CHATTOGRAM, Jan 11: The shipping industry is now faced with mounting challenges following the withdrawal of tax exemption coupled with the imposition of VAT on the sector, posing a serious threat to its growth.
In 2022, the government had announced a tax break for the shipping industry until 2030. In the budget for FY 2022-23, the government had decided to exempt tax on foreign currency income earned by Bangladesh-flagged oceangoing ships until 2030 in a bid to earn $3 billion to $4 billion a year. Prior to the decision, these local ships have to pay 10 per cent tax on their income.
On December 17 last year, the National Board of Revenue (NBR) issued an SRO announcing the cancellation of these benefits. Consequently, the income tax for the industry has now risen to 27.5 per cent. Earlier on December 15, another order was issued announcing the imposition of a 7.5 percent VAT on the sector.
The owners of the ocean-going vessels called upon the government and NBR to withdraw the SRO, as these developments have now led to turmoil in the sector.
Stakeholders in the shipping industry view this as a major setback for the growth of the shipping business. They argue that the sector has flourished under the tax benefits. Large industrial groups, which import raw materials for manufacturing industries, have also expanded their capabilities by engaging in this business. The abrupt cancellation of these existing tax benefits, along with the imposition of new VAT, will severely hinder local businesses in the country's shipping industry.
They further assert that the decision will forfeit a crucial opportunity to conserve foreign currency via global trade and freight transport. The Bangladesh Ocean Going Ship Owners Association (BOGSOA) has written to the finance adviser, asking the NBR to reevaluate its two latest directives.
In the letter, the BOGSOA points out that around 5,000 vessels reach Bangladesh ports annually, with a typical spending of 12 to 15 billion dollar on ship leases. Specifically, shipping costs have risen dramatically due to instability in the global supply chain.
The ownership of ocean-going vessels is quite restricted locally, leading to most shipping rental costs being incurred overseas. Through tax breaks, government support, and extra advantages for utilizing local vessels, in the previous fiscal year, local ship operators saved about 760 million dollars in shipping costs and almost 1.5 billion dollars overall, factoring in the salaries of 2,500 sailors. In this context, if the government fails to reevaluate its recent decisions, there is a serious risk that the growth of the promising shipping sector will encounter substantial challenges.
A previous report from the Bangladesh Bank suggested boosting foreign currency earnings by shipping goods on Bangladeshi-flagged vessels and pinpointing unnecessary spending in transactions.
Until now, Meghna Group has the largest fleet of ships involved in overseas goods transportation by sea. KSRM Group holds the second position, while Akij Group takes the third. Along with private sector entrepreneurs, the state-owned Bangladesh Shipping Corporation (BSC) also invests in the ocean-going shipping industry.
KSRM Group runs bulk carriers via its subsidiary, SR Shipping. Chief Executive Officer of KSRM Group Meherul Karim said, "Through the transportation of foreign goods, we are not only generating foreign currency but also offering jobs to skilled Bangladeshi sailors. Unlike the garment industry, which produces significant export revenue yet experiences considerable outflow via back-to-back LCs, our sector maintains the nation's net income.
"Significant investments have been made, and we trust that if factors such as vessel leasing and local sailor participation are carefully assessed according to the nation's trade volumes, the foreign currency revenues will directly enhance the central reserves, bolstering the economy further."
Talking to the FE, Secretary General of BOGSOA A S M Abdul Baten, also a retired rear admiral, said, "Incentivization is crucial for ship owners operating ocean-going vessels. Once an SRO is implemented by the government to benefit investors for a period by rebating some taxes, entrepreneurs not only gain acceleration by themselves, but simultaneously new entrepreneurs feel encouraged to invest in the same sector.
"Without consulting the stakeholders, the interim government has suddenly cancelled some of the SROs and incentives have been curtailed. This has become a significant concern for investors who have recently purchased new ships."
He also urged the government to provide subsidies or tax benefits for ship owners adopting eco-friendly technologies, which can also attract international collaborations.
Talking to the FE, Director of the Bangladesh Shipping Agents Association Khairul Alam Sujan said, "Even though the number of Bangladeshi-flagged vessels has risen to 101, it is inadequate for cargo transportation.
There are no alternatives to chartering foreign vessels for maritime cargo transportation. Consequently, sustaining the momentum of local entrepreneurs' investments in this industry is essential, as it is important for the nation's economy."
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