Smuggling and enforcement of tax codes in the garments industry in Bangladesh

Research question

This research investigates the feasibility of fighting smuggling using the incentives of powerful organizations adversely affected by specific types of smuggling. We focus on the smuggling of fabrics that happens when duty-free fabrics are imported into bonded warehouses, ostensibly for re-export after processing by the garments industry, but which are instead off-loaded in the domestic market without paying tax. This adversely affects the textile industry because they lose protection, while being liable for domestic taxes that the smuggled fabric does not pay. 

The abuse of the Garments Bonded Warehouse was identified as the most significant mechanism through which the fraudulent evasion of import taxes on fabrics was happening, with adverse effects for the textile industry. 

Project summary

The evidence being collected by the study has two main objectives a) to estimate effective tariff protection for domestic textiles industry given the scale of smuggling from the bonded warehouses, and b) compare this with a trend analysis of production of domestic textile mills. These two types of evidence will be used to test the efficacy of existing strategies used by the textile sector to address this corruption, which includes using their own market price surveys for fabrics and putting pressure on the NBR (the National Board of Revenue) to chase up on markets where prices looked suspiciously low. Our hypothesis is that this strategy has not been very successful and new strategies are required by the textile industry. 

We will compare the feasibility of the ongoing attempts of the textile industry to put pressure on the NBR with alternative strategies like reducing the tariff rates that are applied to fabric imports.  Anecdotal evidence suggests that pressure put on the NBR by the textile industry has had very limited effects on reducing fraud. The problem is that the textile industry continues to believe that high tariff rates protect them. We want to see if this is indeed the case, or whether high tariff rates induce high levels of tax evasion and fraud, with a low effective rate of protection for the textile industry. If the latter, a judicious reduction of tariffs to a level that makes the bribes required to evade the tariff infeasible may be the best strategy for the textile industry, if compensating policy support can be provided to the industry using alternative mechanisms. 

The textile industry is a relatively powerful player in Bangladesh, and we believe that if they use their lobbying power efficaciously, they could bring about policy changes that would reduce the level of corruption driven by smuggling. So far, their strategies have not been very effective, but the research offers evidence-based alternative strategies that may help their lobbying efforts in the future. 

We have established working relationships with key government officials of the National Board of Revenue (NBR), the Customs Bond Commissionerate and Bangladesh Textiles Mills Association (BMTA) and all these organizations are helping the research with data that they have. 

Partner

BIGD- BRAC University