Bangladesh Policy Notes
Export Diversification through Bonded Warehouse Reforms
Key issues and challenges

Benefits and rules of bonded manufacturing are often discretionary. Bonded manufacturing is a form
of temporary admission, which is equivalent to suspended import duty. The term used varies from country
to country: Special Bonded Warehouses (SBW) in Bangladesh, Export Only Units in India, Bonded
Manufacturing Warehouses in Malaysia, etc. The rules under which they operate also vary substantially
from country to country and have changed over time. Bonded manufacturing status allows firms to bring
imported goods into their warehouses without paying import duty, use the goods in their production, and
export the output. The firms can usually also import machinery and replacement parts and other supplies
duty-free, and buy from domestic suppliers free of domestic excise, sales and other taxes. The participating
factories operate under the supervision of Customs authorities, who check the import and export containers
going to and from the bonded factory, or, in some cases, rely on spot checks of the factory's inventories.
The benefits and rules are at the discretion of the governments.

The success of the bonded warehouse facility is not equitable and inclusive in Bangladesh.
Bangladesh’s customs bonded warehouse regime permits licensed manufacturers to import duty-free parts
and materials required for their export production purposes. The regime is most heavily used by RMG
producers and to a lesser extent by leather goods, footwear, and shipbuilding industries. Enterprises are
allowed to use the Special Bonded Warehouse (SBW) facility for importing all inputs duty-free along with
imports of inputs under back-to-back LC (letters of credit), a facility to pay for imported inputs from export
proceeds. This policy works to negate both the effect of relatively high import tariffs and the difficulty in
claiming duty drawback on the export of duty-paid imported raw materials. It ensures competitive pricing
by exporters for their manufactured goods as they compete in regional (and global) markets. However, these
schemes allowing the duty-free import of inputs are not available equally to other sector exporters, who
must pay duties on imported inputs upfront and rely on a dysfunctional duty drawback system that involves
transaction costs. Therefore, for non-RMG sectors, a tariff on imports becomes a tax on exports on two
counts: (a) the higher cost of imported inputs and (b) the higher tariff-induced profitability of Import
Substitute Industries that divert resources away from exports.

There are no restrictions in the policy but the devil is in the details. While the RMG sector is currently
the predominant user of the SBW facility (90 percent of the licensees), there are no specific legal or policy
provisions that prohibit or restrict the use of the facility by non-RMG sectors. In practice, however, it
appears that administratively there are around 320 Statutory Rules and Orders (SRO), meeting minutes and
instructions governing the SBW regime, 248 of which are not even recorded anywhere. Most of the
instructions have been drafted to support the operation of SBWs in the RMG sectors. When applied to other
sectors, the rules have the effect of being less favorable and, in some cases, a barrier to seeking an SBW
license. The key legal basis for the regime is the warehousing provisions of the 1969 Customs Act.
However, those provisions largely described a regime for customs storage warehouses, and contain few
provisions on manufacturing. The lack of a clear legal basis in the Act creates uncertainty as to the
requirements and leaves greater scope for administrative discretion.

The RMG sector enjoys various advantages which are not available to the others. Advantages for
RMG sector include longer audit cycles with the Bond Commissionerate; exemption from annual
entitlement process for accessing imported inputs for direct exporters; setting of utilization rates used to
acquit duty liability by an industry body with industry expertise; permission to have multiple premises
(within 60km) on one license; acceptable to send goods to sub-contractors as part of the process; and no
requirement to house full time Bond Commissionerate staff on site. These perks are not offered to the
leather industry, the second highest manufacturing export revenue-earner.

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Even within the RMG sector, the process of obtaining a license and operating an SBW is overly
arduous. The SBW system is centered on an onerous paper-based manual system. The entire system is
cumbersome, from the process for licensing an entity and bonded premises to the separate process for
seeking permission for, and taking delivery of, imported components and other raw materials to be used in
manufacture. Authorities exercise 100 percent transaction-by-transaction control, rather than risk-based
selective control, making the process burdensome for both the licensee and the Customs officials, who
themselves lack capacity, resources and industry expertise. There is a significant amount of redundancy in
documentation and data requirements and formalities. Duplication also appears between the bill of entry
and the import entitlement.

The National Board of Revenue’s (NBR) recent bond management automation project (iBMS) could
be improved. iBMS has importantly recognized the need to introduce efficiencies for ‘deserving’
(compliant) licensees. However, it has not addressed the question of what standards or what criteria must
be met and maintained to be considered ‘deserving’. The project recognizes the need to review and revise
SROs in the context of automation without providing a clear direction. Addressing revenue leakage is
rightly identified as a priority. However, there are no details on how this is to be achieved. The project has
also identified possible linkages between the new iBMS and other NBR-based systems as a possible option
but without presenting a clear vision. Finally, developing the capacity of the staff has been identified as a
requirement, but again there is a lack of detail on the actual skill sets needed.

Policy Recommendations

To address these issues, in the short term, the government needs to:
• Enact and implement the New Customs Act, which has addressed the SBW-related provisions in the
   Warehousing Chapter.
• Conduct a Business Process Review of bond license issuance, audit, management, reconciliation and
   renewal procedure and identify process simplification options for SBW.
• Review the existing SROs and other instructions that govern SBW and simplify them.
• In collaboration with the Customs Modernization team, make available the capacity building
   opportunities for Risk-based customs control.

To address these issues, in the medium to long term, the government needs to:
• Based on the Business Process Review, introduce new procedures and SROs based on the principles
   outlined, such as generic eligibility criteria, warehouse categories and special eligibility criteria.
• Adopt Risk Management Principles for efficient licensing and renewal system based on compliance
   history and transparent eligibility criteria.
• Introduce automated license management for applications and renewal, and a database of licensees and
   license operations including periodic operating statements.
• Build capacity, beyond the new procedures and into developing the new skills to manage risk and focus
   on enhancing business systems.
• Centralize Bonded Warehouse Facility in Economic Zones and industry clusters.
• Develop Authorized Economic Operator and trusted trader programs including Post Clearance Audit.
• Envision a future warehousing policy that would remove roadblocks;




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