Duty-dodging in Bangladesh

THE Economist, in its September 3 electronic issue, had an interesting article on duty-dodging in Bangladesh, saying that counterfeit counterfoils were the vehicles for that. The article seems to say that duty dodging is a new discovery and it happens only in Bangladesh. It said: “Yet it is surprising how little attention donors pay to the biggest form of graft in Bangladesh, which, if fixed, would leave the government with enough cash to double health spending and to pay for an infrastructure project as large as the Padma Bridge every two years.” The intention of this article was exposed in the concluding paragraph, which said: “And on June 30, Bangladesh’s mandatory Preshipment Inspection Programme (PSI), under which the quality, quantity and price of exports were verified by an independent firm before entering Bangladesh, was dropped. Customs won the battle to scrap the scheme after the intervention of politicians, some of whom may benefit from the fraud. Losses to the exchequer are likely to keep rising.”
The article has identified fraudulent trade invoicing as a major cause of corruption, and the trade pundit quoted might be right in reckoning that if the practice of under-invoicing were stamped out, the country could comfortably increase its tax-to-GDP ratio. But it is very difficult to accept the preposition because if the economy ends up paying a lot for imports, how is the fraudulent practice squandering an estimated $3 billion a year in foreign exchange when aggregated annual import of Bangladesh is around $36 billion
PSI system is still needed to help contain the worst excesses of fraudulent trade invoicing. In Asia, the mandatory PSI system existed only in Bangladesh and Cambodia, with Pakistan discarding the arrangement in late nineties after a brief stint. Voluntary PSI system was introduced in Bangladesh in 1992, and it was made mandatory 8 years later, in a bid to help generate revenue by minimising widespread corruption in customs and ending hassle for importers in clearing goods quickly. NBR tried to take over the charge, depending on three factors (sufficient manpower, end to litigation and completion of automation) to complete capacity building. There were controversies surrounding appointment of PSI agencies, and even in ensuring transparency in the license awarding and block allocation process.
At times different business chambers spoke against going back to non-PSI era as the customs department could not offer the kind of service businesses require to stay in the race in a highly competitive market; customs officials became too dependent on the PSI system, lamenting that no valuation database could be built as yet and the skill and training that are required to stop corruption at this level were missing. There were sharp reactions at the reports of mind-blowing instances of corruption through abuse of the PSI system by increasing financial penalties for irregularities. In an attempt to discourage PSI companies from frequent litigation against customs penalties, the authorities also decided to withhold the service charges of related companies till disposal of cases.
It is a fact indeed that under- and over-invoicing is not really a type of invoicing fraud, more a type of tax fraud. In Bangladesh, there have been allegations of under-invoicing and over-invoicing against the importers since long. Due to higher tax regime in the past, the general tendency among the importers was to under-invoice, mainly in order to avoid taxes or high taxes. With tariff liberalisation or reforms, there is less under-invoicing than over-invoicing now.
Traders resort to duty dodging because they want to have some hard currency abroad to take care of children’s education, to buy assets outside, to obtain coverage against continuous depreciation of Bangladesh taka against hard currencies, and to take care of payments against imports, where they might have under-invoiced.
Traders in tax-free as well as highly taxed items under-invoice the highly taxed item import price. They settle that item exporter’s obligation through the money they remit in excess of the required money for the import of tax free item , simply through over-invoicing. There have been allegations against the traders or importers of over-invoicing the commodity prices, thereby not only contributing to price spiral in the local market and thereby inflation, but also more importantly laundering money outside in excess of the actual value of the commodities imported. Regulators often find it difficult to enforce the law to catch the importers. Under an import policy stipulation, the opening banks should verify the price before opening letters of credit.
Stringent monitoring by banks, customs, and relevant agencies should always be there. ‘End to end transaction’ analysis should be carried out while handling international prices for same commodities, and more importantly similar amounts and similar clients. In the era of technological solutions and information superhighway, the job could be easier. During 2007-2008, coordinated efforts were enforced to make valuation system in order. Customs Intelligence and Inspection Directorate of NBR in recent times have scaled up their roles, and the Customs Valuation Department is going to be more competent and compatible, which might be not enough at the moment but it remains tied to exogenous factors like international trade. Constant changes can result in under- or over-invoicing. There is none to deny the fact that under- and over-invoicing are an effective means of money laundering, and it is proving to be a complex nut to crack for the agencies charged with tracking down frauds and its proceeds.