Smuggling and its effects on economy – by Shaukat Masood Zafar

Smuggling severely harms the economy of a country in multidimensional ways. It undermines the local industry, discourages legal imports and reduces the volume of revenues collected from duties and levies by the state. Unfortunately a parallel underground economy has taken roots in Pakistan. A major proportion of the revenue to be collected by the Government is being lost, over and above the adverse impact that the smuggled items cause to our industry. Obviously this cannot be done without connivance of the corrupt officials including those in the law enforcement agencies and everyone is aware of it but no action is being taken.

Markets and Shops across the country are flooded with smuggled goods of any and all descriptions. Smuggled items through the borders of Iran, Afghanistan, China, and the Afghan Transit Trade form a major part of the informal economy volume of which ranges between 50 to 60 per cent of the formal economy. Smuggling has assumed an alarming proportion and turned out to be a parallel economy, which is depriving the country of its rightful levies including excise and customs duty worth hundreds of billions of Rupees.

Thousands of industrial units have been rendered sick, due to the availability of smuggled goods in open markets. Afghan Transit Trade is the main source of smuggling into Pakistan and its annual volume has been estimated about five to six billion dollars, about 70% of the total smuggling causing a revenue loss of about 2.5 to 3 billion dollars annually (which has been almost tripled during 2008-2010) to the national exchequer.

Afghan imports under Afghan Transit Trade are actually arranged for back smuggling into Pakistan with the help of Afghan traders. It is not possible to determine the precise amount of revenue loss and size of black money or shifting of money abroad. Revenue loss on account of smuggling of Afghan transit trade alone, as estimated by the World Bank, amounted to US$ 35 billion during nine years from 2001 to 2009.

Smuggling has now become a routine part of all economic activities in Pakistan which hardly raises any eye brows nor stirs the slightest fear of the law. Pakistan is facing the challenge of measuring and countering enormous revenue leakages and black money — its size estimated to be three time the regular economy. People are bringing in Pakistan petroleum products from Iran which is cheaper than in Pakistan.

The volume of this trade is estimated to about rupees two billions. Even improvised explosive devices are being smuggled via Afghanistan are contributing to a climate of fear. Smuggled materials help militants prepare suicide jackets, explosive-laden vehicles and other sorts of explosive bombs.

Involvement of Pakistan customs officials in this smuggling racket cannot be ruled out. With their connivance the containers registered in the name of NATO containing alcohol, expensive spices and other contraband items are also offloaded in Pakistan.

Another gateway for smuggling i.e. Afghan Transit Trade through Wahga Border has been opened by the present regime which would result in a big chunk of Indian goods destined for Afghanistan would ultimately land in our domestic market, which would damage the national economy of Pakistan which is already dwindling because of the impact of the war on terror and Afghan transit trade.

It is no secret that Pakistani tax evaders have been transferring to Swiss banks huge amounts of money generated through illegal activities by some politicians, bureaucrats, terrorist networks and businessmen to Swiss banks. White-collar crimes are also responsible for facilitating transfer of capital towards informal economy either from the black market or the formal economy with the connivance of FRB’s officials.

Due to Pakistan’s low productivity resulting from massive exemptions, poor administration, low threshold, and lack of transparency and enforcement, the country faces a massive challenge of balancing low revenues and the avaricious politicians, corrupt bureaucrats, and greedy businessmen, who are mostly crook, corrupt and tax evaders, succeed to remit this black money to their hidden accounts in Switzerland and other European countries.

On the one hand parallel economy in Pakistan is growing at an alarming rate of 20 percent per annum and on the other hand, according to an estimate, the money lying in Swiss banks of Pakistanis has reached to the tune of US $200 billion. The volume of black money generated in the year 2008-09 alone has been measured by the independent sources which is not less than $ 40 billion. The rent-seekers and beneficiaries of loan write-offs in Pakistan have also shifted funds worth billions of dollars to Switzerland.

To curtail the existing high volume of smuggling through Afghan Transit Trade Pakistan needs to revise the transit agreement. Both the countries should also reach on a uniform taxation mechanism on imports. Anti-smuggling and anti-corruption laws need to be strengthened and their implementation in letter and spirit through a dedicated staff should be ensured.

Pakistani policy-makers must realize that a sound development strategy seeks to reduce the size of the informal economy and bring into the open resources that lie in the form of black money. FBR should remove distortions from the economy, bring all the sectors and taxpayers in the tax net, curtail smuggling, curb parallel economy, and take all the stakeholders into confidence and make it business friendly.

At the same time, it should rationalize the taxation system to attract the influential industrialists to pay taxes. Measures should also be taken to discourage under-invoicing and proper documentation of economy should take place to bring the informal economy under the tax net.

According to an estimate, presently tax evaders in Pakistan annually deprive the country of revenue of over US $20 billion in aggregate but the government, instead of putting them behind bars, encourages their unlawful activities.

After signing Avoidance of Double Taxation Treaty with Switzerland, it is now possible to retrieve the looted funds if the government under its Article 25(1), Pakistan should also seek information regarding Pakistanis maintaining accounts in Switzerland as has been done by many other countries in recent past. A good thing in fresh legislation of Switzerland is that now burden of proving that the money came from legal sources would lie with the allegedly corrupt official, rather than the Swiss state.

If the official could not prove a legitimate origin of his or her Swiss assets, they would be confiscated by the Swiss state. The Government should take immediate steps to retrieve this black money which will surely discourage the smuggling tendency also.



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