A Study on Reduction of Customs Duty on Capital Machinery

BUILD would undertake a brief impact evaluation of the reduction of customs duty and other relevant taxes on selected environment-friendly capital machinery especially for export-oriented enterprises. The government has granted certain reduction in customs duty and exemptions on a number of capital machinery and parts. However, the list of products as well as the duty rates have changed in the last few years. The study would briefly discuss the changes and seek to identify potential impact on businesses.

Guidelines for Export Subsidy/Cash Incentives for Export Oriented Industries of Bangladesh

In order to encourage exports in accordance with the export-led economic growth strategy of the country, the Government of Bangladesh provides export incentives to selected export sectors. The sectors to enjoy such cash incentives and the respective rates to be provided are updated every year through circulars issued by Bangladesh Bank. The Government has increased the amount of export subsidy/cash incentives by every year. For an example, in FY 2017-18 the government provided BDT 45 bn as export subsidy/cash incentives to the exporters, which was BDT 43.95 bn in FY 2016-17, BDT 40 bn in FY 2015-16 and BDT 35 bn in FY 2014-15. But unfortunately Bangladesh Bank has found that some exporters with the help of their local banks, withdrew export subsidy/cash incentives by violating government’s rules. This violation of rules causes a question to the overall process of the disbursement of export subsidy/cash incentives.

BUILD has planned to prepare  a report on “Guidelines for Export Subsidy/Cash Incentives for Export Oriented Industries of Bangladesh” to increase the transparency of the process of disbursement of export subsidy/cash incentives. 

Simplification of Policies for Easy Availability of the Official English Version of Laws & Rules for Foreign Investors

“Simplification of Policies for Easy Availability of the Official English Version of Laws & Rules for Foreign Investors” is one of the policy papers initiated by BUILD. JETRO requested Prime Minister’s Office (PMO) for the easy availability of the official English version of 28 laws and rules of Bangladesh. Non-availability of the official English version of these laws and rules creates hindrance for the foreign investors. All the government offices in Bangladesh are constitutionally bound to publish laws and rules in Bangla version. On the other hand, the government of Bangladesh is highly interested to support the foreign investors. In this context, PMO requested BUILD to submit a report on this issue to support Japanese investors to tackle this problem. BUILD has taken an initiative in preparing a position paper for the  simplification of policies for easy availability of the official English version of laws & rules for foreign investors which will be presented in the 4th Meeting of Working Group on Improvement of Investment Climate at PMO and in the upcoming meeting of Trade & Investment Working Committee also.

Timely Publication of Trade Related Statistics

JETRO requested Prime Minister’s Office (PMO) to take initiatives for the timely publication of six trade related statistics, namely Foreign Trade Statistics of Bangladesh, Bangladesh Economic Review (English Version), Labour Force Survey, Household Income & Expenditure Survey, Statistical Year Book  Bangladesh &  Annual Import Payments. In this context, PMO requested BUILD to submit a report to the PMO detailing the sources of trade related statistics, their publication status and time lag and recommendations of BULD to reduce the time lag. BUILD has taken an initiative in preparing a report on timely publication of trade related statisticswhich will be presented in the 4th Meeting of Working Group on Improvement of Investment Climate at PMO.

Current BUILD activities on issues related to Taxation:

CorporateIncome Tax (CIT)

The general objective of the study is to create an attractive, equitable and competitive tax regime and to harmonies the incongruities in tax structure in Bangladesh for the national and as well as for the foreign companies. The study focuses only on the CIT charge under the prevailing tax regime in Bangladesh.

Turnover Tax

BUILD is working on the rationalization of the Turnover Tax system. BUILD will advocate eight recommendations in the PSDPCC, including the insertion of micro industry in the Turnover Tax benefit, simplification of enlistment for turnover tax benefit, and clear definition of the related policies.

Duty Drawback Procedure

BUILD is conducting research on the simplification of the process for the Duty Exemption and Drawback currently followed by Duty Drawback and Exemption Office (DEDO).

Duty drawback refers to refund of duties and indirect taxes paid for inputs and utilities for exports. Import duties, VAT, supplementary duties and other duties paid on imported raw materials can be drawn back by firms under the duty drawback facility. Every month, a large number of applications are rejected due to non-compliance. On top of that, a huge number of files remain unprocessed and unattended for extended periods due to lack of clarity in concerned policies. Slow processing time and ambiguity deter many exporters from applying for reimbursements, even in legitimate cases.

