Federal Tax Ombudsman (FTO) has confirmed that certain importers have established ‘shell corporations’ in Dubai to manage under-invoicing of goods imported into Pakistan, resulting in massive revenue leakage.
According to a special study of the FTO on flaws in Valuation Procedures (Customs), the FTO initiated an own motion investigation regarding persistent under-invoicing of imported goods, the case of under-invoicing. During Investigation by the Advisor Customs, it was observed that there was a glaring difference between the value disclosed and the actual value reported to UAE Custom Authorities. Preliminary investigation revealed that certain importers established ‘shell corporations’ in Dubai to manage under-invoicing of goods imported into Pakistan leading to revenue leakage as well as having adverse implications for the viability of domestic industry in the country.
The Directorate General of Customs Valuation, after analysis of Pak-China import data, identified major sectors where under-invoicing was rampant. The valuation rulings (VR) of these sectors were taken up for revision. It is averred that the extent of under-invoicing in imports was on the decline in Pakistan, For example, the trade gap between Pakistan and China (being the largest exporter of consumer goods to Pakistan) was reduced from 33 percent in the year 2015 to 9 percent up to June 2020.
During investigation, the Federal Board of Revenue (FBR) has informed the FTO that the Customs Act allows the use of information received through data exchange for the determination of customs value. This was the legal basis for operationalizing the Pakistan-China Electronic Data Exchange Agreement (EDEA), whereas, Sections 26A and 26B of the Act, empower officers of Customs to conduct audit of declarations and determine liability of any person regarding payment of duties & taxes. These powers provide the basis for undertaking post-clearance audit (PCA) of both importers and exporters, which is a critical pillar of modern Customs administration. Customs Rules contain detailed procedures relating to valuation of goods by Customs. A significant part of Pakistan’s imports comprises commodities/items that have published price mechanisms which is a transparent way of determining prevailing prices.
Secretary Customs Valuation FBR further contended that to curb under-invoicing of imports in certain cases, the Directorate of Customs Valuation fixes the minimum value of imported items through issuance of valuation ruling (VR). Moreover, VRs had also been issued to provide uniform guidelines for assessments such as for freight, packaging etc. There are a large number of items which are considered low risk for various reasons. In the case of such items/categories, the Deptt either accepts the declared value or assesses based on established yardsticks of valuation, FTO report said.
It was further elaborated by the FBR that the valuation controls are mostly exercised at import stage where the transaction value is not known. Determination of value under Section 25(1) of the Customs Act, requires several documents for ascertaining the correct value of imported goods. However, if detailed documentary checks and verifications are exercised in real-time at import stage at the ports, this will result in delay in clearance, port congestion, incurring of demurrages etc. Therefore, the Deptt had to rely upon documents submitted by the importers which, in case of the informal sector, are often either manipulated or not genuine. Majority of Pakistan’s informal sectors, particularly wholesale and retail, import goods through a network of middlemen, brokers and agents. Some of these middlemen resort to various malpractices to maximize their margins of profit and it is one of the main issues relating to under-invoicing in imports of goods. Sometimes, some unscrupulous traders, in order to avoid proper valuation of imported goods, submit vague declarations of quantity (e.g. fabric in meters instead of kilograms), description and classification. Although, the Customs officials are alert to such misdeclarations, yet the volume and load of work often result in improper assessment of goods.
FTO study revealed that it was observed that historically the government maintained very high tariffs to protect domestic industries from imported goods, which became a major cause of under-invoicing. It was estimated that annual average net revenue loss due to under-reporting of value was almost equivalent to around 11 percent of total revenue generated from customs tariff. In this regard it was noted that analysis of import data received from UAE, conducted by the Pakistan Business Council, revealed that major import value discrepancies had estimated annual loss of about Rs.150 billion.
Thus the under-invoicing of imported goods is a serious and complex problem that negatively impacts the economy in several ways. This also leads to an uneven playing field, unfair competition and is disadvantageous to locally manufactured goods. Although, the general perception that reduction in rates of taxes will have a positive impact on the under-invoicing, however, with the gradual reduction in the customs duties no major decline in the instances of under-invoicing had been observed. It is largely attempted by the traders but the manufacturers are also not far behind.
The review of customs valuation system previously conducted by the FBR established that several factors had contributed to the current state of affairs. These include issues relating to existing business process which is focused at clearance stage, a weak Risk Management System (RMS), an ineffective PCA Organization, trading practices resulting from a large informal undocumented economy, as well as issues of integrity and poor accountability within the Department, FTO maintained.
The department had to put in place Audit-based controls to recognize vulnerabilities in RMS and to deal with the undervaluation in presently, ineffective PCA besides developing a comprehensive mechanism for verification of trade declarations so this kind of systemic maladministration can be dealt with
FTO also directed the FBR and PCA to pursue cases pending before various adjudicating fora and pass on information pertaining to the commercial importers dealing in these items to IRS to cross-match the data with sales tax and income tax returns filed by the importers, to enable the department to plus the revenue leakage.
FTO also recommended some imperative institutional and systemic reforms to defer under invoicing that include development of dynamic Risk Management Framework, strengthening of Post Clearance Audit, use of national valuation database and Exchange of information within the relevant offices, FTO recommended.