Indonesia cannot afford to wait for customs reform

Indonesia cannot afford to wait for customs reform

Djimanto
Secretary General
Indonesian Footwear Association
(APRISINDO)
Jakarta

The article by Richard B. Ness "Don't throw in the towel on
Customs reform" in this paper (Feb. 25) was written from the
privileged position of an industry (mining) which has not had to
stand by and watch its domestic market destroyed and its workers
thrown out of jobs by imports smuggled in from Asian neighbors.

To the rest of us, "a fair and professional manner" of the
customs officers is just a dream. The article does not even
mention the effect that smuggling in the form of underinvoicing
is having on domestic industry. Ness simply asserts that the
domestic industry is not competitive and is seeking non-tariff
barriers as tariff rates continue to decline.

We have never asked for protective tariffs. Even if tariff
rates decline to zero, the 10 percent value added tax (VAT) is
still payable on imported finished products and is based on the
landed costs of the goods, the main component of which is the
declared customs value. If importers can collude with customs
officers and get away with declaring an invoice price at a
fraction of the true value of the goods, the importer pays less
VAT; sells at ridiculously low prices and the damage to domestic
industry will be major, before and after the ASEAN Free Trade
Agreement (AFTA) is effective.

This has nothing to do with the efficiency of domestic
industry. We are not afraid of fair competition. But we are very
afraid of the influx of grossly undervalued finished goods that
are now flooding the domestic market. We have suggested a return
to a new method of pre-shipment inspection of imports (PSI) based
on risk management that maintains customs sovereignty, not as a
non-tariff barrier, but as a means by which the government can
bring this terrible situation under control and a level playing
field can be reinstated. All we are asking for is "fair trade".

What Ness is in effect suggesting is that instead of
advocating the introduction of a system of control that we know
we can trust, we should stand by and wait and watch our domestic
industries destroyed whilst Customs suddenly receives an infusion
of integrity.

We are not "running away from reform". We simply cannot wait
for customs officers to "become honest". In 1985, the Cabinet
introduced PSI out of desperation that a reform of customs was
impossible. Customs were given their chance and they blew it. The
situation must be brought under immediate control as a signal to
the world that this government intends to put its house in order.

The Cabinet decision last week to set up an inter-ministerial
anti-smuggling team is a government admission that in the last
five years the customs service has failed. However, we must also
have a system to check the under-valuation and misdescription on
a day-to-day, shipment-by-shipment basis.

But a more important reason why Ness' article really does miss
the point is that the proposed third party system is a program
based on risk management called MRTI. Under this program, only
the high-risk shipments would be inspected in the country of
export, unlike under the old PSI system between 1985 and 1997
whereby all imports were subject to physical inspection.

The MRTI, based on a risk analysis system, professionally
managed and outsourced to a third party, would result in low risk
goods such as raw materials for domestic producers and presumably
equipment for large scale investors described by Ness as being
excluded from the requirement of an overseas physical inspection.

Based on our previous experience with PSI outsourced to a
professional surveyor, we could be reasonably sure that the high
risk goods that are being smuggled in and destroying our
industries would be correctly described and correctly valued. So
there's no need to raise the spectre of a 100 percent PSI system.

We would agree with Ness that MRTI is not the long-term
solution to the problem of customs. But our industries are dying
and our budget deficit shows no sign of being reduced.

The new risk management system would be a shock therapy that
we want in place this year. There sould also be a clear program
in which customs would be cleaned from the outside. Or systems
could be put in place to make a return to the old ways very
difficult.

In citing investors' fears that they would be subject to a new
level of bureaucracy if PSI were to be reinstated, Ness is
"tilting at windmills." First, by dredging up one myth often
quoted in the articles of customs itself i.e. that PSI moves the
costs from the domestic port to the foreign port, when the fact
is that the PSI companies have never been known to inspect goods
at the port of export. The goods are and were inspected in the
warehouse of the manufacturer or forwarder so there is no
likelihood of millions of dollars being incurred in storage fees
in the port of export for such investors.

Most local manufacturers of finished goods have suffered from
unfair competition from imports through either outright physical
smuggling or underinvoicing practices.

Shoes smuggled from China via Singapore and Hong Kong have hit
domestic factories at a time when they are being forced to depend
more on the domestic market due to declining international
orders. The production costs of a branded pair of sports shoes is
around US$13. After adding freight costs plus customs duty at 12
percent and the 10 percent VAT the landed cost of such shoes is
about $20 and yet at local stores they are $14. Obviously, either
duties and taxes were not paid at all, or if they were paid the
calculation was based on an underinvoiced price, or they were
misclassified with a lower tariff.

We are also faced with direct smuggling in which smugglers
collude with customs officials to bring in their contraband goods
through door-to-door container services. The foreign shoes for
sale in Jakarta's big stores are brought in almost entirely
through such services.

According to the Indonesian Electronics Association, 75
percent of imported electronic goods on the domestic market are
smuggled. From August to November 2001, the Indonesian Textile
Association (API) recorded that around 2,900 containers of
underinvoiced textile and its products entered Indonesia from
China and other Asian countries.

The allegation that customs corruption is causing a massive
loss of revenue to the state has not missed any point as alleged
by Ness. It is not that customs are collecting less revenue but
that they have not been collecting the revenue that is due to the
state. Statistics show that the effective tariff rate in 2001 was
10.8 percent and not 3 percent, so customs duty should still be a
significant part of customs revenue. An even higher contributor
is the VAT on imports, which will be a higher contributor to
government revenue.

In 2000, BPS revealed that customs undercollected $601 million
in customs duties if actual collections are measured on a line by
line basis with what was actually collected. This calculation has
not even included the routine, daily underinvoicing of imports.

The WTO Agreement does say that the basis of valuation is the
transaction value, but it does not give a licence to importers to
declare any value they choose, nor does it relieve customs of
their responsibility to determine on a shipment by shipment basis
whether the price being declared in the invoice is the actual
price paid for the goods.

Professional customs valuation is still needed; nowhere is it
needed more than in Indonesia. And if customs are incapable of
performing an accurate valuation under the new valuation regime
then let the job be given to a third party. There is nothing
"sovereign" about duty collection or tax collection.

Given the massive losses to the state incurred as a result of
customs corruption or incompetence, the costs of maintaining
customs cannot be compared with the fees that would be payable to
a surveyor. The true cost of maintaining customs is definitely
not the $27 million a year as quoted by Ness. It is the $27
million plus the $601 million in lost customs revenue, plus the
lost VAT plus the lost exports earnings through factories that
have had to close. These are the figures that should be compared
with the cost of the surveyor.