Karandaaz Pakistan, a non-profit organization, has released its most recent study on the state of business taxation in Pakistan, with a particular emphasis on the challenges faced by small and medium-sized businesses (SMEs). According to the study, despite accounting for more than 70% of employment and 25% of exports, Pakistani SMEs are largely outside the formal economy.
According to estimates, Pakistan has approximately 5.2 million SMEs, but only about 64,000 associations of persons (AOPs) filed tax returns in 2018. According to the study, the burden of tax compliance is a greater barrier for SMEs than the actual tax paid or high tax rates. Compliance costs are a significant deterrent to filing taxes, causing SMEs to pay penalties and remain outside of the formal economy.
The report recommended that tax authorities streamline taxation policy, establish efficient collection processes, and shift away from revenue-centricity in order to create a cohesive, collaborative, and simplified tax regime. The study also advocated for policy harmonization across jurisdictions, significant investment in systems that can be integrated across government machinery, the adoption of automation and smart regulation accessible to SMEs, and painless tax administration that reduces tax compliance burdens.
The study also highlighted Pakistan’s taxation system’s inherent complexity, which leads to high compliance costs and burdens for taxpayers. Pakistan is ranked 161st out of 190 economies in terms of “paying tax,” highlighting the difficulty and complexity of complying with tax regulations in the country.
Panel discussions with government officials, business leaders, and tax experts were part of the webinar that launched the study. To improve Pakistan’s economic situation, the speakers emphasized the importance of effective policymaking, tax reform, and support for the SME sector. The panelists also emphasized the importance of eliminating inequities in the taxation system and reforming its design to address the root causes of noncompliance.
The study focuses on the challenges that SMEs face in Pakistan’s taxation system and makes recommendations to improve the tax regime. The report is an invaluable resource for policymakers, tax authorities, and SMEs attempting to navigate Pakistan’s complex taxation landscape. By addressing the challenges that SMEs face, Pakistan can realize the full potential of its SME sector, resulting in increased revenue collection, job creation, and socioeconomic development.