and economists warn that a drop in VAT from large firms signals weaker demand, lower sales, or reduced profitability in key sectors, indicating an economic slowdown or declining business confidence.

However, VAT collection from banks, insurance, beverages, and mobile phone sectors recorded a slight increase during the same period, which industry sources attribute to higher tax rates introduced in the last budget.

According to National Board of Revenue (NBR) data, VAT collection from 109 large companies, which are under the Large Taxpayers' Unit, fell by Tk402 crore year-on-year in the first half of FY25, totalling Tk31,578 crore. As a result, the NBR's total VAT revenue dropped by 5.4% year-on-year, settling at Tk55,177 crore during the period.

The latest tax data highlights a crucial reality: excessive tax increases do not always lead to higher government revenue.

Shabab Ahmed Choudhury, head of corporate and regulatory affairs at BAT Bangladesh

Officials said the LTU-VAT office's revenue decline is rare, noting that VAT collection from large companies rose by 20% in the first half of FY24 compared to the same period of FY23.

A senior NBR official told TBS, "The country's supply chain was disrupted heavily due to the July uprising. Subsequently, political instability led to an economic slowdown, a decline in imports, and high inflation — key factors behind the drop in VAT collection from large companies."

Echoing him, former NBR member Md Lutfor Rahman told TBS, "Besides high inflation, business and consumer confidence in the country remains low, leading to reduced consumption."

Both of them, however, expressed hope that the business scenario will pick up steam in the upcoming months.

Bangladesh has experienced slower growth in the construction sector due to consistently high inflation over the last two years. This slowdown became "abnormally low" over the last six months, fueled by the government's decision to backtrack on some construction projects, industry insiders said.

There are nine cement companies paying VAT under the LTU-VAT office, with collections decreasing by over 6% to Tk215 crore in the first half of the current fiscal year. 

There are a total of 34 cement manufacturing companies currently operating in the country. Sector insiders say almost all companies are facing difficulties, forcing them to decrease production by about 15% in recent months.

"We have been experiencing slower growth over the last two years, but in the past six months, it has reached an abnormally low level, forcing the sector into negative growth, the lowest in the last 12 years," said Md Shahidullah, managing director of Metrocem Cement and first vice president of the Bangladesh Cement Manufacturers Association.

He told TBS, "The government has trimmed a significant number of projects, industrial expansion is slow, and other construction work has been delayed due to uncertainty — severely impacting the demand for construction materials."

However, the entrepreneur remains pessimistic about the outlook for the coming months, stating, "A review of cement raw material imports over the past six months shows a decline, leading to lower tax collections at the import stage."

According to customs data, imports of clinker, the primary raw material for cement, declined by 1% over the past six months.

Bangladesh Bank's recent data, released on 23 January, showed that overall Letters of Credit (LC) settlements decreased by 1% from July to November, while capital machinery and intermediary goods imports declined significantly, by 21% and 15%, respectively — indicating sluggish industrialisation, which affects revenue growth.

'Tax hike not always leads to higher revenue'

Cigarettes remain the single highest revenue-generating sector for the government. Half of the revenue collected by LTU-VAT comes from three tobacco manufacturing companies. Despite a significant increase in cigarette prices and taxes in the last budget, collections from this sector in the last six months decreased by Tk771 crore compared to the same period in the previous fiscal year.

Shabab Ahmed Choudhury, head of corporate and regulatory affairs at BAT Bangladesh, said, "The latest tax data highlights a crucial reality: excessive tax increases do not always lead to higher government revenue."

"We urge the government to hold stakeholder-inclusive dialogue with all relevant parties and reconsider such a disappointing decision," he added.

A senior NBR official told TBS, "A decrease in consumption and consumers shifting to lower-tier products to save money following the price hike may be key reasons for the decline in revenue."

He, however, questioned whether large cigarette companies might have any compliance gaps during this period, stating, "As the country's law and order situation deteriorated following the July uprising, revenue officials may have been more restrained, potentially allowing for compliance gaps."

Hospitality industry faces setback

The country's hotel industry has suffered a major setback in the last six months, which is reflected in the sector's revenue collection. During this period, year-on-year VAT collection from five hotels registered with the LTU-VAT office decreased by 25%.

A senior official of a five-star hotel in Dhaka's Gulshan area attributed the downturn to the July uprising and travel advisories from some Western embassies, which discouraged both local and foreign travellers, severely impacting business.

"During July and August, our hotel business dropped to about 10% of the normal level, but in the following four months, it rose to an average of 45%. This month, however, we have reached 70% of our expected business," he added.

Hakim Ali, president of the Bangladesh International Hotel Association, remains optimistic about business prospects in the coming months.

In addition to the tobacco and hospitality sectors, VAT collection in the first half of FY25 fell by 12% for soap, 2% for gas, and about 1% for medicine, according to NBR sources.

'FMCG sales declined by 5% during the last 9 months'

The annual size of the FMCG (fast-moving consumer goods) market has already reached around $4 billion, according to industry insiders. 

However, sales of these products decreased by 5% from April to December last year, said Zaved Akhter, managing director of Unilever Bangladesh Limited, the country's leading FMCG company.

"During the student-led uprising, production and supply chain were severely disrupted, leading to degrowth. Sales have yet to reach expected levels, subsequently impacting government revenue," said Akhter, who is also president of the Foreign Investors Chamber of Commerce and Industry (FICCI).

According to LTU-VAT, revenue from one soap company decreased by about 12%, amounting to Tk36 crore.

Did tax hike boost revenue in banking, beverage, mobile sectors?

NBR data showed that 17 banks registered with the LTU-VAT office contributed 2% more to the government's exchequer, totalling Tk2,491 crore. 

Six insurance companies contributed 4% more in VAT, while four mobile operators and four beverage companies saw an 8% increase over the last six months.

In the last budget, the government significantly increased taxes on bank balances, beverage products, mobile phone talk time and internet usage, which sector insiders believe contributed to VAT growth from these sectors.

However, mobile operators said that their talk time and internet package sales did not increase during this period. So how did VAT from this sector grow by over 8%?

Shahed Alam, head of regulatory affairs at Robi Axiata Limited, one of the country's leading mobile phone operators, told TBS, "Usually, a large portion of mobile phone companies' machinery and equipment imports occur in November and December. The revenue growth reflects imports of machinery and equipment, not an increase in talk time or data sales."