Bangladesh can curb illicit trade with an initiative of the political leadership through reform in the NBR and existing laws and rules including simplification of international trade.
The National Board of Revenue (NBR) plays a pivotal role in the field of controlling, facilitating and regulating international trade. According to Jones (2001), the border is the place where countries control movement of goods, people and crafts entering or exiting their territories. This is the place where compliance in areas such as security, food safety, customs procedures and control of prohibited goods takes place. The policy issues also matter as there is a complex policy of assessment of tax, exemption and regulatory duty to discourage import to protect local industries.
The discretionary power has made tax assessment a complex job and created opportunity of corruption and illicit trade. Exemption of tax, rebate, tax import and manual assessment by tax customs officials create loopholes to breed corruption and promote illicit trade. There is a debate in Bangladesh whether corruption encourages illicit trade or vice versa.
It is found in many studies that the Customs is a high-risk area in which corrupt officials can facilitate duty evasion, causing significant financial losses to the government's exchequer and damaging the economic stability of compliant traders. Jenner (2011) asserts that there is a potential of slow economic progress as people's behaviour changes from performing productive activities to non-productive ones. This situation is then likely to increase the cost of operating a formal economy.
According to the World Bank (2003), the business community frequently perceives Customs as one of the most serious constraints to business investments. Bribes and tips asked for by Customs officials to facilitate clearance of imports and exports lead to a hike in cost of doing business. Such cost is later passed on to consumers through increased prices.
There are four major costs of illicit trade. These are identified as lost revenue, distortion of market prices, collapse of local industries leading to unemployment and social costs that endanger health and safety of nationals, destroy vital habitats and ecosystems and threaten the tourism industry. Grant Thornton (2013) also added costs of counterfeiting and corruption as costs of illegal trade. Some of the costs further include jeopardising public health, emaciating communities' human capital, eroding the security of institutions and destabilising fragile governments (OECD 2011).
A black market or underground economy is the market in which illegal goods are traded. Due to the nature of the goods traded, the market itself is forced to operate outside the formal economy, supported by the established state power. People engaged in black market usually run their business hidden under a business front that is legal in order to survive in the profession.
The United Nations Office on Drug and Crime (UNODOC, 2011) estimated annual costs and revenues generated by illicit networks and organised crime groups. These are as follows: money laundering US$1.3 trillion to US$3.3 trillion, between two per cent and five per cent of world GDP, bribery a significant portion of $1.0 trillion, narcotics trafficking $750 billion to $1.0 trillion, counterfeit and pirated products $250 billion, environmental crime (illegal wildlife, toxic wasting): $20 to $40 billion, human trafficking 20.9 million victims globally $32 billion annually, credit card fraud $10 billion to $12 billion.
Counterfeiting also costs the society more as a result of additional law enforcement and policing expenses, through higher medical and social security costs owing to injuries and illness, and through raised costs for law-abiding businesspersons who have to pay more to cover the additional costs for producers related to security and tracing systems, litigation and civil enforcement.
The illicit trade is a small segment among major crimes. But its nature leads to substitution of a commodity, incorrect quantity declaration, fictitious exports, mis-classification of goods, non-declaration and mis-declaration. The costs of illicit trade are not only economic but also have social implications as it undermines social stability and socioeconomic welfare of communities, preventing equitable sharing of public goods. Illegal economic activity distorts local economy and reduces legitimate business and tax revenues.
Many developing economies depend heavily on trade-related taxes for their economic wellbeing and wealth creation. Illicit trade and illicit markets are providing not only a safe haven and exploitable sanctuaries for illicit forces but also provide illicit liquidity for corrupt officials. Consequently, illicit trade and the wide availability of illicit liquidity prevent fair and open markets from reaching their full economic potential and threaten state sovereignty.
Customs duty is complex and is particularly susceptible to revenue leakage as taxpayers have many avenues to evade including collusion with tax officials, making it difficult for evasion to be detected. Tax avoidance or evasion eats into the national income of both developed and developing economies. The International Monetary Fund (IMF) (2005) estimated trade tax revenue for low-and middle-income countries to be between a one-quarter and one-third of total tax revenue. Customs in Bangladesh collect about 29 per cent of revenue for the country. Usually Revenue Departments prefer tax collection at border rather than collection of Income tax and Value Added Tax afterwards from taxpayers. Fishman and Wei (2004) found a one per cent increase in tax rates being associated with a three per cent increase in customs evasion, and mostly through mis-classification of imports and underreporting of import values.
A study conducted in Mozambique by Van Dunem and Arndt (2006) found a positive relationship between high tax rates and under-reporting of import values and evasion. The excessive customs duty is easy to collect at border point and encourage corruption. In Bangladesh in 2000, the foregone Customs revenue traced to Customs inefficiency was estimated to exceed five per cent of GDP (OECD 2003). The impact of these activities has negatively affected trade and had a devastating impact on the formal economy.
One method by which Customs can strengthen compliance and regulatory frameworks is through enforcement and harmonisation of activities of different agencies and cooperation with businesses and other market actors to enable targeted interventions on both supply and demand sides of illicit trade. Customs officials, policymakers, other border agencies, researchers and the private sector need to work closely together.
Some countries simplified their procedures and created a system which allows fewer contacts between National Board of Revenue (NBR) staff and traders, while others upgraded IT systems and introduced the customs information systems software, ASYCUDA, to improve service delivery, increase transparency and shorten customs clearance time more specifically assessment of tax through the software not manually by tax officials with unlimited discretionary authority.
The World Bank findings show that political support for Customs reforms is essential, together with stable leadership. Cooperation of Customs staff, taxpayers and coordination with other tax agencies are critical for effective customs reform (World Bank 2005). Bangladesh should focus on reform of the NBR to reduce corruption in illicit trade. The businesses are primary victims of illicit trade and forced to go for it in order to survive in the profession while some of the traders take advantage of close cooperation of administration and loopholes in laws and rules.
The bond license issued to exporters is a major instrument of illicit trade and corruption. Bond license may be stopped with reduction of Customs duty on basic raw materials of exportable commodities like garments, leather, furniture, pharmaceuticals, furniture and others. It is believed that the incidental cost of bond license is about 5.0 per cent and an exporter can pay similar duty on imported raw materials. Such withdrawal of bond license will increase revenue collection for the country and reduce corruption. Bangladesh can curb illicit trade with an initiative of the political leadership through reform in the NBR and existing laws and rules.
The writer is a Legal Economist.
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