How an alcohol software made all days dry

Highlights-

• 6 warehouses imported 80% of liquor in FY2018-19
• There were around 1,500 persons with diplomatic status then
• 37 other firms have licence to import alcohol
• NBR does not have data on liquor market in the country
• It mandated using a special software it developed for the 6 bonded warehouse
• But warehouses are resisting the software by keeping their doors closed

It is an open secret that alcohol imported duty-free by bonded warehouses for diplomats often makes its way out through the backdoor by abuse of diplomatic passbooks.

And now that the National Board of Revenue (NBR) has finally stepped in to stop this illegal affair by digitalising liquor trade from 2 July this year, the warehouses have closed their doors and slapped a case on the flimsy ground that use of software will compromise the privacy of their clients.

The revenue board, through a painstaking investigation, has also shed a new light on this illegal trade that thrives for the reason that import of alcohol is subject to a maximum of 600% duty – an absurdly high level of duty that only gives enough incentive to the warehouses and smugglers to engage in illegal trading.

Although the tax officials are fully aware that the high duty is an incentive for this illegal trade, they are reluctant to lower the duty on the ground that it is a "political decision" thus perpetuating the black market of liquor.

A ballpark estimate shows the huge size of this illegal liquor market.

For some 1,500 persons with diplomatic status, these warehouses imported an astounding 47 lakh litres of liquor in the fiscal 2018-19, which would translate to consumption of alcohol at the rate of 8.6 litres a day by each person, something inconceivable.

This clearly shows the bulk of the import found its way into the black market.

Legal imports fell but smuggling boomed

Abu Hena Md Rahmatul Muneem, chairman of the NBR, said they have information that bonded warehouses are involved in illegal activities regarding liquor trade. The mandatory use of the software will legalise liquor trade in diplomatic warehouses, he added.

Two years later this import almost halved when the NBR cut the import ceiling of warehouses to check illegal trade.

But although legal import fell, smuggling of liquor has boomed.

Other than these bonded warehouses, 37 firms have been given the licence to import liquor. These firms imported 45,000 litres of liquor last year, paying the duty. But bafflingly, they sold 6,00,000 litres of alcohol. There is no answer as to where they got the extra around 5,50,000 litres of the drinks.

About the size of the liquor market in the country, NBR Chairman Rahmatul Muneem said they did not have any data on it. This is because in the current manual system it is not possible to get accurate information, he explained.

Abdus Sabur Mondal, director general of the narcotics department, said his department had never maintained liquor import data, which is one of the main weaknesses for the organisation to monitor illegal activities of liquor importers.

After joining the department in September this year, he started to develop data storage about liquor import, he added.

Md Mokabbir Hossain, secretary to the Security Services Division under the home ministry, said importers who are licensed to import liquor are more interested in sourcing the item from the bonded warehouses rather than importing it.

The narcotics department is collecting import data from the licensed importers to take necessary measures to encourage them to import liquor through legal channels, he said, adding the home ministry also is considering new proposals regarding import licensing and bars to increase liquor supply through legal channels.

NBR introduces software to track sales

So to check this illegal market, the NBR has developed the software to strengthen monitoring on the warehouses and check the misuse of the duty-free import facility.

It mandated the use of the software for the six diplomatic bonded warehouse licensees who import duty-free goods and supply them to diplomats and privileged persons in the country.

The bonded warehouses are Dacca Warehouse Ltd, Eastern Diplomatic Services, H Kabir and Co Ltd, National Warehouse, Sabir Traders Ltd, and TOS Bond (pvt) Ltd.

According to NBR data, these six bonded warehouses accounted for more than 80% of total liquor imports in the country in the fiscal 2018-19.

Currently, the warehouses sell liquor against hardcopies of passbooks and often against fake passbooks or passbooks of diplomats who left the country but did not return the books to the foreign ministry.

They show fake sales against these passbooks and sell the liquor in the black market at hefty profits. Slices of this pie then reach various departments of the government.

But when sales are tracked by the software, warehouses will be required to enter necessary data. Every diplomatic bonded warehouse will be required to enter all information regarding import – including bill of entry number, import date, office code, invoice number and date, name of purchased goods, volume, and price – into the bond automation system.

