According to the Federal Board of Revenue (FBR), the country loses about 150 billion rupees each year to under-invoicing in imported goods. This is part of the 600 billion rupees lost each year due to tax evasion (smuggling), and misuse of concessionary duties.
Even though smuggling and leakages under the Afghan Transit Trade (ATT) are frequently cited as major concerns by industry, under-invoiced and mis-declared imports, especially from UAE are considered to be worse since they have an advantage of formal customs clearance documents that allows them to feed into the formal economy. In addition to the industry’s concerns, the Government of Pakistan loses revenue owing to reduced duty, sales tax and income tax collections at the import stage.
This study examines trade between Pakistan and the UAE from 2005 to 2012 and looks at import prices when Pakistan imports from the UAE as opposed to when the same product is imported from other countries. Large differentials between UAE and world prices from one year to another without any plausible explanation or a subsequent increase in demand would appear to indicate discrepancy in valuations at customs. Such discrepancy in prices are seen in sectors such as machinery and electronic equipment, dyes and other chemical agents, plastics, products of base metals such as iron and steel, and parts of vehicles.
No direct correlation between prices and market share was found along products that showed differentials between UAE and world prices. Many products reported UAE’s prices to be vastly lower than world prices but this did not form a greater demand for UAE’s products. This is likely due to mis-declaration of imports.
However, inferences from this study suggest that the impact of such invoice discrepancies in imports from the UAE are in many cases difficult to ascertain and may even be exaggerated.
1) A major chunk of imports from the UAE during the period under review belonged to petroleum fuel and oils (89% in 2012). If we only consider the remaining product imports, imports from the UAE constitute a mere 3% of Pakistan’s imports from the world in 2012. This is down from 5% in 2006. The current non-petroleum import value from the UAE is roughly US$ 0.77 billion. Of these imports, only 9% of the product imports- as reviewed under this study- indicated any significant price discrepancies. As such any loss of revenue in taxes and duties at these values would be insignificant.
2) Valuation differentials as high as US$ 240,000 per ton have been observed along some product lines. However, many such products with large price differentials between UAE and world prices do not appear to translate into major and consistently high market shares for UAE imports. Some examples include food preparations, iron and steel products, hormones, medicaments, dirigibles and parts. Given the small quantities imported from the UAE, one may conclude that even if large price differential indicate any discrepancy in invoicing, they have little or no impact on the total revenue of the government given their low market shares or the quantum of import values.
Given the low volume of imports from the UAE and only a small portion of those imports showing distortion in price valuations, the adverse impact of these discrepancies is nominal. More so if compared to the reported losses in revenue that Pakistan has suffered from exemption of duties under the Pakistan China FTA (US$ 0.23 billion in 2012) or under the Afghan Transit Trade (estimated to be US$2.5 billion). In addition, China’s share in Pakistan’s non-petroleum imports nearly doubled to 24% from 13% between 2006 and 2012 after the implementation of the Pakistan China FTA in 2007. Trade diversion toward China may also have resulted in reduced share of UAE in Pakistan’s non-petroleum imports. This is likely to continue in the future given the growing emphasis on regional trade and the developing Pakistan China ties.