Modernization of Pakistan Customs

(Prepared for World Bank Diagnostic Mission as an introduction to the Terms of Reference)

Modernization of Pakistan Customs

Contents
Contents................................................................................................................. 2 Glossary of terms used...........................................................................................3 Chapter 1............................................................................................................... 4 Role of Pakistan Customs and its challenges..........................................................4 .............................................................................................................................. 9 Chapter 2............................................................................................................. 10 Reform Initiatives in Pakistan Customs ................................................................10 ............................................................................................................................. 12 Chapter 3............................................................................................................. 13 Pakistan Customs and Revised Kyoto Convention.................................................13 ............................................................................................................................. 36 Chapter 4............................................................................................................. 37 Organization and Structure...................................................................................37 Chapter 5............................................................................................................. 46 Human Resources.................................................................................................46

Glossary
The Act

of terms used

The Customs Act, 1969. Where sections of law are mentioned without reference to law, the same are to be treated as section of the Customs Act, 1969. Pakistan Customs Clearances System, the automated system used for customs clearances for the containerised cargo imported at three terminals namely Karachi International Container Terminal (KICT), Pakistan ICT and DP World Qasim ICT. The system is almost paperless. Only some supporting modules have to be developed to make it fully paperless The indigenously developed automated system used for customs clearances for rest of the country. It also envisages physical travel of Goods Declaration with its electronic journey

PaCCS

One Customs

Chapter 1 Role of Pakistan Customs and its challenges

Traditionally, the following are considered to be the objectives of the Customs:
Revenue Collection Prevent the importation and exportation of prohibited or contraband items and ensure fulfilment of conditions for import or export where prescribed under law Provide domestic producers with protection Facilitate trade by providing supply chain security; and Combat the trade of narcotics through the implementation of laws and regulations.

Pakistan Customs also strive to achieve the aforesaid objectives by operating within the parameters specified under the national law and regulations. They try to accomplish these objectives both effectively and efficiently and at the same time trying to facilitate the trading community. Revenue Collection: Although the customs dutys contribution to national exchequer has declined over the years because of declining tariffs but Customs role in revenue generation remains as important as ever because various other taxes collected at the import stage such as sales tax, federal excise duty and advance income tax. It is also entrusted with collection of other nonrevenue levies such as anti-dumping duties. An analysis of these figures for the period July 2009 to March 2010 shows that the Customs are collecting 36% of all tax revenues, which underlines the importance of this role of Customs. Share of customs duty:
Tax Collection, Jul-Mar (Billion Rs.) 200910
342.30 371.20

Tax
Direct taxes Sales Tax

200809
307.60 321.10

Growt h
11.3% 15.6%

Contributi on (2009-10) 38% 41%

Federal Excise Custom s Duty Total

84.40 111.70

81.00 105.40

4.2% 6.0%

9% 12% 100%

909.6 0

815.10

11.6 %

Share of Customs: The table below shows the revenue collected at import stage and its share in total revenue:

Period Jul09 Mar10 Tax

Direct taxes Sales Tax *Feder al Excise Custo ms Duty Total

(Billion Rs.)

Collect ed at import stage 35.35 172.90 10.94

111.70

Other 306.9 5 198.3 0 73.46 0.00 578.7 1

Total

Custom s share % 10% 47% 13% 100% 36%

342.3 371.2 84.4 111.7

330.89 *Estimated

909.6

Prevention of prohibited trade The Import Policy Order 2009 and the Export Policy Order 2009, combinedly called the Trade Policy, are two major instruments that prescribe prohibitions on import and export trade and also conditions for such trade with a view to ensure public health and safety and protection of economy, social order and local industry. The Customs strive to ensure strict adherence. Protection of Domestic Industry: Apart from the Trade Policy, there are several exemptions from payment of duties and taxes which have been proved with the objective of providing stimulus to local industry and there are several others which are available to only such items which are not manufactured locally. It is Customs job to ensure that these conditions are fulfilled so that local industry is not harmed.

Facilitate trade by providing supply chain security: Trade depends a lot on expeditious Customs clearances so that there supply lines are not blocked and the trade runs smoothly. The Customs have to keep balance between this need and the opposing demands of proper revenue realization and import/ export controls. Combating narcotics trade: Heroine produced in Afghanistan generally finds its way to international markets through Pakistan. Attempted export of other locally produced narcotics is also common. The Customs with limited resources have tried to curb such trade. However, their effectiveness is confined to their operations at entry and exit points. Cases of concealed drugs are routinely detected at sea and air ports. It does not have enough resources and the manpower to curb drug trafficking across the long stretches of national border.

Drivers and Challenges in 21st Century

The responsibilities of customs continue to evolve with changing needs. In some administrations, Customs are considered an essential part of national security apparatus. In US, they have been placed under the Department of Homeland Security. In other administrations, the functions of immigrations and Customs have been merged. Trade facilitation and need for automation are other drivers which require that Customs adapt to changing times and make substantial progress. Some new roles and challenges for Pakistan Customs are discussed below:

Trade Facilitation:
With increase in international competitiveness, the Customs have an important role to play. The cost reductions require that the businesses maintain minimal inventories of raw material s and finished goods. To meet export orders in time requires that input goods are expeditiously cleared. These cost cuttings help boost the national and international trade and thus add to the national prosperity. The Customs, therefore, have to be prompt, responsive and less intrusive. Their procedures and policies should be transparent and predictable. Ongoing reforms have emphasized trade facilitation and offices and staff have begun to realize its importance. This is only the beginning and a lot of progress in this respect has to be made.

Revenue:
Despite reduction in customs duties, the revenue is likely to remain an important consideration for customs because of sales tax and other taxes collected at the import stage. In many countries, import tariffs are being seen as an instrument of protection to local industry rather than of raising budget revenue. This is clearly so in developed countries where tariffs provide only a tiny share of total revenue. However, in economies like that of Pakistan, import tariffs remain high. It is contended by the experts that 6

such higher tariffs hamper trade among developing countries as well as the competitiveness of the countries economies. But in countries like Pakistan, where sales tax and income tax have yet to realize their full potential, the customs duty shall remain an important source of revenue for some time to come.

Use of Information Technology:

To achieve the aforesaid two contradictory objectives, the best tool at hand is the use of automation and information technology. Pakistan Customs has already made headway but a lot remains to be achieved. The automation of processes has been done partially and only at selected levels. The limited initiatives have shown their efficacy and have been appreciated by both internal and external users, including trade. Upsets in the process of automation, if any, should be treated as necessary consequences of change and these have taken place due to lack of full automation and use of automated and manual processes for the same goods. It is the need of the day that automation should be implemented in all earnestness without any waste of time. The use of risk-based selectivity criteria is an essential part of automated system. In PaCCS such criteria were comprehensively developed but were not reviewed or revised. The experience of PaCCS should be utilised to review and update the above said criteria.

Post-Clearance Audit:
This area of Customs is in the early stages of development and full resort to taxpayer audit in place of transaction audit is still a futuristic thing. The Customs administration needs to assign due priority to this department. Any suggestions to improve this department should be welcomed by the administration.

Exemptions and Trade Agreements:

The management of exemptions and concessional tariffs under trade agreements require the Customs to be alert. Such schemes make their job complicated as they have to ensure that such schemes are not unduly exploited. However, the desire to curb mis-declarations need to be appropriately balanced against trade facilitation. Therefore, the assessing officers have to be well-trained to make correct assessments and there is further need that plethora of exemptions needs to be revisited and unnecessary exemptions can be done away with.

Integrity:
Civil society is demanding better governance and protection against malpractices of government agencies. Customs services are particularly prone to harbouring corrupt practices and require special focus aimed at reducing corruption. Such efforts may include increased reliance on 7

technology, reduction in administrative discretion, increased compensation to the personnel and proper accountability of wrongdoers.

Monitoring Transit Trade:

Because of porous borders with Afghanistan, transit trade has become a sensitive spot in Customs matters in Pakistan. A large proportion of transit goods find their way back to Pakistan. This has genuinely threatened the legal trade which finds it hard to compete with illegal trade. The presence of international forces in Afghanistan and their demand for transit goods and preferential treatment for the same has led to the instances where the preferential treatment has been misused. This calls for special measures.

Monitoring Exports:
This area is likely to remain important as sales tax refunds, customs duty drawbacks and federal excise refunds associated with exports need to be paid with due care and after ensuring that the goods claimed to have been exported have been actually so exported.

Valuation:
Although Agreement on Implementation of Article VII of GATT 1994 has been implemented in Pakistan and section 25 of the Customs Act, 1994, is true replica of the agreement, yet issuance of fixed import price notifications under section 25A of the Act is also common. The assessing officers tend to raise the declared values on evidential data without adhering to the requirements of section of the Act. This is due to continued under-invoicing and the lack of tools to determine the true value of the goods because of prevalence of undocumented economy. Resort to arbitrary fixation of values creates uncertainty and lack of transparency, which also hurts the interests of the complaint importers. This is one area which requires major attention and demands a solution.

Security Concerns:
Rising threat from globalized terrorism has necessitated a new role for customs. Some administrations like that in US and Canada have made customs part of their security setups. Others have combined their customs and immigration functions. In Pakistan too, there are proposals to extend the scope of customs department to immigration and international trade control. That may require the merger of customs with immigration and commerce departments. Such proposals are at nascent stages and require detailed analysis. But keeping in view, the revenue orientation of the service, the Customs will have to be retained under the umbrella of Ministry of Finance & Revenue, under which remaining tax departments operate.

