Growing for more than 30 years with extensive policy and financial support from the state, the apparel sector is yet to come of age. The industry leaders still clamour for support and incentives on different pleas. Right at this moment, they are protesting the proposed increase in source tax.
In the proposed budget for the next fiscal year (FY2016-17), the finance minister has increased the rate of source tax from 0.60 per cent to 1.50 per cent for the export earnings of the readymade garments. At the same time he has reduced the corporate tax rate from existing 35 per cent to 20 per cent. But the Bangladesh Garment Manufacturers and Exporters Association (BGMEA) and the Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA) are claiming that rise in source tax will put apparel sector in jeopardy. They are also not happy with the significant reduction of the rate of corporate tax.
In their post-budget reaction, owners of the garment factories demanded that both source and corporate tax rates have to be lowered. They demand that source tax should be 0.30 per cent and corporate tax, 10 per cent. Unless their demands were met, they fear that the industry would lose its competitiveness, exports will decline, workers will lose job and economy will suffer. These are old arguments repeated time and time again during the last two decades.
However, the readymade garments industry has continued to grow defying all odds. Three factors contribute to this growth: entrepreneurial dynamism of the owners, hard labour of the workers and uninterrupted policy support of the government. Thus the Bangladesh garment industry has become a strong global competitive player. The country is now the third largest clothing exporter in the world after China and European Union (EU), according to the World Trade Organisation (WTO). Share of Bangladeshi RMG in the global exports stood at 5.1 per cent in 2014 while the share of Vietnam, India and Turkey were 4.0 per cent, 3.7 per cent and 3.0 per cent respectively.
The development of the apparel sector in the country is phenomenal. It is the source of 80 per cent export earnings of the country and provides direct and indirect employment of around 4.2 million people. Annual export earnings from the garment sector have increased from $4.8 billion in 2001 to US$25 billion in 2015.
But the industry suffers from some structural problems including the reluctance of a section of owners to improve working conditions in their factories and ensure decent wages for the workers. This section of garment owners and exporters dominates the leadership of the industry and always puts pressure on the government for incentives and privileges. A general tendency of the garment sector is not to accept market forces although the exporters have to follow market mechanism.
As per market rule, all factories are not equally efficient and all cannot make equal profits. Profit margin varies and in some cases zero profit is unavoidable. So some factories have to face shutdown. It is not wise nor does it make any business sense to provide support to them when they are not able to compete.
Against this backdrop, the proposed budgetary moves to increase source tax rate and reduce corporate tax rate are logical. The source tax on export proceedings is the final settlement for the garment industry. So, garment exporters don't have to make any readjustment. By paying only 0.60 per cent tax, they are actually paying lower tax compare with many others. In 2014, the National Board of Revenue (NBR) announced reduction of source tax on RMG industry from 0.80 per cent to 0.30 per cent for 15 months. A huge tax reduction was made to compensate damages faced by the industry during the political turmoil in the second half of 2013. For this, the government had to forego revenue worth Tk 20 billion in 15 months.
As the size of the country's budget is growing, the garment sector, which is the largest industry in the country also need to contribute more. Thus, 1.5 per cent tax at source shouldn't be considered as a barrier to grow further. Moreover, to ease the pressure of tax hike, the budget has also proposed to cut corporate tax rate from 35 per cent to 20 per cent. It means garments owners will pay one-fifth of their profit as tax which is currently estimated at one-third. This is clearly a big advantage for the industry and skilful manufacturers will tap the advantage.
While continuous demand for incentive is there, dynamic initiatives of entrepreneurs are also there. For the last couple of years, a few entrepreneurs have come forward to invest in environment-friendly factories. This is a reflection of effort to diversify the sector.
Thus garment manufacturers and exporters have to build and demonstrate their capacity to face future challenges. As China is gradually shifting from low-end products due to increase in labour cost, Bangladesh is in a position to fill the vacuum. While Vietnam and Cambodia are gradually advancing in this direction by taking geographical proximity to China, it is not too late for Bangladesh.
Two crucial things, however, need attention here. First, there is no way to depend on low wages anymore. Bangladeshi apparel manufacturers have to get ready to pay incremental wages to the workers along with better working condition. Second, fiscal incentives and other support measures will be reduced in near future. Still the industry is expected to contribute more to the national exchequer. A mature industry can't ignore its greater responsibilities to its own workers, to its society and its country.