Capital machinery import
Thursday, 3 January 2008
Manzur Ahmed
TO encourage development through industrialisation, the government has allowed the import of capital machinery by extending some facilities. Thus, customs duty for the import of capital machinery is set at the lowest level --6%. Importers who are eligible under this category are also exempted from Pre-Shipment Inspection (PSI) and all other duties and taxes (such as 15% VAT, 4% IDSC, 3% AIT). As an added incentive, 100% export-oriented industries are completely exempted from paying all import duties and taxes and if imported together under the same consignment as the capital machinery, spare parts for the imported capital machinery valued at 10% or less of the imported capital machinery enjoy full concessional duty facilities.
The National Board of Revenue (NBR), the supervising authority for the customs houses, allows these privileges to importers under the Customs Act, 1969. Key regulations of the Customs Act that govern the process include Sections 16, 18, 19, 25, 30, and 79-83. In particular, Statutory Regulatory Order (SRO 164) provides two tables which list codes for capital machinery and spare parts that are covered under the SRO.
The Administrative Barriers Review (ABR) is one of the components of Bangladesh Private Sector Development Support Project (PSDSP). The ABR report, based on considerable analysis over almost one year, sets out some agreed prioritised options for reform which the government has committed to pursue.
Process Synopsis: Importers are required to appoint a Clearing and Forwarding (C&F) agent to process the customs formalities. The C&F agent is responsible for representing the importer at the agency and carryout all necessary follow-up. If the machinery imported is on lien through a bank, the importer has to choose a C&F agent that is enlisted with the lien bank.
Once the container arrives, the C&F agent files and submits the Import General Manifest (IGM) and gets a print-out of the corresponding Bill of Entry. About three to 15 documents are required to be submitted to customs authority to clear imports of capital equipment and machinery. Thirty three per cent of the respondents believed there was room to reduce the paperwork and stated that letters of credit authorisation should not be necessary.
The Joint Commissioner then randomly assigns the file to the examination cell. The examination cell is comprised of three separate teams: Inspection, Preventive, and Intelligence. Rather than facilitating the process, the separate teams have tended to add to costs, as alleged by the importers, since each of the teams has to be paid an unofficial fee to expedite the process. So the particular savings intended to accrue to importers of capital equipment tend to dissipate. Following the physical examination, the container is resealed and indented in the presence of the C&F agent and an examination report submitted. An Assessment Superintendent next assigns an Assessment Officer to verify the findings and determine the applicable duty.
During this process, the officer compares the examination report with the declaration report, reviews the value justification and the HS code assessment. Based on his findings he forwards his assessment to the Superintendent and for final approval to the Joint Commissioner. The importer has to clear all his duty obligations before the containers are released.
In case of 100% export-oriented industry, the company signs an indemnity bond with the customs authority. The company has one year to release itself from the bond. Essentially to be released from the bond, the company has to install the imported capital machinery, go into production and export products. The company then needs to provide to customs export documents from the bank where the export letters of credits were opened as proof to be released from the bond and be free of its duty obligations.
According to agency officials, on an average it takes around three days to process and clear capital machinery. The survey data indicated that the average number of days taken at the agency is closer to five for 100% export-oriented companies and six for the others. Most of the stakeholders felt there was room to improve the processing time.
All the respondents indicated that they had paid unofficial fees. The actual unofficial fees ranged between Tk. 200 and Tk. 3 00,000 for companies that were 100% export oriented, while Tk. 500 and Tk. 500,000 for companies in the other industries category. The range of unofficial fees paid was greater for the "Other Industries" companies than it was for 100% export-oriented companies.
It is also observed that, the government, in its efforts to make the process easier for importers, and remove ambiguity in interpretation, has put in place numerous regulations particular to specific types of industries and imports. Rather than facilitating imports, these regulations have had an opposite effect. Almost all the stakeholders outside the government were of the view that the process can be extremely cumbersome and confusing.
