'Make in India' and Customs

Muhammad Zulfi
Posted October 17, 2014

Effective customs administration is crucial for successful implementation of ‘Make in India’.

The 'Make in India' campaign, launched by Prime Minister Narendra Modi in the presence of global and domestic CEOs in New Delhi in September this year, is aimed at making India a manufacturing hub. But what about hurdles in imports and exports and Customs process which is cumbersome and trade unfriendly. According to the Tax Administration Reform Commission’s second report, “Indian customs lack confidence in administering a document-based or digital footprint based controls; hence they go by the dated process of physical control for collection of duty.” Is India prepared for easing its trade unfriendly customs process like its competitors have done? Surprisingly, on the ‘Make in India’ website the Customs find no mention. A Bureaucracy Today report.

By Muhammad Zulqarnain Zulfi

The ‘Make in India’ programme includes major new initiatives designed to facilitate investment, foster innovation, protect intellectual property, and build the best-in-class manufacturing infrastructure. Nevertheless, India's ‘Make in India’ is constantly being compared with China's Made in China campaign. The dragon launched the campaign on the same day as India sought to retain its manufacturing prowess. But what about the age-old and stagnant laws of the Customs process which always tend to drive away investors from India? Has the Narendra Modi-led Government taken these points into consideration? Definitely not! It is evident from the ‘Make in India’ website where Customs updation or improvisation which include the hassle-free process finds no mention. Though strange but true is the fact that the TARC submitted the first report on June 20 this year but nothing has been done till date. Now the TARC has again come up with a new report in a two-month gap with almost similar recommendations focused on the Customs process.

The TARC’s new report has given eight recommendations after consultations with the stakeholders and yet again the same question arises whether they will be implemented or the ‘Make in India’ campaign will result in failure at the end of the day due to cumbersome custom laws and procedures.

The need to raise the global competitiveness of the Indian manufacturing sector is imperative for the country’s long-term growth. The National Manufacturing Policy is a comprehensive and significant initiative taken by the Government as it addresses the areas of regulation, infrastructure, skill development, technology, availability of finance, exit mechanism and other pertinent factors related to India’s growth but what about easing the import - export and customs process?

The Dr Parthasarthy Shome-headed Tax Administration Reform Commission submitted its second report to Finance Minister Arun Jaitley last month. The report focuses on capacity building of the Customs Department and on Data & Information Exchange.

The Commission notes that in the face of the increasingly globalized world, the Customs today faces multidimensional challenges.

Globalization, while affording chances for economic growth also provides opportunities for trans-border crimes. The Customs, being at the frontline of the border, has to play an important role in India’s physical and economic security. At the same time, it has to facilitate legitimate trade so as not to impair the country’s competitiveness and attractiveness as an investment destination. The steady growth of international trade is leading to higher volumes and the emerging trends such as an increase in regional trading arrangements, e-commerce and changing supply chain dynamics are adding to the challenges faced by the Customs. These trends necessitate the creation of new capacities in diverse areas without necessarily increasing human resources. The demand on the Customs, therefore, is to do more with less.

According to the report, to face this challenge, Indian Customs would need to move away from its traditional administrative approach towards a more proactive and wholesome compliance management approach. They would need to transform their governance, change their control paradigm and become a highly technology-driven organisation with a robust and reliable risk management based approach to governance. They will have to move away from excessive revenue orientation to be able to fulfil their mandate in relation to areas such as supply chain security, effective implementation of their responsibilities in trade related areas, IPRs, OGA requirements, etc., and play a much more proactive and prominent role in trade facilitation. Hence their compliance philosophy, says the Commission, needs to be oriented towards promotion of voluntary compliance based on a trust-based approach towards the compliant trade coupled with very effective enforcement against noncompliance. This will require large investments in capacity building in human capital as well as physical and technological infrastructure. Trade facilitation in particular will need capacity building not only in Customs but also in other regulatory agencies. By virtue of their strong background in cargo processing and high international alignment of customs processes, Customs need to be given a lead role to achieve inter-agency harmonisation and coordination in this area.

To enable the transformative changes that are required, the Government needs to empower and enable the Customs by according the CBEC functional and financial autonomy as recommended in the TARC’s first report, subject, of course, to the restructuring and accountability as also recommended in that report.

In its second report, the TARC makes the following recommendations with regard to capacity building of the Customs Department:

Governance

• The CBEC should immediately commence work on the development of a Customs vision and strategic plan, setting out the strategic goals and the implementation strategy that will ensure its place among “best in class” Customs administrations. The strategy must enhance customer focus and proactively promote voluntary compliance and should include measures like customer guidance in the form of self-assessment check-lists, manuals containing standard operating procedures and a fully updated, user-friendly and reliable website. Active guidance should be provided to importers through lucid and detailed publications furnishing detailed guidance about the valuation regime.

• The control paradigm must shift from high levels of pre-clearance interdictions to intelligence lead, risk-based interventions by exception, supply chain management and post-clearance audit.

• The Risk Management Division should be strengthened. The risk management module for container selection needs to be integrated with the CBEC's other operational systems. The CBEC should progressively move away from a local approach in risk management to a strong national approach and move towards setting up a national targeting facility such as the ones set up in the US, Australia and New Zealand.

Customs core clearance processes

• The CBEC should revamp its core clearance process and aim at aligning with the best international practices to ensure that cargo moves seamlessly through Indian ports and airports and build substantial capacities in the area of post-clearance audit. It should abandon the “gatekeeper” approach underlying the current control mechanism as it is ineffective and promotes rent seeking.

