Author: Najib Shah

FinCEN files: Suspicious transactions

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The International Consortium of Investigative Journalists (ICIJ), a US-based non-profit organisation has built a formidable reputation with its exposes about cross border fronts created to launder money. ICIJ has again hit the headlines with data of suspicious activity reports (SARs) sent by banks to FinCEN (Financial Crimes Enforcement Network). FinCEN, the US government bureau engaged in preventing money laundering and other financial crimes is said to have received more than 2,100 SARs filed during the period 1997- 2017. The transactions said to be in excess of $2 trillion spread across 88 countries including India again highlight the vulnerability of financial institutions to being misused for nefarious purposes.

Criminals enter the business of crime to make a profit. Having earned profit through criminal activity-be it evading taxes, smuggling, drug trafficking, embezzlement, there is the fear of detection. The process of laundering (cleansing) the ‘dirty’ money commences. The classic steps of placement, layering, and integration follow wherein the illegal proceeds are introduced into the financial system as legitimate. This is done typically, by investments in real estate, gold, or trade-based money laundering (TBML) recognised as a major vehicle for moving illicit funds.

Money laundering impacts the very integrity of financial systems. It damages the economy of a country. It encourages crime. If ‘laundered’ proceeds are available easily it generates more crime. Terrorism thrives on laundered money.

Every government is concerned because of the sheer amount of criminal money suspected to be laundered. The United Nations Office on Drugs and Crime (UNODC) estimated that in 2009, criminal proceeds amounted to 3.6 percent of global GDP, with 2.7 percent (or $1.6 trillion) was being laundered.

The Financial Action Task Force on money laundering (FATF) was established by the G-7 Summit in 1989 to develop a coordinated international response to this menace. One of the first tasks of the FATF was to develop recommendations that set out measures national governments should take to counter money laundering. Countries are required to introduce anti-money laundering laws and establish a financial intelligence unit (FIU).

Banks were expected to maintain “know your customer’ files and report suspicious activity to law enforcement agencies (LEA). This is in keeping with the classic investigator’s credo—follow the money trail and curb crime by confiscating the proceeds of crime. It is in this background that banks have furnished SARs to FinCEN-it is a different matter that these are supposed to be confidential!

India enacted the Prevention of Money Laundering Act (PMLA), in 2003. (It became a member of FATF in 2010) Anybody who attempts to indulge in any activity connected with the proceeds of crime and projecting it as an untainted property is said to have committed the offense of money laundering. PMLA prescribes obligation on banking companies, financial institutions, and intermediaries for verification and maintenance of records of the identity of all its clients and also for furnishing suspicious transaction reports (STRs) to the Financial Intelligence Unit (FIU-IND).

The suspicious transaction has been defined to mean any transaction (including an attempted transaction) whether or not made in cash which, to a person acting in good faith gives rise to a reasonable ground of suspicion that it may involve the proceeds of crime. It includes cash transactions and cross-border wire transactions above various thresholds and all transactions in counterfeit notes.

FIU receives, processes, analyses, and disseminates information relating to suspect financial transactions to the LEAs. As per their latest annual report FIU has received as many as 1,39,75,397 Cash Transaction Reports, 3,23,162 STRs, 1,07,19,253 cross border wire transfer reports (CBWTR) in 2018-19. The FIU has the formidable task of analysing the reports and disseminating the inputs to LEAs.

The Directorate of Enforcement (ED) has been nominated as the authority for search, seizure, attachment of property, even if it is abroad, involved in money laundering. As per the performance report of ED the value of assets under attachment is valued at nearly Rs 30,000 crore.

A suspicious transaction report by itself is nothing more than that – prima facie suspicious. There is obviously an element of subjectivity. A lot depends upon how the regulator has sensitised the reporting entities to ‘smell ‘a suspicious transaction. Red flag indicators based on the feedback given by the LEAs is the key. The challenge which FIU faces is that they are inundated with transactions deemed to be ‘suspicious’—the reporting entities who can be penalised for not reporting a suspicious transaction take the easy way out and report just about everything. There is a danger of “bad” transactions slipping out.

