Unshackling imports from corrupt customs

Unshackling imports from corrupt customs

Vincent Lingga, Senior Editor, The Jakarta Post, Jakarta

President Megawati Soekarnopurti is under pressure to take
bold measures to bring back a system of pre-shipment inspection
of imports, first introduced by the Soeharto regime in the mid-
1980s, to free up a vital segment of the economy from the hands
of corrupt customs service officials.

Over the last three months, almost all industrial associations
and foreign chambers of commerce have urged the government to
deal firmly with what they have characterized as a grossly
incompetent and corrupt customs service.

In early December, Megawati herself set aside one hour for a
special meeting with the executive board of the Indonesian
Importers' Association, led by Amirudin Saud, who pleaded for the
government to unshackle imports from the corrupt customs
officials by reintroducing the pre-shipment inspection of imports
(PSI) that began in 1985.

The President might not have been surprised by Amirudin's
reports, which described the damages inflicted on the economy by
inefficient, incompetent and highly customs officials.

After all, the customs service is an arm of a government that
has been perceived as one of the most corrupt in the world.

Certainly, the Customs Directorate General is no less corrupt
than, say, the taxation service.

A nationwide study of corruption conducted last year under the
sponsorship of the World Bank and United Nations Development
Program confirmed that the customs and tax services were the most
corrupt public institutions in Indonesia.

The reform program agreement with the International Monetary
Fund (IMF), signed on Dec. 13, stipulated elaborate measures,
including implementation schedules, to improve tax
administration, while minimizing tax evasion, and cleaning up the
tax offices of corrupt officials.

But not a single program was cited for the customs service.
The agreement only stipulated that "the government will formulate
a plan by June 2002 to improve customs procedures ... "

The question arises, then, if inefficient tax service is
damaging the economy, should it instead require more immediate
remedial measures than customs?

The answer, of course, is a resounding no.

It is the incompetent and corrupt customs service which, in
fact, is causing the more serious damage.

The most harmful effect of inefficient tax administration is
state losses in revenue, as the government continually gets far
less than what is due from taxpayers.

But corruption and incompetence within the customs service has
far-reaching damage to the economy.

Violations of customs regulations also distort the domestic
market. When the duties paid and taxes levied on foreign goods is
much less than that which is mandated by law, unfair competition
against domestic products results.

Producers of textiles, garments, electronics, electric
appliances, and footwear, all major export commodities, have
repeatedly complained about contraband goods that are eroding
their share of the domestic market.

These goods enter either through conventional smuggling, or a
form of administrative smuggling in which under-invoicing of
import prices takes place.

Still more egregious is the fact that delays in import
clearance and customs officials' demands for bribes from
importers have made exports far less competitive, as most
Indonesian companies still depend on imported raw materials,
intermediate inputs, parts, and components.

Since manufacturers cannot calculate how much time will be
needed to clear their imports, most are compelled to build up
stocks of imported raw materials or inputs to secure continuous
production.

But this increases inventory costs and debt interest burdens,
because working-capital loans, which charge high interests,
become tied up far longer than need be in stocks.

Foreign investors have complained about what they see as
excessive discretionary powers exercised by customs officials,
letting them interpret the rules as they like.

State revenue losses from the under-invoicing of import prices
are no less damaging, especially now, when the state budget is
suffering from a huge deficit.

A 111-page research report of the Economic and Social Research
Institute of the University of Indonesia, led by senior economist
Muhammad Ikhsan and issued in December, concluded that under-
valuation of imports (outside oil and gas) led to US$1.2 billion
in losses for the year 2000.

The problem began after importers failed to properly pay
duties and the 10 percent value added tax.

The losses amounted to almost $US950 million in the first six
months of 2001 alone.

But the study did not address losses stemming from the
underpayment of luxury sales taxes, and the 2.5 percent income
tax imposed on imports.

Ikhsan explained that the losses were calculated based on an
analysis of non-oil imports as recorded by the Central Bureau of
Statistics. The final figures were determined by comparing tariff
rates that should have been collected, with what was actually
collected as reported by the finance ministry.

