Call to scrap source tax on exports

Bangladesh should phase out the source tax on exports at the earliest opportunity, as it undermines competitiveness and distorts trade, according to a national taskforce on revenue reform.

The panel argues that taxing manufacturing exports contradicts fundamental tax principles and weakens the country's export-led growth strategy.

In its report submitted to the interim government last month, the taskforce stated unequivocally: "Taxing manufacturing exports is a bad idea."

Instead, it recommended collecting revenue from export-oriented industries through corporate and personal income taxes in line with established taxation norms.

The taskforce, formed by the interim administration, observed that export taxes are distortionary. They discourage exports by raising effective export costs and reducing trade flows.

Currently, Advance Income Tax (AIT) is levied at 1.0 per cent on readymade garments (RMG) and other manufactured exports at the time export proceeds are received, under income tax law. The tax is adjustable against the actual tax liability of export-oriented firms.

The National Board of Revenue (NBR) introduced the source tax on export proceeds in 2010. At present, around Tk 50 billion is collected annually from the 1.0 per cent AIT on exports.

Trade economist Zaidi Sattar, who headed the taskforce, said export taxes contradict fundamental taxation principles.

"Tax must be collected on income as Corporate Income Tax or Personal Income Tax, not at source," he told The Financial Express, criticising the tax authority for opting for what he described as an easier method of collection.

He added that the tax department must improve efficiency and curb corruption to raise the tax-to-GDP ratio, which remains among the lowest in the world.

However, several tax officials dismissed the recommendation as "theoretical", arguing that no other sector would be able to compensate for the revenue shortfall if AIT on exports were withdrawn.

"Before the introduction of the source tax on exports, tax collection from this segment was only Tk 90 million in 2004," he said.

The report, obtained by The Financial Express, noted that while export taxes may generate revenue, they create disincentives for export production and distort resource allocation - particularly in countries without market power, such as Bangladesh's RMG and other manufacturing sectors - leading to reduced export performance and welfare losses.

It described all forms of export taxes as an "inefficient mechanism" for raising revenue from international trade.

Across successful emerging economies, export taxes serve specific and limited purposes. They are applied sparingly, almost exclusively on natural resource commodities such as crude oil, minerals, timber or unprocessed agricultural products.

Countries such as Vietnam tax coal and crude oil; Malaysia taxes crude palm oil and petroleum; and Chile has historically taxed nitrate and copper.

Export taxes are typically used to capture resource rents or regulate depletion, not as a routine revenue instrument for industrial products.

None of these successful economies taxes manufactured exports. In fact, South Korea, Vietnam, Malaysia, Thailand and Chile built their export-led industrialisation strategies by keeping manufacturing exports tax-free, while actively promoting efficiency, competitiveness and scale.

The taskforce report also reflected two alternative views from exporters. Some small exporters find it convenient to have their tax settled at the border, although most prefer it to remain an advance tax adjustable upon filing income tax returns.

Others argue that since export enterprises do not always make profits, there should be provision to submit nil returns in loss-making years.

"It is up to the tax department to develop a system where RMG enterprises pay the tax that is due," the report said.

Shams Mahmud, Managing Director of Shasha Denims Limited and former president of the Dhaka Chamber of Commerce and Industry (DCCI), said the AIT should be withdrawn as it blocks working capital for export-oriented industries and weakens competitiveness.

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