Pakistan Loses Rs 1 Trillion Yearly to Massive Tax Evasion and Smuggling

An article in the Karachi-based Business Recorder highlights that tax evasion and smuggling on this magnitude are taking place because of official protection and complicity of the regulatory authorities. Without these, the shadow economy would shrink rapidly under even modest enforcement pressure, it noted.

The article pointed out that the Federal Board of Revenue's (FBR's) Rs545 billion shortfall in the first half of the ongoing fiscal year reflects this grim reality. It is not just the result of weak economic activity or an exhausted tax base. It is also the outcome of an economy where a large share of value creation is deliberately kept outside the tax net. Yet, instead of dismantling the structures that enable evasion, the state turns to the same narrow group of compliant taxpayers to fill the gap, it said.

"That approach has become routine and deeply damaging. Salaried individuals, registered businesses and formally documented firms have long shouldered a disproportionate burden. Higher effective tax rates on this group discourage investment, distort incentives and push marginal actors back toward informality. And the system ends up penalising honesty while rewarding avoidance, creating a cycle that sustains the very problem policymakers claim to be addressing," the article lamented.

The sectors, identified in a study carried out by research agency Ipsos, illustrate how entrenched the dysfunction has become. Real estate continues to operate with chronic under-valuation, weak enforcement and selective scrutiny. The illicit tobacco trade persists despite well-mapped distribution networks and identifiable enforcement points. Similar patterns exist in tyres, lubricants, pharmaceuticals, and tea.

Targeted enforcement, proper documentation, credible valuation mechanisms and full implementation of track-and-trace systems, to check the menace of tax evasion, have been discussed repeatedly. Yet what is still missing is political will. Taking on the undocumented economy means the government will be confronting actors with influence, resources and access. It also demands insulating enforcement agencies from political interference, something successive governments have failed to do, the article stated.

"Instead, enforcement remains selective. Crackdowns are announced; then softened. Technology is introduced; then undermined. Regulatory agencies are asked to perform without protection or consistency. Over time, the signal becomes unmistakable: compliance is optional for the powerful and mandatory for everyone else," it lamented.

The macroeconomic cost of this failure is severe. Revenue shortfalls constrain development spending, increase reliance on borrowing and weaken fiscal credibility. They also feed inflationary pressures as governments resort to indirect taxation. Most damaging of all, they corrode trust. When citizens see that rules apply unevenly, voluntary compliance collapses. Taxation becomes coercive rather than contractual. That has been Pakistan's tax story for far too long, the article underlined.

- IANS