The magnitude of the discrepancy in the India-China official trade numbers as per data sets released separately by New Delhi and Beijing has widened further this year, amid rising instances of under-invoicing and potentially higher losses to the Indian exchequer despite efforts by tax authorities to plug loopholes.
The disparity between official figures on exports to India released by China and the imports from China reported by India jumped over 20 percent to $15.47 billion during the first 10 months of 2023, as against $12.75 billion in the corresponding period last year. Under-invoicing of imported goods involves marking the stated value of imports below the actual value paid to the foreign exporter, thereby reducing the import tax outgo.
The Ministry of Commerce and Industry in response to a query sent by The Indian Express said it had raised the issue of under-invoicing by Indian importers with the Department of Revenue under the Ministry of Finance and they had informed that for the period from January-November 2022, Directorate of Revenue Intelligence (DRI) and Customs formations had detected 896 cases of undervaluation and investigation and recovery process was underway in these cases, it said. “Further, to check such cases of under-invoicing, DRI and Customs field formations maintain constant vigil and take preventive measures like issuance of suitable alerts/modus operandi circulars etc, and take appropriate action as per law when such cases are detected,” the ministry said.
The level of discrepancy and the progressive widening of the gap is a cause for concern, according to trade experts. “The magnitude of the discrepancy in the India-China data is really large. It is a cause of concern since foreign exchange is a precious commodity for us. Such differences exist in our trade with the UAE too, but not with the US. Exporters have an incentive to underreport numbers but that is where regulators come in,” Biswajit Dhar, Professor, Centre for Economic Studies and Planning, Jawaharlal Nehru University said.
“There are gaps in our digital infrastructure and customs will have to do the due diligence. They can look into the unit value to see where the discrepancy actually lies. The granular numbers are not public domain. Now big data techniques are available and income tax authorities have used it well. It is difficult to understand why one wing of the finance ministry has been successful and not the other,” Dhar added.
Trade mis-invoicing resulted in losses close to $13 billion which is equal to about 5.5 percent of total tax revenue collections in India in 2016, Global Financial Integrity (GFI), a US-based think tank that focuses on illicit financial flows had said in a report. Almost two-thirds of the imports that appear to be most “at risk for some degree of potential revenue losses are imports from just one country – China,” the report said.
Trade experts said that the variation in the number could be partly explained by the different valuation methods used in international trade: FOB (Free On Board) and CIF (Cost, Insurance, and Freight) and under-invoicing of shipments by Indian importers to avoid paying import taxes.
FOB, the method India uses to report exports, accounts for the costs of goods and their transportation to the port of departure. In contrast, CIF, employed by China for import data, includes additional costs such as insurance and freight charges to the destination port, former trade officer and Global Trade Research Initiative (GTRI) Co-Founder Ajay Srivastava said.
“Typically, CIF values are higher than FOB, accounting for up to a 10 percent difference. However, this still leaves an unexplained 5 percent variance, which could be attributed to the timing of shipments and their recording in different months.
Indian reports cite imports of $73.1 billion, starkly contrasted by China’s reported figure of $101.8 billion. Given that India’s import figures should ideally be 10 percent higher than China’s FOB-based data (due to CIF terms), the expected import value for India should be around $112 billion. But the difference stands at a staggering 34.7 percent,” Srivastava said.
“This large discrepancy hints at possible under-invoicing of imports on a significant scale. Such practices, not only indicative of revenue loss, could imply dumping, a form of unfair trade practice detrimental to the domestic industry. This situation necessitates a thorough investigation at a product level, to understand the root causes and take corrective measures,” he stated.
The Commerce Ministry in its response said that there could be several reasons for the difference in trade data between the two countries, for example, under invoicing by Indian importers, over-invoicing by Chinese exporters, use of different INCO (International Commercial) terms by two countries viz. Cost Insurance Freight (CIF) or Free On Board (FOB) basis, different data collection methods by two countries, the difference in time period in recording transactions, etc.
“Moreover, the difference between the statistics published by China and India has always been there even prior to COVID-19 times when the deviation in trade data of two countries was approximately 19 percent,” the ministry added.
The Global Financial Integrity report had pointed out that India’s imports identified particular products that appeared to be at especially high risk for trade mis-invoicing in 2016 and identified nearly $1.8 billion in losses associated with just five product types.
Those products and the related estimated revenue losses included: edible fruits and nuts at $149 million, sugars at $78.8 million, cereals at $77.8 million and vehicles at $63.2 million, the report added.
Every year, roughly $1 trillion flows illegally out of developing and emerging economies due to crime, corruption, and tax evasion – more than these countries receive in foreign direct investment and foreign aid combined, the GFI report said.