In today’s age of globalization, imports from and exports to other countries have provided the consumers with a choices galore. Items are imported and exported by a country from/to the other country on the basis of the competitive advantage they have on the particular items.
2. In today’s age of globalization, imports from and exports to other countries have
provided the consumers with a choices galore. Items are imported and exported
by a country from/to the other country on the basis of the competitive advantage
they have on the particular items. Sometimes, this increased trading activity also
brings across several challenges, trade mis-invoicing being one of them. Trade
mis-invoicing is part of the larger picture of illicit financial flows and the global
shadow financial system. The mis-invoicing occurs through commercial invoices
and customs declarations, but the transfers and motivations involved are linked
to money laundering, beneficial ownership, and cross-border tax evasion or
avoidance. Import Under-Invoicing is mainly undertaken to evade customs
duties/GST and to avoid regulatory requirements for imports over a certain value.
In the wake of restrictions and increased scrutiny of imports from China, India
has noticed huge number of instances of trade mis-invoicing in case of imports
from the former.
3. For example, instead of paying US$100 per unit, the importer can arrange for
the invoice to read US$50 per unit and save on the custom duties and GST
that would have been payable at the higher unit price. Upon paying the
invoice at US$50, the importer will still owe the remaining US$50 to the
original producer abroad and therefore must also have a separate means of
shifting money abroad in order to complete the transaction, largely done
using unaccounted money. Sometimes, under-invoicing of imports is done
for shifting un-taxed money out of the country to pay the actual amount
owed. Import under-invoicing is also common method for evading capital
controls. Since more wealth is being brought into a country than is actually
being declared under the guise of trade, import under-invoicing results in
illicit inflows of funds into a country. Under-invoicing of imports also causes
significant revenue losses to the government.
4. Consider the following example for import of a certain items on which the BCD is 20% (say) and
IGST rate applicable is 18% (say) without any additional duty or countervailing duty.
Normal case Under-invoicing cases
Particulars Amount (₹ in crores) Amount (₹ in crores)
A. CIF value at Indian port 100.0 75.3
B. Landing charges @ 1% of CIF 1.0 0.8
C. Assessment Value (A+B) 101.0 76.1
D. Basic Custom Duty @ 20% of Assessment value 20.2 15.2
E. Social Welfare surcharge @ 10% of BCD 2.0 1.5
F. sub-total (C+D+E) 123.2 92.8
G. IGST @ 18% on ‘F’ 22.2 16.7
H. Total Value (F+G) 145.4 109.5
Total Duties & GST payable (D+E+G) 44.4 33.4
5. We notice in our example that the importer was able to evade duties and taxes to the tune of ₹
11 crore by under-invoicing the CIF value of goods actually costing ₹ 100 crore at ₹ 75.3
crore. In recent times, there has been several news reports on massive under-invoicing of
imports into India from China. Customs authorities have issued notices to 32 importers from
the last week of September for suspected tax evasion of about Rs 16,000 crore through
under-invoicing from April 2019 to December 2020. Also, as per the June 2019 Global
Financial Integrity report, it identifies potential revenue losses of US$13.0 billion, which is
equal to about 5.5 percent of total tax revenue collections in India in 2016. Presently, the
news of the trade data mismatch of India and China of $11 billion with China reporting its
exports to India over $103 billion versus $92 billion reported by India is currently making
waves and is attributed to ‘under-invoicing’ by Indian importers for the imports originating
from China. Prima facie, this asymmetrical data may signal towards under-invoicing, which
may form some part of the $11 billion discrepancy, but it may be also due to a variety of other
reasons as well.
Under-invoicing may be only one of the reasons among many for this discrepancy in the
reported trade data. Firstly, the discrepancy in some part may be due to High Sea Sale
(HSS) transactions where an Indian importer may buy certain goods from China and export
the same to, say Indonesia, without the goods ever entering the Indian customs territory. This
sale may be accounted by China as sales to India but the goods will not show up in the trade
data of India as they never entered the Indian customs territory. In the same way, an Indian
importer may Merchanting Trade transactions (MTT) whereby the imported goods are re-
routed to a third country in a bill to-ship to model without the goods ever entering Indian
customs territory.