Electronic Interface with external agencies:

The PaCCS did well to enable banks and port authorities to communicate electronically with the Customs. Whereas banks are a user of PaCCS, the port authorities communicate with the PaCCS though electronic data interchange. The efficacy and utility of similar systems in relation to other external agencies such as laboratories, certification agencies, ministry of commerce etc need to be explored and implemented accordingly as part of a holistic national automated system.

Chapter 2 Reform Initiatives in Pakistan Customs

In June, 2000, Government of appointed a Task Force on Reform of Tax Administration. This Task Force presented its report in May, 2001. The report was conceptually approved by the government with the directions that an implementation strategy be framed in respect of viable recommendations after due consultation with stakeholders. The report apart from trade bodies, accounting institutes, tax bar associations was also discussed with donor agencies. On a request from the Government of for input in its FBR reform effort, an IMF Mission visited in August, 2001. This Mission carried out in-depth discussion with various stakeholders including Ministry of Finance, Establishment Division, Federal Public Service Commission and trade bodies. The Mission presented its draft report in August, 2001. These reports and various other studies recommended a tax system, which has simpler laws and efficient procedures that promote selfassessment, reduce physical controls and creates reliance on audit and risk assessment. FBR on the basis of these reports and discussions with various opinion makers prepared a tax reform strategy, which was approved by Government of in November, 2001. The reform strategy had three main planks (a) policy reforms, (b) administrative reforms and (c) organizational reforms. The policy reforms include simple laws, universal self-assessment, elimination of exemptions, less dependence on withholding taxes, effective dispute resolution mechanism. The administrative reforms aim at, inter alia, re-engineering of manual processes of all taxes with the aim to reduce face to face contact between taxpayers and tax collectors, increasing effectiveness of FBR and improve skills and integrity of the workforce. To achieve these objectives substantial investment has been made in infrastructure development, end-to-end automation of business processes, and human resource development. The Customs processes are reengineered and Customs Administration Reform (CARE) was started, which has minimized the time of clearance of goods to few hours.

Tax Administration Reform Project (TARP):

ECNEC in its meeting held on 25-2-2005 approved the Main phase of Tax Administration Reform Project with a capital cost of Rs: 9500.617 million. Completion period of this main phase of TARP is five years starting from 0101-2005. The main objectives of this project is to raise tax revenue through improved compliance with Tax Laws and broadening of the tax-base, improving the effectiveness, responsiveness and efficiency of Tax Administration through institutional and procedural reform; high quality of tax services; and strengthening audit and enforcement procedure. The Customs Offices were renamed as Model Custom Collectorates which now have refurbished offices with improved work environment. 10

PACCS Project The project was started in 2002 with ambition to reform entire Customs and cargo system. The initiative called the Customs Administrative Reform (CARE) enhanced the functioning of Customs and Cargo System by: a. Business process re-engineering of Customs and port processes; b. Change and modernization of national legislations with respect to Customs and creation of electronic and paperless environment; and c. Development of hardware, software, networking and other facilities as per CARE requirements to create the Customs Computerized System (PaCCS). PaCCS is an integrated, web-enabled, almost paperless, real-time system launched on March 23 2005 and is successfully working for Customs clearance of Containerized imported and exported cargo through Karachi International Container Terminal (KICT) and Pakistan ICT (at Karachi Port) and DP World Qasim ICT (at Port Qasim). It was proposed to gradually roll out PaCCS to all Customs offices. Progress on the same is still awaited. One Customs One Customs is also a Computerized System which allows the Goods Declaration to be filed electronically. The other processes are performed manually but duly recorded in the computer system. Thus the system helps in keeping electronic track of all clearances. It also provides a central database of all customs clearances. One Customs is operational at all nonPaCCS customs stations and ports. Post Clearance Audit The Federal Board of Revenue has set up the Directorate General of Post Clearance Audit for audit of imports and importers. This organization aims at importer audits at their premises. Presently, however, transaction-based audits are routinely conducted. The central organization will select cases on the basis of certain risk criteria and would assign these audits to local audit units for initiation of audit. Compensation Apart from aforesaid structural changes, it was also realized that reform process would not be successful without providing adequate compensation to the employees. As a result, to start with one extra basic pay is being paid to all FBR employees. Thus, they are getting around 70-80% higher pay as compared to employees in equivalent ranks in other government offices. The above mentioned reform process has realized following benefits: 11

Revenue has been benefited. Trade has been greatly facilitated due to reduction in clearance times and change in attitude of officers. Office environment has changed for the better. Transparency of procedures has increased. Resistance to change has diminished and officers have begun to realize the importance of IT and facilitation.

But at the same time it needs to be highlighted that a lot remains to be done. These changes in respect of automation, simplicity of procedures, risk assessment, exemption regime, organizational structure and human resource management will be discussed in subsequent chapters.

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Chapter 3 Pakistan Customs and Revised Kyoto Convention

The International Convention on the Simplification and Harmonization of Customs procedures (revised Kyoto Convention or RKC) was originally adopted in 1974. The WCO Council adopted the revised Kyoto Convention in June 1999 as a step towards modern and efficient Customs procedures so as to meet the challenges of the new realities. Its objectives are to provide international commerce with the predictability and efficiency that modern trade requires. The RKC comprises several key governing principles: transparency and predictability of customs controls; standardization and simplification of the goods declaration and supporting documents; simplified procedures for authorized persons; maximum use of information technology; minimum necessary customs control to ensure compliance with regulations; use of risk management and audit based controls; coordinated interventions with other border agencies; and a partnership with the trade. The convention comprises of General Body, General Annex and Specific Annexes. General Annex includes regulations relating to key customs procedures, applicable to specific annexes. The General Annex is split into 10 chapters including standards and transitional standards. Specific annexes are ten in number each of which is applicable to specific procedures. Each participating nation is obliged to accept the Body and General Annex without any reservation for standards and transitional standards. Reservation is only allowed for recommended practices in specific annex with reasons and subject to review every 3 years. Under the terms of paragraph 3 of Article 3 to the Protocol of amendment, this Convention was to enter into force three months after forty Contracting Parties to the Kyoto Convention (1974) signed the Protocol of amendment without reservation of ratification or have deposited their instrument of ratification or accession. Pakistan was the 36th nation to do so. It acceded to the convention on 19th February 2004. It also accepted following parts of Specific Annexes:
Specific Annex A . Arrival of goods in a Customs territory/ Chapter 1- Formalities prior to the lodgement of the Goods declaration Specific Annex B . Importation/ Chapter 1- Clearance for home use Specific Annex C . Exportation/ Chapter 1- Outright exportation Specific Annex J . Special procedures/ Chapter 1- Travellers

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As per requirement of implementation of revised convention, the 40th country acceded to it on 3rd November 2005. The revised Kyoto Convention thus entered into force on 3rd February, 2006. As of 31st May 2010, 69 countries have so far signed, acceded to or ratified the convention. In the following paragraphs we shall discuss the standards set out in the ten chapters of the General Annex and see what the status of their implementation in Pakistan is.

Clearance and Other Customs Formalities

Competent Customs offices 3.1. Standard The Customs shall designate the Customs offices at which goods may be produced or cleared. In determining the competence and location of these offices and their hours of business, the factors to be taken into account shall include in particular the requirements of the trade. Status: Under the Customs Act, 1969, all the sea ports, dry ports and land customs station have been properly notified with their boundaries. The customs offices are open five days a week and closed on two public holidays. However, the Customs staff posted at in the port area is required to work all days a week. 3.2. Standard At the request of the person concerned and for reasons deemed valid by the Customs, the latter shall, subject to the availability of resources, perform the functions laid down for the purposes of a Customs procedure and practice outside the designated hours of business or away from Customs offices. Any expenses chargeable by the Customs shall be limited to the approximate cost of the services rendered. Status: The Pakistan Customs do perform functions such as examinations, transhipment of goods etc outside the business hours and official premises but no separate fees are charged. Such services are not provided in respect of assessment of goods declarations. 3.3, 3.4 and 3.5 Standard These require that at common border crossing, the Customs administrations concerned shall correlate the business hours and the competence of their offices and whenever possible, operate joint controls. Transitional standard 3.5. requires that when a new Customs office is setup at a common border crossing, Customs shall, wherever possible, co-operate with the neighbouring Customs to establish a juxtaposed Customs office to facilitate joint controls. Status: These requirements are being complied with.

