A Research Journal of Commerce, Economics, and Social Sciences
Online ISSN: 2410-0854
Print ISSN: 1996-2800

Paradigms Journal

A dynamic assessment of the size of underground economy and tax evasion in Pakistan
Author(s) :
Omer Farooq (Statistical Officer Pakistan Bureau of Statistics, Islamabad )
This Paper aims at the dynamic assessment of the size of underground economy and tax evasion in Pakistan with the help of time series data ranging from 1966-2010. Using modified version of monetary approach (modified in the sense that it involves application of ARDL approach), empirical findings do confirm presence of underground economic activities and tax evasion on a higher scale for the under consideration period of analysis. The underground economy being 43.97 per cent of GDP in the base year period 1966, observes an increasing trend till 1980 and then after wards owing to the introduction of structural reforms in the tax, social security costs and regulatory frameworks, underground economy witnesses a decreasing trend and reaches down to 41 per cent of the GDP in 2010. Tax Evasion following and upward growth reaches to its peak at 8 per cent of the GDP in 1980 and then afterwards, observing a sharp downfall stands at 3.5 per cent of the GDP in 2010. The policy-makers should take steps towards documentation of the economy and while taxing, there should be no sacred cow in the economy. It is the only way out for the Pakistani economy to settle the problem of fiscal deficits so that allocations in respect of development budget may be increased, instead of cutting down to keep the fiscal position of the country under control.
Keywords: Underground economy, tax evasion, Gross Domestic Product etc.

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