Bangladesh Garment Makers Praise VAT Relief at Ports
Garment makers in Bangladesh have hailed the government’s decision to lift a value-added tax, or VAT, on port services for export-oriented industries, saying that it will provide some measure of relief during trying economic times.
The move will “reduce operational costs” for beleaguered businesses that are facing multiple headwinds, including collapsing orders in the face of breakneck inflation and escalating geopolitical turmoil, Faruque Hassan, president of the Bangladesh Garment Manufacturers and Exporters Association (BGMEA), told Just Style.
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The National Board of Revenue (NBR) began commandeering a 15 percent VAT following the enactment of the 2022 Finance Act, which whisked away the “zero rate of VAT” on services including the “‘transportation of international transport services and supplies relating to loading on and unloading from ships” from July of that year.
The tax, which was levied on container storage rent, unstuffing fees and river dues, resulted in an additional cost or more than 1,000 Bangladeshi taka ($9) per 20-foot equivalent unit, which authorities were procuring from factory owners rather than shipping agents, industry insiders told The Business Standard.
Some 45 percent of containerized goods imported through the Chattogram port, which started collecting the 15 percent VAT in September, comprise raw materials for the garment manufacturing industry, while most export products are readymade garments, they said.
BGMEA vice president Rakibul Alam Chowdhury told the outlet that apparel exporters would cede their competitiveness if the VAT exemption on port services for garment-related products wasn’t upheld.
“At this critical moment, it is in no way feasible. Furthermore, it is not relevant to engage with garment factory owners,” he said. “To sustain the viability of the garment export business, it is imperative to waive the collection of VAT on garment industry operations.”
Much lobbying from the BGMEA ensued, including an emergency meeting that Hassan held with the NBR in October to discuss the termination of the 15 percent VAT. That same month, BGMEA first vice president Syed Nazrul Islam dispatched a letter to the Chittagong Customs Excise and VAT commissioner Syed Mushfequr Rahman requesting the VAT’s suspension.
On Jan. 3, the NBR issued a directive, saying that “100 percent export-oriented industries, deemed exporters, or firms located in export processing zones (EPZ) will be exempted from VAT on port services in case of raw materials import (for export) and finished goods export.” Already, Chowdhury has sent a letter to the Chattogram Port Authority and VAT authorities requesting that they comply with the notice.
Abul Kalam Azad, a garment manufacturer, told The Loadstar that he welcomed the decision. The tax, he said, had “lowered our competitiveness” with other global manufacturers.
But “like it or not,” 2024 could be another challenging year for Bangladesh’s export-oriented garment industry, Sheng Lu, associate professor of fashion and apparel Studies at the University of Delaware, told Sourcing Journal.
“My studies show that as the U.S. and EU countries struggle with slow economic growth in 2024, the weak import demand would disproportionately impact Bangladesh’s garment exports, which primarily consist of large-volume basic apparel items,” he said.
Compared with other top Asian suppliers, Bangladesh has experienced the “worst performance” in apparel exports to the United States over the past three months, Lu said. In October, for instance, U.S. apparel imports from Bangladesh plummeted by 30.9 percent in quantity and 36.5 percent in value, far more acute than the world average of 8.3 percent in quantity and 21.9 percent in value.
“Without sufficient sourcing orders, many small and medium-sized garment factories in Bangladesh simply cannot survive,” he said.
Garments accounted for more than 80 percent of Bangladesh’s exports in fiscal year 2023, or roughly $47 billion, according to the BGMEA. The country is the world’s second-largest exporter of clothing after China, creating jobs for 4.1 million workers.
With incumbent prime minister Sheikh Hasina headed for her fourth consecutive and fifth overall term as Bangladesh’s helmswoman, it is therefore “critical,” Lu said, that her government heeds the wage protests that roiled its garment industry in October and November, causing the deaths of four workers and injuring scores more.
The violent demonstrations that temporarily shuttered hundreds of factories could also be far from over. While the consortium of labor rights organizations known as the Sammilita Sramik Parishad has postponed the “indefinite strike” set for Jan. 1—the result, it said, of heightened security amid Sunday’s elections and pressure from the garment industry’s power brokers—a new date will be announced shortly.
“We will continue our movement until the demands are met,” Aam Fayez Hossain, the group’s chief coordinator, told the Business Post. “We demand an end to any sort of torture on us.”
Lu said that studies repeatedly reveal the direct impact of political stability on a country’s attractiveness as an apparel-sourcing base to fashion firms. Even more detrimental is any threat of sanctions. Thea Lee, deputy undersecretary for international affairs at the U.S. Department of Labor, has urged Bangladeshi authorities to respect workers’ freedom of association, reconsider the proposed minimum wage and conduct a full investigation into the alleged police involvement in some of the worker deaths. Her words carry bigger muscle in the wake of a new presidential memorandum “directing” federal departments and agencies to “advance labor rights and worker empowerment in their work abroad.”
“Generally, countries with a stable political and business environment performed far better than those suffering from domestic violence and chaos in the same region. Thus, it is critical that Bangladesh’s re-elected prime minister responds to the call for fair wages for the country’s garment workers and avoids political instability that could further hurt Bangladesh’s garment production and exports.”
The American Apparel & Footwear Association says that it will continue to appeal to the Bangladeshi government to “set a tone that facilitates only peaceful discourse as wage and related issues are addressed and resolved,” including releasing anyone who has been unlawfully detained.
“With the election now over, we look to 2024 to continue growing our strategic partnership through responsible sourcing and respect for workers,” Nate Herman, the trade group’s senior vice president of policy, told Sourcing Journal.
For now, however, the VAT waiver counts as a win in a landscape of losses. “The move is a testament to the government’s commitment to supporting export-oriented industries and fostering economic growth,” Hassan told Just Style.