FATF mandates cooperation. FinCEN would have perhaps informed FIU of the transactions involving Indian banks and their corresponding banks. In fact, even the Indian Banks ought to have informed FIU in their CBWTR’s.

There is greater transparency required regarding the outcome of investigations—both as an assurance to the general public at large that the Government is serious about coming down on money laundering and also as a signal to potential fraudsters that siphoning of funds will not be tolerated. Incidentally, while there is no information about the outcome of the investigation done in India in the case of the Panama papers, a US court has recently sentenced a US citizen for money laundering based on the Panama Papers investigation.

The Enforcement Directorate has its work cut out.

—Najib Shah is the former chairman of the Central Board of Indirect Taxes & Customs. The views expressed are personal

Read his other columns here

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Rules of origin: Needless restrictive implementation could act as a trade barrier

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The last Union Budget had proposed a new provision in the Customs Act to regulate imports under Free Trade Agreements (FTAs). Finance Minister Nirmala Sitharaman in her speech laid the ground for “it has been observed that imports under FTAs are on the rise. Undue claims of FTA benefits have posed threat to the domestic industry. Such imports require stringent checks.”

Part B of the speech explained this further – “a new Chapter VAA (a new section 28DA) is being incorporated in the Customs Act to provide enabling provision for administering the preferential tariff treatment regime under Trade Agreements.”

This provision is today part of the Customs Act. Subsequently, the Customs (Administration of Rules of Origin under Trade Agreements) Rules 2020 were notified (with a very inelegant acronym CAROTAR). Detailed guidelines were also issued indicating the date of CAROTAR coming into force as 21st September 2020.

FTAs are agreements between two or more parties to eliminate or reduce tariffs and improve market access. Rules of Origin (RoO) are an integral part of an FTA. They are designed to ensure that concessions envisaged in these agreements are granted only to products originating in the jurisdiction of parties to the agreements. RoO in effect establish the nationality of the product. They are aimed at preventing trade deflection. All FTA imports have also to be accompanied with a certificate of origin issued by the appropriate authority.

RoO can be complex. From a most basic, in cases of goods wholly obtained from the partner country, to a requirement of 35 percent value addition with a change in the tariff classification, to product-specific rules, to concepts of accumulation/cumulation where multiple countries are part of an FTA.

India has sixteen trade agreements, with several others at various stages of negotiations. While there has been an increase in imports as a result of the FTAs (the Receipt Budget 2020-2021 indicated the revenue impact from such trade agreements in 2018-19 to be Rs 48,793 crores, with the amount projected to increase to Rs 65,734 in 2019-2020), there has been no corresponding increase in exports.

Several cases of misuse of FTA benefits have been detected – gold jewellery, flat-panel TVs, beetle nuts, black pepper, cocoa powder amongst others, being instances of such misuse. In these cases, the Customs Department has had to encounter legal challenges. The courts have held that the department cannot go beyond the certificate of origin though investigations have suggested that the certificate has not been issued correctly. And this despite the fact that the customs notifications which permit such preferential duty imports, also empower the customs authorities to deny the benefit sought in the event of the imports not being in accordance with the rules. A need was felt to have statutory authority for dealing with such situations of misuse. Hence the new provision in the law.

It may be noted that Section 28DA merely brings into the statute and makes explicit, many of the provisions which are in the notifications issued to operationalise FTA’s. Thus provisions relating to the manner of issuance of certificate of origin, its presentation by the importing party claiming the benefit, the power to call for retroactive verification of the certificate issued, the power to suspend the benefit of preferential tariff treatment pending verification, are there in the extant notifications.

What CAROTAR seeks to do is to make the importer responsible for doing due diligence while sourcing goods from a free trade partner country. The importer would be expected to substantiate the claim of a preferential rate of duty with documentary proof. Timelines have been prescribed in the rules which should ensure that the interests of legitimate importers are protected.

