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Letters To The Editor

Your efforts to highlight the mining sector are indeed worth appreciating.  It would be great, if you would also cover the Kalabagh iron refinery project. A steel mill was to be set up at Kalabagh.  Kalabagh has the largest reserves of iron ore in Pakistan. This proposed Steel Mill at Kalabagh should be given priority because it will not only provide job opportunities, but steel production within the country will also increase. The best thing about this project is its reliance on the local iron ore deposits. It allows this proposed Steel Mill to produce steel at cheaper rate than presently being produced by PSM due to its imported and expensive iron ore.

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Editorial

Dear Readers,
The Evaluation of goods has always been a thorn in the neck of importers. The process has been a cause of much debate and there have been various rules defined to streamline the procedure. An impartial and fair valuation system is necessary for smooth flow of goods. Considering Pakistan is a signatory to the WTO agreement on valuation of goods based on transactional value, but somehow the agreement has not been enforced in letter and spirit.
As the transaction value system promotes impartiality, it has always been highly recommended that it is implemented, simply because a transparent mechanism is a hindrance in the flow of kickbacks and commissions. To understand the riddle, we have covered the customs valuation process in detail.

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Custom Evaluation Process

Asad Ali

If you ask a customs official about his primary task, the most common answer would be "We collect revenue". Correct as this may be, in a certain manner, few questions remain unanswered. How effective is Customs in accomplishing this primary task? Is the paradigm of revenue collection as the primary task correct? Is the procedural mechanism for revenue collection, essentially sound?
To drive our point home let us consider a few seemingly unrelated examples.
Space Shuttle and the Horse's Ass:
When we see a Space Shuttle sitting on the launch pad, there are two big booster rockets attached to the sides of the main fuel tank.
These are the solid rocket boosters, or SRBs. The SRBs are made by Thiokol at a factory in Utah. The engineers who designed the SRBs might have preferred to make them a bit fatter, but the SRBs had to be shipped by train from the factory to the launch site.
The railroad from the factory runs through a tunnel in the mountains. The SRBs had to fit through that tunnel. The tunnel is slightly wider than a railroad track, and the railroad track is about as wide as two horses' behinds. How?
The US Standard railroad gauge (distance between the rails) is 4 feet, 8 ½ inches. Why?  Because that's the way they built them in England, and the US railroads werebuilt by English expatriates. Why did the English build them like that? Because the first railway lines were built by the same people who built the pre-railroad tramways, and that's the gauge they used. Why did they use that gauge in England? Because the people who built the tramways used the same jigs and tools that they used for building wagons, which used that wheel spacing.
Why did their wagons use that odd wheel spacing? Because, if they tried to use any other spacing the wagon wheels would break on some of the old, long distance roads. Because that's the spacing of the old wheel ruts. So who built these old rutted roads? The first long distance roads in Europe were built by Imperial Rome for the benefit of their legions. The Roman roads have been used ever since. And the ruts? The original ruts, which everyone else had to match for fear of destroying their wagons, were first made by the wheels of Roman war chariots. Since the chariots were made for or by Imperial Rome they were all alike in the matter of wheel spacing.
Thus, we have the answer to the original question. The United States standard railroad gauge of 4 feet, 8 ½ inches derives from the original specification for an Imperial Roman army war chariot. So a major design feature of what is arguably the world's most advanced transportation system was originally determined by the width of a horse's ass.
Moral of the story is, that the way we do things is determined by where we are coming from and there may be very strong impediments, real or psychological, to change.
Water and submersible pumps:
A powerful minister asked the irrigation department to install a submersible pump of 25 Horsepower on his lands. The reason for 25 Horsepower was because his competitors had a 20 Horsepower pump. The 25 Horsepower pump was installed but blew up within 10 days. Angry, the minister wanted a 30 Horsepower pump, which blew up in 7 days. Now he wanted a 40 Horsepower pump.  Somebody had to explain to him that a submersible pump does not make water, it simply pumps water. The power of the pump must correspond with the accumulation of the underground water, if the pump is too powerful it will exhaust the water and start pulling mud, blowing itself up in the process.
