Corruption and tax evasion: a deepening crisis

LAHORE: Large-scale corruption often thrives through the collusion of both public and private sectors, benefiting both parties. However, petty corruption, particularly within law enforcement, disproportionately affects the poor by increasing their vulnerability to extortion and abuse.

In our society, large-scale corruption allows public officials to abuse their positions for personal gain, while private actors collude to avoid regulations, evade taxes or secure contracts. This has led to severe economic distortions, resulting in inefficient resource allocation, mispricing, and unbalanced competition. These factors have hindered overall economic growth and created long-term fiscal imbalances.

While petty corruption may not significantly impact broader economic metrics, it perpetuates inequality and social injustice, marginalising the most vulnerable sections of society. Controlling petty corruption would greatly benefit the poor, saving them time and scarce financial resources.

In the stock market, the emergence of new billionaires over the past decade, despite growing poverty, raises concerns about wealth distribution and loopholes in the taxation system. In Pakistan, stock market profits largely escape the taxation regime, unlike the higher taxes imposed on salaries and manufacturing incomes. Introducing measures like capital gains taxes and transaction taxes could help ensure that capital market profits are taxed on par with other forms of income.

Another segment notorious for tax evasion is traders. Traders’ share of GDP stands at 16 percent, yet their contribution to tax revenue is only 4.0 per cent, highlighting widespread tax avoidance in this sector. In developed economies, the retail and trading sectors typically contribute a tax share more in line with their economic footprint, usually around 10-15 per cent of tax revenue relative to their GDP share.

Despite avoiding taxes, traders are often at the forefront of protests when petrol or power rates increase, even though they promptly recover the cost from consumers the same day price hikes are announced.

Similarly, transporters in Pakistan account for 12 per cent of GDP, but their tax contribution is only 2.0 percent, which is another glaring anomaly. Globally, transport sectors typically contribute 5-10 per cent of tax revenues.

Illicit money transfers in Pakistan fall under the category of large-scale corruption. The government has provided incentives to banks for the speedy transfer of remittances, recognising that expatriate Pakistanis send more money than is officially recorded. However, illegal money transfers through systems like ‘hundi’ or ‘hawala’ are estimated to form a significant part of the informal economy.

Hundi facilitates under-invoicing, which is a major issue in trade-related corruption, allowing companies to evade taxes by manipulating the declared values of imports or exports. The prevalence of hundi is tied to poor governance, weak regulatory frameworks, and a lack of trust in formal banking channels. Controlling it effectively would require stronger regulatory oversight, greater banking transparency, and cooperation with international financial monitoring agencies to track illicit flows. Despite government efforts, hundi dealers operate freely in major trade centres across cities without fear of being apprehended, confident in the protection of influential figures.Addressing these disparities requires comprehensive tax reforms, broadening the tax base, and improving enforcement to bring under-taxed sectors into the fold.