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April 15, 2024

Tighter value addition rules for Bangladesh RMG sector

  • FY22 RMG exports were $42.6B
  • Cutting, Making and Trimming’s share ranges from 15% to 20%
  • Minimum 20% value addition required for incentives
  • Exporters argue present value addition calculation is transparent and simple
  • Proposed import duty on materials for star and luxury hotels to increase to 110% after decade-long 10% benefit

Duty benefits granted on 40 materials

The government has planned to implement stricter regulations regarding the eligibility criteria for cash incentives provided to garment exporters who rely on materials supplied by their buyers, according to officials of the Bangladesh Bank.

In another move, the duty concession on the import of materials for luxury hotels is likely to be withdrawn in the coming budget, said finance ministry officials.

Apparel manufacturers who receive fabrics and other materials from buyers and export finished products after cutting, making, and trimming (CMT), will now be subject to a revised calculation of their value addition. To qualify for cash incentives, the value addition must amount to at least 20%.

Currently, exporters in this sector determine the value addition by subtracting the cost of production, including purchases from local markets and profit margins, from the export proceeds except for freight costs.

But under the proposed new rules, the value addition rate will be calculated on the basis of the price of goods purchased from the local market and CMT materials’ value.

Bangladeshi exporters buy various items such as cartons, poly, printing and labels from local markets. Exporters get incentives only when they add at least 20% value including labour wages and profits.

According to exporters, 15-20% of the total exports of the readymade garment sector are on CMT basis. In the fiscal 2021-22, readymade garments exports were worth $42.6 billion. In the first 10 months of the current financial year, Bangladesh exported garments worth $38.5 billion.

Syed Nazrul Islam, first vice president of the Bangladesh Garment Manufacturers and Exporters Association, told The Business Standard that it is always clear how much value is being added to the products exported on CMT basis. Because foreign buyers provide free materials including clothes.

“Any calculation should be simple so that exporters can easily present their financial details to the authorities concerned for incentives. Any procedure which complicates the proceedings is not desirable,” he added.

Mohammad Hatem, executive president of Bangladesh Knitwear Manufacturers and Exporters Association, said, “If the accounting method is modern, advanced and simple, it will definitely be good for businesses. But it is not right to go for any method, which creates complications.”

Withdrawing duty concession for luxury hotels

The National Board of Revenue (NBR) has given major duty concessions on the import of essential materials used in the construction of hotels to develop the country’s tourism industry. That will end as the tax regime is withdrawing this benefit in the upcoming budget.

According to sources in the finance ministry, on the suggestions from the International Monetary Fund, the government is going to withdraw subsidies and concessional benefits of various sectors. This time, the opportunity to import capital machinery at concessional facilities for the construction of posh hotels is being withdrawn.

The sector insiders believe the move will create a fresh challenge for the tourism and hospitality sectors.

According to sources in the finance ministry, the import duty was fixed at 10% for the construction of luxury hotels through statutory regulatory orders (SROs) issued by the National Board of Revenue (NBR). The business enjoyed this benefit for about ten years. At present, import duty of up to 110% is going to be levied on various goods under various HS codes as before.

At least 40 materials were provided with concessional duty benefits, starting from decoration or interior decoration of hotels, cooking, fire extinguishing equipment, furniture, lighting and electronics.

According to sources in the finance ministry, for the purpose of developing the tourism sector, there was a duty concession on the import of materials used in hotel construction for a long time. But at present the government feels that the sector is sufficiently developed and is set to move forward without government policy support.

Continuation of concessions in a sector in the long run makes them dependent rather than self-reliant. Then they constantly want to get more benefits. On the other hand, the government is deprived of revenue, they said, adding that it will not have any effect here.

Md Sameer Sattar, president of the Dhaka Chamber of Commerce & Industry (DCCI) said the government is set on revenue collection which may affect the consumer of the industry.

Ahsan H Mansur, executive director at Policy Research Institute, said the hotel sector is already overbuilt in Bangladesh like Thailand thanks to such a policy.

“The sector entrepreneurs are also doing well. Now is the time to take a break. If needed, the government may consider in future,” he added.

The eminent economist also advises that the government may offer reduced duty on import of various foods, which will help to attract visitors home and abroad to Bangladesh.

A senior official of the Bangladesh Tourism Board, who did not want to be named, said considering rising prices of construction materials owing to the global economic volatility and the strong dollar, if such a decision is implemented, the progress of this sector will be hampered. According to the tourism board, more than five lakh foreigners visited the country in 2017. The arrivals of foreign nationals were over 5.52 lakh in 2018.

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