“Moral of the story is, Customs does not generate revenue it merely collects revenue. It is in the intrinsic interest of Customs to work for increase of international trade. Greater the trade more the collection”
Now, imagine a person importing a container load of electronic goods. The container is offloaded at Karachi port and sent to the customs yard for evaluation. The customs officer evaluates the price according to pre determined and published price of let's say 200 USD and clears the cargo, feeling proud of earning precious import duty for the country. On the other hand the importer is feeling over the moon. He has just made himself richer by a few million and also made a mockery of the whole process. Apparently, as the price at which the goods were to be assessed was already published.  The importer declared the value goods equivalent to the customs published value, although the goods cost USD 500, but to save duty a fake invoice was made equivalent to the customs declared price. Now, when the customs assessed the value of the goods they did it according to the published price of USD 200 and the import duty was levied at that rate. So, all in all, goods worth 500 USD were cleared at 200 USD, resulting in loss of revenue for the government.
Interestingly, all this is fair according to the law and the law itself is promoting cheating. This is the scenario when the customs officer is honest and performs his duty according to the law. Now, what would have happened if he wanted to make a quick buck? In that case, the result would have been even more devastating.
Before we go any further, we should delve a bit deep to understand the role of customs and the requirement of a proper valuation method. As a country's gatekeeper, Customs is the custodians of a country's border. The responsibilities of customs administrations vary from country to country, and are often the subject of regular review and modifications to ensure their ongoing relevance in a constantly changing world. Traditionally, however, Customs has been responsible for implementing a wide range of government policies, spanning areas as diverse as revenue collection, trade compliance and facilitation, interdiction of prohibited substances, protection of cultural heritage and enforcement of intellectual property laws.
This breadth of responsibility reflects the fact that customs authorities have long been entrusted with administering matters for which other government ministries and agencies have policy responsibility, such as health, agriculture, environment, trade statistics and in some cases, immigration. This is generally achieved through the implementation of a diverse range of service level agreements, with Customs having regulatory responsibility at the point of importation and exportation. Such border management responsibilities stem from the more traditional customs role of collecting duties on internationally traded commodities.
In many developing and least developed countries, import duties and related taxes represent a significant proportion of the national revenue. Because of this, the main focus for the customs authority is, understandably, revenue collection. In developed countries, on the other hand, with relatively little reliance on import duties as a source of government revenue, there is an increasing focus on border protection, with particular emphasis on the enforcement of import and export prohibitions and restrictions. Nevertheless, the current trend towards global free trade and the recent heightening of international terrorism concerns have seen border security emerge as a priority across all economies.
A general indication of a government's view of the role of their customs authority can often be gleaned from the manner in which administrative responsibilities are structured. For example, where revenue collection is the main focus, the customs administration generally forms part of the Treasury or Finance portfolio. Similarly, those administrations that are primarily seen to play a border protection role are likely to be aligned with other agencies that have a border management focus.
The historic role of customs as a gatekeeper, with focus on acting as a filter through which international trade must pass, in an effort to protect the interests of the nation is changing. Now, customs has to act as a facilitator to trade, simplifying procedures and reducing barriers. Intervention in commercial transactions simply for the sake of intervention has been part and parcel of customs and   Customs has the authority to do so, and no one is keen to question that authority, but In this day and age, however, social expectations no longer accept the concept of intervention for intervention's sake. Rather, the current concept is 'intervention by exception', that is, intervention when there is a legitimate need to do so; intervention based on identified risk.
needlessly trying to stem the flow of tide to satisfy our own hidden agendas.
We still believe in intervention just for the sake of intervention and follow the same manual procedures. Instead of facilitating trade, customs is acting as a bottle neck, slowing the flow of goods, benefiting the corrupt and the fraudulent while impeding the legitimate.   
The changing expectations of the international trading community are justifiably based on the commercial realities of its own operating environment. It is looking for the simplest, quickest, cheapest and most reliable way of getting goods into and out of a country. It seeks certainty, clarity, flexibility and timeliness in its dealings with government. Driven by commercial imperatives, it is also looking for the most cost effective ways of doing business. Based on these realities and with an aim to reduce trade embargoes under the free trade agreement WTO has implemented General Agreement on Tariffs and Trade (GATT) around the world. The aim of this agreement is to bring uniformity in the evaluation methods and reduce tariff walls. Now, the question is why did we erect tariff walls in the first place? Based on the misconceived notion that in order to develop the local industry needed protection from international competition. The GATT agreement is aimed to slowly reduce the tariff walls and promote / enhance international trade. The basic aim of the GATT is to liberalize world trade and place it on a secure basis, contributing to economic growth and development.
