A hidden revenue leak

LAHORE: Under-invoicing of imports — the practice of declaring artificially low values to evade taxes and duties — continues to drain Pakistan’s economy, costing the exchequer billions of rupees every year.

Per estimates by the Pakistan Business Council (PBC), the country lost up to Rs1 trillion in 2022 alone due to this practice. The mechanism is simple: importers route goods through shell companies in Dubai or Singapore, declare a lower invoice value at Pakistani customs and pay the remaining amount through informal channels such as hawala or hundi.

The incentive is strong. With combined duties, sales tax and withholding tax driving import costs well above global averages, the temptation to misdeclare remains high. Economists argue that poor governance and weak enforcement make Pakistan particularly vulnerable. The result is not only lost tax revenue but also unfair competition for law-abiding businesses forced to compete with under-invoiced imports.

Yet Pakistan is not alone in grappling with the issue. Even in better-governed India, under-invoicing persists. Global Financial Integrity (GFI) estimates India lost $13 billion in potential revenue to trade misinvoicing in 2016 alone. It further adds that India’s annual trade misinvoicing stood at a staggering $67.5 billion during 2009-2018, dwarfing Pakistan’s average of $8.5 billion.

India’s problem is partly one of scale. With trade volumes exceeding $700 billion, even a small percentage of misinvoicing translates into massive losses. High tariffs on electronics, gold and luxury goods add further incentive. Despite stronger institutions than Pakistan, customs authorities struggle to monitor busy ports, thousands of miles of coastline and porous land borders.

In Bangladesh, trade misinvoicing averaged $8.2 billion annually over the same period — roughly on par with Pakistan. Complex tariffs and the entrenched use of informal money transfers sustain the problem there as well.

China’s case is different. For years, companies have engaged in misinvoicing not only to avoid taxes but also to move money abroad, bypassing Beijing’s strict capital controls. Exporters have also inflated invoices to fraudulently claim higher tax rebates. Despite repeated crackdowns, the sheer size of China’s trade — the largest in the world — allows ample room for manipulation.

In advanced economies such as the US and Japan, under-invoicing exists but on a much smaller scale. Low average tariffs and strong enforcement reduce the scope for systematic evasion. Instead, cases are more often linked to trade-based money laundering, particularly in connection with narcotics or sanctions evasion.

Pakistan’s dilemma, however, is unique. The combination of high import duties, weak monitoring systems and a thriving informal money market makes under-invoicing especially lucrative.“Governance is a factor,” said one trade analyst, “but incentives matter more. If honest importers are penalised with high taxes while dishonest ones benefit from under-invoicing, the system itself rewards illegality.”

For Pakistan, plugging this revenue leak may be as important as negotiating with the IMF or boosting exports. As one customs officer quipped: “If we could stop under-invoicing, we wouldn’t need half the loans we keep begging for.”