Facing a slowdown in global demand and rising production costs, Bangladesh's garment industry is urging the government for tax breaks and extended policy support in the upcoming FY25 budget. This includes a significant reduction in source tax and VAT relief on raw materials, measures they say are essential to navigate a challenging economic climate.
They are asking the government to reduce the source tax on exports from the current 1% to 0.5% and to keep this rate for the next five years.
This follows an increase in the source tax on export earnings to 1% in the FY2022-23 budget.
The manufacturers argue that the post Covid-19 economic environment, along with ongoing conflicts such as the Russia-Ukraine war and the Israel-Palestine war, have prolonged global economic instability, negatively impacting retail sales of RMG items. They warn that a slowdown in the global economy may persist into 2024, putting further pressure on the export sector and foreign exchange reserves.
During this critical period, the RMG manufacturers believe that reducing the source tax to 0.5% would help address these challenges and encourage exporters to boost their export volumes.
The RMG sector is asking for a reduction in the income tax deduction on cash incentives from the current 10% to 5%. They argue that rising bank loan interest rates, fuel shortages, increased raw material and transportation costs, and higher oil and gas prices have made it difficult to maintain production capacity.
The global economic slowdown has led to reduced export orders from foreign buyers and requests for slower shipments, causing liquidity issues for exporters. The RMG manufacturers emphasize that policy support is essential to sustain their operations in these challenging times.
Regarding corporate tax, they said that to support the garment industry, the prime minister has fixed the corporate tax rate of 12% for general RMG factory units and 10% for green factory units.
However, at the time of assessment, other forms of income such as gain on assets disposal, sub-contract income and miscellaneous expenses are considered as disallowable and taxed at normal rate (30%).
In order to sustain the export of the sector and competitiveness, the manufacturers asked the corporate tax rate of 12% for the industry at all levels of taxation.
They also said that the export-oriented RMG sector enjoys tax exemption at the import-export stage and on certain locally sourced goods and services.
However, VAT is still being levied on several locally sourced goods and services and in those cases, they also face claims of dues for previous years. They demanded the exemption of VAT against the said services.
The apparel makers also sought the waiver of 7.5% value added tax (VAT) on sourcing of raw materials for the production of recycled fibres and another 15% VAT on the purchase of those fibres by spinning mills.
The RMG manufacturers also demanded inclusion of SRO for duty free/concessional import of solar related and some electrical machinery and equipment to make factories modern, safe, risk free and environment friendly and to save operational cost.
They also asked to adopt a Harmonized System (HS) for imports. The HS is a standardized numerical method for classifying traded products. It is used by customs authorities around the world to identify products when assessing duties and taxes and for gathering statistics.
Regarding the budget proposal, SM Mannan Kochi, president of the Bangladesh Garment Manufacturers and Exporters Association (BGMEA), told Dhaka Tribune that they want a business-friendly budget for FY25.
“We met the prime minister on Sunday evening and presented our demands. We want to reduce the source taxes to 0.5% from existing 1% for the betterment of the industry,” he added.
Alternative cash incentives should be introduced if the government plans to withdraw any existing incentives, he went on to say that the government should continue all existing policy support till 2029.
“We also requested the prime minister to introduce food rationing for the RMG workers. As always, we presented the issues posed by NBR, customs, and bonds and we requested her to take measures to end the harassment,” he added.
The global economic slowdown, fueled by geopolitical tensions, inflation, and the energy crisis, has significantly increased production costs in the RMG sector.
At the same time, export orders and overall export volume have declined. Manufacturers argue that the government's support through their proposed budget measures is crucial to maintaining the industry's export growth and production capacity.
The national budget for FY25 is scheduled to be presented to the national parliament on June 6th. The BGMEA's proposals will be among the many considerations as the government seeks to navigate a complex economic landscape.