In Bangladesh, the amount received as duty drawback is subjected to tax, as if it were an income or profit. In what appears to be a policy paradox, exporters are required to pay corporate tax on the amount of refund they receive on duty. Moreover, exporters who operate businesses under Bonded Warehouse license, EPZ, 100 percent export-oriented and 100 percent deemed exporters, are qualified to get drawbacks against the payment of VAT on utilities. But exporters who get cash incentive cannot apply for drawback from DEDO and are not even entitled to get drawback against VAT paid on utilities.

Policy Support for Deemed Exporters

According to the current Income Tax ordinance 1984, Clause-53 (BB), 0.80% Advance Income Tax at source is considered as final Tax collection from business sectors like knitwear and woven garments, terry towel, garment accessories, jute goods, frozen food, vegetable, leather goods, packaged food, etc. But the squarely related sectors like Knitting, Dying industries and related organizations involved in business (through the Back-to-Back L/C) who can be considered as Deemed Export cannot avail this benefit.

Simplification of Capital Machinery Re-Import

Through this exercise, BUILD intends to reduce the procedural complexities related to re-sending imported capital machinery and spare parts back to the manufacturer for repair/refill/replacement and bringing them back.

According to the Import Policy Order (2013-2015) 14(10), for sending of machinery/equipment/cylinder for repair/re-filling/maintenance etc. to another country, Export-Cum-Import Permit/Permission is to be taken from the Import Controlling Authority on submission of bank guarantee of equivalent value of the goods.

When imported machinery or spares are damaged or become out-of-order, firms are bound to send those to the foreign manufacturer for repair or free replacement within the guarantee period. In many cases, these machineries cannot be repaired locally nor can the problems be diagnosed domestically due to lack of expertise, technical know-how or workshop facilities within the country.

Massive cost implications, be it the cost of the machinery itself or the loss incurred in production hold-ups with each passing day, make it absolutely critical that export cum import takes place without undue process delays. The current process necessitates involvement of CCI&E, BOI, Commercial Banks, Pre-Shipment Inspection Company and Customs Commisionerate, with the entrepreneur/firm playing a coordinating role. In several cases, the legal procedure of sending the machineries abroad and re-importing could take over 2-3 months.

Current BUILD activities on issues related to Financial Sector Development:

Financing Issues faced by the Shipbuilding Sector

Shipbuilding is a unique industry, because a ship is sold before the construction begins and each ship is custom made for the owner. The lead time is anywhere between 1 year to 3 years for the delivery of a new ship. Like all other industries, during the lead time, shipbuilding firms require ‘short term/ working capital’ financing to procure raw materials and meet over head expenses. Since the “short term” nature of the working capital requirement is fairly “long” in this case, it cannot be accommodated into Bangladesh Bank’s regulation to limit short term financing by banks to less than 360 days. Banks need to seek approval from Bangladesh Bank on case to case basis if they intend to match the payment cycle of the shipbuilding firm and offer working capital financing for a duration exceeding 360days.

Each export LC needs to be backed by a Performance Guarantee from the exporter’s bank. Export receives the payment against any order in a staggered manner (an initial 10% of the payment is due in the form of Advance Payment against Bank Guarantee). Bank guarantee is considered to be a major cost hurdle, especially for the export-oriented shipbuilding industry, as foreign buyers do not accept bank guarantee from local banks. So local banks have to contact their foreign counterparts on behalf of the exporter for a counter bank guarantee which ultimately increases the processing cost, and thus the cost of manufacturing ship increases. According to a study by BFTI, local shipbuilders are paying approximately 7.6 percent of the total contract value for obtaining these bank guarantees.

Eligibility Criteria for Export Development Fund

Export Development Fund (EDF) Loans offered by Bangladesh Bank (at LIBOR +2.5%) are only available to the Textiles sector. Recently, member firms of the BGAPMEA have also been included in this list. Eligibility criteria, according to the master FEPD circular issued in December 2009, are vague and need clarification. According to the circular, input imports by manufacturer-exporters against which an Authorized Dealer Bank seeks EDF loan must be in full compliance with the value addition criteria and other requirements of the government’s Import Policy Order (IPO) in force, as well as with foreign exchange regulations and instructions laid down in the GFET 2009 and subsequent circulars of Bangladesh Bank.

