Moaaz Manzoor

Experts have said transparency, a clear mechanism coupled with incentives are essential for formalising the informal sector, reducing tax evasion and expanding Pakistan's tax base to support sustainable economic growth.

Speaking to WealthPK, Dr Nasir Iqbal, Head of Macro Policy Lab, Pakistan Institute of Development Economics, stressed the need for clarity and a transparent mechanism to include the informal sector in the formal economy. He said, "The government has the resources to formalise the informal sector, but the lack of clarity on who to include and how to include, coupled with an absence of a transparent mechanism, remains a significant issue." Iqbal highlighted the complexity of Pakistan's taxation system, pointing to tax exemptions, self-assessed collections, limited Federal Board of Revenue outreach and over-regulation as major hurdles.

He stated, "The current system is over-regulated, cumbersome, and lacks effective enforcement. A transparent and simple system combined with incentives can encourage compliance without the need for harsh crackdowns, which only create anxiety, business closures and disruptions to economic activity." He suggested that incentivising taxpayers by making inclusion in the tax system simple and beneficial could reduce evasion. "A transparent, well-defined and easy system will increase documentation, expand the tax net and reduce tax evasion," he added. Dr Ikramul Haq, a tax expert and advocate of the Supreme Court, stressed the need for structural reforms.

He emphasised comprehensive documentation of the economy as a means to expand the revenue base and reduce dependency on external borrowing. He said, "A significant portion of the economy operates informally, leading to tax evasion and constrained fiscal space. Incentivising formalisation, streamlining tax mechanism, and leveraging technology can mobilise greater revenues for development initiatives." Regarding the current tax policy, Haq said, "High sales and corporate tax rates hinder growth and lead to evasion. The overall tax policy design appears anti-growth."

He further pointed out gaps in the system such as the lack of an online portal for agricultural income tax in Punjab, which signals limited interest from both provincial and federal governments in addressing this critical issue. The recently enacted Punjab Agricultural Income Tax (Amendment) Act, 2024 has also raised concerns. While it claims compliance with the National Fiscal Pact, experts argue that it lacks alignment with federal legislation and constitutional provisions, further complicating the taxation landscape. Experts agreed that fostering compliance and accountability within the business and trade communities is essential for reducing reliance on external debt and addressing fiscal challenges.

Simplifying tax collection mechanisms, reducing procedural hurdles, and encouraging a transparent and incentivised tax system could help overcome longstanding challenges. Aligning tax reforms with transparency and incentives is vital to combat evasion and build a sustainable tax framework. By addressing procedural inefficiencies and fostering trust, Pakistan can create a fairer, growth-oriented tax regime that broadens the revenue base while reducing dependency on external borrowing.

Credit: INP-WealthPk