Framework to Control Illicit Trade

Pakistan suffers from one of the highest levels of illicit trade in Asia. The combined value of smuggling, under-invoicing, mis-declaration of imports, counterfeiting and adulteration is estimated at US$ 68 Bn or 20% of the formal economy. Informal economy is estimated at about the same size as the formal economy, therefore illicit trade represents 10% of the total economy. The estimated annual tax loss from illicit trade is Rs. 8 trillion, amounting to 85% of the tax revenue target for FY 24. There can be other estimates of the size of illicit trade. Suffice to say that it is large and needs to be addressed. Besides loss of tax revenue, illicit trade undermines the formal sector’s growth, exploits labour, operates in environmentally detrimental ways, 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 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. 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 require a system-wide change which 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.

This framework outlines key measures that can in combination help control illicit trade:

  • Develop a strong political consensus to fight informality in the economy
  • Starve the flow of foreign currency that funds smuggling and under-invoicing
  • Create transparency of transactions by limiting the use of cash
  • Broaden the tax base to include all points of sale through which illicit goods are sold
  • Reduce incentives to evade through lower taxes and levies;
  • Raise the cost of evasion through tighter enforcement;
  • Provincial government co-operation to prevent sale of illicit items in their jurisdictions;
  • Use technology and labelling measures to make it difficult to evade;
  • Minimize misuse of Afghan transit trade;
  • Refocus provincial Food Authorities on items that are more vulnerable to adulteration;
  • Enable effective prosecution and penalize the guilty in the extended chain of evasion.