Documentation for economic prosperity

Dr Ikramul Haq | Huzaima Bukhari | Abdul Rauf Shakoori

29 March 2024

Published in: Business Recorder

Upon assuming office for the second time, Prime Minister Shehbaz Sharif has undertaken the critical responsibility of steering Pakistan through its prevailing challenges. Addressing attendees at the Tax Excellence Award 2024 ceremony, he reaffirmed his administration’s unwavering dedication to ensuring macroeconomic stability and fostering growth. He lauded the successful conclusion of the Stand-By Arrangement (SBA) with the International Monetary Fund (IMF) and expressed anticipation for Pakistan’s forthcoming disbursement next month.

Additionally, Premier Shehbaz Sharif advocated for the commencement of another IMF programme to spur growth and facilitate job creation. Despite the country’s involvement in the IMF programme, the Prime Minister expressed confidence that Pakistan remains unhindered in its pursuit of agricultural growth. He emphasized that regardless of challenges, Pakistan possesses the capacity to achieve significant growth in both agricultural and information technology sectors while concurrently enhancing traditional and non-traditional avenues of economic development.

The Prime Minister hinted at a potential overhaul of the Federal Board of Revenue (FBR), proposing hiring of a consultant by April 2024, however, acknowledging the fact that digitization process would take a significant amount of time. During his address at the ceremony, Muhammad Aurangzeb, the federal finance minister shared his strategy for fostering growth by reducing import-driven subsidies for businesses and ramping up export-oriented growth. He also admitted that boosting tax collection and broadening tax base continue to pose difficulties for the government.

In their addresses, both Premier and Finance Minister expressed a strong commitment to revitalising the economy but evidently ignoring a critical aspect essential for prosperity: documentation of economy. Pakistan ranks as the world’s fifth populous country, yet the magnitude and extent of its informal economy surpass that of its documented economy, indicating that an overwhelming proportion of such activities continue beyond direct oversight of regulatory authorities.

Unfortunately, successive governments have failed to earnestly address this issue. Instead, their ad-hoc policies and measures have inadvertently fueled the growth of parallel economy, thereby hindering efforts to add value. Consequently, Pakistan finds itself perennially dependent on global lenders to fulfill its balance of payment obligations despite possessing substantial potential for generating tax revenues.

Policies implemented by authorities with the aim of incorporating the concept of non-filers into the tax system cultivate a culture of preferential treatment in taxation, allowing the tax delinquents to mould their business strategies to evade regulatory requirements. This issue is particularly conspicuous within the retail sector, which starkly illustrates the flaws inherent in our policies.

Looking at the performance of successive governments, none has taken any decisive action to enforce compliance with the provisions outlined in section 114 of the Income Tax Ordinance, 2001. Instead, our finance ministers appear to take pride in introducing special preferential measures for this sector, allowing them an advantage over honest taxpayers.

It is a fact that the retail sector holds significant importance within the economy, making substantial contributions to the national GDP, consumer spending, and employment generation. This sector encompasses a diverse array of businesses, spanning over local independent shops and traditional bazaars to large-scale marketplaces, modern hypermarkets, and online platforms. However, a glaring absence exists in our failure to establish mechanisms aimed at fully harnessing the revenue-generating potential of this sector.

The government needs to set its sights on formalizing the economy and ensuring that all sectors contribute to the tax base, without granting preferential treatment. It is imperative to develop a robust legal framework tailored to the specific requirements of each sector. This framework should outline registration procedures, reporting obligations to relevant authorities, licensing requirements, as well as the duration and validity of licenses issued to do business. It should also include provisions for filing tax returns, considering the business threshold. It is important to accurately assess the underlying factors driving informality and analyze labour market indicators, legal and policy frameworks, while integrating formalization strategies into comprehensive employment and development policies.

Furthermore, it is essential to prioritize social protection measures to support individuals during this transition. Drawing from successful global practices, interventions should focus on enhancing working conditions, formalizing employment, addressing work shortfalls for vulnerable groups. Additionally, emphasis should be placed on skill development, providing incentives for compliance, and ensuring effective enforcement mechanisms. Finally, efforts should be directed towards promoting freedom of association, facilitating collective bargaining, and fostering sustainable enterprises within the formal economy.

In an era of the fourth industrial revolution, governments have a unique opportunity to use the power of digitization for administrative efficiency and economic growth. One particular step is the implementation of a simplified business incorporation process, achieved through introduction of a single-click system. This system allows aspiring entrepreneurs to complete with ease online registration forms for obtaining both business registration and national tax numbers promptly.

Moreover, governments should prioritize the establishment of a fair and straightforward taxation framework, moving away from complex systems reliant on withholding taxes. These reforms would not only reduce bureaucratic hurdles but also enhance transparency thus fostering a conducive environment for entrepreneurship and innovation to flourish.

Transitioning from informal to formal economies necessitates incentivising formalization effectively. This can be achieved through a combination of measures such as tax incentives, reduced bureaucratic hurdles for registration, and tailored financial assistance schemes. Additionally, providing training and capacity-building initiatives ensure that individuals and businesses are equipped with the necessary skills and knowledge to thrive in the formal sector.

By offering tangible benefits and support mechanisms, the process of formalization becomes more attractive and feasible, ultimately contributing to economic stability and growth. For effectively generating revenue, formalizing the economy and maximizing resource utilization are important. As recently indicated by the finance minister, intention to tax sectors like agriculture and real estate highlights the need to broaden the tax base. Yet, without comprehensive data on businesses and robust monitoring, reporting, and transparency mechanisms in place, such efforts may prove fruitless. It is through documenting the economy that governments can use its full potential for tax growth and revenue generation. Therefore, prioritizing efforts to enhance documentation processes is not just a fiscal necessity, but a fundamental step towards fostering economic prosperity.