''Red'', ''Yellow'' and ''Green'' channels: new benchmarks set for Customs clearance

The Federal Board of Revenue has devised new criteria/benchmarks for clearance of imported consignments - "Red", "Yellow" and "Green" Channels - under which Goods Declarations (GDs) in case of banned/high-risk/sensitive items along with those where valuation rulings are not applied would be processed through "Yellow or Red channels."
Sources told Business Recorder here on Monday that under the new customs policy, traders have been classified into five categories of A, B, C, D and E for clearances under "Red", "Yellow" and "Green" Channels at ports. As per new customs clearance policy, GDs involving Duty and Tax Remission for Export (DTRE) scheme, manufacturing bond, temporary import and export-oriented units would have to be passed through checks of "Red" channel facility. The customs clearance cases involving royalty or transfer pricing disputes would be processed under the "Red channel".
As per new customs policy, all the consignments of embassies or holders of Free Tax Numbers (FTNs) would to be processed under "Green" Channel facility as usual. All the items involving huge revenue would be processed under "Yellow" channel. Besides, the FBR has also issued parameters for declaring traders within the categories of A, B, C, D and E on the basis of turnover of trade, contraventions, assessed & declared value difference and types of businesses.
The FBR has issued the new Customs Risk Management System (CRMS) to all Model Customs Collectorates (MCCs) to process imported goods falling under the categories of "Red", "Yellow" and "Green" Channels facility under the new CRMS. The FBR has also issued a standard procedure for all customs officials at ports to follow the new procedure for clearance of imported consignments under "Red", "Yellow" and "Green" Channels facility. The FBR instructions dated December 2, 2011 has also covered all cases, which would be blocked under the "Red" category of customs clearance system as per CRMS. Out of all "Green" Channel clearances, 5 percent consignments shall be picked up randomly by the system for examination and 20 percent for post clearance verification.
The FBR instructions covers reforms and automation introduced in the customs clearances processes at ports with new systems and procedures to protect government revenue at the import stage, checking consignments of five categories of importers ie A, B, C, D and E.
The FBR has also issued instructions to the Directorate General of Valuation to start issuing valuation rulings for all major exported commodities. At present, there is no practice of customs authorities to issue valuation rulings on the export of items, which would be discontinued.
Under the new selection criteria, the FBR has decided that 10 percent GDs falling within the category of "Yellow" Channel would be physically checked by the Principal Appraisers and 5 percent of the "Yellow" GDs would be randomly be marked to Assistant Collector/Deputy Collector for counter-checking prior to release of imported goods. The customs clearance system shall process the GD under "Yellow or Red channel" if there is banned item in the declaration or if valuation has not been applied, otherwise the system shall process the GD under Green channel and calculate the score at back end. Despite this explanation, the understanding developed during the meeting was that for ''A'' category traders the system shall process the GD as per laid down criteria for each category of risk, which means that the system shall evaluate each risk criterion and even if it failed to meet any parameter, it shall process it under Yellow or Red channel, as the case may be. In other words no separate treatment for ''A'' category traders.
According to the FBR, a meeting of the Overview and Review Committee of Customs Risk Management System (CRMS) was held at Model Customs Collectorate (PaCCS) Karachi in the past. Now, the FBR has circulated the approved minutes of the meeting for necessary action by all the MCCs. The FBR has chalked out the new Customs Risk Management System based on the decisions taken in the meeting.
Sources said that the Co-ordinator of CRMS Development team stated that the Team was given the task of development of the Customs Risk Management System (CRMS) by the Federal Board of Revenue. The development team stressed the need to understand the concept of Risk Management System (RMS), which means addressing all risks of an organisation in different areas like Human Resource, Information Technology, and internal and external factors etc. The RMS encompasses all weaknesses of the organisation. In other countries the ownership of such system is at the highest level (like Finance Minister in some countries). It was also explained that the terms RMS is applied in a broader concept which involves ultimately restructuring and revamping of all areas of FBR. However, the mandate of the Development team was to develop selectivity criteria for clearance of consignments. For complete RMS of customs a team may be constituted at the Board''s level with clear term of references.
