Business Leaders, Economists, and Consumers Voice Concerns Over Economic Consequences

Criticism Mounts Over VAT and SD Hikes

Business Report :

The interim government’s decision of 9th January to raise VAT and supplementary duties (SD) on a broad range of goods and services from industries including fruits, juices, beverages, cigarettes has sparked significant criticism.

While aimed at boosting revenue, the hikes have raised concerns about their economic impact, particularly regarding the burden on consumers, stifled future investment and potential opportunities, eroding trust in policymaking.

The new taxes affect both essential and non-essential items, including food, beverages, mobile services, and restaurants. Business leaders have called the hikes “suicidal,” warning they will hinder both domestic and foreign investment.

Taskeen Ahmed, president of the Dhaka Chamber of Commerce and Industry (DCCI), warned that the VAT and SD hikes would place excessive pressure on businesses and consumers alike, exacerbating existing economic challenges.

Consumer advocates, including the Consumers Association of Bangladesh (CAB), have demanded the reversal of VAT increases, otherwise which will further stretch household budgets. The Foreign Investors’ Chamber of Commerce & Industry (FICCI), representing most foreign direct investment in Bangladesh, has expressed concern that the lack of consultation with the relevant stakeholders could deter investment, with the potential to dampen consumption and undermine revenue targets.

Economists have criticized the government’s reliance on indirect taxes, which disproportionately impact the general public. Selim Raihan of the South Asian Network on Economic Modelling described the VAT hike as “short-sighted,” arguing it could slow economic growth. The approach has been rather myopic when it comes to accounting the long-term effects of the decision. Bangladesh’s low tax-to-GDP ratio, averaging just 9.9% from 2016 to 2020, remains a persistent issue.

The government has also raised SD on over 100 items, including paints and cigarettes. The paint industry, already burdened by inflation, faces a 30% SD on raw materials, driving prices up by 8-15%. In the tobacco sector, which is one of the highest incomes contributing industry, prices for cigarettes have risen by Tk 10-20, with SD climbing from 76% to 83% specially at the low segment of the cigarette which contribute to 80% of the market. While intended to curb consumption, these increases may fuel illicit sales, ultimately reducing tax revenue.

In response to the backlash, the government rolled back VAT hikes for certain sectors, including ICT. The National Board of Revenue (NBR) reduced VAT and SD on several goods and services, including mobile services, restaurants, and medicine. While some welcomed these reductions, CAB noted that essential items like soap and tissue paper remain heavily taxed, continuing to strain households.

With Ramadan approaching, CAB has called for further revisions, particularly to ease the burden on everyday items. Economists like Raihan continue to argue for long-term reforms, including expanding the income tax base and reducing reliance on short-term policy measures driven by IMF revenue targets.