Duty drawback system
Saturday, 5 January 2008
Manzur Ahmed
The duty exemption and drawback facility provided to exporters by the government enables a business to claim back, within six months of exporting a good, the duties and taxes paid on raw materials used in the production process. Apart from imported raw materials, businesses are entitled to duty exemption and drawback on taxes paid on utilities and, in some cases, on the fuel consumed in the production process.
Eligible exporters can enjoy this facility under two broad categories -- a duty exemption or a duty drawback. Under the duty drawback system, exporters get refunds of the duties and indirect taxes they have paid on imported inputs.
Eligible exporters can claim their drawback by filing their claim with the Duty Exemption and Drawback Office (DEDO), which is an agency under the authority of the National Board of Revenue (NBR).
The Customs Act, 1969 and the VAT Act, 1991 govern the duty drawback (DDB) process. Duty drawback can be claimed on inputs under Section 13, Rules 28, 29, 30, 31, 32, 32(a), 33 and 34. Additional statutory regulatory orders (SROs) that guide the process include SRO 154 (June 9, 2005) and SRO 157 (June 9, 2005).
The DEDO office is responsible for administering the duty exemption and drawback facility for the entire country. The agency has three sector specialists on staff, primarily charged with determining the input-output coefficient - a number that is used to estimate the duty drawback an exporter is eligible to receive.
Duty may be refunded in three ways. Due to fewer complications and ease of operation, the flat rate system remains the most preferred method of refund.
Actual drawback systems refund the duties and indirect taxes paid by the firms based on actual amounts paid.
The fixed drawback system refunds the estimated duties and indirect taxes that are part of the cost of production of exports according to a preset schedule.
The Administrative Barriers Review (ABR) is one of the components of Bangladesh Private Sector Development Support Project (PSDSP). The ABR report, based on considerable analysis over almost one year, sets out some agreed prioritised options for reform which the government has committed to pursue.
ABR: Process Synopsis: At DEDO, duty drawback applications are collected in the receipt and dispatch (R/D) section and forwarded to the Director General. DEDO prefers that the applications are sent by mail, since the postmark on the application serves as proof of the application date. In case of hand delivery, it is an onus on applicants to get their applications stamped and dated from the R/D upon submission.
The DG notes the application and returns it to R/D for distribution to the appropriate section. There are six sections categorised alphabetically, numerically, according to volume, and sector.
Out of the six sections, the DG directly is responsible for overseeing the functions of one of the sections. Of the remaining five sections, the Deputy Director is in charge of three, while the Assistant Director is in charge of two.
Once the application reaches the appropriate section, the Section Assistant (UD/LD) opens a file against each application and passes the file to an Inspector/Appraiser for verification. Next, the file is sent for verification by the Superintendent/Principal Appraiser, and the file along with the payment voucher is forwarded to the section head.
If the section heads are satisfied with the recommendation of the Superintendent/ Principal Appraiser, they forward the file and payment voucher, to the DG for final approval. The DG makes the final approval and clears payment. DEDO mails the cheque directly to the lien bank and issues a letter to the applicant advising credit.
In case of a flat rate, inspection by a specialist is required to determine the coefficient. DEDO does not have enough sector specialists in its employment for the volume of work. To facilitate the process, a decision, still in effect, was taken by the NBR in 2001 to utilise the services of external specialists at the cost of the exporter.
The law allows for a maximum of 30 days to process a claim without any compulsion to adhere to the stipulation. Survey respondents stated that the maximum can be much longer (the maximum reported figure was 180 days). As of October 2005, DEDO had 2,114 pending files, of which 685 were from the 2004 calendar year.
Much of the delay in processing duty drawback claims may be attributed to a fear on the part of civil servants that they will be implicated in some form of corruption or somehow will be mislead by private business people, or fooled by false documentation filed by business claimants.
Primary reasons for delay include incomplete application, export clearance (DEDO copy) not received from relevant customs house/station, declaration/ verification from lien bank about Proceed Realisation Certificate (PRC), and Clearance from VAT circle regarding status of duty exemption. Opportunities clearly exist to simplify the process and reduce the number of required supporting documents.
