Analysis on under-invoicing of Imports into India

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.

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.

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.

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.

Secondly, Indian importers may avail foreign trade zones or free-ports to import goods from China in that place and export the goods to other countries, with that location serving as its warehouse without the intervention of the customs authorities. Since, these goods would never enter Indian territory, they wouldn’t be accounted as imports into India but they may be reported by the Chinese as its exports to Indian customer.

Under-invoicing of imports may also be used to weaken the competitiveness of domestic producers of a particular item as dumping of the products in this manner affects the prices of local produce and dents the progressive growth thereon.

To help the governments reduce the degree of trade mis-invoicing, Global Financial Integrity has developed a tool – GFTrade – that can be used by customs officials to compare the declared prices on invoices of imports and exports in real time (i.e. while goods are still in the port) against prices for the same product traded between the same two trading partners over the previous 12 months. The comparison enables customs agencies to flag any invoices with prices that may be overstated or understated and that could be indicative of trade mis-invoicing for further investigation.