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OP-ED: Safeguarding income against service sales to non-residents

  • Published at 07:26 pm May 4th, 2021
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Earned income without record is not reflected in national accounts

Similar to goods, service is commonly used and consumed. Official definition is not available in respect of services. According to General Agreements on Trade in Services (GATS) of World Trade Organization (WTO), services are traded in four modes - (i) cross border services delivery, (ii) consumption abroad, (iii) commercial presence for service delivery, and (iv) physical presence of natural persons. In industrial policy of the country, there are some items categorized as service sector. Export policy in force identifies few items as export of services.

Within GATS framework, cross border service delivery is like export of goods but executed in non-physical form such as consultancy service, business process outsourcing service, etc. under service mode 1. Foreigners visiting Bangladesh purchase our services like hospitality, medicare, education, etc. This falls under mode 2. Commercial presence with investment abroad is under mode 3. Bangladeshis working abroad is within service mode 4. 

Present regulatory framework, despite existence of bilateral investment treaties with many countries, does not allow residents to invest abroad; specific permission from the authority is required. It is reported that central bank has given permissions to few corporates to make equity investment abroad. Definitely, the investment shall generate income in the form of profit or dividend which needs to be repatriated for which set monitoring mechanism may be available. On the other hand, Bangladeshi nationals working abroad are sending their hard-earned income of more than $18 billion annually. Most of such remittances are reported to have been in small tickets sent by blue color workers working abroad for their family. White colors are, on the other hand, reported to send money for equity investment, portfolio investment and also for buying diaspora bonds. It is not workable to impose mandatory requirements on wage earners for repatriation of their income to Bangladesh. However, remittances channels may be a supportive tool for flight of money in case of non-amiability of effective banking system including currency in stable value. Incentive in this case plays a positive role which is found currently on declaration of cash incentive against wage remittances. Mode 3 is under controlled since investment is executed through approval route. Remittance from mode 4 depends on the will of individuals working abroad. However, access to market under mode 4 helps to employ excess manpower of the country. Its long term impact brings positive result for countries like us.

As said earlier, mode 1 is similar to export of goods from Bangladesh. Difference from export of physical goods is that services are rendered by resident service renderers to non-residents in non-physical form. It does not require customs formalities, formal declaration and so on. Declaration is made to banks by service renderers as and when payment is repatriated. What to happen if such income is not repatriated? No tools are there to identify for service rendered and repatriation of payment thereof. As such, cross border service renderers do not face regulatory eyes as faced by exporters of goods in case of non-repatriation of payment. Declaration for export of services is possible but it is meaningless to impose since service renderers may give declaration of such amount as and when they will arrange repatriation. So what is needed is either to devise a tool to identify non-repatriation or allow service renderers to retain income abroad in income generating boxes. It is heard that most of countries of the world comply with AML/CFT regulations. If so, service renderers cannot retain funds abroad. But what really happens is obscure.

Use of cash notes in international travels is found phasing out. International cards are taking the place of cash notes. Plastic money is secure and safe, it is said. Early part of this century, digital wallet comes in to operation, which is more user-friendly. People can carry digital wallet through their mobile phones, enabling them to execute transactions. In general practice, foreigners visiting Bangladesh can draw Taka from ATM against the foreign currency held in cards, which can also be used for purchase in point of sales (POS). Banks giving Taka through ATMs receive payment from card issuing banks abroad by way of international settlement mechanism. Shoppers selling goods receive payments from their acquiring banks which in turn realize payments from card issuing banks abroad as per settlement process. But cards are found to be phased out as said earlier and replaced by digital wallet. Still now digital wallet holders visiting Bangladesh cannot use the wallet for which necessary arrangement is needed to set network between banks and digital wallet service renderers abroad. This will facilitate foreign tourists to use their wallets in Bangladesh for necessary transactions.

Can a Bangladeshi holding cards in Taka use them while visiting abroad? It is possible if the merchants abroad set our banks as acquiring banks. This way is nothing but conduit way to repatriate money from abroad. Is it allowed by regulations? Definitely not. In opposite direction, a resident merchant of Bangladesh selling goods to a foreigner through cards can set acquiring banks abroad. Under this system, resident funds can easily move abroad.

It is frequently said that trade is a window for capital flight by so called mis-invoicing. Trade transactions in goods are recorded at different regulatory points. If vigilant looks at the points are on, capital flight is rarely possible. But trade in services under mode 1 and even in mode 2 can easily facilitate outflows because of impossibility of imposing check points. 

There are systems in place for monitoring trade transactions of physical goods. But such systems are rarely possible to be applied for trade in non-physical goods. Global regulations for AML/CFT do never allow such transactions. But local regulations are a matter, monitored by authorities of respective countries. Monitoring micro transactions are not so easy to concerned authorities working for macro views. The non-inflows of a country’s income can be accumulated in the global balance of payments statements based on statements of individual states. The consolidated statement may show mismatch as errors and omissions due to missing link with counterpart countries. Economic tools depict the results as unofficial movements of fund. Private think tanks distribute the figures among different countries in accordance with the methods they apply.

Like trade in goods, countries give services waiver in terms of multilateral agreements under GATS framework. Bangladesh has given specific commitments in two sectors- telecommunications and tourism. More than twenty developed countries are reported to have given special waiver on service sectors. Bangladesh can explore the waivers to access to those countries especially under mode 1 and mode 4. For mode 2, we need infrastructure to attract foreigners to receive services from us while their visits to Bangladesh. We are moving to upper stages in status. Whatever the opportunity we can avail, we also need safeguards in respect of repatriation of payments without drainage.

As seen earlier, monitoring mechanism does not work in case of service delivery in non-physical form. Hence, regulatory framework to ensure usual repatriation of payment is quite difficult to devise. FATCA is found enforced for US citizens by the USA to protect such income, inter alia. It is possible for implementation by them due to the political hegemony the country enjoys globally for its king currency status. Such act is not possible to be implemented by countries like us. So we need alternatives. 

Earned income without record is not reflected in national accounts. Such income does not support as a tool of lever for balance of payment. But if it is properly repatriated or used officially abroad, it reflects in current account records of external accounts. Non-repatriated surplus fund is nothing but a placement abroad like foreign assets managed by Government authority. If the fund is placed by private sectors, earnings will be the result. In the absence of non-supervisory tools, authorities should think of allowing service renderers to utilize their earned funds in foreign currency in income generating safe instruments abroad.

 

The author works in the development sector and can be reached at [email protected]