A question can arise as to whether these new measures are necessary when detections to the tune of only about Rs 1500 crore has been made. This is a specious argument. Plugging loopholes and strengthening the hands of Customs to prevent misuse, can never be a cause of concern for legitimate trade.

There is a need also to review all FTAs. A cost-benefit analysis has to be done. The concerns of exporters and domestic manufacturers are paramount. We need to understand why our exporters have not been able to take advantage of the FTAs; why they are not competitive. We need to understand the impact that preferential imports have on domestic manufacture.

The WTO rules do permit renegotiation; specifically, FTAs permit (for instance Article 9 of the India -Asean FTA) any party, through negotiations and agreement with the other party, to modify or withdraw concessions made; similarly, FTAs permit initiation of safeguard measures in case imports are in such increased quantities so as to cause serious injury to the domestic industry of the importing party.

Liberalization through free trade agreements has an impact on trade flows. Depending on how rules of origin are thereafter implemented, they may promote or restrict trade. If the implementation of the rules of origin is more restrictive than is necessary, they may have protectionist effects and end up acting as trade barriers. Hence Customs should implement CAROTAR with a light touch – never forgetting they are meant only to prevent unscrupulous trade and not throttle legitimate trade.

—Najib Shah is the former chairman of the Central Board of Indirect Taxes & Customs. The views expressed are personal

Read his other columns here

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VIEW: National Anti-Profiteering Authority – a critique

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The National Anti-Profiteering Authority (NAPA), a creature of the Goods & Services Tax (GST) is a unique institution. It was created to ensure benefits of ‘input tax credits availed by any registered person or the reduction in the tax rate have actually resulted in a commensurate reduction in the price of the goods or services or both supplied by him.’

Section 171 of the Central Goods & Services Tax Act, (CGST) which deals with this was controversial- should the government be determining the quantum of profit which a supplier of goods or services can make? Is not a price control mechanism an anachronism?  NAPA came into being in the backdrop of industry voices bordering on the shrill. The genesis of NAPA can be traced to a 2010 study of the Comptroller & Accountant General (CAG) in the context of VAT.

The study suggested that the benefits of abolition of the cascading effect of taxes had not resulted in any reduction of prices. It highlighted the absence of a system to ensure such benefits are being passed on to the consumer. The Government was also aware that Australia, Canada and Malaysia had similar provisions in their VAT laws.

GST was a credit-based tax system with the credit of tax paid at the earlier stage available for discharge of liability created at a later stage. The logical expectation was that there would be a consequential reduction in prices.

Given the huge fiscal gamble which both the Centre and states were taking it was incumbent that government could demonstrate this; the anti-profiteering provision clearly fitted this requirement. It was also important that industry be assured that government would not determine how business is run- the relevant rules gave the authority a life of two years only.

The provision with its emphasis on ‘commensurate’ benefits to be passed appeared innocuous. The challenge was in how this would be determined. After all market forces it is which play a critical role in the pricing of a product. The distinction sought to be made between profit and profiteering was nebulous-with the act at that time not even having a definition of profiteering.

While this was well known to its practitioners, it was only through the Finance (No. 2) Act 2019 that an explanation to the section was introduced defining ‘profiteered’. This definition basically linked the concept to the amount of benefit generated because of reduction in rate of tax on supply of goods or services without any commensurate reduction in the price. Incidentally, the constitutional validity of the very provision of anti-profiteering is under challenge as being violative of Art 19 (1) (G) of the constitution.

NAPA formally began functioning from December 2017 and has done a commendable job. It has ensured that the intent of the government has been conveyed through well-reasoned orders that the benefit reduction in the tax rate needs to be passed on. With the government in the name of rationalisation, reducing GST rates regularly, the work of NAPA has been cut out.

