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October 30, 1997


Hackers crack customs system

Software exporters use ingenious methods to save
on duties by exploiting procedural short-circuits.

The finance ministry wants the commerce ministry to put a cap on the value of CD-ROMs that can be exported.

Strange! After all, why should the government want to put curbs on exporters who are earning some much-needed foreign exchange?

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But the finance ministry's proposal is not that weird when you take a closer look at the goings on in the customs department:

There is a 'duty entitlement passbook scheme', or the DEPB, which allows exporters 20 per cent credit. In other words, if the trader exports Rs 100,000 worth of goods, she can import goods costing Rs 20,000 without attracting any duty.

Now some exporters of CD-ROMs, who can avail of the DEPB concession, are overvaluing the cost of the software on the disks, thus gaining substantially more credit for importing goods without paying duty!

It is almost impossible to catch them at the overvaluation trick because it is very difficult to put a price on software. There have been instances where exporters have valued their CD-ROMs at over Rs 400,000 a piece.

The first case was detected at New Delhi's Indira Gandhi International air cargo base when customs authorities found that some exporters have been claiming 20 per cent credit, not only on ordinary software, but empty CDs too!

Except for the 'applications' variety, software does not attract customs or excise duties. Revenue officials wondered why credit should be given to exporters exporting CDs with duty-free software? They wrote to the Central Board of Excise and Customs, asking them that no credit be issued in such cases under the DEPB scheme.

A notification to the effect was promptly sent out by the Director-General for Foreign Trade.

But the Inland Container Depot did not hear of it and exporters continued to make hay: When the air cargo authorities refused to allow such consignments under the DEPB scheme, exporters moved to the Inland Container Depot.

The depot normally handles high-volume, low value goods like, say cotton. So when consignments weighing less than 70 kg but valued at over Rs 30 million were noticed, eyebrows shot up.

The customs authorities found that CD-ROM exporters were back at the game, taking complete advantage of the notification that had missed the depot.

Perturbed by similar reports from Bombay and Madras, the finance ministry has taken up the issue with the Director-General of Foreign Trade which, in turn, has referred it to the Department of Electronics.

Despite, all the fuss, technically, exporters have done no wrong! The only charge that can be brought against them is perhaps of overvaluing their consignments. But the allegation can never be proved and the government is estimating loss of revenue to the tune of Rs 100 million.

Earlier: CD-ROM titles are not software, say customs authorities

- Compiled from the Indian media

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