Under-invoicing is a key source of Customs Duty leakage in imports in the absence of effective measures to restrict or minimize this malpractice. Due to growing mis-declaration of commercial imports, it was proposed four years back to link the Pakistan Customs with China Customs. Some initial work was undertaken by the Customs department but nothing happened. The major reasons for under-voicing are attributed to the defective software in use by the Customs.
To tackle under-invoicing of imports, Pakistan and China have reached an agreement to initiate digital exchange of trade data from April 30th, 2018. This move is being carried out as a substitute of expansion bilateral of trade between Pakistan and China, which is hugely in favour of the Chinese largest economy. Electronic data exchange platform commence operations end of April 2018. An official of the Federal Board of Revenue stated beta-testing of this electronic data exchange platform is scheduled to be held this month. They shared a memorandum of understanding for data exchange will be signed between Pakistan and China and draft of the agreement had already been finalized.
In a meeting between China’s and Pakistan’s Commerce Ministry officials last month, the former agreed to launch an electronic data exchange. The formation of trade data exchange would help control under-invoicing imports from China, which is hitting Pakistan’s industry.
A Pakistan Business Council (PBC) research had reported about the variances and under-invoicing of imports between Pakistan and other trading partners including China. Comparing figure of imports made by Pakistan from China and vice versa exports from the latter by PBC revealed an exceptional difference.
During the year 2016, apparel import from China was recorded at $60 million compared against reported exports by China of $329 million. A similar shape can be observed in the data reported by other trading partners. China’s reported figures are five times higher than the Pakistan’ volume of imports simultaneously. Large under-invoicing and mis-declaration of imports is happening at Pakistan’s end. Textile imports from China are coming into Pakistan without paying the actual amount of duty, causing massive losses to national exchequer and destroying the domestic industry.
Pakistan needs modernization of its reporting mechanism to restrict the mis-declaration of imports, which is also stealing national exchequer of huge tax collection during customs. The inequality in synthetic fibre and garments imported from China by Pakistan for 2016 were recorded at $269 million compared to exported figures in same period of $739 million by China. Pakistan’s reported imports of synthetic fibres from China are just 36 percent of the figures reported by China as exports to Pakistan.
It was proposed that Pakistan Customs be linked with China Custom to restrict or at least minimize under-invoicing. There have been reports about progress towards the establishment of an Electronic Data Interchange System (EDIS) but nothing appears to have been done until now. Many problems exist in Pakistan’s current account that would require large reinvigorating of the economy in the long term to fix. This is a problem that can be done away in the short term and can save the economy billions. Estimate suspects under-invoicing to have crossed the Rs300 billion in 2010 on imports from China. A relatively simplified but pertinent estimation of Pakistan-China trade by PBC placed the disparity at $3.5 billion for 2016.
Pak-China trade is not the only bilateral trade attached to under-invoicing nor is the official channel of formal trade the only avenue for wicked activities. Lahore Journal of Economics estimated more than $92.7 billion in losses from 1972 to 2013 for 52 major traded commodities for trade with 21 partners due to mis-invoicing. The gross revenue loss to the national exchequer was placed at $21.1 billion while loss of revenue in the form of custom duties evasion and export withholding tax was at $11 billion. The annual average net revenue loss due to it was roughly equal to 11.2 percent of revenue from tariffs. Trade with China was identified as one of the main miscreants it is by no means the only one.
A PBC study on under-invoicing from UAE lists a range of goods from mineral and chemicals to dyes, cosmetics and textiles on which disparities were observed. As per the study, Pakistan loses about Rs150 billion each year to under-invoicing which is part of the Rs600 billion lost each year due to smuggling and misuse of concessionary duties. Among other countries, a cursory comparison between ITC data and SBP data for Pakistan’s trade with USA, Japan, and Indonesia lead to a discrepancy of nearly Rs1.9 billion.