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The declarant
(a) Persons entitled to act as declarant

3.6. & 3.7 Standards National legislation shall specify the conditions under which a person is entitled to act as declarant and person having the right to dispose of the goods shall be entitled to act as declarant. Status: Sections 79, 104 and 131 of the Customs Act, 1969, the owner of the goods is entitled to file declarations for home consumption, ex-bonding and export. (b) Responsibilities of the declarant 3.8. Standard The declarant shall be held responsible to the Customs for the accuracy of the particulars given in the Goods declaration and the payment of the duties and taxes. Status: Mis-declaration of material particulars is an offence under section 32 of the Act.
(c) Rights of the declarant

3.9. Standard Before lodging the Goods declaration the declarant shall be allowed, under such conditions as may be laid down by the Customs: (a) to inspect the goods; and (b) to draw samples. Status: Under section 79, the declarant, in case of used goods, may be allowed to examine the goods before filing of Goods Declaration. However, the option to draw sample seems unavailable which needs to be allowed. The Customs Act only authorizes the Customs Officers to draw samples. 3.10. Standard The Customs shall not require a separate Goods declaration in respect of samples allowed to be drawn under Customs supervision, provided that such samples are included in the Goods declaration concerning the relevant consignment. Status: There is no such requirement in the Act. The Goods declaration (a) Goods declaration format and contents 3.11. Standard

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The contents of the Goods declaration shall be prescribed by the Customs. The paper format of the Goods declaration shall conform to the UN-layout key. For automated Customs clearance processes, the format of the electronically lodged Goods declaration shall be based on international standards for electronic information exchange as prescribed in the Customs Co-operation Council Recommendations on information technology. Status: The prescribed Goods Declaration conforms to the above standards. 3.12. Standard The Customs shall limit the data required in the Goods declaration to only such particulars as are deemed necessary for the assessment and collection of duties and taxes, the compilation of statistics and the application of Customs law. Status: The prescribed Goods Declaration is based on international standards and requires only the essential information. 3.13. Standard Where, for reasons deemed valid by the Customs, the declarant does not have all the information required to make the Goods declaration, a provisional or incomplete Goods declaration shall be allowed to be lodged, provided that it contains the particulars deemed necessary by the Customs and that the declarant undertakes to complete it within a specified period. Status: There are no provisions in the Act for filing of such declaration. 3.14. Standard If the Customs register a provisional or incomplete Goods declaration, the tariff treatment to be accorded to the goods shall not be different from that which would have been accorded had a complete and correct Goods declaration been lodged in the first instance. The release of the goods shall not be delayed provided that any security required has been furnished to ensure collection of any applicable duties and taxes. Status: Compliant. Provisional assessment under section 81 is accorded same treatment as a complete Goods Declaration and is finalized after receipt of security. 3.15. Standard The Customs shall require the lodgement of the original Goods declaration and only the minimum number of copies necessary. Status: This is also complied with.

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(b) Documents supporting the Goods declaration

3.16. Standard In support of the Goods declaration the Customs shall require only those documents necessary to permit control of the operation and to ensure that all requirements relating to the application of Customs law have been complied with. Status: Under section 79 of the Act, commercial invoice, bill of lading or airway bill and packing list are required to be attached with the Goods Declaration. It also empowers the Customs to require any other document; such as Letter of Credit and brochures and technical literature to ensure proper classification and assessment of goods. 3.17. Standard Where certain supporting documents cannot be lodged with the Goods declaration for reasons deemed valid by the Customs, they shall allow production of those documents within a specified period. Status: Under such situations, the Customs accept undertaking or securities and release the goods, generally under section 81 of the Act relating to provisional assessment. 3.18. Transitional Standard The Customs shall permit the lodgement of supporting documents by electronic means. 3.19. Standard The Customs shall not require a translation of the particulars of supporting documents except when necessary to permit processing of the Goods declaration. Status: The standards 3.16 to 3.19 are complied with. Lodgement, registration and checking of the Goods declaration 3.20. Standard The Customs shall permit the lodging of the Goods declaration at any designated Customs office. Status: The Goods Declaration can be filed at the customs office in whose jurisdiction the goods are to be imported or exported. 3.21. Transitional Standard The Customs shall permit the lodging of the Goods declaration by electronic means. Status: PaCCS and One Customs both require electronic filing of Goods Declaration. 17

3.22. Standard The Goods declaration shall be lodged during the hours designated by the Customs. Status: In PaCCS, Goods Declaration can be filed at any hour of the day or night through internet. The requirement for filing such GD is to have sufficient balance in the PD account of the importer so as to pay the due duties and taxes. In One Customs, Goods Declaration can be filed during office hours. 3.23. Standard Where national legislation lays down a time limit for lodging the Goods declaration, the time allowed shall be sufficient to enable the declarant to complete the Goods declaration and to obtain the supporting documents required. Status: Section 82 of the Act provides that if Goods Declaration is not filed within twenty (20) days of their arrival at the port, the goods can be sold through auction. 3.24. Standard At the request of the declarant and for reasons deemed valid by the Customs, the latter shall extend the time limit prescribed for lodging the Goods declaration. Status: Section 82 provides that time limit of 20 days can be extended for another 10 days. 3.25. Standard National legislation shall make provision for the lodging and registering or checking of the Goods declaration and supporting documents prior to the arrival of the goods. Status: Under Section 79, GD can be filed within ten days prior to the expected time of arrival of the vessel. 3.26. Standard When the Customs cannot register the Goods declaration, they shall state the reasons to the declarant. Status: Neither there is practice nor law to prevent an owner of goods filing the Goods Declaration and refusing to register it, unless some essential information is missing. 3.27. Standard The Customs shall permit the declarant to amend the Goods declaration that has already been lodged, provided that when the request is received 18

they have not begun to check the Goods declaration or to examine the goods. 3.28. Transitional Standard The Customs shall permit the declarant to amend the Goods declaration if a request is received after checking of the Goods declaration has commenced, if the reasons given by the declarant are deemed valid by the Customs. Status for 3.27 and 3.28: Section 29 of the Act provides that no amendment of goods declaration relating to goods assessed for duty on the declared value, quantity or description thereof shall be allowed after such goods have been removed from the customs-area or assigned a Customs Reference Number electronically, as the case may be. Section 88 further allows correction of bona fide error in quantity or value of any goods, at any time
before the warehousing of the goods.

3.29. Transitional Standard The declarant shall be allowed to withdraw the Goods declaration and apply for another Customs procedure, provided that the request to do so is made to the Customs before the goods have been released and that the reasons are deemed valid by the Customs. Status: Under section 79, the Additional Collector of Customs, may allow substitution of Goods Declaration for home consumption with a goods declaration for warehousing or vice versa, if conditions given therein are met Under PaCCS. 3.30. Standard Checking the Goods declaration shall be effected at the same time or as soon as possible after the Goods declaration is registered. Status: Under PaCCS, the calculations are performed by the system at the time of filing of Goods Declaration. Moreover, the system also allows claiming exemptions of duties and taxes only as per pre-specified criteria. The checking of Goods Declarations, selected for scrutiny, begins immediately in the order as they are filed. In One Customs as well, after the filing of Goods Declaration, the same is processed manually without delay. 3.31. Standard For the purpose of checking the Goods declaration, the Customs shall take only such action as they deem essential to ensure compliance with Customs law. Status: Compliant. Special procedures for authorized persons 3.32. Transitional Standard 19

For authorized persons who meet criteria specified by the Customs, including having an appropriate record of compliance with Customs requirements and a satisfactory system for managing their commercial records, the Customs shall provide for : - release of the goods on the provision of the minimum information necessary to identify the goods and permit the subsequent completion of the final Goods declaration; - clearance of the goods at the declarant's premises or another place authorized by the Customs; and, in addition, to the extent possible, other special procedures such as: - allowing a single Goods declaration for all imports or exports in a given period where goods are imported or exported frequently by the same person; - use of the authorized persons commercial records to self-assess their duty and tax liability and, where appropriate, to ensure compliance with other Customs requirements; - allowing the lodgement of the Goods declaration by means of an entry in the records of the authorized person to be supported subsequently by a supplementary Goods declaration. Status: These facilities have not been provided as yet except that under section 79, an Assistant Collector may, in case of goods requiring immediate release allow release thereof prior to presentation of a goods declaration subject to conditions to be prescribed by the Board and also that under section 80, the Collector may condone or defer the examination of goods and allow it to be performed at a designated place. Examination of the goods
(a) Time required for examination of goods

3.33. Standard When the Customs decide that goods declared shall be examined, this examination shall take place as soon as possible after the Goods declaration has been registered. Status: Compliant. 3.34. Standard When scheduling examinations, priority shall be given to the examination of live animals and perishable goods and to other goods which the Customs accept are urgently required.

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Status: Due priority is given to such goods in manual system. PaCCS maintains single queue for each of assessment and examination processes on FIFO basis without regard to the nature of goods. However, wherever manually possible due priority is accorded to such goods. 3.35. Transitional Standard If the goods must be inspected by other competent authorities and the Customs also schedules an examination, the Customs shall ensure that the inspections are co-ordinated and, if possible, carried out at the same time. Status: To be complied with.
(b) Presence of the declarant at examination of goods

3.36. Standard The Customs shall consider requests by the declarant to be present or to be represented at the examination of the goods. Such requests shall be granted unless exceptional circumstances exist. Status: Joint examinations are allowed on case to case basis. 3.37. Standard If the Customs deem it useful, they shall require the declarant to be present or to be represented at the examination of the goods to give them any assistance necessary to facilitate the examination. Status: Compliant.
(c) Sampling by the Customs

3.38. Standard Samples shall be taken only where deemed necessary by the Customs to establish the tariff description and/or value of goods declared or to ensure the application of other provisions of national legislation. Samples drawn shall be as small as possible. Status: Compliant. Errors 3.39. Standard The Customs shall not impose substantial penalties for errors where they are satisfied that such errors are inadvertent and that there has been no fraudulent intent or gross negligence. Where they consider it necessary to discourage a repetition of such errors, a penalty may be imposed but shall be no greater than is necessary for this purpose. Status: Generally imposition of penalties is resorted to in case of mala fides being established. 21

Release of goods 3.40. Standard Goods declared shall be released as soon as the Customs have examined them or decided not to examine them, provided that: - no offence has been found; - the import or export licence or any other documents required have been acquired; - all permits relating to the procedure concerned have been acquired; and - any duties and taxes have been paid or that appropriate action has been taken to ensure their collection. Status: Compliant. 3.41. Standard If the Customs are satisfied that the declarant will subsequently accomplish all the formalities in respect of clearance they shall release the goods, provided that the declarant produces a commercial or official document giving the main particulars of the consignment concerned and acceptable to the Customs, and that security, where required, has been furnished to ensure collection of any applicable duties and taxes. 3.42. Standard When the Customs decide that they require laboratory analysis of samples, detailed technical documents or expert advice, they shall release the goods before the results of such examination are known, provided that any security required has been furnished and provided they are satisfied that the goods are not subject to prohibitions or restrictions. Status for 3.41 and 3.42: Section 81 allows provisional assessment where further enquiry is required for correct assessment after an appropriate security has been furnished. 3.43. Standard When an offence has been detected, the Customs shall not wait for the completion of administrative or legal action before they release the goods, provided that the goods are not liable to confiscation or forfeiture or to be needed as evidence at some later stage and that the declarant pays the duties and taxes and furnishes security to ensure collection of any additional duties and taxes and of any penalties which may be imposed. Status: Compliant.

