We are in desperate need of a strong mechanism to combat the phenomenon of underground economy where people make profits while evading taxes. According to a recent study by the Utara Malaysia University, the volume of this informal economy within Saudi Arabia's regulated economy increased from SR 2,351 billion in 1980 to SR 5,942 billion in 2010, at an average ratio of 4.62% and 82.57% of the gross domestic product (GDP), respectively. These figures go beyond what was previously projected and exceeds recent estimations of SR 540, based on Schneider's estimates. Another study has revealed that the growth rate of the underground economy in Saudi Arabia is the highest as compared to some Asian and African countries, such as Bangladesh, Malaysia, Morocco, Ghana, Tanzania, Nigeria, Malawi and Ethiopia. We need to identify the best ways for tackling this problem. The first requirement is to know where we were in this regard, where we are, and where we will be, so that the gravity of the matter could be understood and appropriate solutions worked out. Businesses transacted within this unaccounted economy should be prevented and the various factors, including cash dealings, should be dealt with strongly. According to the Saudi Arabian Monetary Authority, the average cash circulated outside the official banking channels amounted to SR 172 billion from January to November, 2016, due to the lack of transparency in such transactions and weak enforcement of applicable laws and regulations. In this respect, the General Authority for Zakat and Tax declared recently that it had set up a Department of Tax in preparation for levying the selective goods tax and value-added tax (VAT). The Authority indicated that it would coordinate with other concerned bodies to work out a mechanism for putting this into effect. The Authority will proceed with levying the selective goods tax (tobacco derivatives and energy beverages, 100%, and soft drinks, 50%) in the second quarter of 2017. VAT will be introduced in the first quarter of 2018. These levies are necessary for the protection of consumer health and for saving billions of riyals, whether for the Ministry of Health, insurers or individuals. However, it will be difficult to collect such taxes in full from factories, wholesalers, retailers and consumers unless there are accurate accounting practices in place to monitor the sales of these goods to prevent falsification of data. Otherwise, the problem of gray economy will be further compounded, harming the regulated economy. Cash dealings have contributed to the spread of the informal economy because such payments cannot be traced. In fact, cash dealings are what actually fuel the underground economy. Enactment of specific laws to combat the underground economy and strict enforcement of such laws will help reduce the problem, as can be seen in some European countries. These countries follow strict auditing practices, compulsory use of authenticated invoicing programs and software for small and medium enterprises, and auditing of VAT with merchants via the point-of-sale networks. The tax departments are also determined to ensure compliance. Electronic payment systems increase transparency in business transactions and make indulging in shady economic practices difficult and expensive. There is a strong negative relationship between the spread of electronic payment systems in a country and the underground economy. Countries with high rates of electronic payments, such as Britain and North European countries, have a weak underground economy in comparison with countries using lesser electronic payment systems, such as Bulgaria, Romania and Greece.
