Hina Sarfraz Author is student of LLB (III). She is member of study circle.

Tax Evasion in Context of Black Market
Black Market as the name suggests appears to be a matter of technical economics, finance and market phenomena. That it is. However, unlike the apparent connotation, this seemingly academic and technical subject has a simple but strong base in the human instinct to maximize financial self interest without regard to the constraints of ethics and law. The basis of Black Market is thus, in hearts and minds of men.1 Statement of the Problem: Pakistan is the country rich in natural and strategic resources. Yet, barring the present day scenario, it remained limping on the road to economic development. Many causes are ascribed to this scenario that range from issues of governance to a number of historical and situational factors. In the recent decades one area of focus in this context has been the role of Black market which is believed to be one of the major challenges for the economy at large. From the onset it is essential to define Black Market in clear terms. 2 Sloman stipulates it to be “…( a market) where people ignore the government’s price and quality controls and sell illegally at whatever price equates illegal demand and supply.” The noteworthy content of the definition is the “illegal” aspect. How exactly does the illegality arise, is the next issue that requires attention. Perhaps the best exposition of the “illegality” is that “the underground economy, Black Economy, or Black Market consist of all commerce on which applicable taxes are being evaded. The market include not only legally-prohibited commerce( for example: drugs, prostitution, and gambling activities that are illegal in some countries), but also trade in legal goods and services because some income is not reported and consequently taxation is evaded, e.g., through money laundering, payment in cash (which can almost never be traced), or other means”.3 Thus, whether the economic activities in goods, services or production are in legal or illegal commerce the determining an differentiating factor towards identifying Black Market is primarily the tax-factor. Main Causes of increase in Black Market: The growth of the Black Market is associated with various factors, such as.• Anomalies in Laws: The problem area pertaining to wealth statements is assets held in the name of some other person. The exact inception of the practice of “ benami”is not known but it is agreed that it has been in vogue from times immemorial and practically in all the countries of the world though under different labels. The practice is not confine to acquiring or holding of property in names other than those of the real owners but also extends to carrying on business in that fashion. Many causes such as fear, avoidance of taxation, fraud etc. account for the adoption of such a course and yet all of
1

Richard Lipsey, and colins, First Principles of Economics, Second Edition (NY: Oxford University Press, 1994 ), 102. 2 Jhon Sloman, Economics, second Edition (NY. Prentice Hall, 2001) 98 3 Underground Economy Available from http://en.wikipedia.org/wiki/

the real owner has to prove the benami nature of the transaction and even the provisions of the Evidence Act\Ordinance do not stand in his way to give proof of his title as against the ostensible owner\benamidar. the same attitude has continues. the rich people regard the government as an adversary and the taxes as an instrument of extortion. iii. Central Board of Revenue. Islamabad. Our system of law. Bonafide transfer for value from the ostensible owner without notice of the real title of the real\beneficial owner is protected under Section3 of the Transfer of property Act. The practice of “benami” is. at present can utilize the information regarding benami transactions for taxation purposes but they have to prove against the real owner\beneficiary that the property held in the name of somebody else {benamidar) is really his. Even people who are deeply religious and righteous do not regard tax evasion as a vice. tax evasion before independence was regarded as virtue. in our system of law. The fundamental difference between the two types of transactions is that whereas in the former there is an operative transfer resulting in the vesting of title in the transferee. His activities are inextricably linked with others and he cannot work or 4 5 Trust Act 1872. recognized and protected in our system provided it does not offend the provisions of any law. After independence. December 1986. Purchaser of property from the ostensible owner at court sale under section 66 of the Code of Civil procedure is protected. Commercially. and iv. Gazette of Pakistan amended adapted 1972. The former type is covered by Section 82 and the latter by section 81 of the Trusts Act4.e. The tax authorities. . therefore. In fact. but the real purchaser is B. The base of benami. National Taxation commission Report. When the transaction of benami is a fraud upon the creditors of the real owner. lies in the Trusts Act.e. Historically. for example. the areas comprising Pakistan do not have a tradition of voluntary payment of taxes as the successive conquerors “imposed” taxes on the people and the question of acceptance of these levies by the tillers of the soil or the traders who contributed to the treasuries of the rulers was not even raised. The real owner cannot be deprived of hi property in a benami transaction. If the transaction is against public policy i. X being his “benamidar” who in legal terms is known as the ostensible owner. the purchaser is illegal or in other words prohibited y law or contravenes the provision of any law. 112.there is a real transaction as. when A purports to sell his property to B without intending that his own title should cease or pass to B. in the latter there is no genuine transfer. Of course in such a case the plaintiff i. when A sells property to B but the sale deed mentions X as the purchaser. for example. There transactions can be enforced under the law by the real owner under Section 42 of Specific Relief Act by obtaining a declaration from a court of law.5 Analysis Of Tax Evasion: There are numerous causes which have contributed to birth an spread of evasion. There are two types of benami transactions 1. as. In our history. much less a crime or sin. every person engaged in production or distribution of goods is a part of one big machine. The other type is a sort of sham transaction. therefore. duly recognizes the benami transactions subject to the following main exceptions: i. ii. Here the sale itself is genuine.a contribution to the struggle for independence.these may not be illegal and immoral.. there being no passing of consideration.1882.

