Sri Lanka Customs revenue targets and actual collections: An interim review

Revenue collection must be viewed in proper context

Before assessing whether Sri Lanka Customs has performed efficiently or inefficiently against its annual revenue target, it is important to recognise that the quantum of Customs revenue collected is not determined solely, or even predominantly, by the administrative efficiency or enforcement effectiveness of Sri Lanka Customs.

Customs revenue is influenced by a combination of external economic, fiscal, trade and policy variables, many of which are outside the direct control of Customs.

These variables include:

• The overall volume of imports;
• The type and composition of goods imported;
• International market prices and the declared/customs value of imported goods;
• The prevailing exchange rate between the US Dollar and the Sri Lankan Rupee;
• The applicable rates of Customs Duty, VAT, PAL, CESS, SCL and other taxes and para-tariffs;
• Imports made under Free Trade Agreements and other preferential trade arrangements;
• Customs Duty and tax exemptions, concessions and waivers granted by the Government;
• The extent to which Customs Duty and taxes are compromised through penalties, settlements or other statutory mechanisms;
• The relaxation or suspension of import restrictions, particularly in response to shortages of food and other essential commodities;
• The introduction of new taxes and duties or increases in existing rates;
• The introduction or revision of para-tariffs;
• Changes in international commodity prices, particularly fuel prices; and
• Changes in the volume and value of investment-related imports under the Board of Investment.

Consequently, an increase or decrease in Customs revenue cannot automatically be attributed to an improvement or deterioration in the performance of Sri Lanka Customs.

Vehicle imports and changing revenue base

A particularly important factor in reviewing recent Customs revenue performance is the contribution made by motor vehicle imports.

Historically, vehicle imports have generated a substantial proportion of Customs revenue. The reopening of vehicle imports resulted in an exceptional increase in the volume and value of vehicle imports and consequently generated a significant increase in Customs Duty and tax collections.

However, this situation cannot necessarily be projected indefinitely.

Once the initial pent-up demand for vehicles has been substantially satisfied and the market moves towards a more normal replacement cycle, the volume and value of vehicle imports are likely to stabilise or decline. Consequently, the revenue contribution from vehicle imports will also change.

Similarly, the volume and value of imports by enterprises operating under the Board of Investment may fluctuate depending on investment cycles, project implementation, production requirements and international market conditions.

Therefore, comparing actual Customs revenue against a fixed annual target without adjusting for these structural changes can produce a misleading assessment of Customs performance.

External variables can increase or reduce Customs revenue

There are several circumstances in which Customs revenue can increase even without any corresponding improvement in Customs administration.

For example, if the international procurement price of fuel increases, the customs value of fuel imports may increase and, depending on the applicable tax structure, the amount of revenue collected may correspondingly increase.

Similarly, if the exchange rate moves from, for example, Rs. 300 to Rs. 330 to Rs 350 against the US Dollar, the LKR value of a US Dollar-denominated import will increase or vice versa. Where duties and taxes are calculated on that value, the Customs revenue generated from the same physical quantity of imports can increase without any increase in Customs enforcement activity.

Conversely, if the Government reduces Customs Duty or other taxes, grants additional exemptions, expands preferential trade arrangements, or reduces the tax burden on particular commodities, Customs revenue can decline even though Customs administration and enforcement remain equally effective.

The same principle applies to Customs penalties and compromises. Where penalties or other amounts legally recoverable by Customs are increased or reduced, the resulting revenue movement may reflect changes in enforcement outcomes or policy decisions rather than changes in the underlying volume of trade, since a larger amount of such recovery is attributed to the Customs Officers than the State.

Revenue target versus Customs performance

For this reason, the difference between the Customs revenue target and the actual revenue collected should not, by itself, be treated as a direct indicator of Customs efficiency.

A revenue target is essentially a fiscal projection based on assumptions relating to:

1. Import volumes;

2. Import values;

3. Commodity composition;

4. Exchange rates;

5. International prices;

6. Applicable duty and tax rates;

7. Exemptions and concessions;

8. Trade agreements;

9. Import restrictions;

10. Vehicle imports; and

11. Other prevailing economic and policy conditions.

If one or more of these assumptions changes materially during the year, actual revenue can deviate substantially from the target even when Customs performs its administrative and enforcement functions efficiently.

A more meaningful performance assessment

Accordingly, an objective review of Sri Lanka Customs should distinguish between: Revenue generated by external economic and fiscal factors.

Conclusion

This interim review therefore proceeds on the fundamental premise that the amount of Customs revenue collected is not, in itself, a reliable measure of the efficiency or inefficiency of Sri Lanka Customs.

The first question that must be understood before evaluating Customs against its revenue target is what proportion of the actual revenue outcome was determined by factors outside the control of Customs and what proportion was attributable to the effectiveness of Customs administration and enforcement.

Only after making this distinction can the Government, Parliament, the Treasury and the Customs administration make a meaningful assessment of whether Customs has performed efficiently, exceeded expectations, or fallen short of its operational potential.

Accordingly, Customs revenue targets should ideally be accompanied by a Revenue Performance Attribution Analysis, separating revenue movements arising from changes in import volumes, commodity prices, exchange rates, duty and tax policy, exemptions and trade agreements from additional revenue attributable to Customs enforcement and administrative efficiency.

Such an approach would provide a substantially more accurate and fair assessment of the actual performance of Sri Lanka Customs.

(The author is the President, Customs House Agents and Traders Association)