Causes of Smuggling
By Dr. Rajendra Shrestha and Dr. Puspa Kandel
Smuggling is rampant in Nepal, says everyone whether he is a government bureaucrat, politician, journalist, teacher or an ordinary citizen. But how rampant? An attempt was made recently by the writers of this article with support from FNCCI to assess the scale of smuggling in the country and the findings are mind-boggling.
Unauthorised import as per government rules is equivalent to smuggling. If goods are imported without paying custom duties or using an unauthorised route or misreporting the route, it is called smuggling. Also the goods carried without customs authorisation document are defined as smuggled goods. The rules says if smuggling is detected the goods will be seized and fines equivalent to the value of the smuggled goods or imprisonment of up to five years or both are imposed on the smuggler. Also the vehicle's owner and the driver used to smuggle the goods are liable to penalty. The vehicle is seized and the owner sent to the prison for up to one year, while the driver can get a six-month sentence. If the driver has committed the crime without the knowledge of the vehicle owner, he could face either a prison sentence of up to one year or a fine of up to Rs. 1,000 or both. Those who have encouraged smuggling face a fine of up to Rs. 500 or six months in jail or both.
The Department of Customs and its offices, Revenue Investigation Department and its field offices, Armed Police Force for boarder patrolling, local police and Chief District Office are specified as the state agencies responsible for controlling smuggling.
Goods prohibited for import into Nepal are opium, morphine, alcohol having more than 60 per cent of spirit (except those to be used as raw materials in the alcoholic beverage industry), arms and ammunitions other than those permitted by government, equipment related to communications (such as walki-talkie, wireless and other similar equipment), valuable metals (including jewels except those permitted under Jhiti-gunta provision), beef, plastic wastages and recycled plastic items, environmentally harmful certain coloring items, reconditioned or already used vehicles (except those permitted by the government), worn out clothes and poppy seeds (in more than the permitted quantity).
After a month-long study based on both primary and secondary information, we came up with the findings given below.
The findings:
1. Informal and unauthorised imports are around 38.9 per cent of the formal imports as per our field survey. This figure is 42.86 per cent as shown by national accounts. One earlier study had estimated it to be 34 per cent.
2. The customs revenue loss due to such imports ranges from Rs. 1,670.19 million to Rs. 3,674.42 million under different assumptions whereas it ranges from Rs. 7,282.0 million to Rs. 9,606.9 million in the case of total revenue.
3. Most of the informal and unauthorised import from India is through the customs point itself. A considerable number of persons enter Nepal with goods purchased in India without paying the customs. A huge number of persons both in Nepal and India earn their livelihood through the unauthorised activity of carrying goods from India to Nepal.
4. A significant part of informal import is covered by the goods intended for business purpose. The goods so carried are hoarded in the city area of the customs point and sent to next market later on.
5. Informal and unauthorised import is closely related to formal import. Goods carried through unauthorised and informal channels are mixed with formally imported goods and transferred to other areas. Since Birgunj is the major point for formal trade, it is also the major point for the informal and unauthorised imports.
6. Majority of the items which come under informal and unauthorised trade are those which are subsidised or banned in India to have commercial transaction and export, or carry high tariff in Nepal. These items include fertilizers, sugar, cotton garments, hardware, tobacco items, cosmetics, rice etc.
7. There is lack of cooperation and coordination between different Nepali oversight agencies as well as between Nepali and Indian administration in controlling the informal and unauthorised import.
8. People psychologically believe that goods in India are cheaper than in Nepal. So, people from Nepali border cities buy most of the household items from India. Goods imported in Nepal under DRP are cheaper in Nepal than India. But Nepalis are found going across to India to buy such goods.
9. Many people are running their livelihood by smuggling. More Indians than Nepalis appear to be engaged in carrying smuggled goods. From the interaction with local people and carriers, it was found that there are around 500 carriers in Bhairahawa and around, 7,000 carriers in Birgunj and around 500 carriers in Biratnagar and around who transport goods from India to Nepal through or beyond the customs point.
10. Government's tariff reduction policy has a negligible effect on smuggling. It means, one of the reasons of smuggling is procedural complication in formal route. It is followed by the intention to avoid the tax net altogether. That may be the reason why even those items are smuggled in which there is no customs duty for import into Nepal.
11. There is considerable extent of undervaluation and misreporting in customs point. A significant amount of revenue is evaded through this.
12. One customs declaration form or VAT bill is used for more than two times to carry the smuggled goods to other markets by the smugglers.
Some Other Interesting Points Noted During the Study:
During the interaction with the respondents of various sectors, the researchers recorded a number of interesting observations. Some of them were:
1. Huge numbers of people enter into Nepal each day with considerable quantity of goods purchased in India. In the three customs point Bhairahawa, Birgunj and Biratnagar, their number is around 3,000, 7,500 and 2,500 respectively. They bring in goods worth millions of rupees each day without paying customs. The observation of earlier study that "As the border approaches closer, more and more people are involved in transporting goods across the border. In fact in some border districts … nearly four fifths of the local population reportedly depend on smuggling", is still valid.
