Midway through the fiscal year, the interim government has unexpectedly increased the Value Added Tax (VAT) on 43 goods and services, a move that has sparked significant discontent among businessmen.
They argue that the decision by the National Board of Revenue (NBR) to implement the VAT hike will inevitably place additional financial strain on consumers, leading to higher costs for products and services.
Business leaders have voiced concerns that the sudden increase will further aggravate the economic environment, still reeling from the political upheaval of 5 August.
The business sector, already struggling with the impact of two years of high inflation, finds itself under greater pressure.
Despite various measures, including interest rate adjustments by the interim government, inflation remains unchecked, making the VAT hike a severe blow to both Businessmen and consumers.
Finance Adviser Dr Salehuddin Ahmed, however, downplayed the impact, suggesting that the VAT increase would not significantly affect prices, given that duties on essential goods have been reduced to zero.
Speaking to journalists at the Secretariat on Thursday (2 January), He maintained that the adjustment would not lead to price hikes.
Effective from the first day of the new year, the government’s revenue-raising strategy includes elevating VAT and supplementary duties.
VAT on products such as garments, air-conditioned restaurants, sweets, and non-AC hotels has been increased to 15%, up from the current 5-7%.
The proposed amendments to the Value Added Tax and Supplementary Duty Ordinance, 2025, received policy approval from the advisory council’s meeting last Wednesday, pending vetting by the parliamentary affairs division.
Under normal circumstances, any tax increase requires parliamentary approval, as the power to levy taxes is constitutionally vested in Parliament.
However, in the absence of Parliament, the NBR will issue a special ordinance, with presidential consent, to enforce the new VAT rates, potentially as early as this week.
Experts have highlighted that VAT, being a direct tax paid by consumers, inherently increases their financial burden when raised.
They anticipate that once the higher VAT rates are implemented, businesses will pass on the costs to consumers, compelling them to pay more for the same goods and services.
NBR sources indicated that VAT on sweet sales, currently at 7.5%, will be doubled to 15%.
For example, VAT on a kilogramme of sweets will increase from 7.5% to 15%, raising the cost for consumers.
This scenario will replicate across all 43 categories of goods and services affected by the hike.
Economists warn that the increase in VAT will likely cause another round of price hikes, exacerbating inflation and disproportionately impacting low- and middle-income groups, making their lives even more difficult.
Former NBR member Md Farid Uddin remarked that the VAT increase on the designated goods and services will result in higher prices, consequently increasing consumer expenses.
He recommended that instead of a broad-based VAT hike, the government should have focused on tax reform and stringent measures to curb evasion.
NBR collects revenue primarily from three sources: income tax, VAT, and import duties, with VAT accounting for 39% of total revenue.
It is tasked with contributing 86% of the national budget's revenue target of Tk4.8 lakh crore for the current fiscal year.
Currently, there are 5.25 lakh VAT-registered businesses, with about 3.5 lakh regularly paying VAT.
The NBR has yet to implement effective measures to bring the remaining businesses under the VAT net.
An earlier initiative to install Electronic Fiscal Devices (EFDs) in businesses to enhance VAT collection has largely failed.
A survey conducted by the NBR two years ago revealed that 70% of collectible VAT in the service sector is evaded.
Farid Uddin suggested that meticulous oversight and significant reforms in this sector could enhance VAT collection, potentially eliminating the need for new VAT rate increases.
The VAT hike is partly in response to conditions set by the International Monetary Fund (IMF), which has demanded a uniform 15% VAT rate as a condition for disbursing the fourth tranche of a $4.7 billion loan programme.
The IMF, following its visit to Bangladesh last December, agreed to increase the loan size by an additional $750 million, provided the country implements stricter tax collection measures.
In addition to raising VAT on 43 goods and services, the government is considering lowering the annual turnover threshold for VAT liability from Tk50 lakh to Tk30-50 lakh, thereby bringing smaller businesses into the VAT regime.
Reactions from the Business Community
President of the Bangladesh Shop Owners Association and former Vice-President of FBCCI, Md Helal Uddin, criticised the VAT hike, asserting that it will inevitably burden consumers.
He emphasised the need for a business-friendly environment and urged the government to consider consumer interests, especially amidst the existing inflationary pressures.
Secretary General of the Bangladesh Restaurant Owners Association, Imran Hassan, described the mid-year VAT increase as a rash decision, demanding its immediate reversal to avoid further strain on consumers.
Md Helal Uddin further added that the lack of consultation with business stakeholders, asserting that such a significant decision should not have been made unilaterally.
