PBC urges Govt to take action on under-invoicing of imports

October 06, 2023 (MLN): There is an immediate need to address the under-invoicing of imports as it is creating a significant revenue leakage and causing greater harm to the industry, as stated in a letter issued by the Pakistan Business Council (PBC) to the caretaker finance minister, Shamshad Akhtar, on Thursday.

The PBC has repeatedly shared with the FBR, the significant disparity in export values reported by China, Singapore, Germany, and the United Kingdom of their exports to Pakistan and the declared import values as reported by Pakistan Customs to the International Trade Centre (ITC).

ITC is a multilateral agency that has a Joint mandate with the World Trade Organization (VVTO) and the United Nations (UN) through the United Nations Conference on Trade and Development (UNCTAD).

Every calendar year, countries other than those from the GCC, report their trade figures. The extract from ITC in respect of trade for calendar 2022 between Pakistan, China, Singapore, Germany, and the UK was as follows:

Under the ITC convention, countries report (and Pakistan levies duty) on imports on a cost, insurance, and freight (CIF) basis, whilst exports are reported on FOB values.

Depending on the distance, value, volume or weight of goods shipped or air freighted, the insurance and freight cost can range between 10%-20% of the value shipped.

Using 10% as a minimum, the disparity in reported values mentioned above would rise from $7.51bn to $8.26bn, equivalent to an average 2022 exchange rate of Rs205/$ at between Rs1.539tr and Rs1.69tr.

Based on total trade disparity before adjustment for insurance and freight cost, and on three different assumptions of aggregate customs duties (CD, ACD, RD) i.e., 10%, 15%, and 30%.

To this needs to be added GST at 18% of duty-paid value and Withholding Income Tax of 6% on CST-paid value.

On this basis, the tax revenue loss suffered by Pakistan in 2022 at Rs205/US$ average exchange rate, is estimated at between Rs578.8bn to Rs963.9bn, as follows:

A revenue loss of Rs578bn at a low 10% cumulative duty rate is significant, let alone nearly Rs1tr on the more likely 30% cumulative duty.

The exact loss will need to be determined by the FBR/Customs by reference to actual duty rates on the items imported and in the case of China, whether a concessional rate applies under the FTA. In any case, the revenue loss is unlikely to be below Rs578bn.

“We have been recommending that Pakistan enters into agreements with its main trading partners for Electronic Data Interchange (EDI) on trade, which could potentially give real-time transparency on export values,” the notice further reads.

Some attempts were made in the past but technical and other reasons, including resistance from trading partners, have thwarted this effort.

This needs to be renewed, this time with determination similar to your government's efforts to thwart smuggling and misuse of the Afghan transit trade.

Secondly, when Customs receives information through EDI or of disparity between export and import values, it should move swiftly to recover lost revenue from the importer.

Finally, now that Pakistan has entered into an FTA with GCC, details of which need to be shared, it is vital that Pakistan secures EDI to gain information on export values to match import declarations in Pakistan.

The PBC also congratulated the government on its evident success in curbing smuggling and thwarting the misuse of the Afghan transit trade.

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