Sources said that a question was raised whether the RMS carries necessary elements and structure to move ahead into live environment. Responding to this, sources said that the system carries the necessary structure and flexibility to handle the customs clearance risks. Customs authorities agreed that as the RMS is an ongoing and ever-correcting process. It is good to have sonic system, even if imperfect then not to have one at all.
When asked that who designed the Customs Risk Management System (CRMS), sources said that best international practices were consulted along with guidelines given by World Customs Organisation (WCO) etc. It was designed indigenously by the Development Team keeping in view the ground realities.
On the enquiry of customs authorities as to why NTNs were to be taken for "Red" category instead of the HS Code, it was explained by the Development Team that any HS code is not good or bad in itself; it is the person (or business entity) that is good or bad. The "Red" HS code punishes all traders including genuine/clean persons importing same commodity, hence NTN is taken for "Red" categories so that only a ''BAD'' person (high risk) may be blocked. The customs team explained that the risky HS Codes have also been identified which are prone to high risk (banned items) and may be incorporated in the system as and when deemed necessary by the proposed Risk Management Unit/ Directorate.
Sources said that the Profile scoring was explained as a historical performance of the trader based on their turnover, age, contraventions, assessed & declared value difference and business entity type. Based on these conditions a start-up score is given and traders will he classified into A, B, C, D and E categories. Progressively the traders profile score will move upward and downward based on his performance in clearance of his consignments.
About the treatment of importers/exporter who have first time started importing or exporting system, the Development team of the CRMS explained that first time trader will be placed in "E" category and since their profile start up score will he low they will naturally fall in Yellow/Red channel, but as the turnover of their imports increases, the system will start adjusting the profile depending upon their record.
About the authority who would decide about inclusion (or otherwise) of any importer/ HS code/ or any other feature, in the proposed RMS, sources explained that a Risk Management Unit Directorate (RMU) will take such decision on the feedback of field collectorates, once the RMU is established by the Board.
The Development team explained that out of Green Channel clearances 5 percent consignments shall be picked up randomly by the system for examination and 20 percent for post clearance verification. Member Customs asked as to how system will pick the GDs for these categories? What would be the cut off time/ number to ascertain the percentage of GDs? It was explained by the Development Team that the system will work on automated Roll Dice system and selection shall be on random basis by the system. The decision shall be taken by the automated system (without human intervention) on each entry after it has been declared of Green status.
When asked who will be responsible to handle RMS configurations, policies and amendments, the Development Team commented that a Risk Management Unit and Directorate has been proposed to be set up by FBR that will periodically handle and incorporate emerging risks in consultation with the field formations into CRMS, sources said.
About the responsibility for development of fully automated Web-Based Customs Clearance System (WeBOC), sources explained that the Project Director WeBOC is in-charge. However, it was proposed that a project team should be notified to review the development activities of'' PRAL for WeBOC. Upon this, it was informed that a WeBOC project Team has been notified as suggested by the Overview Team. Further, the FBR owns the WeBOC system and it will be notified and provided legal cover. The WeBOC system would be ahead of the previous clearance systems in terms of its efficacy and features and if any problems arises upon its trial run those will soon be rectified to make it best clearance system. The Development team also explained that the RMS Configurations will completely be handled by Customs Officials in the Risk Management Unit/Directorate through a multiple user IDs whereby the members of'' the Directorate will have to log-in all at once to access the Configuration screen.
Sources said that the system must be run on international best practices and that a project team should be constituted rather than allowing the system to be governed by field formations. It was explained that the proposed Risk Management Unit/Directorate (RMU) will work independently of field formations.
The Pakistan Revenue Automation Limited (PRAL) team has applied all risk criteria on all categories. They showed results of RMS on ECF importers and pointed out numerous examples where ''A'' category (ECF) importer was sent to Yellow channel. In one instance they explained that GD of an importer was sent to Yellow channel by the system because of one factor ie, GD filed by ''C'' category customs agent. Certain overriding risk criteria have been defined wherein sensitive PCTs, importers, consignments etc hit by the said criteria shall be directed to the yellow or red channel. It was also explained that certain overriding risk criteria have been defined wherein sensitive PCTs, importers, consignments etc hit by the said criteria shall be directed to the yellow or red channel.
