COMMENT
To curb revenue leakages, the government needs to rein in those who are involved in under-invoicing and under-filing, as well as those who do not file their tax returns. The Federal Board of Revenue (FBR) too needs to take those officials to task who are found involved in aiding the businessmen and traders in evading taxes.
Contrary to common belief, under-invoicing does not benefit consumers. If a product is worth Rs100 in the global market and the import invoice is made for Rs10, the importer pays the remaining Rs90 to the foreign suppliers through hundi or hawala. The importer then pays duty and sales tax on the invoiced amount. This way he saves 90 percent of the government levies.
A product with 20 percent duty and 17 percent tax on duty paid value would then be officially imported at Rs14.04 (Rs10 invoiced value, Rs2 duty and Rs2.04 sales tax on duty paid value) the actual cost of import would be Rs90 paid abroad and Rs14.04 as per duty paid invoice and 2 percent hawala charges on Rs90 which comes to Rs1.80. The total cost comes to Rs105.04.
If the same product is manufactured in Pakistan at the global cost of Rs100, the producer is exempted from any duty. The duty in fact is levied to provide some protection to the domestic producer. However, the rate of sales tax is the same as on imports. This means the producer is liable to pay 17 percent sales tax on the product.
This will escalate his cost to Rs117 which is Rs11.96 higher than the cost of the same product to the importer. It would thus be impossible for the domestic producer to compete with the under-invoiced product. This means closure of domestic industry and loss of all jobs. Or in other words this means creation of jobs in the supplier country.
The planners have been trying to control under-invoicing through the evaluation wing of the Pakistan customs. This has miserably failed, as the evaluation depends on the discretion of the official evaluator.
The rates at which tyres for instance are released, does not even cover the cost of raw material used in them. Incidentally, these raw materials are imported in the country by domestic tyre manufacturers that pay duty and sales tax on these imports.
Similarly, artificial leather is imported at 10 percent the original cost. Tile manufacturers complain that the rates at which tiles are being imported from Europe are much lower than the cost of tile produced in Pakistan.
Another point worth noting is that a product imported at 10 percent original cost is retailed in the market at higher than its original cost. If the cost of the allegedly under-invoiced item is the same as declared, then its retail price should be much lower or the importer should be paying exorbitant income tax. The record of import is available with the FBR, and its income tax department can retrieve it. The retail price of the product should be the reference price, minus usual wholesale commission. These steps, if taken, could discourage under-invoicing.
Another fall back of under-invoicing is that in order to compete with under-invoiced products, the domestic producers resort to under-reporting of their production. If they report 50 percent of their production, they save 50 percent of the sales tax, and if they conceal 90 percent of the production, their cost comes at par with the imported products.
Seeing this trend, some of the industries that are not even impacted by imports, resort to under-reporting production. The beverage sector for instance is one case where the companies operate on full capacities but oppose collection of sales tax on capacity basis. The businessmen oppose electronic monitoring of goods dispatched from production facilities. The tax collectors are also reluctant to introduce this transparent measure because this would deprive them of the personal “revenue” they collect from the under filers.
A glaring example of tax evasion was witnessed six months back in Lahore when customs evaluation increased the import tariff price of readymade garments from $4.8 per dozen to $3.3 per piece. Containers were being released for years at $4.8 per dozen which even at current dollar rate means Rs42 per garment. It is pertinent to note that even a meter of lowest grade fabric is retailed at double this price. The garments that are imported are of finer fabric. This price fixed for custom duty collection does not even cover the stitching charges.
Some honest customs official re-evaluated the import tariff price to the higher and realistic level of Rs346 per piece. The imported jeans, trousers or men’s shirts retail above Rs1,000 in the market, and even after paying duty on this price, the importer could earn over 40 percent profit. But the importers and chambers in Punjab protested strongly against this measure. The ITP seems to have been silently reduced and probably the evaluation officer transferred.
The connivance of the businessmen and the custom officials can be judged by the fact that whenever local manufacturers come up with solid irrefutable proof of under-invoicing the custom staff increases the ITP by a very high percentage of 20-30 percent. This is not the proper solution. If a product is being imported at 10 percent of its actual value, an increase of 20 percent would mean that it would now be imported at 12 percent of the original value. This was done a few years back in case of tyres and tubes. The IPT should be increased to realistic levels.
Pakistan is transferring at least a million jobs to countries from where the tyres are imported because of under-invoicing. The local industry is fulfilling only 20 percent of the local tyre demand, despite having much higher capacities. This is happening simply because the under-invoiced tyres are cheaper due to the nominal sales tax on low-declared value, while the domestic companies pay the full sales tax on the actual value.
The under-invoicing and under-reporting of production is a double-edged sword, as both deprive the national exchequer of revenue. The worst thing is that these malpractices are not done in isolation but with the connivance of those that are supposed to collect government taxes.
The writer is a staff member
