Home / Economy / The mystery of missing $12bn in India-China trade

NEW DELHI : Vastly varying trade data from India and China have left experts searching for clues to explain the mismatch. While China has claimed that trade with India touched $103 billion in the first nine months of 2022, India’s data show that bilateral trade stood at just $91 billion.

Trade experts claim that the significant gap is most likely because of the under-invoicing of shipments by Indian importers to avoid paying import taxes. Under-invoicing of imports involves marking the stated value of imports below the actual value paid to the exporter abroad, reducing the import tax outgo.

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While India’s tax department unearths cases of under-invoicing from time to time, the substantial gap between the trade figures of India and China indicates instances of import tax evasion are far more widespread than previously thought. Studies have also shown the link between high import taxes and evasion.

According to Biswajit Dhar, a professor at Jawaharlal Nehru University, the most common motivation of importers to mis-invoice is maximizing profits. “To reap maximum benefits, traders manipulate the values on invoices submitted to the customs authorities to avoid tariffs that should be levied. Empirical studies also show that when the tariffs are high, firms tend to under-report imports," he said.

For instance, while data from China’s General Administration of Customs showed exports to India climbed to $89.66 billion in the nine months to 30 September, India’s official data acknowledged imports of only $79.16 billion, a gap of $10 billion.

China’s official data also showed that imports from India in the nine months stood at $13.97 billion. In contrast, India’s official data showed shipments to China were $12 billion during this period, a gap of $2 billion.

Based on its data, China claimed India’s trade deficit widened to $75.67 billion, while India’s official data shows a narrower gap of $67.17 billion.

The difference in the trade figures reported by the two countries stood at nearly $12 billion.

“This difference (in official trade figures reported by the two countries) has increased from $5.2 billion in 2018," Dhar said.

In response to a query, the ministry of commerce and industry said, “India is a sovereign country and our numbers are quite solid, based on data collected from various sources, including ports. We cannot comment on how other countries gather their data, particularly countries that are very opaque. India abides by international norms and UN conventions for maintaining robust data."

Queries emailed to the embassy of China in New Delhi remained unanswered till press time.

India’s imports from a partner country cannot be equal to a partner country’s exports to India as export values of products generally reflect the market value or free on board (FoB), whereas imports include cost, insurance, and freight (CIF), meaning the import value should be higher. However, it is the opposite in the case of China-India bilateral trade.

Therefore, while the gap of $2 billion in India’s exports to China and its imports could be explained by this, $10 billion lower imports by India compared to China’s exports to India cannot be explained by this.

“Normally, the difference between the FoB value and the CIF value of a given consignment is assumed to be 10%. Higher differences are generally called trade mis-invoicing. Data on India’s trade with China show a considerable extent of trade mis-invoicing. Thus, when China’s exports to India on an FoB basis should have been smaller than the CIF value of India’s imports from China for the reasons mentioned above, the actual numbers are just the opposite," Dhar said.

Dhar added that foreign exchange market controls also motivate traders to engage in fraudulent trade practices to gain extra foreign exchange.

“Exporters would choose to misreport if the exchange rate is overvalued. Similarly, an importer would under-invoice if the tariffs are higher than the market exchange rate. Trade mis-invoicing may be driven by a desire to bypass administrative hurdles instead of tariff avoidance.

According to a recent report by US-based think tank Global Financial Integrity, the most pervasive form of Chinese money laundering comes from “trade mis-invoicing". The think tank earlier claimed India lost $13 billion in 2016 to trade mis-invoicing, with Chinese-origin imports making up the biggest chunk of instances of under-invoicing.

According to official trade data, exports in the first half of the fiscal contracted by 36% on a year-on-year basis to touch $7.87 billion. On the other hand, imports from China grew by 24% in April-September to touch $52.41 billion.

Last year, while Beijing claimed it was India’s largest trading partner, Delhi countered it by saying that the US remained its largest trading partner. According to India’s official data, trade with the US stood at $67.72 billion in April-September, while that with China stood at $60.28 billion during this period.

A prominent engineering exporter who declined to be named said under-invoicing had been happening for some time, but the entire data disparity could not be attributed to that. “For example, the cost of a pump is $10,000, but the Indian importer would ask for a bill of $7,000 as the import duty would be based on that. So, the importer would pay the balance of $3,000 via a Dubai or Singapore account."

However, the data disparity could also be due to other reasons, he said. “There will be a gap between what we record at our ports and what China says it exports because some material is in the high sea which has not landed and not cleared in India," the exporter added.

Vijay Kalantri, president of the All India Association of Industries, said that while there has been an emphasis on Make in India, the capacity building has not happened yet.

“Take, for instance, lightning accessories used during Diwali; it has all come from China. Not everything coming from China is input. Only items like printed circuit board and chemical pharma are inputs," Kalantri said.

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ABOUT THE AUTHOR

Dilasha Seth

" Dilasha Seth is a journalist reporting on macroeconomic policy for the last 11 years. She writes extensively on issues including international trade, macroeconomic data, fiscal policy, and taxation. At Mint, she reports on trade deals that India is signing besides key policy decisions of the Ministry of Finance. She closely tracked and covered the transition to the goods and services tax (GST) regime in 2017 and also writes on direct tax-related issues. In the past, she has worked with Business Standard and The Economic Times. She is based in Bangalore."
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