The National Board of Revenue (NBR) has rescinded the recently implemented 2% advance income tax (AIT) on imports of cotton and synthetic fibres utilized by Bangladesh’s garment sector. This decision follows significant pressure from industry stakeholders.

The exemption, which takes effect immediately, is specifically for holders of industrial Import Registration Certificates (IRC), as stated in a gazette published today (17 July). Commercial importers will not be eligible for this adjustment.

The 2% AIT was introduced in the current budget, starting from 1 July, and was aimed at over 150 imported raw materials, including cotton and synthetic fibres. The NBR had anticipated an additional revenue of Tk900 crore from these items during the fiscal year.

However, textile mill owners quickly called for its repeal, contending that the tax imposed an excessive burden on an already challenged industry. They cautioned that it could result in the shutdown of spinning mills and jeopardize Bangladesh’s export competitiveness.

Bangladesh relies on imports for nearly 99% of the cotton used in its garment production for both export and domestic markets. In 2024, the country imported 83.21 lakh bales of cotton, as reported by the Bangladesh Textile Mills Association (BTMA).

Key sources include Africa (43%), India, CIS countries, Australia, and the US, with over 7% of last year’s cotton imports originating from the United States.

The withdrawal of the AIT applies to both synthetic fibres and their raw materials, such as acrylic, synthetic, nylon, polyesters, and acrylic, which are mainly imported from China.

Saleudh Zaman Khan, who serves as the Vice President of BTMA and the Managing Director of NZ Textile Mills Limited, expressed his approval of the decision. He pointed out the significant consequences the tax would have imposed, stating, “With a 2% AIT, the effective tax rate for my factory would reach 64%, despite the official rate being 27%.”

He further mentioned that Bangladesh imports approximately $4 billion worth of cotton and synthetic fibers each year, indicating that the industry’s survival would be jeopardized if the tax had persisted. “This would result in an annual payment of Tk32 crore solely for cotton import tax. No one generates that much in a year,” he clarified.

NBR officials defended the AIT, claiming it could be adjusted against final profits. NBR Chairman Abdur Rahman Khan informed The Business Standard, “Even if the tax is paid upfront during import, companies can later adjust it if they achieve sufficient profits.” Another NBR representative added, “If a textile company’s tax rate is 27% and it realizes a 10% profit in a year, that translates to Tk2.7 tax on every Tk100 earned. Since we are collecting Tk2 upfront, they should not encounter issues.”

Nevertheless, mill owners argued that a 10% profit margin is “extremely unrealistic” given the current economic conditions. They also highlighted the practical challenges in securing refunds or adjustments, expressing concerns that the measure would complicate rather than facilitate business operations.

Showkat Aziz Russell, President of BTMA, had earlier raised concerns to The Business Standard: “The NBR claims the tax can be adjusted at the year’s end, but the process is quite complicated. At a time when the government is aiming to simplify procedures, it makes no sense to complicate matters further.”

He also pointed out an inconsistency: “There is a tax on cotton imports, yet no tax on yarn imports. This will raise costs for our cotton importers.”

NBR sources confirmed that discussions with representatives from the International Monetary Fund took place prior to the decision to rescind the tax.