Tax policies encourage businesses to join the informal sector.

On Sunday, former Vice President of FPCCI Atif Ikram Sheikh said the tax-to-GDP ratio is below 10 percent in Pakistan, which is below the level required for any proper economic growth. He said 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. Atif Ikram Sheikh, who has also served as President of ICCI and Chairman of PVMA, said in a statement today that over-reliance on imports and turning businesses into withholding agents was a policy that was not supposed to work from the very beginning. It encouraged many businesses to move from a formal to an 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 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 increased the cash in circulation.

He observed that the government still needs to learn from its mistakes and the focus continues on extracting more tax from the existing tax base which will shrink the ground even further.

He said there are plans for imposing taxes on banking transactions that have not worked in the past, adding that the tax burden is tilted towards the documented manufacturing sector. There was a super tax imposed last year that may also continue in the coming year. Then there is a proposal to tax reserves of companies which were built up after paying due taxes, which will incentivise businesses to move more towards the informal sector.

The track-and-trace system ensures 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 sometimes have products that do not comply with the required food standards.

Posted in News Update.

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