The labour-intensive MSME sector (Micro, Small and Medium Enterprises) plays a vital role in Bangladesh's economic development by fostering entrepreneurship, driving sustainable technology innovation, and contributing to economic growth, employment generation, poverty alleviation, and social stability. According to the 2019 manufacturing survey by the Bangladesh Bureau of Statistics (BBS), MSMEs represent 93.81 per cent of industrial output and employ over 32.85 per cent of the workforce. In the fiscal year 2022-23, the sector contributed 38.51 per cent to value addition and 24.45 per cent to GDP. However, the sector has faced significant challenges due to the Covid-19 pandemic, with many small businesses shutting down due to lack of capital. The expansion of MSMEs is hindered by inadequate infrastructure, limited financial support, technological lag, market entry barriers, and a shortage of skilled labour, threatening the sector's viability. Increasing financial incentives in the 2025-26 budget, such as MSME-friendly tax policies, credit facilities, VAT concessions, interest reductions, and tax exemptions, could be crucial in creating jobs and encouraging investment by boosting productivity and competitiveness. This article explores the necessity and significance of these financial incentive strategies and their potential impact.
COMPARATIVE ANALYSIS OF MSME SECTOR CONTRIBUTIONS IN BANGLADESH AND OTHER COUNTRIES: According to the SME Policy 2019, there are approximately 7.8 million MSME industries in Bangladesh, providing direct and indirect employment to around 21 million people. The SME Foundation reports that in the fiscal year 2022-23, investment in the MSME sector was merely 27,560.27 crore taka (2.75 billion dollars), representing only 0.61 per cent of the GDP, which totaled about 4,490,842 crore taka (451.53 billion dollars). In contrast, the MSME sectors in India, China, and Japan contribute 80 per cent, 60 per cent , and 69.5 per cent to their respective GDPs, significantly surpassing Bangladesh's figures. In Germany, small and medium enterprises constitute the majority, accounting for 82 per cent of employment and contributing 17 per cent to value added. Additionally, in the Asia-Pacific region, MSMEs in China and India contribute over 40 per cent of total exports, compared to 26 per cent in Thailand, 19 per cent in South Korea, and 16 per cent in Indonesia. This comparison underscores the critical role of the MSME sector in both developed and developing economies, highlighting the need for special initiatives and policy support in Bangladesh to enhance the sector's contribution and improve overall economic and export capacity.
FINANCIAL INCENTIVE STRATEGIES FOR MSME SECTOR: In a market economy, small businesses often struggle against larger competitors that can monopolise the market, utilising information advantages to stifle MSME entry. To protect and sustain small businesses, special measures are essential. According to the structural transformation theory and the inclusive growth model in development economics, the MSME sector plays a crucial role in economic development by decreasing income inequality, creating opportunities for mobility, and broadly distributing economic benefits. To bolster the MSME sector's competitiveness, a variety of financial incentive strategies should be implemented at both public and private levels. These strategies aim to enhance MSME productivity and facilitate growth by lowering financial and administrative barriers.
LOW-INTEREST LOANS AND CONSULTING SERVICES FOR NEW ENTREPRENEURS IN EXPORT-ORIENTED MSMES: The government and Bangladesh Bank can collaborate to establish a refinancing fund, offering partial credit guarantees to commercial banks for loans to export-oriented SMEs under favourable terms. This can include direct low-interest loans through specialised institutions that assist in adopting eco-friendly technologies and modern equipment. Additionally, providing consultancy services can help new MSME entrepreneurs improve product quality, create market connections, and enhance international marketing capabilities. With low-interest financing, export-oriented SMEs can elevate product quality while adhering to global standards and invest more in marketing. Such loans enable new entrepreneurs to expand their operations cost-effectively and invest in innovative technologies, leading to product diversification and improved quality. Ultimately, this development will generate new employment opportunities, alleviating unemployment in both rural and urban settings.
TAX LIABILITY REDUCTION : The MSME sector primarily faces income tax and VAT obligations. Given their lower annual turnover, reducing tax liabilities for these businesses can ease the financial burden on MSME entrepreneurs, helping them compete with larger firms and expand. Tax assistance can enhance the investment climate, promoting new ventures and projects. By offering tax breaks for research and development (R&D), employee training, and environmentally friendly technologies, the tax liability for MSMEs can be reduced. Studies indicate that tax incentives in the U.S. and Canada significantly alleviate MSME tax burdens. Supporting R&D will foster innovation and competitiveness, while tax incentives for employee training will cultivate a skilled workforce, boosting productivity and performance. Investments in eco-friendly technologies will encourage sustainability within the sector, contributing to long-term environmental protection. Overall, tax relief for MSMEs will stimulate sector growth, job creation, and economic development.
CLUSTER-BASED REGIONAL INCENTIVES: Recognising MSMEs as priority sectors, specific clusters (e.g., light engineering, foundry-based MSMEs) may be eligible for reduced corporate tax rates or tax holidays. These clusters produce agricultural machinery parts, vehicle spare parts, and metal components for local and international markets, such as the light engineering clusters in Bogra or plastic manufacturing in Dholakhal (Dhaka). Criteria like environmentally friendly practices, minimum local value addition, and cluster association membership may be established for qualifying MSMEs. The National Board of Revenue (NBR) could approve tax holidays or reduced rates for compliant MSMEs. Such incentives will enable clusters to upgrade machinery, expand production, and remain competitive against imports, while enhancing the overall size and effectiveness of the cluster. Linking incentives to MSME clusters will further lower operating costs, improve resource sharing, increase productivity, ensure quality control, and enhance worker skills.
PREFERENTIAL TAX REGIME (PRT) BENEFITS FOR LABOR-INTENSIVE MSMES: The government's Preferential Tax Regime (PRT) for labour-intensive micro, small and medium enterprises is a special tax benefit that provides tax reduction, tax exemption or easier tax treatment to labour-intensive or employee-dependent enterprises. In this case, handicraft and cottage industries that employ a relatively large number of workers can get a minimum tax rate or some tax exemption. For example, if an investment is made in labour-intensive industries in the handicraft and cottage industries sector or if the activities or production capacity of the MSME is increased and the employment target is met within a certain period, the government can provide tax exemption as an expansion benefit. For example, if the enterprise starts on a small scale and gradually increases the number of employees and invests in new production lines, the enterprise can come under the scope of tax exemption related to increased production facilities. The Preferential Tax Regime benefit can play a very positive role for MSMEs. Because it reduces production costs somewhat, increases investment interest, and significantly increases local employment opportunities. This will increase the government's total revenue collection from MSMEs, as well as the contribution of MSMEs to GDP.
In conclusion, ensuring transparency and proper verification in selecting MSME beneficiaries for financial incentives is crucial. Strong policies and monitoring frameworks must be established. Regular evaluations using modern technology should maximize the use of incentive funds. During the 2025-26 fiscal year, effective distribution of credit facilities, tax exemptions, and incentives to new and export-oriented enterprises will support MSME sector expansion, job creation, and economic growth.
To make these steps fruitful, it is important for the National Board of Revenue, MSME Foundation, banks and financial institutions to play a responsible role, prevent corruption and use new technologies, provide training and consultancy services to entrepreneurs. Overall, such planned support to the MSME sector will accelerate sustainable growth and social development in the national economy.
Dr. Md. Abdul Latif, (PhD in Development Policy) Global Ambassador & ADB-JSP Scholar, Additional Director, Bangladesh Institute of Governance and Management (BIGM).abdul.latif@bigm.edu.bd
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