India has the third highest trade-related illicit financial flow among 135 countries with 83.5 billion dollars (about Rs 6.08 lakh crore) -- or 3.05 per cent of gross domestic product (GDP) -- escaping the government's tax net, according to US-based think tank Global Financial Integrity (GFI).
The GFI classifies as illicit flow funds that are illegally earned, transferred or utilised across an international border. The primary sources of illicit flows include grand corruption, commercial tax evasion and transnational crime.
In its annual update 'Trade-Related Illicit Financial Flows in 135 Developing Countries: 2008-2017,' GFI examined trade-related illicit financial flows across 135 developing countries and 36 advanced economies by trading partner, commodity, region and per cent of total trade among other indicators.
By analysing individual country government trade statistics supplied to the United Nations Comtrade database, GFI identified value gaps or mismatches in the reported data.
In terms of averages over the ten-year period, the countries with the largest identified value gaps were nearly the same as those leading in 2017: China (482.4 billion dollars), Russia (92.6 billion dollars), Mexico (81.5 billion dollars), India (78 billion dollars) and Malaysia (64.1 billion dollars).
"It is notable that China was the country with the largest value gap by far for each year over the ten-year period while Russia, Mexico and India repeatedly ranked among the second or third largest average value gaps throughout the period," said the GFI report.
Others like Malaysia, Brazil, Poland, Thailand, Turkey and Indonesia also consistently ranked within the top 10 largest average value gaps in terms of US dollars over the period.
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GFI identified a total value gap of 8.7 trillion dollars in trade between the 135 developing and 36 advanced economies over the ten-year period. In 2017, the most recent year for which data are available, the total value gap in trade between advanced economies and developing countries was 817.6 billion dollars.
The act of trade misinvoicing is a major type of illicit financial flow and can be used to evade customs duties, VAT taxes and currency controls among other illicit activities. It also deprives developing country governments of desperately needed tax revenues.
"Developing countries are losing a significant percentage of the value of their trade transactions. In 2017, the value gap associated with trade misinvoicing amounted to 18 per cent of developing country trade," said GFI President and CEO Tom Cardamone.
"If the integrity of trade transactions cannot be assured, it is unlikely countries will be able to achieve the UN Sustainable Development Goals by the 2030 deadline," he said adding data asymmetry is a key problem in trade misinvoicing.
This report provides a host of global and national policy recommendations to reduce information asymmetry. "Implementing these will help countries crack down on trade misinvoicng and start capturing more trade-related revenue," said Cardamone.
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