Review of pre-shipment inspection in Bangladesh
Sunday, 18 November 2007
Manzur Ahmed
THIS article reviews the write-up titled "Pre-shipment inspection in Bangladesh: outsourcing customs efficiency to foreign companies" published in The Financial Express on September 26, 2007 by Rashid ul Ahsan Chowdhury Ph.D, the incumbent Member, Customs of the National Board of Revenue (NBR), introduced as a free-lance contributor, rendering the real intention and credibility of his paper on PSI in Bangladesh questionable to the reader. This is all the more important since the Member, Customs is the concerned senior officer who is directly responsible for PSI operations in Bangladesh.
The credibility of the article is also suspect given that there are numerous complaints about non adherence to PSI Rules by the Customs officials. The author does not make a single attempt to examine why the officials from his own department routinely deviate from PSI Rules making matters difficult for the business community although the author admits that Customs Department is corrupt and many actions of customs officials are driven by the corrupt motives.
Dr. Chowdhury reviews the national background in which PSI was introduced in Bangladesh. But in doing so the author did not state the objective of PSI in clear and rational terms as stipulated under the WTO PSI Agreement. Governments all over the world have the Constitutional right and obligation to collect the correct revenue imposed by law. The objective of the PSI Scheme is to assist the government to do so. The basic principle behind the WTO Agreement on Customs Valuation (ACV) is to assess duties and taxes on the correct value of the import so that there is a distortion free level playing field for the business community. It is notable that even after eight years of the adoption of ACV by Bangladesh Customs, full implementation of the ACV is still a dream. As a former member of the Review Committee, I have observed that Customs Officers are generally reluctant to accept legitimate actions by PSI companies if it goes in favour of the importer. I would emphasise that under auspices of ACV, PSI is the best possible option to ensure rational, internationally acceptable and business friendly valuation.
In assessing the performance of the PSI Companies, Dr. Chowdhury uses two types of information; (a) summary statistics on the performance of the PSI Companies and (b) isolated events and incidents pertaining to PSI. Analysing these two categories of information, it would appear that Dr. Chowdhury's analysis is internally inconsistent and it would seem that the "widespread" problems cited in his paper are actually not borne out by the summary statistics presented in his paper. I discuss some of these issues below.
Dr. Chowdhury reports that between February 15, 2002 to August 31, 2005, PSI Companies issued 418,988 CRFs out of which 8,695 CRFs were found to be "defective and irregular". These 8,695 CRFs represent only 2.0% of the total CRFs issued during this period. He also reports that in the new contract signed on August 2005 the number of discrepancies "does not exceed 3.0%". Given these statistics reported by the author it would appear that the alleged discrepancies are below 3.0% for the entire program under both contracts. While 100% accuracy is a desirable objective, those of us who live and work in the real world know that it is not possible to achieve 100% accuracy. Most statistical models that seek to evaluate management systems and its efficacy would call a system to be functioning well if the system is able to operate at a 95% problem free level. Using this statistical rule it would seem that the PSI system is performing reasonably well.
It therefore, follows that the problems that the author highlights in his paper pertain to less than 3.0% of the PSI supervised consignments. The author states that the PSI Companies do not have adequate knowledge on valuation, HS classification and Import Rules of Bangladesh leading him to question the abilities of PSI Companies to perform their assigned tasks. If PSI Companies do not have adequate knowledge on the three points mentioned above, then it begs the question, how did PSI Companies achieve 97% accuracy in their certification? It would appear that the author is exaggerating that reflects his bias which is not supported by statistical information reported by him.
The fact is that valuation under GATT, HS classification and relevant rules of importation are subject to interpretation. There are occasions when the relevant rules and the Explanatory Notes, etc., are quite technical and complex and therefore, it is quite possible that two well-meaning persons reading the same text may have two different interpretations. Therefore, the 3.0% of cases that is reported in Dr. Chowdhury's paper are not all errors or examples of malfeasance by PSI Companies. Most of them are disputes that need an objective interpretation by a neutral third party. Unfortunately, this has not happened yet. Generally, if a customs official disputes a PSI interpretation of the Rules of Valuation, HS Explanatory Notes or Import Regulations the entire administrative review process within the customs administration takes a position against the PSI Company due to institutional inertia. I witnessed such problems of institutional inertia as a member of the Review Committee. This problem became so severe that when SRO 255 (PSI Rules, 2002) was first promulgated it stipulated that all disputes shall end in the Customs House. Fortunately, some importers challenged this in the High Court which interpreted this provision to be unlawful and which eventually lead to the amendment of SRO 255.