Before you flip through the pages, it will be interesting to know the history of GATT. Established in 1948, the World Trade Organization (WTO) is the only multilateral organization that lays down agreed-upon rules for international trade. It also functions as the principal international body concerned with multilateral negotiations for the reduction of trade barriers and other measures that distort competition. So GATT, put forth by the WTO, is both a code of rules and a forum in which countries could discuss and resolve their trade disputes and negotiate to enlarge global trading opportunities.
Since its inception, countries have used the WTO to initiate rounds of negotiations to deal with the major problems of international trade. Over its history, the WTO has sponsored eight rounds of multilateral trade negotiations. The early rounds addressed key trade policy issues of their time, namely the reduction of tariffs on industrial goods and the establishment of clear rules for governments to regulate international trade. Significant progress has been made in both of these areas. The exception provided to agricultural produce under GATT has always been contentious.
The main objectives of GATT are the reduction of barriers to international trade achieved through reduction of tariff barriers, quantitative restrictions and subsidies on trade through a series of agreement. GATT has been given a new life by the name of WTO.
The World Trade Organization was created with the primary purpose to supervise and liberalize international trade. The organization officially commenced on January 1, 1995 under the Marrakech Agreement, replacing the General Agreement on Tariffs and Trade (GATT), which commenced in 1948. The organization deals with regulation of trade between participating countries; it provides a framework for negotiating and formalizing trade agreements, and a dispute resolution process aimed at enforcing participants' adherence to WTO agreements which are signed by representatives of member governments and ratified by their parliaments.
The WTO's headquarters is at the Centre William Rappard, Geneva, Switzerland and has 153 members representing 97% of the World Trade. Pakistan became a member of the WTO on January 1, 1995.
The WTO oversees about 60 different agreements which have the status of international legal texts. Member countries must sign and ratify all WTO agreements on accession. One of the most important agreements is the Agreement on Customs Valuation, formally known as the Agreement on Implementation of Article VII of GATT, prescribes methods of customs valuation that Members are to follow. Chiefly, it adopts the "transaction value" approach.
Article VII of GATT is applicable to all members of the World Trade Organization. The Agreement ensures that determinations of the customs value for the application of duty rates to imported goods are conducted in a neutral and uniform manner, precluding the use of arbitrary or fictitious customs values.
How arbitrary or fictitious customs values a barrier to trade? There are two types of barriers to trade, these are called Tariff and Non Tariff Barriers, arbitrary or fictitious customs values are part of the Non Tariff Barriers (NTB’s) to trade, and their use has risen sharply after the WTO rules led to a very significant reduction in tariff use.
WTO has defined how the value of the goods will be assessed to ensure through but fair taxation. This system is designed to be uniform and neutral that determines the value of imported goods in accordance with commercial realities and in which arbitrary or fictitious Customs values are prohibited. The value for customs purposes of imported merchandise be based on actual value. However, it also allows countries substantial flexibility in defining the actual value of imports, thus permitting the parties involved to use widely differing valuation practices.
Before actual price system BDV (Brussels Definition of Value) was widely practiced. The system was adopted after 1950, when 13 European governments in an effort to achieve greater harmonization of valuation practices, adopted this system. Under BDV, the price of imported merchandise was determined on the basis of the price of the merchandise or the price that the merchandise would fetch if sold on the open market under fully competitive conditions for export to the country of importation. The basic elements of BDV were price, time, place, quantity and commercial level. BDV concept implies that there is a notional price which can be determined by customs on the basis of the available information taking into account the conditions and the other circumstances relating to the specific transaction being valued. Against the notional concept of BDV, on the other hand, countries like Australia, New Zealand, Canada and Untied States used a positive concept of valuation laying down the standards based on the price actually agreed on in sale. Since the preparatory phase of the Tokyo Round, the European Union (EU) had been seeking for improvements in the GATT rules on valuation reflecting their desire to restrict customs authorities’ discretion and in November 1977,a fundamental change in its valuation systems was adopted by opting for a positive approach instead of the notional approach of the BDV. The draft agreement provided that in all cases customs value should be determined on the basis of price paid or payable for the imported goods in the particular transaction. This meant that customs should, as a rule, accept the invoice price. However, most developing countries did not join the new valuation agreement for the fear of under-valuation of goods which leads to significant loss of revenue. The situation changed with the establishment of WTO. Now the agreement on customs valuation has become binding on all member countries. Pakistan is also a signatory to this agreement and we are bound to follow this agreement in letter and spirit.
