By Priyamvada Jain
Trade mispricing is a process by which individuals can transfer money abroad without detection. By over-invoicing imports and under-invoicing exports, individuals can evade taxes and avert capital controls through routine trade. Heres how it works, suppose an Indian furniture manufacturer, who wants to send money abroad illegally, imports $100 worth of timber from the United States. Instead of paying $100, the furniture company reports and pays $200. The companys U.S. trading partner takes $100 for the furniture, reports the $100 on its own invoice, and shifts the extra $100 to a secret bank account. So the furniture company has shifted the $100 to the United States without Indian governments knowledge.
With the depreciation of rupee, the Indian government has raised an alarm over the increasing number of fraudulent mispricing of exports and imports in the country. Importers and exporters are stashing away dollars abroad to take advantage of the depreciating rupee in the current scenario. The exporters are declaring a lower export value than the worth of goods shipped. The party receiving the goods is parking the balance amount in a foreign bank for a commission. Similarly, importers are overpricing the goods purchased and the extra amount remitted is parked in a foreign bank. Data suggests that India’s exports growth has suddenly turned negative in the new financial year, coinciding with the massive slide in the rupee against the dollar. India’s exports dropped 1.4% in the April-June quarter while its non-oil imports rose 5.8% in the same period, yielding a trade deficit of $ 50.2 billion, which is 19 % more than last year. Globally, trade mispricing is the most commonly used method of moving illicit flows, as it is difficult to verify each transaction and its value. Global Financial Integrity had earlier highlighted that India was among the top ten nations in terms of illicit outflows with $123 billion in outflows in the ten years to 2010.
This practice has further aggravated the problem. The country is already facing a high current account deficit and a weak rupee in the international arena. The Finance Ministry has identified the problem and is taking steps to solve the problem. The online clearance system will now generate a database on exporters, goods, their places of origin, prevalent value and intellectual property rights based on intelligence and other inputs. It will raise a red flag the moment the declared value of a particular consignment exceeds or falls short of the range fixed for that item. This system will not only facilitate exchange of information on valuation of goods but also drastically cut the time taken to clear consignments as intervention of customs officials will be restricted to only those shipments that fail to clear the standard parameters as notified by the government.
The government can further take steps to curb the problem of mispricing in the economy. All shipments are cleared by the custom authorities before trade. If these official have knowledge about the commodities and their prices so identifying the mal practise will become easier. So all custom officials should be trained and educated about the average price of the good so that they can ensure that no bill is underpriced or overpriced. Seminars should be conducted for all custom officials so that there ethical and moral values remain intact and they dont give in to corruption. Custom authorities should do surprise checks on the companies on the items being shipped by them, wherein they check the quantity, price and other details of the items being shipped. This check will make the traders aware that the transactions are not unguarded and strict vigilance is kept on them. Further, the RBI should check foreign payments of the companies occasionally. This will help to ensure that the payment received by the company is as per the invoice only.
The problem of trade mispricing should be dealt with immediately so that the problem of the depreciating rupee of the country is solved. If unchecked it can make the whole economy suffer. The finance ministry, RBI and custom officials should work in tandem to solve the mess India is currently in.
jainpriyamvada@gmail.com