Illicit trade eats up 20 percent of Pakistan’s formal economy, says PBC

KARACHI: Pakistan suffers from one of the highest levels of illicit trade in Asia, costing the country billions of dollars in lost tax revenue and undermining its formal sector, a business group said on Monday.

The Pakistan Business Council (PBC), a policy advocacy group representing the country’s largest businesses, said the combined value of smuggling, under-invoicing, mis-declaration of imports, counterfeiting and adulteration was estimated at $68 billion or 20 percent of the formal economy.

The informal economy, which operates outside the tax net and regulatory oversight, was estimated at about the same size as the formal economy, therefore illicit trade represented 10 percent of the total economy, the PBC said in a report.

The council said the estimated annual tax loss from illicit trade is Rs8 trillion, amounting to 85 percent of the tax revenue target for the fiscal year 2023-24. "Besides loss of tax revenue, illicit trade undermines the formal sector’s growth, exploits labour, operates in environmentally detrimental ways, produces and sells substandard, unsafe and sometimes life-threatening products," it added.

“Smuggling and under-invoicing also feeds off Hawala, affecting the country’s official remittances and reserves, as well as the value of the rupee.” Hawala is an informal system of money transfer that operates outside the banking channels and is often used to evade taxes and exchange controls.

The PBC said the main reasons for illicit trade were high taxes and ineffective enforcement, coupled with poor political will and vested interests. "The combination of high taxes and ineffective enforcement are primary reasons for illicit trade. Poor political will and vested interests’ thwart efforts to stem it. A poorly documented, cash-based economy sustains it."

It said Pakistan’s recurring economic crises and International Monetary Fund (IMF) imposed short-term tax targets had not allowed time for fundamental and holistic changes in talent, technology or structures, nor addressed the fragmentation in jurisdictions that could deliver concrete results.

“Instead, knee-jerk, revenue-seeking measures to meet high and increasing government expenditure, losses of state-owned enterprises, growing energy circular debt and the cost of servicing government debt have resulted in higher taxes, which in turn grow the incentive to evade.”

It also listed some key measures to thwart illicit trade, such as developing a strong political consensus to fight informality in the economy, starving the flow of foreign currency that funds smuggling and under-invoicing, creating transparency of transactions by limiting the use of cash, broadening the tax base to include all points of sale through which illicit goods are sold, reducing incentives to evade through lower taxes and levies, raising the cost of evasion through tighter enforcement, provincial government co-operation to prevent sale of illicit items in their jurisdictions, using technology and labelling measures to make it difficult to evade, minimising misuse of Afghan transit trade, refocusing provincial Food Authorities on items that are more vulnerable to adulteration, enabling effective prosecution and penalizing the guilty in the extended chain of evasion.

The PBC called for a system-wide change that would require strong political will and a ‘whole-of-government’ approach to tackle illicit trade. “This will take time, patience and determined implementation to yield results. Piecemeal changes can only bring temporary relief.”