High incidence of taxes on imports: Under-invoicing, smuggling on the rise

LAHORE: Under-invoicing and smuggling are large due to high incidence of taxes on imports as 45 to 50 percent of the total revenue of FBR is customs-dependent out of which a major chunk is of sales tax and withholding tax, said sources.

They said the multiplicity of taxation at the import stage points towards not only high incidence of taxation but also the complexity of taxation structure of Pakistan. Therefore, customs import duties are not solely responsible for the high tax burden at the import stage but also motivate firms to under-declare, mis-declare, mis-invoice, and smuggling.

Over the years, the said sources, Pakistan has developed a system of collection of direct taxes in the mode of indirect taxes. Withholding tax (WHT), which is income tax for all theoretical and practical purposes, is collected at import stage at 6 percent which simply means that it is not being charged against income but against 'imported goods' from which the importer has not yet earned any income. Similarly, sales tax is also collected at import stage @ 17 percent with some exemptions and in certain cases reduced rates.

In the case of Pakistan, estimates suggest losses of more than $92.7 billion due to mis-invoicing from 1972 to 2013 for 52 major traded commodities. The gross revenue loss to the national exchequer is estimated at $21.1 billion during the said period. The annual average net revenue loss is estimated at around 11.2 percent of revenue from tariffs.

The Pakistan Business Council estimates losses of Rs 150 billion each year due to under-invoicing whereas total loss due to under-invoicing, smuggling, and misuse of the concessionary regime is estimated at Rs 600 billion per annum. There are guesstimates that under-invoicing through the Chinese border is causing loss of revenue in the range of US$ 4 to 6 billion per annum.

It may be noted that various studies suggest that tariff rates have a positive effect on import tax evasion. A one percentage point increase in tariff rate tends to increase the trade gap by 0.6 percent and in the case of differentiated goods increase in the trade gap is around 2.1 percent. Findings of another study suggest that a one-percentage-point increase in the tax rate is associated with a three percentage increase in evasion.

The sources said an increase in tax rates or additional levies have been used as tools of tariff policy under the assumption that increase in tariff rate or additional levy shall increase revenue in a simple linear relationship.

This premise is fundamentally a fallacious assumption. Increase in import tariffs not only reduces the competitiveness of businesses but also promotes tariff evasion through misdeclaration, under-invoicing, smuggling, and corruption.

Copyright Business Recorder, 2020