It was a little surprising for Ghulam Hyder Khan when the buyer of his plot told him that he would pay Rs20 million in cash, and not in the form of a pay order or a cheque. Mr. Khan has been living in Canada for almost 24 years, and his elder brother had called him to dispose of his inherited property share, and convert it into liquid assets if he had no plan to ever return to the country of his origin permanently. His last visit took place almost 14 years ago when his father had passed away.

This time, his relatively long visit and direct interaction with some common Pakistanis and businesspeople had surprised him on various counts. Interaction with the buyer of his 10-marla plot was also interesting and surprising for him. The guy was an under-matriculate, in his early 40s, and the owner of a motorcycle spare-parts manufacturing unit in Lahore.

Finding Mr. Khan an inquisitive Canadian-Pakistani, the buyer told him he did have a bank account but deposits only a limited amount in it from time to time. Big cash transactions in any account may land the account holders in unseen trouble at the hands of income tax and Federal Board of Revenue officials, he explains. “They provide businesspeople no facilities, but keep squeezing them through imposition of taxes, on one pretext or the other,” the ‘small industrialist’ says. “That’s why, we mostly deal in cash, and deposit only small amounts in our bank accounts to keep the tax authorities at bay,” the ‘intelligent tax-dodger’ further explained.

Then Hyder Khan noted that most fast food points, restaurants, superstores, shopping malls and brand outlets in Lahore were brimming with customers, but people were found everywhere complaining of skyrocketing inflation. He also noted a huge majority of people paying their bills in cash, and returning home with full bellies, and a lot of purchased items.

It was clearly evident to Mr. Khan like all economists that Pakistan has developed a lot of shadow economy, or underground, informal, and parallel economy. People here are making money not only from illegal activities, but also keep their income unreported generated from production of legal goods and services, either from monetary or barter transactions. As experts say, Pakistan’s economy is working, but only for its elite. Sustained, rapid, and equitable economic growth has remained elusive due to policy distortions that serve its elite only.

Various local and foreign institutions keep issuing comprehensive reports on the economic losses caused by the illegal trade, tax evasion and smuggling in Pakistan. A global research report of Ipsos on tax evasion, released in June 2022, stated that the shadow economy in Pakistan accounted for about 40% of gross domestic product (GDP) and about 6% of GDP was being stolen every year. However, depending on the methodology adopted, the estimates of the grey economy’s size go up from 50-60pc to 90pc of the GDP. That is a significant amount that can be used to improve the living standards of people by developing the economy on a sound footing. But the question remains: how, and who can do it?

The report relates top five products/ sectors that have caused annual tax evasion of Rs. 310 billion: including the illicit trade in tea (Rs. 35 billion), tobacco (Rs. 80 billion), tyres and lubricants (Rs. 90 billion), medicines (Rs. 45 billion) and real estate (Rs. 60 billion). The volume of goods smuggled into Pakistan increased nearly threefold from 2014 to 2018. The smuggled goods have penetrated several sectors of the economy. Various markets in Lahore, Karachi, Rawalpindi and other big cities are known to everyone selling smuggled items.

The report revealed that around 53% of diesel, 43% of engine oil, 40% of tyres and 16% of auto parts sold in the country are smuggled ones. Apart from these, 20% of cigarettes and 23% of tea are smuggled into the country. Alarmingly, the law enforcement and regulatory bodies have only been able to seize 5% of the smuggled goods. People attacked with the automobile sector say that the annual consumption of tyres in Pakistan is estimated at 14 million units, of which around 15-18% is met by domestic production, more than 50% by smuggled tyres and 35% by legal imports.

A UNDP report, produced by a team of Pakistani researchers, led by Dr. Hafiz Pasha, and released in April 2021, offered an exceptional deconstruction of the country’s political economy. It assessed that in the 2017-18 fiscal year alone, Pakistan’s corporate, feudal, and military elite received the equivalent of $13 billion in current dollar terms in “benefits and privileges” — roughly 7% of the country’s GDP. When the general public and ‘small’ industrialists find nothing facilitating them on the part of the ruling elite, they prefer becoming a part of the unregulated economy.

The incumbent coalition government in the Centre, under severe pressure from the International Monetary Fund, claims to have made a comprehensive plan of regulating the grey economy, but results seem nowhere in sight. During the previous government, the number of registered taxpayers touched a record high of 2.7 million, but the tax collection remained very low owing to clogged economic activities and stubborn resistance from a strong segment of those sought to be brought in the tax net.

Quoting a survey, Pakistan Businessmen and Intellectual Forum President Mian Zahid Husain says 62% of the trade is in the informal sector. Informal enterprises are not only household-based or small-scale entities. In reality, studies show that large-scale enterprises in the documented sector have hidden parts of the production and assets from regulatory and tax authorities. A wide range of studies recommend diverse approaches for a transition from informality to formality. A research paper titled ‘Formalising the informal economy’ highlights two factors which need to be taken into account in formulating official policies. First, for enterprises, it says, the transition to formality needs to make good sense. Second, the government should create a sense of trust by utilising the tax collected for the welfare of the taxpayers.