NBR doubling down on sub-contracting factories

The National Board of Revenue (NBR) is contemplating on taking a strong stance on sub-contracting ready-made garments (RMG) factories and the way they operate.

The sub-contracting factories must acquire a bond license from now on from the Customs Bond Commissionerate before they can take orders to produce export-oriented products. The manufacturers that are sub-contracting their orders, must have the bond license as well.

According to sources, the NBR has already prepared a draft-regulation and an order-notification in this regard is likely in coming weeks.

The new regulation will also make it compulsory for the factories to secure permission when changing VAT Commissionerate area for the production of export-oriented products.

"For non-bonded companies it is difficult to determine proper use of export-oriented raw materials and accessories. As a result, there is a scope for abuse," a senior NBR customs official, told The Business Standard requesting anonymity,

"This initiative has been taken to prevent this kind of abuse," he added.

However, business leaders say this will make business more difficult. They also claimed this will lead to harassment of businessmen.

The issue of sub-contracting for the production of readymade garments in Bangladesh is widely discussed. When a manufacturer transfers the whole of part of an order after receiving

After receiving an order from a foreign buyer, if a manufacturer does not have the capacity to finish production, he often chooses to transfer the whole or part of the order to another company, popularly known as sub-contract.

Sub-contracting factories usually get orders of cutting and sewing.

Garment exporters, who take orders directly from buyers, and have to import raw materials or accessories from abroad, are obliged to have a bond license. However, most of those who purchase raw materials and equipment from local sources do not acquire bond licenses.

The NBR recently wrote to banks not to offer this facility without a bond license to those who purchase raw materials from local sources through back-to-back letter of credits (LCs). However, the directive was later withdrawn after widespread objections from traders.

While the issue is still being discussed, the NBR is thinking of the initiative to take a tough stance on the sub-contracting factories.

Back-to-back LC is the credit line opportunity to purchase raw materials from a local source against LC received for export from a foreign buyer. Garment exporters can normally purchase 50 to 75 percent of raw materials and accessories through back-to-back LCs.

According to the two associations of the apparel makers, the number of factories producing garments for export in the country is about 1,000, employing 6.5 lakh workers.

At present, the number of factories directly involved in exports is about three thousand.

Mohammad Hatem, executive president of the Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA), told The Business Standard that at present, about 600 factories that regularly sub-contract for exports do not have bond licenses.

"Approximately 2 to 2.5 lakh workers work in these factories," he added.

He said if the NBR takes this initiative, the country's exports will undoubtedly suffer. Sub-contracting factories do not have the capacity to take bond licenses, because if a factory is newly established, it begins with sub-contracting for 6 months to one year before receiving direct export orders.

"Then again, due to the scarcity of work orders, factories choose to go for sub-contracts from time to time. Sometimes sub-contracting has to be done to handle the pressure of additional work order for timely shipment. This has never caused any loss to the country's revenue," he said

He also said that a lot of money has to be 'spent' to get a bond license. The factory owners have to pay a lot of money in the name of an audit every year. That is why small factories do not want to take bond licenses, he explained.

"When the government is trying to make exports easier, the NBR wants to make business difficult," he commented.