We share the suspicions of the Financial Transactions Report and Analysis Centre (PPATK) and Coordinating Political, Legal and Security Affairs Minister Mahfud MD that the method of falsifying HS codes, which was intended to avoid paying taxes and duties on gold imports, could not have been possible without the collusion of individuals in the Customs Office.

How indeed could the HS codes been changed without involving customs officers? This is because in the country of origin, the produce was recorded as semifinished gold, which would be subject to import duties.

We were painfully surprised by the revelation of the suspected fraud over the last few weeks. We thought that the Customs Office had improved its competence and integrity.

We still remember clearly how authoritarian president Soeharto, a very nationalist leader, took a bold move against the customs service in 1985: He was so fed up with the corruption, inefficiency and competence within the DGCE that he stripped it of its import inspection and clearance authority and transferred that mandate to Geneva-based Société Générale de Surveillance (SGS) for more than 10 years.

Soon after regaining its inspection and clearance authority in 1997, the DGCE pledged to clean house and improve its efficiency and competence.

But it seems that the Customs Office simply reverted to its “business as usual” mode, as indicated by the incidents of falsified HS codes that allegedly took place between 2016 and 2019. And this malfeasance was apparently caught by Geneva-based Transparency International (TI) while conducting a survey for its annual Corruption Perceptions Index (CPI).

TI lowered Indonesia’s score in the 2022 CPI by four points to 34, from 38 in 2021, on a scale from 0 for very corrupt to 100 for very clean. It was the biggest decline in 25 years, and ranked Indonesia 110th out of the 180 countries surveyed.

“I have clarified the report with Transparency International, and they said one of the main reasons for the fall in the score was corruption within the directorates general of taxes and of customs and excise,” Mahfud recently told the House of Representatives in a special hearing.

The latest scandal involving the importation of gold bars is another glaring example of the urgent need for an electronic invoicing system in Indonesia’s cross-border trade, something that many businessmen have been recommending since early last year.

In the latest alleged fraud, it is understood that gold was listed under “other semimanufactured forms” with the tariff code 7108.13.00 and 5 percent duty and then imported from Singapore. When it was submitted to the DGCE, the export invoice had been altered so the gold appeared under the heading “lumps, ingots or cast bars” with the tariff code 7108.12.10 and 0 percent duty.

In this case, it appeared that the customs service did not actually inspect the physical form of the gold.

Had a cross-border electronic invoicing system been in place, this fraud could not have occurred. Under this system that has been proposed to the Finance Ministry, as confirmed by business sources with knowledge about the matter, a foreign exporter must complete export invoices in real time on a platform that belongs to and is operated by the Indonesian government. The completed export invoice is then immediately shared with not only the Directorate General of Taxes and Bank Indonesia, but also other relevant fiscal agencies. There will therefore be no opportunity for an importer to falsify the original description of the goods and thereby change the tariff code and the amount of duty payable.

The most important feature of the proposed system is that the invoices will be not only digital, but also shared in an integrated system. The lack of integration between the financial agencies is the weakness of the current system.

The Finance Ministry need not look any further than India for a model on the seamless introduction of electronic invoicing. In December 2019, the Indian tax authority, the Goods and Services Tax Council (GSTC), approved the gradual implementation of business-to-business (B2B) electronic invoicing through the Goods and Services Tax (GST) System. Essentially, the GST’s e-invoice system introduces a process that authenticates electronically generated invoices through the GSTC’s reporting platform.

As part of Prime Minister Narendra Modi government’s “Digital India” campaign, this was a sweeping change to India’s tax system that enabled it to shift from a convoluted to a homogenous tax system. As the new e-invoice system gradually gained acceptance with the private sector, it was rolled out in phases. In the sixth phase to be adopted this August, the system will be applied to all businesses with an annual turnover of over $600,000.

India already applies e-invoicing to cross-border exports, and it can be assumed that imports will eventually be included. Large accounting firms have described the system as a welcome move for transforming the Indian economy into a digital and transparent system with real-time reporting and secure records retention.

As the case of the imported gold bars is now the top priority of the Money Laundering Prevention and Eradication Task Force (TPPU), Mahfud should make a strong recommendation to the finance minister to adopt an integrated and transparent system like cross border e-invoicing to avoid any recurrent incidents of this type of fraud.

Malfeasance within the Customs Office causes far-reaching harm to the economy, and especially international trade. Aside from resulting in losses to the state, customs violations also disrupt the domestic market, because foreign goods on which much lower duties and taxes were paid than those mandated by law create unfair competition against domestic products.

There will never be fair trade without an efficient, fair and clean customs service.

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The writer is senior editor at The Jakarta Post.