Exemption Policy

 

Background:

Taxpayers engaged in international assistance, humanitarian or development can be exempted from customs duty in some of the following ways: 1) By a legal act of Afghanistan (e.g. Presidential Decree, law, regulations, Government Agreement), 2) By ratified international agreement or convention, 3) By exemptions provided by the Customs Law. The Minister’s Council, on recommendation of the Ministry of Finance, is authorized to give exemption to those items that are not mentioned in the customs code.

 

Brief History and Current Procedure:

Exemptions have always been granted by the Customs Department on the recommendations of different ministries however the process was not standardized. The exemption section in the ACD used to receive a lot of applications and recommendations from different ministries on different formats which meant longer processing times. Under the current reform process, an exemption form has been introduced to standardize the exemption process. The new form has simplified the process and expedited the speed of processing. However the volume of applications has increased due to a tremendous increase in the number of NGOs engaged in humanitarian work. The current procedure is as follows:

 

The application exemption form can be purchased from the Director of Exemptions - the cost of a single application is 50 Afghanis. The applicant or agent (broker) completes the application together with a copy of supporting documents i.e. Government of Afghanistan Contract. The customs duty which otherwise would have been paid is entered in box 17 of the application. The completed application is submitted to the relevant sponsoring Government Ministry for approval – the sponsoring ministry endorses and signs box 23 of the application. The applicant / broker must submit the completed approved application at least 24 hours before the goods are to be cleared to the Custom House. The Customs officer checks that all the relevant boxes of the application have been completed and approval boxes stamped and signed. The officer attaches copy 1 (original) to the final declaration. Copy 5 of the application is returned to the applicant – copies 2, 3 and 4 are returned to the Director of Exemptions.

 

 

Need for Exemptions:

Many countries provide duty relief for imports. This practice is mainly used for the importation of inputs used for the manufacture of export products. The justification for doing so is simple. Any duty paid on these inputs would increase the cost of the exports and make these exports less competitive. In fact, following the widely accepted destination principle of taxation, only goods destined for domestic consumption should bear a tax burden. For a net importing country like Afghanistan having very limited exports, it is imperative to revise the exemption policy. Furthermore it is important to note that most of the goods exempted in Afghanistan have no commercial significance or bearing on improving the national economy and exports and are mostly for consumption within the country. Last but not least is the commercial sale of exempted goods in the market in violation of existing laws and regulations. All these reasons necessitate a change in the existing procedures to tighten customs controls.

 

Exemptions are recommended by all ministries including the Ministry of Foreign Affairs, Ministry of Water and Power, Ministry of Economy, Ministry of Information and Ministry of Energy and even such government bodies as the Civil Service Commission and DAB. It has been observed that the existing policy of granting exemptions especially to NGOs and construction contractors is very lenient and open to abuses especially in the absence of strong monitoring and post clearance controls.The amount of revenues foregone too is a major dent on the national treasury and puts the national finances under major constraints. The amount of revenues foregone in the year 1384 due to such exemptions amounted to Afs 1346.373 million (around $27 million) as per the data collected by Customs Data Unit.

 

Exemption tools:

There are different ways in which duty exemption is provided to imported goods such as:

 

Zero Tariff rating:

Goods used as raw materials for national exports, foodstuff and edibles considered as staple diet for the public and goods having vital impact on the national economy are granted zero rating or exemption from tax in the tariff. Import of relief goods under some continuing relief scheme initiated by the government or brought in by recognised world bodies, donated goods, goods used for scientific or educational purposes, temporary imports etc. are also usually granted exemptions in tariff.

 

 

International agreements and conventions:

Many international organisations and world bodies are exempted from duty payment as per international agreements and conventions such as the United Nations under the United Nations (Privileges and Humanities) Act 1948, diplomats, embassies and consulates under the provisions of the Vienna Convention. In many countries imports by these organisations are further regulated by a certification from relevant authorities such as UNDP in case of UN or by placing quota restrictions on quantities imported.

 

 

Bilateral Agreements:

Imported goods from a certain country or for a certain organisation (such as ISAF, US military in Afghanistan) may be provided duty exemption duly backed up by full documentation and certification from the relevant authorities.