During sales, they will have to log into the system and input information about passbooks or Tax Exemption Certificate (TEC) numbers, names of sold goods, volume, the bill of entry number, and price in the software.

Warehouses push back

Previously, bonded warehouses used to provide all the information manually to the NBR.

This is why the warehouses are now resisting the software by keeping their doors closed.

In a writ petition filed against the NBR's decision of mandatory use of software in business operation, Eastern Diplomatic Services claimed that warehouses were compelled to use the software without any legal basis, without any consultation, vetting and security check. The court, however, rejected the petition.

The NBR has developed the software to monitor bonded warehouses after taking consent from the foreign ministry, which is entitled to determine the purchasing ceiling of alcohol for diplomats and foreigners living in the country.

Halting the sales of liquor by the diplomatic bonded warehouses goes against the rule as they are obliged to supply goods to diplomats and privileged persons uninterruptedly as per licensing conditions.

This issue was discussed at a meeting between the NBR and the foreign ministry held on 24 October this year.

According to the meeting minutes, necessary measures can be taken following the rule against the warehouses that have stopped sales. But no action has yet been taken, even though sales have remained suspended for more than one month.

Kazi Mustafizur Rahman, commissioner of Customs Bond Commissionerate, said, "The bonded warehouses have stopped sales but we cannot take action until we get complaints from customers."

Extremely high taxes on liquor import hurts business

Currently, importers have to pay 300% to 600% import duty on liquor imports, which is not viable for business.

Previously, the NBR took initiative to make import duty logical for liquor importers but could not do it mostly because of resistance from the bonded warehouses which are the main beneficiaries of the prevailing high import duty, said a senior official of the revenue board.

The extremely high import duty on alcohol forces importers to procure their needs from the bonded warehouses who import duty-free liquor.

"A reduction in import duty will help to boost government revenue from this sector and stop illegal trade by the bonded warehouses," said the official.

The NBR chairman said the revenue department may positively consider any proposal put forward by the narcotics department regarding taxation to increase liquor supply to meet existing demand.

The bonded warehouses are not only reluctant to digitalise, but they do not want to provide import data to the regulatory authorities as well, which shows how murky their business operation is.

For instance, bonded warehouses filed petitions against their licensing authorities – the Department of Narcotics Control – after the department had asked them to provide data about liquor import.

According to the Narcotics Control Act, bonded warehouses are bound to take permission from the narcotics department to import liquor. But they have been importing liquor violating the rule. As a result, the narcotics department that has the authority to control the liquor market does not have any data regarding how much foreign liquor is entering the country.

In August 2018, the narcotics department issued an office order to confiscate liquor that was imported by bonded warehouses without taking its permission and filed cases against the lawbreakers.

The bonded warehouse licensees, however, filed a writ petition, challenging the order and the issue is still unresolved.

This is how the bonded warehouses have kept them out of surveillance, challenging government initiatives.

The dry spell

The country's liquor market has been mostly dry since the bonded warehouses called strike after the NBR made the use of the software mandatory from 2 July. Currently, 190 bars are operating in the country but liquor is not available there.

Speaking to several bar owners, The Business Standard has come to know that there is now a crisis of liquor in the market and that some of them are selling from their limited stocks at high prices.

Citing the high import duty as the main reason behind the illegal trade of liquor, they said traders, despite having licences to import liquor, either source the item from the bonded warehouses or import it through  false declaration.

The mandatory use of software for bonded warehouses will create a severe crisis in the liquor market if import duty is not made logical, said industry people.

Liquor imports by bonded warehouses declined drastically in FY2020-21 after the NBR had taken initiatives to develop the software use from the beginning of this year and strengthen monitoring on bonded activities.

In the fiscal 2020-21, bonded warehouses imported 25 lakh litres of foreign liquor, which was almost half of the imported volume in FY2018-19, according to NBR data.

The fall in legal import helped a boom  in smuggling during the last fiscal year.

For instance, in the first 10 months of the current year, different government agencies confiscated around 2 lakh bottles and 3,000 litres of foreign liquor which was the highest in the past five years, according to the narcotics department.

In this situation, the NBR is planning to bring down import duty on liquor, aiming to stop illegal trade and leakage from bonded warehouses.

The stance of the home ministry is now for issuing more bar licences to ensure legal supply in the liquor market.