The Director General, Valuation has informed the FBR that a list of risky Embassies or FTN (Free Tax Number) organisations need to he incorporated and that all such organisations cannot be given green channel processing, and there must be random checks in the system. It was explained by the Development Team that Diplomat''s GDs shall be processed through "Green" channel with special stream ie, no checking of GD or examination shall he conducted if documents are complete. In case of FTN only selected organisations having good repute have been included, sources said.
The Co-ordinator, Development Team explained that risk factor of Valuation carries 10 marks in the total score. However, Valuation risks cannot be addressed in the RMS due to following factors:
1. London Metal Exchange (LME), SCAN and other International data is in PDF Form and cannot be read by the system. A comprehensive plan or separate cell need to be established to tackle the issue.
2. The 200 valuation rulings have been issued but computer system cannot link values with each PCT as there are multiple items in one PCT. Moreover there are multiple rulings against one item due to different specification, brand, origins etc.
3. Rulings are not issued according to structured description - to match values of individual PCTs/ description - with origin, brand, specs etc. To resolve these issues in the long run we should switch over to 12 digit Tariff, where each item could he given a separate HS code.
4. The Valuation Directorate does not issue rulings/advice for exported items. Valuation Rulings may be issued for all major export commodities by the Valuation Directorate and to be updated as per market trend.
5. Valuation data for the PCTs for A & B Categories of importers and exporters.
It was explained by Co-ordinator, Development Team that the system shall process the GD under "Yellow or Red" channels if there is banned item in the declaration or if valuation has not been applied, otherwise the system shall process the GD under Green channel and calculate the score at back end.
Director General, Valuation, was of the view that the Directorate General of Customs Valuation should have been taken on board in this regard and should have been consulted during RMS development. It was explained that a letter was sent to the Director Valuation during development stage and this issue was discussed with him in detail. Moreover, Director Valuation is also a member of Review team and all issues were discussed in the RMS Committee meetings too.
Development team explained that initially valuation shall be checked on the basis of 90 days historical data, and development team has drawn a list of risky HS Codes prone to under-invoicing. Upon this the DG Valuation instructed that 90 days data may not be taken to check valuation risk under RMS as it is not reliable and can distort the profile scoring. Customs authorities observed that every modern clearance system should have an efficient Valuation Module. He emphasised that the development of an effective Valuation Module should be taken as a separate project to be subsequently integrated with the Clearance and Risk Management System. DG Valuation stated that Directorate of Valuation has never worked on valuation pertaining to Exports. Without the data of declared value (DV), Assessed value (AV) and valuation rulings in proposed system RMS may not cater to valuation scoring, sources said.
DG Valuation said that the valuation Rulings are legally binding. All "Green" channel clearances will be cleared on Declared Value (DV). Valuation department shall provide a list of items where huge revenue is involved. Such items shall be processed under "Yellow" channel. The FBR Member Customs agreed and requested DG Valuation to provide the list so that it is incorporated in the system and processed under "Yellow" channel.
Sources said that the WeBOC clearance system needs to he studied before reviewing its Risk Management System. The FBR Member (Customs) commented that WeBOC is being run at MCC Port Muhammad Bin Qasim and MCC Exports at Port Qasim for the past months and that it is an effective system and the Customs Overview Team may visit the system there if desired.
Customs authorities have further inquired about the number of GDs cleared under green channel during trials. The representatives from PRAL explained that number of GDs sent under "Green" channel depends on the configuration and adjustment of controls in the proposed Risk Management System. On the current configurations provided by the Development/Review Committee a simulation was conducted. The RMS was run on 1800 GDs of ''A'' category (ECF importers) in which 58 percent consignments were processed as "Green". The FBR has also directed the Pral to run RMS on PaCCS data to see what number of GDs was being cleared through "Green" channel. The Pral team stated that they will try to follow the orders and will run it on PaCCS system when the system will be made available to them by M/s Agility, a foreign customs service provider.