Abandonment or destruction of goods 3.44. Standard When goods have not yet been released for home use or when they have been placed under another Customs procedure, and provided that no 22

offence has been detected, the person concerned shall not be required to pay the duties and taxes or shall be entitled to repayment thereof: - when, at his request, such goods are abandoned to the Revenue or destroyed or rendered commercially valueless under Customs control, as the Customs may decide. Any costs involved shall be borne by the person concerned; - when such goods are destroyed or irrecoverably lost by accident or force majeure, provided that such destruction or loss is duly established to the satisfaction of the Customs; - on shortages due to the nature of the goods when such shortages are duly established to the satisfaction of the Customs. Any waste or scrap remaining after destruction shall be liable, if taken into home use or exported, to the duties and taxes that would be applicable to such waste or scrap imported or exported in that state. Status: Change of procedure is allowed as provided in section 79. There are no specific rules regarding refund in such cases. However, the law does not require payment of duties and taxes if the goods are not cleared by the owner and the duty paid in excess can be claimed back under section 33 . 3.45. Transitional Standard When the Customs sell goods which have not been declared within the time allowed or could not be released although no offence has been discovered, the proceeds of the sale, after deduction of any duties and taxes and all other charges and expenses incurred, shall be made over to those persons entitled to receive them or, when this is not possible, held at their disposal for a specified period. Status: In case the goods are auctioned as above, the owner can claim the amount remaining after realization of duties and taxes as provided in section 201.

Duties and Taxes

A. ASSESSMENT, COLLECTION AND PAYMENT OF DUTIES AND TAXES 4.1. Standard National legislation shall define the circumstances when liability to duties and taxes is incurred.

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Status: Compliant. 4.2. Standard The time period within which the applicable duties and taxes are assessed shall be stipulated in national legislation. The assessment shall follow as soon as possible after the Goods declaration is lodged or the liability is otherwise incurred. Status: The existing law is compliant to above standard. 4.3. Standard The factors on which the assessment of duties and taxes is based and the conditions under which they are determined shall be specified in national legislation. Status: Compliant. 4.4. Standard The rates of duties and taxes shall be set out in official publications. Status: Compliant. 4.5. Standard National legislation shall specify the point in time to be taken into consideration for the purpose of determining the rates of duties and taxes. Status: Compliant. Sections 30, 30A and 31A are relevant. 4.6. Standard National legislation shall specify the methods that may be used to pay the duties and taxes. Status: Compliant 4.7. Standard National legislation shall specify the person(s) responsible for the payment of duties and taxes Status: Section 83 stipulates that the owner of the imported goods is responsible for payment of duty. 4.8. Standard National legislation shall determine the due date and the place where payment is to be made. Status: All payments are required to be made in the designated branches of National Bank of Pakistan. Under PaCCS, the payment of duties and taxes is to be made at the time of filing of Goods Declaration, whereas in One 24

Customs, the payments are to be made after the assessment made by the Customs officer. If the payment is not made within 10 days of assessment, a surcharge is payable under section 83. 4.9. Standard When national legislation specifies that the due date may be after the release of the goods, that date shall be at least ten days after the release. No interest shall be charged for the period between the date of release and the due date. Status: Generally the duties are payable before the release of goods. In some cases, the payment is deferred against securities, such as in case of provisional assessment. No interest is chargeable in these cases for the intervening period. 4.10. Standard National legislation shall specify the period within which the Customs may take legal action to collect duties and taxes not paid by the due date. Status: Section 32 prescribes a period of three years for raising demand where due amount has not been paid because of error or inadvertence. 4.11. Standard National legislation shall determine the rate of interest chargeable on amounts of duties and taxes that have not been paid by the due date and the conditions of application of such interest. Status: Section 83 provides for the rate of surcharge and the conditions. 4.12. Standard When the duties and taxes have been paid, a receipt constituting proof of payment shall be issued to the payer, unless there is other evidence constituting proof of payment. 4.13. Transitional Standard National legislation shall specify a minimum value and/or a minimum amount of duties and taxes below which no duties and taxes will be collected. Status: Section 19C prescribes Rs. 100 as the minimum amount of duties and taxes to be collected. 4.14. Standard If the Customs find that errors in the Goods declaration or in the assessment of the duties and taxes will cause or have caused the collection or recovery of an amount of duties and taxes less than that legally chargeable, they shall correct the errors and collect the amount underpaid. However, if the amount involved is less than the minimum amount specified in national legislation, the Customs shall not collect or recover that amount. 25

Status: Section 32 prescribes a limit of Rs. 100 for this purpose. B. DEFERRED PAYMENT OF DUTIES AND TAXES 4.15. Standard Where national legislation provides for the deferred payment of duties and taxes, it shall specify the conditions under which such facility is allowed. Status: Section 21A provides for deferment of duties and taxes against security. 4.16. Standard Deferred payment shall be allowed without interest charges to the extent possible. Status: Minimal interest rates are prescribed under section 21A. 4.17. Standard The period for deferred payment of duties and taxes shall be at least fourteen days. Status: Compliant as the period prescribed under Chapter XIII of Customs Rules, 2001 exceed the period of fourteen days. C. REPAYMENT OF DUTIES AND TAXES 4.18. Standard Repayment shall be granted where it is established that duties and taxes have been overcharged as a result of an error in their assessment. Status: Compliant. Section 33 is relevant. 4.19. Standard Repayment shall be granted in respect of imported or exported goods which are found to have been defective or otherwise not in accordance with the agreed specifications at the time of importation or exportation and are returned either to the supplier or to another person designated by the supplier, subject to the following conditions : - the goods have not been worked, repaired or used in the country of importation, and are re-exported within a reasonable time; - the goods have not been worked, repaired or used in the country to which they were exported, and are re-imported within a reasonable time. Use of the goods shall, however, not hinder the repayment if such use was indispensable to discover the defects or other circumstances which caused the re-exportation or re-importation of the goods. 26

As an alternative to re-exportation or re-importation, the goods may be abandoned to the Revenue or destroyed or rendered commercially valueless under Customs control, as the Customs may decide. Such abandonment or destruction shall not entail any cost to the Revenue. Status: Section 35 provides for drawback/ repayment and conditions. However, the provisions relating to abandoning of such goods have not been prescribed. Section 36 provides for repayment even if goods have been taken into use. 4.20. Transitional Standard Where permission is given by the Customs for goods originally declared for a Customs procedure with payment of duties and taxes to be placed under another Customs procedure, repayment shall be made of any duties and taxes charged in excess of the amount due under the new procedure. Status: To be achieved. 4.21. Standard Decisions on claims for repayment shall be reached, and notified in writing to the persons concerned, without undue delay, and repayment of amounts overcharged shall be made as soon as possible after the verification of claims. Status: Although there are no time limits prescribed, efforts are made to pay refunds at the earliest. Where refund is not due, an appealable order is passed as provided in rule 544 of the Customs Rules, 2001. 4.22. Standard Where it is established by the Customs that the overcharge is a result of an error on the part of the Customs in assessing the duties and taxes, repayment shall be made as a matter of priority. Status: Compliant. 4.23. Standard Where time limits are fixed beyond which claims for repayment will not be accepted, such limits shall be of sufficient duration to take account of the differing circumstances pertaining to each type of case in which repayment may be granted. Status: A time period of one year is fixed under section 33. 4.24. Standard Repayment shall not be granted if the amount involved is less than the minimum amount specified in national legislation. Status: Minimum amount so fixed is Rs. 100 as in section 21. 27

Securities
5.1. Standard

National legislation shall enumerate the cases in which security is required and shall specify the forms in which security is to be provided. Status: Compliant. 5.2. Standard The Customs shall determine the amount of security. Status: Compliant. 5.3. Standard Any person required to provide security shall be allowed to choose any form of security provided that it is acceptable to the Customs. Status: The law is compliant with above standard such as section 81. 5.4. Standard Where national legislation provides, the Customs shall not require security when they are satisfied that an obligation to the Customs will be fulfilled. Status: Law conforms to the above standard. 5.5. Standard When security is required to ensure that the obligations arising from a Customs procedure will be fulfilled, the Customs shall accept a general security, in particular from declarants who regularly declare goods at different offices in the Customs territory. Status: Security is deposited with the office whose revenue is affected. 5.6. Standard Where security is required, the amount of security to be provided shall be as low as possible and, in respect of the payment of duties and taxes, shall not exceed the amount potentially chargeable. Status: Compliant. 5.7. Standard Where security has been furnished, it shall be discharged as soon as possible after the Customs are satisfied that the obligations under which the security was required have been duly fulfilled. Status: Compliant.

