Small apparel exporters worry as NBR stands firm on bond licencing

Infographic: TBS

The National Board of Revenue (NBR) is firm about mandating bond licences for the country's small apparel exporters, according to a recent circular of the revenue authorities, despite the commerce ministry's recommendation for a loosening of the grip.

The firm stance of the NBR will take raw material sourcing on credit and without value-added tax (VAT) facilities away from small entrepreneurs, forcing them into losing their competitiveness and drop out of business.

For its part, though, the NBR builds its argument by saying that licensing will compel apparel-makers to follow the minimum revenue regulations and safety compliances.  

Apparel exporters with bond licences are entitled to purchase raw materials on credit, import duty cut and enjoy VAT exemption on raw material sourcing. The non-bonded factories have been enjoying the same facility against back-to-back letters of credit (LCs).     

This means since the small-scale exporters do not have bond licences on their own, they will source raw materials such as yarn and accessories from third parties that have bonds to import them. The revenue board now means to move to obstruct the parties – often called deemed exporters – in selling the imported items to the exporting ventures.     

Four associations of manufacturers – Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA), Bangladesh Terry Towel and Linen Manufacturers and Exporters Association (BTTLMEA), Bangladesh Textile Mills Association (BTMA) and Bangladesh Garment Manufacturers and Exporters Association (BGMEA) – sent letters to the commerce ministry last week seeking its intervention.         

On the other hand, knitwear association leaders have already met top Bangladesh Bank officials and requested that non-bonded factories be allowed to enjoy regular back-to-back LC opening, according to sources.

On condition of anonymity, a revenue board official told The Business Standard that the central bank had subsequently asked them about the next course of action.     

"Small-scale factories will not be able to survive if the bond conditions are met. This will ultimately hurt the country's exports," Mohammad Hatem, BKMEA executive president, told TBS.

According to the knitwear leader, it is not possible for small exporters to meet the conditions for obtaining bond licences. It is also not possible for them to incur "separate costs" during and after the licences are obtained.

He said these new conditions will make business difficult instead of easing it.

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 the sourcing of raw materials and accessories on credit.

According to the import policy of the commerce ministry, raw material purchase on credit under such LCs stipulates having a bond licence. But non-bonded exporters have been enjoying the facilities for the past three decades.      

A row between the revenue authorities and the non-bonded exporters surfaced when in 2014 the NBR raised questions about the issue. The exporters subsequently initiated lobbying to change the regulations to this regard.     

The row came to light again last year as the revenue authorities requested the central bank not to allow back-to-back LCs by non-bonded exporters. That caused a serious stir, resulting in a joint task force being formed under the commerce minister.     

After a series of meetings, the task force recommended dropping the bond licence mandate in import policy to qualify for a back-to-back LC and changes in revenue laws.

But the latest Import Policy Order published in April this year showed no changes, while the revenue authorities came up with their firm stance.      

"We do not have any issue with the duty and VAT free facility for exporters, but there should be minimum monitoring. If there is no licensing, how can we ensure that the product made with that raw material is actually exported, or how much of it  got misused," a top revenue official told TBS.

Why exporters reluctant to bond licences?

According to industry insiders, there are currently around 1,150 exporters without bonds, with about 7 lakh workers. The entrepreneurs export apparel items worth $6 billion annually.

To obtain the bond licence, an exporter has to comply with about 30 conditions, some of which, according to apparel-makers, are impossible to be fulfilled by a small factory.

The Narayanganj-based Caspian Sweaters Ltd, the annual exports of which are less than $6 lakh, does not have a bond licence. "We want to get a licence but it is not possible for small exporters like us to meet the difficult conditions," Kamruzzaman, managing director of Kashpean, told TBS.

Another exporter, speaking on condition of anonymity, told TBS that licence renewal every year and the large sums of money allegedly claimed by bond officials in the name of audit are two of the reasons why small entrepreneurs shy away from bond licensing.

Knitwear leader Mohammad Hatem said bribes claimed by bond officials during the licensing is an open secret.  

"The lower-level officials such as revenue officers and assistant revenue officers do not move a paper until you pay them. If you don't pay, they will put you in such trouble that even top-level officials will not be able to settle your issues," he commented.