Is Importing Raw Materials Without Duty Possible?

 

Bangladesh economy is moving toward a manufacturing hub in both ways - export and import substitution. Considering the comparative advantages, the economy is bestowed with skilled and semi skilled manpower. Since eighties of the last century, Bangladesh has been showing improvement in export trade, readymade garments in particular. The development story indicates that some factors would work, duty free inputs imports are one of them.

Bangladesh allows the import of raw materials without duties under certain conditions. These provisions are typically available for businesses that engage in manufacturing cum exporting goods. Under specific customs schemes, such as bonded warehouse license, exporters can import raw materials without paying customs duties, provided that they meet certain requirements.

Export oriented industries in specialized zones like export processing zones, economic zones, etc. producing goods for exports can import raw materials without paying duties, as long as they meet the export obligation criteria. There is another scheme known as duty drawback. If raw materials are used in the production of export goods, an exporter can be eligible for a refund of the duties paid on the raw materials.

The above stated schemes often require compliance with strict rules and regulations set by the authorities concerned, including maintaining proper records, meeting export obligations, and using the materials solely for the intended purpose.

Bangladesh, a developing economy, has witnessed significant growth in sectors like textiles, food processing, pharmaceuticals, agriculture, etc. We are not a strong economy with availability of all items as required. As such, dependency on external sector for inputs contents cannot be avoided. In this point of view, the economy is said to be service manufacturing industries. We are just processing inputs for making outputs. As for an example, it can be said that inputs for garment industries are procured to make final outputs. In respect of agro-processing industries, inputs imports cannot be avoided, though it is small in quantity.

Besides export, import substitution industries are found progressing since long. It refers to the strategy of producing goods locally that were previously imported, thereby reducing dependence on foreign goods. This strategy is particularly beneficial for Bangladesh, where the goal is to enhance domestic industries, create employment opportunities, reduce the trade deficit, and promote economic independence. Import substitution industries typically involve different production ranging from consumer goods to industrial goods. But it cannot avoid foreign imports completely. Inputs are sourced from external sector.

For import substitution industries to thrive, access to raw materials at competitive prices is essential. Bangladesh's industrial landscape has encountered challenges in securing such raw materials at a cost-effective price due to customs duties and import tariffs, which inflate the cost of production. It can be said that removal of these duties for raw materials could therefore serve as a catalyst for growth in these sectors. Is it possible? Duty is a source of income on the part of Government. As such, duty free imports of raw materials sound promising for fostering import substitution industries, but several challenges are there.

Customs duties are a significant source of revenue for the Government. Waiving import duties on raw materials may result in a considerable loss of treasury income. In a country with a large population and development needs, finding alternative sources of revenue or offsetting the loss of import duties may be a complex task. However, this deserves attention.

A policy adopted to implement duty free import of raw materials requires careful monitoring to prevent abuse. There is a risk that some industries might misuse such exemptions for importing goods that are not directly linked to import substitution or local production. This may result in undermining the intended goals and creating a loophole for corruption.

A blanket reduction in duties on raw materials for all industries might create market distortions. Industries that do not require import substitution or that is already competitive can benefit much. This may lead to inefficiencies and an uneven playing field, ultimately defeating the purpose of promoting specific industries.

Import substitution is not only about replacing imports but also about fostering domestic industries to meet consumer needs. If raw materials are imported without duty, producers of such raw materials may struggle to compete with international suppliers, particularly in sectors where local production is yet to be fully competitive. This can undermine the potential for the development of certain industries that the Government aims to protect.

Despite the challenges, there are compelling arguments in favor of duty free raw material imports for certain industries in Bangladesh. Lowering the cost of raw materials can make locally produced goods more competitive in both domestic and international markets. This could lead to reduced prices for consumers, higher quality products, and increased demand for locally manufactured goods.

Bangladesh export trade is run on readymade garments. The sector is reported to have been developed due to the facilities extended for duty free inputs imports under bonded warehouse licenses. Industries such as pharmaceuticals, light engineering, etc. rely heavily on imported raw materials. Duty free access to these materials can help reduce production costs, improve margins, and enhance the competitiveness of manufacturing base of Bangladesh on the global stage. Import substitution industries often require advanced technologies and know-how. Facilitating access to essential raw materials can support research and development, drive innovation, and help industries stay at the forefront of technological advancements. This is especially critical in sectors like pharmaceuticals and engineering, where technological advancements are key to growth.

Lower production costs in import substitution industries can result in job creation and increased industrial outputs. As industries grow, there would be a ripple effect in the economy, including the creation of ancillary sectors, retail opportunities, and improved infrastructure. This can contribute to overall economic development.

It can be said that Bangladesh economy has shown better performance in export trade of readymade garments. The sector is export oriented, meaning that output goes beyond borders. There are many sectors including but not limiting to pharmaceuticals and engineering which play role in dual markets - Bangladesh and the globe. In the global market, such products cannot be competitive in respect of price if duty is embedded in product costing. Hence, only duty free inputs imports can promote export basket of the country for products trading in local market and global markets.

Import is a cost but a necessity. It is impossible to allow blanket exemptions, duty free import policies for raw materials can be adopted for sectors with high potential for import substitution including potentiality to export. This should focus on industries where the country is most dependent on imports.

The idea to promote export depends on policy supports. Historically, export is reportedly promoted by different policy tools from the part of Government. Bonded warehouse works better to facilitate export oriented industries. In addition to such types of industries, import substitution industries can work as exporters out of their total products. Bonded warehouse facilities are rarely possible to extend to these industries. Duty drawback is a way out, but industries avoid this facilities due to bureaucratic bottlenecks as per business insiders. There requires a way out. What is to happen if specified raw materials can be allowed to import without duty. Cotton can be cited as an example. It is imported without duty. It can be imported by spinners as well as traders. No license in the name of bonded warehouse is required. As a result of policy, no administrative cost is necessary in the name of monitoring. In the same way, several items can be included in duty free imports.

Exemption of duty free list will definitely reduce income of the Government. But it will otherwise benefit the Government. This will enhance profitability of import substitution cum export industries which will increase direct tax payable to the Government. Export earnings will enhance the external income of the country and it will support to supplement employment of mass people.

By prioritizing strategic sectors and creating the right incentives, Bangladesh can navigate toward greater industrial progress and reduced reliance on imports. Why should the economy miss the train in the name of abuse? The earlier is the better. Concept from license RAJ needs to be got rid of. Duty free imports should be brought into regulatory framework phasing out bonded warehouse license, for which list of permissible inputs need to be selected.

 
Mehdi Rahman works in the
development sector. He also
writes on business phenomena
and monetary issues.