The National Board of Revenue (NBR) has proposed imposing a 5% VAT on locally-manufactured mobile phones and refrigerators from next fiscal year, according to sources at the finance ministry.
The government has decided to levy VAT on those industries to make them more competitive in the market. It is also a strategy to achieve the revenue collection target by increasing VAT on some products, ministry officials said.
At the same time, the government recommended cutting VAT to 5% from the existing 10% for jewellery traders and 5% from 3% for the restaurant sector.
In the next budget, there will be a number of proposals to make the VAT law business-friendly. In some cases, VAT rates will be reduced to give relief to the people, considering local and global economic conditions, said sources in the know about the development.
The finance minister is scheduled to present the next fiscal year's budget in the parliament on 9 June.
"We have invested largely in mobile and refrigerator manufacturing to offer products at affordable prices if the government imposes any VAT on those at any stage that will affect its prices," said Mesbah Uddin Ahmed, chief marketing officer at Fair Electronics.
"Prices of raw materials meant for electronic items have risen about 20%, we have to adjust the hike with product prices," he also said, adding that a number of brands have already done that.
Mesbah Uddin Ahmed said the VAT imposition will also hinder the growth of Digital Bangladesh.
Rabiul islam Milton, Walton Hi-Tech Industries PLC deputy executive director, said, "We all manufactures are struggling because of raw material price hike. The economy has been facing a slowdown as the local currency has lost its value."
Rabiul islam urged continuing the current facilities given by the government to cope up with these economic conditions, otherwise manufactures will have to increase the product prices.
Industry people say local refrigerators manufacturers have been enjoying VAT exemption since 2010.
Thanks to the government policy support a dozen of industries have developed locally, those occupied around 80% of the market and the remaining 20% belong to foreign brands, according to Marketing Watch Bangladesh.
Before 2010, foreign brands had around 80% share of the refrigerator market with the remaining 20% market being the contribution of aspiring local brands.
The annual market of refrigerators has grown by $131 million in just two years from a $549 million one in 2018, Dhaka University research revealed.
A rapid rise of a middle-income class, increasing numbers of small families and working women amid countrywide electrification and urbanisation, and the localisation of manufacturing have together helped the Bangladesh refrigerator market grow at a double-digit rate over the past decade.
And now the Marketing Watch Bangladesh (MWB), a research initiative of the Dhaka University marketing department, forecasts that the market will reach $900 million in 2022.
Localisation of mobile manufacturing
According to Bangladesh Mobile Phone Businessmen Association (BMBA) data, 12-13 companies have invested over Tk5,000 crore in manufacturing mobile phones and created more than 1 lakh employment. Yearly production capacity of these companies is more than 4 crore units.
Those are supplying more than 90% of the market demand.
More companies are waiting for the clearance to go into production with new investments.
Pran RFL Group is gearing up to enter the market after local industrial giants – Fair Electronics, Walton and Edison.
At least seven global brands, including Samsung, Tecno, Nokia, Xiaomi, Vivo, Oppo and Lava have set up factories in the country in the last three years.
Industry insiders say almost all major brands have set up manufacturing as well as assembling factories in the country due to tariffs on mobile handset imports, tax holiday and VAT exemptions on local products.
The government first introduced a tax policy for local assemblers in the fiscal year 2017-18 and it was revised in every budget till now.
Currently, there is 57% tax on smartphone imports and 32% on basic and feature phones. The tax for locally-assembled and manufactured handsets is 18% and 13% respectively.
Rezwanul Haque, chief executive officer at Transsion Bangladesh Limited, said mobile manufacturers have paid 5% VAT on raw materials at the import stage if the government imposes any VAT on retail sales that might bring a pressure on the industry.
All types of raw materials saw a 10% increase in prices, she also said, adding that in the current budget, the government offered the local mobile handset manufacturers a VAT waiver at production stage for next two years (till FY23).
"The local mobile phone Industries grow with policy support in any country. It was no different in Bangladesh," noted Rezwanul Haque, a former secretary of Bangladesh Mobile Phone Manufacturing Association.
Flat VAT rate for restaurants
The new budget is also likely to introduce a flat 5% VAT rate for the air conditioned (AC) and non-air conditioned (non-AC) restaurants to revive the sector from the pandemic shocks.
However, the VAT rate for five-star hotels remains at the same rate of 15% for the next fiscal year.
Ministry officials said the restaurant sector was affected largely by the pandemic and the sector is also under threat due to commodity price hikes.
Considering the situation, the government decided to support them through fixing a flat VAT rate.
Welcoming this move, Imran Hasan, general secretary at Bangladesh Restaurant Owners Association (BROA), said this VAT rate deduction is one of their major demands.
This is one of the emerging sectors in the country but it was almost drowning in the pandemic situation, he noted.
According to Bangladesh Restaurant Owners Association, there are currently about 60,000 restaurants across the country, with more than 8,000 in the capital alone. Close to 2.8 million people depend on the restaurant industry for their livelihoods, while the number is several times higher if it includes the supportive sectors.
VAT rate cut for Jewellery sector
The new budget has proposed reducing the VAT on the jewellery sector to 3% from 5% to help it flourish.
Welcoming this move, Bangladesh Jewellers Samity General Secretary Dilip Kumar Agarwala said it will make the sector more competitive with neighbouring country India.
A group of people used to go India to buy jewellery as their VAT rate is 3% on jewellery.