Nearly 150 orders have been passed thus far-including against names which were perceived to be close to the establishment. Thus, in its order in case 16/2020 dated 12.03.2020 it has held that M/s Patanjali Ayurveda Limited has violated the provisions as it had not passed on the benefit of the reduction in the GST rates.

The order determined that an amount of Rs 75.08 crore had been profiteered. Since it was going to be difficult to identify the customers the order directed the company to deposit the money in the Consumer Welfare Fund. And for added measure also directed that the company reduce the prices commensurately for the future.

A Consumer Welfare Fund (similar to what was created under the provisions of the Central Excise Law) has been created under the provisions of GST. The fund is operated by the department of consumer affairs with the objective of ‘providing financial assistance to promote and protect the welfare of the consumers and strengthen the consumer movement in the country’. More than Rs 400 crore has been deposited in the Consumer Welfare Fund thus far in terms of the orders of NAPA. What this will also mean is that there has been a commensurate reduction in prices for the future thus benefiting the consumer.

NAPA’s tenure which was to expire in November 2019 has been given a two-year extension till November 2021 – a reflection that it has gained the confidence of the GST council. However, NAPA should be cognizant of the danger as one prescient state finance minister stated while the matter of extension was being discussed ‘’ that once a monstrosity is created it is bound to be misused by the tax department’. NAPA should rigorously demonstrate a fair-minded approach -and not become a monstrosity.

The GST council should take a serious call if the tenure of NAPA should be extended further. Ideally it should not-and this will in no way be a reflection of the functioning of the Authority but just an acknowledgement that it has done the task entrusted to it well. And a nod also to industry to say that while they are trusted, they would do well to ensure that commensurate benefits are passed without any prodding from the government.

Najib Shah is the former chairman of the Central Board of Indirect Taxes & Customs. The views expressed are personal

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VIEW: The perils of uncleared hazardous cargo

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The recent explosion in hanger 12 at the Port of Beirut which resulted in large scale damage to life and property, has had reverberations across the globe. It was a sharp wake up call to authorities in India with the Central Board of Indirect Taxes & Customs (CBIC) ordering an immediate verification of uncleared hazardous cargo in the ports.

India has 12 major ports and 65 non-major ports handling import, export and transshipment cargo. This is apart from the more than 127 Inland Container Depots (ICD) created as a trade facilitation measure in the hinterland and the 167 Container Freight Station (CFS) which are extended arms of the port. Being at the point of entry and exit, the Customs enforces apart from the Customs Act, a host of other laws including The Manufacture, Storage and Import of Hazardous Chemicals Rules and the Hazardous & Other Wastes (HOW) (Management & Transboundary Movement) Rules, in so far as they relate to import.

Hazardous chemicals have been defined as those which satisfy specified toxicity criteria. Hazardous waste has been defined as ‘any waste which by reason of any of its physical, chemical, reactive, toxic, flammable, explosive or corrosive characteristics causes danger or is likely to cause danger to health or environment whether alone or in contact with other wastes or substances’. These are wide definitions and make the task of identifying hazardous cargo challenging.

The total container traffic handled in 2019 was in excess of 16 million TEU’s (twenty equivalent units) with chemicals the largest single group of commodities in terms of volume. (Incidentally, India’s chemical industry is the sixth-largest in the world.) Given the traffic, and the emphasis on ease of doing business, the Customs have adopted a robust risk management system. Thus, while there is self-assessment, the documentation goes through a risk appraisal and action taken accordingly. Consignments which are deemed to be risky are subject to examination.

Major Customs ports have in-house labs to test and assist in the detection of suspected hazardous goods. Hazardous cargo is either banned (like ozone-depleting substances) or regulated (for instance, ammonium nitrate) -and action initiated. Having detected and detained a hazardous cargo, the greater difficulty is at its disposal. This differs, depending on the hazardous nature from incineration, to disposal in secured landfill by designated agencies. While the accepted norm is that the polluter pays, in very many cases the delinquent importer is not available. Thus, every Indian port has uncleared containers -blocking valuable space and posing a potential danger. It is estimated that there are more than 100000 uncleared containers in the various ports—the numbers of containers of hazardous cargo out of these are not known.

