Strain by illegal clothing imports

A study by research firm Econex gives an indication of the scale of this illegal trade Econex notes that the value of clothing imported into SA from China in 2010, as recorded by the SA Revenue Service (Sars), was R4,6bn. But this was 40% less than the R11,3bn export value officially recorded by China. The department of trade & industry (DTI) has a similar finding.

"Underinvoicing is the main method used by illegal importers," says Johann Baard, executive director of the Apparel Manufacturers of SA (Amsa). Underinvoicing entails underdeclaring the value of goods to minimise the import duty and Vat payable. DTI examples of this cite jeans declared at 49c each.

It is not only illegal imports from China that damage local retailers. In a recent address, Sars commissioner Oupa Magashula said: "Our analysis shows that higher levels of abuse are prevalent in imports from Hong Kong and Indonesia than from China."

So-called "China shops" and informal traders are often fingered as the culprits in the illegal clothing trade. They are a big factor but not the only ones, says Baard. "The problem spans the entire apparel sector," he says.

"For a big retailer to deliberately do something illegal would be stupid," says Lawrence. But he says it is possible for illegally imported goods to land up on a legitimate retailer's shelves. "We do our best and co-operate closely with Sars, but we are not policemen. The regulators are having trouble enforcing their own rules."

Illegal goods can be found on a law-abiding retailer's shelves when they are purchased from a third-party importer, Lawrence explains. "Retailers must be presented with a document from customs showing the goods have been legitimately declared. But it does not show how much was paid for the goods."

Where apparel is bought from a third party importer, it is usually because it is priced below what the retailer could import it at, says Lawrence. The lower price could be because the importer has done a good deal with a manufacturer. "But if anything looks odd, we investigate," he says.

Sars's main weapon in the fight against illegal imports is its customs risk engine, which enables it to target consignments identified as high risk, Magashula says. Sars is also granting preferred trader status to importers who demonstrate strict compliance. This, he says, reduces the burden on trusted importers and enables Sars to focus its "scarce inspection resources" on tackling illicit trade.

Baard applauds Sars's efforts, saying Amsa has a full-time forum working with Sars to curb illegal imports. What is needed, he says, is more prosecution. "It is not for want of effort by Sars. There are too many plea bargains and admission-ofguilt fines, even by repeat offenders."

Lawrence says this is just the tip of the iceberg as regards fraud. "High import duties on apparel [45% on imports from China] are a huge incentive for crime." A solution could be to remove or slash import duties and replace them with subsidies to manufacturers, as is done in China and India.

Lawrence says subsidy costs and lost import duties would be recouped through higher sales from legitimate retailers who pay Vat and income tax. Based on Econex's data, Sars lost R650m in Vat alone on illegal clothing imports from China in 2010.

Source: Financial Mail