Reducing Costs in RMG & Export-Oriented Industries through VAT Exemptions in Bangladesh

Author: Shibli zaman | November 27, 2024

Export-oriented industries, such as Bangladesh’s Ready-Made Garments (RMG) sector, are crucial to the country’s economic growth. To boost their competitiveness, the government has introduced VAT exemptions on critical inputs like gas, electricity, and certain services. These VAT exemptions in Bangladesh help lower operational costs for businesses, making them more cost-effective and competitive globally. Under the VAT Act and VAT Rules, businesses can benefit from input tax credits, which allow them to offset VAT paid on inputs against their VAT liability. This reduces the overall tax burden on export-oriented industries.

In addition to VAT exemptions, the Income Tax Act and the Income Tax Rules provide favorable tax reliefs, including exemptions from income tax and turnover tax for export sectors. The Supplementary Duty Act and Supplementary Duty Rules offer further tax benefits, especially for businesses involved in production and exports. Import duties are also often reduced under the Customs Act, providing significant savings for businesses.

The VAT Commissionerate enforces these tax rules, ensuring compliance with VAT invoices, VAT Gos, and Excise Rules. Additionally, businesses can seek legal advice to navigate complex tax regulations and make use of available exemptions. By offering tax reliefs, including customs SROs and income tax SROs, the government aims to support the growth of export-oriented industries, making Bangladesh a more attractive destination for international trade.

Critical VAT Exemptions for Export-Oriented Industries

1. Gas and Electricity: Export-oriented industries are exempted from VAT on the supply of gas and electricity. This exemption significantly reduces utility costs, enabling industries to reinvest in production and remain competitive globally.
2. Procurement Providers: VAT exemptions apply to services provided by procurement agents facilitating the sourcing of raw materials for export production. This reduces intermediary costs, making the supply chain more efficient.
3. Security Services: Security services used by export-oriented industries are VAT-exempt. This helps reduce overhead expenses while ensuring safety for factories and warehouses.
4. Transport Services: Transportation of goods within Bangladesh for export purposes enjoys VAT exemption, reducing logistics costs.
5. Laboratory Testing Services: Essential for quality assurance, lab testing services for export products are also VAT-exempt. This allows manufacturers to maintain global quality standards at a lower cost.
6. Freight Forwarding Services: VAT exemptions on freight forwarding services for export consignments reduce shipping costs, ensuring competitive pricing in the global market.

Impact of VAT Exemptions on Export-Oriented Industries

1. Cost Efficiency
2. By exempting essential utilities and services, businesses can reduce operational costs, making their products more competitive in international markets.
3. Encouraging Compliance
4. Simplified VAT structures and exemptions incentivize businesses to comply with tax regulations, improving transparency and accountability.
5. Promoting Export Growth
6. Reduced production costs allow export-oriented industries, particularly the RMG sector, to expand their market share globally, driving overall export growth.

Challenges in Utilizing VAT Exemptions

1. Documentation Requirements
2. Businesses must maintain proper records to claim VAT exemptions. Inadequate documentation can result in disqualification or penalties.
3. Awareness Gaps
4. Many businesses must be made aware of the available exemptions and how to leverage them effectively.
5. Compliance with the VAT Act
6. Export-oriented industries must issue Mushak 6.3 and submit Mushak 9.1 to justify VAT exemptions, requiring accurate declaration and reporting.

How S. Rahman & Co. Can Help

At S. Rahman & Co., we provide comprehensive support to help export-oriented industries maximize the benefits of VAT exemptions. Our services include:

• VAT Registration and Return Filing (Mushak 9.1).
• Preparation of Sales/Export Challan (Mushak 6.3).
• Purchase Register (Mushak 6.1).
• Documentation Assistance: Ensuring all records meet regulatory standards.
• Advisory on VAT Exemptions: Tailored guidance on gas, electricity, and services exemptions.
• Audit Support: Assistance during audits to ensure compliance with VAT regulations.

Conclusion

VAT exemptions for utilities and services such as gas, electricity, and freight forwarding offer a strategic advantage for export-oriented industries, including Ready-Made Garments (RMG). By leveraging these exemptions, businesses can significantly reduce costs and improve their competitiveness in the global market. The Bangladesh Tax Authority, under the VAT Law and related tax laws, allows businesses to claim VAT deductions on exempted goods and services, allowing them to optimize their financial strategy.
To ensure compliance, businesses must stay informed about VAT procedures, VAT returns, and the latest updates from NBR officials and VAT authorities. Accurate VAT returns and timely submission can help businesses avoid VAT evasion and penalties, safeguarding their operations and reputation. Additionally, businesses should understand how the VAT procedure works for exempt importation, as this can further reduce costs for companies importing essential goods and services.
Many businesses rely on VAT agents for expert advice and guidance to navigate the complex VAT system. Companies can ensure proper tax administration and avoid errors in VAT returns by working with VAT agents. For further assistance in optimizing your VAT strategy and ensuring compliance with tax laws, contact S. Rahman & Co. today for expert advice on maximizing VAT benefits and ensuring sustainable business growth.