Customs Control
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6.1. Standard All goods, including means of transport, which enter or leave the Customs territory, regardless of whether they are liable to duties and taxes, shall be subject to Customs control. Status: Compliant. 6.2. Standard Customs control shall be limited to that necessary to ensure compliance with the Customs law. Status: Compliant 6.3. Standard In the application of Customs control, the Customs shall use risk management. Status: Compliant. PaCCS is based on a comprehensive risk assessment module whereas in One Customs, risk assessment is based on past profiles of the importers. 6.4. Standard The Customs shall use risk analysis to determine which persons and which goods, including means of transport, should be examined and the extent of the examination. Status: Compliant 6.5. Standard The Customs shall adopt a compliance measurement strategy to support risk management. Status: Compliant 6.6. Standard Customs control systems shall include audit-based controls. Status: Compliant. A Directorate General of Post-Clearance Audit is operative. 6.7. Standard The Customs shall seek to co-operate with other Customs administrations and seek to conclude mutual administrative assistance agreements to enhance Customs control. Status: Compliant. Such arrangements are in place with China and other administrations. 6.8. Standard 29

The Customs shall seek to co-operate with the trade and seek to conclude Memoranda of Understanding to enhance Customs control. Status: Compliant. Although there are no formal instruments, the Customs do seek the cooperation of trade. 6.9. Transitional Standard The Customs shall use information technology and electronic commerce to the greatest possible extent to enhance Customs control. Status: Information technology is being considerably used and its scope is also being extended. However, there are no means to monitor electronic commerce. 6.10. Standard The Customs shall evaluate traders commercial systems where those systems have an impact on Customs operations to ensure compliance with Customs requirements. Status: Periodically such exercises are carried out.

Information Technology
7.1. Standard The Customs shall apply information technology to support Customs operations, where it is cost-effective and efficient for the Customs and for the trade. The Customs shall specify the conditions for its application. Status: Compliant. The information technology is being used to the advantage of both Customs and Traders. Further extension is also being considered. 7.2. Standard When introducing computer applications, the Customs shall use relevant internationally accepted standards. Status: Compliant. Recently a system audit of PaCCS was also carried out. 7.3. Standard The introduction of information technology shall be carried out in consultation with all relevant parties directly affected, to the greatest extent possible. Status: Compliant 7.4. Standard New or revised national legislation shall provide for:

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- electronic commerce methods as an alternative to paper-based documentary requirements; - electronic as well as paper-based authentication methods; - the right of the Customs to retain information for their own use and, as appropriate, to exchange such information with other Customs administrations and all other legally approved parties by means of electronic commerce techniques. Status: Chapter XVI-A of the Act consists of provisions relating to the Customs Computerized System and audit and access to documents and electronic records.

Customs and Third Parties

8.1. Standard Persons concerned shall have the choice of transacting business with the Customs either directly or by designating a third party to act on their behalf. Status: Compliant 8.2. Standard National legislation shall set out the conditions under which a person may act for and on behalf of another person in dealing with the Customs and shall lay down the liability of third parties to the Customs for duties and taxes and for any irregularities. Status: Compliant. Sections 207, 208 and 209 are relevant. 8.3. Standard The Customs transactions where the person concerned elects to do business on his own account shall not be treated less favourably or be subject to more stringent requirements than those Customs transactions which are handled for the person concerned by a third party. Status: Compliant 8.4. Standard A person designated as a third party shall have the same rights as the person who designated him in those matters related to transacting business with the Customs. Status: Compliant 8.5. Standard The Customs shall provide for third parties to participate in their formal consultations with the trade.

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Status: Third parties i.e. agents are also made part of consultation process, and the trade as well. 8.6. Standard The Customs shall specify the circumstances under which they are not prepared to transact business with a third party. Status: Section 207 lays down that an unlicensed agent will not be able to transact any business with Customs. 8.7. Standard The Customs shall give written notification to the third party of a decision not to transact business. Status: Rule 103 provides for conditions under which a license can be cancelled.

Information, Decisions and Rulings Supplied by the Customs

A. INFORMATION OF GENERAL APPLICATION 9.1. Standard The Customs shall ensure that all relevant information of general application pertaining to Customs law is readily available to any interested person. Status: Customs not only publish a two-volume set of laws each year, they also place all relevant laws on Federal Board of Revenues website. 9.2. Standard When information that has been made available must be amended due to changes in Customs law, administrative arrangements or requirements, the Customs shall make the revised information readily available sufficiently in advance of the entry into force of the changes to enable interested persons to take account of them, unless advance notice is precluded. Status: Information made available as soon as a change is made. 9.3. Transitional Standard The Customs shall use information technology to enhance the provision of information. Status: FBRs website publishes all laws, rules and notifications in updated form. A helpline based on email is also available.

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B. INFORMATION OF A SPECIFIC NATURE 9.4. Standard At the request of the interested person, the Customs shall provide, as quickly and as accurately as possible, information relating to the specific matters raised by the interested person and pertaining to Customs law. Status: Compliant 9.5. Standard The Customs shall supply not only the information specifically requested but also any other pertinent information which they consider the interested person should be made aware of. Status: Compliant 9.6. Standard When the Customs supply information, they shall ensure that they do not divulge details of a private or confidential nature affecting the Customs or third parties unless such disclosure is required or authorized by national legislation. Status: Compliant 9.7. Standard When the Customs cannot supply information free of charge, any charge shall be limited to the approximate cost of the services rendered. Status: No charges are recovered except in case of published paper-based volumes of laws. However, informative brochures are provided free of charge. C. DECISIONS AND RULINGS 9.8. Standard At the written request of the person concerned, the Customs shall notify their decision in writing within a period specified in national legislation. Where the decision is adverse to the person concerned, the reasons shall be given and the right of appeal advised. Status: Compliant. The decisions are communicated electronically. Right of appeal is invariably provided. in writing or

9.9. Standard The Customs shall issue binding rulings at the request of the interested person, provided that the Customs have all the information they deem necessary.

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Status: Customs do issue clarifications which are binding and complied with until the same are withdrawn or overruled by competent forums.

Right of Appeal
10.1. Standard National legislation shall provide for a right of appeal in Customs matters. Status: Compliant. Multi-stage appeal process is provided. Sections 193, 194-A, 196 and 196-E are relevant.

10.2. Standard Any person who is directly affected by a decision or omission of the Customs shall have a right of appeal. Status: All decisions are appealable. However, in case of omissions, instead of appeal, the process of complaints before Federal Tax Ombudsman is provided under a separate law. 10.3. Standard The person directly affected by a decision or omission of the Customs shall be given, after having made a request to the Customs, the reasons for such decision or omission within a period specified in national legislation. This may or may not result in an appeal. Status: No legal procedure is laid out. However, such requests are routinely responded to. 10.4. Standard National legislation shall provide for the right of an initial appeal to the Customs. Status: Compliant. Section 193 is relevant. 10.5. Standard Where an appeal to the Customs is dismissed, the appellant shall have the right of a further appeal to an authority independent of the Customs administration. Status: Compliant. Further appeal process includes independent Appellate Tribunal, High Court and Supreme Court. The above comparison brings out that Pakistan Customs is on the whole compliant with the standards of Revised Kyoto Conventions. There are only few standards where the Pakistan lags in some respects and those gaps have to be filled. In the following chapters, we shall discuss some of these 34

standards as well as other major parameters where progress is required to make Pakistan Customs a model to follow.

How RKC Objectives can be achieved?

In foregoing paras we have discussed specific standards of the Convention. It would also be fruitful to generally discuss some of its important objectives. We have noted that the objectives of RKC are: transparency and predictability of customs controls; standardization and simplification of the goods declaration and supporting documents; simplified procedures for authorized persons; maximum use of information technology; minimum necessary customs control to ensure compliance with regulations; use of risk management and audit based controls; coordinated interventions with other border agencies; and a partnership with the trade

In following paras we shall discuss that how the improvements in fields such as information technology, risk management, simplification, transparency etc can help in achievements of aforesaid objectives. In the next two chapters we shall discuss the role of organizational structure and human resource management in achieving the same ends.

Information Technology/ Automation

The use of information technology in Customs has been appreciated but its scope still remains limited. PaCCS, which is flag bearer of IT in Pakistan Customs, is limited to three container terminals. Specified cargo such as scrap or consignments containing goods of varied types has been excluded from its purview. On one hand, it still has to be owned fully by the internal stakeholder; on the other, it has gained the confidence of the traders. The departmental users of the system also appreciate the convenience it offers. It is highlighted that PaCCS operates in a limited area. All the goods manifested in PaCCS are not cleared by PaCCS. Some goods are transferred from PaCCS to manual system such as those meant to be cleared through upcountry stations or those being transited to Afghanistan. There is a need that such automated system should be an all encompassing one, so that a single system is used all over the country. Therefore, the urgency of such a system cannot be overemphasized. Moreover, PaCCS does not provide coverage to all customs procedures. Some areas such as arrears recovery and auctions have not been included. Others such as adjudication and legal processes, securities and warehousing have not been fully covered. These gaps can be filled to make the system more effective. 35

Risk Management system

Effective RMS should be a major tool for clearance of cargo through customs. Number of declarations going for assessment should be gradually. Rest of the declarations can go through green channel subject to Post Release Verification within 7-10 days. There should be permanent RMS committee to handle a vibrant and dynamic RMS. This Committee should be an independent entity. There are also proposals that consignments carrying medium risk should be subjected to examination through a scanner instead of examination after opening up the container.