Given the gravity of the issue, the Supreme Court on a writ petition number 657/95 filed by an NGO, constituted a Monitoring Committee. The Committee was tasked to examine uncleared consignments of hazardous cargo in ports to ensure its speedy disposal. The matter was transferred to the National Green Tribunal to monitor and ensure compliance with the rules. The status report filed earlier this year by the Central Pollution Control Board and available at makes interesting reading. There are multifarious regulations under the umbrella Environment Protection Act and nine Ministries/Departments engaged in their implementation. With so many players and consequential diffusion of responsibility, there is a danger of hazardous cargo slipping between the cracks.

The CAG has recently carried out a performance audit of CFS’s and ICD’s. (Report 16/2018). They have highlighted the non-availability of specified demarcated areas and space for the storage of hazardous goods. Given the fact that the ICD’s and CFS’s are normally in/nearer the city limits, uncleared hazardous cargo poses a greater threat. The responsibility lies with the custodian of the goods who should take necessary steps.

The CBIC has recently upgraded the revenue laboratories so essential for the customs officers to identify the nature of the goods. Funds also should be made available for disposal of confiscated/uncleared hazardous cargo. Where the polluter is not available the shipping lines should be made responsible. One possible solution is to insist on pre-shipment certification from the port of origin in all cases of hazardous cargo—an effective solution in the past in the case of metal scrap originating from war-torn countries.

The Beirut blast occurred when an uncleared consignment of ammonium nitrate exploded. It has been said that there was correspondence between the port, the customs and the courts, spread over six years seeking permission for its disposal. Apparently, there was no response—leading ultimately to fatal consequences.

This scenario sounds ominously familiar. Urgent co-ordination between all agencies is called for to ensure all uncleared hazardous consignments are identified and disposed before God forbid any such eventuality.

—Najib Shah is the former chairman of the Central Board of Indirect Taxes & Customs. The views expressed are personal

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Atma Nirbharta: The way forward is change in thinking and approach

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Every celebration, more so if it is of such a momentous event like our 74th Independence Day, which has just gone by, is also a cause for contemplation. From a country with a nominal GDP of lesser than $30 billion in 1947, we have marched on to become an economic powerhouse with a GDP in excess of $3.2 trillion, way above our colonial masters which today is at about $2.75 trillion. It has been a long, exciting and eventful economic journey—from a planning commission to a national institution for transforming India, from a controlled, protectionist economy to an open economy; and having come so far down the globalised road, is there a danger that we are now lurching back to protectionist mode?

The border clashes with China threw the stark reality of the danger of over-reliance on imports—more so on one country with whom we are having a strained relationship with and who could potentially stop their exports and hurt. The Prime Minister in his May 12 address this year to the nation launched the Atma Nirbhar Bharat Abhiyan (Self Reliant India Campaign). and enunciated the five pillars which were to be the basis of the campaign with Economy which ‘brings Quantum Jump rather than Incremental change’ being the main pillar.

At one level this can also be seen as a natural progression of the ‘Make in India ‘call given by the Prime Minister in September 2014; neither of these goals can be faulted. But does this mean turning inwards and stopping the flow of trade? To be fair to the Government, several ministers had clarified that Atma Nirbhar does not mean stopping all imports. But the pitch has been queered by persuasive calls from some industry bodies.

How self-reliant are Indian industries? Electrical equipment, electronic items including critical parts like PCB (printed circuit boards), almost all components of the mobile handset industry, more than 60 percent of medical devices, the solar industry, auto industry, especially the country’s nascent electrical vehicle industry, motor vehicle industry, pharmaceuticals particularly the active pharmaceutical ingredients (API),  specialty chemicals, oil, so essential for the country and gold, that useless metal which is so dear to the average Indian, are all largely imported; the tragedy is that even items like nails, tacks, toys, umbrella’s, footwear, vacuum flasks, tri-cycles, and the like are also heavily imported. China is by far the single largest source for most of the imports—the trade deficit with China alone being about $57 billion. To answer then the query, the short answer is that India is not entirely self-reliant in a whole host of products.