According to sources, the Co-ordinator, Review Team explained that GDs selected for "Green" Channel will undergo Post Release Verification (PRV), 20 percent of GDs cleared under Green channel will go for Post Release Verification. Member (Audit) inquired about the basis/formula for 20 percent selection of such GDs. It was explained by representatives of Pral that 20 percent selection is entirely based on chance mechanism that is built by proprietary software provider such as Microsoft and that it is completely unpredictable. The FBR Member Audit directed that selection for Post Release Verification (PRV) should not be managed by humans and it should he selected by system randomly. The Overview and Review Committee of Customs Risk Management System agreed to Member Audit''s viewpoint.
Sources said that some tax officials inquired about the qualifying score for clearance under "Green" channel. The criteria for "Green" channel facility stated that above 85 marks from total score will allow green channel processing. Another official was of the view that the clearance through "Green" channels signifies that it has fulfilled all the pre-requisites to qualify. Member (Customs) commented that with such stringent scoring system, it would he difficult to get such score for any importer and hence qualify for "Green" clearance.
DG Valuation appreciated the Development Team for incorporating the risk factor of accounting weight and PCT difference between Bill of Lading and Goods Declaration and commented that it is a good risk factor. Customs authorities agreed that all Respective Headings and Others mentioned in the Exemption SROs need to be clearly specified. Further, he approved the recommendation that the rate of duty for ''Others'' heading in Customs'' Tariff must always be higher than the items specified in the same category to prevent the misuse of such headings. Customs authorities also appreciated the marking of GDs in "Red" category if declared PCT falls under description as ''OTHER''. This will discourage traders to use such vague descriptions/PCTs. Customs authorities also agreed with the members'' contention that Customs General Order (CGO) for unit of measurement (UoM) must be reviewed and should be in line with the business realities and be de-linked with World Customs Organisation (WCO) harmonised tariff code, which is only for statistics purposes.
Sources said that the Customs authorities also observed that DTRE regime is risk prone and must be reviewed and amended in another forum to enable the system to clear it without marking for examination. Following are the decisions taken by the FBR in consultation with the Overview and Review Committee of Customs Risk Management System (CRMS) for implementation in all MCCs:
1. The Review Committee has proposed that, "20 percent of the yellow GDs cleared by Appraising Officer should randomly be marked to Principal Appraiser for counter check prior to release".
Decision: Approved after amending it to 10 percent of assessed GDs.
2. The Review Committee has proposed that. "5 percent of the yellow GDs cleared by Appraising Officer should randomly be marked to Assistant Collector/Deputy Collector for counter-check prior to release".
Decision: Approved.
3. The Review Committee has proposed that, "the importer should be allowed to add by ''himself'' the duty and taxes not mentioned in the importer''s screen".
Decision: Approved.
4. The Review Committee has proposed to include, "the provision of
a) Import related quota
b) Arms and ammunition quota
c) CFC gases
d) Samples'' drawal
e) SRO / DTRE, etc related quotas"
Decision: Approved.
5. The Review Committee has proposed that, "the unit of measurement in GDs should be in consonance with actual trade practice and may be allowed to declare the same in GD along with Tariff/international Standard of measurement (ISOM)".
Decision: Approved.
6. The Review Committee has proposed that, "copies of invoice, packing list & BL should be made mandatory at the time of filing of GD. import policy related certificates/NOC should be scanned at the time of filing GD and captured in the system".
Decision: Approved.
7. The Review Committee has proposed that, "Generic IDs should not be allowed to officials to ensure proper account of transactions".
Decision: Approved.
8. The Review Committee has proposed that, "acceptance/rejection of Examination request by Appraiser should be Principal Appraiser''s responsibility"
Decision: Approved.
9. The Review Committee has proposed that, "acceptance/rejection of Document calling request by Appraiser should be Principal Appraiser''s responsibility".
Decision: Approved.
