Fiscal Year 2025–26 Budget: Opportunities and Challenges for Bangladesh’s Apparel Sector

The national budget plays a vital role in enhancing the competitiveness coupled with creating a business-friendly environment for any sector in the economy. This also holds for the Bangladesh apparel sector, which is the largest export-oriented sector of the country’s economy. The sector accounted for 81.29% of total national export whilst contributing 8.03% to the country’s GDP in the fiscal year 2023–24. For the fiscal year 2025-26, the interim government of Bangladesh has announced a budget of Tk 7.9 trillion, equivalent to around USD 64.33 billion. With this in mind, the article outlines several positive measures included in the fiscal year 2025–26 budget that are highly expected to benefit the sector. Simultaneously, it also highlights important proposals put forward by the sector’s representative trade associations, such as BGMEA and BKMEA, which were not incorporated into the final budget, in spite of their potential to further increase the competitiveness of the sector.

Table: Bangladesh and Other Countries in Global Apparel Exports in 2024 (value in billion USD)

Note: Export Value and Market Share Based on Mirror Data, i.e. reported by the partner countries; Apparel (HS61 & 62); Source: Author’s calculation based on ITC Trade Map, 2025

Some Favorable Budget Initiatives for Ameliorating the Growth in the Apparel Sector

The budget for FY 2025–26 expressed the goal of reducing the inflation rate, with a sharp drop from 9.0% in FY2024–25 to 6.5% in FY2025–26. However, if this goal can be achieved in a real sense, it will surely benefit the country’s low-income people, especially workers in the apparel sector, whose cost of living is greatly affected by changes in price level of essential goods.

The Value Added Tax (VAT) and Supplementary Duty (SD) Act, 2012, has been amended to reduce the advance tax on the import of industrial raw materials from 3% to 2%. This initiative will not only benefit the apparel sector but also other export-oriented sectors by reducing the raw material import costs.

To simplify and make the bond system business-friendly, the ‘Central Bonded Warehouse and Free Zone Bonded Warehouse’ systems have been introduced. Moreover, the one-time bonding capacity for bonded enterprises has been increased from one-third (33.33%) to half (50%) of their total bond limit, and thus, it is allowing larger duty-free raw material imports per shipment. The warehouse license application process has also been simplified, and now businesses no longer need to wait six months before applying. And all these measures in this case, are expected to reduce both time and costs when it comes to importing raw materials for the apparel and other export-oriented sectors, and thereby supporting to enhance competitiveness.

To promote widespread adoption of renewable energy, the duty on the import of solar inverters has been reduced from 10% to just 1%.

Under Bangladesh’s 2023 Customs Act (Section 171), previously, mistakes in HS code classification would lead to heavy penalties of 200% to 400% of the customs duty payable on the imported goods. However, the FY 2025–26 budget has taken the initiative to lower this penalty amount. Although the exact changes are not known yet, it is a positive move.

For the issuance of advance rulings on the determination of Harmonized Systems (HS) codes for any product, the validity period has been extended from 18 (eighteen) months to 36 (thirty-six) months. In this case, this positive move will bring greater flexibility and encourage business.

The rate of tax deduction at source for the supply of raw materials used in the eco-friendly recycling industry has been fixed at 1.5% instead of 3%. Although it is not directly related to the apparel sector.

The corporate tax rate for the apparel sector remains at 12% for non-green factories and 10% for environmentally friendly (green) factories in FY Budget 2025-26 as previous periods. In this sense, it can be considered a stable positive move.

• In the budget the FY 2025–26, no changes have been made regarding the source tax or tax deducted at source (TDS). In other words, the existing rate of 1% remains unchanged, as in previous periods. Although it was proposed for  the FY 2025–26 budget to fix the tax at source for the apparel sector at 0.5% for the next five years (i.e., from 2025–26 to 2029–30), this proposal was not considered.
• The ‘Vehicle and Cargo Declaration Claim and Pre-Arrival Processing Rules–2025’have been issued to simplify activities related to cargo declaration, and the relevant law has been amended to remove the requirement of paying a minimum of Tk. 50 (fifty) thousand collected as fines. As such, it will easier customs procedures, reduce delays, compliance costs for both importers and transport operators. 