What then is the way forward? Look closely at all non-essential imports, especially those which are manufactured by the SME/MSME sectors. These sectors provide employment and need to be protected. The scrutiny next should be of imports of finished goods—while we would need to continue with imports of raw materials and components/intermediates, wherein there is domestic value addition and employment generation; finished goods, unless critical, should be discouraged. All free trade agreements (FTA) need to be reviewed-unless we can see a corresponding, commensurate benefit for Indian exporters, we should insist on a relook at value addition norms and the commodities under an FTA.

Discouraging imports means the imposition of tariffs, introducing a licensing regime and imposing non-tariff barriers. It also supposes that we have sufficient wherewithal domestically. These steps will necessarily cause pain to the Indian consumer and are regressive. So, all these measures have to be carefully calibrated and monitored. These measures should necessarily be short-term; we cannot afford to give endless protection to the domestic manufacturers and mollycoddle them into complacency and become non-competitive in the global economy. We cannot lapse into an autarky. And in a globalised economy, we should be prepared for similar retaliatory action against our exports.

Obviously, Atma Nirbharta is a process. It will again, to quote the Prime Minister in another context mean a change both in ‘soch (thinking) and approach’. It will mean that the other key pillars of an Atma Nirbhar economy, namely infrastructure and system are also in place. It means looking at why our products and exports are uncompetitive and addressing those issues urgently—labour, freight, electricity, interest rather than attempt to resolve it only by protectionism.

For we should never forget Adam Smith’s now-iconic phrase, “It’s the invisible hand of the market, not the heavy hand of government, that provides us with freedom, security and prosperity.”

—Najib Shah is the former chairman of the Central Board of Indirect Taxes & Customs. The views expressed are personal

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VIEW: The compensation challenge in the GST regime

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The issue of compensating the states for ‘loss’ of revenue due to migration to the Goods & Services Tax (GST) regime has hit the headlines yet again—this time the trigger being the reported statement of the Finance Secretary to the Parliamentary standing committee on finance that the Centre is not in a financial position to compensate.

Compensation to the states for loss of revenue, arising on account of implementation of the GST, for a period of five years was a commitment brought about by the Constitution (one hundred and first amendment) Act 2016. The methodology of calculation was a result of animated discussions spread over the first few meetings of the GST council where proposals ranging from considering an average revenue of 3 years to 10 years were discussed before a consensus was finally arrived at. It was agreed that a projected 14 percent growth rate during the transition period with the base year being the financial year ending March 31, 2016, would be the basis for calculating the ‘loss’. This got translated into the GST (Compensation to States) Act 2017.

What this commitment meant was that compensation would be calculated assuming growth of 14 percent on the base year of 2015-16, and the difference between this figure and the actual revenue of a particular year would be compensated—the point being that the ‘loss ‘is not actual but as a result of the mathematical gymnastics showing 14 percent growth (which incidentally was not achieved by any state)  whereby the Centre was giving the task of compensating’ something which was never in the first place lost.

The 27^th July Press Information Bureau (PIB) report on the quantum of compensation released in 2019-20 makes very interesting reading—compensation has been given to states likes Tripura (Rs 293 crore), Meghalaya ( 157 crore), Bihar ( 5,464 crore), Assam (1,284 crore)—states which were expected to be the beneficiaries of a destination-based tax regime and were never in the reckoning when compensation was being thought off. It was expected that such a mechanism was required for the manufacturing States only—Karnataka, Gujarat, Maharashtra, Tamil Nadu and the like. However, out of the 31 states and Union Territories, all but 5 have been compensated thanks to the very generous mechanism of calculating ‘loss’.