considerable parts of NWFP and the entire Northern Areas are beyond the scope of Tax laws. it is almost impossible even for the honest ones to pay taxes correctly because they are forced to conceal those transactions which their suppliers or buyers do not want to put on record. In addition. The Tax laws provide extensive Tax exempt Sectors. The Tax policies as such need to be reviewed in this perspective. Loans from agriculturists and tribal people have become a common feature in the explanation of assets created with black money. Thus an honest taxpayer reporting his income correctly is also subjected to similar treatment neted out to the dishonest. firstly. tax evasion is easy and its detection by the authorities difficult as cash transactions leave no trace behind.operate in isolation. which remains out of tax net. Natinal Tax Reforms Commission Report.g. prostitution etc. e. Since assessments are made long after the transactions take place. In short. thus. the tax statutes grant exemption to a large number of other sectors like poultry farming. Forms of Black money: it essentially comprises two forms. exempt sectors and areas allow black money to appear as loans from those enjoying income from such sectors or areas. Income from agriculture though under tax net yet escapes major tax burden. there are many persons who work at more than one place6 and do not report their income from the second job. until the agriculture tax was not strictly enforce industrialists and traders were prompted. Also. He. Even now tax on agriculture sector is significantly lower and this practice of tax evasion still persists. In an economy where tax evasion has become a norm. of Baluchistan. Repeated amnesties discourage an honest taxpayer who honestly pays taxes every year at the prescribed high rate while those who do not pay honestly pay taxes every year at the prescribed high rates while those who do not pay honestly. earn further income on the evaded tax. the prevailing conditions not only encourage tax-evasion but also positively discourage honest tax-reporting. fishing and fish processing etc. Major parts. In the public sector government employees are not allowed to work anywhere besides their main office. For details see black Markets at www. Over a period of time. .com. the evaders are far richer than the honest taxpayer and be a worse disincentive for honest taxpayers. cattle farming. However.7 The other form. Sectoral tax exemptions enable the businessmen to show their taxable income as derived from tax-exempt sources. to show their income having been generated from agriculture and were exempted from taxation. in society where the majority of those liable to taxation are evading taxes. apart from tax holidays to a host of industrial undertakings set up in the backward areas. those who are not doing so are also regarded as dishonest simply because it is not possible for the tax department to identify the honest tax payer.. 113. Islamabad. owing to lopsided tax policies. employed and generate for and by activities that are outright illegal such as narcotics. Further. those funds used. ends up paying far more than he should have paid which discourages him for being honest and straight forward. the authorities are unable to detect those not recorded. This form of Black Market and its activities escape not only the state taxation network but also transcend all borders of regulatory control. In an economy based primarily on cash transactions. is the market which evades the taxation network is 6 7 Central Board of Revenue.wikepedia. which we are mainly concerned here.

