Bangladesh's knitwear export sector is facing a significant internal hurdle: its tax system. BKMEA President Mohammad Hatem has publicly criticized the current tax regime as 'overly complex and unethical,' warning it is eroding the country's cost advantage as the world's second-largest garment exporter. This is no alarmist claim: as competitors like Vietnam and India optimize their business climates, if Bangladesh fails to achieve tax reform, its long-accumulated industrial competitiveness may rapidly diminish.
How Tax Issues Impact Industry Costs
Bangladesh's textile rise has largely relied on low labor costs and GSP tariff preferences. However, the BKMEA president's tax concerns push up operating costs from two angles. First, compliance costs: complex tax categories and vague filing processes force factories to hire more accountants or outsource to agencies, directly squeezing margins for SMEs. Second, hidden costs: 'unethical' clauses may refer to gray fees or arbitrary enforcement, leading to actual tax burdens exceeding statutory rates. For apparel OEMs with profit margins of 5%-8%, any extra cost can redirect orders.
Chain Reactions on Investment and Export Competitiveness
Tax uncertainty is affecting long-term investment in Bangladesh's textile industry. Over the past decade, the country attracted significant FDI from China and South Korea based on labor advantages, but tax issues may prolong project approvals and raise operational risks. Meanwhile, major buyers—Western brands—increasingly emphasize supply chain compliance. If suppliers face tax disputes, it could trigger brand audits, pushing sourcing to Vietnam or Cambodia. Chinese customs data shows Bangladesh's knitwear export growth to the EU lagged behind Vietnam in 2023, with tax factors playing a notable role.
Industry Responses and Adjustments
Industrial clusters in Dhaka and Chittagong are already adapting. Some large exporters use bonded warehouses or EPZ status to bypass some taxes, but this is not feasible for small factories. More notably, foreign firms are retaining high-value steps like fabric R&D in their home countries, placing only sewing in Bangladesh—a defensive move against tax risk. For Bangladesh, this could stall industrial upgrading, trapping it in low-end assembly long-term.