The reasons for value manipulation are well known. In the developing countries where import duty rates are usually high, importers tend to undervalue consignments to reduce duty liability. Some countries maintain quantitative restrictions based on value, some others a regime of exchange control.

Over-valuation of imported cargo is resorted to repatriate higher amounts of foreign exchange to make compensatory payments on other consignments. Normally, over- valuation is noticed in respect of goods attracting state subsidised items, zero, or lower rates of import duty to launder money abroad.

Over-valuation of imported goods is also noticed as a means of circumventing sliding rates of antidumping duty. In the case of export goods, over-valuation is usually noticed for obtaining higher amounts of export incentives whereas under-valuation is resorted to for parking funds abroad.

Manipulation in customs value not only causes revenue loss but creates a hostile trading environment for honest traders by distorting the market. Value manipulation also provides an easier route for money laundering. Adoption of a valuation system based on the WTO Agreement on Customs Valuations with its emphasis on acceptance of transaction value provides a greater scope for misdeclaring the customs value, particularly in a developing country scenario.

Customs administrations in developing countries are usually ill-equipped and lack trained personnel and financial resources and hence find it difficult to cope with problems of value manipulation. Existence of corrupt elements in some administrations does not make the task any easier.

The ways of value manipulation are well known. Some of these are:

false invoicing, double invoicing, and thirdinvoicing; misof description, quantity, quality or grade of the imported goods; misof freight and insurance charges; nondeclaration of other dutiable charges; artificial splitting of value for part consignments; suppression of related party transactions and transfer pricing, etc.

The list is in no way exhaustive of all the modes of manipulating customs value. Keeping in view the basic reasons for value manipulation and the various ways this is done, this write-up attempts to present a list of possible responses to such manipulation from a perspective of developing countries.

Since high duty rates make manipulation in value more lucrative, reduction in duty rates is a possible solution. However, countries, which depend greatly on import taxes, may find it difficult to reduce duties beyond a point in the short-run, though reduction in duty can be partly compensated by way of greater yield from the resultant larger volume of imports at lower rates. In fact, checks on under- valuation and lowering of duty rates can go handin- hand.

During last month, a meeting of Engineering Development Board committee on the Sewing Machine Industry development was held in Islamabad wherein the senior vice- president, Lahore Sewing Machine Manufacturers & Traders Group, Ghulam Sarwar Chishti said that that sewing machines and parts are imported at 80 per cent lower value than actual and due to this reason in the past 50 years sewing machine industry could not progress.

It is high time for the CBR to look in this manipulation. It was emphasised that heavy under- invoicing occurred due to CARE system of clearance. If authorities restrict the import of domestic sewing machines and parts under the CARE, it can control under invoicing at large. Reduction in import duty is essential for curbing value manipulation..

Many countries have irrational duty structures. On similar items, duty rates at times vary widely without any reason. Some times goods imported together are charged to varying duty rates (e.g. hardware and software). In such a situation, the importer tends to artificially increase value of goods attracting zero or lower rates of duty and reduces the value for higher rated goods. The solution lies in rationalising duty structure to a few uniform duty rates. The optimal tax theory supports uniform duty rates on grounds of economic efficiency.

Much has been written about the merits of ad valorem duties over specific levies. However, even the most advanced countries have not given up the use of specific duties as can be seen from their tariffs. For specific items prone to gross under- valuation, use of specific levies for short durations is an ideal solution. When specific duties are imposed, the customs administration must closely monitor changes in the price levels and should have the flexibility to change the levels of specific duty either upward or downward.

Specific levies may not be ideal for a very diverse product group. WTO member countries, which have bound their tariffs in terms of ad valorem duties, have also to ensure that specific levies do not exceed the tariff bindings.

For a product group which is characterised by large differences in quality and characteristics, a composite duty rate with both specific and ad valorem components may be more suitable instead of a purely specific duty. While the specific duty component would ensure certain assured amounts of revenue, the ad valorem component would yield higher revenue on a high value product.

Some administrations use sliding rates of duties with duty rates increasing for lower value items. While this kind of duty can curb under valuation, it can be regressive for genuinely low priced goods.

Fixed values such as standard values, minimum values and tariff values have been used by different customs administrations for curbing under- valuation and for simplifying the assessment process when the market price of certain goods fluctuates widely.

Importance of a sound legal framework to tackle under-valuation can hardly be emphasised. The laws of a country must provide for declaration of the value as well as retention of documents for a reasonable period without which it would be difficult to investigate under valuation cases and sustain penal actions in courts of law.

Many developing countries have found it useful to write into their valuation law the WTO Ministerial Decision on Rejection of Declared Value in Doubtful Cases. The valuation laws of some countries specifically provide for shifting the burden of proof to importers and provide for deterrent penal provisions to deal with cases of gross under valuation.

