Abstract

Tax system of an economy plays a dominant role in stimulating sustainable development but the developing countries failed to do so. Taxes play a very important part in financing the economy’s expenditures. But evasion of tax is something that is connected with the activities that are illegal and adopted by the people to avoid or evade tax is the main hurdle in this financing. The main objective of the study is to find the significance of tax evasion and to show that tax evasion is the major determinant of an underground economy. The monetary approach is used to find the size of underground economy. The study period of the paper is from 1980 to 2019. All the data used is secondary and taken from State Bank of Pakistan’s reports. Results of the study showed tax evasion as a significant part of underground economy. Suggestions like proper channel of taxation is needed and time to time audits can minimize tax evasion practice.