 Unmet Sector Proposals: Hindrance to Further Strengthen Competitiveness

• As a part of the pre-budget proposal, it was urged to fully exempt all necessary goods and services for Bangladesh’s export-oriented garment industry, including services such as subcontracting, printing, courier, auditing, consultancy, CSR activities, construction, and training programs, etc. Although the FY 2025–26 budget has not accepted this proposal, if it is adopted, it could still significantly help the sector remain competitive, especially with the complete withdrawal of cash incentives following Bangladesh’s LDC (least developed country) graduation on November 24, 2026.
• In the budget FY 2025–26, it was recommended that incomes such as gains on asset disposal, sub-contract income, and other disallowable items related to the RMG sector be taxed at the sectoral corporate tax rate of 12% instead of the regular 30%. However, this proposal was not included in the budget, meaning such incomes will still be subject to the higher tax rate, which is potentially increasing the sector’s tax burden and ultimately reducing its competitiveness.
• For the budget FY 2025–26, a proposal was made to withdraw the 7.5% VAT on pre or post discarded textile or apparel waste (locally known as “jhut”) and the 15% VAT on the supply of recycled fiber. As it plays a crucial role in promoting reusing and recycling practices however, the proposal was not considered in the budget. As such, this decision is likely to hinder rather than accelerate the promotion of the circular economy approach in the sector.            
• Generally, a 25% customs duty is imposed on imported raw materials and machinery for man-made fiber production. To encourage local production of man-made fiber, a proposal was made to withdraw all duties and VAT, but this was not considered in the fiscal 2025–26 budget discussions. Rather, the tax on the production of man-made fiber (MMF) has been increased from Tk. 3 to 5 per kg, which will raise production costs and discourage local manufacturing in this case.
• In the 2025-26 FY budget, the specific tax on the production of cotton yarn has been increased from tk. 3 per kg. to 5 per kg. This tax increase will lead to an increase in the price of cotton yarn produced by domestic textile mills, and ultimately, it will negatively impact the apparel industry’s cost competitiveness in the global apparel market. Since local textile mills in Bangladesh meet a significant portion of the cotton yarn demand for the apparel sector.
• In the FY 2024–25 budget, the VAT on energy-efficient LED (Light Emitting Diode) bulbs has increased from 5% to 15%. Therefore, a proposal was made to reduce this VAT back to the previous 5% for the 2025–26 budget. However, the budget for FY2025-26 not only retains the 15% VAT on LED lights but also raises the VAT on their imported parts from 10% to 25%. As a result, this step is likely to hinder the adoption and innovation of such a type of energy-efficient technology.
• To make factories compliant, safe, and risk-free, particularly in installing fire safety machinery and equipment and reducing their operational costs, a proposal was made to allow the import of certain equipment and materials at duty-free or concessional rates, which was not taken into account in the FY budget 2025-26.  On the other hand, although effluent treatment plant (ETP) machinery imports are duty-exempt, the imported chemicals required for daily ETP operations, costing Tk. 50,000 to 80,000 per day are subject to duty. Consequently, the costs of this machinery and equipment, coupled with their increased operational expenses, are expected to hinder the adoption of compliant and sustainable apparel factories, to a great extent.

To conclude, the FY 2025–26 budget supports enhancing Bangladesh’s apparel sector competitiveness with reduced import taxes, simplified bonding systems, stable corporate tax rates, and other customs-related flexibility in one sense. In another sense, some unmet proposals, such as tax exemptions for export-oriented services, reduced VAT on reused or recycled apparel waste, and duty-free equipment imports, etc.  may hinder the sustainability and cost-effectiveness of the sector. Therefore, it is vital to address these gaps for the sector’s global edge and resilience following the country’s LDC graduation.

Author: Md. Sajib Hossain, Research Associate, Research and Development Cell, BKMEA. He can be reached at hsajib87@yahoo.com