Effective Enforcement of Illicit Trade is Key to Boosting Tax Revenue and Economic Growth – Startup Pakistan

Illicit trade results in significant losses in tax revenue, hampers the growth of the formal sector, exploits labor, violates environmental regulations, and funds criminal activities. Addressing these issues is crucial for economic stability and growth.

According to a report by the Pakistan Business Council, several key measures can effectively counter illicit trade. First, controlling the flow of foreign currency that supports smuggling and under-invoicing is essential. Hawala, a traditional method, is a major source of these funds. Incentivizing overseas Pakistanis to use formal banking channels for remittances can help address this issue.

Limiting cash transactions is another critical measure. Cash is often used to conceal turnover and profits in illicit supply chains. Increasing transparency in transactions can significantly discourage illicit trade.

Broadening the tax base is also necessary. It is estimated that 40% of goods sold through certain outlets are illicit, including smuggled, counterfeit, and adulterated products. Despite representing 20% of GDP, this sector contributes only 1% of direct taxes. Bringing this sector into the tax net is essential.

Reducing incentives for tax evasion is crucial. High import duties, GST at 18% on duty-paid value, Advance Income Tax, and Federal Excise Duty create strong motivations for evasion. Lowering these taxes and levies can diminish the incentive to evade.

A federal/provincial fine-sharing mechanism should be developed to encourage provinces to cooperate in combating the sale of illicit goods. Recent measures in the Finance Act penalize retailers for dealing in smuggled and illegal goods, including cigarettes, tea, spices, medicines, and milk.

Utilizing technology, such as the Track & Trace system and improved labeling, could be essential to making evasion more difficult. Additionally, minimizing the misuse of Afghan Transit Trade is necessary.

Provincial authorities should focus on items prone to adulteration, such as open or loose items like milk, spices, cigarettes, and tea. This approach will protect consumers, create a level playing field for the formal sector, and increase government revenue.

Finally, effective prosecution is needed. Counterfeiting cases should be transferred to consumer courts, where specialized understanding of consumer interests can lead to more effective trials. Public prosecutors often lack motivation and commitment, making this change crucial for improving enforcement.