Quantifying the size of informal economy By: - Articles Detail
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While the average GDP growth of Pakistan has been hovering around three percent over the last five years, one fails to understand the lavish lifestyle of those living in urban as well as rural areas. The increase in number of cars, condominiums, rush at shopping centers and expensive restaurants suggests otherwise and looks people have gone richer.
It is true that a small percentage of society has done richer, which also indulge in 'vulgar display of wealth' the largest percentage has gone poorer and millions pushed below the poverty line. However, one completely fails to understand why there has bas been no significant increase in overall tax collection and tax to GDP ratio?
Many of the experts are of the opinion that the over the years size of undocumented economy has increased manifold, thanks to quantum increase in farmers' income. This is the outcome come of hike in commodity prices around the globe and 'agri income being tax free in Pakistan'. Now some of the groups club all sorts of income under 'income from agriculture' and manage to evade tax.
Bulk of this income is used either buying expensive cars or properties in urban areas. Since these people have ample cash they also love to pay in cash and often don't demand receipts. It becomes all the more surprising that tax collectors hardly bother to take note of those making millions of rupees daily sales, or just keep their eyes closed because they are also among beneficiaries of this system.
The bureaucracy is never tired of accusing business community of evading duties and taxes but never gather the courage to accept that all this 'corruption' is not possible without their connivance. If one looks at their salaries and perks and their lavish spending, it is easy to draw the conclusion that maintaining this kind of lifestyle is not possible without following an old saying 'you scratch my back and I scratch your back'.
According to some analysts while bulk of the income remains undocumented, most of the expenses are documented because many of these are paid through formal banking system. Following payment of utility bills, school and college fees of children, payment of fuel, mobile phones, and hotel and restaurant bills through credit cards are enough clues to identify the tax evaders.
Similarly, a lot is talked and written about transfer of wealth from Pakistan to other countries but least attention is paid on rounding up the culprits. One such channel is money changers/exchange companies. Though much of the their business has been regulated by the central bank but still no one knows how millions of dollars are kept outside Pakistan by these companies.
Since bulk of the undeclared income is spent in Pakistan, it may not be wrong to say that formal economy is also the beneficiary of the informal and undocumented economy. This could be best understood by looking at the tax component (GST) of petrol and CNG, almost all the consumer items and hotels and restaurants.
It is often said that very few people pay tax, which is totally incorrect. Even the most poor pay tax when he/she buys soap, buy prepaid cards of mobile phone, pays bus fare and even medicines. Since bulk of it falls under 'indirect tax' no one says that poor and salaried tax classes pay bulk of the tax.