FTO probe traces shell corporations used to invoice imported goods

 The Federal Tax Ombudsman (FTO) has confirmed that some importers have set up 'shell corporations' in Dubai to manage under-invoicing of goods imported into Pakistan, resulting in massive revenue leaks.

According to a special study on deficiencies in FTO's assessment procedures (customs), the FTO initiated an inquiry into its movement in relation to the issue of ongoing under-invoicing of imported goods. During the Consultative Customs investigation, it was found that there was a marked difference between the disclosed value and the actual price reported to the UAE Customs authorities. Preliminary investigations revealed that some of the importers had set up 'Shell Corporation' in Dubai to manage under-invoicing of goods imported into Pakistan, resulting in revenue leakage in the country as well as loss to the domestic industry. has a negative impact on performance.

The Directorate General of Customs Assessment, after analyzing Pak-China import data, identified key areas where under-invoicing was on the rise. The Valuation Rules (VR) of these areas were taken up for review. It is estimated that the extent of under-invoicing on imports into Pakistan has decreased due, for example, to the trade gap between Pakistan and China (which is Pakistan's largest exporter of consumer goods) year on year. In 2015, it has reduced. over 33%. 9% as of June 2020.

During the investigation

the Federal Board of Revenue (FBR) informed the FTO that the Customs Act permits the use of information obtained through data exchange to determine the customs value. This was the legal basis for activating the Pakistan-China Electronic Data Exchange Agreement (EDEA), whereas Sections 26A and 26B of the Act required customs officials to make declarations and discharge duties and taxes. Give the option to set. , These options provide the basis for Post Clearance Audit (PCA) for both importers and exporters, which is a key pillar of modern customs management. Customs regulations contain detailed procedures for the determination of the value of goods by customs.

Secretary Customs Valuation FBR said that in some cases, Directorate of Customs Assessment fixes minimum prices for imported goods through issuance of Valuation Rolling (VR) to prevent short invoicing of imports. In addition, VRs were issued to provide uniform guidelines for freight, packaging, etc. There are many items that are considered low risk for various reasons. The report of the FTO states that in case of such articles/categories the department either accepts the declared value or makes an estimate based on the criteria laid down by the assessment.

The FBR further clarified that valuation controls are mostly exercised at the import stage where the value of the transaction is not known. A number of documents are required to determine the true value of the imported goods for determination of value under Section 25(1) of the Customs Act. However, if the detailed documentation at the import level is verified and verified in real time at the ports, it will result in clearance delays, port congestion, demurrage etc. Therefore, the department had to rely on the documents submitted by the importers. Which, in the case of the informal sector, is often manipulated or not real. Most of Pakistan's informal sector, especially wholesale and retail, imports goods through a network of middlemen, brokers and agents.Some of these middlemen resort to various forms of corruption to maximize their profit margins and this is one of the major issues related to low invoicing in import of goods. Sometimes, some unscrupulous traders, in order to avoid getting a fair price for the imported goods, furnish vague declarations of quantity (such as fabric in meters instead of kilograms), description and rating. Although customs officials are wary of such misrepresentation, overwork and workload often result from misappropriation of goods.

The FTO study found that historically the government maintained high tariffs to protect domestic industries from imported goods, a major cause of under-invoicing. It was estimated that the average annual net income loss due to under-reporting of value was about 11% of the total revenue from customs tariffs. In this regard, it was noted that the analysis of import data received from UAE by the Pakistan Business Council showed that due to large discrepancies in the import price, the loss is estimated to be around Rs 150 billion per year.

Thus, under-invoicing of imported goods is a serious and complex issue which adversely affects the economy in many ways. This leads to an uneven playing field, unfair competition and is detrimental to locally manufactured equipment. While it is generally believed that a reduction in tax rates will have a positive impact on under-invoicing, there has been no significant reduction in the incidence of under-invoicing with the gradual reduction in customs duty. It is highly demanded by the traders, but the manufacturers are not far behind.

An earlier review of the Customs Assessment System by the FBR proved that several factors played a role in the present situation. These include issues related to the current business process that are focused on the withdrawal phase, a weak risk management system (RMS), an inefficient PCA organization, business practices resulting from a large informal undocumented economy, as well as issues involving integrity and Does bad accountability. Department, maintained FTO.

Apart from establishing audit-based controls to identify vulnerabilities in RMS and tackle under-assessment of existing inefficient PCAs, the department was to develop a comprehensive mechanism to verify trade declarations to prevent such systemic mismanagement .

The FTO directed the FBR and PCA to follow up on cases pending before various decision-making forums and to provide information about commercial importers doing business in these items to the IRS. The data can be cross-matched with sales tax and income tax returns filed by taxpayers. Departments other than revenue leakage.

The FTO also recommended some necessary institutional and systemic reforms under invoicing, including development of a dynamic risk management framework, strengthening post-clearance audits, use of national clinical databases and exchange of information within the respective offices. is included.