One example of a poor law with good intention are the two tables in SRO 164 which list HS codes for capital machinery and equipment, and spare parts. The tables are not comprehensive so even a 100% export-oriented company brings in machinery eligible for the duty holiday, but not listed in the SRO, face difficulties obtaining the duty holiday to which they are entitled.
However, it is the contention of the government officials that the listed HS codes are exhaustive and there cannot be any capital equipment imported that does not fall within the purview of the list. Complaints that are received are usually for items (for example non-industrial air conditioner; units, plumbing fittings), which can also be used for household purposes and therefore are not entitled for the duty holiday.
In some cases, unscrupulous importers are complicit in the process and pay bribes for a more favourable classification and mis-declaration of quality or quantity. Also, complicity among the importer, exporter, and customs agent makes it possible to set the invoice amount to a suitably low value and thereby evade customs duties.
The major concerns with the agency, as expressed by the respondents, which lead to increased processing time and costs, include the long inspection time to clear any consignment, the volume of necessary paperwork, and the number of required signatures (an average of 24 signatures are required). ,
Agency officials indicated that capacity building activities are required to increase the quality of the C&F Agents as well as the inspectors and superintendents. The quality of the inspectors and superintendents are extremely critical to the process, since the senior officers reach their decisions and make approvals based upon the inspection and appraisal reports of these officers.
To expedite the process further the agency officials stated that an on-line network connecting the customs station with the lien banks through a central database at the Bangladesh Bank would enable them to verify the submitted documents faster. Currently, there is no such mechanism in place and therefore the physical inspections carried out at the customs stations are the only means of verifying the imported items.
ABR: Options for Reform: The capital machinery and equipment clearance process at the customs houses needs to be quick, effective and efficient. Given the importance of the process in the overall industrialisation and development of the country, it is extremely important that reforms are considered at this agency.
Key options for reform that emerge include:
(a) Strengthening Human Resource Capacity: Productivity of the inspectors can be improved by undertaking capacity building activities to enhance their performance. Reexamining their incentive package and linking it to their output and performance would also be a step in the right direction;
(b) Institution of a Risk-based System of Inspection: Key to an effective reform initiative would be to control for the discretionary nature of the inspections. The discretionary power of the customs officers cannot be eliminated without doing away with the current ad-hoc method of carrying out the physical examinations or the unrealistic expectation that all consignment needs physical examination.
In this context, the proposals of the Federation of Bangladesh Chambers of Commerce & Industry (FBCCI) include the following.
1. SRO 164 which lists HS codes for capital machinery and equipment, and spare parts eligible for import needs to be amended to list specific tariff heads of capital machinery and equipment that are not eligible for import under concessional terms.
2. All capital machinery and equipment not included in the negative list proposed above should be allowed to be imported under concessional terms without any conditionalities.
3. Customs checks should be limited to 10% and selective at the time of clearance. Selective post-release verification and audit be applied with selection of goods or imports based on information from the risk management system and customs maintain a comprehensive information system and database.
4. NBR should adopt and implement a customs trade facilitation programme which must include the following key elements:
l Streamlining and computerising operational procedures;
l Introducing modern clearance strategies, i.e., selective checking based on risk analysis and management, and post-clearance review;
l Professionalising customs through appropriate personnel recruitment, development and management policy; better salaries; adequate and sustained training; and internal controls;
l Introducing modern forms of organisation and management based on administrative, financial and technical autonomy, coupled with accountability.
l Capacity building programme to increase the quality of the C&F Agents as well as the inspectors and superintendents.
5. Value Database: A. Value Database must be developed in Bangladesh jointly with the private sector apex body FBCCI, as per the WCO guidelines for the development and use of a national valuation database as a risk assessment tool. Possible sources for building up a data base should include the following: 1. Reliable, scrutinised, recent import declarations 2. Certificates of verification from the PSI service providers 3. International databanks, already existing or being developed, in particular by information technology companies that specialise in establishing data warehouses on world prices.
6. Demurrage: Importers should not be held responsible for the delay because of physical examination, chemical tests or any other investigations and asked to pay demurrage if they are not adjudged guilty for an offence under the Customs Act by a competent authority.
..................................................
