Pakistan Institute of Development Economics

Research Reports
Underground Economy and Tax Evasion in Pakistan:A Critical Evaluation
Publication Year : 2003
Author: M Ali Kemal

A large number of economic activities are not reported to formal economy in Pakistan and thus remain out of the tax net; such activities includes smuggling, corruption, black-marketing, narcotics, etc., constitute the black or underground economy. Thus the term “black economy”1 indicates all those activities which are concealed from the tax authorities in an attempt to evade taxes. Tax evasion refers to all the illegal actions taken to avoid the lawful assessment of taxes. The underground economy flourishes when cash transactions such as construction, illegal sale, smuggling, and drug trafficking are common. High tax rate, recession, high unemployment, and negative public attitudes towards government and taxes are some of the factors that lead to the spread of the underground economy, tax evasion, as well as tax avoidance. The existence of a large underground economy results in high tax rates, reduction in government services, unfair competition, and an uneven playing field for honest business. Mainly, self-employed persons are involved in tax evasion and underground economic activities because there is no formal system of documentation for self-employed persons and their activities.