Multiple levels of verifications add to the frustration of the clients who, according to the survey, perceive the process more often as a hassle and choose to forego the monetary incentives that they are eligible to claim.
This is particularly true for the small businesses, who generally are resource starved and potentially have more to gain from the incentives available than their larger counterparts.
The duty drawback system is difficult because, on the one hand, government is seeking to provide a helpful facility to exporters, while on the other hand, DEDO needs to ensure with certainty that the refunds are provided in response to legitimate claims.
Deemed export: The current duty drawback system does not serve "deemed" or indirect exporters well. Although they are eligible to claim duty refunds from DEDO on their imported inputs which are transformed and sold to direct exporters, they face enormous difficulties in obtaining original export documentation to support their claims.
ABR: Recommendations for Improvement: The claim review process at DEDO involves too many officials. Each additional layer results not only in higher costs due to payment of unofficial fees, but also contributes to longer process time.
From the perspective of the agency officials, the high number of officials is necessary to ensure adequate mechanisms are in place prevent abuses by the claimant. Also, each layer is in place to adequately scrutinise the applications. Sadly, despite all the safety mechanisms in place many exporters have succeeded in defrauding the system.
To address the delay associated with the coefficient determination process, it was suggested that rather than customised determination, a national weighted average be used. Such a reform has previously been recommended by another donor funded project. DEDO could publish a schedule of these calculations annually and each applicant could file their claim accordingly. This would greatly expedite the process.
Many expressed the view that the role of commercial banks should be more prominent in the process, which would lead to higher efficiency. The participants were in agreement that DEDO needs to automate the duty drawback process and become more technologically sophisticated which hopefully will lead to more efficiency and transparency at the agency.
The Federation of Bangladesh Chambers of Commerce & Industry (FBCCI) is in agreement with ABR findings. It along with ABR recommendations, has proposed the following measures:
1. DDB refund should only be made on clearance from the Bangladesh Bank on receipt of export or deemed export payments.
2. Disposal of DDB Application: Applicants may apply to DEDO for the refund using the standardised "DDB Application Form". Within three days of receipt of an application the authorities shall acknowledge the duly filled standardised application form and the application must be disposed either by refunding or by rejection of the claim giving reasons in writing for such rejection within next [30] days.
3. Streamlining the verification process: The verification process for DDB claim should be expedited through automation and computerisation with more formal arrangement with the other institutions and banks from where verification documents are requested and through stricter internal controls to increase accountability and transparency within the system.
4. For expediting verification of submitted documents on-line connectivity with banks, the Export Promotion Bureau and customs databases should be established
5. Adopt standardised coefficients: The DDB coefficient for each industrial sector rather than by each particular company should be calculated by NBR valuation department in consultation with the sectoral stakeholders and concerned agencies based on Export Promotion Bureau (Rules of Origin) and NBR (VAT) databases.
The determined coefficients should then be published annually as a list for reference, based on which enterprises can calculate their eligible drawback, using the coefficient for their industrial sector, and file their claim. The list could be updated as when necessary.
6. Duty Suspension instead of Duty Drawback: To grant exemptions to exporters in the earlier stages of the production process before the duty and other VAT are paid by the exporter. This will allow exporters to receive exemption at the bank when the gas bill is paid and is legally mandated through SRO 154 (June 9, 2005). Such exemptions would greatly reduce the work of DEDO and provide relief to the exporters.
7. The following categories of supply of goods by the main/ sub-contractors shall be regarded as "Deemed Exports" under this policy, provided the goods are manufactured in Bangladesh:
· Supply of goods to projects financed by multilateral or bilateral agencies/funds, as notified by the government of Bangladesh (GOB) where the legal agreements provide for tender evaluation without including the customs duty;
· Supply of capital goods, including in unassembled/ disassembled condition as well as plants, machinery, accessories, tools, dyes and such goods which are used for installation purposes till the stage of commercial production and spares to the extent of 10% of the value to export oriented units, fertiliser plants, power projects and refineries.
· Supply of goods to any project or purpose in respect of which GOB, by a notification, permits the import of such goods at zero customs duty.
· Supply to projects funded by UN agencies.
The governing laws relating to DDB need to be streamlined in line with above recommendations.