thereby evading excise duty and sales tax where leviable.otherwise legal activities i. The prevalence of this form of evasion became evident when entering the latest amnesty scheme. v. . evasion of these duties. retailers etc.e. wholesaler or a retailer cannot conceal his sales quantitatively. Now a large number of daily wage earners like masons. all belong to this class. architects etc. the sale price is verifiable as in the case of contractors. Since tax evasion is birth point of Black Market. forms and consequences. Under statement of sales: When an importer. Many film stars receive a substantial part of their fees in cash as “on-money”. some out of ignorance. Small shopkeepers.8 Forms of Tax Evasion: Although it is Not possible to provide comprehensive details of the various methods of tax evasion. producer. They neither record such purchases nor sales correctly. 8 Central Board of Revenue. shares and other investments and even those drawing salary. brokers. doctors. Broadly speaking. Some times such expenses are debited although having not been incurred at all and some-times such expenses are debited although having not been incurred at all and sometimes the amount claimed is shown substantially higher than the one actually expended. iv. resort to this method. Total Non-Reporting: This is the crudest but most prevalent form of evasion. Professionals.. manufacturers do not record a part of their production. It is done either by not showing one’s income atall( nonreporting) or showing less income than avoidance which means taking advantage of the loopholes in the law or stretching the rules and regulations without actually breaking them. We need to delve into its meaning. the method employed is over-statement of purchases. National Taxation Reform commission Report. A. This category includes not only businessmen but persons owning property. through deliberate tax evasion. Under invoicing of exports: At times exporters understate the value of exports and receive the difference abroad from the foreign importers. carpenters( even the dock side labour) earn taxable income but file no return. overstating the expenses is employed to reduce profits. iii. suppliers etc. lawyers. B. excise duty and sales tax. This under=reporting can take the following forms: i. many parties demanded amnesty against proceedings for evasion of custom duty. Inflation of purchases: Where for any reason. tax evasion means evading payment of tax legally payable on one’s genuine taxable income. Suppression of transactions: Importers. omit a substantial part of their transactions altogether. he resorts to understating his sales price. Persons earning taxable income just do not file their returns. ii. an outline of the basic techniques and methods of tax evasion include inter alia. Their main argument was that bulk of the black money represents. Similarly. They do file returns and pay taxes but declare only a part of their income. but mostly it is deliberate. wholesalers. vendors. Inflation of expenses: Like inflation of purchases. Islamabad 106. Under Reporting: Most of the existing taxpayers resort to this type of evasion. They charge more than the amount for which they issue the receipts.

diamonds or other valuables. who receive commission (usually for indenting) from abroad. vi. Acquiring income-yielding assets in the name of dependents or “benamidars” e. importers overstate their import price and obtain the difference abroad. relatives or give ownership rights to fictitious persons. relatives or employees. Large firms and private companies create agencies owned by dependents for sale/ purchase of goods dealt in by them or paying large amounts as salary/commission\ rent\ to dependent\ relatives of directors and shareholders.Large export houses usually export to their own concerns abroad thus facilitating the process but commission for obtaining export orders is paid to dummy agents in foreign countries. Over invoicing of imports: where import duty is not charged ad valorem. importers usually receive rebate or discount on their imports abroad. The income on which tax has been totally or partly evaded is commonly called black money. There are very few registered firms all of whose partners are genuine. v. factories. c) Converted into gold. Unrecorded trade receivables iv. C. acquiring property or shares in the name of wife or children or dependents or even non-existent’ persons. Owners of cinemas. Miscellaneous methods: a) Good debts are shown as bad debts. Contractors showing bogus sub-contracts in the form of relatives/dependents. Creating firms consisting of dependent. Undeclared capital investment iii. vii. Diversion of income: This takes many shapes but the more common methods are as follows: i. keep a part of it outside Pakistan. make fictitious leases to firms consisting of their dependents. iv. People. c) Stocks are under-stated and under-valued in order to conceal profits.g. Fictitious loans/payables b) kept in cash in homes safes or bank safe deposits. Making dependents and “ benamidar” partners in various firms. iii. etc. . Part of this money is utilized for consumption and part for hoarding or investment. ii. The black money not consumed is utilized in one or more of the following ways: a) Utilized in business recorded in books which may be in the form of: i. Undeclared stocks ii. Similarly. vi. b) Capital expenditure is shown as a deductible expense in the revenue account. d) Deposited in banks in form of fixed deposit receipts in fictitious names.

