Over Rs. 5,500 Billion Loss in Pakistan-China Trade Due to Under-Invoicing and Digital Gaps at Ports

A recent report from the Maritime Sector Reform Task Force has revealed a significant discrepancy of Rs. 5,500 billion in trade between Pakistan and China over the past five years, largely due to under-invoicing and gaps in digital integration at the country’s ports.

Sources from the Ministry of Defense pointed out that Pakistani ports are not digitally connected to global counterparts, leading to widespread mis-declarations. According to reports, the lack of digital integration in cargo, manifest, and declarations is being exploited for manipulation, contributing to this enormous financial gap.

The report estimates the discrepancy of Rs. 5,500 billion based on sampled data. Due to outdated systems at ports, customs duties are undervalued as items are declared at lower prices, particularly those with higher taxes. This issue is compounded by corruption, with individual cases of mis-declarations, manipulation of Harmonized System (HS) codes, and lack of integration within the system.

The primary issue highlighted by the task force is the lack of digital connectivity between ports, the Federal Board of Revenue (FBR), and customs officials. The report also criticized the outdated Information and Communication Technology (ICT) infrastructure, which is not aligned with key business operations, leading to errors in reconciliations, weak reporting, and poor port management.

The task force identified 11 critical areas out of 32 key processes that should be digitally integrated, including vessel and traffic management, cargo and container management, safety and security, environmental monitoring, billing, and financial operations. However, Karachi Port Trust (KPT) and Port Qasim Authority (PQA) have only partially implemented digital systems, with only 4 and 6 processes digitalized, respectively.

Additionally, the lack of transparency in import declarations and the absence of necessary technology for external communications result in fraudulent invoicing, wrong declarations, money laundering, tax evasion, smuggling, and misuse of the green channel.

Examples, such as the under-invoicing of “carbon steel pipes” with a price discrepancy of $0.9 per kilogram being reported as $0.69, demonstrate the scale of under-invoicing. This could lead to a loss of Rs. 20 million on a 500-ton shipment.

Furthermore, manipulation of HS codes and lack of system updates allow for tax evasion, as seen with deodorants, where discrepancies in declared prices lead to undervaluation and potential tax losses.

The existing “Web-Based One Customs” (WeBOC) system, designed to manage imports and exports, remains outdated, with its scanners and inspection systems not properly integrated with the digital requirements, causing delays and errors. The lack of a unified digital financial transaction system also exacerbates the issue, resulting in significant tax evasion.

Experts suggest that the lack of digital connectivity and manual processes at ports are undermining investor confidence and hindering the potential for tax revenue growth, contributing to significant losses in the economy. The full extent of these losses, due to manual work and the absence of technical controls, remains difficult to estimate.