WTO rules stipulate the following methods for valuation of importing or exporting goods. To have a 30 view of the situation, it will be useful to understand first what those methods are.
1.   Transaction value
2.   Transaction value of identical goods
3.   Transaction value of similar goods
4.   Deductive method
5.   Computed method
6.   Fall-back method
Transaction value is the price actually paid or payable including the total payment made and it includes all payments made as a condition of sale of the imported goods by the buyer to the seller, or by the buyer to a third party to satisfy an obligation of the seller.
In Transaction value of identical goods, transaction value is calculated in the same manner on identical goods if the goods are the same in all respects including physical characteristics, quality, and reputation produced in the same country as the goods being valued and produced. For this method to be used, the goods must be sold for export to the same country of importation as the goods being valued. The goods must also be exported at or about the same time as the goods being valued.
Transaction value of similar goods stipulates that transaction value is calculated in the same manner on similar goods if goods closely resembling the goods being valued in terms of materials and characteristics are capable of performing the same functions and are commercially interchangeable with the goods being valued.
 In Deductive value method; the agreement states that if customs value cannot be determined on the basis of the transaction value, it will be determined on the basis of the unit price at which the imported goods are sold to an unrelated buyer in the greatest aggregate quantity in the country of importation. The buyer and the seller in the importing country must not be related and the sale must take place at or about the time of importation of the goods being valued.
Computed value is the most difficult and rarely used method, it determines the customs value on the basis of the cost of production of the goods being valued, plus an amount for profit and general expenses usually reflected in sales from the country of exportation to the country of importation of goods of the same class or kind.
The last method is the Fall-back method.  This method allows Customs valuation to be determined on reasonable means consistent with the provisions of WTO, when the customs value cannot be determined under any of the previous methods. For this method, valuation should be based on previously determined values and methods.
All said and done, now let’s study the practice applicable by Pakistan Customs.
Customs valuation refers to the working process and procedures adopted in order to collect tariff and evaluate goods imported into a country. The customs determines the dutiable price of imported and exported goods and articles according to the valuation principles specified in the tariff laws and regulations.
As Pakistan became a signatory to the WTO agreement on valuation of goods in 1995, it is binding on the government of Pakistan to switch to the new system. WTO gives five years to implement the Transactional Value Concept. Pakistan was to switch from the old system in June 2000. Customs rules have been modified to implement the notion of transactional value system.
 Although, Pakistan is a signatory to this agreement and the customs act states that Transactional Value System is to be adopted, but in reality, we have modified the law by adding a sub clause to the customs act. Section 25 of the customs act states that,
"The customs value of imported goods, subject to the provisions of this section and the rules, shall be the transaction value, that is the price actually paid or payable for the goods when sold for export to Pakistan…….”
The law is crystal clear that Transitional Values are to be considered while assessing the goods, binding the authorities to follow the WTO rules. All fair and done?  Not really. FBR added another clause to the Customs Act which gives the discretionary powers to the collector customs to determine the value of the goods. The law further states that any such assessment may only be done after following the procedures laid down in Section 25. Now, how two contradicting laws can be followed at the same time is beyond comprehension.
Furthermore, section 25A reads,
"Notwithstanding the provisions contained in section 25, the Collector of Customs on his own motion, or the Director of Customs Valuation 88[on his own motion or] on a reference made to him by any person 88[or an officer of Customs], may determine the customs value of any goods or category of goods imported into or exported out of Pakistan, after following the methods laid down in section 25, whichever is applicable”
As, it's apparent, the act has been modified cleverly and the entire procedure changes when both Section 25 & 25A are read together. The law further states that,
"The customs value determined under sub-section (1) or, as the case may be, under sub-section (3), shall be applicable until and unless revised or rescinded by the competent authority”
The ground realities and procedures being followed by the customs is a complete contrast to the agreement and also negates the basic principal of fairness. According to Transactional value, the importer declares the value of the goods but in reality customs is declaring a base price itself.
