Pakistan Business Council’s Make-in-Pakistan thrust highlights the extent of under-invoicing and its adverse effects on Pakistan’s tax revenue and manufacturing sector. Though it is highly likely that Pakistan’s imports are under-invoiced, it is hard to gauge from available trade data alone.
In Pakistan’s case, in volume terms the largest discrepancy exists in the difference between imports reported by Pakistan as compared to exports to Pakistan reported by China. However, when China’s imports from India and US were compared to their reported exports to China, substantial discrepancies were found as well. With the sole exception of UK’s trade with India where the difference between reported figures of the two countries is negligible, substantial discrepancies were found in trade figures reported by the selected countries. In EU’s case in particular the discrepancy is quiet startling but that is because EU’s reported figures consist of 28 different countries, not all of which reported data to ITC.
What can explain the differences? Are importers from across the globe under-invoicing? That is one possible explanation. A more plausible explanation is that there are differences in valuation. Imports are generally reported on the basis of cost, insurance and freight (CIF) while exports are reported on a free on board (FOB) basis. Inconsistency among reported figures also stems from differences in time of recording, processing errors and the accuracy and quality of data provided by the reporting country.
UN COMTRADE estimates that CIF and FOB differences alone account for 10 to 20 percent of discrepancy between reported data. Barring EU (reported data is incomplete), the average discrepancy for trade with US was 10 percent whereas for trade with India was 19 percent. This indicates the fairly common sense assumption that the level of development of a country is inversely related to discrepancy of its trade data.
Not including EU, Pakistan’s average discrepancy for the selected countries was 26 percent. It is the nature of illicit trade activities that it is hard to find an evidentiary enough paper trail. Though trade statistics alone cannot provide precise information, general trends and magnitude of differences can be identified. In this case, the higher average percentage of trade discrepancy indicates that some degree of under-invoicing is taking place, though it is hard to gauge the extent of it.
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