New budget measure could tax earnings from export incentives at up to 27.5%

Experts say lower withholding rates may be offset by broader tax treatment changes

Incentives Inverted: Hidden Export Penalty?

The 27.5 percent hit: Recasting incentives as advance tax hikes the total effective rate from 10 percent to 27.5 percent for struggling exporters

Strained sectors: The garment industry faces intense pressure as the new burden hits during prolonged declines in export earnings

Timing turmoil: Introduced with just weeks left in the accounting cycle, the shift forces sudden, retrospective financial changes

Exporters face a sharply higher tax burden on incentive earnings under a proposed budget change that reclassifies a key support mechanism.

The shift could add pressure on a sector already grappling with slowing export growth.

At the centre of concern is a proposed amendment to Section 163 of the Income Tax Act in the Finance Bill 2026.

If approved, the revision would remove the existing minimum tax regime and recast how different forms of income -- including export incentives -- are treated under the tax system.

Under the framework proposed by Finance and Planning Minister Amir Khosru Mahmud Chowdhury in the FY2027 budget, income from sources ranging from savings instruments to export incentives would be treated as part of total taxable income.

While lower-income savers may benefit from existing exemption thresholds and initial tax slabs, exporters face a markedly different outcome due to the absence of a comparable structure for incentive income.

At present, export incentives are subject to a 10 percent withholding tax, which is treated as a final settlement of tax liability. Exporters are not required to pay additional tax beyond this deduction.

That mechanism is set to change.

For the next fiscal year, the withholding rate has already been reduced to 5 percent.

However, under the proposed system, this would no longer be treated as a final tax but instead as advance tax, meaning exporters would remain liable for additional payments based on standard corporate tax rates.

In effect, export incentive income -- classified not as export revenue but as a government-issued incentive -- would fall under a standard corporate tax rate of 27.5 percent, creating what analysts describe as a higher burden.

How the Numbers Change

To illustrate the shift, experts point to a simple example.

Currently, if an exporter receives Tk 10 million in incentives, Tk 1 million is deducted as final tax at source, and no further tax is payable.

Under the proposed system, the same Tk 10 million would attract a 5 percent advance tax of Tk 500,000.

The remaining liability would then be calculated under the standard rate, leaving an additional burden of Tk 2.25 million -- bringing the total effective tax rate to 27.5 percent.

SMAC Advisory Services Director Snehasish Barua said the change could intensify pressure on an already strained export sector.

“Look, the garment sector is already struggling. Export earnings have been declining for a long time. At this moment exporters were expecting a reduction in withholding tax,” he said.

“The withholding tax has been reduced from 10 percent to 5 percent, which is fine. But once you move away from a final tax regime and bring it into a standard rate system, the burden will still remain. So you are receiving an export incentive, and now you may have to pay 27.5 percent tax on it.”

Explaining the rationale, he added that incentive income cannot be treated in the same way as export earnings.

“This is not export income. This is a tax incentive. Under income tax law, it will be taxed at the standard rate. So the impact is significant -- much larger than it appears.”

Snehasish also warned that the absence of an impact assessment could create unintended consequences.

“Before taking such a decision, there should have been an impact study and consultations with industry stakeholders to understand how it would affect the sector,” he said.

He further cautioned that the measure could have retrospective effects on exporters already deep into their accounting cycle.

“Many businesses have already closed accounts for the first half of the year. Those who finalise accounts in June have only about 15 days left. This timing creates additional pressure on exporters,” he added.