Bangladesh’s economy is flourishing, propelled a young demographic, and a substantial workforce. Over the past 20 years, the country has seen an average annual growth of 6.25%. The youth, comprising 30% of the population, offers a vast growth potential. The active labour force significantly contributes to the nation’s economic health, with foreign exchange earnings, job creation, and a rise in consumer goods consumption fueling industrial expansion.
Bangladesh’s National Board of Revenue (NBR) has significantly contributed to the country’s fiscal health over the past six years. Despite hurdles such as the Covid-19 pandemic, the Ukraine War, a decline in exports, reduced loan repayments, and the recent Middle Eastern crisis, the NBR has maintained stable growth indicators and witnessed a commendable revenue increase of approximately 15% annually during his tenure. The leadership in navigating these challenges is noteworthy and praiseworthy.
In the last decade, Bangladesh’s swift economic progress has been fueled by various sectors, with the FMCG industry becoming particularly influential post-pandemic. Despite economic slowdowns due to inflation, the FMCG sector stayed resilient, driven by small purchase sizes, affordability, and the swift expansion of middle-income families. Within FMCG, the beverage industry has been a critical growth driver, drawing significant investment from international brands and investors.
With its tropical climate Bangladesh presents an attractive market for the beverage industry. The growing thirst for carbonated and other beverages positions it alongside ice cream, biscuits, as categories ripe for growth and contributors to government revenue, fueled by rising consumer demand.
In the fiscal year 2022-23, the NBR’s VAT SD contribution amounted to Tk1,552 s, accounting for about 1.25% of domestic revenue and 0.48% of total NBR revenue, nearly doubling in two years. Amid this growth, both local and international beverage companies are ramping up their investments in Bangladesh. The expansion of the beverage sector is also broadening the retailer network and creating more job opportunities. Currently, the food and beverage industry employ 2.45% of the country’s workforce, significantly contributing to the GDP and signaling potential for further expansion and employment generation.
The introduction of a higher supplementary duty and a minimum taxation has significantly slowed the beverage industry’s growth to 20-25% recently, reflecting in its reduced government revenue contributions -- from approximate Tk200cr in the first half of 2023 to Tk170cr in the latter half. This decline became more pronounced after a 3% turnover tax was levied in June 2023, cutting the revenue to nearly half. For example, the revenue fell from Tk1,071cr in July-September 2022 to Tk 865cr in the same period in 2023, dropping below 2021 figures.
Implementing such stringent fiscal policies hurts the future growth of the beverage industry. Turnover taxes, based on annual sales, hark back to colonial times. Prior to levying or increasing such taxes, the NBR must consider various factors including the price of raw materials at the import stage, foreign exchange rates, inflation, value addition, market dynamics, and, fundamentally, the purchasing power within the economy.
In Bangladesh, while many sectors face a nominal turnover tax of only 0.1%, with the closest counterpart to the beverage industry, ice cream, being taxed at a mere 0.3%, the proposed 3% turnover tax on beverages stands out as extraordinarily high without clear rationale
However, the beverage sector faced a disruptive shift last year with the abrupt introduction of a 5% turnover tax (up from 0.6%) as per the newly enacted Income Tax Act, 2023, which was later adjusted to 3%. This swift imposition of a higher minimum tax on turnover rattled the industry.
Revenue figures from the past nine months reveal the immediate effects of this policy. Revenue for January to March 2024 stood at Tk237cr, a significant decline from Tk436cr in the same period in 2023, and Tk344cr in 2022. Should the 3% turnover tax persist or increase, it could halt the industry’s growth. It would likely lead to a slowdown in job creation and a halt in investment inflows, ultimately impacting revenue growth and economic advancement. This could jeopardize the National Board of Revenue’s (NBR) objectives.
In Bangladesh, while many sectors face a nominal turnover tax of only 0.1%, with the closest counterpart to the beverage industry, ice cream, being taxed at a mere 0.3%, the proposed 3% turnover tax on beverages stands out as extraordinarily high without clear rationale. Implementing this rate would place undue stress on both local manufacturers and foreign investors, setting the stage for an imbalanced competitive landscape.
The imposition of the 3% turnover tax has compelled companies to reduce their trade margins and investments, resulting in elevated prices for consumers and decreased affordability. Consequently, fewer individuals are purchasing carbonated drinks, leading to a decline in sales and, ultimately, a loss of government revenue.
Acknowledging that the beverage sector in Bangladesh faces a combined tax rate of approximately 48.2%, including 15% VAT, 25% supplementary duty, and import duties, positions it as the highest taxed in comparison with neighbouring countries -- India at 40%, Sri Lanka at 29.2%, Nepal at 38.43%, and Bhutan at 30%. This elevated tax burden significantly raises production costs, subsequently inflating the market retail prices of these products. A more competitive tax regime could not only encourage foreign investment into Bangladesh’s carbonated beverage industry but also stimulate job creation, skill development, and augment government revenue.
It is pertinent to mention that the beverage industry in Bangladesh has attracted foreign direct investment (FDI) based on the potential of the Bangladeshi market. However, the imposition of an exorbitant and abrupt 3% tax on the industry, instead of bolstering government revenue, inadvertently lead to a decrease in overall fiscal intake. In fact, this impact is against the essence of Sustainable Development Goal (SDG) 9, which comprises of building resilient infrastructure, promoting inclusive and sustainable industrialization, and fostering innovation.
Therefore, to ensure sustainable growth of our economy the current 3% provision should be reduced to 1% or less and which will help flourish the sector and the economy with positive growth. Such policy decisions require evidence, industry consultation, comprehensive impact assessments, and, ideally, a collaborative approach to address industry concerns, as all this is necessary for Bangladesh to continue to ride the growth wave.
Rezaul Hasan is an ex-member (VAT) policy, National board of revenue, Dhaka. He can be reached at [email protected]
