Under-invoicing denies local industries level-playing field

LAHORE: Under-invoicing is an uncompetitive practice that denies the domestic industries a level-playing field. It is, in fact, more injurious for the economy than the cartels as it transfers precious jobs outside the country.

Yet, we have never heard the Competition Commission of Pakistan (CCP) taking any action against this malpractice. Discussions with the CCP officials reveals that commission thinks that interfering in import matters is beyond its mandate as it is the duty of National Tariff Commission (NTC) to keep an eye on unfair imports. There is fine line that separates the CCP and NTC, both of which aim to ensure that businesses operate fairly; former ensures fair competition and the latter prevents foreign products from being dumped in Pakistan.

The CCP keeps an eye on the market and acts on its own whenever it finds any uncompetitive behavior. The NTC, on the other hand, waits for the domestic industry to lodge a complaint against imports that are cheaper than its cost of doing business.  The NTC accepts to investigate the complaint if it is lodged by manufacturers representing at least 25 percent of the total domestic production. The NTC, then, investigates the complaint through a lengthy process that may take a long time. 

Pakistan is among countries which imposed the lowest number of antidumping or countervailing duties on foreign imports. Moreover the NTC do not ban the import of any item but simply raises duties to offset the dumping impact.

As far as under invoicing is concerned, even 100 percent increase in import duty cannot provide any relief to the domestic industries. We have seen numerous domestic industrial sectors closing down because of a massive under invoicing. One could count on fingertips the number of artificial leather manufacturers that were over six to seven dozen only two decades back. 

The capacities of tyre manufacturers are not being fully utilised though the tyre consumption has increased manifold in the past two decades. The tile manufacturers are closing one after the other. Some most reputed firms have been booted out of the market through under-invoiced imports. Again the demand of tiles has increased at an astonishing pace in the past 20 years.

The auto part manufacturers in Pakistan have a limited domestic market available to them, which is due to compulsory use of local parts by domestic car assemblers. After-market sales of auto parts they produce are denied to them by under-invoiced auto parts. And, this market is many times bigger than the annual domestic sales of parts that the auto parts manufacturers supply to car assemblers. The auto parts produced by these auto parts manufacturers are certified of being the same standard as those used in the multinational brands in Japan. The list goes on and on and the closing down of domestic industries due to under-invoicing cost the country millions of jobs. Moreover, several industries destined to graduate into exports through reaching economies of scale have died down.

The menace of under-invoicing is successful due to clever understanding between the importers and the custom officials. Curbing this malpractice is possible through technology if there is a will to do that. Most of the under-invoiced products are finished products. They are produced from the same inputs as used by domestic industry. For instance, in cases of tyres the inputs are carbon, rubber and steel. Most of these inputs are imported from abroad and cleared after payment of duty and sales tax. Each tyre is produced according to the globally agreed specification and each tyre contains specific amount of carbon black, rubber and steel wire.

Now if a tyre is being imported at below the cost of its main inputs it is definitely under-invoiced. This is because the custom officials are regularly clearing these inputs imported by domestic tyre producers. A software could be developed for each product and its cost calculated on the basis of the price of each ingredient used in it in addition to energy, labour and management cost. This would eliminate under-invoicing.

In Pakistan, the bureaucracy protects itself with ‘loading’ the import by ‘increasing’ its import value for duty determination. If a product valued Rs100 globally is imported at Rs10 the importer ends up saving duty and sales tax on 90 percent value. If the custom official then increases the value for duty determination to Rs20 the value increases by 100 percent but the importer still saves 80 percent of government levies.