Budget could have been more inclusive for expansion of SME sector

With a modest and tidy budget, the economic advisor has been more successful in managing finances than in protecting the interests of SME entrepreneurs. Moreover, the language used is so complex that these small entrepreneurs may not benefit much from it. Additionally, by imposing some new taxes, a situation has been created that may stifle these small initiatives. It is noteworthy that private investment has not been increasing for a long time. Such policies could further weaken the investment climate. To increase investment, the budget proposes setting up a Public-Private Partnership Fund, dropping several projects, and prioritising climate-resilient projects in the face of climate change-induced disasters, which is planned in consideration of its importance; but since SMEs are the lifeblood of our economy, they deserve special attention.

In the 2023–24 fiscal year, cottage, small and medium industries contributed about 12 percent to the GDP, and the budget speaks of creating 15,000 new entrepreneurs in the next three years. It also mentions enhancing loan disbursement facilities for SMEs and women entrepreneurs, and creating databases and digital platforms for them. Although the tax proposals claim to aim for a non-discriminatory and sustainable economic system, that has not been reflected in practice.

The VAT on all types of plastic products at the production stage has been increased from 7.5 percent to 15 percent. The tax on cotton yarn at the production stage has been raised from Tk 3 to Tk 5 per kg, and the same applies to yarn made from artificial fibres or blends. Additionally, VAT on blade production has also been increased.

It is true that without increasing VAT at the production stage, where will the government get its revenue? Bangladesh has a universally high VAT rate and tax-on-tax structure. The benefit of tax credit under VAT, which is generally applicable, is not effectively in place in Bangladesh. There are multiple VAT rates, and credit is only available if one complies with the highest 15 percent rate, meaning there is no scope for credit at other applicable rates.

The additional tax burden on the plastic sector will fall on consumers. Most of these products are sold in rural areas informally, where there is hardly any scope for VAT credit. Moreover, the mentioned plastic products are mostly used by poor consumers; therefore, the commitment to build a non-discriminatory and sustainable economic system might not be achieved if prices of these goods increase.

The advance tax on the import of industrial raw materials by manufacturing companies has been reduced from 3 percent to 2 percent, while it has been increased from 5 percent to 7.5 percent for commercial importers. SME entrepreneurs mostly purchase raw materials from commercial importers and cannot claim credit, thus making their products more expensive.

Section 122 of the budget proposes amendments to the Value Added Tax Act, 2012, stating that for commercial importers, if local value addition is not more than 50 percent, VAT should not be imposed on final settlement at the business level. Generally, value addition at the commercial stage cannot exceed 20 percent. Another issue is that no VAT credit can be taken if the rate is less than 15 percent, so there remains no scope for VAT credit—yet the law is worded so intricately that it becomes burdensome for small entrepreneurs.

In the 2024–25 fiscal year, the main budget allocated Tk 7.97 trillion for 62 ministries or departments. Of these, 10 ministries saw increased allocations or expenditures, with the agriculture ministry seeing the highest increase. It is noteworthy that agricultural growth has declined from 3.37 percent in 2022–23 to 3.30 percent in 2023–24, and has now dropped to 1.79 percent in 2024–25, which is very alarming. The budget states that the situation has been immediately managed through imports, but long-term measures are needed. Agriculture plays a major role in food security, and a significant number of small entrepreneurs are directly linked to this sector. The budget says nothing about agricultural product manufacturers, some of whom were involved in exports to neighbouring countries. It offers no guidance on how these small entrepreneurs will operate their businesses while facing non-tariff barriers.

Some small SME entrepreneurs were making progress by selling products online; but the VAT on online sales commission has been increased from 5 percent to 15 percent at once, which will utterly crush these small entrepreneurs.

Additionally, an ordinance dated 9 January 2025 has reduced the VAT exemption threshold for small entrepreneurs from Tk 5 million to Tk 3 million. The turnover tax—i.e. those who paid 4 percent VAT instead of 15 percent—has also been reduced from a Tk 30 million threshold to Tk 5 million. These changes are disheartening for small entrepreneurs.

However, the plan to streamline and make the bond system more business-friendly by establishing a Central Bonded Warehouse, if implemented, could solve many problems for small entrepreneurs.

On the other hand, the budget mentions a Tk 1 billion fund for start-ups, which, if realised, could create an environment for new start-ups. However, the Bangladesh Bank had already created a Tk 50 billion refinancing start-up fund, where scheduled banks were to contribute 1 percent of their profit for the next five years, but it has seen very little implementation. Only Tk 350 million of the fund established in 2020 has been used. The reason for its underutilisation must be identified. Otherwise, announcing a new fund serves no purpose.

Moreover, registered companies in Bangladesh face numerous difficulties in repatriating their profits. As a result, almost 90 percent of registered companies prefer Singapore over Bangladesh to bring in foreign funds, choosing not to register in Bangladesh.

The government has expanded the scope of minimum tax, adding 40 new clauses (Draft Finance Act 2025, Clause 163). This tax is payable regardless of profit or loss. However, it has been stated that for certain imported goods, this tax can be adjusted.

The tax on various products—especially beverages—is set at 3 percent. For cigarettes and bidis, it is 1 percent of gross income. A 30 percent supplementary duty also applies to beverages. Due to health concerns, this sector faces higher tax rates. Though this sector is not SME, the actual total tax rate is higher than in many other countries. This year's budget reduces the supplementary duty on all types of ice cream from 10 percent to 5 percent.

On the other hand, the finance advisor has said that VAT will not be increased on biscuits and bread. That is, the government wants to discourage sugary foods among the youth by raising minimum and supplementary taxes on beverages. At the same time, it does not want to increase taxes on staple foods like biscuits and bread consumed by the poor. Yet, it has reduced the tax on ice cream. Some consistency is needed in such policies.

Increasing small entrepreneurs and generating employment are key elements of our economic agenda—both these areas require stronger focus and vision in the budget. SMEs are a major source of employment, and the tax system should be flexible enough to allow the creation of many new entrepreneurs in the country.

Ferdous Ara Begum: Economist and chief executive, Business Initiative Leading Development