Smuggling and under-invoicing: government urged to provide protection against illegal imports

Local engineering and manufacturing industry has urged the government in its budget proposals to provide "protection from illegal imports, which increases their vulnerability to misdeclared and under-invoiced goods". In recent years, smuggling and under-invoicing has increased and it has become a bane for the local vendors.
"It is very easy to bring auto parts into Pakistan by mis-declaration, especially at Karachi Ports," alleged a local vendor. Although some efforts have been made by local customs authorities from time to time to stop this illegal business without even making a dent on such illegal imports, an auto parts manufacturer Arshad Awan, General Engineering's CEO said.
The country annually suffers a loss of Rs 10.3 billion in tax revenues on smuggled, counterfeit and mis-declared/under-invoiced imported auto parts, claimed domestic car industry sources. "Almost all types of auto spare parts, ranging from critical engine and transmission parts such as rings, pistons, gaskets, maintenance parts like oil filters and air filters, are being imported from Thailand and Dubai in astonishing quantities, making it hard for local vendors to survive," claimed the local manufacturer.
Sources said that importers involved in mis-declaration are selling their goods at rates 50-60% less than locally-made goods or imported via proper channels, adding that such importers have mushroomed to such an extent that they have assumed the guise of a mafia rapidly spreading their business across the country. Many traders knowingly and unknowingly have started doing business with them to mint more profits, the sources said.
According to an industry source, a wide range of goods ranging from finished goods to spare parts and electronic items to consumables are being imported from Western and East Asian countries and many of these importers are cleverly using loopholes in import policies.
He said that while investigating a few cases regarding auto parts import, he found out that importers are very intelligently cheating the authorities by mis-declaring few parts in other categories saving applicable duties. For example, he said that shock-absorbers are allowed to be imported in ITP 8010 category paying 50% punitive duty as the part is being made locally, but some importers are importing it under ITP 8090, paying just 35% duty.
An expert on the subject said that a parallel alternative economy has taken roots in Pakistan and a major share of revenue to be collected by the government is being lost. It is a big question mark on the credibility of law-enforcement and relevant authorities but no effective action has been taken.
An auto industry expert also agreed with the assertion that auto parts were being cleared through mis-declaration and said that all importers were clearing shock-absorbers in different PCT Pakistan Custom Tariff to save 15 per cent additional duty as per Pakistan Customs Tariff ACT chapter 8708. Instead of clearing it into 8708.8010, many individual importers are clearing it into 8708.8090 which are for other parts and not for shock absorbers, an auto vendor said.
A senior executive of a leading car manufacturer said that the collective share of three major car assemblers' accounted for just 13 per cent (Rs 3.3 billion) of the estimated Rs 25 billion auto parts market for up to 10-year-old vehicles. The market share of smuggled auto parts was estimated at Rs 3.8 billion, counterfeit parts being sold as original at Rs 2 billion and imported parts at Rs 16 billion.
While government receives no taxes on smuggled and counterfeit parts, importers hide true value of their consignments and indulge in under-invoicing. "Importers pay a paltry sum of Rs 1.6 billion as taxes on their imports, which account for 64 per cent of the total auto parts market," the executive, who requested anonymity, contended.
"Thus the government is losing tax revenues of Rs 1.59 billion on smuggled parts, Rs 1.06 billion on counterfeit parts and Rs 9.28 billion on imported parts," he argued. On the other hand, he said, assemblers were paying more than Rs 1 billion as tax for their small share of Rs 3.3 billion in the market. Imported auto parts attract 73 per cent taxes (35pc import duty, 15pc additional duty, 18pc GST, and 5pc income tax) on their declared value.
Syed Nabeel Hashmi Chairman Pakistan Association of Auto Parts and Accessories Manufacturers (PAAPAM) said: "A huge quantity of auto parts is being imported from China and these parts are easily available in all markets. But interestingly nobody knows how these parts are being imported as the local customs authorities don't have any record of the import of these parts."
Hashmi said that vendors are already facing several challenges, which include high cost of production due to energy shortages, non-availability of skilled labour and no government support for enhancement of capabilities. He added that the Auto Industry Development Committee (AIDC) program, although approved by the government, had not been implemented yet.
Another issue is used cars which are generally junk with no after-sales service or parts availability. It discourages expansion plans of local OEMs and Auto Parts Manufacturers, which in turn deprives the country of employment, industrialisation and technology transfer he said.
Both Original Equipment Manufacturers (OEMs) & Auto Part Manufacturers (APMs) have invested heavily and are further investing towards capacity expansions to meet the local demand. Capacity expansion requires reasonable lead time and must be encouraged by banning import of used cars.
He suggested that all auto imports should be assessed in units rather than kilograms. PAAPAM, he said, should be involved as an expert to assist customs staff to assess proper values of auto parts import in order to deal with mis-declaration. Hashmi said: "Engine, transmission and body parts, which are replaceable, are more prone to mis-declarations whilst smaller parts, like bearings and other hardware, being small and smuggled into Pakistan. However Pakistan customs assessed value as declared by importers was under $160 million."
"A strong recommendation was given by an OEM that the government should focus into mis-declaration issue which is causing billions of revenue loss to the national exchequer and creating hurdles to bring more foreign investment into the country with latest technology," he said.