Tax policies encouraging businesses to join informal sector

Islamabad, May 28, 2023 (PPI-OT): Former Vice President of FPCCI Atif Ikram Sheikh on Sunday said the tax-to-GDP ratio is below 10 percent in Pakistan which is below the level required for any proper economic growth. There have been no serious efforts to expand the tax base and tax machinery relief on increasing collection through indirect taxes and burdening taxpayers which has never worked, he said.

Atif Ikram Sheikh who has also served as President of ICCI and Chairman of PVMA said in a statement issued here today that over-reliance on imports and turning businesses into withholding agents was a policy which was not supposed to work from the very beginning and it encouraged many businesses to move from formal to informal economy.

The concept of higher taxes on non-filers persuaded businesses to remain outside the tax net and pay a higher tax in the shape of withholding tax in order to escape documentation and scrutiny by taxmen, he noted. The business leader said that businesses absorbed the higher tax in their cost of doing business and priced their products accordingly which also increase the cash in circulation.

He observed that the government is still not learning from its mistakes and the focus continues on extracting more tax from the existing tax base which will shrink the base even further. There are plans for imposing taxes on banking transactions which have not worked in the past, he said, adding that the tax burden is tilted towards the documented manufacturing sector.

There was a super tax imposed last year that may continue in the coming year as well. Then there is a proposal to tax reserves of companies which were built up after paying due taxes which will incentivising businesses to move more towards the informal sector.

The track-and-trace system to ensure documentation is not progressing as intended due to a lack of required political will to go after the evaders who are politically powerful people. This lack of will to take on the high and mighty is increasingly pushing people to move from the documented businesses to the informal domain.

There are 52 tobacco companies in Pakistan while the track-and-trace system has been implemented in only two big multinationals. In another example, the government has imposed 10 percent FED on fruit juices and that has resulted in a decline in volumes of the formal juice market by 45 percent.

It has also hampered investment in the backward value chain where pulp extraction helps farmers to reduce wastage and get better returns. Now the market is getting replaced by undocumented players, who at times have products not comply with the required food standards.

For more information, contact:

Atif Ikram Sheikh

Ex. Chairman PVMA, Former VP, FPCCI,

Former President ICCI, Former President HCCI,

Tel: +92-51-4437597, 4440772

Fax: +92-51-4440773