India lost $13 billion in revenue collections due to trade misinvoicing: GFI study

Potential tax revenue losses to the Indian government due to trade misinvoicing are estimated at 13 billion dollars in 2016, according to a study by think-tank Global Financial Integrity (GFI).

This is 5.5 per cent of total revenue collections that year, said the study released on Monday (local time). 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.

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GFI estimates that the value of the trade gap for misinvoiced goods equals 74 billion dollars, or 12 per cent of the country's total trade of 617 billion dollars in 2016. Of the total estimated potential lost revenue of 13 billion dollars, about 4 billion dollars was due to export misinvoicing and nearly 9 billion dollars was due to import misinvoicing.

The 9 billion dollars in import misinvoicing can be further broken down by uncollected value added tax (3.4 billion dollars), uncollected customs duties (2 billion dollars) and uncollected corporate income tax (3.6 billion dollars).

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. Some of the Indian imports most at risk for high values of import under-invoicing were from imports from the United States, Australia, South Africa and Ghana.

Looking at both high-risk commodities and high-risk trade partners, 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.

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 urged India to adopt a public registry of beneficial ownership information on all legal entities and to consider using online tools for building the capacity of customs authorities to better detect misinvoicing as transactions are occurring and take corrective steps in real time.

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"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 Financial Action Task Force (FATF) is an inter-governmental organisation founded in 1989 on the initiative of the G7 to develop policies to combat money laundering.

GFI is a Washington DC-based think tank, producing high-calibre analyses of illicit financial flows, advising developing country governments on effective policy solutions, and promoting pragmatic transparency measures in the international financial system as a means to global development and security.

Every year, about one trillion dollars 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. Many developing countries have failed to grow past the point where foreign aid is no longer necessary. For years, development economists were puzzled by the lack of growth in developing economies despite large inflows of aid.