The GATT Valuation Rules stipulate that if there is more than one price reference of identical/similar goods, then for the assessment of customs duties and taxes, the lowest value should be used. The Chittagong Customs House (CCH) in its Minutes of a meeting (No: AS-5/Bibidha/156/2002/(Pre)/89(31) Cus dated July 14, 2007) instructs its officials to use the highest value for the assessment of customs duty which is in clear violation of GATT Valuation Agreement (SRO 57 of 2000). It is not clear why the Member, Customs has not taken any action against this instruction. Therefore, disputes arising out of this unlawful instruction can not be construed as an example of nonperformance by PSI Companies.
When a customs officer does not accept the declaration of value made by the importer, the GATT Valuation Rules give the importer the right to request for documentary evidence from customs on the basis of which importer's declaration was rejected. I know of several cases where importers have made such requests in writing to Customs Authorities but the authorities have never responded. This would be an indication of the arbitrariness of customs officials. Dr. Chowdhury acknowledges that "… corruption still rampant as the customs officials have too much discretionary power to challenge and alter the PSI certificate."
The author states that importers filed writ petitions in order to settle disputes with customs assessments. He views that such filing of writ petitions and appeals by the importers as an indication "… everything is not going well with the PSI system." The author's logic is not clear because writ petitions cannot be filed unless there has been a violation of fundamental rights of citizens. There are many instances where importers have filed writ petitions when PSI companies have accepted the importers' declarations. Could it be that such writ petitions are a result of a failed bargain between an importer and a customs officer? It is notable that the author recognises the existence of such bargaining.
The author suggests that the PSI procedures cause delay both in the country of export as well as in Bangladesh. The author, however, does not provide any basis for his statement. While there may be isolated cases of delay in the country of export or in the Bangladesh office, we have not experienced systemic delay in the PSI procedures. On the other hand, the PSI rules clearly state that a PSI supervised consignment should be cleared within two working days from the date of submission of Bill of Entry (B/E). To the best of my knowledge, most consignments are not cleared within stipulated two working days. On several occasions, the business community has stated that the customs authorities are averse to assess customs duties on the basis of PSI certificates causing delays in clearance. It would have been useful if the author would have informed us what steps he has initiated in his capacity as Member, Customs (as well as a former commissioner of customs) to mitigate this problem.
Dr. Chowdhury states that "…from December 2006 to March 2007, eighty five consignments of chemicals of different nature certified by the PSI companies were subjected to laboratory test by the Customs authorities and found to contain different kind of chemicals that those certified by the PSI companies." The fact is that no chemical test has been performed in the customs laboratory and an independent review showed that the equipment that should have been used for testing has never been used. Because of this malpractice some individuals associated with so called 'chemical tests' in CCH had to be suspended by the authorities. The author as Member, Customs had full knowledge of this matter, he seems to have forgotten this important fact in his article under review.
The business community recognises the performance of four government appointed PSI companies are not at the same level. The performance of some companies is better than others. But the facts remain that how were these companies with questionable track record qualified through such an exhaustive tender evaluation process? Could it be that powerful lobby groups in the past governments influenced the appointment process resulting in inclusion of companies who did not have the relevant experience and necessary qualifications to perform the job?
At the same time, it would not be correct to state that there were no problems with the performance of PSI Companies. Occasionally, importers have faced problems with PSI Companies but these are isolated in nature and should be dealt in that manner. Similarly, if the performance of a particular PSI Company has been below par then necessary actions should be taken against the PSI Company as per the provisions of the Law. It would be incorrect to paint all PSI companies with the same brush.
