Zafar Iqbal
A recent Ipsos study estimating over Rs1 trillion in annual tax losses across select sectors should have sounded alarm bells across Pakistan’s policy and economic circles. Instead, it landed in familiar territory, confirming what insiders have known for years: the scale of the shadow economy is massive, systemic, and deliberately tolerated.
Real estate alone is leaking roughly Rs500 billion annually. The illicit tobacco trade costs another Rs310 billion, while multiple consumer goods sectors operate largely outside the documented economy. These figures are not revelations—they are a restatement of realities that Pakistan’s fiscal managers have chosen to ignore. The persistence of such leakage is neither accidental nor purely structural. Tax evasion and smuggling of this magnitude require tacit tolerance, active collusion, and, often, corruption. Supply chains do not remain invisible without protection, and undocumented transactions do not flourish without regulatory complicity.
The Federal Board of Revenue (FBR) shortfall of Rs545 billion in the first half of the current fiscal year underscores this grim reality. Weak economic activity or a narrow tax base explains only part of the story. The larger issue is structural: a significant share of economic activity is deliberately kept outside the tax net, while enforcement selectively targets compliant taxpayers to fill revenue gaps. This approach has become routine, placing disproportionate burdens on salaried individuals, registered businesses, and formally documented firms. Higher effective tax rates discourage investment, distort incentives, and push marginal actors back toward informality. In effect, honesty is penalised and avoidance rewarded.
The Ipsos report highlights the entrenched nature of this dysfunction. Real estate suffers chronic undervaluation and selective scrutiny. The illicit tobacco trade persists despite clearly mapped distribution networks. Tyres, lubricants, pharmaceuticals, and tea follow similar patterns. These are not accidental enforcement gaps—they are choices.
Solutions exist and are widely discussed: targeted enforcement, proper documentation, credible valuation mechanisms, and full track-and-trace systems. What is missing is political will. Tackling the shadow economy confronts powerful actors with influence and resources. It requires sustained pressure, consistency, and insulation of enforcement agencies from political interference. Successive governments have failed on all counts. Instead, enforcement remains episodic, selective, and undermined by political interference. The implicit message is clear: compliance is optional for the powerful and mandatory for everyone else.
The macroeconomic consequences are severe. Revenue shortfalls constrain development spending, increase borrowing, weaken fiscal credibility, and fuel inflationary pressures as governments rely on indirect taxation. Even more damaging is the erosion of trust. When citizens perceive the system as unfair, voluntary compliance collapses, turning taxation into coercion rather than a social contract.
Pakistan does not need more studies diagnosing the shadow economy. The contours are well understood. What is required is a strategic shift. Revenue mobilisation cannot continue by squeezing compliant taxpayers while allowing massive leakages elsewhere. Confronting illicit trade and tax evasion will be politically uncomfortable, disruptive, and opposed by entrenched interests—but avoiding it guarantees repeated fiscal crises and sustained dysfunction.
As trillions continue to be lost under the state’s watch, the predictable outcome remains: revenue targets are missed, honest taxpayers are penalised, and the shadow economy thrives. The cost is deliberate, systemic, and entirely avoidable. Reform is not a choice—it is the only path to fiscal credibility and economic stability.
