Muhammad Asad Tahir Bhawana

The enduring prevalence of informal economic activities continues to significantly hinder the development of Pakistan’s economy, reports WealthPK quoting a Pakistan Business Council (PBC) report. Primarily, the presence of informality imposes constraints on economic efficiency by inhibiting the entrepreneurial capacity within sectors characterized by small-scale firms that lack the ability to expand and incorporate technological advancements necessary for international competitiveness, says the report.

“Furthermore, informality exerts detrimental effects on the competitive position of the formal sector and acts as a deterrent to foreign investment, primarily due to its infringement upon intellectual property rights. Moreover, it undermines the fiscal underpinnings of the state by impeding the overall availability of taxable revenue for allocation by the federal government while simultaneously imposing disproportionate revenue burdens on the formal sector.”

“As a result, the government faces diminished resources for the provision of essential services, including healthcare, education, and social protection. Additionally, it hampers the government's ability to maintain and enhance regulatory capacity in critical sectors, as well as its capacity to ensure national security. The main sectors which consist of informality more than other sectors and are also top sectors of the economy include wholesale, and retail trade (WRT), and real estate,” says the report.

“With regard to the WRT, one of the identified areas requiring attention is the remarkably low level of tax compliance. Consequently, despite its substantial contribution of over 19% to the overall Gross Domestic Product (GDP), the sector's contribution to direct tax collection remains below 3%. The WRT sector currently is the fourth largest employer in the country, ranking behind agriculture, community and social/personal services, and manufacturing. It accounts for 14.4% of the total employment, encompassing a significant population of 10 million individuals. Out of this figure, over 9.5 million individuals are self-employed proprietors (such as small shopkeepers), contributing family workers, or sales employees engaged in wholesale and retail establishments,” it adds.

According to the PBC, informal employment arrangements dominate the sector almost entirely, with labour force estimates indicating that 97.7% of all individuals (equivalent to 9.77 million people) working in the WRT sector are informally employed. “The prevalence of informality in the wholesale and retail sector can be attributed, in part, to the economic incentives that favour higher profits. The process of formalizing and corporatizing businesses within this sector is still at an early stage, with no more than 3 to 5% of the total value-added occurring through fully formal entities.

A significant number of new enterprises opt to prioritize autonomy and profit maximization by operating as unregistered entities. This practice is accompanied by various common strategies, including smuggling and evading customs regulations, engaging in non-genuine or falsified invoicing for business-to-business transactions, and intentionally under-declaring stock and turnover figures. Lastly, a tiered system of tax registration keeps a large segment of the sector in the informal sector.”

Similarly, the real estate sector has presented opportunities for the illicit concealment of funds obtained through unlawful means and the laundering of black money. The absence of sufficient regulatory supervision and the implementation of relatively lower effective tax rates have facilitated the utilization of the real estate sector as a means to store black money. This has been predominantly made possible by the existence of numerous unregistered and unregulated real estate agents operating within the sector.

“In recent endeavours aimed at combating money laundering and countering terrorism, the Federal Board of Revenue (FBR) has been entrusted with the responsibility of registering real estate agents as designated non-financial businesses and professions (DNFBPs) to ensure that the real estate activities are not exploited for money laundering purposes. However, recent estimations indicate that out of 500,000 property dealers and real estate agents, merely 22,000 have obtained registration as DNFBPs. Additionally, thousands of unregistered investors and property dealers continue to engage in transactions involving unregistered open files, affidavits, and certificates.”

The report shows mechanisms through which informality persists in the wholesale and retail as well as real estate sectors and has identified initiatives aimed at transitioning towards a documented and regulated economy. The task of transitioning to the formal economy is substantial, necessitating a collaborative endeavour involving policymakers, government officials, industry stakeholders, and academic experts. Academics hold a pivotal position in this process, as they can contribute significantly by devising inventive and efficient approaches to implementing the necessary reforms.

Credit: Independent News Pakistan-WealthPk