10. The Review Committee has proposed that, "formats may be developed for monitoring, contribution and performance of Appraising Officer, Principal Appraiser, Assistant Collector and Deputy Collector".
Decision: Approved.
11. The Review Committee has proposed that, "drop down menu may be developed to cater to the requirements of various Appendices of Import Policy Order".
Decision: Approved
12. The Review Committee has proposed that "the Risk Management Unit/ Directorate should be institutionalised".
Decision: Approved.
13. The Review Committee has proposed that, "the Hard copy of GD should be maintained for Post Clearance Audit".
Decision: Rejected.
14. The Review Committee has proposed that, "the user may be disallowed to operate if three attempts of GD filing are failed".
Decision: Rejected.
15. The Review Committee has proposed that, "increasing or decreasing the risk criterion may be left for the proposed RMU/ Directorate".
Decision: Approved.
16. The Review Committee has proposed that, "gantry weight may be linked with the declaration in CDI and GD. Tolerance level to be decided later on by the proposed RMU, however, initial Tolerance level must be up to 10 percent".
Decision: Approved.
17. The Review Committee has proposed that, "Database for minimum bench mark for valuation should be prepared by valuation department within 90 days for category-''A'' importers while International data available should be linked and made applicable in live environment within 3 months for category-B importers and Develop values/data base for at least 10,000 products within one year".
Decision: Approved.
18. The Review Committee has proposed that, "working on list of importers and exporters should be made in such a way so that at least 60 percent of TEUs be covered in Green".
Decision: Approved.
19. The Review Committee has proposed that, "Role of post clearance audit (PCA) must be strengthened. Importers! Exporters should co-operate with Customs for conducting audit failing which their grading be reduced".
Decision: Approved.
20. The Review Committee has proposed that, "the cases involving royalty or transfer pricing disputes should be sent to "Red" channel".
Decision: Approved.
21. The Review Committee has proposed that, "the ECF data of 90 days may be ignored or implemented,
Decision: To be discussed later on.
22. The Review Committee has proposed that, "PCT code may be extended from 8 digits to 12 digits to cover valuation rulings etc, and a separate team should be notified to work on it".
Decision: Approved.
23. The Review Committee has proposed that, "A box should be introduced for the importer to declare customs assessable value (ie agreed prices, prices notified under Section 25-A of the Customs Act, 1969)".
Decision: Approved.
24. The Review Committee has proposed that, "the Bank contract may be linked with import documents".
Decision: Approved.
25. The Review Committee has proposed that, "GD filing may be allowed without having sales tax registration by Assistant/ Deputy Collector".
Decision: Approved.
26. The Review Committee has proposed that, "in exports, GDs involving DTRE, manufacturing bond, temporary import and export-oriented units, 10 percent of Category-A, 20 percent of Category-B GDs should be made "Red". The analysis cards and controls specified in manufacturing bond scheme should be introduced to all the aforesaid schemes. Further port of clearance may be specified for all such clearances".
Decision: Approved.
The above mentioned decisions were taken by the customs authorities with the help of Overview and Review Committee of Customs Risk Management System (CRMS) for immediate compliance at the level of customs ports.
In addition, following decisions were further taken by the Overview and Review Committee of Customs Risk Management System:
1. RMS should be tested and launched in live Environment.
2. It was decided that RMS shall be tested and run in background for imports as well at Port Qasim.
3. Further the Risk Management Unit needs to be set-up and made functional for taking cognisance of emerging risks.
4. The system must be reviewed periodically to incorporate or remove certain functionalities to enhance trade facilitation through speedy clearances.
5. The ratio of "Green" clearances should be increased with the passage of time.
6. The automated clearance collectorates shall establish a Post Release Verification (PRV) cell to avert any misuse of "Green" clearance facility.
7. Efforts will be undertaken to introduce paperless working in all Customs offices.
8. Finally and not the least the RMS needs to be updated constantly under the risk management unit (RMU) as it is an ongoing exercise and cannot be taken as static and that the work of Development/Review and Overview team cannot be deemed permanent.
The customs authorities have assured that necessary orders shall be issued in light of the decisions is being issued, sources added.