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

This research investigated the feasibility of fighting smuggling using the incentives of powerful organisations adversely affected by specific types of smuggling. We focused 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.

We collected evidence to a) estimate effective tariff protection for the 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. We then tested the efficacy of existing strategies used by the textile sector to address corruption, which includes using their own market price surveys for fabrics and putting pressure on the National Board of Revenue (NBR) to chase up on markets where prices looked suspiciously low.

We compared 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. We wanted to see whether high tariff rates induce high levels of tax evasion and fraud, with a low effective rate of protection for the textile industry. If so, 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.

SOAS-ACE is currently undertaking research in Bangladesh and Nigeria, including in the education, health and power sectors, as well as on successful collective action that overthrew a corrupt autocracy. Moving beyond pure research, we are also monitoring the implementation of anti-corruption strategies our research has recommended, such as a strategy to reduce pharmaceutical companies’ overpricing of medicines.

Our partner on this project is BIGD – BRAC University.