AG recommends restriction on clearance of imported goods: serious irregularities unearthed in PACC system

Auditor General of Pakistan (AG) has strongly recommended the Federal Board of Revenue (FBR) to restrict the clearance of imported consignments to registered firms, private and public companies and multinational companies to check evasion of duties and taxes under the Pakistan Customs Computerised System (PACCs).
A special study report of the AG office on PACCs (2008-2009) unearthed serious irregularities in the project with necessary recommendations to improve the whole system. According to recommendations of the AG office, the Self Assessment System should be restricted to registered firms, private and public companies and multi-national companies etc.
It should be properly linked with 'Post Release Verification' and 'Post Clearance Audit and Inspection' of imported goods. This facility should not be extended to individual users and commercial importers, as there were evidences of revenue leakage caused by them on regular basis. The AG office recommended that the FBR should take stern action for encashment of securities and finalise adjudication of contravention cases for recovery of adjudicated amount of duties and taxes.
The AG office detected serious lapses committed by the management during the execution of the project which indicated that planning and estimation was not made with due diligence. The entire items of civil works provided in the approved Bill of Quantities/Engineer's estimate were either increased or decreased during execution of works.
The quantum of work valuing Rs 9.780 million was increased and the quantum of work valuing Rs 10.490 million was decreased. The quantum of work valuing Rs 7.069 million included in approved Bill of Quantities/Estimate was not actually executed at site and the additional quantum of work valuing Rs 6.018 million was executed at site for which no provision was made in the approved Bill of Quantities/Estimate.
The overall cost of civil work was increased by 20 percent as the expenditure of Rs 28.696 million was incurred against the provision of Rs 24.000 million provided in PC-I without any change in design or specification of the work. The overall cost of hardware was increased by 825 percent as the expenditure of Rs 67.524 million was incurred on the purchase of hardware against the provision of Rs 7.300 million made in the PC-I.
The cost of generator was also increased by 70 percent as the expenditure of Rs 5.089 million was incurred on its purchase against the approved estimated cost of Rs 3.000 million provided in PC-I. An expenditure of Rs 2.799 million was incurred on telephone and local networking whereas no provision was made for it in the PC-I.
These facts indicates the poor estimation and mis-planning of the project management which resulted into incurrence of Rs 61.108 million (111 percent) over and above the sanctioned amount of Rs 55.000 million provided in PC-I. No provision for annual recurring expenditure was made in the PC-I.
The project running expenditure was met from the government's budgetary allocation. However, the public money to the tune of Rs 141.072 million utilised during the years 2005-06 to 2007-08 for operating the system has also been examined in the light of prescribed rules and regulations issued from time to time.
The AG office further found that a Self-Assessment System properly linked with Risk Management System, Post Release Verification and Post Clearance Audit and Inspection of imported goods was required to be developed and introduced.
The PACCs introduced a Self-Assessment System subject to Risk Management System for automated clearance of import/export cargo by accepting the importer's declaration without any checking/verification/approval from Customs and government dues were paid accordingly. The "Post Release Verification" of documents and "Post Clearance Audit" of all clearances from green, yellow and red channels had not been started up to June 2008. Absence of requisite features provides opportunity to the importer to mis-declare resulting in loss to government exchequer.
Tax node system (TNS): In tax node system, Sales Tax Registration Numbers (STRNs) were required to be uploaded in PACCs from database maintained in the Sales Tax Collectorates, as well as in FBR. As the Tax Node System had not been developed by the vendor in PACCs Project up till now, therefore, sales tax on value addition could neither be assessed nor collected from the commercial importers in compliance of government notifications issued during 2005-06 & 2006-07 which caused huge loss of revenue.
The non-development of TNS makes architecture of system inflexible to cater for new changes in taxation. About the Disaster Recovery Site, the AG office opined that the backup and Disaster Recovery Site in case of any mishap and unforeseen circumstances was also required to be developed as per contractual requirements and timelines given in contract and inception reports.
However, the requisite disaster recovery site had not yet been developed. The absence of Disaster Recovery Site could put the system in security threat and could create un-certainty. The AG office further disclosed that the online connectivity with regulatory authorities and departments was one of the dominant features of PACCs, which had not developed.
For example, online connectivity has yet not been developed as with the Large Taxpayer Units (LTUs) and Regional Tax Offices (RTOs) for verification of DIRE approvals and exemptions of Advance Income Tax etc; Director General Valuation and Post Clearance Audit (PCA) for application of valuation rulings issued for the assessment of customs duty; National Tariff Commission for imposition of Anti-dumping duty on import of specific items and banks for verification of deposit and genuineness of letter of credit, and in case of exports, genuineness of Form "E" etc.
The PACCs has no online connectivity with the Engineering Development Board for deletion programmes and regulatory authorities and bodies like Ministries regulating the imports of specific items and issue necessary permissions and certificates to importers etc.
The AG office has further found that the PACCs had not yet been rolled out to the entire custom ports, throughout the country despite the completion of pilot project in March 2006. Thus the ultimate/desired benefits have not yet been achieved.
It has been detected that the valuation module was required to be developed to determine minimum value of identical/similar goods for valuation of imported goods based on previous data, and to ensure proper valuation under section 25 of Customs Act, 1969. The absence of valuation module caused in permanent revenue leakage of Rs 3.195 million in certain illustrative cases by accepting declared values on very lower side by the system.
Adjudication module lacks proper monitoring of adjudication process to ensure the completion of adjudication of contravention cases within prescribed period under law. There are 331 contravention cases awaiting decision since May 2007.
The delay in adjudication of contravention cases has also been observed in 28 cases. Transhipment module of PACCs was not capable of reconciling the transhipment consignments at sending and receiving ports due to absence of online link of mother port with the destination ports.
Further, bonded carriers were not linked with the system to ensure the receipts of bonded goods at destination warehouses under Safe Transportation Scheme. The warehousing module of PACCs was also not capable of monitoring the ex-bonding of bonded goods and imposing penal surcharge on clearance of bonded goods beyond this stipulated period at the time of ex-bonding.
Goods were in-bonded both with PACCs and One-Customs, without co-ordination. Thus, allowed limits of in-bonding may easily be crossed and monitoring of ex-bonding of bonded goods become difficult. Bonded Carriers under Safe Transportation Scheme were not linked with the system causing problems in ensuring receipts of bonded goods at warehouses.
The AG office recommended that the PC-I of PACCs project be revised and get approved by the competent authority. The extra/due care should be made at the time of planning and preparation of estimates of the project.
The Online connectivity with all regulatory authorities/bodies (remote internal/external users) should be fully developed to implement the PACCs completely/effectively all over the country for covering full spectrum of customs activities. The proprietary rights and source code of PACCs system software should be obtained from the software vendor.
The software vendor had not developed three modules ie Tax Node System, Disaster Recovery Site and Online Connectivity, though it was his contractual obligations. The same should be got developed from him as the contractual amount had already been paid, the AG office added.