The imposition of a uniform 15 percent VAT would lead to increased prices of building materials and result in a fall in demand, affecting the country's construction sector and related industries that employ around 30 lakh people.
The government has recently announced implementation of the new VAT rate from July 1, ending the two-and-a-half-decade system of multiple VAT rates for different goods.
However, prices of rod have already started going up even before the new rate comes into effect, amid an increased demand from a section of traders and contractors. They are stockpiling them fearing further price hikes, say realtors and industry operators.
Other construction materials such as brick and cement are also expected to become costlier, making it difficult for middle income families to have new homes.
Flat buyers will have to spend extra from their pocket as well once the 15 percent VAT rate is implemented. Currently, VAT on flats ranges from 1.5 to 4.5 percent, depending on their size.
The tax measures come at a time when the construction sector and related industries are growing, buoyed by implementation of infrastructure projects by the government and construction of concrete homes in rural and suburban areas following remittance inflows.
The sector, which accounts for 7.39 percent of the country's gross domestic product (GDP), has grown 9.32 percent in the outgoing fiscal 2016-17 up from an 8.65 percent growth a year ago, according to Bangladesh Bureau of Statistics (BBS) provisional estimate.
The real estate sector has also expanded this fiscal year, spurred by recovery in demand for homes among urban middle class following reduction in property prices and interests on home loans.
“If prices of apartments go up following [implementation of] the new VAT, many people will be discouraged [to buy them] and the sector will go down again,” said Alamgir Shamsul Alamin, president of Real Estate and Housing Association of Bangladesh (REHAB).
Prices of flat are likely to increase by Tk 500-1000 per square foot, he said, adding that they had been demanding reduction in registration fees for flats for the last several months. But, the government took tax measures, instead of meeting the demand.
“On one hand, the government promises to ensure home for all by 2021 and on the other, it takes budgetary measures to discourage housing. This is contradictory,” he said.
Toufiq M Seraj, managing director of Sheltech (Pvt) Ltd, a real estate company, said the new VAT system would put an extreme adverse impact on the real estate sector.
“Apartment sale will tumble. The government's revenue collection will also go down,” he said, adding that employment and other ancillary industries related with the real estate sector would be affected too.
Steel millers and brick kiln owners also fear negative impact on their business owing to a fall in demand, resulting from higher prices due to the 15 percent VAT implementation.
Currently, the VAT on per tonne of rod, costing Tk 50,000, is Tk 900. A 15 percent VAT means another Tk 7,500, said SK Masadul Alam Masud, former president of Bangladesh Auto Re-Rolling and Steel Mills Association.
“Our production cost will also rise…This will create a huge negative impact on the construction sector, particularly in the private sector in both rural and urban areas.”
Now, 50-55 lakh tonnes of rod are used annually in the country, up from 35-40 lakh tonnes five years ago, said Masud. “We have increased our production capacity to meet the growing demand.”
Citing slump in demand in 2008 after prices hit up to Tk 75,000 per tonne, he said, “It took years for us to recover [from the situation]. And now we are ahead of a new challenge. We are not taking the price hike positively as higher prices cut off demand.”
Prices of each piece of brick will also go up by Tk 1 for imposition of the single VAT rate, said BN Dulal, general secretary of Bangladesh Auto Brick Manufacturers Association.
Not only realtors, people, especially those who took schemes to build homes with limited budget, are also likely to be in trouble.
“We had a plan to construct a three-storey building. But now, we might need to revise the plan as the construction costs are soaring,” BM Asadul Haque, who wanted to erect a building in his home town in Bagerhat within Tk 40 lakh.
Apart from the people, the government would also have to spend more in implementing its infrastructure and other construction projects, Mir Nasir Hossain of Mir Akhter Hossain Ltd, one of the leading construction firms.
Prices of other construction materials such as boulders and ready-mix concrete would also escalate after the revenue authorities slapped the 15 percent VAT, he added.
The government should have kept construction materials exempted from VAT considering its impact on infrastructure development, said Nasir, also former president of the Federation of Bangladesh Chambers of Commerce and Industry (FBCCI).
Khondaker Golam Moazzem, research director of Centre for Policy Dialogue (CPD), suggested cut in VAT rates to ease tax burden on people. He also recommended fixation of flat registration fees, depending on the size, in a bid to ease pressure on customers.