THE obvious lack of will on the part of the ruling coalition to effectively tax the rich including the large feudal community, as the new budget measures show, will further expand the country’s informal economy.
The informal sector is that part of the economy which may be partly documented but does not pay tax, bribes taxman and does not declare his income. It is different from black economy or underground economy – the terms which are used in negative connotation. The informal sector cannot be equated with ‘black economy’ which is mostly illegal and crime-related.
Since most of the informal enterprises are now seen pursuing legitimate economic activities, they need to be classified as ‘extra-legal,’ and not ‘illegal.’ The solution, therefore, lies in neither encouraging nor suppressing informal economic activity but rather in facilitating the transition of informal businesses to the formal sector by removing barriers.
There are several reasons why many businessmen, particularly shopkeepers, prefer not to register their businesses or declare their actual income. Currently, most of the tax burden is on industry and trade. Agriculture which accounts for 22 per cent of GDP, contributes only one per cent in taxes while the industry, which accounts for 25 per cent of GDP, contributes 63 per cent of taxes, according to Karachi chamber chief. Informal economy grows along with corruption, speed money, bureaucratic redtape, government contracts and ways to evade tax.
According to some research reports, the size of Pakistan’s informal economy at present is near $90 billion and if taxed at, say, ten per cent only it could provide a revenue of $9 billion to the exchequer. This practice is favoured in some countries with a view to achieving a higher tax revenue target. They prefer lower tax rates and business-friendly laws for it is the burden of too many and cumbersome laws that drives some businesses into the informal economy. Another reason for reluctance to pay taxes is that some of them find the government unable to help them when they confront armed groups who indulge in extortion, land grabbing and kidnappings. And it happens frequently mostly in Karachi. The result is that the informal sector has grown more rapidly than the formal economy over the last three decades.
According to the Economic Survey 2011-2012, the informal economy plays an important and ‘sometimes controversial’ role. It provides jobs and reduces unemployment but in many cases jobs are low paid. This economy employs 73.8 per cent of the total labour force and hence is the largest employer in the country. The employment ratio in rural informal sector (76.5 per cent) is higher compared to that in the urban areas (71.2 per cent).
According to the Labour Force Survey (LFS) 2008-09, the male employment rate in the rural informal sector stood at 76.2 per cent and remained constant in 2010-11. However, in the urban informal sector employment has increased from 70.6 per cent to 72.4 per cent during this period. The overall percentage of persons working in the informal sector shows an increase in both the rural and urban areas.
However, the formal economy did not show any significant changes with respect to employment level during the 2008-2011 period. The level dropped slightly from 26.7per cent to 26.2 per cent. But in urban areas there was a significant reduction from 29.4 per cent to 28.8 per cent during the same period.
According to International Lbour Organisation (ILO), Pakistan’s informal economy is quite large and has provided higher level of employment compared to previous years. The key sectors for jobs are wholesale and retail trade, manufacturing, community/social and personal services, construction and transport. The 2010 Labour Policy, it notes, had set parameters to provide facilities to the workers in the informal economy. The government did plan to improve working conditions mostly in small enterprises and also give benefits to home-based domestic workers, such as improved safety and health arrangements and the payment of minimum wages. But not much has been done to implement the plans.
The ILO has taken notice of the fact that incidence of child labour is much prevalent in the informal economy. Pakistan’s only child labour survey of 1996 had revealed that 3.3 million children under the age of 14 years were working in the country. The government had promised to address this human issue but it is the widespread poverty that compels parents to send their children to do work.
Some experts are of the view that globalisation has shrunk the size of large-scale industrial sector and increased the share of informal workers in Pakistan, putting additional pressure on women to supplement the household income. They say that in the last two years, it has grown by 28 per cent. Kaiser Bengali, an economist, calls this expansion of informal work the ‘reverse cascade effect,’ which hits those ‘right at the bottom’. Pakistan’s economy, he says, began spiraling into a decline by the end of 2005.