Pakistan’s tax-to-GDP (Gross Domestic Product) ratio has remained consistent at around 9-10% for several years, with the majority of the population paying taxes indirectly through consumption. This regressive taxation disproportionately affects the poor and vulnerable households, widening the gap between the destitute and the elite. To address this issue, it is crucial to expand the tax net to include wholesale and retail traders, who currently contribute only 2% to direct taxes despite making up 18.1% of the country’s GDP (Gross Domestic Product).
The industrial sector, which accounts for 18.4% of the GDP (Gross Domestic Product), contributes 40% to total taxes. Salaried individuals, who make up only 2% of the total labor force, contribute 15% of the total direct taxes. This disparity highlights the need to increase direct taxes and expand the tax net to include more taxpayers.
The wholesale and retail trade sector is largely informal, making it difficult to estimate its total size. However, commercial electricity connections can be used as a proxy to estimate the number of commercial business entities. According to the State of Industry Report 2023, there were 4.1 million commercial electricity connections as of June 2023, with an average monthly consumption of 181 units.
Using data from CreditBook, a digital ledger used by over 1 million micro and small enterprises, it is possible to estimate the gross profit margins of these entities. Assuming a conservative gross profit margin of 7%, it can be inferred that small enterprises with commercial connections could generate a monthly turnover of around Rs1.2 million and a monthly gross profitability of around Rs100,000.
A fixed tax rate of Rs3,000 per month for small enterprises could generate additional tax revenue of Rs147 billion annually. This approach can be improved by utilizing GIS (Geographic Information System) estimates to identify businesses and their potential size, and cross-referencing with electricity consumption and sales data.
Expanding the tax net to include wholesale and retail traders is crucial for Pakistan’s economic growth and development. By implementing a fixed tax rate and utilizing available data, the government can increase tax revenue and reduce the burden on salaried individuals. This move will also help create a more equitable economy, where poor and vulnerable households are not disproportionately affected by regressive taxation.
