Analysis on under invoicing of imports into india

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Analysis on under-invoicing of Imports into
India
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• In todays 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.

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• For example, instead of paying US100 per unit,
  the importer can arrange for the invoice to read
  US50 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 US50, the
  importer will still owe the remaining US50 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.

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• 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 _at_ 1 of CIF
  1.0
  0.8
• C. Assessment Value (AB)
  101.0
  76.1
• D. Basic Custom Duty _at_ 20 of Assessment value
  20.2 15.2
• E. Social Welfare surcharge _at_ 10 of BCD
  2.0 1.5
• F. sub-total (CDE)
  123.2
  92.8
• G. IGST _at_ 18 on F
  22.2
  16.7
• H. Total Value (FG)
  145.4
  109.5  
• Total Duties GST payable (DEG)
  44.4
  33.4

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• 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 US13.0 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.

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• 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 wouldnt 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.
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