2. Also the items which can be imported free of customs duty are smuggled from India. This is mainly because though such items do not attract customs duty they attract certain other taxes (e.g. local development fee). Moreover, the importers want to avoid the tax net and there are many procedural complications in customs point.
3. When the authorities control a smuggling route tightly, the smugglers use another route to carry the goods. The Indian goods in Kathmandu are brought even via Pokhara and Trishuli.
4. Since, the cost of making long distance phone call is cheaper in India than in Nepal, people go there to make phone calls to their relatives in India and abroad and while returning home they bring Indian goods without paying customs duty.
5. Sometime the auctioned goods by customs are purchased at a higher price than the market rate. This is done to mix the smuggled goods with the auctioned goods.
6. The involvement of revenue police is different in different cities. In Bhairahawa, armed police does not check the travelers' bags near customs point. In Birgunj, the checking by armed police (within 50 metres of customs point) is heavier than that by customs persons. In Biratnagar, armed police and customs person stand at the same point. There the armed police open travellers' bags and the customs official observes the goods.
7. Also handicapped people are involved in the informal import. Over 100 such persons in both Bhairahawa and Birgunj have a daily job of carrying the goods from India to Nepal using rickshaws. They carry cement in Bhairahawa while they carry cardboard papers in Birgunj.
The Study Methodology
The primary data were collected using various instruments such as a random check of person's bags and baggage who passed through the customs points during the field survey, carriers involved in transporting goods from India to Nepal, interview with local informal traders, authorities of the local chambers of commerce, local administrative and customs officials etc. The secondary data were collected from various published and unpublished sources.
For the purpose of the study, goods imported via the customs point without payment of customs were taken as informal import and goods imported through routes beyond the customs point were taken as unauthorised import. Goods prohibited by the Nepal law were not covered in the study. The three major customs points Birgunj, Bhairahawa and Biratnagar were selected for study in terms of volume of formal imports. A random check of the bags of the persons coming from India and passing through customs points was done to collect information on the value of goods, and the nature and types of goods brought into Nepal. The value of the goods brought by the persons were attributed, wherever possible by observing the bill or asking the person about the price of purchased goods. If it was not possible to find out the value by observing the bills or by asking the person, the enumerator himself calculated the estimated value. To arrive at the total value of informal imports from customs points, a 10 per cent addition was made to the total value of such imports observed by the enumerators assuming that more movement of persons with such packages will take place during festivals like Dashain, Tihar, Holi, Chhath etc.
The information collected from various customs points were aggregated and linked with formal imports from India to get an estimate for all Nepal assuming that formal imports will also lead to informal and unauthorised imports due to the facilities in the places where heavy formal imports take place. |
Policy Prescription
On the basis of the study, the following recommendations are made:
1. There is a need for some mechanism to regulate the movement of the people from India to Nepal. It may be system of registering the people going to India and coming into Nepal. Introducing a minimum amount of fee (like Rs. 5 to 10) on the passengers carrying goods should be considered. This restriction would collect a considerable amount of revenue.
2. There should be weighing and screening machine in each and every customs point. Right now, no such machine is installed even at the Birgunj customs point.
3. As a long run policy, there should be no residential area within one kilometer of the border on both sides. Dense residence near the border has made it easy to smuggle the goods. The government should think of erecting barbed wire fencing of certain length on either side from the customs point along the border.
4. The business community needs to communicate to the people about the prices of goods that are cheaper in Nepal than in India. This will overcome the belief of the people that every item is cheaper in India than in Nepal.
5. The decrease in customs rate only is not sufficient to reduce smuggling and informal trade. Also the VAT, income tax and other taxes need to be decreased. For smuggled goods the carrying cost is estimated to be around 8 per cent of the value of the goods which is a lot less than the tax rates (13 per cent VAT, 1.5 per cent special fee and 1.5 per cent as local development fee). This induces illegal and unethical import.
6. Inland Revenue Department and private sector agencies like the FNCCI should also be effective to introduce billing system in the market. The customs office alone is not able to control the underground economy. There should be coordination between IRO, civil society organisations and customs offices.
7. The VAT bills should be marked whenever the goods pass the revenue checkpoints. It has been the weakest point through which goods are passed from border areas to the next market.
8. There needs to be effective coordination between government agencies like customs office, armed police force, district administration, district police and revenue investigation offices. Also there is a need for effective coordination between Nepali and Indian customs offices.
9. A comprehensive study is needed to cover all the aspects of informal and unauthorized trade covering export, under valuation in import and geographical area from Pashupatinagar to Darchula. The government should initiate this as soon as possible if it has to launch correct commercial and revenue policy in the future.
(Shrestha and Kandel are Readers in Faculty of Management, Tribhuvan University)
