At a time when the country is going to face stiff competition and big challenges to boost exports in the post-LDC era, local contractors or deemed exporters are facing difficulties in getting tax exemption, participating in international tenders and using foreign exchange due to policy mismatch.
The mismatch between the procedures for obtaining tax exemption or adjustment as per VAT and SD Act, 2012 and using foreign exchange received by local contractors for international tenders makes it difficult for them to procure goods or services locally aiming to get work order under international tenders.
For enabling local contractors to bid international tenders in competitive prices, it is essential that local contractors be exempted from VAT and SD, the study group on tariff rationalisation in its final report recommends.
The report will be submitted soon to the national committee, formed by the government, with the principal secretary to the prime minister as its chief.
The committee has been constituted in an effort to overcome the challenges which may arise after the country’s graduation from the LDC status. The government aims to implement the action plan and monitor its implementation.
The government has formed the study group led by Md Masud Sadiq, member (customs policy) at the National Board of Revenue (NBR). The study group was first formed with Syed Golam Kibria, member (customs policy and ICT), as its head.
“Careful review of the definitions of export and deemed export reveals that there is no difference in definition of direct export in related acts and policies. But there are differences in definition of deemed export,” the report reads.
VAT and SD Act, 2012 specifies three types of domestic supply as deemed exports, including supply of any ingredient of goods or service in a prescribed manner against foreign exchange and destined for consumption outside Bangladesh.
Supply of any goods or service within the territory of Bangladesh against foreign exchange in a prescribed manner through an international tender and supply of any goods or service within the territory of Bangladesh against foreign exchange in a prescribed manner under cover of local letter of credit (LC) are included in the act.
It is clear from this provision that in order to get the benefits of deemed exports, three types of supplies of goods or services must be made against foreign exchange. Export Policy Order 2021-24 and Duty Drawback Rules follow the same definition.
However, Income Tax Ordinance, 1984 in its definition of export includes only the first type of deemed export listed in VAT Act, and Foreign Exchange Regulation 1947 does not give any definition of deemed exports.
Nevertheless, guidelines for foreign exchange transaction address the issue of deemed exports as defined in VAT Act, allowing opening of inland back-to-back LC in foreign exchange for procuring inputs from local manufacturers-cum-suppliers.
It allows opening of LC in foreign currency, favouring local contractors under international tenders. VAT Act requires supply of goods or services against foreign exchange in order to avail the benefits of deemed exports.
It is important to carefully review the relevant provisions of VAT and SD Rules 2016 and Guidelines for Foreign Exchange Transaction, the report recommends.
Inconsistency in VAT Act & foreign exchange guidelines
The comparison of VAT Act and provisions of guidelines for Foreign Exchange Transaction shows that guidelines allow supply of ingredients or inputs by local manufacturers-cum suppliers to exporters against foreign exchange.
Therefore, such supply seemingly does not face any difficulties in getting treatment under VAT Act. But other local supplies considered as deemed exports under VAT Act may face difficulties.
VAT and SD Rules 2016 reveal and treat supply of goods of services by local contractors awarded under international tenders as well as partial supply of goods or services by any local suppliers under inland LC in foreign exchange against any work order received by any organization--local or foreign-- through international tenders as deemed exports.
This rule specifies documentary requirements for treating such types of supplies of goods or services as deemed exports and subsequently receiving tax exemption or adjustment.
Along with providing evidence on work order, details of locally procured materials, bill of entry, VAT challan, the supplier or contractor has to provide Export Proceed Realisation Certificate (PRC) certified by banks for claiming decreasing adjustment of input tax and supplementary duty where applicable, it said.
PRC is issued by the banks only when LC is opened in foreign exchange against export or deemed exports. Therefore, in order to treat any supply of goods or services within Bangladesh as deemed exports, PRC is a must.
Guidelines for Foreign Exchange Transaction maintains that it is allowed to open LC in foreign exchange favouring local contractors, but they may retain foreign exchange and thus take up to 30 days to settle import payments.
It means that local contractors may open LCs in foreign currency only for import but not for supply of goods and services from local suppliers. Thus PRC may be issued in favour of local contractors only when they import goods or services.
Since local contractors are not authorised to open LCs in foreign exchange for partial supply of goods from local suppliers, PRC may not be issued.
As a result, local contractors cannot claim tax exemption for partial supply of goods and services under international tenders from local suppliers, it said.
The report said that there is a standard practice for evaluating international tenders by comparing domestic prices of local participants with the cost, insurance and freight (CIF) prices of foreign participants.
That is why in order to create a level playing field, it is important that the prices of local participants in international tenders do not increase due to tax burden.
Since local contractors, by winning an international tender retain foreign exchange in the country, VAT Act considers supply of goods or services by local contractors as deemed exports and allows VAT exemption or adjustment for this supply.
In a bid to obtain such benefits, PRC is a must as per the rule, which can be issued when only LC is opened in foreign exchange. But foreign exchange guidelines allow contractors to open LCs in foreign exchange only for import but not for local procurement.
Subsequently, local contractors can get benefits of exemptions or adjustment when they import from foreign suppliers outside Bangladesh.
If the contractors intend to procure goods or services from local suppliers to implement the work order under international tenders, they cannot avail such exemptions or adjustments.
As a result, contractors tend to import goods or services from foreign suppliers outside Bangladesh in an effort to have price advantage, the report said.
Study group’s recommendations
For enabling local contractors to bid international tenders in competitive prices, it is essential that local contractors be exempted from VAT and SD, the report recommends.
As part of considering the needs, VAT Act has defined the supply of goods or services within Bangladesh under international tenders as deemed exports and allow VAT exemptions or adjustments for this supply.
Besides, VAT Act and VAT and SD Rules 2016 require inclusion of supply of goods or services under international tenders against foreign exchange and submission of PRC for obtaining VAT exemptions or adjustments.
Foreign Exchange Transaction should allow opening of LCs in foreign exchange favouring local contractors to implement work order under international tenders, and use this foreign exchange to procure goods or services locally.
When policy adopted under VAT act seems rational, reservation in Foreign Exchange Transaction guidelines in opening inland LCs against foreign exchange received for implementing work order under international tender is the main obstacle in implementing the policy adopted under VAT act, it stressed.
Against this backdrop, it is recommended to revoke the corresponding circular of Bangladesh Bank and make necessary amendments to Foreign Exchange Transaction guideline more specifically last sentence of the paragraph.
In order to enable local contractor to procure goods or services from local suppliers using foreign exchange received for international tender, which in turn will allow bank to issue PRC and allow local contractor to avail tax exemption or adjustment, it is highly required, the study opined.
The National Board of Revenue may consider requesting Bangladesh Bank to revisit the corresponding paragraph in a bid to implement VAT act and VAT and SD Rules 2016, it stated.
The study group consisted of Zaidi Sattar, Chairman and Chief Executive of Policy Research Institute of Bangladesh (PRI), Manzur Ahmed, adviser of Federation of Bangladesh Chambers of Commerce & Industry (FBCCI), Ferdaus Ara Begum, Chief Executive Officer (CEO), Business Initiative Leading Development (BUILD), Abu Daiyan Mohammad Ahsanullah, Joint Secretary, Finance Division, Md Salim Ullah, Senior Assistant Secretary (Policy), Ministry of Industries, Md Mamun-Ur-Rashid Askari, Joint Chief, Bangladesh Trade & Tariff Commission (BTTC), and Kazi Iqbal, Senior Research Fellow, Bangladesh Institute of Development Studies (BIDS).
