ISLAMABAD, Feb 1: The proportion of black economy in GDP has grown to more than 27 per cent and is increasing at the rate of 10.6 per cent.

Presenting his paper in a seminar titled “a critical evaluation of assessment of the estimates of underground economy and tax evasion in Pakistan covering a period from 1980 to 1998” at Pakistan Institute of Development Economics on Saturday, staff economist, M. Ali Kemal said following the year of 1993, the rate of increase in black economy is greater than the rate of increase in formal economy.

He said that the black economy (underground economy) and tax evasion has increased sharply in the last seven years at 10.6 per cent and 11.4 per cent, respectively.

He said that black economy came out to be 27.11 per cent of GDP and tax evasion as 3.62 per cent of GDP in 1998. However, these estimates should not be taken as precise measures, rather it could be taken as broad indications of trends because it assumed that before 1980s there was no underground economy.

The researcher said that because of high underground economy, the government revenue fails to rise and government is forced to increase the tax rates, it also results in reduction in government services, unfair competition and uneven playing field for honest businesses.

While unregistered companies are involved, there are generally the self-employed who are involved in underground economic activities because there is no formal system of documentation of self employed persons and their activities.

Relating tax evasion to the underground economy, the researcher said that tax evasion is a significant determinant of underground economy. Farming community are exempted from taxation and agricultural incomes are conduit for whitening the black money; industrialists, traders use to show their income as their farming income and exempted from taxation.

The researcher said that it is an open fact that severity of problem of underground economy started after Afghan war in 1979 due to Afghan transit trade, though black economy before that period cannot be ruled out.