Colombo Telegraph

Rs 2,000 M Vehicle Duty Fraud: A Story Full Of Half-Truths

By Nagananda Kodituwakku

Nagananda Kodituwakku

Today, one English newspaper ‘Ceylon Today’ reported that over 2 billion rupees of ‘revenue’ has been lost by Customs on ‘undervalued’ vehicles. Relying on the information given by some Customs Officers the newspaper accused Director General of Customs, Chulananda Perera for ‘connivance’ in this colossal ‘fraud’.

The objective of this piece of writing is to respect the readers of their right to know the truth behind this whole episode and not to discredit or award credit to any. I will try my best to make this presentation in a very simplified form, enabling the learned reader to comprehend the whole issue.

Legal duty of customs

The Customs Department is the major revenue contributor of the government. And it is not out of place to mention that this department has produced some incredibly genuine officers as well its share of utterly corrupt officers. The primary duty of Customs is the collection and protection of government revenue and also to act as an agent at the border to enforce all restrictions and prohibitions as provided by various laws.

Levies are recovered on transaction value

All levies are charged on the ‘transaction value’ as defined by Article 1 of the Schedule E of the Customs Ordinance, which is the ‘primary basis’ for the customs valuation.

Stringent penal sanctions against abuse

The law provides stringent penal sanctions against any person presenting a FALSE valuation for customs purposes. This includes the forfeiture of the commodities and followed by a fiscal forfeiture of treble the value of the goods. (Section 52 of the Customs Ordinance).

Utterly corrupt Customs Valuation regime

There is an undeniable truth that no honest importer can survive in the trade with declaration of the ‘true transaction value’ as the valuation regime regulated by Customs is corrupt to the core, causing ‘hundreds of billions of revenue loss’ on regular basis, for which both the trade and the officers are jointly responsible.

Government removes vehicles from transaction value regime

In this backdrop in Nov 2013 the government made a decision (with a gazette notification published by the Minister) to apply ‘a minimum value’ (as determined by a committee appointed by the DGC), which shall be the basis for the recovery of all taxes.

Violation of the GATT obligations to adopt transaction value

This decision completely violated the Sri Lanka’s obligations under the World Trade Organisation Valuation Agreement as set out in Article 7 of the Customs Ordinance, which requires that ‘Customs value’ for all commodities shall be determined using reasonable means consistent with the principles and general provisions of the agreement of the implementation of Article VII of the General Agreement on Tariff and Trade (GATT) 1994. Furthermore it provides that no customs value shall be determined on the basis of ‘minimum customs value’ or ‘arbitrary or fictitious values’.

Customs valuation committee failed Government’s objective

However, with this flawed decision, the government contemplated to maintain ‘true customs value base’ for all makes and motor vehicles. All levies would be recovered on the minimum value – determined by the Customs – irrespective of the values declared by the importers.

Unfortunately, the appointed committee opted to operate on the basis of the minimum value of motor vehicles, fatally failed the government’s objective, due to the unfounded nature of the minimum values determined by it. This has now compelled the government revise the customs minimum value base substantially.

Law does not allow importers to be liable

This thoughtless decision-making by the government also had a very serious impact on the enforcement mechanism enacted by law against false value declarations for customs purposes. This is due to the fact that the declared valuation for vehicles forwarded by the importer has no regard in the revenue collection process, as interpreted by Article 10 of Schedule E.

Therefore, the false declaration allegations levelled against the importers are baseless and unfounded, as it has been established that the levies for each vehicle had been recovered on the minimum value, the basis determined by the Customs and not using any of the valuations disclosed by the importer.

There is no doubt that the officers may have lost a huge opportunity to claim a substantial cash reward from the enforcement action that would have been taken against the importers had the officers proved a case of wilful understatement of value by the importers.

Yet, the simple truth here is that the law does no allow any importer to be dealt with under the new valuation regime released to the trade by the Customs after the fraud involved in the formulation of the minimum value regime for customs purposes were detected.

Importance of rectifying the flawed valuation system without making vulgar allegations

Therefore the best prudent cause of action available to the government to correct this wrong process is to withdraw the regulations framed under Article 10 of the Schedule E of the Customs Ordinance and immediately reverting to the application of to the GATT Valuation system for motor vehicles, without making vulgar allegations against the DGC and the Minister.

*Nagananda Kodituwakku – Former head of the Customs Revenue Task Force & Attorney-at-Law

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