Amirudin of the importers' association came up with an
estimate of even bigger losses: some $3 billion a year.

The research institute has recommended that the government
reintroduce pre-shipment inspection for imports (PSI).
Researchers have argued that the benefits of such a system to the
economy, state budget and business climate will, overall, far
outweigh the costs of such a system.

The corruption-plagued customs service was stripped of its
import inspection authority in 1985 when the government
introduced PSI system for imports.

The PSI was ended in April 1997 when the customs service,
thought to have cleaned up its act and reorganized, was given its
inspection authority back.

The customs service then promised to streamline import
inspection procedures and root out corruption by introducing an
electronic data interchange (EDI) system.

Customs officials said that the communications system would
allow customs, import and banking officials to more effectively
determine and receive of customs duties and taxes via a modem
transmitted to the customs officials' EDI clearing house.

According to Amirudin, however, the customs service was back
to "business as usual" only a few months after resuming its
inspection authority.

Amirudin and other business leaders insisted that a corrupt
mindset -- rather than technical incompetence or lack of
equipment -- was the core problem. It is, indeed, all but
impossible to expect the customs service to be an island of
virtue in a sea of corruption.

Corruption is a disease that cannot be cured within one or two
years, and certainly cannot be treated in isolation from other
government and state institutions.

But problems within the customs service are urgent.

Customs and Excise Duty Director General Permana Agung,
however, has defended the conduct of his office, saying that the
criticism is only part of a campaign to have him removed.

He added that delays in import release cannot be solely be
blamed on the customs service, because there are some 30
government institutions which play a role at seaports.

Amirudin, nonetheless, insisted that the current system has
benefited only importers eager to collude with corrupt customs
officials.

No wonder, many have said, that industrial associations have
demanded that the PSI be reintroduced immediately, recalling its
success during its years of existence between 1985 and 1997.

In 1996, the Ministry of Finance reported that, under the PSI
system, customs collection rose dramatically from Rp 960 billion
in fiscal 1986-1987 to Rp 3.5 trillion in l995-1996.

Though the achievements should be attributed partly to the
steady increase in imports, they were nonetheless considered
quite impressive because the average import tariff fell sharply
-- from 22 percent to 9.5 percent during that period.

The importers' association said that the PSI system cut down
on the costs of imports by more than 70 percent, while reducing
the time needed to import goods by 86 percent.

The PSI system also minimized physical contact between
importers and customs, thereby removing the points at which
collusion and corruption could take place. Under that system,
importers passed through only two customs counters, compared to
more than 35 before.

One counter served as a check of the surveyor's inspection
ports; the other, for the physical location and release of
imports.

There were additional benefits, too. The PSI system was able
to detect discrepancies between the imports ordered, and the
contents of the shipment such that importers could be assured
that the quality and quantity of what they would receive would
fully conform with their wishes.

Importers have been so displeased with the current system that
they said they are even willing to bear the costs of the PSI to
gain certainty in import flows, and to avoid any more contact
with customs officials than is necessary.

It is high time for the Cabinet to address the customs
problems, especially now, as Indonesian exports are facing
tougher competition, and the government is strapped for
additional revenues to plug its gaping budget hole.

Djimanto, secretary general of the Footwear Association, has
asked why, when the economy was better in 1985, the government
acted so decisively, in contrast to now, as the economy is ailing
severely.

Re-launching PSI may not be so difficult now that the
government-owned surveyor company, PT Sucofindo, has built up
decades of experience and has gained a strong international
reputation in commodity inspection service.

Moreover, importers have said they would be willing to bear
the cost of inspection to secure on-time delivery of imports to
create more certainty in the customs process.

Even if the PSI is funded by the budget, the surveyor's fee,
amounting to about 0.5 percent of the value of shipments
inspected, will still be negligible, compared with the bigger
duty and tax revenues to be collected under the system.

More important still are the bigger benefits to be accrued
from smooth import flows, and the removal of a major source of
high costs to the economy.

The costs can be minimized if the government focuses the PSI
system on imports from countries considered highly vulnerable to
"irregularities" such as Hong Kong, Singapore, Taiwan, China,
India and South Korea.