Simplification of Procedures & Processes / Review of Exemption Regime

Currently the procedures are too complex owing to very loose exemption regime. The exemption regime needs to be reviewed and streamlined. This will ensure not only better compliance and improved revenues, but also facilitate automation of processes as well as more effective RMS, besides enhanced trade facilitation resulting in reduced cost of doing business.

Monitoring Transit Trade

Transit trade to Afghanistan has become a big cause of revenue leakages as most of the goods meant fir transit to Afghanistan end up in Pakistani markets. Transit trade volumes are significantly high and beyond levels what can be consumed in Afghanistan. The proposals regarding quota system have not been accepted. Now there is need to ensure that goods meant for Afghanistan actually reach there and are not routed back. There are proposals regarding installation of tracking devices on containers and also installing scanners at the borders.

Upgrading Facilities in Customs Laboratory

Presently, the Customs Lab is not fully equipped and its reports lack requisite credibility. The Customs Lab should be upgraded with modern equipment and facilities. Well qualified staff should be inducted and trained.

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Chapter 4 Organization and Structure

Organization structure plays an important role in the success of an organization. Customs administrations throughout the world have undergone tremendous organizational reforms in order to match the changing demands of international trade. The challenges of terrorism, money laundering, intellectual piracy, smuggling, including human and drugs trafficking, cyber crimes, and a myriad of other issues have led to redefining the role of Customs in most parts of the world. Therefore, today Customs has a diversified role, ranging from collection of import/export duties and taxes to implementation of trade policies, to immigration and border management, to counter-terrorism, to anti-piracy and antismuggling operations, to safeguarding public health and morality and so on. Accordingly, Pakistan Customs need to be reformed in the light of international best practices. Despite partial success in automation, infrastructure up-gradation and simplification of procedures, Pakistan Customs is yet to be comprehensively reformed and modernized with a diverse and expanded mandate in keeping with the current world trends. Under the circumstances, Customs cannot be expected to gear up even for its traditional role, leaving aside the challenges that it faces in this century. Shrinking Customs vs. Rising Trade Volume Despite manifold increase in Pakistans international trade from US $ 19 Billion in 2001-02 to US $ 54 Billion in 2009-10, the total number of Customs officers to supervise the international trade has continued to diminish, with no fresh appointment of operational staff since 1994. Likewise, narco-trade and smuggling of merchandise have also assumed new proportions during the current decade despite Pakistans commitment and international cooperation. As per UNODC Report 2008-09, 96 % of the world opium is produced in Afghanistan and Pakistan is one of the key transit countries for the smuggling of these narcotics to international markets, a fact which re-enforces the role of Customs in effective border management against narco-trade. While most law enforcement agencies remain engrossed in tackling militancy and worsening law and order situation, anti-smuggling operations, particularly drugs interdiction, along the international borders of the country have been adversely affected. The phenomenon of smuggling, whether of normal merchandise or of narcotics, has serious adverse impact on Pakistans economy and society in a number of ways. Addressing this issue is the need of the hour. The role of Customs in this regard cannot be exaggerated. However, Customs has to be reformed to enable it to perform 37

a more robust role in the changed scenario. Pakistan Customs needs to be expanded and entrusted with functions which Customs in many countries of the world have been assigned. This expansion has to be two-pronged: internal and external. The proposition is elaborated as under.

Internal Expansion
Expansion in Scope of Customs: Throughout the world, Customs has undergone significant reforms, from policy to administration. From traditional function of collection of duties and taxes, Customs has, in many countries, moved on to assume a more vibrant role as an enforcement organization in areas such as immigration, border management, drugs-interdiction, countering piracy and terrorism, intelligence and investigation, in addition to collection of import/export duties and enforcement of import and export policy. For instance, in United States, the post 9/11 scenario witnessed the emergence of Customs and Border Protection (CBP) and Immigration and Customs Enforcement (ICE) as totally new organizations, resulting from a major organizational reshuffling. For the first time, Customs was separated from the US Treasury and entrusted to the Department of Homeland Security (DHS), a new department created in 2003. Newly created CBP was given the mandate of immigration services as well as border patrolling in addition to collection of import duties and taxes. CBP combined employees from the United States Department of Agriculture, the United States Immigration and Naturalization Service and the United States Customs Service. Similarly, ICE was established as a dedicated service merging of investigation and prosecution wings of the former US Customs and Immigration and Naturalization Service. Today, USA has much more effective and organized border management and immigration system all along its international borders than ever before. Similar models cab found in Canada and Australia. In view of Pakistans international commitments and needs highlighted above, it needs to have an effective border management agency. Experience so far has shown that entrusting the functions of Customs to other agencies working along Pakistans international borders has not yielded tangible results. This requires re-hauling Pakistan Customs with a view to making it an effective organization to deal with emerging challenges. Following proposals are made to this effect: Functional Division: Based on functional model, all Customs Clearance Collectorates throughout Pakistan should be bifurcated into separate Appraisement Collectorates and Preventive Collectorates. This will be followed by transfer of work and related staff as well as corresponding resource to the respective Collectorates. Appraisement Collectorates would deal with transit, imports and exports clearance and related matters at sea port and dry ports. Exports Collectorate Karachi and Exports Lahore would be dedicated only to handle exports and related issues. The existing Collectorates of Customs will be re-named 38

accordingly. For instance, Model Customs Collectorate (MCC), Lahore, would be renamed, MCC (Appraisement), Lahore. Border Control: Preventive Collectorates, on the other hand, would be assigned full fledged Border Management functions including movement of goods and people through International airports in Pakistan. It shall comprise two branches, Operations and Enforcement. The Operations Branch will handle all Customs operations enforcing regulations such as imports, exports processing (at border stations and airports), immigrations services at the borders, drugs checking of export consignments at ports, dry ports and sea ports and similar other functions. Enforcement branch shall handle anti-smuggling (including anti-narcotics) operations along the international border as well as inside the country. The enforcement staff shall also comprise of staff taken from agencies such Frontier Constabulary, Rangers, and Coast Guards etc. The staff so borrowed will serve in Preventive formations of Pakistan Customs against the posts reserved for them and shall also be eligible to the benefits available to other Customs staff such as special allowance, reward, facilities during their posting tenure within Customs. The staff on the Operations side will exclusively consist of the officers of Customs department. The proposed force shall have presence all over the international borders of Pakistan. An alternative to the option of posting of staff from other agencies is to create new posts of enforcement staff within Customs department and recruit against such posts fresh enforcement staff such as sepoys, hawaldars, Subedars, Preventive Officers and Superintendents etc. Merger with Immigration and other agencies: At the level of international airports and seaports too Customs and immigration services need to be merged. Currently the immigration functions are performed by the staff of the Immigration Department Ministry of Interior. There are various departments, such as Immigration, Anti-narcotic Force (ANF), Airport Security Force (ASF), Customs, and Civil Aviation Authority (CAA) working at the airports in Pakistan. If some of the functions are clubbed and entrusted to Customs at par with international best practices, it would yield welcome results, particularly for the government and the passengers. For instance, the functions of immigration and ANF can and should be performed by the Customs staff. This would not only eliminate duplication of functions and reduce hardships for the travellers but will also help a great deal in tracking terror financing, smuggling of all types, particularly drugs, monetary instruments and pirated goods and keeping data of travellers for various purposes. This integration of functions will, however, require a decision at the very highest level of the government of Pakistan.

Expansion of Existing Functions

The existing customs functions i.e. Appraisement and Valuation and support functions such as Training and Input-Output Coefficient Organization (IOCO) 39

also require expansion in view of increasing workload. The proposals in respect of these are discussed below: Creation of new Collectorates: Similarly, the work of customs has increased manifold over the years all over Pakistan. There is now need for separate Collectorate for Hazara Division and Northern Areas to cater to traders needs and national economy, especially in view of the ever growing volume of trade through Sust and Azad Kashmir. Similarly, the government of Azad Jammu and Kashmir would also welcome a dedicated Collectorate in AJK, where officers from Pakistan Customs would be posted the way officers of Police Service and District Management Group (DMG) are posted in AJK. The importance of having a dedicated Collectorate at Gawadar cannot be exaggerated. Moreover to facilitate boosting Pakistans exports, a dedicated Exports Collectorate at Lahore is long overdue and must now be established. Expansion of PCA set up: So is the need for having Post-Clearance Audit (PCA) setup in other cities in addition to Karachi and Lahore because in the post automated clearance system and risk management processing of declarations, the importance of post clearance audit is an established practice and vital for the twin objectives of regulatory control and trade facilitation. PCA shall also take up audit of imports under concessionary SROs to forestall revenue leakages well in time. There should therefore be one full fledged Directorate of PCA at each provincial capital as well as Islamabad with two Director Generals, one for North and one for South Zones. Revival of Adjudication Collectorates: Another significant setup which Customs badly needs is Adjudication Collectorates in line with the policy of separation of executive from the judiciary. The existing arrangement is not fully in consonance with the principle no man can be judge is his own case. The seizing authority and adjudicating authority should, as a principle, be independent of each other in order to meet the ends of justice. It is proposed that the adjudication branch may be activated again and it must be ensured that the branch is financially and administratively independent from the executive branch with appropriate funds at its disposal so that the client gets speedy justice. Customs Positions in FBR: It has been noticed that Grade 18 officers have been posted in FBR on policy formulation positions in recent past. If experience is any guide, it is a fact that only officers who have worked in the field are better equipped with sufficient knowledge to effectively play a role in policy formulation exercises. It is, therefore, pragmatic to post only senior officers in FBR for policy formulation. All the posts of Second Secretaries in FBR should be re-designated as Deputy Secretaries in Grade 19 similar to the Deputy Secretaries in Federal Government. They shall continue to serve under respective secretaries 40

