Pakistan's tax failures threaten formal businesses and economy

Pakistan's efforts to enhance its tax revenue have been longstanding but unsuccessful. The country is faced with a significant challenge as it struggles to raise public revenue, achieving only 12.5% of its GDP against a potential of 20-22%. Despite numerous IMF programs and reform commissions, the focus has primarily been on the shrinking formal sector, leaving the larger informal economy largely untaxed. This reliance on documented firms has not only strained existing taxpayers but also incentivized further informalization, undermining competitiveness. Importantly, the tax policy has led to adverse economic consequences, particularly as firms are pushed to operate outside the formal framework. The policy is described as anti-growth, inequitable, and counterproductive to fostering documentation in the economy. As firms continue to rely heavily on existing taxpayers, the government has failed to broaden its tax base effectively. The informal sector remains untouched, exhibiting a growing gap between formal and informal enterprises. This situation has resulted in inefficiencies that hinder the establishment of a more robust tax regime. The impact of these tax policies is evident in specific industries, such as tobacco, where compliance rates are alarmingly low at only 4.6%. As illicit sales surge, projections estimate that these could capture 100% of the cigarettes market if left unchecked by 2030. The government stands to lose approximately Rs300 billion annually in revenue, which constitutes nearly 0.3% of the GDP. Without a fundamental rethink of its tax strategies, Pakistan faces dire consequences for its economy. The current policies threaten to drive the formal sector toward extinction, highlighting the pressing need for an overhaul of the tax regime to prevent further economic decline.