Rampant smuggling, high taxes, huge revenue loss for Bangladesh

Over the past few months, many in the business community have been calling to revise the tax regime in Bangladesh, as high taxes are one of the greatest impediments in the ease of doing business here. 

The pandemic has exacerbated the problem to the extent that Managing Director of Apex Footwear, Syed Nasim Manzur went viral recently after his remark at an event about quitting the business altogether if the tax system is not reformed. 

"The local tax system is not business-friendly. For this reason, the business should be stopped. Those of us who do business in Bangladesh, we want to leave it from tomorrow," he had said during the webinar.

This does not only affect the export of leather goods, but also importers of goods. 

Take for instance the Customs Act, 1969, where cosmetics and personal care products, such as lotions, shampoos and perfumes have been subjected to an increasing tax incidence trend over the years- being considered as luxury goods. 

Skin and baby care products such as powders, lotion, oils, soap, and shampoo, etc. that are mostly imported for the local consumers- identified by HS codes 33.03 to 33.07- are subjected to high custom tariff; having a highest Total Tax Incidence (TTI) of 150% and the lowest being 89.2%.

Total tax incidence for specific products is the summation of applicable charges entailing Customs duty (CD), Surcharge Duty (SD), Value Added Tax (VAT), Advanced Income Tax (AIT), Regulatory Duty (RD), and Advance Trade VAT (ATV). 

Shampoos have TTI of 153.49%; Skin care/ make-up/ powder 130.19%; Perfumes and toiletries 106.9 % and Soaps 91.37%

Taxation makes goods pricier, which gives rise to smuggling and counterfeit products. Which in turn becomes a loss making venture for legal importers and also lost revenue for the government in taxes. 

“We have a minimum Tk2 crore monthly revenue loss, yearly it could be Tk24 crore,”said Procter & Gamble (P & G) Bangladesh Branch Manager, Zakir Hossain. “Because of illegal imports 15%-20% of their products remain unsold.”

There are so many illegal products from international brands in the market that FMCG brand distributors and wholesalers have also alleged parent companies of knowing about the illegal channels through which their products make their way into the local market. 

Dhaka Tribune reached out to Marico Bangladesh and Reckitt Benckiser about this issue but they declined to comment. 

“The government’s policy is rightly to protect domestic industry but there should be rationale for a good balance between domestic and imported products and the best way to do this is to modernize the tax system with a reforms,” thinks Fahmida Khatun, executive director at the Centre for Policy Dialogue (CDP). 

The market will always dictate price

Because smuggled goods are cheaper, consumers naturally prefer paying less than more for the legally imported goods. 

According to the authorized distributor of one MNC brand, the legally imported baby care product that costs Tk265 in the market, is being sold at Tk190-200 in the Chawk Bazar market, causing legal importers immense losses. Another 100ml product of the same brand that costs Tk132 is being sold at Tk100-110.

According to sellers, if they buy from authorized dealers then they are unable to make a profit, so they go to Chawk Bazar where they can get all branded products at the cheapest price.

Speaking to a salesman of a shop in Chawk Bazar who ensured they have the cheapest price of baby products in the market, he said: "The issue is not whether these are coming through other illegal or legal channels. What matters is that we can give you the cheapest price and people are buying the real products at the cheapest price, it does not matter to the customers if it is illegal." 

When visiting some markets,a Dhaka Tribune correspondent found lots of skincare and baby care products like powders, lotion, oils, soap, and shampoo being sold openly without any importers’ stickers or any Bangladesh Standards and Testing Institution (BSTI) approval seal, that guarantees consumer rights in terms of price and safety selling at a lower price than authorized dealers or importers. 

These products are often smuggled through the border through illegal channels and sold at Chawk Bazar. 

Upon inquiry, the proprietor of one shop selling illegally imported products, said: “These are not legally imported products. These are from the Black market. It is risky to sell black market products openly. Besides, luggage party products come without any vat or tax so we can sell it at the lowest price that legally imported products can’t be sold at this price.”

Essentially, cosmetic and toiletries products from brands like Procter& Gamble (P & G), Unilever, Nestle, Johnson & Johnson (J&J), Marico, Reckitt Benckiser (RB) that are available in the market, essentially are of three grades- original products that are imported through authorized channels; “luggage party” goods or original products brought in through illicit channels and counterfeit goods.

Such unauthorized-imported, and counterfeit products may contain chemicals that pose a severe threat to the health and safety of consumers, according to Rezaul Haque, the Deputy Director (metrology) of BSTI.

Local sellers are able to offer such discounted prices since the products come through parallel channels that are illicit without the payment of customs duty or import tax.

Bangladeshis have spent a whopping $2.5 billion dollars on cosmetics in 2016 alone, according to the State of the Global Islamic Economy Report 2016-17 being the sixth-largest buyer of cosmetics in the Muslim world, the report states. 

According to a study conducted by Allied Market Research, the Bangladesh skin care products market size was valued at $1.23 billion in 2020 and is expected to garner $2.12 billion by 2027, registering a CAGR of 8.1% from 2021 to 2027. 

The channels

The unauthorized products are being brought in by international travelers and airline crew in quantities within the duty-free limit, or sometimes beyond those amounts but without any duty; Travellers bring branded cosmetics from different countries saying they are for personal use or gifts and later sell them to the retailers. Airline crew takes advantage of the fact that the 20 or so kilograms of luggage they are allowed are rarely if ever screened.

After talking to several importers, dealers, and buyers DT correspondent came to know these products are coming directly at the Indian Potti, Churi Potti-Jeshore Sadar through Jashore-Benapole border, Satkhira Sadar and Vomra Bazar through Vomra Border, Boro Bazar at Khulna Sadar through Benapole and Vomra Border, Feni Bazar -Sadar Road through Feni Border  Bazar, Bogura Sadar at NewMarket through Hili Border. 

These illegal products are mostly found in the wholesale markets in Chawk Bazar, Dhaka including Moulvibazar Tower, Ikramulla Plaza, and Khan Market, Rajgonj Bazar at Comilla, Indian Potti/Churi Potti at Jessore, Borobazar at Khulna, Vomra Bazar at Satkhira, and New Market at BograSadar which are the main wholesale points of illegal products.

The current state of control measures

BSTI’s Deputy Director Rezaul Haque on how they control the situation said: “We have been taking action against unauthorized and counterfeit products which reduced illegal imports. Police, RAB, and Directorate of National Consumer Rights Protection (DNCRP) have been continuously initiating raids based on the allegations they have found. 

We destroyed Tk20 crore products in one and half years. But with the lockdown ongoing our operations have been halted. When the situation is normal again, we will start our operation again.”