Controlling evasion of customs duties

Customs duty is around one-third of the government's total tax revenue. Excise and customs wing of the National Board of Revenue (NBR) collects customs duties together with value added tax, supplementary duties, infrastructure development surcharge, and advance income tax at import stage. The recent trend however is that customs duties are decreasing around the world for increasing competition among domestic and foreign entrepreneurs.

TARIFFS AROUND THE WORLD (WEIGHTED MEAN), 2015:  Developing countries have the higher tariff rates than in developed countries with 11.9 per cent in Bangladesh, 7.1 per cent in India, 3.4 per cent in China, 7.6 per cent in Kenya, 4.8 per cent in Korea, 1.6 per cent in Europe, 1.4 per cent in Japan, and 1.6 per cent in USA.

Customs duties are necessary in developing countries. These countries do not have their own advanced products unlike in the developed nations. So protection of local industries is not an issue. Most of these high technology products are imported and rich and wealthy people are the users of these products and therefore charging some tariffs to these can help redistribution of wealth. 

SMUGGLING: According to the World Integrated Trade Solution (WITS), China's total exports to Bangladesh in 2015 were $13,894m whereas Bangladesh's records of imports from China were $10,349m in that year which means $3545m worth of imports were smuggled. So from China alone, the government lost Tk1,38,255m ($3545 x Tk78 for exchange rate x 50 per cent for average Total Tariff Index) revenue on account of customs, VAT, supplementary duties and other duties. One estimate reveals 7.0 per cent of LCs have no Bill of Entry. WITS 2016 show insignificant variations of these data for UK, Germany and USA.

OVERPRICING AND UNDERPRICING: Importers have a tendency to over-invoice their purchase from foreign countries. There are several reasons: (i) to transfer foreign currency abroad illegally, (ii) to overstate cost of goods sold and thus to understate profit and reduce tax liability. An importer imports say $100 worth of goods but instructs the exporter to bill $125. As a result of such over-invoicing a private company importer can get $125 allowable deduction and corporate tax savings of 35 per cent of ($125-$100). But he has to suffer extra customs duties and supplementary duties if any. Thus the net benefit depends on the corporate tax rate, tariff, and supplementary duties. However, the importers of goods for exportable items are surely the beneficiaries because there are duty drawbacks for imports used for exportable goods. In most of the cases the importer gets the illegal benefit because average tariff rate is 10 to 12 per cent.

  The opposite happens when our businessmen export goods; they may under-invoice the exportable goods. A Bangladesh exporter sends say $100 worth of goods to another country but instructs the importer to bill and send $75 and deposit the balance in a foreign country account. As a result of this under-invoice the exporter can evade corporate tax 0.8 per cent TDS (tax deducted at source), the lowest on $100-$75. 

GOVERNANCE: During early 1990s there emerged two governance principles around the world in the corporate sector. One is the role of non-executive directors (NED) in corporate governance and second is the split of Chairman and Chief Executive Officer (CEO) positions in the Board. In around 2005, these two principles were being applied in the public sector organisations including the ministries and its various agencies. The corporate board around the world nowadays is composed of executives who are an organisation's internal and non-executives who are its external. NEDs are part-time and do not take part in day-to-day activities of the company, they attend company board meetings usually once or twice in a month and particularly look at the strategic issues including if the executives are taking good care of the shareholders' money. NEDs are usually distinguished lawyers, university teachers, social workers, and other intellectuals of independent mind who must be free from any undue influence from the executives and the management. They are not only experts but also celebrated citizens who bring name and fame for the country.

SPLIT OF CHAIRMAN AND CEO: Split of Chairman and CEO positions is an established governance practice both in corporate and public sector around the world and the Chairman usually is a part-time non-executive. With a single executive holding the positions of the Chairman and CEO, or two separate executives holding the titles, the company's entire decision-making process lies in the hands of executives, and there is little in the way of check and balance. The Sarbanes-Oxley Act of the USA requires the Audit Committee consists only of external board members. This means that no member of the executives can sit in the audit committee.

TAX ADMINISTRATION: UK Inland Revenue has part-time non-executives from 2008. Its Chairman is a non-executive. The Board has five full-time Commissioners and eight non-executive members. The executives give the internal perspective and the non-executives give the external perspective of the concerned organisation. There is a Cabinet Office Guidelines for public appointments as non-executives. Government departments or agencies advertise the posts on the Cabinet Office website; there is a selection panel with a Chair and an independent non-executive. In the USA the Internal Revenue Service's Oversight Board is a nine-member independent body responsible for budget review and long-term planning, and ensuring the proper treatment of taxpayers by the employees of the Internal Revenue Service. Six Board members are part-time non-executives appointed by the President of the United States and confirmed by the Senate for five-year terms. These members have professional experience or expertise in key business and tax administration areas. This is an honorary position rather than a commercial position. The Internal Revenue Authority Board of Singapore has nine members of whom seven are non-executives. The Hong Kong Board of Inland Revenue has an executive Chairman and three no-executive commissioners.

NBR has 17 permanent executive members, including the Chairman, and do not have a single no-executive.

BIG PORTS AROUND THE WORLD AND CHITTAGONG PORT AUTHORITY: The big ports of the world are governed by independent non-executives or by a supervisory committee and an executive committee. The Dover port of UK has seven non-executives, including the chairman, and two executives in its board. Port Singapore Authority's board has a seven-member supervisory committee with all non-executives and a 10-member executive committee. Mumbai Port Trust has 16 members, including one commissioner of customs, two labour union members and four members from outside government (independent non-executives). Chittagong Port Authority has a five-member board comprising of three commodores and two joint secretaries from the ministries. It has neither any independent non-executive member nor any supervisory committee. It also does not have any representation from the customs wing of the NBR. Mumbai discloses value of imports and exports together with quantities whereas Chittagong does not disclose the value which could be necessary for a check with the customs records.

Dhiman Chowdhury PhD, is Professor of Accounting, Dhaka University.

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