The writer is Advisor, FBCCI
The duty exemption and drawback facility provided to exporters by the government enables a business to claim back, within six months of exporting a good, the duties and taxes paid on raw materials used in the production process. Apart from imported raw materials, businesses are entitled to duty exemption and drawback on taxes paid on utilities and, in some cases, on the fuel consumed in the production process.
Eligible exporters can enjoy this facility under two broad categories -- a duty exemption or a duty drawback. Under the duty drawback system, exporters get refunds of the duties and indirect taxes they have paid on imported inputs.
Eligible exporters can claim their drawback by filing their claim with the Duty Exemption and Drawback Office (DEDO), which is an agency under the authority of the National Board of Revenue (NBR).
The Customs Act, 1969 and the VAT Act, 1991 govern the duty drawback (DDB) process. Duty drawback can be claimed on inputs under Section 13, Rules 28, 29, 30, 31, 32, 32(a), 33 and 34. Additional statutory regulatory orders (SROs) that guide the process include SRO 154 (June 9, 2005) and SRO 157 (June 9, 2005).
The DEDO office is responsible for administering the duty exemption and drawback facility for the entire country. The agency has three sector specialists on staff, primarily charged with determining the input-output coefficient - a number that is used to estimate the duty drawback an exporter is eligible to receive.
Duty may be refunded in three ways. Due to fewer complications and ease of operation, the flat rate system remains the most preferred method of refund.
Actual drawback systems refund the duties and indirect taxes paid by the firms based on actual amounts paid.
The fixed drawback system refunds the estimated duties and indirect taxes that are part of the cost of production of exports according to a preset schedule.
The Administrative Barriers Review (ABR) is one of the components of Bangladesh Private Sector Development Support Project (PSDSP). The ABR report, based on considerable analysis over almost one year, sets out some agreed prioritised options for reform which the government has committed to pursue.
ABR: Process Synopsis: At DEDO, duty drawback applications are collected in the receipt and dispatch (R/D) section and forwarded to the Director General. DEDO prefers that the applications are sent by mail, since the postmark on the application serves as proof of the application date. In case of hand delivery, it is an onus on applicants to get their applications stamped and dated from the R/D upon submission.
The DG notes the application and returns it to R/D for distribution to the appropriate section. There are six sections categorised alphabetically, numerically, according to volume, and sector.
Out of the six sections, the DG directly is responsible for overseeing the functions of one of the sections. Of the remaining five sections, the Deputy Director is in charge of three, while the Assistant Director is in charge of two.
Once the application reaches the appropriate section, the Section Assistant (UD/LD) opens a file against each application and passes the file to an Inspector/Appraiser for verification. Next, the file is sent for verification by the Superintendent/Principal Appraiser, and the file along with the payment voucher is forwarded to the section head.
If the section heads are satisfied with the recommendation of the Superintendent/ Principal Appraiser, they forward the file and payment voucher, to the DG for final approval. The DG makes the final approval and clears payment. DEDO mails the cheque directly to the lien bank and issues a letter to the applicant advising credit.
In case of a flat rate, inspection by a specialist is required to determine the coefficient. DEDO does not have enough sector specialists in its employment for the volume of work. To facilitate the process, a decision, still in effect, was taken by the NBR in 2001 to utilise the services of external specialists at the cost of the exporter.
The law allows for a maximum of 30 days to process a claim without any compulsion to adhere to the stipulation. Survey respondents stated that the maximum can be much longer (the maximum reported figure was 180 days). As of October 2005, DEDO had 2,114 pending files, of which 685 were from the 2004 calendar year.
Much of the delay in processing duty drawback claims may be attributed to a fear on the part of civil servants that they will be implicated in some form of corruption or somehow will be mislead by private business people, or fooled by false documentation filed by business claimants.
Primary reasons for delay include incomplete application, export clearance (DEDO copy) not received from relevant customs house/station, declaration/ verification from lien bank about Proceed Realisation Certificate (PRC), and Clearance from VAT circle regarding status of duty exemption. Opportunities clearly exist to simplify the process and reduce the number of required supporting documents.
