'Proposed budget a bane for IT'

Despite the government's emphasis on promoting technology, the proposed budget for fiscal 2023-24 includes measures that are expected to raise the cost of importing IT hardware and software, which could potentially hinder the growth of the industry.

According to industry insiders, the increase in import duties on key components and the introduction of an additional VAT levy will result in higher expenses for hardware and software. This, in turn, will reduce protection and incentives for the development of local software.

Subrata Sarker, president of the Bangladesh Computer Society (BCS), highlighted the paradoxical situation created by the proposed budget, stating, "The key enablers of the industry, namely IT products, and software, have been proposed to become more expensive."

Members of the IT industry have expressed concern that the proposed budget prioritises making imported hardware more expensive before sufficient local capacity is built. At the same time, it reduces protection for the local software industry and increases their costs.

Computer to get costlier

Subrata pointed out a specific example, stating, "While we requested a reduction in duty on larger computer monitors, as they have become a necessity for the growing number of Bangladeshi knowledge workers, the government responded by increasing the import duty on even smaller monitors from 5% to 25%, under the pretext of encouraging local production. However, currently, only one company assembles monitors locally."

He also mentioned that modern hard disk drives, pen drives, and routers, which have no local production, will face higher duties. Consequently, computer hardware will become more expensive.

Even import duties on the foundation software that has no local source, such as operating systems (OS), database software, security software, and development tools used by programmers, will also increase from 5% to 25%, in addition to the newly proposed 15% VAT.

Subrata emphasised the financial impact on consumers, stating, "Consumers will have to spend several thousand taka more to purchase a desktop computer, while the prices of operating systems, databases, security software, and development software will increase by approximately one-third."

Also, prices of laptops with built-in genuine versions of Microsoft Windows will also rise, he further noted.

Higher capital expenditure and VAT to hurt software industry 

The Ukraine war following the Covid pandemic has already caused the prices of IT hardware to go up and now it would be software's turn, said Russel T Ahmed, president of the Bangladesh Association of Software and Information Services (BASIS).

Previously, software products without local alternatives were subject to a 5% import duty and no value-added tax (VAT). However, with the proposed changes, consumers, businesses, and the software industry will now have to bear the burden of higher duty and VAT, said AKM Fahim Mashroor, a technology entrepreneur and former president of BASIS.

He noted that the capital expenditure for software and other IT-enabled service firms, as well as any other companies considering automation, will rise.

On the other hand, while import duties and VAT for application software with local alternatives remain unchanged, local software will face a new 5% VAT. This reduction in protection and incentives for the local software industry in the proposed budget is concerning, according to Russel T Ahmed.

He explained that the concept of protecting the local industry has been misunderstood, as protection is typically sought only when local companies are competing with imports. However, this is not the case for operating systems, database software, security software, and development tools.

Mashroor points out that widely used operating systems such as Windows, database software such as MS Office, security software such as antivirus, and internet security cannot be pirated or obtained for free by professionals, especially those involved in exporting.

The increased costs associated with these essential software products will negatively impact the growth of the software industry.

Russel adds that the rise in costs will hinder the software industry's growth, especially when it requires new incentives to realise the vision of a Smart Bangladesh.

BASIS reports that the local market for software in Bangladesh has reached at least $600 million, with over two-thirds of the demand being met by local firms.

The IT and IT-enabled services sector is currently the third-largest export sector in Bangladesh, reaching $1.4 billion in 2022, primarily driven by software exports and benefiting from cash incentives.

BASIS aims to achieve $20 billion in exports by 2031, as major markets are facing a shortage of knowledge workers and Bangladesh is emerging as a prominent player in the industry.

The industry had been requesting an advance announcement of tax waiver extensions for the software and ITES industry since the existing waiver is set to end in June 2024.

The absence of this announcement in the proposed budget has created confusion among investors, suppressing the call for smoother policy communication after the shocks of the increased duty and VAT, concluded Russel.