 

Customs Code:

Goods may also be exempted by providing a blanket exemption in the customs code.

 

Special exemptions:

These may be provided by the government to organisations usually in consultation with the Ministry of Finance and the national customs administration for projects of national importance such as dams, mega construction projects, exploration of natural resources such as oil and gas etc. These exemptions are in many cases subject to provision of indemnity bonds and guarantees stating that the goods imported under them will not be used for purposes other than declared. Such projects are always notified in advance by the government. Special exemptions may also be provided in terms of national calamity and disasters such as earthquakes, famine, drought and floods as well as for certain privileged people.

 

 

Authority for Exemption from Customs Duty in Afghanistan:

It must be mentioned that under the existing customs code, exemption from customs duty can either be granted on:

 

1. Goods mentioned in the Customs Code-Article 27(2)
2. Goods approved by the Council of Ministers on the recommendation of the Minister of Finance.

 

The current practice however means that though exemptions are granted by the ACD/MOF, little consideration is paid to the revenues foregone. Most of the exemptions are granted under Clause 5 of the Article 27 of the Customs Code on the recommendations of the different ministries.

 

 

Recommendations:

The existing procedure must be tightened up to prevent misuse and abuse of the system and to facilitate goods imported for genuine purposes. Some suggested measures are as follows:

 

 

UN, ISAF, US military and Embassies

1. A list of internationally exempted organisations including foreign missions is recommended to be compiled and notified in consultation with the Ministry of Foreign Affairs and if need be the Ministry of Defence. Goods imported directly by these organisations for their own use, for personal use by their direct employees, military supplies and humanitarian and relief supplies will stand exempted automatically provided the import documents are accompanied by a certificate from the Head of the Agency/Foreign Mission/ ISAF/US military or any of his designated officer at the time of import.
2. The exemption shall not extend automatically to any of the contractors hired by these organisations for executing an agreement entered previously by the Government of Afghanistan and such organisation unless a specific clause granting customs duty exemptions has been inserted in the original agreement between the Government and the executing party and such clause has been discussed with and approved by the Ministry of Finance and the Afghan Customs Department.
3. All such international agreements shall be annexed to the tariff or alternatively corresponding changes should be made in the tariff in accordance with Article 23 (3).
4. No foreign mission shall certify any import except in accordance with para 1 above.
5. All these organisations should certify the receipt of goods in writing to the relevant customs directorate.

 

 

NGOs, Commercial Contractors, Construction Projects Business and Industry

1. A list of approved public and private, foreign and international relief and development agencies should be notified. These agencies should be notified on the basis of their acknowledged contribution to the relief efforts on the basis of a list forwarded by the Ministry of Economy and on the approval of the Council of Ministers. Only these agencies would be entitled to exemption from customs duty. Any change in the list should be routed through the Council of Ministers.
2. Fresh exemptions shall not be granted on the recommendations of any Ministry for any government project except if it is clearly stated that the project is being funded by loan and certified by the relevant ministry for being so or if the goods are being imported by any relief and development agency approved by the government in accordance with Article 27 (2) (5) and as per the procedure suggested above.
3. A list of all government projects being funded through loans shall be compiled by the MOF and provided to the ACD exemption section on a regular basis.
4. The importing agency should be responsible for certifying the receipt of goods at its premises to the relevant customs directorate with a copy endorsed to the ACD Exemption section.
5. Exemptions in tariff shall be granted to only export led sectors of the country’s nascent industry after due deliberation and approval of the Council of Ministers.

 

 

Monetary limits shall also be imposed on the Exemption Section. All cases involving customs duty, say for example above Afs 1 million shall be approved by the Deputy Director General and above Afs 5 million by the Director General.

 

 

Concluding Note:

The above suggestions are not changing the exemption procedures but are suggesting tighter controls. None of the ministries has powers under the Customs Code to exempt goods; they only make recommendations to assist customs in making decisions. For all exemptions from customs duty, Customs Code would be the primary law overriding other laws often quoted such as the NGO law etc. Grant of exemptions by any ministry other than the MOF would be violation of law. These measures are expected to draw protests from some ministries and NGOs as the process will be more difficult and tedious to follow however it is expected to bring positive change in the revenue. The suggested changes will take time to produce results.