The mystery of Indian trade’s missing billions | Mint

The mystery of Indian trade’s missing billions

Many Indian traders are at fault but China too plays an outsized role in facilitating illegal financial flows. Photo: Mint
Many Indian traders are at fault but China too plays an outsized role in facilitating illegal financial flows. Photo: Mint


We may not know exactly how big the racket is, but it is now big enough to start showing up as a mismatch in official trade data.

On a rainy August afternoon, in Mumbai, three officers from India’s Central Board of Indirect Taxes and Customs (CBIC) found themselves scurrying in the by-lanes of Dharavi, one of the world’s largest slums.

It may take many hours for strangers to find their way around this slum, spread over 2.1 square kilometres. The CBIC team took about half an hour to find their target—the result, however, left them dispirited.

The $10 billion hole
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The $10 billion hole

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“It was a solid lead and we were hoping to nab one of the linchpins of a (shell) company involved in hawala trading. Instead, we found a migrant rickshaw puller from eastern Uttar Pradesh with no knowledge of the racket at all," said an officer with CBIC’s Mumbai office. “He had been fooled and his credentials misused but it was a dead end for us. In two other cases, too, our search ended with a vegetable vendor and a watchmaker."

Part of the department of revenue under the ministry of finance, CBIC, apart from being tasked with making policies concerning levy and collection of customs and other duties, also works on the prevention of smuggling. In this case, the officers were investigating the under-invoicing of electronics goods imported from China over the last eight months.

In similar raids last year—in and around Delhi, Haryana and West Bengal—conducted by the income tax (I-T) department, a large racket of shell companies was busted. A group of such companies imported goods worth nearly 2,000 crore but the declared value on paper, on which taxes were paid, was only 20 crore. It was a chance discovery after a container in the Kolkata port was opened. Several laptops and mobile phones worth 64 crore were found instead of the declared 3.8 lakh worth of HDMI cables. This led to more searches and the prize catch.

These are classic cases of import duty evasion. Ingenious importers order consignment from a foreign country at prevailing market rates. Next, they forge documents to under-invoice the goods at the port in India to pay lower customs and other duties. Finally, they use hawala channels through shell companies based in Dubai or Hong Kong for payment of the balance amount to sellers overseas. In the post-pandemic era, these transactions have become more rampant.

It is nearly impossible to speculate how big the under-invoicing racket is but it is now significant enough to start showing up as a mismatch in official trade data. In the first nine months of 2022, China claimed to have exported goods worth $89.66 billion. Data from India’s ministry of commerce and trade, however, put the figure at just $79.18 billion. An already fractious and lopsided trade relation—India suffers a debilitating trade deficit of nearly $73 billion—is further imbalanced by this mismatch. To put this figure in context, the $10 billion gap for nine months this year is comparable with that of the full year 2021 (see chart). It was less than $3 billion in 2018.

Government sources said notices have been sent to nearly 40 importers and the suspected tax evasion could be to the tune of 25,000 crore starting from 2019. The net is still being cast and the estimate could well turn out to be conservative.

“It is a priority area for us now but we do not want to make too much noise about it. Shipments are still arriving and stealth is key," said an officer with the directorate of revenue intelligence (DRI) in Delhi. The printer in his IP Estate office, in Delhi’s Indraprashta Marg, is constantly whirring.

“In some cases, importers have taken the pains to camouflage their crime with sophisticated methods. In others, it is very blatant as if they have no fear of being caught," he added.

DRI is the intelligence and enforcement agency on anti-smuggling matters under the CBIC. None of the government officers mentioned in the story wanted to be identified.

The epicentre

Many Indian traders are at fault but China, too, plays an outsized role in facilitating this. In fact, in November, Washington-based think tank Global Financial Integrity (GFI) underlined China’s role in transnational crime and illicit financial flows in the world.

In 2019, the think tank released a report on mis-invoicing in India and its impact on the economy—China, again, figures prominently. GFI studied data for 2016 to conclude that India lost $13 billion in revenue, equivalent to 5.5% of the country’s total tax collections in the year, to trade mis-invoicing.

“This is not a new problem," said Ashwani Mahajan, national co-convener, Swadeshi Jagran Manch, a political organization often critical of foreign direct investment. “They are always on the lookout to destabilize our economy and hurt our local businesses. We need to be more vigilant and stricter punishment should be given to those caught," he added.

Meanwhile, Ajay Sahai, the director general and CEO of the Federation of Indian Export Organizations (FIEO), contends that the trade mismatch should not merely be attributed to under invoicing or unscrupulous behaviour by importers.

“There is always a lag between when shipments start from China and the time they reach India. Further, many traders do business on the high seas. So, some goods get diverted to other countries and never show up on Indian ports," he said. “Under invoicing happens but not on a big scale—not by large exporters as there is fear of getting caught and the loss of reputation is massive."

In a high sea sale, an importer finds a customer from another country while the goods are still in transit on international waters. It is a common international trade practice.

Shades of grey in steel

Under-invoicing picked up pace with India raising tariff and implementing stricter quality controls to thwart Chinese imports. This happened in the aftermath of the Doklam clash between the armies of the two nations in 2017 and intensified with the pandemic.