Again, the PIB release reveals that as against an amount of Rs 1.65 lakh crore given as compensation, the compensation cess collected is only Rs. 95,444, leaving a balance of nearly Rs. 70,000 crore which has been met from the balance cess collected in the earlier years, and worse by dipping into the Consolidated Fund of India. Incidentally, the GST (Compensation to States) Act categorically states that all amounts payable to the states shall be paid out of the compensation fund. Given the sharp drop in economic activity, the compensation amount is only going to increase dramatically.

What then are the solutions? Increasing the number of goods on which compensation cess can be imposed, so that there is money available to compensate or increasing GST rates so that the amount to be compensated reduces, are difficult political calls. Another suggestion has been made that the government should borrow to compensate the states. The 8^th GST council meeting had in passing discussed this as a possible solution in the event of a shortfall—this will need to be examined in depth; who will borrow, how will you repay, does it mean extending the cess collection beyond 5 years to repay the borrowing?

The Centre should also explore the possibility of reworking the compensation formula for the years 2020-21 and 2021-22 in close consultation with the GST council. Every force majeure situation permits a renegotiation. The fiscal crises are not just the problem of the Centre—the states do need to chip in. The assumed 14 percent growth rate needs to be reworked to a more realistic rate. This is obviously going to be challenging—the Centre will be seen as reneging on its promise but then again, what are the options available?

The states which have, on the promise of compensation been lulled into revenue complacency, need to be urged to mobilise revenue. We need to plug evasion—more than 3 years after the launch of GST we cannot afford to keep having leakages. The long-awaited simplified return and matching of invoices should be implemented. The audit which in the absence of regular filing of returns has yet to commence should be started without any further delay. This is yet another opportune moment to look closely at expanding the GST coverage—petroleum products, real estate, electricity should be brought within the GST ambit, exemptions should be reduced.

There are no easy answers—the Centre has its task cut out.

—Najib Shah is the former chairman of the Central Board of Indirect Taxes & Customs. The views expressed are personal

Read his other columns here

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VIEW: MOOWR 2019—A stepping stone to move seamlessly from local to global!

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Narasapura, some 50 km away from Bengaluru in Kolar district and identified as one of the 16 national investment and manufacturing zone (NIMZs) districts in the country under the National Manufacturing Policy, has been witnessing a hectic activity of late. The trigger being the revised warehousing regulations (Manufacture and other Operations in Warehouse Regulations 2019—MOOWR 2019) of the Central Board of Indirect Taxes and Customs (CBIC).

In terms of the warehousing provisions, which are simple and easy to comply, capital goods and raw materials can be imported without payment of duty for manufacturing and other operations, to a bonded warehouse facility. The duty is deferred—and where the imported inputs are used for the manufacture of goods exported, the duty, namely the basic customs duty and IGST is exempted and the GST, zero-rated. A single point of approval, common application form, unlimited period of retaining the warehoused goods, facility of importing capital goods needed for the manufacture also duty-free, no geographical restriction as to where to open the manufacturing warehouse, make it a more attractive proposition than other extant schemes.

The bonded warehousing manufacturing facility also falls nicely within the remit of the Prime Minister’s alliterative call ‘be vocal for local’ which has grabbed attention—social media is agog with excitement and nationalistic fervor and calls for boycotting all things Chinese. While the call for buying local is necessary, we should avoid the pitfall of slumping into a protectionist mode; globalisation, is here to stay. The warehousing facility permits India to be part of the global value chain, one of the major arguments for pursuing free trade agreements, without its pitfalls. Goods apart from being permitted to be imported duty-free for further processing or manufacture for export can also be cleared for domestic consumption-on payment of all appropriate duties, thus ensuring Indian manufacturers have the necessary protection. And being located within the country it provides employment opportunities.

