Policy inconsistency in deemed exports: implications for domestic industry

The National Board of Revenue (NBR) is the apex body for tax administration and revenue collection in Bangladesh, operating under the Internal Resources Division of the Ministry of Finance. The NBR is responsible for formulating, implementing, and supervising policies related to income tax, value-added tax (VAT), and customs and excise duties, with a view to integrating them, making revenue management effective, and ensuring their sustainability.

In addition, the organisation's important and strategic functions include defining the tax system, issuing notifications, and interpreting tax laws.

Policy coherence, transparency, and predictability are essential for a modern and effective revenue system. However, in practical application, a fundamental question arises about how reasonable and acceptable the differences in definitions, interpretations, and policy approaches are among different tax departments operating within the same organisation.

Since the basic objective of the income tax, VAT, and customs departments under the NBR is to ensure revenue collection for the state, it is very important to have policy consistency in the basic concepts and definitions related to taxation.

Unfortunately, in practice, the same content is often defined differently across categories, or the interpretation of one category is not recognised in another.

Such policy inconsistencies not only increase administrative complexity but also create uncertainty, interpretative conflicts, and a variety of risks for traders and investors. As a result, tax compliance costs rise, the investment environment deteriorates, and industrialisation and overall economic activity are negatively affected in the long run.

As per Section 2 (62) of the Value Added Tax and Supplementary Duty Act, 2012, "deemed export" means any supply that is not directly exported out of the country but is deemed to be exported subject to the fulfilment of specified conditions.

Under this section, firstly, if any goods or services are supplied in exchange for foreign currency in the prescribed manner for consumption outside Bangladesh, it will be considered a deemed export.

Secondly, even if any goods or services are supplied within Bangladesh in accordance with the prescribed procedure in exchange for foreign exchange through international tenders, they will be included as deemed exports.

Thirdly, the provision of deemed export will also apply to the supply of goods or services within the country in exchange for foreign currency against local letters of credit; these will be included as deemed exports.

According to Section 2 (82) of the Value Added Tax and Supplementary Duty Act, 2012, "export" means any supply or deemed export in exchange for foreign exchange from within the territory of Bangladesh to outside the territory of Bangladesh.

Section 2 (80) of the Income Tax Act, 2023 defines "export" as the supply of goods or services from within Bangladesh to outside the geographical boundaries of Bangladesh and the supply of locally produced raw materials and other materials to export-oriented industries under domestic back-to-back LCs.

However, since there is no clear definition or recognition of "deemed export" in the Income Tax Act, the same transaction is being treated differently. As a result, domestic suppliers under deemed exports are required to pay a maximum tax of 7% at source, which is subsequently treated as a minimum tax.

That is, on the one hand, export facilities are provided under the VAT Act, but on the other hand, the same activity is considered a taxable supply under the Income Tax Act, 2023.

This dual approach is posing a silent but significant risk to the domestic industry. This is because such supplies are mostly obtained through competitive international bidding or tendering, where domestic firms compete directly with foreign firms.

Excessive tax pressure increases their cost structure, squeezes profit margins, and causes liquidity crises. As a result, institutions often fail to repay bank loans on time, which adversely affects the economy as a whole and further weakens their competitiveness.

Although domestic industries and suppliers are currently performing government work through international competitive bidding, they are incurring financial losses due to these policies. Many EPC contractors are struggling to sustain their businesses and are unable to make loan instalments on time. What is more worrying is that many of these companies earn foreign exchange but do not receive the same benefits as direct exporters. This, on the one hand, reduces their incentives and, on the other hand, hinders the country's export potential.

In the current global economic context, where the development of domestic industry and the diversification of exports are considered strategic priorities, such policy inconsistencies can become a major obstacle.

Ambiguity and divergent interpretations in the tax system undermine investor confidence and discourage investment flows in the long run. Now is the time for concerted action.

There is a need to develop a common definition and policy among the three categories of income tax, VAT, and customs. The main objective should be to ensure that the same economic activity is treated the same under different laws.

Ensuring policy consistency will increase the efficiency of tax administration, enhance taxpayer confidence, and create a stable, investment-friendly environment for business and trade. Above all, it will be instrumental in further accelerating the country's industrialisation and economic growth.

The writer is a fellow chartered accountant and a financial sector analyst. He can be reached at faysal.aqc@gmail.com