Under-invoicing of Imports: A Case Study of Pakistan

Abstract

Most of the developing countries, including Pakistan, set high tariffs and stringent quantitative restrictions (QRs) to protect their domestic industries from foreign competition and to raise tax revenues. Both tariffs and QRs, due to the weak enforcement of controls, provide incentives to smuggle goods through illegal channels and to under-invoice imports through legal channels of trade to evade import taxes. In particular, under-invoicing of imports challenge both the abovementioned obj~ctives; that is. the under-invoicing of imports confers much lower protection to domestic industries than that accorded by statutory rates of import duties, while the tax revenues are lost as import taxes are evaded. Tariff barriers, QRs, and foreign exchange rationing give rise to black foreign exchange markets. Foreign remittances and under-invoicing of exports are the major supply sources of foreign exchange in black markets. On the other hand, the demand for illegal foreign exchange comes largely from the nationals who want to travel abroad, capital flight abroad, and the under-invoicing of imports which requires the purchases of black market foreign exchange to make full payment to the foreign exporter.