Now, why would the customs and FBR be reluctant to implement this internationally accepted procedure? One argument could be that it is a ploy to protect the local industry (I know it's hard to imagine this - but we can be optimistic, can't we?). The resulting increase in duty will make the imported products expensive as local products become cheaper in comparison.
Other's may opinion that the Transactional value system may be flawed in reality and ITP scheme followed by Pakistan Customs is better. Let's analyse the brewing arguments.
Transactional Value system, takes the original value of goods into account (the price at which the goods are bought). Considering all the factors the transactional value system is the most appropriate as it assures a fair and neutral system of assessment and also facilitates the end result i.e. increasing trade and generating revenue.
In case of ITP method used by FBR, Customs set a base price for each product imported and declares it. It is accepted internationally that setting minimum price is a race to the bottom, as every importer will declare the value of goods according to the bench mark set by the customs authorities.
Now, what happens is that as the price is declared previously, goods bought at 500 USD and 200 USD will be cleared at the same rate. The chances of fraud and under declaration increase as the importers make up fake invoices (raising it to the bench mark set by the customs) as they may have bought products at a higher price. As one importer of costly electronic goods confides, it so happens that customs declares the price of DVD players at say USD 200 per item. Now, our brothers with an aim to make a quick buck will corroborate with customs officials and will have their goods cleared at that rate although the original price was USD 50. So, how can this system be fair which promotes fraudulent transactions?
Under the Transactional Value it is mandatory to display packing list, containing all the information including price and other specifications. When the packing list is displayed inside the container, the value of the goods can be assessed easily and it is difficult to forge the documents. While, at this time importers even quote half the original price, as there is no mechanism to verify the invoice.
The practice of packing list is being followed for consignments which are sent by air, as it is mandatory by I.AT.A. It is also a mandatory requirement of State bank of Pakistan and no L/C can be opened without it. When the requirement of packing list was in place, many cases of fake declarations were unearthed where importers quoted prices much lower than the actual price.
Apparently, in a clear violation of rules and only one month into operation, FBR declared the requirement of packing list null & void. Now, importers submit invoices themselves and there is no alternate method of verification.
The benefit of all this is being availed by the importers who underdeclare the value of goods, sharing the profit with crooked customs officials and the loss by the national kitty. The sheer corruption and black money generated through this practice is mind boggling, no doubt the law of mandatory packing list was done away with so hastily.
Corruption is a nasty business, calling it an inevitable part of the system, a requirement for smooth work flow or something similar may make it sound less horrible, but it is still a terrible business. It eats the society from within making the whole system hollow and prone to collapse.
 If, we do not follow the international practice, we will be the ones on the losing end of the bargain. In order to make the process of valuation fair and neutral, the practice of declaring the minimum value of a product before valuation need to done away with. To curb valuation fraud, electronic filling of values must be made mandatory.
Standardization of unit of measure is not being followed although PaCCS makes it mandatory e.g. in case, a container of sugar is imported. The units of measure i.e. Kilo or Pounds must be mentioned clearly. In order to save duty, the common practice is to use the term ‘Bori’ instead of proper unit of measurement.  PaCCS locks the unit of measurement and if correct format was not used, it is declared an offence.  Currently, importers are filling values as “Null or Nil” in many instances but customs is taking no action against such offenders.
Specification is also an under addressed issue, importers normally do not fill in the exact specification in order to avoid high duties.  Then there is a question of brand. A normal hand bag may only cost Rs 1000 whereas the same bag if manufactured by Channel or Louis Vuitton will cost a whopping lot more. If packing list is displayed inside the container, as it’s stated in the law, most of these issues will be resolved automatically.
In the circumstances, the transactional valuation system is the right way forward to ensure transparency and reduce corruption. FBR and Customs must wake up to the realities of the 21 century, where the role of customs is not only intervention and inspection but also facilitating and generating revenue by providing services to traders or in case of Pakistan at least not being a hindrance.

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