NBR against back-to-back LCs for firms without bonded warehouse

The National Board of Revenue has requested the Bangladesh Bank to order banks to refrain from opening back-to-back letters of credit for factories that do not have bonded warehouse licences.

The move has stoked concerns of increased working capital cost among 500 export-oriented factories. Still, NBR officials say the agency is open to granting the licence to factories so that they enjoy the benefit while buying raw materials for exports from both domestic and international markets.

"We have taken the step after finding abuses of the benefits," said a senior official of the NBR seeking to remain unnamed.

As per rule, an export-oriented factory with the bonded warehouse licence is entitled to open back-to-back LCs -- a financing facility that is extended by a bank to enable an exporter to purchase raw materials against an export LC and enjoy the zero-duty benefit.

On the other hand, a firm without a bonded warehouse licence does not have permission to get the back-to-back LC facility.

The benefit is given based on the recommendation from the related trade body.

The NBR found that a factory, Krishnachura Design Ltd, availed the privilege of the back-to-back LC and bought raw materials from local markets without paying any value-added tax, although it did not have any bonded warehouse licence.

The firm opened the LC based on the Utilisaiton Declaration permission from the Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA), according to the NBR.

At the same time, the company availed cash incentive against the export from the government, which, the NBR said, is not allowed as per a previous Bangladesh Bank circular.

The NBR, in a letter to the central bank, says a firm can claim cash incentive against exports if it does not enjoy the bonded warehouse facility or claim a duty refund.

Krishnachura can't claim the cash incentive as it secured back-to-back LC benefits.

The NBR took the stance after the Customs Valuation and Internal Audit Commissionerate unearthed that Krishnachura misused the benefit of the back-to-back LC against the bonded warehouse licence and the cash incentive.

Mohammad Enamul Hoque, the commissioner of the field office of the NBR, said they got information from the central bank that more than 300 firms enjoyed both the back-to-back LC benefit and the cash subsidy.

As a result, the government is losing revenue, and taxpayers' money is being wasted, said the NBR letter.

The list appears to be partial, Hoque said.

Mohammad Hatem, first vice-president of the BKMEA, said 500 knitwear factories had been exporting goods without bonded warehouse licences.

Krishnachura Design is one of them, said Hatem, adding that the firms did not need the licences as they exported goods by procuring raw materials from the local markets.

"The factories that don't have the bonded warehouse licences should be given priority when it comes to extending the back-to-back LC facility because they ship goods made from raw materials."

If garment items are made from imported raw materials, 70 per cent of the value is sent to the foreign sellers, he said.

"It is very simple that the garment exporters will receive the incentive on the export for the use of local raw materials," said Hatem, adding the letter from the NBR seemed to go against the spirit of the guidelines on cash incentives.

A BB official said the central bank was working on the issue following the letter from the NBR.

Firms without the back-to-back LC facility have to pay an LC margin while opening it, which will raise the cost of working capital for businesses.