It needs to be mentioned that no expenditures are made from the government's revenue or development budget for the PSI System. Instead, the business community pay 1.0% service charge and PSI companies are paid from this service charge. According to our information, after settling PSI bills, the National Board of Revenue generates a surplus that goes to the government exchequer. The author reports that PSI companies received TK 3.12 billion(312 core) as PSI fees over a four-year period and these fees were collected from importers as service charge. Before PSI, it is estimated that the business community had to pay in excess Taka 10 billion(1,000 core) annually to customs officials as speed money or bribe to clear their import consignments. Therefore, the Taka 3.12 billion(312 core) PSI service charge is considerably less than Tk. 40 billion(4,000 core) that the business community would have to pay over the same four-year period.
Bangladesh Customs is not known either for its integrity or for its effectiveness and plain reading of Dr. Chowdhury's article would also show that he recognises the existence of corruption in Customs. Given the above, when Dr. Chowdhury makes recommendations for doing away with PSI, as an active member of the business community, I can not help being gravely concerned about its consequences for us. Hence, we are very keen to know how far he has succeeded in eliminating corruption in his own department as the responsibility of cleansing the mess in the customs primarily lies with him. Besides, if PSI is discontinued at this stage, we want full assurance from him that we shall not be subject to further harassment by demands for pay-offs from corrupt customs officials. In my considered opinion, dismantling of PSI at this time shall result in the following:
· Unscrupulous traders coalition with corrupt customs officials shall cause further decline in the government revenue
· Widespread underinvoicing without detection as customs do not have the access to current market price information on a continual basis.
· Honest traders would suffer immeasurably because of uneven competition from unethical traders and from incurring very high costs for doing business.
PSI is an interim measure to help develop the capacity of the Bangladesh Customs to administer the WTO Agreement on Customs Valuation. Bangladesh Customs is far from achieving this objective and it is imperative that the present distorted PSI regime now in place in Bangladesh is replaced by an appropriate PSI system, to expedite the transformation of Bangladesh Customs into an efficient, credible and trade facilitation agency. Finally, the author talks about the need for conducting a study to evaluate the performance of the PSI companies. This is a good idea if the researcher is objective and I believe that the business community shall support such an objective study.
The writer is member of the Federation of Bangladesh Chambers of Commerce & Industry(FBCCI)- National Board of Revenue(NBR) Task Force on Tax, value added tax(VAT) and Customs duties
THIS article reviews the write-up titled "Pre-shipment inspection in Bangladesh: outsourcing customs efficiency to foreign companies" published in The Financial Express on September 26, 2007 by Rashid ul Ahsan Chowdhury Ph.D, the incumbent Member, Customs of the National Board of Revenue (NBR), introduced as a free-lance contributor, rendering the real intention and credibility of his paper on PSI in Bangladesh questionable to the reader. This is all the more important since the Member, Customs is the concerned senior officer who is directly responsible for PSI operations in Bangladesh.
The credibility of the article is also suspect given that there are numerous complaints about non adherence to PSI Rules by the Customs officials. The author does not make a single attempt to examine why the officials from his own department routinely deviate from PSI Rules making matters difficult for the business community although the author admits that Customs Department is corrupt and many actions of customs officials are driven by the corrupt motives.
Dr. Chowdhury reviews the national background in which PSI was introduced in Bangladesh. But in doing so the author did not state the objective of PSI in clear and rational terms as stipulated under the WTO PSI Agreement. Governments all over the world have the Constitutional right and obligation to collect the correct revenue imposed by law. The objective of the PSI Scheme is to assist the government to do so. The basic principle behind the WTO Agreement on Customs Valuation (ACV) is to assess duties and taxes on the correct value of the import so that there is a distortion free level playing field for the business community. It is notable that even after eight years of the adoption of ACV by Bangladesh Customs, full implementation of the ACV is still a dream. As a former member of the Review Committee, I have observed that Customs Officers are generally reluctant to accept legitimate actions by PSI companies if it goes in favour of the importer. I would emphasise that under auspices of ACV, PSI is the best possible option to ensure rational, internationally acceptable and business friendly valuation.
In assessing the performance of the PSI Companies, Dr. Chowdhury uses two types of information; (a) summary statistics on the performance of the PSI Companies and (b) isolated events and incidents pertaining to PSI. Analysing these two categories of information, it would appear that Dr. Chowdhury's analysis is internally inconsistent and it would seem that the "widespread" problems cited in his paper are actually not borne out by the summary statistics presented in his paper. I discuss some of these issues below.
