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.