In the last five years, India has hiked duties on a range of items—printed circuit boards, cameras for cellphones, chargers, compressors for air conditioners, plastic goods, textiles, metals and automotive components.

In certain items such as stainless steel, India imposed a substantive 18.95% countervailing duty (CVD) on China, in addition to the basic customs duty. This took the effective taxation upwards of 30%.

At least two separate investigations, by the office of the directorate general of valuation, attached to CBIC in Mumbai, found substantial evidence of under invoicing, ranging between 13% and 47%, in the price of some grades of stainless steel from China as compared to the prevailing international prices between 2019 and 2022.

Mint has reviewed some invoices of shipments originating from a steel company in China’s Guangdong province and Hong Kong. They made their way to Gujarat’s Mundra Port in September and were undervalued by 30-35% when compared to the prevailing rate in the international market. Further, the investigation by the directorate general of valuation also found evidence of misinformation on the grade of steel imported—an attempt to circumvent quality control standards that India has enforced to curb spurious imports. Quality standards are specified by the Bureau of Indian Standards (BIS).

“This is being done in a very sophisticated manner. All steel looks the same. Even if a cursory check is done, we will not be able to make out the difference," a DRI officer quoted earlier said.

A letter from the intelligence bureau of the ministry of home affairs, dated 22 August, also warned of the import of substandard stainless steel from China under false certification.

“It is learnt that the mill test certification issued by Chinese manufacturers intentionally certified/claimed export material as ‘stainless steel (SS) seamless super duplex pipes’ and ‘seamless duplex’ but actual material imported was ‘standard 304L’ and ‘316L category’. As per existing rules, standard 304L and 316L falls under BIS certification/regulation and SS seamless super duplex and duplex pipes does not fall under the ambit of BIS regulations," the letter stated.

The 304 grade of stainless steel is used in kitchenware, appliances and decorative items. The 316 grade is widely used for industrial usage in pharmaceutical sector and chemical piping. Duplex stainless steel pipes are known for their strength, toughness and corrosion resistance which makes them perfect for offshore oil and gas rigs and for transportation and production in the oil and gas industries.

Trade circumvention is another challenge. After the imposition of CVD on stainless steel, there was a surge in imports from Indonesia and a parallel decline from China (see chart). India had signed a free trade agreement (FTA) with the ASEAN block in 2010—imports from Indonesia, therefore, enjoy a tax concession. The CVD was revoked in February 2021, and voila! imports from Indonesia fell dramatically.

To counter circumvention, India has been actively pursuing the rule of origin, or a set of criteria that determines the national source of a product.

“Rule of origin in trade has been strictly enforced. That is why we have seen Chinese companies set up operations in Indonesia, Thailand and Vietnam. Circumvention is a reality; the government is cognizant of it," said Mahajan of SJM. “The need is to rewrite the rules of FTA with ASEAN. We need to plug every loophole."

Abhyuday Jindal, managing director of Jindal Stainless, a maker of stainless steel in India, felt that the country needs an institutionalized system of checks and balances. “This includes stricter vigilance at our ports and empowerment of customs officials through stronger rules. Only when the offenders are permanently barred from getting such imports, can we expect laws to prevail in letter and spirit," he said.

Tangled wires

If you were to visit any of the electronics markets in India—Ghaffar Market or Nehru Place in Delhi; Lamington Road in Mumbai; Chandni Chowk in Kolkata—you would probably sense that a significant chunk of the gadgets on sale are smuggled. Apart from steel, rampant under- invoicing and circumvention is probably true in mobile phones, laptops, and accessories.

“There are good discounts on any smartphone, even an iPhone, if you pay in cash, don’t want receipt or warranty," says a retailer in Ghaffar Market who didn’t want to be identified. “How do we manage it? We save on the goods and services tax (GST) and pass on part of the saving to the customer. Are the phones smuggled? I would always say no but don’t take my word for it."

The bigger mystery? Despite the increase in import duties and a genuine shift of production in items like mobile phones—India produced 300 million units in fiscal 2022 versus just 60 million units in fiscal 2015— overall electronics import from China continues to grow.

“It is a puzzle. We don’t have scale yet to produce everything in-house but we have made progress. Overall, imports should have begun to taper by now," said an executive with a homegrown electronics major who didn’t want to be named. “It indicates that the grey market is still strong."

Mint reached out to some importers but most were too coy to discuss under-invoicing. Even industry bodies that are at the forefront lobbying for incentives and tax rebates chose to remain silent.

“It is easy to blame us. But ultimately, we are businessmen. We provide a product at a price that the market demands," said an Ahmedabad-based trader on condition of anonymity. “The customer always wants to pay less and loopholes are embedded in the system. If I don’t do it, somebody else will."

And thus, begins the cycle of evasion—somewhere in a warehouse in China’s Guangzhou. Before it ends in a basement in Delhi’s Karol Bagh or a by-lane in Dharavi, a complex web of transactions would have criss-crossed Hong Kong, Indonesia, Dubai, and finally, the India ports.

For the officers of CBIC, pursing this trail of breadcrumbs is quite a task.

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