LAHORE:
A large chunk of the Pakistani population continues to fuel the informal economy through various measures, often unknowingly contributing to a system tear that undermines national revenue and economic transparency.
Let’s take the example of an average Pakistani who purchases an item from a non-registered retailer. In this case, both partiesthe retailer and the customerdodge the taxation system. Another major sector is real estate, where the difference between the market rate and the official, or DC rate, puts a legitimate Pakistani in the informal or black economy zone, many of whom do not even realise that this difference between the two rates is actually the black money they now possess.
Nearly every part of the country sees this practice thriving. This undocumented system, fuelled by cash deals and hidden from official records, is larger than the official economy or GDP of the country, which currently stands at around $374 billion. There are various estimates from different institutes on the size of the informal economy, placing it somewhere between $400 billion and $500 billion. Many businessmen even claim that the size of the informal economy is almost double that of the formal economy, though they do not have any studies or research to support these claims.
This parallel economy operates outside tax systems, depriving the government of funds needed for schools, hospitals, and infrastructure. While it provides jobs and services to millions, experts warn it is crippling Pakistan’s growth and deepening poverty.
The real estate sector remains the biggest contributor to this hidden economy. Property deals often involve massive cash payments, with buyers and sellers agreeing to underreport values to avoid taxes.
“In major cities, up to 70% of real estate transactions use black money,” says a property dealer in Lahore, who spoke to The Express Tribune on the condition of anonymity. He explains that fake documents and unnamed bank accounts help hide these deals. Construction materials, labour payments, and even rental incomes often go unrecorded, making it nearly impossible for authorities to track the flow of money.
Small businesses and retail shops form the second-largest part of the undocumented economy. Markets across Pakistan are filled with shops operating without tax registration, licenses, or proper record-keeping. A Lahore-based clothing trader, Muhammad Asif, said that registering a business means dealing with complicated paperwork, high taxes, and frequent visits from officials asking for bribes. “Most small traders can’t afford this hassle,” he said.
A recent study by the Sustainable Development Policy Institute (SDPI) estimates that 40% of Pakistan’s retail sector operates informally, costing the government over Rs1.5 trillion annually in lost revenues.
Small factories, particularly in textiles, leather, steel re-rolling mills, and auto parts and allied industries, also play a role. Many underreport their production, pay workers in cash, and ignore safety and environmental regulations. “If we follow all the rules, our costs would double and we’d have to shut down,” says a factory owner in Faisalabad, Pakistan’s textile hub. These practices not only hurt tax collection but also expose workers to exploitation and unsafe conditions.
High taxes, complex regulations, and widespread corruption have pushed many businesses into the shadows. Pakistan’s tax system is ranked among the most complicated in the world. Small businesses, in particular, struggle with confusing tax categories and frequent changes in policies. “Every year, there’s a new tax or rule. It’s impossible to keep up,” said Nadeem Bhatti, a wholesaler.
He added that corruption at every level of governance makes the problem worse. From local police demanding bribes to tax officials turning a blind eye, the system often rewards dishonesty. “If you have connections or money, you can bypass any law. If you do not have any, you will be punished for trying to do things right,” Bhatti said. This lack of trust in the system discourages people from joining the formal economy, he added.
On the other hand, market analysts said that tackling the issue of the grey economy is a difficult task and might take decades to control. “Monetary benefits are the cornerstone of this economy, and no one wants to lose such benefits,” said Osama Siddiqi, a Karachi-based economist. The government, on the other hand, is making every effort to turn things around and has had some success. “However, the major reason people or businesses avoid coming under the tax net is due to the bad experiences of those who are paying tax and trying to be legitimate citizens or businessmen.”
Simplifying tax laws, reducing rates for small businesses, and improving public services could encourage people to join the formal economy. “People need to see a benefit in paying taxes, like better roads or healthcare. Right now, they don’t. Until the formal system becomes more accessible and trustworthy, the shadow economy will continue to grow, keeping Pakistan trapped in a cycle of lost revenue and rising inequality,” Siddiqi added.
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