Fixing the shadow economy

In the land of the pure, the informal sector continues to grow, whereas the formal remains in the shadow. By some rough estimates the GDP is above USD 1 trillion while the official numbers are much lower.

Taxing the taxed has not worked. Right from day one around 1 percent of the population pays direct income tax mainly because of a defective taxation system. First it was called CBR (Central Board of Revenue) but later changed to FBR (Federal Board of Revenue). Quite like the change of uniform of Punjab police, tax collection remained the same with the change of name.

Federal government continues to borrow to cover the budget deficits. Even IMF (International Monetary Fund), the prime lender, has shown serious concerns about spending priorities of the government. Cosmetic changes will not work; major course correction is required. According to some reports, over Rs 1 trillion is lost annually to tax evasion and smuggling.

Every country must understand and then define the purpose of taxation. In the US, common belief is that no government is the best government. The state is contained and neutral with sole purpose to serve not rule. The tax collected must be spent on public amenities.

The people rule while the administrative setup serves. During the Bill Clinton presidency major structural reforms were introduced by the committee headed by Vice President Al Gore. For their work of understanding the environmental challenges resulting in climate change, they were awarded the Nobel Peace Prize in the year 2007. Two distinguished Pakistani scholars (Dr Adil Najam, Dr Tariq Banuri) were part of his team.

The challenge was to balance the federal and state budgets. Expenditures and wastes were controlled to increase public spending.

Traditionally, the federal government collected income tax in California, which was then sent to a common pool in Washington DC to be redistributed amongst the states after the deduction of the federal government’s share. There were two un-necessary transactions for which money was deducted. It was decided to remove the redundant transaction. States were allowed to keep their share while transmitting only the federal portion.

The net result was savings; states were able to reduce taxes and provide better services to the residents. In California driving licence fee was waived during this period.

Taxation is very high in the Nordic Welfare States as every citizen is covered from cradle to grave. People are happy and satisfied with the services provided. Referendums are held to ascertain public opinion on tax reduction, but the response is mostly positive.

The state acts like a real mother, which takes good care of its children. Unfortunately, in the land of the pure the state apparatus continues to be cohesive and exploitative. Those responsible for collecting taxes act as rulers and exploiters where public has no say.

Money collected either directly goes into individual pockets or is funnelled through AGPR (Accountant General of Pakistan Revenue) to be spent on providing comfort to the state functionaries only.

Taxation does not serve the taxed. The state continues to behave like a stepmother even after 78 years of ‘so-called’ freedom.

Pakistan and its people continue to survive because of the shadow economy as it provides goods, service and employment to a vast majority. The moment FBR touches them collapse starts. The inspectors first demand their own share leaving the national kitty aside. I have a close friend who runs his own electricity generation business.

He operates by the book and pays all the taxes. In every tax audit that he is made to face, the auditors complain of not being taken care off; this is the ground reality of the Islamic republic where common interest is uncommon. Like the US the state must be cut to size as it is non-performing and exploitative.

Businesses have started to shut down to move overseas. Several multi-nationals have already left while others are in the process. Tax collection leaves a lot to be desired. Personally, I have been filing manual tax returns.

Last year FBR refused to accept manual returns. I consulted their published guidelines and with copies of the relevant portion re-sent my return, which was returned forcing me to submit online. Recently, the court ruled that manual returns are admissible.

Instead of facilitation, FBR creates impediments; the term used in Punjabi is ‘PUSUHRI’, which is all over when dealing with the state apparatus. This approach must end; FBR needs a major overhaul mere change of name or image is not enough.

Copyright Business Recorder, 2026