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)