Budget 2026-27: Additional income tax burden trumps incentives for exporters

Exporters say they will have to pay a 27.5 percent tax on their export earnings, which far outstrips any benefits from new incentives

The Bangladesh government has decided to incentivise export income by reducing the withholding tax in the upcoming budget, but exporters say an additional 27.5 percent tax imposed on their incomes will completely overwhelm any benefits from the scheme.

The hike in their income taxes will come as a result of the decision to remove the minimum tax provision in the budget Finance and Planning Minister Amir Khosru Mahmud Chowdhury presented for the fiscal year 2026-27 in parliament on Jun 12.

As part of that plan, the Finance Bill 2026 proposes to amend Section 163 of the Income Tax Act, which, if adopted, will remove the minimum tax section.

As a result, all income, from savings certificates to incentives for export products, will be considered part of a taxpayer’s total income.

In the case of savings certificates, people with limited income will benefit somewhat, as the tax-free income slab and the first tax slab are set at a 10 percent tax rate. However, as there is no such tax slab or rate for export incentives, exporters will have to pay a 27.5 percent tax on that income.

Currently, as part of export sector incentives, withholding tax is considered the final tax and the minimum tax for a taxpayer.

According to the law, there is a provision to withhold tax at source at a rate of 10 percent against export incentives. After deducting this, a taxpayer would not have to pay any additional tax on it. This is the final tax, or tax liability, in the language of the law.

For the upcoming tax year, withholding tax has been set at 5 percent. Although it has been reduced by half, according to the new income tax provisions, withholding tax will now be considered as advance income tax instead of final tax.

In other words, after deducting 5 percent tax at source from the amount applicable on an exporter's incentive income, they will still have an obligation to pay the remaining tax.

According to the Income Tax Act, this is not export income but rather income from export incentives, which means that it will fall under the 27.5 percent corporate tax rate on general income.

As an example, currently, if an exporter receives an incentive of Tk 10 million against export income, there was a withholding tax of Tk 1 million, i.e. a tax of 10 percent. This was the taxpayer’s minimum tax.

With the new provision, against an export incentive of Tk 10 million, Tk 500,000 (5 percent) will be deducted at source as advance income tax. However, as this incentive falls under the corporate tax rate of 27.5 percent, the exporter will remain liable for an additional Tk 2.25 million (22.5 percent) in additional tax for a total of Tk 2.75 million.

Although the initial tax rate on the export incentive seems to have been lowered, the effective tax rate has gone up.

SMAC Advisory Services Director Snehasish Barua told bdnews24.com, “The situation in the garments sector is already bad. Exports have been declining for a long time. At this time, the demand from exporters was a reduction in the withholding tax.

“The withholding tax has been reduced from 10 percent to 5 percent, that’s fine. But, at the end of the day, when you come to the final tax, it is going up to the 'standard rate', then the burden on them remains. That means, if you get an export incentive, you now have to pay 27.5 percent tax on it.”

Asked why the tax burden would hit 27.5 percent, the analyst said: “Exports are a sector that has a corporate tax rate of 10 percent or 12 percent on export income.

“But this is not actually export income. This is a tax incentive. According to the Income Tax Act, it will be taxed at the 'standard rate'. So the impact of this is significant. In fact, the impact will be much greater.”

Although there have been demands to remove the minimum income tax section, Snehasish believes that it is important to analyse the consequences before taking any sector or person out of it.

“An impact study should have been performed before such a decision was taken. Discussions should also have been held with the people in the industry to gauge how it would be affected.”

He also highlighted that the decision would have a “retrospective” impact on exporters as it was made on the income of the current fiscal year.

The analyst said, “Those companies that close their accounts at the end of the year have already completed their accounts for six months until the end of 2025. Those who calculate their business in June have only fifteen days left. The government’s decision, coming at such a time, will create additional pressure and have a negative impact on them.”