Market Update: ‘Shadow economy’ primary hurdle for economic recovery – Full Analysis

LAHORE: Pakistan can still achieve its ambitious tax collection targets if the government takes decisive action against illicit trade. The Federal Board of Revenue (FBR) faced a significant shortfall of Rs545 billion against its original target during the first half of the current fiscal year. This gap reflects massive revenue leakage in the economy, sources said.

According to a study by Ipsos on tax evasion in five sectors, over Rs1 trillion is lost annually to tax evasion and smuggling across key sectors. A strategic focus on enforcement and documentation could provide the fiscal space needed to stabilize the economy without further burdening compliant taxpayers or the formal business community.

The “shadow economy” has become the primary hurdle for economic recovery. The real estate sector alone accounts for approximately Rs500 billion in annual tax losses, while illicit tobacco trade—comprising smuggled and non-tax-paid cigarettes costs the national exchequer another Rs310 billion. Other major industries, including tyres, lubricants, pharmaceuticals, and tea, collectively account for over Rs200 billion in additional evasion, the sources said.

Macroeconomic analyst Osama Siddiqui said because these sectors operate largely outside the documented net, fiscal pressure is unfairly shifted onto a small pool of compliant taxpayers. This creates a vicious cycle where high taxes further incentivize evasion and hinder commercial growth.

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Siddiqui said that the solution lies in targeted enforcement rather than higher tax rates. “To meet these tax targets, the government must plug loopholes that lead to tax leakages and intensify targeted enforcement efforts,” he said, adding: “The state should focus on bringing the undocumented sector into the tax net and eliminating smuggling rather than solely relying on existing resources. The ineffective implementation of Track & Trace systems across various industries highlights a lack of government resolve in curbing illicit trade.”

He urged that the path to fiscal sustainability depends on shifting strategy from taxing the “already taxed” to capturing the “untaxed”. Strengthening regulatory enforcement and eliminating illicit trade networks are essential steps to ensure tax targets are met through growth and equity rather than emergency measures, he said.

Copyright Business Recorder, 2026