The writer is Advisor, FBCCI
TO encourage development through industrialisation, the government has allowed the import of capital machinery by extending some facilities. Thus, customs duty for the import of capital machinery is set at the lowest level --6%. Importers who are eligible under this category are also exempted from Pre-Shipment Inspection (PSI) and all other duties and taxes (such as 15% VAT, 4% IDSC, 3% AIT). As an added incentive, 100% export-oriented industries are completely exempted from paying all import duties and taxes and if imported together under the same consignment as the capital machinery, spare parts for the imported capital machinery valued at 10% or less of the imported capital machinery enjoy full concessional duty facilities.
The National Board of Revenue (NBR), the supervising authority for the customs houses, allows these privileges to importers under the Customs Act, 1969. Key regulations of the Customs Act that govern the process include Sections 16, 18, 19, 25, 30, and 79-83. In particular, Statutory Regulatory Order (SRO 164) provides two tables which list codes for capital machinery and spare parts that are covered under the SRO.
The Administrative Barriers Review (ABR) is one of the components of Bangladesh Private Sector Development Support Project (PSDSP). The ABR report, based on considerable analysis over almost one year, sets out some agreed prioritised options for reform which the government has committed to pursue.
Process Synopsis: Importers are required to appoint a Clearing and Forwarding (C&F) agent to process the customs formalities. The C&F agent is responsible for representing the importer at the agency and carryout all necessary follow-up. If the machinery imported is on lien through a bank, the importer has to choose a C&F agent that is enlisted with the lien bank.
Once the container arrives, the C&F agent files and submits the Import General Manifest (IGM) and gets a print-out of the corresponding Bill of Entry. About three to 15 documents are required to be submitted to customs authority to clear imports of capital equipment and machinery. Thirty three per cent of the respondents believed there was room to reduce the paperwork and stated that letters of credit authorisation should not be necessary.
The Joint Commissioner then randomly assigns the file to the examination cell. The examination cell is comprised of three separate teams: Inspection, Preventive, and Intelligence. Rather than facilitating the process, the separate teams have tended to add to costs, as alleged by the importers, since each of the teams has to be paid an unofficial fee to expedite the process. So the particular savings intended to accrue to importers of capital equipment tend to dissipate. Following the physical examination, the container is resealed and indented in the presence of the C&F agent and an examination report submitted. An Assessment Superintendent next assigns an Assessment Officer to verify the findings and determine the applicable duty.
During this process, the officer compares the examination report with the declaration report, reviews the value justification and the HS code assessment. Based on his findings he forwards his assessment to the Superintendent and for final approval to the Joint Commissioner. The importer has to clear all his duty obligations before the containers are released.
In case of 100% export-oriented industry, the company signs an indemnity bond with the customs authority. The company has one year to release itself from the bond. Essentially to be released from the bond, the company has to install the imported capital machinery, go into production and export products. The company then needs to provide to customs export documents from the bank where the export letters of credits were opened as proof to be released from the bond and be free of its duty obligations.
According to agency officials, on an average it takes around three days to process and clear capital machinery. The survey data indicated that the average number of days taken at the agency is closer to five for 100% export-oriented companies and six for the others. Most of the stakeholders felt there was room to improve the processing time.
All the respondents indicated that they had paid unofficial fees. The actual unofficial fees ranged between Tk. 200 and Tk. 3 00,000 for companies that were 100% export oriented, while Tk. 500 and Tk. 500,000 for companies in the other industries category. The range of unofficial fees paid was greater for the "Other Industries" companies than it was for 100% export-oriented companies.
It is also observed that, the government, in its efforts to make the process easier for importers, and remove ambiguity in interpretation, has put in place numerous regulations particular to specific types of industries and imports. Rather than facilitating imports, these regulations have had an opposite effect. Almost all the stakeholders outside the government were of the view that the process can be extremely cumbersome and confusing.
One example of a poor law with good intention are the two tables in SRO 164 which list HS codes for capital machinery and equipment, and spare parts. The tables are not comprehensive so even a 100% export-oriented company brings in machinery eligible for the duty holiday, but not listed in the SRO, face difficulties obtaining the duty holiday to which they are entitled.
