In a startling disclosure, the Auditor General of Pakistan has unearthed a Rs520bn loss to the national kitty during audit year 2013-14 due to the evasion of duties and taxes in four selective areas of customs and the Federal Board of Revenue.

The final audit report on the tax-to-GDP ratio has been submitted to the president and will be laid before the two houses of the parliament.

While most of the causes of the low tax-to-GDP ratio identified by the Auditor General (AGP) are generally well known, the latest report provides a critical insight into specific areas where targeted action and remedial measures could lead to the avoidance of significant revenue loss.


The audit reported that the loss to the exchequer due to the under-invoicing of imports from China alone amounted to Rs92bn in three years


The AGP has concluded that the prevalence of corrupt practices among the taxation machinery, importers and taxpayers is a major cause of the continued low tax-to-GDP ratio. Inadmissible tax exemptions and concessions also remain major factors.

He said “Smuggling, under-invoicing, under-valuation, misdeclaration, misclassification, misuse of exemptions and concessions, disposal of confiscated goods at inappropriate prices and inconsistent policies are the key tools of evasion of duty and taxes and the factors responsible for the low tax-to-GDP ratio.”

Mainly because of these reasons, the AGP noted that Pakistan’s tax-to-GDP ratio either remained static or worsened between 2003 and now, while that of its regional peers like India, Bangladesh and Sri Lanka consistently improved.

It noted that if tax evasion was curbed, then there was no need to impose new taxes. The report added that the AGP’s effort was to identify and examine tax evasion issues ‘having mega impact on the economy,’ even though the FBR did not provide it with soft data or records. Consequently, the auditors relied mostly on approximate losses based on third-party sources and reports available on the FBR’s website.

The AGP found Rs401.848bn worth of duty and tax evasion due to under-invoicing and under-valuation during the target year, including Rs92bn in losses on account of imports from China alone.

It said the UN statistics division quoted Pakistan’s total imports at $43.578bn, while the Pakistan Bureau of Statistics (PBS) put this number at $40.4bn. The audit worked out that the $43.578bn in total imports comprised $28.568bn in dutiable and $15bn in duty-free imports. The customs rate ranged between 5-50pc on consumer goods and 60-150pc on luxury items.

Meanwhile, when a mean rate of customs duty and related taxes of 13.94pc was applied, the collection came to Rs1.051tr, against the FBR’s actual collection of Rs579.6bn. After accounting for Rs166.8bn of exemptions for the said year, the duty and tax shortfall was put at Rs305bn.

Furthermore, if the revenue from the sale proceeds of confiscated goods and vehicles and the recovery of arrears was excluded from the actual customs duty collection of Rs185bn, the level of evasion would be much more. Even on the basis of PBS figures, the shortfall was put at Rs183bn.

The audit reported that the loss to the exchequer due to under-invoicing of imports from China amounted to Rs92.016bn in three years. It said Pakistan and China had entered into a treaty in November 2006 under which Islamabad allowed exemption and concessions on the import of 5,909 items that were produced and manufactured in China.

The AGP noted that the comparison of UN data with that of the FBR indicated that goods imported from China were consistently under-invoiced by importers to gain illegal financial benefits.

The AGP said the FBR’s amnesty scheme for smuggled vehicles, introduced in March 2013 by then-finance minister Salim H. Mandviwala, had caused a Rs50.52bn loss to the national kitty. A total of 51,011 smuggled and non-duty paid vehicles were legalised under this scheme across the country.

Without taking into account the realisable revenue without this scheme or through the sale or auction, the auditor noted that the targeted revenue was not collected despite a much higher number of vehicles estimated for regularisation. The scheme envisaged legalisation of 23,000 vehicles and Rs30bn in revenue.

“However, the number of vehicles legalised was more than double of the expected number, but the revenue realised was only Rs16bn.” The report said the authorities should have earned Rs66.52bn when considering the number of vehicles that were actually legalised and the per-vehicle tax rate, which left a gap of Rs50.5bn.

The report also noted losses of Rs19bn to the Pakistani economy due to the misuse of the Afghan Transit Trade Agreement and Rs10.6bn on account of blockage of revenue due to non-disposal of confiscated goods and vehicles. Inadmissible exemptions and SRO-based concessions, without fulfilment of requisite conditions by importers, contributed to a further loss of Rs30.83bn.

The auditors said the customs department’s internal controls were weak and ineffective, as various lapses were identified during the audit. “There was poor monitoring of collection of customs duty and related taxes, weak reconciliation mechanism, inadequate coverage of internal audit, and non-conducting of physical verification of inventories and assets.”

On top of that, the report found that the internal control mechanism was deteriorating day by day, as a number of containers were found without invoices and packing lists. Other anomalies included the existence of duplicate PCT headings, feeding of lesser rates of customs duty and insertion of unauthorised PCT headings into the PRAL system, and the clearance of imported goods without the realisation of the assessed revenue.

Published in Dawn, Economic & Business, July 27th, 2015

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