Bold Reform Within Indonesian Customs And Excise Administration

  • Vincent LinggaThe Jakarta Post

Jakarta   /   Mon, January 7, 2019   /   09:16 am

Bold reform within customs and excise administration

Customs and excise offices are not popular institutions in many countries as they are deemed to be notoriously corrupt. Even the Bible negatively perceives customs collectors as sinners, as in the story of Zacchaeus, who later was happily reformed and gave half of his possessions to the poor.

Authoritarian president Soeharto was so fed up with the then corrupt and inefficient customs office that he stripped it of its import inspection and clearance authority in 1985 and transferred that mandate to the Geneva-based Societe General de Surveillance (SGS), the world’s leader in surveyor and inspection services. 

Soon after the Customs and Excise Directorate General regained its import and export inspection authority in 1997, it pledged to minimize corruption by introducing an electronic data interchange (EDI) system that would facilitate all communication between officials, importers and banks in the determination and receipt of customs duties and tax. 

But reform within the directorate was sporadic over the past 20 years and the customs service, like the tax office, continues to be perceived as a corrupt and inefficient public institution even though its governance is now much better than before 1998. The directorate launched the EDI system through the internet in 2016, but the online filing of trade documents was not at that time made compulsory for importers and exporters.

Then the directorate announced on Dec. 21, through an advertisement in this newspaper, that it would fully implement the EDI system for all importers and exporters starting in January, 2019. What a bold move.

EDI, an electronic trade documentation system, will provide an online, real time electronic interface and enable exchanges of data among all players in the import and export process (customs and other relevant government offices involved in seaport and airport handling, banks, shipping lines and freight forwarders). 

Businesses (users) can transfer data (documents) at anytime and from any place with an internet connection across the world’s largest archipelagic country. Many other countries that have fully implemented the EDI have been able to slash the time it takes to complete customs clearance and the whole port handling process from a few days to a few hours, or even a few minutes as in Singapore. 

EDI implementation should certainly be supported by a comprehensive reform program that includes improving the customs code, implementing controls based on risk assessment, adopting performance standards and effective internal audit, maximizing information and digital technology, and establishing a consultation process with the private sector. 

It should also be remembered that customs clearance is only one of the many aspects influencing the dwell time of freight — the length of time cargo sits in a seaport terminal’s in-transit storage — which in Indonesia remains very long and has contributed the most to logistics costs, which are among the highest in the ASEAN region. 

Why then is a clean, efficient and technically competent customs service so vital to the economy and a key to connecting Indonesia to the global value chain?

To a certain extent, the Customs and Excise Directorate General plays a more important role than the Taxation Directorate General. The most damaging effect of corruption within the tax authority is state revenue losses, as the government receives much less than what is due from taxpayers. But malfeasance within the customs service causes far-reaching damage to the economy, especially international trade. 

Violations of customs rules, besides resulting in state losses, create distortions on the domestic market because foreign goods, on which much lower duties and taxes are paid than what is mandated by law, create unfair competition with domestic products. Outright physical smuggling, which is believed to be rampant given the vast and porous coastal lines across the archipelago, also has a similarly devastating impact. 

Even after most import tariffs have now been slashed mostly to less than 10 percent under free trade agreements, the 10 percent value-added tax (VAT) is still payable on imported finished products, and this tax is based on the landed costs of the goods, the main component of which is the declared customs value. 

If general importers can collude with customs officers and get away with declaring an invoice price at a fraction of the true value of the goods, the importer pays less VAT. A grossly corrupt customs service could cause an influx of grossly undervalued finished goods on the domestic market and cause unfair competition with local manufacturers.

In fact, no trade policy instruments will be effective, however well designed they may be, if the customs service that is responsible for guarding the gateways (airports and seaports) remains venal and technically incompetent. There will never be fair trade without an efficient, fairly clean customs service.

An efficient customs service contributes greatly to facilitating the smooth flow of imports, which is vital for the domestic manufacturing industry because of its heavy dependence on imported materials and components. Even foreign tourist arrivals, which are so important in bringing in foreign exchange, could be discouraged by an inefficient customs service. 

The launching of the EDI system will certainly face startup problems and resistance from vested interests who will lose a cash cow. But then all bold reforms are never easy because they have to deal with the rent-seeking mentality that had developed within the old system. But this is the challenge for the chief economics minister, Darmin Nasution, to see to it that all government offices involved in port handling fully cooperate to make the EDI a success.

Do you need Help? Get in touch.

Feel free to contact TNETS for information on any matter related to customs or trade compliance. We're here to help!