However, it is the contention of the government officials that the listed HS codes are exhaustive and there cannot be any capital equipment imported that does not fall within the purview of the list. Complaints that are received are usually for items (for example non-industrial air conditioner; units, plumbing fittings), which can also be used for household purposes and therefore are not entitled for the duty holiday.
In some cases, unscrupulous importers are complicit in the process and pay bribes for a more favourable classification and mis-declaration of quality or quantity. Also, complicity among the importer, exporter, and customs agent makes it possible to set the invoice amount to a suitably low value and thereby evade customs duties.
The major concerns with the agency, as expressed by the respondents, which lead to increased processing time and costs, include the long inspection time to clear any consignment, the volume of necessary paperwork, and the number of required signatures (an average of 24 signatures are required). ,
Agency officials indicated that capacity building activities are required to increase the quality of the C&F Agents as well as the inspectors and superintendents. The quality of the inspectors and superintendents are extremely critical to the process, since the senior officers reach their decisions and make approvals based upon the inspection and appraisal reports of these officers.
To expedite the process further the agency officials stated that an on-line network connecting the customs station with the lien banks through a central database at the Bangladesh Bank would enable them to verify the submitted documents faster. Currently, there is no such mechanism in place and therefore the physical inspections carried out at the customs stations are the only means of verifying the imported items.
ABR: Options for Reform: The capital machinery and equipment clearance process at the customs houses needs to be quick, effective and efficient. Given the importance of the process in the overall industrialisation and development of the country, it is extremely important that reforms are considered at this agency.
Key options for reform that emerge include:
(a) Strengthening Human Resource Capacity: Productivity of the inspectors can be improved by undertaking capacity building activities to enhance their performance. Reexamining their incentive package and linking it to their output and performance would also be a step in the right direction;
(b) Institution of a Risk-based System of Inspection: Key to an effective reform initiative would be to control for the discretionary nature of the inspections. The discretionary power of the customs officers cannot be eliminated without doing away with the current ad-hoc method of carrying out the physical examinations or the unrealistic expectation that all consignment needs physical examination.
In this context, the proposals of the Federation of Bangladesh Chambers of Commerce & Industry (FBCCI) include the following.
1. SRO 164 which lists HS codes for capital machinery and equipment, and spare parts eligible for import needs to be amended to list specific tariff heads of capital machinery and equipment that are not eligible for import under concessional terms.
2. All capital machinery and equipment not included in the negative list proposed above should be allowed to be imported under concessional terms without any conditionalities.
3. Customs checks should be limited to 10% and selective at the time of clearance. Selective post-release verification and audit be applied with selection of goods or imports based on information from the risk management system and customs maintain a comprehensive information system and database.
4. NBR should adopt and implement a customs trade facilitation programme which must include the following key elements:
l Streamlining and computerising operational procedures;
l Introducing modern clearance strategies, i.e., selective checking based on risk analysis and management, and post-clearance review;
l Professionalising customs through appropriate personnel recruitment, development and management policy; better salaries; adequate and sustained training; and internal controls;
l Introducing modern forms of organisation and management based on administrative, financial and technical autonomy, coupled with accountability.
l Capacity building programme to increase the quality of the C&F Agents as well as the inspectors and superintendents.
5. Value Database: A. Value Database must be developed in Bangladesh jointly with the private sector apex body FBCCI, as per the WCO guidelines for the development and use of a national valuation database as a risk assessment tool. Possible sources for building up a data base should include the following: 1. Reliable, scrutinised, recent import declarations 2. Certificates of verification from the PSI service providers 3. International databanks, already existing or being developed, in particular by information technology companies that specialise in establishing data warehouses on world prices.
6. Demurrage: Importers should not be held responsible for the delay because of physical examination, chemical tests or any other investigations and asked to pay demurrage if they are not adjudged guilty for an offence under the Customs Act by a competent authority.
..................................................
The writer is Advisor, FBCCI