Critical Factors of Underground Economy and Tax Evasion: Evidence from Pakistan

DOI: 10.24312/ucpmr020217

  • Yasmine Muhammad Javaid Iqbal Ph.D. Fellow, George Washington University, School of Business, Washington DC. USA.
  • Hamayal Fatima Department of Leadership and Management Studies, National Defence University, Islamabad, Pakistan.
  • Yasir Tariq Department of Leadership and Management Studies, National Defence University, Islamabad, Pakistan.
Keywords: Underground Economy, Tax Evasion, Pakistan, Critical Factors, Tanzi Equation

Abstract

Underground Economy and Tax evasion remains the hot cake for economists because of its direct relationship with the country’s GDP and social development. This paper aims to investigate the main critical factors of underground economy and tax evasion contributing towards the regressing economic landscape of Pakistan. The presence of Underground Economy is a reflection of the citizens of the country. As it conceals their income generation sources to avoid tax payments; this is either because they are not worth revealing or more primarily earned from illegal businesses that are banned in Pakistan including Smuggling, Trafficking, Drugs and other similar unlawful activities. Tanzi (1983) equation for measuring the underground economy is used to highlight the contributing factors of underground economy. These factors are analysed prudently to dig out the critical factors for the Underground Economy of Pakistan from the existing literature. The findings of the study explains that corruption and concealment of income to avoid tax payments to state are the main factors; consequently followed by unaware labour force, de-regularized fiscal policies and weak tax collection system are the constituents of Underground Economy in Pakistan. The paper concludes with recommendations to policy makers to combat the nuisance of underground economy and tax evasion, and to put the economy of Pakistan on the track towards progress.

Published
2019-06-30