Entrepreneurs and business leaders welcomed this move, saying it would help strengthen backward linkage industries and attract more FDI to the apparel sector
The government is planning to diversify the apparel export basket and strengthen its backward linkage industries by extending the tax holiday facilities for manufacturing of artificial fibre or man-made fibre (MMF).
Industry people said MMF is the future of the apparel industry as its global demand is growing every year while that for cotton products is shrinking.
Due to lifestyle changes, consumers are now looking for products that are easy to care for, raising the demand for MMF-based products.
Entrepreneurs and business leaders welcomed this move, saying it would help strengthen backward linkage industries and attract more Foreign Direct Investment (FDI) in the apparel sector.
A Chinese company is already producing man-made fibre in Bangladesh.
Apparel sector insiders also demanded duty-free raw material import facilities to capitalise on this tax holiday advantage.
"We welcome the government's move. But if we want to cash in on the full advantage of a tax holiday, the government should allow importing the raw materials under a duty-free facility. Otherwise, cost of production will be higher," said Mohammad Ali Khokon, chairman of the Bangladesh Textile Mills Association (BTMA).
He added that many industries will grow under this initiative as Bangladesh has good demand for alternative yarn.
"We think the government has made the right move. As the second-largest apparel exporting country, we are still dominating in cotton-based products although demand for cotton items is decreasing globally," said Sheikh Fazle Fahim, president of the Federation of Bangladesh Chambers of Commerce and Industries (FBCCI).
He added that cashing in on the facility will help diversify the apparel export basket and Bangladesh could secure a strong position in the market within two years.
"The government has our special gratitude for tax exemption on producing artificial fibre," said Dr Rubana Huq, president of the Bangladesh Garment Manufacturers and Exporters Association (BGMEA).
According to former BTMA chairman Abdul Matin Chowdhury, Bangladesh required such a decision years ago.
"In 2005, we wanted to set up an MMF factory named New Asia Synthetic. But we ultimately failed because of non-cooperation from some departments, like the gas supplying authority, and complaints of pollution."
It was a $100 million project at the time, he added.
"We need to see how the budget documents describe man-made fibre. If it is only for those who make fibre from petrochemical, it will not work. Bangladesh does not have that much capacity in making fibre from petrochemical," explained Sayed Nurul Islam, chairman and CEO of Well Group – a leading man-made yarn manufacturer and exporter in Bangladesh.
"If it also includes the yarn made from man-made fibre, then it will work as Bangladesh is growing in terms of MMF yarn production," he said, adding, "To promote the man-made textile sector, the import tax on fibre and VAT on sales of man-made yarn needs to be reviewed. We expect the VAT rate to be zero instead of 3 percent."
Industry people said Bangladesh currently has about 27 spinning mills that are producing man-made yarn. They can meet only 20 percent of the national demand for the product.
If the country wants to sustain the textile sector, it needs to shift to man-made fibre from cotton. Increasing the capacity of the textile industry to produce 60 percent of man-made yarn for the next two years requires investment worth at least Tk5,000 crore.
Industry insiders also explained that if anyone wants to set up an MMF yarn production factory with a minimum 1,000-tonne capacity, it would require Tk150-Tk200 crore.
But going a step backward and setting up a man-made fibre producing factory with a minimum capacity of 5,000 tonnes would require Tk400-Tk500 crore.
The cost will also depend on the combination of types of machinery used, they said, since European machinery is more expensive than Chinese machinery.
Industry people mentioned that the share of global trade of cotton-based apparel is around 35 percent, which shrunk at a 0.5 percent compound annual growth rate (CAGR) between 2007 and 2017.
On the other hand, the share of MMF-based apparel is around 45 percent of total apparel trade, which had been growing at 5 percent CAGR during the same 10-year period.
The global trade of MMF-based apparel was $150 billion in 2017, where Bangladesh had a 5 percent share and Vietnam had a 10 percent share, according to PricewaterhouseCoopers (PWC).
In contrast, 74.14 percent of Bangladesh's apparel exports are cotton-based, which was 68.67 percent 10 years ago.
China, Vietnam, Indonesia, South Korea, Thailand, and Cambodia are the main MMF producing countries.
Bangladesh's fibre import reflects a similar picture. The latest data reveals that out of the 2 million tonnes of fibre imported in 2018, over 93 percent was cotton.
Industry people said that though our backward linkage industries have grown significantly in the past few decades, pulled by the demand of the export-oriented RMG industry, the primary textile industry remains overwhelmingly concentrated in cotton than other materials like MMF, polyester, vegetable fibre and animal fibre.
The country has about 430 spinning mills, of which only 27 are based on synthetic and acrylic fibre, and the rest are cotton spinning mills.
"Moreover, with the effect of graduation to middle-income country, we have to comply with the 'double transformation' process as per European Union GSP Rules of Origin. So, it requires Bangladesh to bring more investment in primary textiles, especially in woven and non-cotton sectors," said Rubana.
"Considering the prospect of non-cotton apparel in the global market and the trade advantages, the exemption of artificial fibre production from tax will directly incentivise investments in Bangladesh, and thus help us diversify our export basket and go for higher value-added items," the BGMEA president added.
In times of the global and unprecedented challenge, the sector has to steady itself and engage more in online sales, brand itself better, and retool industries to at least meet the immediate needs of PPE and athleisure, she said.
The tax at source for apparel exporters will be doubled to 0.50 percent from 0.25 percent in the 2020-21 fiscal year, according to the budget proposal.
Industry people said this might create a Tk1,500 crore burden for the sector.
"Our humble appeal to the government is for a reduction to the earlier 0.25 percent," said Rubana Huq.
Although the National Board of Revenue (NBR) fixes tax at source for RMG at around 1 percent during the budget every year, apparel makers always seek political interventions to have the rate slashed.
Last year, the government ended up reducing source tax from 1 percent to 0.25 percent.
RMG exporters are currently paying a 10 percent corporate tax for green factories and 12 percent for others; they will enjoy this facility for the next two fiscal years.
"In times of extreme uncertainties, the government's clear understanding of the requirements of the sector is greatly appreciated," the BGMEA president further said.