Fiscal policy favours fossil fuels over renewables

Bangladesh’s tax structure favours fossil fuels over renewable energy technologies, imposing significantly higher duties on clean energy equipment while offering lower tax burdens on fossil fuel imports and power plants, said a study by the Centre for Policy Dialogue (CPD).

This practice thereby creates discrimination in the competition, said the study, released by the private think tank yesterday at its Dhanmondi office.

It found that the imported liquefied natural gas (LNG) enjoys the most favourable tax treatment among major energy categories, facing a total tax incidence of only 9.5 percent.

In contrast, solar panels, batteries, grid equipment, and electric vehicles -- technologies considered critical for integrating renewable energy into the power system -- face effective tax rates ranging from 61 percent to 93 percent.

Most of the fossil-fuel based plants’ equipment face 15 percent Value Added Tax and 7.5 percent Advance Tax while the renewable energy technologies face multiple layers of customs duties, supplementary duties, advance income tax, and Regulatory Duty in top of the VAT and AT, the study found.

A VAT rate of only 6 percent on LNG imports is artificially making the fuel more lucrative than other energy sources, said the study.

The study titled “Fiscal Discrimination Against Renewable Energy Versus Fossil Fuels” argues that the country’s fiscal regime is simultaneously discouraging investment in renewable energy and reducing potential government revenue from fossil fuel imports, creating a policy imbalance that could undermine Bangladesh’s energy transition ambitions.

“The current fiscal structure sends contradictory signals. On one hand, Bangladesh has committed to expanding renewable energy, but on the other, technologies essential for that transition -- such as batteries, grid infrastructure, and electric mobility -- continue to face significantly higher tax burdens than fossil fuels,” said Khandaker Golam Moazzem, research director at CPD while unveiling the study report.

The report argues that such fiscal disparities influence investment decisions across the energy sector, affecting electricity generation choices, distributed renewable energy projects, industrial rooftop solar installations, and electric mobility adoption.

According to the study, grid and transmission equipment face some of the highest tax burdens among renewable-energy-related technologies despite their importance in supporting renewable energy integration.

“Critical components, including transformers, conductors, towers, and meters, are subject to multiple layers of taxation, significantly increasing the cost of expanding and modernising the national grid,” said Moazzem.

From this sector, the government generated Tk 1,513 crore in fiscal revenue from imports worth Tk 2,656 crore during the 2025-26 fiscal year, the study said.

The government’s estimated revenue generation for this fiscal was Tk 439 crore from Tk 1,529 crore solar products import and Tk 610 crore from Tk 985 crore storage systems import.

By contrast, LNG imports benefit from zero VAT and only a 2 percent advance income tax, resulting in one of the lowest effective tax burdens in the energy sector, with Tk 1,059 crore generated from imports valued at Tk 11,149 crore, the study said.

“This creates an uneven playing field for investment decisions,” Moazzem said.

The study estimates that the National Board of Revenue is foregoing significant revenue through the preferential treatment of LNG imports, while coal-based power generation receives additional benefits ranging between Tk 241 crore and Tk 664 crore compared with renewable alternatives.

The report also examined revenue generation from fossil fuel imports and found that oil products account for more than Tk 26,800 crore, or over 80 percent of total revenue collected from fossil fuel imports.

“Our analysis shows that the tax system is effectively making the energy transition more expensive. The technologies needed to integrate renewable energy into the grid are being taxed heavily, which ultimately raises costs for the entire transition process,” said the CPD research director.

Beyond taxation, the report argues that public spending remains heavily tilted towards fossil-fuel-based infrastructure.

According to its analysis of the revised FY2025-26 budget, fossil-fuel-based projects account for 87 percent of the total power and energy project portfolio and receive nearly 79 percent of annual allocations.

Renewable energy projects, meanwhile, represent only 3 percent of the project pipeline and receive less than 5 percent of annual budget allocations.

The study found that fossil-fuel-based projects have consistently received more than 90 percent of development allocations in the power and energy sector over the past decade despite repeated policy commitments to expand renewable energy.

“We are not arguing against energy security. Our argument is that fiscal incentives should be structured in a way that supports both energy security and the long-term energy transition instead of creating barriers to clean energy adoption,” Moazzem added.

The report recommends rationalising taxes on renewable energy technologies, energy storage systems, grid modernisation equipment, and electric vehicles, increasing budgetary support for renewable energy, and smart-grid projects, and reviewing preferential tax treatment currently enjoyed by fossil fuel imports, particularly LNG.