BGMEA for removing legal bar on back-to-back LCs for non-bonded exports

The BGMEA has demanded speedy amendment to the National Board of Revenue (NBR) rules to approve raw material purchases under back-to-back LCs of readymade garment exporters who are not covered by bonds.

In a letter sent by Bangladesh Garments Manufacturer & Exporters Association (BGMEA) President Faruque Hassan to the NBR chairman on January 13, he said the Ministry of Commerce has been requested to revoke the obligation of the exporters to have a general bond licence or special bond licence to open a back-to-back LC (Letter of Credit). 

In a back-to-back LC, an importer issues an LC to an exporter and the exporter can use it as collateral to get another LC issued for sourcing raw materials and accessories on credit.

The letter called for immediate action to amend the existing provisions of the NBR's VAT Act to give permanent approval to non-bonded companies to open local back-to-back LCs for the purpose of procuring raw materials locally.

Under the current provisions, institutions without bond licences cannot purchase raw material on credit through back-to-back LCs for export purposes.

The revenue board in a letter on 31 August last year requested the Bangladesh Bank not to allow non-bonded apparel factories the facility as it contradicts the central bank's guidelines. 

The letter caused a stir among exporters.

Industry insiders said if the benefit goes, at least 500 knitwear and home textile factories will no longer be able to procure raw materials and accessories on credit. Instead, they will have to make full payments plus VAT in cash for local purchases, which will make their survival very difficult.

With over 3 lakh workers, such factories export goods amounting to around $5 billion annually.

Following the letter, a committee was formed at the initiative of the Ministry of Commerce to resolve the issue.

Meanwhile, the NBR withdrew the letter sent to Bangladesh Bank.

On November 30, a committee formed by the commerce ministry made five recommendations, including an amendment to the VAT Act, to repeal the condition of having a bond licence for back-to-back LCs.

However, the rules have not been amended so far.

Fazlee Shamim Ehsan, vice-president of Bangladesh Knitwear Manufacturer & Exporters Association (BKMEA), told The Business Standard that as there is no permanent solution to the issue, some non-bonded exporters are still facing hurdles from some banks in opening back-to-back LCs. 

A letter has also been sent to Bangladesh Bank on behalf of BKMEA to take initiative to solve this.

However, a senior official of the department concerned of the NBR told The Business Standard on condition of anonymity that the NBR has not yet taken any decision or initiative to amend the rules. However, these issues may come up in the meeting with BGMEA on January 20 (Thursday).