Budget offers mixed bag of benefits, threats for capital market

The proposed budget for FY26 offers tax benefits for some specific sectors while imposing higher taxes on other industries where growth is not under the agenda of the government for attaining economic stability.

EBL Securities distinguished both the groups in a budget review and explained why one group will benefit but the other will endure more obstacles to smooth business operations.

The doubling of withholding tax rate to 10 per cent on interest income from fixed-income securities will shrink net returns on such investment vehicles. This higher withholding tax rate will also reduce banks' net return on investments in fixed-income securities.

Most of the listed banks reaped handsome profits from low-risk government debt-based securities in an adverse business climate engendered by inflationary pressure in the last two years. They will see a significant decline in income from this segment in FY26 if the budget proposal is finally approved and enforced.

However, an exemption of excise duty on bank balances up to Tk 0.3 million instead of the existing Tk 0.1 million will attract small savers towards bank deposit schemes, said EBL Securities.

Publicly-traded companies will be subject to a 20 per cent tax rate if only all types of income is transacted via bank transfers. Otherwise, a higher tax rate by 2.5 percentage points will be applied. Non-listed companies will be taxed at 27.5 per cent. So, the tax gap between listed and non-listed companies has widened to 7.5 percentage points from the existing 5 percentage points.

The wider tax rate gap is anticipated to make stock exchange listings more attractive and help increase the market depth, according to the EBL analysis.

Proposed lower tax burden for market intermediaries - brokerage firms and merchant banks -- is also expected to provide some relief during this prolonged bearish market scenario, it said. However, there is no direct tax benefit for general stock investors.

According to EBL Securities, proposed tax cuts are expected to benefit companies in the sectors of pharmaceuticals & chemicals, fuel & power, information technology, food & allied, real estate, cement and automobiles.

On the other hand, increased tax burden will adversely affect companies in the sectors of steel, textile, tobacco and paper manufacturers.

Steel sector facing "renewed" threats

Fixed import duty on mild steel (MS) products has been increased by 20 per cent to Tk 1,800 per tonne for the next financial year.

"The [tax] increase particularly on scrap iron, a key raw material for MS products, and ferro alloys is expected to raise input costs for steel manufacturers, which may exert upward pressure on finished steel prices and potentially impact the industry's overall profitability," said the EBL analysis.

As a result, the production costs of listed companies, such as GPH Ispat, Bangladesh Steel Re-rolling Mills, and BSRM Steels will go up. Such a sharp increase in taxes would drive up product prices further, reducing consumers' purchasing power, putting the entire industry under renewed threat.

Duty-free benefits for textile sector removed

The government has proposed that tax at the production stage of cotton yarn and man-made fiber would be increased to Tk 5 a kg, up from the existing Tk 3 a kg. There will also be a 1 per cent import duty on polyester staple fibre as the interim government decided to stop giving duty-free benefit to this segment.

"Due to higher taxation, yarn production costs of textile manufacturers will increase, which will negatively impact their profitability," reads the EBL analysis.

So, listed textile companies, such as Square Textile, Matin Spinning Mills, Malek Spinning Mills, Apex Spinning Mills and Saiham Cotton, may experience greater challenges in business.

Meanwhile, 1 per cent source tax on export proceeds of readymade garment industry has remained unchanged in the proposed budget for the upcoming fiscal year.

Higher advance tax on tobacco sector

The advance tax rate on net sales value of cigarette manufacturers is up from 3 per cent to 5 per cent for FY26 while supplementary duty on imported cigarette paper has been doubled to 300 per cent.

The revised advanced income tax policy is likely to result in higher cash outflows upfront, potentially tightening short-term liquidity and compelling manufacturers to rely more heavily on short-term borrowings, thereby increasing finance costs, EBL analysis noted.

As a result, the lone listed cigarette manufacturer BAT Bangladesh may face higher manufacturing costs and lower profits.

Telecom sector's turnover tax benefit will have little impact

Turnover tax on mobile operators has been reduced from 2 per cent to 1.5 per cent in the proposed budget while a 10 per cent supplementary duty is imposed on OTT platforms.

EBL Securities said there would be no significant impact on listed telecommunication companies as their taxes on pretax earnings are higher than turnover taxes and considered for final tax settlements.

Due to an increase in subscription prices, the number of OTT platform subscribers may drop, hampering revenue growth in this segment.

The government also offers a 10 per cent tax rebate if telecom operators float 20 per cent shares to the public through an initial public offering (IPO).

This stimulus targeting non-listed operators -- Banglalink and Teletalk - may encourage them to list in the secondary market, according to EBL Securities.

Drug makers may get inspired to produce API

VAT exemption on API (active pharmaceutical ingredients) production has been extended to June 30, 2030, which will have an impact on the business of Beximco Pharma, Square Pharma, and Renata.

The strengthening of local capacity to make APIs will reduce dependency on imports (mostly from India and China), lowering production costs, improving medicine availability, and enhancing export potential for Bangladesh's growing pharma industry.

E-bikes to give a boost to automobile cos

In the proposed budget for FY26, the government proposed removing all VATs in excess of 5 per cent on local production of e-bikes until June 2030.

This fiscal incentive is aimed at bolstering the domestic e-bike manufacturing sector by reducing production costs and encouraging eco-friendly transportation solutions.

Listed Runner Automobiles will get advantage from the lower tax rate as the company produces/ assembles and markets e-bikes in Bangladesh.

Moreover, the government has decided to exempt companies from supplementary duty on imports of certain essential raw materials for the manufacturing of refrigerators, freezers, air conditioners and their compressors until June 2028.

This will support Walton and Singer Bangladesh in growing their business and securing higher profits.

The proposed reduction in import duties on essential raw materials for tyre manufacturing, along with a cut in duties on imports of buses (16-40 seats) and microbuses (10-15 seats) will help IFAD Autos.

Lower import duties will bring down costs of assembling vehicles, potentially increasing market share. Lower duties may also enhance profitability.

Oil refiners to avail of tax cut

Moreover, the withholding tax rate on oil supplied by companies involved in oil refining has been reduced from 2 per cent to 1.5 per cent. Jamuna Oil Company, Padma Oil Company, Meghna Petroleum, MJL Bangladesh and Eastern Lubricants Blenders will be benefited for this.

Food and allied sector to benefit from health risk remedies

The supplementary duty on all types of ice cream has been slashed to 5 percent from 10 percent, which may increase the profitability of Taufika Foods and Lovello Ice-cream.

The existing VAT exemption for imports of raw materials for sanitary napkins and diapers, which are necessary for the health protection of women and children, has been extended till June 30, 2030. ACI Limited is likely to see a positive impact from the measure.

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