The government has decided to withdraw its proposal to impose a specific Value Added Tax (VAT), commonly known as the package VAT, on small businesses following strong protests from retail traders and concerns that the measure could hurt the country's small and medium-sized enterprises (SMEs), officials said.
The government is also set to soften several proposed tobacco tax measures. The import-stage Supplementary Duty (SD) on nicotine pouches is likely to remain at 35 per cent instead of being increased to 40 per cent, while a proposed tax hike on imported raw materials for conventional cigarettes has also been dropped, official sources said.
Officials at the National Board of Revenue (NBR) said reversing proposed tax increases on tobacco products is a rare occurrence in the board's history.
The VAT proposals were incorporated into the Finance Bill 2026, tabled in Parliament on 11 June, as part of the government's efforts to broaden the country's VAT base.
Officials said the NBR had initially expected to generate around Tk 2.0 billion in additional VAT revenue from the measure. However, they noted that the primary objective was to expand the VAT net rather than significantly boost revenue collection.
At present, retail businesses with an annual turnover of Tk 5.0 million or more are required to register for VAT. Businesses below that threshold are exempt from VAT.
Under the budget proposal, however, all retail businesses would have been required to obtain VAT registration from July 1, 2026, regardless of their annual turnover.
The proposal triggered widespread concern among small traders, who feared higher compliance costs and increased harassment by tax officials.
Official sources said Finance Minister Amir Khasru Mahmud Chowdhury has instructed officials to remove the provision from the Finance Bill before it is passed as the Finance Act on June 29.
The issue gained prominence after the finance minister told Parliament last week that the government planned to bring 16 categories of retail and service businesses under the VAT regime in FY2026-27 as part of efforts to widen the tax base.
A senior government official said the proposal was reconsidered because it could create implementation challenges and encourage many medium-sized businesses to seek inclusion under the package VAT system to avoid the standard VAT regime.
The package VAT system was introduced in the past to simplify tax payments for small traders. It was later abolished following the introduction of the automated VAT system under the VAT and Supplementary Duty Act, 2012.
Replying to a question from reserved-seat lawmaker Selina Sultana, the finance minister said the proposed sectors included grocery shops, ready-made garment retailers, confectioneries, cosmetics stores, sellers of plastic and ceramic household goods, shoe shops, hardware stores, decorators, mobile phone and electronics retailers, sanitary ware and fittings outlets, tile dealers, corrugated tin-sheet traders, rod and cement dealers, furniture shops, sweetmeat stores, restaurants and beauty parlours.
The announcement prompted strong protests from the Bangladesh Shop Owners Association, which on Saturday urged the government to keep small and micro enterprises outside the VAT net.
At a press conference in Dhaka, the association warned that bringing small retailers under the VAT regime would expose thousands of traders to unnecessary harassment by VAT officials and create instability in the SME sector.
Association President Md Helal Uddin said micro businesses lack the capacity to collect VAT from consumers.
He also recalled that when VAT was introduced in 1991, then finance minister Saifur Rahman had assured traders that small businesses in local markets and bazaars would remain outside the VAT net.
According to the association, around 775,000 businesses are currently registered for VAT.
Of the Tk 1.42 trillion collected in VAT during the last fiscal year, about 60 per cent came from just 109 entities under the Large Taxpayers Unit (LTU).
The association also urged the NBR to accelerate VAT automation, expand the genuine taxpayer base and strengthen tax enforcement on large businesses and source-level collections rather than placing additional compliance burdens on marginal retailers.
The tax-free income limit for individual taxpayers may be increased to Tk 400,000 for FY27 and FY28. In the Finance bill, the limit is Tk 375,000 for next two years, up from current Tk 350,000.
Also, gain tax for land owners may be reduced to 5.0 per cent, from the proposed 15 per cent.
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