The goods and services tax (GST) may not only improve tax compliance in India but might also make India’s trade figures, especially with neighbours like Bangladesh, more realistic, reasonably free from the menace of under-invoicing and over invoicing.

Manipulating invoices is not new to trade or exceptional to Indian trade. But many believe such practices were rampant in our land border trade with immediate neighbours for variety of reasons from high duty differential to entrenched corruption. Sources right from the traders, clearing and forwarding (C&F) agents, to the customs and GST officials confirm that incidence of such malpractices are down in Indo-Bangladesh trade after introduction of the tax reforms.

Rising compliance

The impact of the change is palpable at the busy Petrapole land border with Bangladesh. The gate contributes 35 per cent of $7.5 billion bilateral trade.

In January, trade observed a three-day strike at Petrapole apparently to protest against the procedural delays by Customs. In private, however, the strikers blamed it on gate officials for harassing the trade for being compliant. “Till last year, barely 10 per cent transactions carried out through this gate had clean papers and the gate officials feasted on the rest. The rules of the game changed after the introduction of GST in July 2017. As majority of the trade became compliant, the gate officials missed their pound of flesh and resorted to delaying tactics,” said an Indian exporter.

According to Kartik Chakrabarti, a prominent C&F agent at Petrapole, the compliance level increased from barely 10 per cent to 90 per cent at Petrapole. Only some smaller players who are still avoiding the GST net are fudging numbers.

While it is difficult to ascertain to what extent trade has become compliant post GST, senior level tax officials confirm “noticeable reduction” in such malpractices.

There are two structural reasons behind this change.

Indian exporters resorted to under-invoicing to help their trade partners in Bangladesh to dodge the high import duty. The importers shared a part of the savings with the exporter through hawala channel. GST made this difficult as under-invoicing would cost the exporter, input tax credits.

Over-invoicing was rampant in items eligible for duty drawback benefits as they were calculated on the shipment value. GST regime saw drastic reduction on the scope of such benefits. In bulk tea for example, the drawback benefits are down from one per cent to 0.15 per cent.

Zero surprises

The trend, however, is difficult to explain by numbers. Ideally reduction in under-invoicing or over-invoicing should change the trade numbers. But trade data of Petrapole doesn’t throw up any such surprises. Tax officials believe it would take minimum one-year, to assess the full benefit.

The change is difficult to assess on the Nepalese border, as majority of the Indo-Nepal trade takes informal route and is undeclared.

GST officials are, however, bullish that improvement in tax compliance will reduce the scope of under or over invoicing in foreign trade.

“The change is real. The recent introduction of e-way bills, which will bring inter-state movement of goods under digital mapping, will strengthen this trend. The final change will come as and when the government allows us to take penal action,” said a GST official. As part of the confidence-building measure, the government has so far allowed trade to participate in GST on voluntary basis.

But correct reporting by Indian traders helps neighbours to improve customs duty earnings. The possibility is weak, due to lack of mechanism for exchange of trade data and strong vested interests across the border.

“There had been proposals from World Customs Organisation for data exchange. It failed to take off.

India tried such mechanism with Sri Lanka to prevent misuse of duty drawback benefits in textiles. It stopped in no time as vested interests put pressures on either side of the border,” said a Customs official.

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