Dr. Chowdhury reports that between February 15, 2002 to August 31, 2005, PSI Companies issued 418,988 CRFs out of which 8,695 CRFs were found to be "defective and irregular". These 8,695 CRFs represent only 2.0% of the total CRFs issued during this period. He also reports that in the new contract signed on August 2005 the number of discrepancies "does not exceed 3.0%". Given these statistics reported by the author it would appear that the alleged discrepancies are below 3.0% for the entire program under both contracts. While 100% accuracy is a desirable objective, those of us who live and work in the real world know that it is not possible to achieve 100% accuracy. Most statistical models that seek to evaluate management systems and its efficacy would call a system to be functioning well if the system is able to operate at a 95% problem free level. Using this statistical rule it would seem that the PSI system is performing reasonably well.
It therefore, follows that the problems that the author highlights in his paper pertain to less than 3.0% of the PSI supervised consignments. The author states that the PSI Companies do not have adequate knowledge on valuation, HS classification and Import Rules of Bangladesh leading him to question the abilities of PSI Companies to perform their assigned tasks. If PSI Companies do not have adequate knowledge on the three points mentioned above, then it begs the question, how did PSI Companies achieve 97% accuracy in their certification? It would appear that the author is exaggerating that reflects his bias which is not supported by statistical information reported by him.
The fact is that valuation under GATT, HS classification and relevant rules of importation are subject to interpretation. There are occasions when the relevant rules and the Explanatory Notes, etc., are quite technical and complex and therefore, it is quite possible that two well-meaning persons reading the same text may have two different interpretations. Therefore, the 3.0% of cases that is reported in Dr. Chowdhury's paper are not all errors or examples of malfeasance by PSI Companies. Most of them are disputes that need an objective interpretation by a neutral third party. Unfortunately, this has not happened yet. Generally, if a customs official disputes a PSI interpretation of the Rules of Valuation, HS Explanatory Notes or Import Regulations the entire administrative review process within the customs administration takes a position against the PSI Company due to institutional inertia. I witnessed such problems of institutional inertia as a member of the Review Committee. This problem became so severe that when SRO 255 (PSI Rules, 2002) was first promulgated it stipulated that all disputes shall end in the Customs House. Fortunately, some importers challenged this in the High Court which interpreted this provision to be unlawful and which eventually lead to the amendment of SRO 255.
The GATT Valuation Rules stipulate that if there is more than one price reference of identical/similar goods, then for the assessment of customs duties and taxes, the lowest value should be used. The Chittagong Customs House (CCH) in its Minutes of a meeting (No: AS-5/Bibidha/156/2002/(Pre)/89(31) Cus dated July 14, 2007) instructs its officials to use the highest value for the assessment of customs duty which is in clear violation of GATT Valuation Agreement (SRO 57 of 2000). It is not clear why the Member, Customs has not taken any action against this instruction. Therefore, disputes arising out of this unlawful instruction can not be construed as an example of nonperformance by PSI Companies.
When a customs officer does not accept the declaration of value made by the importer, the GATT Valuation Rules give the importer the right to request for documentary evidence from customs on the basis of which importer's declaration was rejected. I know of several cases where importers have made such requests in writing to Customs Authorities but the authorities have never responded. This would be an indication of the arbitrariness of customs officials. Dr. Chowdhury acknowledges that "… corruption still rampant as the customs officials have too much discretionary power to challenge and alter the PSI certificate."
The author states that importers filed writ petitions in order to settle disputes with customs assessments. He views that such filing of writ petitions and appeals by the importers as an indication "… everything is not going well with the PSI system." The author's logic is not clear because writ petitions cannot be filed unless there has been a violation of fundamental rights of citizens. There are many instances where importers have filed writ petitions when PSI companies have accepted the importers' declarations. Could it be that such writ petitions are a result of a failed bargain between an importer and a customs officer? It is notable that the author recognises the existence of such bargaining.
