Blockchain technology in Customs (Part 63)

Welcome to the 63rd part of the 100-part series on Blockchain.

Any cross-border trade involves a large number of stakeholders, including producers, logistic companies, and distributors through whom vast amounts of goods and wealth travel. Further cross-border trading also involves many legal formalities like contracts, certificates, customs, and approvals from various regulatory bodies. Even though many authorities are involved in any cross-border trade, the most notable authority in any cross-border trade is Customs. The role of the customs is to ensure that all the permits obtained are valid, all the goods have been lawfully declared, and all the defined regulatory requirements have been met.

Challenges of collecting customs duties

Customs duty is a very crucial component of any international trade; it is an indirect tax levied on both imports and exports by customs authorities for international shipments. This tax is collected by the government to

· generate revenue that is used for the country’s development and economic growth of the citizens.

· Prevent smuggling of goods.

· Another essential reason for imposing customs duty is to maintain domestic manufactured products equally competitive with imported goods.

Today’s customs handling requires significant manpower to maintain safety, customs evaluation, and regulations. Moreover, customs clearance is a tedious task and takes a lot of time, sometimes even weeks, if proper documentation is not provided or some paperwork is incorrect.

Blockchain in customs declaration

The shared ledger Blockchain technology can have a huge impact on customs services and help make the whole process swift and transparent. Let’s understand how:

(i) Blockchain will record all the trade transactions chronologically, which can then be shared with all the concerned parties involved in the supply chain, thus minimizing the risk of fraud. The complete information about the shipment, including the proof of purchase, clearance form, bill of lading, and insurance, will be recorded on the Blockchain and will be accessible to suppliers, transporters, buyers, regulators, and auditors.

Therefore, through Blockchain, Customs authority could see the necessary data like the seller, buyer, price, quantity, carrier, insurance, etc., that has been tied with the goods that need to be declared for customs clearance.

(ii) With this transparency provided by Blockchain technology, Customs authorities and other border agencies would have real-time updates of any trade happening, which would significantly improve their efficiency for risk analysis and will reduce the burden of manual verification to validate declarations. This, in turn, would lead to faster Customs declaration and reduced end-to-end processing time.

(iii) There are growing concerns about the product quality and authenticity of the products that are traded. Therefore relevant licenses, permits, certificates, and other authorizations are required at the time of Customs clearance, depending on the nature of the declared goods and related national regulatory requirements to keep a check on illegal trading. All of these certificates if uploaded on the Blockchain, can be accessed easily from anywhere. Once implemented, this would also minimize the risk of data manipulation.

(iv) Moreover, as the customs authority will have access to all the shipment related documents present on the Blockchain, it can automatically clear the goods that have been ‘pre-screened’ by them on the shared ledger at an earlier stage. This would eliminate the need to withhold these goods at the time of declaration, which is the case currently, where the shipment takes a lot of time to get customs clearance, and because of this, the delivery of goods gets delayed.

(v) Further, this would also decrease auditing and accounting costs as well.

Blockchain in combating Tax Fraud

In many cases of international trade, tax fraud occurs, in which there is a wide gap between the expected value-added tax (VAT) revenues and the revenue that is actually collected. When goods are imported into a country with a VAT regime, import VAT is charged as a percentage of the value of the imported goods.

Because of transparency in the supply chain provided by Blockchain, frauds and errors will be much easier to detect because the system will provide clear and transparent information about all the transactions. Thus making the whole system more robust and reliable.

Additionally, all the transactions between an importer and an exporter can be handled by smart contracts, which are self-executing contracts and get executed when the predefined conditions are met. These smart contracts can be used to automate the VAT collection process and thus bring more transparency to the system.

In this setup, an automatic payment equivalent to the amount of VAT payable will be deducted from the buyer’s payment to the seller and will be released to the concerned department at the time of clearance of the goods. The remaining pool of money, after deducting VAT, can then be sent to the seller of the goods.

Thus, minimizing any chance of fraud or false declarations.

Scalability concerns

(i) Storing all the documents required during customs clearance, including licenses, permits, certificates, and other authorizations, etc., on Blockchain is very costly; thus, distributed file storage IPFS can provide low-cost off-chain storage to store this data. A unique hash is generated for every uploaded file on the IPFS server, which is then stored on the Blockchain and accessed through the smart contract. Any change in the uploaded file would change its hash. IPFS has been explained in detail in Part 18.

(ii) To make the Blockchain scalable for its use in customs, layer 1 (discussed in Part 15) and layer 2 (discussed in Part 16) scaling solutions will be required to be implemented.

If you liked this article and want to know more about Blockchain, NFTs, Metaverse, and their applications, click the below link.

Happy learning!

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