Massive under-invoicing destroying domestic industry

Massive under-invoicing across-the-board and dumping of imported products, especially by commercial importers is destroying the domestic industry in Pakistan.

The information regarding the values at which various Customs check-posts clear import consignments is not available with the relevant authorities, which encourages unscrupulous importers to under-invoice the value of consignments to evade taxes.

Along with under-invoicing, the massive leakages in the Afghan Transit Trade (ATT) and smuggled goods openly sold in all major shopping centres of the country is another factor, which is hurting the documented economy.

A Pakistan Business Council report showed that the Customs officials are not willing to act against smuggled products on the plea that the local authorities are not cooperating.

IPSOS, a global leader in market research, in its study on tax evasion in the tobacco, tyres and auto lubricants, pharmaceuticals and real estate sectors, said that 6 per cent of GDP is undocumented, while the shadow economy accounts for around 40 per cent of GDP.

The annual volume of the tax evasion in these sectors comes around Rs310 billion, including the tax evasion of Rs35 billion in illicit trade of tea, Rs80 billion from tobacco, Rs90 billion from tyres and lubricants, Rs45 billion from medicines and Rs60 billion from the real estate sector on an annual basis.

The plight of under-invoicing and under-reporting put pressure on the local industries and is a major source of stealing taxes. The two are a major source of Customs duty and tax leakages due to an absence of effective measures to curb or minimise these malpractices.

The traders who operate honestly are forced to shut down their businesses because they cannot bare under-invoiced imports, as well as concealed local production by producers to save sales tax.

These illicit activities can be controlled through technology and technology-based surveillance.

The PBC has urged the government to insist on Electronic Data Interchange (EDI) for both free trade agreement (FTA) and non-FTA imports from China.

The requirement of EDI should be made mandatory for imports from FTA and preferential trade agreement (PTA) partner countries, it added. The council suggested that after discussion with the stakeholders, the Import Trade Price (ITP) should be fixed on the basis of the country of origin, weight and volume, depending on the industry.

The ITPs should be fixed for most items prone to mis-declaration such as consumer goods and the margins of commercial importers should be monitored to assess the value of subsequent supply of imported goods.

For items, prone to under-invoicing and mis-declaration, the Federal Board of Revenue (FBR) should designate one or two ports, including the dry ports, for clearing of import consignments. This will allow better monitoring of the import consignments where chances of mis-declaration are on a higher side.

Monthly sales declared by commercial importers should be matched with the sales declared in the annual income tax return, as well as the credit entries in all business bank accounts.

In case of any discrepancy, a reconciliation with justifiable reasons should be submitted by the commercial importers.

Transparency in the collection of taxes will discourage mis-declaration, as measures to discourage evasion of taxes and duties will help the industry fairly compete with unscrupulous imports and the government will also benefit from the increased indirect taxes. It will also help in accountability of the Customs staff and will reduce the incidence of Customs duty and sales tax evasion and increase the government revenues.