of wings so that the senior Grade 19 officers shall work as Secretaries while junior Grade 19 officers shall work as Deputy Secretaries Reorganization of Internal Audit: One of the weakest links in Customs controls in Pakistan is the internal audit system. It has not been given the kind of importance it deserves. It can play an effective role in improving transparency in the Customs operations and reducing revenue leakage. In order to render Internal Audit on more efficient lines, it is proposed that the Director General should be supported five Directors (BS-20), one for each province and one Director for Islamabad, with appropriate number of officers working under them. Re-organization of Input Output Coefficient Organization (IOCO): The IOCO was established in the year 2000 with the following objectives, scope and functions: o Fixation of duty drawback rates in respect of Custom Duties, Sales Tax and Federal Excise Duties o Rationalization of the duty drawback regime and to systematically estimate and update the actual input output coefficients under Rule 309, Sub-chapter 8, Chapter XII of Customs Rules, 2001. o To determine input output ratios and wastages in DTRE applications as the work assigned to IOCO vide Boards notification SRO 506(I)/2007 dated 09-06-2007 The sanctioned strength of IOCO at the time of its establishment was one Director, 07 Sector Specialists and supporting staff. Four Sector Specialists were appointed in year 2000 in MP-III, later upgraded to MP-II Pay Scales who served this department until 2008. These Sector Specialists were relieved by the Board on expiry of their contract period. The ex-Sector Specialists left behind enormous pendency and unattended cases. IOCO has almost remained non-functional due to absence of requisite technical expertise and logistic. The internal staff was picked up as in interim arrangement to work as Sector Specialists, but they are lacking in the requisite expertise for determining input-output ratios. The working of IOCO has further undermined due to frequent transfers. Besides, the IOCO does not have a regular Director, but is being looked after since long. In the wake of increasing workload, IOCO needs to be thoroughly reorganized to cater to the needs of the export sector. It is proposed that the existing organization should be upgraded to a Directorate General, headed by a DG (BS-21) with two Directorates, North and South regions, to be established at Lahore and Karachi respectively. Further, the Directorates should comprise regional offices each at Peshawar, Rawalpindi, Faisalabad, Gujranwala, Lahore, Hub (Quetta), Hyderabad and Karachi. An Additional Director to be the 41

incharge of regional office. Each regional office should have three to seven Sector Specialists depending upon the workload of each regional office. Reorganization of Directorate General of Training: Currently, the Directorate General of Training (Customs) is also, by and large, a neglected area where Human Resources of Customs department get training but the insufficient training facilities and staffing as well as shortage of faculty are serious issues. In order to enable Directorate General to impart useful training in keeping with the changing requirements of job of Customs officers, it is suggested to have the Director General (BS-21), duly supported by five Directors for the four provinces and the Capital with appropriate organizational structure under them including faculty members. Modernization and expansion of Intelligence & Investigation function: Modernization and expansion of the work of Director General (Investigation & Inspection), as was envisaged in the Gilmore Report and TARP papers, is yet to become a reality. Three separate Divisions as were envisaged are (i) National Intelligence Division (ii) Customs & Tax Fraud Division and (iii) Internal Affairs & Vigilance Division. The time is ripe for such modernization and reforming of DG I&I. Details of such expansion can also be worked out. It is proposed that the post of Director General should be upgraded to BS-22 as he shall be reporting to Chairman FBR directly. Under the DG, there shall be two Additional Director Generals (BS-21), one for North and one for South Zones and other officers working under them. This organization is presently undermanned while the volume of work has increased manifold over the years. Therefore fresh induction and enhancing the number of enforcement staff is critical to the reinvigoration of DG I&I as an enforcement arm of the FBR.

External Expansion
The proposals in this respect are as under: Take over the job of Safeguards/National Tariff Commission: While in India a full-fledged Directorate General of Safeguards within the Ministry of Finance has been functioning successfully for the last many years and the officers of Customs Department are performing functions of safeguards under the Indian Customs Tariff Act, there is no formal fullfledged organization in Pakistan Customs. It has the powers to investigate the existence of serious injury or threat of serious injury to domestic industry as a result of increased imports of a particular item. We need to emulate that. Under the circumstances, either a full-fledged Directorate General headed by a Director General (BS-21) be established to be manned by officers of Customs Department or else a separately set up in FBR, to be manned by Customs Officers. 42

Role of Intellectual Property Rights Organization: The role of Intellectual Property Rights Organization has increased in recent years due to sensitivity of developed countries towards the issue of counterfeit goods. The IPO has already been developed in Pakistan a few years back but it is still in infancy; it lacks enforcement machinery, capacity and vital resources, necessary for carrying out on-field operations. As such there is a dire need to make it a robust and dynamic organization. Customs officers deal with copyright issues throughout their career and are very well-suited to deal with property rights issues due to the very nature of their jobs. The IPO should be headed by a Grade 22 officer from Customs service and he shall be assisted by adequate number of offices in various parts of the country i.e. at Karachi, Lahore and Islamabad. Allocation of quota in various ministries: Being engaged with the fiscal and economic policies of the country, Custom officers pass through a grilling yet enriching experience of first implementation of governments financial policies and then formulating such policies. The Custom officers are abreast with the ground realities of business more than the officers of any other department. It is imperative for the Government to have people who have worked in the field to be in positions of economic decision making so that informed decisions can be taken for the benefit of all. It is proposed that 20% of all the vacancies in following Ministries, from BPS-19 and above be filled from the Customs Department: President Secretariat; Prime Minister Secretariat; Governors Secretariat; Chief Ministers Secretariat; Ministry of Finance; Ministry of Commerce; Ministry of Industries; Economic Affairs Division; Planning Commission; National Assembly Secretariat; Senate Secretariat; Establishment Division; Engineering Development Board. OR as an alternative, the officers of Customs and Excise Group should automatically be included in All Pakistan Unified Group (APUG) at the time of promotion to BS-19 just like DMG / Police officers so that they become eligible for promotion against the Cadre strengths available to APUG officers.

Appointment of customs counsellors abroad: The quantum of trade with major trading partners of Pakistan is on the rise both in terms of exports and imports. Under-valuation in imports hurts our revenue collection as well promotes the un-documented transfer of foreign exchange. Similarly over-valuation of exports results in over-payments of sales tax refunds besides money laundering and whitening of black money. The significance of this illegal business in view of terrorism and narcotics funding as well as promotion of a parallel economy cannot be overestimated. The impact of under-invoicing can best be understood by taking the case of international trade of Pakistan with China. In year 2007, the difference between the officially reported figures of Chinas export to Pakistan and Pakistans import from China stood at US$ 1.62 billion. This means that under-invoicing to the extent of USD 1.62 billion 43

was committed in 2007. Now if we take an average incidence of duties and taxes to be around 50%, the duty / taxes evaded are to the tune of US$ 800 million i.e. approximately Rs. 64 billion. Now if we assume that the Customs counsellors posted in China are able to check underinvoicing only to the extent of 25% that would mean an increase in the Government revenue to the extent of US$ 200 million or Rs. 16 billion approx annually. Assuming the costs of one Customs Counsellor (including salary, office, accommodation etc) to be US$ 200,000 per annum, three such officers in China would cost only US$ 600,000. The Customs Counsellors shall be supervised by Director General (International Customs), BS-21, and he shall be assisted by three regional chiefs (BS-20), and six secretaries (BS-19). The wing shall also look after all present functions of International Customs Wing including issues pertaining to WTO. Allocation of Quota in Trade Counsellors Jobs: If past performance can be criteria, it has been proven beyond any doubt that customs officers make the best commercial counsellors. It is not that custom officers are somehow more gifted than the others; it is the life long experience dealing with trade issues like import, export, WTO matters etc that helps a customs officer to perform better as trade counsellors in comparison to his counterparts from other services. The need of the hour is that such posts are filled by the best and most experienced people available. It is proposed that 50% of the trade officers jobs in all grades be filled from Customs Department. Appointment of drug liaison officers: The significance of combating narcotics cannot be over-emphasized and its role in the funding sources of terrorism is gaining attention with every passing day. In this scenario, it becomes important that Drug Liaison Officers be posted in different countries to effectively check this menace. The countries selected for such postings shall be those as fall along the routes followed by drug dealers.

Creation of Autonomous Revenue Authority

Presently Federal Board of Revenue works as a purely government body and all its officers are treated in the same manner as other officers of the civil service are. This suggests that they would get the same perks and benefits as other civil servants get. However being part of a revenue generating organization, they are entitled to some preferential treatment in terms of remuneration and other benefits. Moreover, as a government organization FBR has to depend on Finance Division to get resources for its expenditure, which hampers its function as only meagre resources are granted. To overcome these impediments, it is sometimes suggested that

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FBR be given the status of an autonomous body i.e. Autonomous Revenue Authority (ARA). The emergence of ARAs can be traced back to the concept introduced in the late 1980s in the United Kingdom. Such agencies were to operate more like private businesses than like government agencies. Government would frame policies and ARAs would execute these policies with greater autonomy and accountability in their day-to-day activities. The ARA would get a fixed share from the generated revenue for it operations. The advantages of this approach are:

More focused on revenue generation Free itself from political interference in day-to-day activities Free from civil service constraints, it could establish its own personnel policies, including compensation, promotion etc., to enhance effectiveness and efficiency. Independent personnel policy can help reduce corruption Greater accountability Greater operational flexibility, and shielded from political or other interference.

