BD lagging behind others to tap potential due to high tax

Bangladesh is missing out on the potential of a rapidly expanding coffee market and failing to attract foreign investors to the sector thanks to high taxation on manufacturing.
According to local manufacturers, the current tax incidences are stubbornly high, hindering production and further investment. Moreover, previous bitter experiences of existing investors are discouraging new foreign investors from entering the market.
Compared to neighbouring South Asian countries such as India, Sri Lanka, and Pakistan, which impose import duties of approximately 54 per cent, 45 per cent, and 30 per cent respectively on coffee manufacturing and instant coffee, Bangladesh's coffee import tariffs hover around 89.32 per cent.
As a result, the country is struggling to compete in the global coffee market and is failing to reap the economic benefits of a booming local market.
Global coffee consumption has been steadily increasing over the years. According to the International Coffee Organization, coffee consumption has increased to 166.3 million bags in 2021 from 141.6 million bags in 2009.
In Bangladesh, the consumption is relatively low compared to other countries. According to a study conducted by the Bangladesh Coffee and Tea Development Board, Bangladesh ranks 111th out of 140 countries in terms of coffee consumption.
The country's lone investor of 'ready-to-consume' coffee is Switzerland-based Nestle Bangladesh Limited (NBL), which now considers its Tk 245 million investment in the manufacturing plant in Bangladesh is at stake after the government imposed a 20 per cent Supplementary Duty (SD) in the budget for FY 2022-23, industry sources said.
They said the company has invested in plant and machinery and employed manpower to process and package coffee imported in bulk for retail sales.
Bangladesh produces only 70-80 tonnes of raw coffee per annum while the consumption would be around 2,700-3,000 tonnes.
In recent years, the consumption of coffee in Bangladesh has been increasing.
According to the Bangladesh Coffee and Tea Development Board, consumption increased from 3,500 metric tonnes in 2016 to 4,000 metric tonnes in 2019.
A total of 55.75 tonnes of coffee beans was produced on 118.3 hectares of land in fiscal year 2019-20 in seven Upazilas of Bandarban, according to the horticulture wing of the Department of Agricultural Extension (DAE).
In a recent proposal, the NBL requested the National Board of Revenue (NBR) to introduce a new HSN code in the Customs Act - 1969 to accommodate the import of bulk coffee beans and instant coffee in a bid to help the manufacturers get rid of Supplementary Duty, Regulatory Duty and enjoy a reduced rate of Customs Duty.
Debabrata Roy Chowdhury, Director of Legal, RSA, Corporate Affairs and Company Secretary of NBL, said that because of this new 20 per cent SD, the investment made by Nestlé for processing and filling of Coffee through its state-of-the-art plant commissioned in its factory will be at stake unless there is some sort of protection introduced for the local industry.
This protection can be done through the introduction of a separate HS Code for the import of bulk coffee for VAT-registered industrial IRC holders to enable lower duty rates (10 per cent to 15 per cent) without any RD and SD. Else, it will drive away the existing and potential new foreign direct investment (FDI) in Bangladesh, he said.
The NBL recently submitted a plea to the NBR to consider the issue in the upcoming budget for FY 2023-24.
Currently, only 5.0 per cent of our population consumes coffee as compared to 50 per cent in developing countries, the NBL letter said.
The government should encourage the existing and well-reputed industries like NBL to facilitate the expansion of this industry which will eventually help the government earn more revenue in the long run and generate employment, it said.
A study of the NBL suggests that coffee in house holds nowadays is not considered as a luxury item and it is served even at the roadside tea stalls. Every five out of 100 people in Bangladesh consume coffee regularly.
As it is not a luxury item in a country that is set to graduate to middle-income status by 2026, the imposition of the SD is not justified.
"In case we fail to sustain and continue the production, a parallel market of smuggled coffee would dominate the market, cheating the consumers and depriving the government of its due revenue," the letter said.
As an IRC holder, the NBL is entitled to get exemptions from SD, and RD and enjoy the reduced CD as similar other goods are available. Coffee is allowed to import both in bulk and retail forms.
The government should separate the bulk import category for the sake of the sustainability of local manufacturing units as it is labour-intensive, industry insiders said.
According to the World Customs Organization, the HS structure applicable in Bangladesh has three major broad categories depending on the degree of manufacturing or sourcing such as raw materials or natural goods, semi-finished goods and finished goods.
In the case of coffee (coffee beans, coffee extracts and essence) in Bangladesh, the existing HS codes skipped the semi-finished goods category. Experts in this sector suggested that in cases of extracts and essence, there should be two separate HS codes for semi-finished goods and finished goods for ensuring proper duty structure which will promote the local industry to a greater extent.
In a letter to the Bangladesh Trade and Tariff Commission (BTTC), the NBL recently furnished a projection of generating additional foreign currency savings worth US$ 810,000 because of lesser import cost in bulk while the contribution to the public exchequer could increase by Tk 160 million if the government introduces separate HSN code having lesser tax incidences.
"If no changes are made, we may have to discontinue the 1.0-gram coffee sachet and reduce significant volume as the cost will go up if the products are imported in finished goods format," the letter said.

[email protected]