The author suggests that the PSI procedures cause delay both in the country of export as well as in Bangladesh. The author, however, does not provide any basis for his statement. While there may be isolated cases of delay in the country of export or in the Bangladesh office, we have not experienced systemic delay in the PSI procedures. On the other hand, the PSI rules clearly state that a PSI supervised consignment should be cleared within two working days from the date of submission of Bill of Entry (B/E). To the best of my knowledge, most consignments are not cleared within stipulated two working days. On several occasions, the business community has stated that the customs authorities are averse to assess customs duties on the basis of PSI certificates causing delays in clearance. It would have been useful if the author would have informed us what steps he has initiated in his capacity as Member, Customs (as well as a former commissioner of customs) to mitigate this problem.
Dr. Chowdhury states that "…from December 2006 to March 2007, eighty five consignments of chemicals of different nature certified by the PSI companies were subjected to laboratory test by the Customs authorities and found to contain different kind of chemicals that those certified by the PSI companies." The fact is that no chemical test has been performed in the customs laboratory and an independent review showed that the equipment that should have been used for testing has never been used. Because of this malpractice some individuals associated with so called 'chemical tests' in CCH had to be suspended by the authorities. The author as Member, Customs had full knowledge of this matter, he seems to have forgotten this important fact in his article under review.
The business community recognises the performance of four government appointed PSI companies are not at the same level. The performance of some companies is better than others. But the facts remain that how were these companies with questionable track record qualified through such an exhaustive tender evaluation process? Could it be that powerful lobby groups in the past governments influenced the appointment process resulting in inclusion of companies who did not have the relevant experience and necessary qualifications to perform the job?
At the same time, it would not be correct to state that there were no problems with the performance of PSI Companies. Occasionally, importers have faced problems with PSI Companies but these are isolated in nature and should be dealt in that manner. Similarly, if the performance of a particular PSI Company has been below par then necessary actions should be taken against the PSI Company as per the provisions of the Law. It would be incorrect to paint all PSI companies with the same brush.
It needs to be mentioned that no expenditures are made from the government's revenue or development budget for the PSI System. Instead, the business community pay 1.0% service charge and PSI companies are paid from this service charge. According to our information, after settling PSI bills, the National Board of Revenue generates a surplus that goes to the government exchequer. The author reports that PSI companies received TK 3.12 billion(312 core) as PSI fees over a four-year period and these fees were collected from importers as service charge. Before PSI, it is estimated that the business community had to pay in excess Taka 10 billion(1,000 core) annually to customs officials as speed money or bribe to clear their import consignments. Therefore, the Taka 3.12 billion(312 core) PSI service charge is considerably less than Tk. 40 billion(4,000 core) that the business community would have to pay over the same four-year period.
Bangladesh Customs is not known either for its integrity or for its effectiveness and plain reading of Dr. Chowdhury's article would also show that he recognises the existence of corruption in Customs. Given the above, when Dr. Chowdhury makes recommendations for doing away with PSI, as an active member of the business community, I can not help being gravely concerned about its consequences for us. Hence, we are very keen to know how far he has succeeded in eliminating corruption in his own department as the responsibility of cleansing the mess in the customs primarily lies with him. Besides, if PSI is discontinued at this stage, we want full assurance from him that we shall not be subject to further harassment by demands for pay-offs from corrupt customs officials. In my considered opinion, dismantling of PSI at this time shall result in the following:
· Unscrupulous traders coalition with corrupt customs officials shall cause further decline in the government revenue
· Widespread underinvoicing without detection as customs do not have the access to current market price information on a continual basis.
· Honest traders would suffer immeasurably because of uneven competition from unethical traders and from incurring very high costs for doing business.
PSI is an interim measure to help develop the capacity of the Bangladesh Customs to administer the WTO Agreement on Customs Valuation. Bangladesh Customs is far from achieving this objective and it is imperative that the present distorted PSI regime now in place in Bangladesh is replaced by an appropriate PSI system, to expedite the transformation of Bangladesh Customs into an efficient, credible and trade facilitation agency. Finally, the author talks about the need for conducting a study to evaluate the performance of the PSI companies. This is a good idea if the researcher is objective and I believe that the business community shall support such an objective study.
The writer is member of the Federation of Bangladesh Chambers of Commerce & Industry(FBCCI)- National Board of Revenue(NBR) Task Force on Tax, value added tax(VAT) and Customs duties