NBR to probe 'misuse' of cash incentive on exports

Highlights:

• Stakeholders say exporters of readymade garments and home textiles would immediately face losses if cash incentives are cancelled.
• Exporters with bond benefits may also face the same damages.
• 35 banks have disbursed Tk1,384 crore as alternative cash assistance in the last three years.
• In addition to readymade garments, 37 sectors are currently getting cash assistance ranging from 1% to 20%.

Exporters of readymade garments and home textiles are at risk of losing the cash incentives on exports – which they enjoy for using locally sourced yarn and fabrics – as the Customs Valuation and Internal Audit Commissionerate, a wing under the National Board of Revenue (NBR), has suggested revoking the facility terming it "against the rules".

The commissionerate in a report sent to the revenue board recently has argued that exporters who have availed the duty drawbacks facility or have purchased duty-free raw materials under back-to-back LC facility are not eligible for this incentive – known as alternative cash assistance – as per a central bank circular concerning the issue.

Stakeholders say exporters of readymade garments and home textiles would immediately face losses if cash incentives are cancelled. Exporters with bond benefits may also face the same damages.

According to the NBR report, 35 banks have disbursed Tk1,384 crore as alternative cash assistance in the last three years. Officials involved in preparing the report, however, told The Business Standard (TBS) that the actual amount would be much higher.

At present, the rate of alternative cash assistance on exports of products made with locally-produced yarn or fabrics is 4%, which has been objected to by the audit commissionerate.

Apart from this, 4% cash incentives are provided to small and medium industries, 4% are provided on exports to new markets outside Europe and America, 2% are provided as special assistance on exports to the Euro region. Another 1% cash incentive was introduced last year to deal with the Covid situation. However, in total, an apparel exporter will not get more than 12% incentive.

In addition to readymade garments, 37 sectors are currently getting cash assistance ranging from 1% to 20%.

NBR sources said a committee has been formed to find out in detail what other irregularities have taken place in availing cash incentives against exports of products made with raw materials imported duty-free through back-to-back LCs.

The five-member committee, headed by Additional Commissioner Abdul Mannan Sarder of the Customs Valuation and Internal Audit Commissionerate, was asked to submit a detailed report within 15 working days.

But, Mohammad Enamul Hoque, commissioner at the customs valuation commissionerate, told TBS it will not be possible for the probe body to submit the report within the deadline.

"We have applied to the NBR to extend the time," he said.

No exporter – irrespective of whether they have a bond licence or not – will be entitled to cash incentives if they purchase raw material under duty-free facility or avail duty drawbacks, he continued.

Mentioning that banks also have had a role in helping exporters avail the alternative cash assistance, he said, "We are now collecting information from the banks on how they have been providing exporters with the facility for so many years."

Exporters who receive this cash assistance say the NBR report is not logical. They consider it as an act outside NBR purview which has misinterpreted the Bangladesh Bank circular.

Mohammad Hatem, senior vice-president of the Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA), told The Business Standard that they will soon meet the commerce minister to seek a solution to the NBR's letter to the central bank on the cancellation of back-to-back LCs for exporters without bond license and on the issue of cash incentives.

Fazlee Shamim Ehsan, director of the BKMEA, said, "The government has provided cash assistance to exporters on the purchase of local raw materials. The Bangladesh Bank also has issued a circular in this regard. Exporters are receiving cash assistance on purchasing raw materials from local sources in compliance with those rules."

He observed the customs valuation commissionerate has given such a report based on unreasonable interpretation.

Speaking to TBS, Mohammad Ali Khokon, president of the Bangladesh Textile Mills Association (BTMA), questioned the legal basis based on which the NBR is now talking about cancellation of the alternative cash assistance facility which is there for so many years.

"Do they want to shut down local industries and make the country dependent on imports? If this facility is withdrawn, the local textile industry may collapse."

Economists are of the opinion that such problems have resulted from the lack of policy coordination between one government agency and another.

Dr M Masrur Reaz, private sector expert and chairman of Policy Exchange, told TBS the government has to give incentives to the sectors as the cost of doing business is high in the country.

"Decisions are not taken in a consultative manner, impact analyses cannot be done properly. As a result, the government's objectives are not properly reflected," he said.

In order to encourage the use of local raw materials and accessories instead of imports, the government introduced alternative cash assistance in 1997 for exports that use local raw materials for their products.

According to the Bangladesh Bank circular, on which the NBR affiliate organisation's report is based, a cash incentive will be given against the export of textiles and garments products if these products are made from yarn produced by mills which are members of Bangladesh Textile Mills Association (BTMA).

The circular also mentions that the products cannot enjoy any duty drawback or bond facility on the raw materials used at any stage in the production process.

On condition of anonymity, a senior NBR official involved in the preparation of the report told TBS, "Exporters who enjoy back-to-back LC and bond license facilities are not eligible for alternative cash assistance. That means the entire export-oriented garments sector, home textiles and some other sectors are not entitled to get this assistance from the government."

Exporters say these facilities along with alternative cash assistance have fueled the great boom of the garments industry despite the fact that Bangladesh is not a cotton producing country.

In Bangladesh, about 3,000 export-oriented factories – which are members of the BGMEA and the BKMEA – enjoy these facilities. Apart from this, about 60 home textile exporters also get the same benefits.

Of these, about 500 factories that use 100% local raw materials do not have bond licenses.

Dr Ahsan H Mansur, economist and chairman of Brac Bank, told TBS, "As per the Bangladesh Bank circular, alternative cash incentives will not be available if any exporter enjoys duty drawback and duty-free facilities. In that case, this incentive can be withdrawn as per the circular. But, it is better not to drag on with what happened in the past."

According to exporters, the government provided this facility to encourage the purchase of raw materials from local sources, so that a strong backward linkage industry can be developed. The industry has got the benefits of this facility in the last two and a half decades.

BTMA claims that local textile mills are currently able to supply 80% of the country's knitwear garments and 40% of woven garments.

According to people concerned, earlier in 2005, the NBR had taken the initiative to cancel the alternative cash assistance. At that time, the NBR had asked Bangladesh Bank to get back the money provided in the previous three years as cash assistance. Although there was a temporary solution in the meeting of the parties concerned, no permanent solution was achieved.

A senior official of Bangladesh Bank's Foreign Exchange Department said on condition of anonymity, "The issue needs to be resolved permanently by discussion. All the parties concerned including the finance ministry and the commerce ministry. In this regard, Bangladesh Bank has very little to do."