Customs value of imported goods has to be determined in accordance with the national laws of a country. However, in the case of a WTO Member country, its national laws on customs valuation have to be based on the WTO’s legal instruments, namely (i) Article VII of the General Agreement on Tariffs and Trade (GATT), 1994, (ii) the Agreement on Implementation of Article VII of the GATT, 1994, referred to as the Agreement on Customs Valuation (ACV), and the Uruguay Round ministerial decision regarding cases where customs administration has reasons to doubt the “truth or accuracy” of the declared value, which has been subsequently adopted as a Decision of the WTO Committee on Customs Valuation.
Pakistan was earlier following the Brussels Definition of Value (BDV) system of customs valuation. To ensure correct customs valuation, the Controller Customs Valuation used to fix minimum Import Trade Prices (ITP) for various items, which were revised on quarterly basis, if so required. The ITP values were fixed in consultation with the importers, local manufacturers and other interested parties. However, Pakistan adopted the WTO’s Transactional Price System for customs valuation in January 2001.
The introduction and implementation of the WTO’s Transactional Price System for customs valuation has resulted in substantial revenue loss to the exchequer and erosion of protection available to the domestic industry, which is now being adversely affected due to under-invoicing.
The article focuses on the concept of WTO’s transactional price system and its impact on the economy and the domestic industry.
Article VII of the GATT, 1994 lays down the main principles of customs valuation, which states that customs value should not be arbitrary, fictitious or based on value of indigenous goods. The value should be real and based on the actual value of goods under import of like goods. If the actual value is not ascertainable, the customs value should be based on the nearest ascertainable equivalent of such value. The ACV contains provisions to implement these principles.
The preamble to the ACV recognises that, to the greatest extent possible, the basis of customs value should be the transaction value. However, in all, it provides for six methods of valuation to be applied in the prescribed order viz. (i) the transaction value method, (ii) transaction value of identical goods, (iii) transaction value of similar goods, (iv) deductive value method, (v) computed value method based on cost of materials, fabrication and profit in the country of production, and (vi) fallback method based on previous methods with greater flexibility. These methods require to be applied in the given sequence, starting with the first one.
Article 4 of the ACV allows an importer to request reversal of the order of application between the deductive value method and the computed value method. However, the developing countries are allowed to make a reservation to the effect that such reversal will be subject to approval by customs authorities.
The ACV requires that the customs value should be based on the transaction value to the greatest extent possible. However, application of the transaction value method is subject to (i) customs authorities being satisfied with the truth and accuracy of the declared value, (ii) compliance with the valuation conditions given in the Article 1 of ACV, and (iii) availability of objective and quantifiable data with regard to valuation factors for making adjustments to the price actually paid or payable, which are contained in Article 8 of the ACV.
If customs authorities have reason to doubt the truth or accuracy of the declared price, they may ask the importer to provide further explanation, including documents or other evidences, that the declared value represents the total amount actually paid or payable for the imported goods. If, after receiving further information, or in the absence of a response, the customs authorities still have reasonable doubts about the truth or accuracy of the declared value, it may be deemed that the customs value of the imported goods cannot be determined by the transaction value method. However, before taking a final decision, the customs authorities have to communicate to the importer, in writing, if requested, the grounds for doubting the truth or accuracy of the particulars or documents produced and the importer shall be given a reasonable opportunity to respond.
Other methods of customs valuation: The method of valuation based on transaction value of identical goods can be used when the transaction value method fails or is not applicable and when transaction value of identical goods imported at or about the same time is available.
Identical goods have been defined in the ACV as goods that are (i) the same in all respects including physical characteristics, quality and reputation, (ii) produced in the same country as the goods being valued, and (iii) produced by the producer of the goods being valued.
The method based on transaction value of similar goods is to be applied if the transaction value method and the method based on the transaction value of identical goods fail or do not apply. Similar goods used in this method should have been imported at or about the same time as the goods being valued.
Similar goods have been defined in the ACV as goods which (i) closely resemble the goods being valued in terms of characteristics and component materials, (ii) can perform the same functions and are commercially interchangeable with the goods being valued, (iii) are produced in the same country as the goods being valued, and (iv) are produced by the producer of the goods being valued. Where similar goods produced by the same producer are not available, similar goods produced by a different producer can be considered.
The definition of identical and similar goods excludes imported goods for which engineering, development, artwork, design work, plans or sketches are undertaken in the country of importation and are provided by the buyer to the producer of the goods free of charge or at reduced cost.
The deductive value method comes next in the hierarchy of valuation methods to be applied where the ones described earlier fail. By this method, the value for assessment is determined on the basis of sales in the country of importation of the goods being valued or of identical or similar imported goods, less certain specified expenses resulting from the importation and sale of the goods.
The computed value method is the next method of valuation in the hierarchical sequence. Under this method, the value for assessment is based on computed value which shall be the sum of (i) the cost of materials, fabrication and processing, (ii) an amount for profit and general expenses for sales of goods of the same class or kind in the country of exportation for export to the country of importation, and (iii) the cost of transport, insurance and loading, unloading and handling charges.
When customs value cannot be determined under any of the other methods of valuation, the same has to be determined under the fall back method by applying earlier methods in a flexible manner and in accordance with the principles and general provisions of Article VII of GATT, 1994, on the basis of data available in the country of importation.
The ACV is considered to be a trader-friendly and trade-facilitating Agreement. It seeks to harmonise systems of customs valuation across WTO Member countries. Even some non-Member countries apply its principles. Since the most preferred and primary method of valuation under the ACV is based on the transaction value, the duty liability becomes known in advance. It brings in greater objectivity and transparency to determination of customs value and makes the border crossing faster, cutting down costs and delays. The ACV gives several rights to the importers and customs authorities.
Article 17 of the ACV states that nothing in the Agreement should be construed as restricting or calling into question the rights of the customs administration to satisfy themselves as to the truth or accuracy of any statement, document or declaration presented for customs valuation purposes. Paragraph 6 of the Annex III to the ACV further elaborates on the right of the customs authorities. It recognises that customs authorities may make enquiries for verifying that the elements of value declared or presented to customs are complete and correct. As such the system does not mention about the rights of domestic manufacturers. They can, however, indirectly be watched and protected by the customs authorities through correct customs valuation.
Impact on Pakistan: The introduction and implementation of the WTO’s transactional price system for customs valuation has resulted in substantial revenue loss to the exchequer and erosion of the protection available to the domestic industry, which has been adversely affected by under-invoicing. The main reasons being the complexities of the WTO’s transactional price system, the rights of importers, inability and the corrupt practices on the part of the customs valuation authorities.
The main areas which involve under invoicing to the extent of about 50% to 60% are ferrous and non-ferrous metals and their products, raw materials, chemicals and consumer products. A fair analysis of these sectors reveals that additional customs revenue of about Rs.500 billion to Rs.700 billion can be generated by just correct customs valuation. The additional generation of the corresponding sales tax at import stage would be added advantage.
The situation requires (i) an overall assessment of the impact of WTO’s transactional price system on customs valuation in Pakistan, (ii) identification of important sectors in which substantial under invoicing is rampant, (iii) recommendations for remedial measures available under the respective valuation methods of the WTO for combating under-invoicing. The exercise would result in substantial increase in the government revenues on account of customs duty and sales tax and revival of the industrial units which have been hit hard by the import of under-invoiced goods. The National Accountability Bureau can also play a vital role in the exercise.
The author is Director (WTO) in the International Islamic University
