Illegal trade is weakening Pakistan’s performance in the global arena and the country is losing a huge amount of invaluable tax revenue, which can be used to enhance development spending.
Ipsos, a global market and social research organization, in its latest report launched in Islamabad, highlighted that the mammoth gap in tax collection, arising from illicit trade in 5 sectors of Pakistan namely Real Estate, Tobacco, Tyres & Auto Lubricants, Pharmaceuticals and Tea. The total loss being caused by these 5 sectors alone is approximately PKR 956 billion to the national exchequer.
As per IPSOS research, tax evasion in the real estate sector is driven by legislative gaps, poor valuation methods, under-invoicing and cash transactions. Estimates suggest that the untaxed potential in the real estate sector could range up to PKR 500 billion. The report emphasizes enhanced documentation and enforcement by the regulators to curb tax evasion.
The tobacco industry in Pakistan is one of the most heavily taxed industry in the country, hence, it is also the most lucrative to avoid taxes. Locally manufactured tax evaded cigarettes hold a significant part of the market and an estimated 38 percent of the overall cigarette market in Pakistan is composed of such brands. Smuggled cigarette brands enter the country through illegal channels, evading taxes and disregarding local regulations. IPSOS research has found that the illicit trade in cigarettes stands at 48% of the total market. This includes 38% of locally manufactured tax evaded cigarettes and 10% of smuggled cigarettes. According to the research, 48% or around 2 Billion cigarette packs are evading taxes to the tune of Rs 240 Billion annually.
According to IPSOS report, 65% of the tyre market is met by illegal or smuggled tyres, while only 20% of the total consumption is locally manufactured and 15% is imported legally. FBR data of 2022 reveals that the PKR 20 Billion was collected from the industry which was contributed by the documented players, having 35% share of the market. Industry experts say that 25% of the tyre import is under-invoiced which increases the loss to government to the tune of 50 billion rupees in total. Govt. of Pakistan collected 187 billion rupees in taxes from the lubricants industry. This collection is done against the 70% of the industry as 30% of the oil is reclaimed. If the use of reclaimed oil is clamped down, then the government can add a staggering 56 billion rupees to its kitty. A total of PKR 106 Billion is being evaded from the Tyre and Auto Lubricant Sector.
According to the IPSOS study, the Pharmaceutical sector is plagued by the menace of counterfeit and smuggled drugs. The financial impact of these illicit drugs is almost PKR 60-65 billion. This loss is further exacerbated by the presence of unregistered and unlicensed pharmacies along with a lack of awareness of the regulators to differentiate between legitimate and illicit drugs.
Estimated amount of tax evasion in tea sector is PKR 45 Billion annually. According to IPSOS report, Large-scale importers meet approximately 55%-60% of the country’s tea demand, while small traders fulfil the remaining 40%-45%.
The study suggests that if tax evasion of more than 956 billion rupees in five sectors can be controlled then Pakistan can cover the total cost of the Public Sector Development Program (PSDP). This huge amount is also enough to fully finance Benazir Income Support Program (BISP). The report also indicates that collecting this huge amount of tax by curbing evasion through stringent enforcement, Pakistan can enhance the Federal Education Budget by 10 times. This amount is more than enough to build Mohmand dam. This sum of Rs956 billion can be used to construct more than 1700 km of motorways. This amount could also be used to provide clean drinking water to all the population.