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OP-ED: Back-to-back LCs and its use in local procurements

  • Published at 10:10 pm August 31st, 2021
Ship dock containers sea import export shipping
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Insider information shows that export under LCs is decreasing day by day and is being replaced by sales contracts

It is said policy support plays a pivotal role behind the development of export trade particularly readymade garments (RMG) export.

Duty free imports under customs bond licences, duty drawback facilities, cash incentive and so on are cited as fiscal facilities.

On the other hand, import on deferred payments under back-to-back LCs (letters of credit), pre-shipment financing at rebated rates, refinancing scheme of central bank for input import payments, single pool system to park export proceeds for settlement of import liabilities, retention of a portion of export proceeds in foreign currency accounts for meeting external bonafide payments are referred to as banking facilities. 

The industry is now at maturity level. Backward linkage industries for RMG are well established in Bangladesh.

This results in an increase of value addition against export of RMG. Knit garments and home textiles are reported to have huge value addition, import contents of which are rarely required. 

Import transactions of Bangladesh are guided by import policy order (IPO).

Payment settlement is executed in terms of existing foreign exchange regulations prescribed by the central bank.

Central bank regulations state that back-to-back LCs can be opened against export LCs.

The exporters need to have bond licences for such imports under back-to-back arrangements.

Inland back-to-back LCs can be opened in compliance with the same regulations in favor of manufacturer-suppliers.

But insider information shows that export under LCs is decreasing day by day and is being replaced by sales contracts.

Based on the sales contracts, banks are opening back-to-back LCs. Central bank overlooks the situation without changing the regulatory framework.

Conditions

Import is subject to payments of applicable duties and taxes.

But if exporters have bond licences, they can import inputs without making payments of duties and taxes. In this context, exporters need to comply with the conditions as stipulated in the bond licences including mandatory export of goods using the duty free inputs.

On the other hand, transactions between sellers and buyers within the country, other than transactions in bonded areas like EPZs, are subject to payment of value added taxes to be borne by buyers; and taxes at sources by sellers.

Since the development of backward linkage industries, input contents are in many cases not required for import. Local procurement is possible.

In the same way as practiced for bond license-holders, inland back-to-back LCs are opened for local procurement on behalf of exporters having no bond licences.

As the payments are settled by export proceeds, necessary taxes like value added taxes, sources taxes are not made as per insider information. This is business practice exercised for a long time. 

In the banking system, it is observed that sometimes few banks stop opening back-to-back LCs on behalf of exporters operating without bond licences.

Banks are reported to stop opening back-to-back LCs when they may face problems from concerned authority.

But they are found doing the same after a few months since fierce competition prevails in the banking system.

It is observed that the central bank issued a notification in 2010 stating that the requirement of bond licences is related to the National Board of Revenue (NBR). 

But later in March of 2016, the central bank issued another notification with reference to the decision of NBR.

The notification states that exporters operating without bond licences can procure items like cartons and accessories in foreign currency from manufacturer-suppliers working with bond licences.

There comes a question how RMG exporters operating without bond licences will procure basic inputs like fabrics or yarn.

Without back-to-back LCs, they need to face payments of applicable taxes like value added tax which are not viable at all for the industry.

Regulations do not allow it but transactions are in practice every day.

If regulations do not allow it, it is very difficult to draw conclusions regarding the transactions. There is a dilemma - regulations will be violated if ‘yes’ is said favoring the transactions, if ‘no’ is said, export will suffer.

In a very simple way, exporters may be allowed to buy all required inputs locally in foreign currency from manufacturer-suppliers regardless of their status having bond licences or not under the same conditions as stipulated at the notification issued by the central bank in 2016.

Role of exporters

As we all know, exporters sell goods abroad and import employment.

At every step, export faces different bottlenecks.

Duty drawback facilities do not work since excessive payments on account of duty and tax-type payments need huge working capital facilities which are also costly.

Considering this view in mind, general authorization may be given to export oriented industries depending on backward linkage industries for input procurements locally against inland deferred or back-to-back LCs.

But there lie challenges if the inputs are not exported after processing. This means that fiscal facilities are used in illegitimate ways. There should be safeguard measures.

The facilities allowed in 2016 seem to be out of appropriate safeguards, which should be embedded with suitable conditions such as payments shall mandatorily be settled out of proceeds against relative exports. 

In case of the proposition to settle payments out of export proceeds, the transactions may be considered as closed.

This is the basic issue to be observed.

In all respects, the procedures should be observed are: (a) export to be executed by banks through which back-to-back LCs for local procurements have been issued, (b) back-to-back payments shall mandatorily be settled out of relative export payments, (c) in case of payments against back-to-back LCs without export proceeds, the settlement needs to be made mandatorily in Taka, (d) Taka settlement is subject to payments of all applicable duties, taxes and other levies, (e) the transactional procedures are to be reported to central bank reporting system, (f) system is to be in place for concerned authority to access central bank reporting database, (g) the payments cycle shall be 180 days from the date of delivery unless extended period is granted.

Bond licences

Transactions under bond licences are guided by UD/UP (utilization declaration/utilization permit) and settlement of payments in foreign currency.

Payments in foreign currencies may not ensure export of goods by using the back-to-back inputs.

As per back-to-back LCs terms, paying banks need to settle LC payments on maturity.

As such, banks are bound to settle payments in spite of non-realization of export proceeds.

Consequently, banking norms do not ensure avoidance of duties, taxes and other payments.

In the context of non-realization of export proceeds, appropriate measures like local settlement in Taka including payment of all applicable taxes as noted earlier should also be in place even if the transactions are under bond licences. 

Export transactions need to be facilitated with policy support.

The sector has arrived at a height due to policy support extended by different Government agencies.

But the present situation regarding back-to-back input procurements by exporters having no bond licences is like a ‘hide and seek’ game.

For the sake of the sector, this game needs to be stopped with policy instructions from the concerned authorities.

The proposition as noted earlier may be adopted with proper articulation. Otherwise, ‘hide and seek’ to avoid regulations for the sake of export transactions will continue.

Immediate action from the concerned authorities should be focused on the issue for smooth export transactions to make a win-win position at all ends.

Regulatory authorities should come up with their support in association with representatives of trade bodies.


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

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