Pakistan Has One of the Highest Illicit Trade Levels in Asia

The Pakistan Business Council (PBC) on Monday said that Pakistan suffers from one of the highest levels of illicit trade in Asia with the combined value of smuggling, under-invoicing, mis-declaration of imports, counterfeiting, and adulteration estimated at $68 billion or 20 percent of the formal economy.

In a post on X, PBC said that the informal economy is estimated at about the same size as the formal economy, therefore illicit trade represents 10 percent of the total economy.

The estimated annual tax loss from illicit trade is Rs. 8 trillion, amounting to 85 percent of the tax revenue target for the current fiscal year (FY24). It added that the size of illicit trade is large and needs to be addressed.

It further said that besides loss of tax revenue, illicit trade undermines the formal sector’s growth, exploits labor, operates in environmentally detrimental ways, and produces and sells substandard, unsafe, and sometimes life-threatening products. Smuggling and under-invoicing also feeds off Hawala, affecting the country’s official remittances and reserves, as well as the value of the Rupee.

The eco-system of illicit trade is supported by and funds crime, the PBC said in its statement.

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.

Pakistan’s recurring economic crises and IMF-imposed short-term, front-loaded tax targets have not allowed time for fundamental and holistic changes in talent, technology, or structures, nor addressed the fragmentation in jurisdictions that could, over a period, 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 added,

The reliance on import levies to fund a large part of tax revenues does not help. Caught in a vicious cycle, the various stop-start measures to quell illicit trade yield unsustainable results. Enduring, fundamental reforms requires a system-wide change that only strong political will and a ‘whole-of-government’ approach can deliver. This will take time, patience, and determined implementation to yield results. Piecemeal changes can only bring temporary relief, said PBC.

PBC also highlighted key measures that can, in combination, help control illicit trade. They include 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, and reducing incentives to evade through lower taxes and levies.

Raising the cost of evasion through tighter enforcement, the cooperation of provincial governments in preventing the sale of illicit items in their jurisdictions, the use of technology, and labeling measures to make it difficult to evade.

Other possible measures include minimizing misuse of Afghan transit trade, refocusing provincial Food Authorities on items that are more vulnerable to adulteration, and enabling effective prosecution and penalizing the guilty in the extended chain of evasion.

Source: Pro Pakistani