Preview/Tackling_Informal_Economy/Tackling Informal Economy.txt

Overview
Significance of the Informal Sector:
Contributes approximately $661 billion to Pakistan's economy (35.5% of GDP).
Serves as a safety net in areas with limited formal job opportunities.
Challenges of Informality:
High income inequality and poverty.
Limited tax revenue collection and lower productivity.
Key Features of the Informal Economy
Employment:
Engages nearly 75% of Pakistan’s labor force.
Critical for regions with limited formal employment opportunities.
Fiscal Implications:
Wholesale and retail trade (WRT) sector contributes only 2.9% to direct taxes despite accounting for 18% of GDP.
Significant tax revenue losses due to unregistered businesses and workers.
Comparison with Other Countries
Global Trends:
Informal sector accounts for 50% of GDP in India and 30–40% in Mexico and Brazil.
60–70% of the workforce in low-income countries is employed in the informal sector.
Fiscal Losses:
South Africa: 5–10% of GDP lost to informality.
Kenya: Up to 8% of GDP lost annually.
Pakistan’s Challenges
Tax Evasion:
Only 300,000 of 3.5 million retailers file tax returns.
Retail sector’s potential tax revenue is underutilized.
Sectoral Imbalance:
Manufacturing contributes 34.5% to direct taxes, while WRT contributes only 2.9%.
Policy Weakness:
Absence of streamlined taxation systems for the informal sector.
Initiatives and Solutions
Tajir Dost (Special) Procedure, 2024:
Aimed at small traders and shopkeepers to bring them into the tax net.
Advance tax of PKR 1,200 per year to be paid monthly through computerized systems.
FBR Point of Sale (POS) System:
Integrates retail sales with tax systems.
Benefits:
Real-time data transmission and improved tax compliance.
Incentives for retailers, transparency, and better business insights.
Tier-1 Retailers:
Businesses meeting specific criteria (e.g., large retail chains, high electricity usage) must integrate POS systems.
Only 58,802 traders registered under Tier-1, highlighting a gap in tax compliance.
Tax Potential
Retail Sector:
Estimated retail market size of $300 billion in 2023.
A 4% market size tax and 1% income tax could generate $15 billion annually.
Current Contributions:
Retail sector contributes Rs. 48.2 billion in taxes, far below its potential.
Overall tax collection for 2022–23 stood at Rs. 7,164 billion.
Recommendations
Simplified Tax Schemes:
Introduce low-rate, easy-to-implement tax schemes for small businesses.
Expand POS Integration:
Ensure wider adoption of FBR POS systems for transparency and compliance.
Awareness Campaigns:
Educate informal sector workers and businesses about the benefits of formalization.
Incentivize Formalization:
Offer tax rebates and financial support to businesses transitioning from informal to formal.
Conclusion
Economic Potential:
Addressing informality can enhance tax revenues and reduce fiscal deficits.
Strategic Focus:
Combining administrative reforms, technology integration, and incentives is critical for formalizing the informal economy.
Long-Term Goal:
Formalizing the informal sector is essential for sustainable economic growth and achieving development goals.