Karachi, October 6, 2023 – The Pakistan Business Council (PBC) has issued an urgent call to the caretaker government, demanding immediate measures to put an end to widespread under-invoicing, which is causing substantial revenue leakages.
In a letter addressed to Dr. Shamshad Akhter, the caretaker finance minister, the PBC lauded the government’s commendable efforts in thwarting the misuse of Afghan transit trade, recognizing the potential benefits to Pakistan’s tax revenue and the formal sector.
However, the PBC has brought to attention another critical issue of under-invoicing that is inflicting severe revenue losses on the national exchequer. The council revealed that it has consistently shared concerns with the Federal Board of Revenue (FBR) about the significant disparities between export values reported by China, Singapore, Germany, and the United Kingdom for their exports to Pakistan and the import values declared by Pakistan Customs to the International Trade Centre (ITC).
The PBC highlighted that the trade disparity with these four countries alone amounted to a staggering $7.51 billion in the year 2022.
The council further elaborated that, based on the total trade disparity before factoring in insurance and freight costs, and considering three different assumptions of aggregate customs duties (CD, ACD, RD) at 10 percent, 15 percent, and 30 percent, along with sales tax at 18 percent of the duty-paid value and a 6 percent withholding income tax on GST-paid value, “the estimated tax revenue loss suffered by Pakistan in 2022, with an average exchange rate of USD = PKR 205, ranges between Rs 578.8 billion to Rs 963.9 billion.”
Even at the lowest assumed cumulative duty rate of 10 percent, a revenue loss of Rs 578 billion is a significant concern, not to mention the nearly Rs 1 trillion projected loss at the more probable 30 percent cumulative duty rate. The exact extent of the loss will need to be determined by the Federal Board of Revenue (FBR) and Customs, taking into account the actual duty rates for imported items, and assessing whether a concessional rate applies under the Free Trade Agreement (FTA) with China. In any scenario, the revenue loss is expected to be substantial and unlikely to fall below Rs 578 billion.
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The PBC emphasized that Pakistan has previously entered agreements with its primary trading partners to establish Electronic Data Interchange (EDI) on trade, which holds the potential to offer real-time transparency on export values. Although previous attempts were made, technical challenges and resistance from trading partners hindered the full implementation of this initiative.
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The PBC concluded, “This initiative needs to be reinvigorated with the same determination as your government’s efforts to combat smuggling and misuse of Afghan transit trade.”
The Pakistan Business Council’s urgent appeal underscores the critical necessity of addressing under-invoicing promptly to safeguard the country’s revenue and ensure transparency in international trade transactions. The caretaker government’s response to this pressing issue is eagerly awaited.
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