• The CBEC should move to a model of centralised assessment for compliance verification, adopting the centres of excellence concept. There needs to be a thrust on full digitisation of the processes, dematerialisation of documents and documents management system.

• The regime of advance filing needs to be effectively implemented ensuring high data quality.

• The development of an advanced passenger information system (APIS) incorporating modern identity management and entity analytics solutions should be fast-tracked.

Enforcement and anti-smuggling

• Greater capacity needs to be built in the Customs to counter trade-based money laundering by greater use of analytics and strong co-ordination among the DRI, the RMD, the FIU and the Directorate of Enforcement.

• To motivate officers in anti-smuggling operations in remote areas, a package of special facilities should be developed.

• Specialised training facilities for anti-smuggling operations, tailored to specific requirements, should be created.

RTAs and trade remedies

• A Directorate of Origin should be set up in the CBEC to handle RTA-related issues. It should develop specialised expertise on rules of origin and related areas.

• The posting of Customs officers in the Directorate General of Anti-dumping will ensure enhanced co-ordination and better management of anti-dumping measures.

International cooperation

• A Directorate of International Co-operation should be created and adequately staffed in view of the high importance of international co-operation in Customs functioning. A clear framework needs to be created for international data exchange and dedicated resources assigned.

• In consultation with the relevant ministries, the CBEC should initiate a programme for cross-border cooperation with India's neighbours, which can lead to joint border control as envisaged in the Revised Kyoto Convention. This can begin with an institutionalised arrangement for regular border meetings between designated Customs officials to deal with day-to-day operational issues that create difficulties for trade.

Capacity building

The CBEC needs to revisit its transfer policy that presently prevents specialisation, dilutes accountability and affects its performance. It needs to address the issue of people development in a properly constructed competency framework.

• Urgent steps are required for bridging the skill gap of Groups B and C officials through effective training and competency building.

• The NACEN needs to substantially upgrade its curricula and training methodology with a greater infusion of technology and a widening of its training coverage. It will also have to build capacity for delivery of training at all levels in emerging areas of Customs administration.

‘Made in China’ vs ‘Make in India’

This debate is not just about the Mangalyaan. It is also about the timing of the ‘Made in China’ programme. It’s also about the timing of China’s PLA incursion in the Chumar sector. It’s also about Chinese President Xi Jinping’s order to withdraw forces from Chumar. Moreover, it also is related to the non-implementation of the order. It is about the mainstay of the ‘Make in India’ programme. It probably can be summed up by saying that it is all about the way things went between Prime Minister Modi and Xi during their recent meeting in New Delhi.

Curiously the Chinese President matched the timing of the ‘Made in China’ programme with Modi’s global launch of ‘Make in India’ project. Equally interesting is the fact that at a time when Modi reached out to global players to partner India’s growth story, China’s new move aimed at prompt technical improvement of companies, especially the innovation of small and medium-sized enterprises, which in the last three decades propelled it to become the world’s second largest economy and made it a powerhouse of the manufacturing industry. Is China afraid of what Modi terms 3D – Democracy, Demography and Demand (an ever rising consumer market), which is the hallmark of India?

“The Chinese Cabinet asked Government organs to implement the new measures as soon as possible to arm ‘Made in China’ with advanced technology and equipment, encouraging more competitive products with high added value,” a leading Indian daily reported.

Interestingly China’s Global Times published a special editorial, ‘India’s Mars success boosts space research’. It talked about‘rhetoric’ in Indian social media circles talking about the success of Mangalyaan which is pouring salt into China’s wounds. It further goes on to say – “India’s space exploration endeavour, against its prevailing social conditions, should be reflected upon by Chinese people. China’s space programme and the relevance to its social development level were subjected to intensive Western public scrutiny, but the West takes China’s competitiveness in space seriously now. India reminds us of the importance of taking the first step.”

So the Chinese Government-controlled media finds it important to address the issues discussed in Indian social media circles. And equally important is the fact that the PLA withdrawal from sovereign Indian soil is going to finish on September 30, the day Prime Minister Modi’s US visit comes to an end.

India and global trends

The impression of there being a large gap between the current state of customs administration in India and international best practices is reinforced by some of the key feedbacks the TARC got from consultations with various stakeholders.

According to its report, the Indian Customs lacks confidence in administering a document-based or digital footprint-based control; hence they go by the dated process of physical control for the collection of duty.

The TARC report further notes that though there has been an improvement in terms of quick release under programmes like the ACP and AEO, there is a high degree of unpredictability in the release processes and uneven quality in performance across different formations. Trade facilitation is not considered an important action point by the Indian Customs. Each forward step is often followed by a backward step – resulting in the Indian Customs border being an unpredictable element in the global supply chain. Also, the approach is not very taxpayer-friendly, particularly at frontline levels, and the customs is widely perceived to be adversarial in attitude and lacking in a positive and helpful approach.

The biggest point to worry is that the present Customs policy in India lacks a proactive approach in issuing clarifications on doubtful or contentious issues. This leads to lack of clarity and consistency and avoidable disputes.

The report clearly states: “Customs are also not regarded as being responsive to emerging needs and opportunities for industrial growth. For example, although the country has the potential to be a choice destination for exhibitions, seminars or other international events, its realisation is inhibited by the discretionary nature of controls on temporary imports and inconsistent practices. India is widely considered a temporary import unfriendly country. Some of the notifications issued in this regard were written in 1994 and 1995 and do not seem to have been reviewed to suit contemporary needs.”

Comments 1

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Shaheen S Dhanji
Oct 19, 2014
Oct 19, 2014

Dear Aryan,

Thank you for sharing your thoughts ! Certainly, I agree with your post.

Keep it up.