A Taiwanese contract manufacturing giant who opted for this facility to manufacture in a bonded warehouse received the licence from the Customs authorities in 4 working days. They have invested in excess of Rs 2,800 crore in its 43-acre manufacturing facility in Narasapura for the manufacture of iPhone SE with an export target of 3 million units in 2020-21. With more than 650 employees and plans to ramp up to 10,000, Narasapura (meaning praiseworthy dwelling place) is living up to its name. MOOWR has indeed moved the business environment and should be a much-needed stepping stone to move seamlessly from local to global!

—Najib Shah is the former chairman of the Central Board of Indirect Taxes & Customs. The views expressed are personal

Read his other columns here

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Kerala gold smuggling: The obsession with yellow metal

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The recent seizure of about 30 kilograms of gold by the Customs Department in Thiruvananthapuram airport from baggage declared as diplomatic, has again thrown into sharp focus the insatiable appetite for gold in India.

With average annual licit import of gold in the region of about 650 tonne for the last decade (we had a high of about 975 tonne in 2011), the Reserve Bank of India (RBI) holding about 618 tonne and a further estimated 20,000 tonne of gold within the country in the temples and private possession of individuals, one would think we have had enough of this metal.

But our fascination with gold as an object of desire continues unabated. Its lustre and malleability make it the metal of choice for jewellery, an integral part of our social mores; people also hoard it for its durable value as a hedge against inflation and uncertain economic times.

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Gold has a basic customs duty (BCD) rate of 12.5 percent; with an Integrated Goods & Services Tax (IGST) rate of 3 percent, the duty at the time of importing works up to 15.5 percent. The high BCD rate was not so much to generate revenue but more as a trade deficit saving measure by making import unattractive. The corollary of this was, given the demand and the rising gold prices, smuggling became an attractive preposition with handsome profits of more than Rs 5 lakh to be made on one kg.

Gone are the days of landings in the coast as gold is now smuggled through the land routes from Myanmar, Nepal and Bhutan, through air passengers and through sea and air cargo.

While the Directorate of Revenue Intelligence (DRI) and the Customs Department have had significant detections and thwarted many such attempts, the canny smuggler also adopted the diplomatic baggage route. The immunity and privileges of diplomats are governed by the Vienna Convention on Diplomatic Relations. Thus, the premises of a Mission are ‘inviolable’; private residences of diplomats also being so. Diplomatic bags are not to be opened and goods imported by a diplomat are granted exemption from customs duties, be they meant for official or personal use.

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A mission informs the ministry of external affairs( MEA) of the items in it, or a diplomat attached to it, seeks to import and the MEA accordingly informs the customs department. All privileges are extended and goods exempt from inspection and payment of taxes. This has unfortunately been a provision abused at times- contraband also tends to get imported in the guise of diplomatic baggage.

The present case involving diplomatic cargo has seen the Mission concerned cooperating (Unlike the piquant situation which arises when the diplomat is involved and refuses to cooperate) with the Customs Department and permitting the examination of the diplomatic cargo, it appears that the diplomatic cargo which came in from UAE had been tampered with and gold concealed within. While this raises a lot of questions, obviously investigations will help unravel the truth.

A larger question which arises is whether the import duty on gold which provides the necessary incentive for smuggling should be reduced. Over the last decade from complete restriction on the import of gold, to tariffs which in 2011 was Rs 300 per 10 gram, to the present 12.5 percent BCD rate, has been a long journey.

During this period the value of gold has increased by nearly 150 percent .Given the demand for gold, the arbitrage caused by higher tariffs, the pressure it puts on enforcement to stop smuggling, the money which smuggling generates which can be used for nefarious activities detrimental to the country, perhaps there is a case for a look at the present tariff structure of gold. This will mean some loss of revenue, but will be more than offset by the reduction in collateral damage which generation of proceeds of smuggling creates.

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People also need to be weaned out of their obsession with gold. The RBI’s sovereign gold bonds is one step forward. Greater awareness among the younger generation that this metal is just another metal will ultimately be the answer.

Najib Shah is chairman (retired) of Central Board of Indirect Taxes & Customs (CBIC)

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow