Informal economy of Pakistan: the way forward


Iqra Liaqat
Economic progress of a country largely depends on revenue generation through taxation. These taxes, in return, benefit the citizens in the form of infrastructure, security and human development. Economic systems all over the world contain informal economy. Volume of this informal economy is smaller in developed countries as compared to that of third world nations. Pakistan is among those poor nations where large volume of informal economy is of great concern. Problem with Pakistan is that its 50% of economy is informal. Informal economy contains both legal and illegal economic activities. Pakistan’s markets are full of these informal activities. Vendors selling plastic goods, small book stalls with daily newspapers and pirated books, cabins of cigarettes, people selling second-hand clothes on encroached roads, milk shops, vehicle mechanics, tailors, plumbers, rickshaw drivers and many more self-employed people are part of informal economy. According to a report 62 percent of Pakistan’s trade is associated with informal sector. Along with these un-registered trades, a large number registered and documented sector is also involved in informal economy. In order to avoid tax they conceal their production and assets from regulatory and tax authorities. This tax-concealed money is a large source of black money in Pakistan. Along with legal businesses, informal sector is also comprised of illegal economic activities such as gambling, smuggling, drugs, prostitution, black marketing. Due to very nature of this black economy, people involved in this economy keep their illegal activities hidden. Furthermore, Pakistan’s large portion of black economy consists of money from corruption. A large number of civil and military bureaucrats and politicians are involved in corruption. Informal economy has not only damaged the economic growth of Pakistan but it is also a great source of exploitation of working class. According to a report 70 percent of employees in Pakistan work under informal sector facing poor working environment, uncertainty of job and many other issues. This informal economy adds insult to the injury regarding Pakistan’s economic woes. On one hand burden of foreign loans increases, secondly Pakistan has to face budget deficits every year. Ultimately the poor strata of the society bears the brunt of these budget deficits and huge loans in the form of under-development and inflation. Moreover growth rate of Pakistan also remains poor. In order to overcome the economic challenges, Pakistan needs to overcome the menace of informal economy.One of the main cause of informal economy in Pakistan is corruption. Corruption by certain tax authorities, in collusion with businessmen, increases the volume of informal economy. Corrupt taxation officers take bribe from certain taxpayers and do not conduct their audit properly. They give benefit to these taxpayers on under-invoicing, cash payments, inadmissible expenses. As the saying goes “it takes two to tango” so both the corrupt taxpayers and corrupt tax authorities are beneficiaries of corruption. A study conducted by Lahore University of Management Sciences in 2018 showed that out of Rs 100, the government receives only Rs 38 and Rs 62 is pocketed by taxpayer, tax collector and tax practitioner. With this corruption a large amount of informal revenue goes untaxed.Besides corruption, most of the regular tax payers hide their production because of high tax rates. They think that they are the only taxpayers who bear the brunt of non-tax payments of informal sector. These registered taxpayers think that government, in order to meet budget targets, taxes them heavily. Due to burden of heavy taxes along with advance tax, minimum tax and non-payment of refunds their margin of profit decreases. In order to get more and more profit they hide their real income. Their hidden income contributes to informal economy.Along with lacunae in tax laws, amnesty schemes are also a great source of whitening the black money. In order to meet budget deficits several governments have been announcing amnesty schemes at eleventh hour. These amnesty schemes allow people who possess huge black money to pay a certain amount of tax and get that money whitened. This practice of amnesty gives safe way to people who manage to accumulate black money through illegal practices. Secondly this encourages them to further keep involved in illegal practices of making money as they know that government would sooner or later announce amnesty schemes for their rescue. This ill practice of amnesty schemes causes huge loss to revenue of the country. Another key reason due to which government is unable to control informal economy is presence of strong mafias in informal sector. Number of informal businesses in large cities of Karachi and Lahore have become very strong mafias. Whenever government formulates any policy to register these undocumented businesses, these strong mafias come into action. They threaten the government that they would close all business activities in the country. Secondly, being voters and financial supporters of local political parties these mafias have strong political support. They prefer to give extortion to political parties instead of government taxes. Due to these reasons government finally bows before these mafias and is unable to move with any policy of formalization of informal economy. Last, Pakistan needs to promote awareness about importance of tax and demerits of tax evasion. Pakistan is one of those countries where evasion of tax is not perceived as an illegal or immoral activity. In this regard media can play a vitalrole to make people aware about importance of tax. Secondly, government can also provide awareness to students by including lessons on benefits of tax. To conclude, the presence of large volume of the informal economy is a matter of serious concern for the government. The existence of such a large underground economy has disastrous effects on Pakistan. This not only causes large fiscal losses to the economy but also affects poor strata of the society. Tax evasion has a negative impact on Pakistan’s fiscal and monetary sectors. In order to compensate for this loss, the government imposes more taxes and this practice further raises the problem of tax evasion. Reducing the size of the underground economy can enhance the economic growth of Pakistan.