In some national laws, there are provisions to shift the burden on to importers to show that the relationship has not influenced the price. Such provisions enable customs administrations to adequately deal with cases of manipulations.

A legal provision to take over goods by the customs at the declared value backed by an efficient system of auctioning such goods can be an effective deterrent to under- valuation.

In the absence of an adequate valuation database, it is next to impossible for any customs administration to carry out a reasonable check regarding accuracy of the declared value. Use of some of the methods of valuation depends on past data of identical and similar imports. Building of a valuation database requires considerable resources and time. Moreover, a valuation database gets outdated within a short time span due to changes in market price. Yet, the past data helps in establishing cases of value manipulation over a period of time.

An ideal valuation database should not only have transaction data from different ports, airports and land customs stations, it should also have access to published price information from reputed commodity journals which report current market prices based on actual transactions.

A database helps in testing accuracy of the declared values. Availability of current valuation data with customs also discourages importers from declaring false values. Use of a price matrix can also identify outliers for greater scrutiny.

Establishment of a valuation database and customs modernisation are inconceivable without adequate investment in information technology. Enormous amount of data require to be analysed and compared with the declared values, which can only be done by employing adequate computing resources. It is imperative that a customs administration wanting to tackle largevalue mis-declaration be adequately equipped with necessary computer hardware and software.

Since proper valuation depends on determination of the correct description, quantity, quality, grade and specification of the imported goods, Customs administrations must invest in acquiring modern equipments such as container scanners to help in detection of mis-declaration leading to value manipulation.

Developing countries may have a resource constraint in providing necessary equipments. An alternative solution can be found by either outsourcing jobs such as scanning and inspection to private enterprises or by building resources on a community ownership basis (joint ownership of public and private bodies).

Many customs administrations, in developing countries in particular, persist with prephysical checks for customs assessment. While physical check by trained customs officials of integrity had its own utility in the past, persisting with such checks in the modern world leads to port congestion, detention of containers, higher transaction costs and is detrimental to the economy as a whole.

Moreover, when a physical preclearance checking system has to depend upon inefficient and corrupt officials, the system leads to more leakages, delays and a high cost to the economy. Such a system in any case cannot cope with large scale under valuation. Checks on documents relating to a singe consignment cannot also reveal parallel payments made through double invoicing over a period of time.

The solution lies in changing the transaction based assessment system to a system based on risk assessment and post clearance audit coupled with a sound intelligence gathering system. All these three areas require attention to supplement and reinforce the benefits that can be derived from each of these. The risk assessment parameters have to be designed using local inputs in each country and on a dynamic basis. It is important to note that risk factors are not uniform across countries or even across commodity sectors. Moreover, they keep changing over time.

The post-clearance audit system also depends on the expertise of customs personnel deployed on audit work. It has a limitation in deferring revenue realisation to a future date in the event of deficiencies discovered in audit. No customs administration can do without a sound intelligence gathering system and its necessity for checking under valuation is vital since most of the customs frauds relate to under valuation cases.

Training in valuation rules is a prebut is not sufficient for detection of under-valuation. It is very important to have customs officials specialising in particular commodity markets. It is far easier to master the elaborate valuation rules than to develop expertise in specific commodity markets and to be able to monitor the international price trends in such markets.

Most customs administrations follow a regular policy of rotation and transfer, which is detrimental to development of commodity specialisation. Apart from developing commodity specialisation, customs officials need to develop intelligence gathering and enforcement skills to successfully detect valuation frauds and prosecute offenders.

Phenomenal increase in intratrade and trade between affiliates of multinational firms in recent years also requires development of special skills to deal with related party transactions and transfer pricing.

Valuation .frauds involve transactions across at least two countries and sometimes involve intermediate countries through which either the goods transit or in which invoices are raised. Tackling valuation frauds, therefore, requires co-operation between the customs and trade officials of importing, exporting and intermediate countries. Such cocan be enlisted through bilateral agreements, though a multiarrangement is obviously a far more desirable solution.

The international trading community and member nations of the VVTO must negotiate on a priority basis, the introduction of a single administrative document for export and import purposes. This would be one single big step in facilitating genuine trade, curbing value manipulation, reducing scope for money laundering and illicit trade.

Suspected cases of value manipulation can be verified abroad either by engaging foreign sources or by posting officials abroad. Developing countries may, however, find such an option costly apart from resistance from foreign authorities. Lack of legal powers to carry out inquires on foreign territory without the support of the foreign administrations also deters use of such an option.

The writer is chairman, Sewing Machine Rehabilitation & Development Committee Engineering Development Board, Ministry of Industries & Production