July 5, 2019
Washington, DC – In a comprehensive study on the level of trade misinvoicing in India in 2016, GFI found that the estimated potential tax revenue losses to the Indian government that year is US$13.0 billion, equivalent to 5.5 percent of the value of India’s total government revenue collections in 2016.Trade misinvoicing is a method for moving money illicitly across borders which involves the deliberate falsification of the value, volume, and/or type of commodity in an international commercial transaction of goods or services by at least one party to the transaction and constitutes the largest component of illicit financial flows as measured by GFI.
Using a trade gap analysis, GFI was able to break down the estimated potential tax revenue losses to misinvoicing by measuring illicit financial inflows and outflows for both import and export under- and over-invoicing. GFI estimates that the value of the trade gap for misinvoiced goods equals US$74 billion, or 12 percent of the country’s total trade of US$617 billion in 2016.
The report, titled India: Potential Revenue Losses Associated with Trade Misinvoicing, analyzes India’s bilateral trade statistics for 2016 (the most recent year for which sufficient data are available) as published by the United Nations Comtrade database. The detailed breakdown of bilateral Indian trade flows in Comtrade allowed for the computation of trade value gaps that are the basis for trade misinvoicing estimates. Import gaps represent the difference between the value of goods India reports having imported from its partner countries and the corresponding export reports by India’s trade partners. Export gaps represent the difference in value between what India reports as having exported and what its partners report as imported.
“While any country may be affected by misinvoicing, the problem is particularly acute for developing countries where productive capacities and domestic tax bases may be limited,” according to Tom Cardamone, GFI’s President & CEO. “The social costs of trade misinvoicing can undermine sustainable growth in living standards in developing countries, as well as exacerbate already pronounced inequities in the distribution of income and wealth.”
Other notable findings:
- Of the total estimated potential lost revenue of US$13.0 billion, approximately US$4.0 billion was due to export misinvoicing and approximately US$9.0 billion was due to import misinvoicing.
- The US$9.0 billion in import misinvoicing can be further broken down by uncollected VAT tax (US$3.4 billion), uncollected customs duties (US$2.0 billion), and uncollected corporate income tax (US$3.6 billion).
- In 2016, some of the Indian imports most at risk for high values of import under-invoicing were edible fruits and nuts, sugars, vehicles and cereals.
- In 2016, some of the Indian imports most at risk for high values of import under-invoicing were from imports from USA, Australia, South Africa and Ghana.
- Looking at both high-risk commodities and high-risk trade partners in 2016, GFI found that under-invoiced imports of edible fruits and nuts from Ghana, mineral fuels from Australia and South Africa and electrical machinery from China were highlighted as potential high-level risks for revenue losses.
- In 2016, almost two-thirds of Indian imports that appear to be most at risk for some degree of potential revenues losses are imports from just one country – China, which was by far India’s largest source of imports in 2016.
GFI urges India to adopt a public registry of beneficial ownership information on all legal entities and to consider using GFI’s online tool GFTrade, designed by GFI to build the capacity of customs authorities to better detect misinvoicing as transactions are occurring and take corrective steps in real time. India should also encourage other countries to adopt a beneficial ownership registry, to fully implement FATF’s anti-money laundering recommendations, country-by-country reporting, tax information exchange initiatives and the Addis Tax Initiative.
The report was published with the generous support of the Ford Foundation.