Partial exporters will likely get access to the bonded warehouse benefit, like 100% export-oriented apparel makers, for importing raw materials meant for producing export items without paying duty, so they can enhance their competitiveness in the international market.
The Bangladesh Trade and Tariff Commission has recently recommended that the commerce ministry offer them the duty-free raw material import facility against a 100% bank guarantee as an alternative to the existing duty drawback, with a view to diversifying the country's export basket.
Such a benefit will increase capital flow to manufacturers, reduce production cost and shorten lead time to export, resulting in a boost in forex earnings by creating opportunities to export products at competitive prices, the commission said.
Besides, revenue collection will speed up and leakage of bonded goods in the domestic market will be plugged, it added.
Earlier, the commerce ministry requested the commission to give its opinion with a full report on the issue of giving partial exporters the bond facility against a bank guarantee. On 22 June, the commission submitted the report to the commerce secretary.
Bangladesh has around 750 different exportable products, of them, 659 are of partially export-oriented industries in iron and steel, chemical, electronics and electrical and furniture sectors. Such industries need to import 80-90% of their raw materials by paying duties ranging between 25% and 65%. Their local value addition rate is 35-70%.
The access to the duty-free raw material import benefit will reduce capital expenses in manufacturing goods of these industries who mainly depend on imported raw materials, which is very "essential" and "timely" for diversification of export products, according to the report.
The commission said offering local manufacturers the bond facility will increase investment and employment in various sectors too.
Highlighting the importance of partial export products, the commission said it is easy to export products that are available in the local market because it is possible to improve their quality by getting feedback from local buyers. A 100% export-oriented company does not get such a facility. As a result, in many cases, it becomes difficult for them to hold the export market.
Citing overreliance on limited products as the main weakness of Bangladesh's export sector, the tariff commission said Japan, South Korea and Vietnam are also providing similar facilities to develop local industries and diversify export products.
The 100% export-oriented industries import raw materials without duty under the bonded warehouse facility, while partial exporters who sell their products in the domestic market as well as export them have to pay duty on imports of raw materials.
The National Board of Revenue (NBR) reimburses the amount paid after auditing the number of goods exported by them. The process takes 4-5 years, according to the commission's report.
Thus, production cost goes up with exporters' capital getting stuck.
They can easily get back bank guarantee money after exporting products manufactured with raw materials imported under the bond facility if they are offered. If they do not export, the NBR can deduct duty from the bank guarantee money, which will also speed up revenue collection.
Meghna Group of Industries imported crude edible oil after paying a duty amounting to Tk23.82 crore and exported it after refining in between 2018 and 2020.
The group's chairman, Mostafa Kamal, wrote a letter to the commerce secretary last year, saying he applied for a duty refund but had not received it. The delay in getting the drawback of the big amount of money is creating a liquidity crisis in his industry, which might lead to a loss of interest in exports.
In 1997, the government introduced a special bonded warehouse facility for the readymade garment sector to utilise Bangladesh's surplus production capacity after the United States and Canada imposed quotas on imported garments. The sector has registered enormous growth over the years with the bonded benefit.
But 659 products of partial exporters who depend on imported raw materials see their export growth limited to 8-9% without having such a facility.
According to the commission's report, diversification of Bangladesh's exportable products is essential to accelerate investment, employment and development through increased exports. But it is not possible at all with the existing duty drawback facility. Therefore, partial export-oriented industries should get access to the bond facility like the RMG sector.
There is a shortage of raw materials for industrial products in Bangladesh and it will not be possible to meet the shortage from local sources in future as well. The solution is to build a competitive export sector based on imported raw materials. In the same fashion, Japan and South Korea are now on the list of developed countries by creating an established export sector based on imported raw materials.
Citing the example of Vietnam, the commission said in the country, there is a duty-free facility to release imported goods as opposed to a bank guarantee. In this case, a third company gives such a guarantee. In the case of Bangladesh, its lien bank will guarantee the same amount of duty on imported raw materials on behalf of the importing company, so no third party will be required.
Misuse of bond facility will be reduced, revenue collection will be easier
Under the existing policy, exporters have the opportunity to import raw materials within the annual fixed financial limit under the two-year general bond facility. On the other hand, under the specialised bond facility, they get the opportunity to import required raw materials and capital machinery on the basis of Utilisation Declaration (UD) and Utilisation Permission (UP) against export orders.
In these cases, a compulsory audit needs to be conducted towards or after the end of a year to verify whether imports of raw materials have exceeded the prescribed limit or the products manufactured with imported raw materials have been exported in the right quantities, the accuracy of wastage and export quantity. Since such work needs to be done at the end of a year, revenue remains unpaid and cases get delayed.
If the bond facility is given against a 100% bank guarantee, exporters will be forced to adjust the amount of the guarantee with the imposed duty as per the UD and UP process against export documents on their own initiative.
In case of any inconsistency, the government will be able to deduct duty from the bank guarantee. So, it will be the responsibility of exporters to provide accurate information. This will also reduce the workload of the customs authorities.
The Trade and Tariff Commission has termed this method the safest and risk-free.
"Many local industries have been unable to compete in the market owing to leakage of bonded products under the existing bond system, the commission's report said, adding that a bond audit is mandatory every year, but it cannot be down even in 4-5 years due to constraints of the authorities concerned. As a result, it is not possible to know the status of unaudited bonded warehouses.
What partial exporters say
Welcoming the tariff commission's proposal to provide bond benefits to partial exporters for the diversification of export products, Golam Murshed, managing director of Walton Hi-Tech Industries, the country's largest electronics exporter, told The Business Standard that the RMG sector is a big example of how advantageous export facilities can be to an industry. New export sectors can be created by removing the existing difficulties of partial exporters and patronising them.
There is no alternative but to focusing on increasing the export of electronic products to realise the dream of a developed Bangladesh after graduating to a developing country status. But, in this case, it is important to have an accurate calculation of the value addition of the manufactured products, he added.
Kamrul Islam, executive director (finance) of GPH Ispat, told TBS, "We are losing interest in exports despite a huge potential because of complexities in getting the duty drawback. Instead, if the bond facility is given against a 100% bank guarantee, exports of other sectors, including steel, will also increase.
Choudhury Atiur Rasul, director (accounts) of Pran-RFL Group, said owing to legal complications and manpower crisis in the department concerned, they suffer a lot to get duty drawback after exports.
According to the Export Promotion Bureau, more than 85% of Bangladesh's total exports depend on the readymade garment sector. The export volume of partial exports is also increasing.
Exports of chemical products, plastic products, engineering products, iron and steel and furniture are also on the rise amid the pandemic, so is Bangladesh's investment in these sectors.
In the fiscal 2020-21, the export of chemical products amounted to $280 million, which is 41% higher over a year ago. Among the chemical products, the export growth of the pharmaceutical industry is more than 24%.
In the last financial year, Bangladesh exported $115 million worth of plastic products in contrast to $10 crore in the previous fiscal year.
Despite Covid-19, furniture exports grew by 4% to around $80 million year-on-year.
Exports of engineering products have risen sharply in this pandemic time to $530 million in FY21, which is more than 80% over FY20.
Among engineering products, the growth rate of iron and steel exports is 130%. GPH Steel has exported $50 million worth of steel products in the last six months. The company has now many export orders.