Multiple levels of verifications add to the frustration of the clients who, according to the survey, perceive the process more often as a hassle and choose to forego the monetary incentives that they are eligible to claim.
This is particularly true for the small businesses, who generally are resource starved and potentially have more to gain from the incentives available than their larger counterparts.
The duty drawback system is difficult because, on the one hand, government is seeking to provide a helpful facility to exporters, while on the other hand, DEDO needs to ensure with certainty that the refunds are provided in response to legitimate claims.
Deemed export: The current duty drawback system does not serve "deemed" or indirect exporters well. Although they are eligible to claim duty refunds from DEDO on their imported inputs which are transformed and sold to direct exporters, they face enormous difficulties in obtaining original export documentation to support their claims.
ABR: Recommendations for Improvement: The claim review process at DEDO involves too many officials. Each additional layer results not only in higher costs due to payment of unofficial fees, but also contributes to longer process time.
From the perspective of the agency officials, the high number of officials is necessary to ensure adequate mechanisms are in place prevent abuses by the claimant. Also, each layer is in place to adequately scrutinise the applications. Sadly, despite all the safety mechanisms in place many exporters have succeeded in defrauding the system.
To address the delay associated with the coefficient determination process, it was suggested that rather than customised determination, a national weighted average be used. Such a reform has previously been recommended by another donor funded project. DEDO could publish a schedule of these calculations annually and each applicant could file their claim accordingly. This would greatly expedite the process.
Many expressed the view that the role of commercial banks should be more prominent in the process, which would lead to higher efficiency. The participants were in agreement that DEDO needs to automate the duty drawback process and become more technologically sophisticated which hopefully will lead to more efficiency and transparency at the agency.
The Federation of Bangladesh Chambers of Commerce & Industry (FBCCI) is in agreement with ABR findings. It along with ABR recommendations, has proposed the following measures:
1. DDB refund should only be made on clearance from the Bangladesh Bank on receipt of export or deemed export payments.
2. Disposal of DDB Application: Applicants may apply to DEDO for the refund using the standardised "DDB Application Form". Within three days of receipt of an application the authorities shall acknowledge the duly filled standardised application form and the application must be disposed either by refunding or by rejection of the claim giving reasons in writing for such rejection within next [30] days.
3. Streamlining the verification process: The verification process for DDB claim should be expedited through automation and computerisation with more formal arrangement with the other institutions and banks from where verification documents are requested and through stricter internal controls to increase accountability and transparency within the system.
4. For expediting verification of submitted documents on-line connectivity with banks, the Export Promotion Bureau and customs databases should be established
5. Adopt standardised coefficients: The DDB coefficient for each industrial sector rather than by each particular company should be calculated by NBR valuation department in consultation with the sectoral stakeholders and concerned agencies based on Export Promotion Bureau (Rules of Origin) and NBR (VAT) databases.
The determined coefficients should then be published annually as a list for reference, based on which enterprises can calculate their eligible drawback, using the coefficient for their industrial sector, and file their claim. The list could be updated as when necessary.
6. Duty Suspension instead of Duty Drawback: To grant exemptions to exporters in the earlier stages of the production process before the duty and other VAT are paid by the exporter. This will allow exporters to receive exemption at the bank when the gas bill is paid and is legally mandated through SRO 154 (June 9, 2005). Such exemptions would greatly reduce the work of DEDO and provide relief to the exporters.
7. The following categories of supply of goods by the main/ sub-contractors shall be regarded as "Deemed Exports" under this policy, provided the goods are manufactured in Bangladesh:
· Supply of goods to projects financed by multilateral or bilateral agencies/funds, as notified by the government of Bangladesh (GOB) where the legal agreements provide for tender evaluation without including the customs duty;
· Supply of capital goods, including in unassembled/ disassembled condition as well as plants, machinery, accessories, tools, dyes and such goods which are used for installation purposes till the stage of commercial production and spares to the extent of 10% of the value to export oriented units, fertiliser plants, power projects and refineries.
· Supply of goods to any project or purpose in respect of which GOB, by a notification, permits the import of such goods at zero customs duty.
· Supply to projects funded by UN agencies.
The governing laws relating to DDB need to be streamlined in line with above recommendations.
The writer is Advisor, FBCCI