These laws then nee to be enforced strictly so that they become a deterrent to migration to the informal sector. Thus all taxpayers other than companies. Improved Documentation: the best weapon against continuing unhindered growth of the informal sector in laws enected to promote stringent documentation of as many economic activities as it feasible.e) Converted into bearer bonds. This practice can be checked by providing in the law that in cases where any assets are found to have been held in the names of non-existent\bogus persons. constitute the underground economy. cash payments to the shopkeepers who do not provide valid cash memos etc.g. These activities are not in the tax net and have significant negative impact on social welfare of the country. Prize Bonds. . thus. assets are also held by taxpayers not in the name of any benamidar in the legal sense of the word but in the name of non-existent\ bogus persons. i) Used in furnishing bungalows. Saving certificates etc. f) Invested in stocks\shares. purchasing cars and other luxury items. Ali Kemal. the transaction should also be made unenforceable by the real owner as against the bemanidar. uptill 2001 when the Income-Tax Ordinance of 2001 superseded the Ordinance of 1979. e. can be made more effective by providing in the law that holding of a property liable to taxation in the name of another (benami) without showing it in the wealth statement filed with the IncomeTax Department by real owner would be a penal offence. Provisions having similar import also exist in the Indian Income-tax law. Trust Act and other laws that provide grey areas to the tax evader and Black Market operator. self employed persons are involved in tax evasion and underground economic activities because there is no formal system of documentation of self-employed persons and their activities. transactions in illegal sales. and linkages with the Formal Economy . Consequences. Conclusion and recommendations: Illegal activities such as smuggling.only corporate & professional entities like doctors\architects were required to maintain books of accounts and related documentation.9 In attempting to address the challenges posed to the economy by the Black Market. In Pakistan. the aets involved may be forfeited by the Government. Remove Loopholes in Laws: The controls in matters such as those falling in the domain of Benami transactions. h) Used for private lending. Almost all the transactions made in the underground economy are through cash. doctors & architect could claim 9 M.It may be pointed out that in Pakistan. transactions involved in smuggling and drug trafficking. A Fresh Assesment of the Underground Economy and Tax Evasion in Pakistan: Causes. narcotics. In that event. This would not offend the constitution. corruption. This is quite common in respect of bank deposits and shares. in general. Improvement in labour laws: requires introducing laws favourable to the labour and compliable for the employers. the best referent is available in the form of the factors that promote Black Market activities. the obvious beginning point is the regulatory milieu and in this context the tax system. Black-marketing. informal legal jobs etc.. g) Invested in real estate. payments to the contractual workers.

The introduction of mechanical and electronic Cash Registers. -Ghausi. This could be made effective by providing incentive to the buyer and seller in the form of tax rebates. After the enactment of the Ordinance of 2001 however every tax payer is required to maintain accounts and documentation as prescribed by FBR for different categories of assessee’s. Taxation Reforms:. -Sloman. Many an economic initiatives fails due to lack of congruence between the two. . Efficient Enforcement: Firstly. It would also be very good idea to revive the wealth Tax Act originally enacted in 1963. the scantier the surviving data or secondary evidence regarding the past situation. NY. John. . can serve the same purpose as these machines also permit easy verification of the periodic sale-volume. property registrars. Prentice Hall. suggested that use of Cash Registers may be made obligatory in certain types of businesses and the cost incurred compensated by allowing it as revenue expenditure over a period of two years instead of allowing it as depreciation allowance over a number of years as at present. Such low rate would force taxpayers to declare all assets formally. The Hidden National Wealth.Re-enact the Wealth Tax Act. Second Edition. including immoveable property that has become a heaven for funds that have suffered no tax and have been contrived illegally through the informal sector. and more so the mandatory maintenance of accounts envisaged in the latest CBR regulations. Richard and Colins. 2006.. Economics. NTN and NADRA records can be linked through an information management system. therefore.Tax system should be simple and easy to understand because loopholes in the complex tax system tempt people to evade taxes which they might pay otherwise. First Principles of Economics. Economic and Financial Regulations: Pre-dominance of cash transactions in trade and commerce is one of the main factors which assist under-reporting of income because such transaction are by their nature difficult to trace. -Lipsey. albeit with very low rates of wealth tax. Bibliography: -Trusts Act 1872 -Wealth Tax Act -Income Tax Ordinance -Law of Benami Transactions 1952 -NTRC (1986) Final Report of the National Taxation Reform Commission. Dawn September 25. Another remedy for this problem would be to put some legal restraint on the unlimited quantum of transactions which can be made in cash. the more difficult it is to make a sound assessment.before the ITO they did not maintain any accounts\documentation whatsoever and the income tax assessing officer then would have no option but to determine the assessee’s total income in his best judgment. Sabihudin. Oxford. . etc with the taxation system. through checking and containing corruption -Effective monitoring by inter-alia integrating various departments such as excise. As the system of tax assessment is based on a re-construction of past events.. 1994. It is. Attempts have been made in past by the income tax authorities to devise such mechanisms as may assist them in enforcing recording of cash transactions.Reduce the rate of direct taxes -Broaden tax base to compensate for reduction in rates -Integrate tax reforms with macro-economic reforms.

2003.-Kemal. PIDE R. -Kemal.A. M.A. . Fresh Assessment of the Underground Economy and Tax Evasion in Pakistan:Causes..Net Browsing List of Abreviations: CBR Central Board of Revenue ILO International Labour Organisation ITO Income Tax Officer NAB National Accountability Beareau NADRA National Data Base Registration Authority NTN National Tax Number FBR Federal Board Of Revenue . M.R. No 183.. Underground Economy and Tax evasion in Pakistan.

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