RMG exporters demand lower source tax

Garment exporters yesterday urged the government to cut the source tax from 1 percent to between 0.5 and 0.65 percent, citing ongoing difficulties caused by domestic challenges and external pressures.

They also proposed keeping the reduced rate in place for the next five years.

In addition, they called for exemption from the 10 percent income tax on export incentive receipts, saying that export incentives have already been reduced as part of preparations for Bangladesh’s graduation from the least developed countries (LDC) group.

The Bangladesh Garment Manufacturers and Exporters Association (BGMEA) and the Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA) made these proposals in their budget recommendations for fiscal year 2026-27 (FY27), which were submitted to the National Board of Revenue (NBR) yesterday.

Both associations proposed setting the corporate tax rate for subcontracting factories at 12 percent instead of the current 25 to 30 percent, arguing that it should be aligned with existing policies where green factories pay 10 percent and non-green factories pay 12 percent.

They also said subcontracting factories, which place work orders with other factories, currently pay a 5 percent source tax on contract payments and demanded that it be reduced to 1 percent in the upcoming budget.

In addition, they proposed fixing the bond licence fee at Tk10,000 for three years, along with relaxed rules for sub-contracting and bond licence locking.

They also recommended exempting VAT and import duties on the import of man-made fibre and non-cotton yarn, saying this is necessary to expand production using man-made fibres and increase global market share.

Globally, around 75 percent of garments are made from man-made fibres, while in Bangladesh, over 70 percent of exports are cotton-based and only around 30 percent come from man-made fibres, meaning the country is missing significant opportunities.

They added that while cotton imports are already duty-free, similar tariff-free access should be extended to man-made fibre and yarn to stay competitive.

RMG UNDER PRESSURE AS EXPORTS FALL, COSTS RISE

The BGMEA, in its proposal, said the garment sector is facing an unprecedented set of challenges both at home and abroad, including global recession, geopolitical instability and tariff wars that have slowed export growth.

Internal issues such as rising costs of doing business, weak ease of doing business, and structural weaknesses are also affecting competitiveness.

Recent export data shows garment exports fell by 3.73 percent in July-February of FY26 compared to the same period of the previous fiscal year, with earnings continuously declining since August 2025.

As a result, factories are operating below full capacity, increasing fixed costs and overall production expenses.

New work orders have also slowed, with Bangladesh Bank data showing that back-to-back letters of credit (LC) openings for raw material imports fell by 6.79 percent in dollar terms during July-January of FY26.

Lower export orders, combined with reciprocal US tariffs and higher Chinese exports to Europe at competitive prices, have reduced export prices, with the average unit price of garments falling by 1.76 percent in July-February of FY26.

In the first seven months of FY26, imports of capital machinery dropped by 37.87 percent in the textile sector and 12.44 percent in the garment sector, continuing a negative trend from the previous fiscal year.

This reflects declining capacity and a weak investment climate, raising concerns about the sector’s future.

The data shows that the country’s main export-earning sector, the RMG industry, is going through a critical period, with around 400 garment factories closing over the past three years while many others remain financially weak.

At present, lending interest rates have risen to 12 to 15 percent, while energy costs have increased sharply amid ongoing shortages. Gas prices rose by 286 percent between 2017 and 2023, and electricity tariffs increased by 33 percent over the past five years.