How to tackle under-invoicing

LAHORE: As Pakistan grapples with controlling under-invoiced imports, neighbouring India has effectively curbed this practice by implementing non ad valorem duties -- customs duties calculated based on factors other than the value of goods (ad valorem).

These factors include duties levied on a per-kilogramme basis or compound duties, where an additional percentage (eg, 5.0 per cent) of the item’s value is imposed alongside the per-kilogramme duty. Under the non-ad-valorem framework, the importing country charges whichever is higher between the specific and ad valorem rates. Technical duties, such as a fixed percentage per kilogramme, also fall under this mode.

India has strategically deployed non ad valorem duties to disadvantage imports from developing countries. These duties disproportionately affect low-value products from developing nations while sparing high-value goods from advanced economies. For instance, a high-value fabric from Italy or the US may incur a 10 per cent ad valorem duty exceeding India’s minimum non-ad-valorem duty of INR300 per kilogramme. However, the same INR300 duty on lower-value Pakistani fabric could equate to an exorbitant 150 per cent duty.

Pakistani authorities should adopt a similar non ad valorem approach, potentially adding hundreds of billions of rupees to the national exchequer. The advantages of such duties are many. These duties generate consistent revenue unaffected by price fluctuations, as they are based on specific rates (eg, Rs100 per kilogramme). This approach simplifies calculations and collection processes, bypassing reliance on potentially manipulated invoice values. Non-ad-valorem duties also protect against under-invoicing, which involves declaring artificially low values to reduce ad valorem duties. Since these duties are volume or unit-based, they insulate domestic markets from price volatility in imported goods and offer better protection for sensitive sectors or products.

While non ad valorem duties mitigate under-invoicing, they do not entirely eliminate it. Traders may still attempt to manipulate quantities, misclassify goods or exploit loopholes. Strong enforcement and advanced valuation methods are necessary to counter these tactics. However, challenges remain. Uniform duties can disproportionately impact cheaper goods, making them relatively more expensive. Combining ad valorem and specific duties may increase administrative complexity. Exporting countries might perceive high non ad valorem duties as trade barriers, leading to potential disputes.

Under World Trade Organisation (WTO) rules, non ad valorem duties are permissible if they are bound and applied transparently. Countries commit to bound rates during negotiations, which set maximum allowable tariffs. These can be ad valorem, specific or mixed.

The WTO’s most-favoured-nation (MFN) principle ensures non-discrimination among member states, except under specific agreements. Member countries must notify their tariff schedules, including any non-ad-valorem duties, to maintain transparency.

The country’s average applied tariff rate is approximately 9.03 per cent, compared to India’s MFN tariff rate of 14 per cent. Agricultural products often attract higher rates. While Pakistan is engaged in trade agreements offering duty concessions on specific agricultural commodities, implementing non ad valorem duties could provide a robust tool to combat under-invoicing and stabilise revenues, provided they align with multilateral commitments and avoid trade distortions.