Govt to reduce tax at source to facilitate leather industry

Among the foreign exchange earning sectors in Bangladesh's economy, the leather industry is the country’s second-largest contributor to Bangladesh’s export earnings after the RMG sector. But the sector at present is facing multifaceted challenges.The price of leather goods has not increased in the global market, although the production cost has increased by several times in recent years.

In addition to the decrease in demand in the international market, substantial increase in wages, power price and interest rates of banks in the country as well as 40 percent increase in the fuel cost of the ships in the sea transportation due to the various geopolitical conflicts have contributed to the continuous decrease in the export of leather and leather-made products.

Industry insiders believe that in order to increase the export of leather and leather goods, create entrepreneurs and attract foreign investment; the government has to provide policy support of tax benefits to the industry.

NBR initiates policy support

Exporters of leather and leather goods said that to compete in the global market, providing policy support to the sector has become an inevitable necessity.

In this situation, with an aim to provide policy support to the country’s second largest sector of export earnings, the National Board of Revenue (NBR) has taken an initiative to reduce tax at source from 1 percent to 0.50 percent against export earnings of the leather industry. The proposal has been sent to the finance ministry. The NBR will issue an order in this regard after receiving the green signal from the finance ministry. The tenure of the tax waver may be up to June 30, 2026, said NBR sources.

Earlier, the Leathergoods and Footwear Manufacturers & Exporters Association of Bangladesh (LFMEAB), in the pre-budget discussions held at NBR, had proposed to reduce the tax at source on leather goods and footwear exports from 1 percent to 0.5 percent for the next three years. The organisation said that this facility will increase exports along with creating more employment.

Besides, the organisation also sought permanent waiver of 10 percent tax at source on cash assistance in export of leather goods and footwear. The entrepreneurs of the leather sector said that the cash assistance in this sector was earlier 15 percent which has been reduced to 12 percent at present. Exporters will get a 10.8 percent subsidy after the deduction of tax at source. The government provides subsidies for exports as part of policy support. Therefore, the stakeholders of the leather sector think that deduction of tax at source on this assistance cannot be justified.

Present scenario of leather industry

The export of leather and leather-made goods has been decreasing continuously during the recent years, posing a grave threat to the future prospect of the potential sector.

According to available data, the export of leather and leather goods has decreased by 14 percent in the first seven months (July-January) of the current 2023-24 fiscal year, compared to the corresponding period of the previous fiscal.

In fiscal year 2022-23, the country exported leather and leather products worth $1.22 billion which was 1.75 percent less than the previous fiscal.

Industry insiders said that the area of local value addition of leather and leather products is much higher than that of garment products produced in Bangladesh; because Bangladesh has sufficient raw materials for this industry, which is not the case in the apparel industry. That is why the sector has the potentiality of capturing a significant portion of the global leather market.

Lack of LWG certificate reason behind limited export

As a result of the China Plus One policy, the leather industry in Bangladesh has a considerable potential for attracting huge foreign investment in the future. The country's leather and leather goods export is limited as most of the country’s tanners do not have the globally acknowledged UK-based 'Labour Working Group' (LWG) certificate.

It is difficult for the leather goods manufacturers to get orders from buyers in the US and Europe, if the leather used to make the goods is not sourced from tanneries with LWG certificates.

According to a study by the Bangladesh Investment Development Authority (BIDA), manufacturers of leather and leather goods in Bangladesh do not buy raw materials from local companies due to the lack of fully functional CETP at Savar Tannery Industrial Estate. Because the global brands would not purchase the finished products unless the raw materials are sourced from companies having globally acknowledged Leather Working Group (LWG) certificates, which the tanners of the industrial estate do not have due to the lack of a fully functional CETP.

As a result, Bangladesh is unable to fully harness the export potential of the leather sector and is expending a significant amount of foreign currency to procure raw materials from overseas sources, the BIDA report said.

Huge global market, tiny share

The global leather sector is expanding rapidly. In 2022, the global leather goods market was worth $420 billion. According to a new report by Grand View Research, an India-US based research firm, the size of the global leather goods market will reach $624.08 billion by 2028. According to a study by Canada-based research firm Presidency Research, the size of this market will be $735 billion by 2032.
Currently, Bangladesh’s share in the global market is only 0.26%.

Despite the lack of raw materials, Bangladesh ranks second in the world in exports of ready-made garments, earning $4,699 crore in the last financial year. But despite having sufficient raw materials in the country, the export of leather and leather goods was only $122 crore in the last fiscal, according to the Export Promotion Bureau.

According to the tannery owners, many countries, including European ones, demand LWG certificates in the export of various leather products including shoes to those countries. Tanneries without that certificate are exporting per square foot of processed leather at an average of 85-90 cents. These hides could have been sold to European buyers at twice the price if they were certified. Due to this reason, China, which does not demand LWG certificates, is now the biggest buyer of Bangladeshi leather.

According to the data, about six lakh people directly and another three lakh people are indirectly involved in this sector. The contribution of this sector to the total exports of Bangladesh is 4 percent, which is 0.5 percent of the country's total GDP.