Daily Times

Underinvoicing is the act or practice of stating the price of a good/service on an invoice as being less than the price actually paid/to be paid. Underinvoicing occurs when the importer reduces the financial impact of a tariff or when a seller reduces his apparent profits so as to pay less in taxes. Underinvoicing is also done by exporter who wants to show lesser profits in his country and, simultaneously, getting the underinvoiced amount in other country in foreign exchange. On the other hand, over invoicing , as defined by Cotecna, means ” to increase fraudulently the price of a good or service. A real service is made ( or products is delivered) and an invoice, inflated deliberately, is paid by the customer, who is accomplice of supplier. The overpayment is returned to the customer in the form of liquid or various benefits. The purpose of over-invoicing is obviously to manage discreet exit of money , illegally generated by the seller. For example when the supplier and customer are accomplice and who get an agreement beforehand, one to increase the price and the other to pay in order to retrocede him eventually in cash or in fringe benefits which corresponds to the overpayment. All these actions and transactions are attempts to deceive the tax collectors.

Import taxes are levied by every country on the goods and services when these cross into the international borders of another country unless the importer and exporter countries have an agreement to apply zero customs duty on each others’ goods in to their respective countries. The duties are charged advalorem ( according to value) or by weight or by measurement. However, certain importers , to reduce the import cost, misdeclare the value or specification of the goods, declaring a quality lower than what it actually is or declaring lower weight. This is generally done in collusion with government functionaries. Government of Pakistan loses colossal amount of money due to Underinvoicing of imports. Value of some import items are predetermined by the Customs Department under section 25-A of the Customs Act . In the case of textile items, the predetermined rates are so low that even the cost of yarn with which the product is made, is more than the cost of declared value. For instance the cost of an imported blazer or jacket for jents/ ladies is assessed at Rs 170 per piece whereas the cost of tailoring is more than this amount. A pair of imported socks is assessed at Rs 15 and ladies blouse at Rs 92 per piece. PRGMEA ( Pakistan Readymade Garments Manufacturers &Exporters Association) had been challenging these ridiculous valuations for long time. However Customs Department vide Valuation Ruling of 25.7.2016 has refixed the “determined” prices of textile garments which though are increased but are still much lower than the actual price at which these are exported by various countries. For instance, 2 piece ( coat and pant) Suit is now assessed at Rs. 2080 and boys/girls formal trouser/jeans at Rs 340 per piece. Every international traveller knows that you can never get the suits or jeans at these prices from any country, even if you buy container load. Then in certain cases, grey fabric is exported to China , say at $0.60 per meter and the same type of fabric ( with the same yarn count and density) after bleaching, finishing, coating etc is being imported from China at $0.60/mtr. The Customs Department is well aware of this Underinvoicing. Similarly all the imports from China, Thailand and other countries are underinvoiced . The reason or temptation for Underinvoicing given by the importers is the high customs duty on import. But surprisingly, the Underinvoicing is also prevalent in goods which attract only 5% customs duty.

As per just released study of Pakistan Business Council, total export of China to Pakistan in 2015 was $16.4 billion whereas as per Pakistan’s import record, it was only $11 billion; balance $5.4 billion represents Underinvoicing which is on upward trajectory since in 2013 the Underinvoicing amounted to $4.393 billion. Interestingly Pakistan imports of apparel and clothing accessories from China was $42 million whereas China exported this item valuing $319.3 million, proving an Underinvoicing of 87% of the value. This discrepancy in figures goes back to a decade but nothing concrete was done to nip this evil. Pakistan’s local industries are at a complete disadvantage due to this unbridled Underinvoicing mainly from China. Another blow is outright smuggling in the garb of Afghan Transit Trade where Afghanistan imports raw materials for which there is no industry to consume these. Further Afghanistan imported apparel and clothing accessories for $47.9 million (for its population of 33.5 million) against Pakistan’s imports of this item from China at $42 million only (for its population of 195 mill). These two factors i.e. Underinvoicing and ATT have not only caused colossal loss to the national exchequer but also resulted in closure of industries with resultant unemployment.

An attempt was then made to legally bind the Chinese exporter to put a custom verified invoice copy in the container which would have drastically curtailed the Underinvoicing . This effort was stymied due to Customs Department giving an option of paying a redemption of Rs50,000 per container ( later reduced to Rs5,000) which did not carry invoice copy. The value of evaded duty was definitely much more that Rs 5,000; so everybody who underinvoiced happily paid a fine of Rs5,000. The quantum of current under invoicing by importers of Pakistan are estimated, ranging from $5 billion to 7 billion. However, the 2015 figures of Underinvoicing of $5.4 billion as calculated by PBC from official statistics of both countries is correct. Assuming an average customs duty rate of 10 %, sales tax @ 16% and WHT @ 5%, the total loss to the national exchequer is Rs175 billion. There is no other existing sector of economy which has the capacity to generate this kind of revenue , just by assessing the imports at their actual value. It is high time for the Government to create a separate Collectorate whose sole job should be to eradicate this menace of Underinvoicing and smuggling which shall result in a minimum enhancement of Rs200 billion per annum in government revenue.

The two steps taken by the Government may have some salutary effect to curb these menace which are continuously eroding the viability of the local industries. First is the agreement of Pakistan with China to share the data of exports to Pakistan by Electronic Data Inter-change (EDI) which was to be effective from 1st July, 2016. The second is amendments in the Anti Money Laundering Act, 2010 by which FBR has now immense power to prosecute the evaders of income tax, customs duty, sales tax evasion. However, the success of these two factors depends how efficiently and fairly these are implemented.

The writer is President of Political Economy Watch and can be reached at; president@economywatch.com.pk