Government of Bangladesh has recently increased EDF allotment from USD 600Mn to USD 800Mn. BUILD is assessing the utilization rate of EDF and recommends more export sectors to be eligible for EDF.


Current BUILD activities on issues related to SME Development:

Issuance of Utilization Permission (UP) for plastic sector

Recently, BUILD has conducted a qualitative research on chalking out the regulatory constraints faced by the plastics sector of Bangladesh. BUILD reached out directly to manufacturers and identified the regulatory constraints. Delays in the issuance of Utilization Permission by the Customs Bond Commissione  rate (CBC) has been identified as a pressing problem.

In order to adjust imported raw materials against different export orders, exporters require Utilization Permission (UP). For plastic goods exporters, UP is currently issued by the CBC; whereas, for the RMG sector, it is provided by the private sector associations, namely BGMEA and BKMEA. For plastic goods, if this service is transferred from CBC to the concerned private sector associations (BGAPMEA and BPGMEA), import of raw materials for export will be much easier, faster, and cheaper.

Policy simplification for supermarkets

Supermarkets is a fast expanding sector, recognized as Industrial Service by MOI as per Industrial Policy 2010. Industry turnover of stands at BDT 15Bn with BDT 300Mn paid in VAT (according to Supermarkets Owners’ Association). New outlets are emerging in Dhaka and district towns, in line with changing consumption patterns, urbanization, emancipation of women, rising per capita income and rising consumer confidence on products available through supermarkets. About 2% of the total FMCG sales in Bangladesh takes place through SMs, compared to about 10% in India.

BUILD initiated a research to identify the regulatory hurdles faced by the super-markets and identified the following issues:

  • Dual License Requirement: Around 50 food products require two separate licenses, issued by BSTI and City Corporation. BSTI and DCC administer the SMs separately to check whether the food products carry both the certifications. Most manufacturers/ suppliers of these 50 food products are not aware of these dual license requirements. Supermarkets end up paying the fines for having these food items in their shelves.
  • Maintenance of quality and standard: A number of Kits are available to measure the presence of toxic materials, carbide and harmful chemicals which are reported to be mixed in the food products. There is no recognized Authority with certificates from the government organization to certify Calibration Rate of available Kits and Instruments to measure presence of these toxic elements
  • Multiple implementing authorities: Implementing Authorities are not correctly defined; Ministry of Health and Family Welfare and Ministry of Local Government and Rural Development and Cooperatives both implement Bangladesh Pure Food (Amended) Act 2005, Bangladesh Pure Food Rules, 1967, BD Penal Code, 1860, and Iodine Deficiency Disorders Prevention Act, 1989. There are more such laws and regulatory authorities. Cross-country comparison reveals that in India and Thailand, food-related issues are being processed under a single Ministry.
  • Reducing the rate of VAT for SMs: Supermarkets have to pay 4% Trade VAT, while other shops pay VAT at a flat rate of 1.5%. Consumers end up paying higher prices for purchasing products from supermarkets, which affects the demand for the products sold through supermarkets and hampers growth. Previously, Trade VAT was 1-1.5% but it has been increased further on products sold through supermarkets

Mandatory certification standards for plastic products

BSTI is responsible for certifying product standards in Bangladesh. However, standards for several plastic consumer goods are yet to be developed by BSTI, posing problems for the exporters of these goods. Many plastic goods producers cannot participate in national and international tenders as they fail to submit the standard certification along with the bid.

Policy simplification for manufacturing of boilers in Bangladesh

Boiler is one of the most essential and widely used industrial components, used for generation of heat or energy. Some local manufacturing units produce Boilers in a limited scale. Locally made boilers are more popular as a result of after-sales services. However, local manufacturers face stiff competition from cheap imported boilers, often of inferior quality. Local manufacturers also suffer due to absence of appropriate policy guidelines and unjust tariff structure on imported raw materials.

The Boiler Act 1923 needs to be updated so that the following issues can be resolved:

  • Accounting for technological advancement
  • Inclusion of appropriate Inspection Authority as an annex with this Act. There are 30-35 boiler inspection authorities throughout the world; this list needs to be circulated with the private sector
  • Setting up a criterion of producing Boilers for small agro industries like Rice Millers, Poultry Feed Firms, Food Industries etc.
  • Ensure Frequency of Board Meetings of the Boiler Board appointed by the Government so that license approval and registration procedures by the Office of Boilers are not delayed
  • Inclusion of private sector representative in the Boiler Board as has been the case in the neighboring countries