Combating smuggled imported products

Combating smuggled imported products

JAKARTA (JP): The main gateways through which electronic
products illegal enter Indonesia are Jakarta, Medan, Batam and
Surabaya. However, illegal products can be found almost
everywhere in Indonesia.

It is ironic that, despite a market shrinkage due to the
economical crisis, illegally imported products, known as Non-G
products, have thoroughly dominated the local electronics market
since September 1998 after the rupiah became slightly stable
again. So far, no one, least of all the government, has taken any
action.

Distribution of Non-G products normally occurs only through
traditional electronics shops. Major stores such as Best
Electronic, Continent, Makro, Carrefour, Clubstore, Goro, Courts
and Metro only sell legitimate goods as their suppliers have to
provide taxation invoices. In traditional markets, legal products
are also available and are known as product ex-agent or G
products (products with a warranty).

Smuggled consumer electronic goods cause immense problems. The
Indonesian government suffers incredible financial losses due to
unpaid import duties and other unpaid formal taxes including
luxury tax, value-added tax and income tax. Table 1 shows several
duties of imported consumer electronics; potential tax losses to
the government are shown in Table 2.

Smuggling and tax fraud are seriously undermining the already
frail credibility of the government in the eyes of businesspeople
and the international community, thereby inhibiting the flow of
potential investment.

The government's program to develop the local electronics
industry cannot be accomplished because the legal protection
given in terms of import duties and other tax structures is
almost nonexistent and/or violated. Imported, fully assembled
products have a very competitive price: for example, an illegally
imported 29-inch Toshiba TV with commendable features is cheaper
than a locally made 29-inch Polytron TV.

Local companies and authorized distributors/agents of
electronic products are very frustrated and have difficulties in
obtaining a decent operating profit.

These companies are forced to cut prices and, in a pinch, may
be forced to narrow the price gap with smuggled products, thus
jeopardizing their very existence. It is extremely unfair that
illegal traders can survive and even enjoy profits without paying
taxes, while businesspeople who operate legally experience
tremendous difficulties.

Regarding foreign investment distribution companies, the
problem of parallel imports mainly affects their records of
performance, as the sales results are recorded as the performance
of Singaporean subsidiaries and not as the performance of
Indonesian subsidiaries. Because of misleading figures, some
headquarters' direct investment may go to neighboring countries
instead of directly to Indonesia.

In reality, Indonesia appears to have already started free
trade competition for consumer electronics. It's extremely
difficult for local brands such as Polytron or Akari to
confidently face the future and make further innovative
investments as long as illegal products still flood the
Indonesian market.

Indonesian consumers do not receive proper legal protection
from manufacturers regarding the quality of illegally imported
products they happen to purchase; in addition, authorized
distributors are required to shoulder an added burden, namely
consumers' requests to repair illegal parallel import products.

The actual credit for Indonesian business potential and
business turnover never goes to Indonesian subsidiaries of
international companies -- it goes, instead, to Singaporean/other
countries' subsidiaries and traders, who, by using illicit
trading activities, break the territorial barrier through illegal
imports by Indonesian traders/handling agents.

For several years, the Indonesian Electronics Association has
extensively discussed the deplorable situation created by illegal
imports and has recommended solutions to the government.

However, after so many years, the problem still remains. Some
solutions to be considered are as follows:

* Consumer campaigns:

Heretofore, Indonesian consumers may not have realized that
the attractively low-priced electronic goods they purchase
(Japanese, Chinese or other foreign brands) may very well be
illegal goods. They just know that those products, marketed under
a well-known name, must certainly give the best value for money.

Several foreign brands distributors such as PT Topjaya Sarana
Utama (the distributor of Toshiba audio visual and home
appliances), PT Sony Indonesia, PT National Panasonic Gobel and
PT Adab Alam (the distributor of Pioneer products), often engage
in campaigns to warn consumers and emphasize the importance of
buying official, legitimate products which come with a warranty
card.

However, these praiseworthy efforts need to be increased, as
far too many illegal, NON-G products are still very much
available on the market. It is recommended that the purchase of
illegally imported electronic products be regarded as a crime
since the importers do not pay the proper taxes.

It cannot be stressed enough that the purchase of these
products is unlawful, and only benefits illegal, dishonest
importers and unscrupulous electronics dealers. The practice is
very unfair to the Indonesian government and all legal companies
who really desire to do business in the right and correct way in
Indonesia. If consumers buy legal products, they can truly be
proud of themselves for doing the right and, therefore, the
legitimate thing.

* Law enforcement

In a recent Electronics Association seminar, it was emphasized
that customs officials do their best to control the influx of
illegal electronic equipment. If many illegal electronic products
are still found on the market, then this indicates that the crime
is committed by the importer as well as the seller.

Therefore, law enforcement needs to be applied, either by
preventing the illegal arrival of the goods through more
extensive control at customs, or by eliminating their illegal
distribution channels. Sweeping and sudden checking by officials
(as they did for illegal software) would also help.

If executed regularly and continuously, these crime-curbing
activities will most certainly terminate illegal distribution of
electronic wares and encourage the dealers to sell only official
products, thereby increasing government tax revenues. If the
government really wants to be consistent with its much-lauded
development program directed by the Ministry of Industry and
Trade, then other governmental departments must help to enforce
the laws that support the policy. Stern and consistent law
enforcement will also help increase government credibility, as
the aforementioned problems have existed for many years and
remain unsolved.

* Lateral approach

There is one more alternative which might be taken into
consideration, in case other alternatives prove to be too
difficult or too costly. Some trade-off and repositioning of
government strategy might be considered. The proposal is to
totally eliminate import duties and luxury tax for electronic
products. In this way, Indonesia would actively engage in ASEAN
Free Trade Area (AFTA) ahead of schedule -- and for a very good
reason. By doing this, the Ministry of Industry and Trade may
expect business growth as well as new investments in the form of
distribution companies and service centers.

Many investors, both local and foreign, know very well that
the potential market for electronic products for 200 million
Indonesians is enormous, and very promising.

The distribution of electronic products in Indonesia certainly
requires a strong distribution network and infrastructure, good
examples of which have been offered by companies such as
Unilever, Tempo, Kalbe Farma and Indomarco.

If import duties and luxury tax for electronic products were
totally eliminated, local electronics businesses would grow and
develop more rapidly, as they could offer attractive lower prices
to meet the buying power of local customers. In addition,
distribution companies would be able to make a decent profit,
thereby increasing revenue to the government from income tax. And
the Ministry of Industry and Trade could certainly expect growth
of its trading business, which mainly comes from the
establishment of distribution and authorized service companies.

The aforementioned suggestion may perhaps be regarded as one
that would cause a terrible blow to local electronics businesses,
especially the manufacturing industry. Actually, at present,
without adequate protection from the government and with almost
nonexistent law enforcement, local electronics manufacturers have
lost direction because they face innumerable difficulties in
competing in a market with illegally imported products.

After thorough consideration of the aforementioned
alternatives to combat the influx of illegal electronic goods, it
stands to reason that one alternative is, by far, the best and
therefore the most recommended. Total and complete abolishment
and eradication of import duties and luxury tax would have the
following benefits: local consumers may purchase legal products
at much lower prices, unscrupulous practices of "parallel
importers" would be eradicated, and local sales of electronic
equipment would be encouraged. (Stefanus Indrayana)