The creation of ARAs also leaves positive impression on traders and taxpayers who are thus assured of governments seriousness in revenue generation and are expected to react with better compliance. The concept of ARAs has been tried in many countries with success. It frees the revenue collection agency from dependence on government for its resources and also offers greater operational flexibility. In Pakistan, this idea has been explored in the past and this met with a positive response from the officers working under FBR. This idea has been successfully tried in Pakistan in case of State Bank of Pakistan, National Database and Registration Authority (NADRA) and other organizations. This is right time that this idea be again explored and seriously considered for implementation.

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Chapter 5 Human Resources

Managing human resources at customs involves following stages: defining the desired staff profile establishing a recruitment process that ensures that customs has the desired staff on board training incumbent staff to maintain skill levels ensuring that the compensation package enables customs to motivate and retain staff ensuring that poor performance and integrity failures are promptly sanctioned.

Staff Profile A modern customs administration needs to define the profile of its desired staff. The profile refers to the level of educational background and the outlook of the personnel. The Customs officers have to perform diverse functions in accounting, intelligence gathering, finance, investigation, analysis, training, planning, and HR management. All these functions also involve increasing use of IT. Modern workflow analysis can be used to determine the desired distribution of personnel across the various skill categories. Some of the major professional qualifications essential to fulfilling these requirements include the following: Staff should stay informed about developments in international trade negotiations and the requirements of globalization so they can enforce domestic laws and regulations at borders. Staff should also have adequate legal expertise to help in legislation of related laws. IT expertise to be able to Implement modern customs clearance processes and develop and understand modern risk assessment and carry out post-clearance audit. Skills in communication so as to maintain good relationship with trade to be able to convey laws and obligations and get their feedback. Capacity to integrate the agendas of other agencies into customs procedures so as to Enforce laws relating to intellectual property rights, security, drug trafficking, and, eventually, labour and human rights. IT expertise and an awareness of the importance of statistics for economic decision making for Collection and dissemination of international trade statistics. 46

Sound human resources management and human development expertise for Management of customs HR.

resources

Recruitment
Proper recruitment ensures that the existing staff profile is matched to the desired one to keep pace with the changing requirements. Recruitment is essential not only to provide placement for the retirees but for expansion of the organization. In Pakistan Customs, the recruitment has been less than systematic. There is growing gap in the desired staff profile and the existing one. The reason is that there has not been any proper recruitment over the past many years. This has led to he gaps and overall inability of the staff to deal with the challenges of their job. The vacancies created in technical positions are being filled through promotions from non-technical staff instead of recruitment. The non-technical staff does not possess the requisite qualifications to handle the demand of their job and as result not only the revenue collection suffers but the image of the department also suffers. It is the need of the day that recruitment effort is taken in all earnestness with due consideration to merit and transparency. Potential recruits should be subjected to stringent background investigations relating to police record, previous employers and credit and bank account checks. The selection process should focus on the ability to develop staff profile as discussed above.

Training
Initial training prepares the staff to face the challenges of the job. However, in Pakistan Customs, the training demands much more effort than the one presently being put into it. The trainings are not seriously taken. The faculty is not appropriate and the administration does not take due interest. Only the entry-level training is somewhat satisfactory and given reasonable priority. The state of refresher training is pathetic. Those nominated are not interested. Their bosses are reluctant to relieve them as day-to-day work suffers. The training can be improved by: Appointing proper faculty Providing proper resources and facilities Assigning due priority by the top management Courses should be well designed Foreign courses should also be included Performance in training should be made part of personal record and performance evaluation process

In addition to above measures to strengthen the training process, following areas are also highlighted in which training is essential to improve the efficacy of the organization:

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Assessment Valuation Risk profiling RMS Prevention of frauds Anti smuggling Legal matters and prosecution.

Integrity
Main functions of the Customs are revenue generation and trade facilitation. Both these functions are of such nature that they become tool of corruption in the hands of ill-meaning customs staff and the traders who want to maximize their profits by all means. The traders unwilling to pay due tax offer illegal gratification to customs staff to get lower duties and taxes assessed on their imports. They also want their goods expeditiously so that they do not have to pay high inventory costs and are able to meet the supply deadlines. For this they are ready to offer facilitation or speed money to the customs staff. Such practices take place at the cost of government revenue and at the expense of other traders whose goods are ignored to expedite clearance of goods belonging to other traders. Such practices also make customs staff habitual of such gratifications and they are ready to inflict loss to the revenue for their personal gain and they also tend to slow the clearances so as to be able to extort some monetary benefit. The corruption thus makes the clearance process non-transparent and unpredictable and runs counter to the interests of genuine trade. The administration must take all possible measures to curb such practices. In Pakistan too, the corruption is major issue in Customs. The causes are: Lack of proper training Lack of professionalism Inadequate compensation Lack of accountability Complex procedures High tariffs Complexity and multiplicity of exemptions

To curb malpractices, the administration can take following measures: Proper training and development of ethics Simple and transparent procedures Adequate compensation Maximum automation Development of Code of Conduct and adherence to it Development of Morale and Organizational Culture

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Adoption of international best practices and WCO guidelines and holding of integrity seminars

Compensation & Promotion

Staff Compensation Staff compensation is a crucial factor in HR management. It should be sufficiently high to attract and retain staff with the necessary qualifications to start work at customs. However, being part of civil service, overall staff salaries are often inadequate and the difference between the compensation of management and lower level staff is much narrower than what prevails in the private sector. While compensation is not the only motivating factor for doing a good job, it certainly ranks high. Lack of good remuneration can be compensated by providing sense of pride and ownership in the staff. Because of nature of job in Customs, where opportunities for seeking illegal gratification are plenty, importance of good compensation is increased. This realization has lead to the efforts to provide better compensation. In some countries, Autonomous Revenue Authorities have been established so that better remuneration can be paid. Other administrations have tried to increase compensation while maintaining the civil service structure. In Pakistan too, the compensation levels are not adequate. However, some efforts have been made to increase the compensation as given below: As part of Tax Administration Reform Project, an extra basic salary to Customs officers is being paid for the past two years. One or two months salary is paid as bonus to selected employees each year, on the basis of performance.

However, above measures are not enough to contain the urge for malpractices. It is fit to point out here that some good practices of the past have been discontinued which also have contributed to the de-moralization. These practices were: Old reward rules have been rescinded which were generous in payment of rewards and criteria were also lenient. The rewards were payable to those who contributed to detection of cases of shortpayment or non-payment. Now, the criteria have been made stringent and amount payable has also been reduced. Practically, no rewards are being these days. The rational offered for discontinuation of old reward regime was that the employees are paid for doing duty and there was no justification in paying reward for something which was done as part of official duty. However, this thinking lacks pragmatism as it has contributed to de-moralization and affected the motivation for detecting cases of default.

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A part of reward amount was credited to Common Pool Fund, which was established for the welfare of employees. CPF assisted employees in matters of health and childrens education and in other times of need. It was also used to compensate employees residing in rented house, as the market rents were high and those paid by the government were meagre.

To reduce corruption and instil a sense of pride in employees, following suggestions are made to increase compensation payable to staff so that the employees having competence and ability are attracted to the job and retained: FBR can be given the status of Autonomous Revenue Authority. This will enable it to pay market-based salaries to attract matching talent. This will also allow performance based salaries which will encourage employees to perform better. As an alternative to above, while remaining within the civil service structure, one more basic salary can be allowed as special allowance. However, to ensure differentiation between performers and nonperformers, such allowance can be paid to selective employees on the basis of performance. Old reward rules may be revived. This will create an urge in the employees to do better. This will also revive the Common Pool Fund, which can be used for welfare activities. The assistance obtained from CPF will compensate for lower salaries. Customs, all over the world, collect fees for services such as those provide beyond office hours and for automated processing. Such fees are proposed to be collected by Pakistan Customs and utilized in welfare of Customs Staff. Bonuses should be paid more often, instead of once a year.

Promotions: Presently, promotions are allowed strictly on seniority-cum-fitness basis. This means that as long as one does not get an adverse performance evaluation, he will be promoted on the basis of seniority. This policy does not encourage performance. It is advisable that the promotions are based on performance. Better performers should get promotion earlier than the non-performers. Moreover, because of lack of expansion and ill-designed service structure, the promotions in Customs have stagnated. Because of lack of openings, it is taking loner for Customs people to get promoted as compared to other departments such as District Management, Police and Accounts etc. This is having a demoralizing effect on the service. It is highly desirable to plan 50

expansion in the service so that the objective of faster promotions can be achieved. Some of expansion has been proposed in the preceding chapter relating to Organizational structure. Modern customs clearance practicesbased on intensive use of IT as well as adequate staff compensationwill play the determining role in countering integrity problems. However, this is not sufficient to completely eradicate corrupt practices. Hence, any HR policy must clearly spell out how to deal with these issues. Staff should be made fully aware that corrupt practices and slacking behaviour will not be tolerated and appropriate shall be taken.

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