Wednesday May 29, 2024

Capital suggestion: Informal sector

By Dr Farrukh Saleem
September 17, 2023

According to Pakistan's official Labour Force Survey, the informal sector employs nearly 75 per cent of the working-age population. This sector plays a pivotal role in providing income-generating opportunities for a significant portion of Pakistan's populace. It serves as a vital countermeasure against unemployment and poverty. Moreover, it acts as a haven for marginalized groups, including women and youth, who encounter obstacles in securing formal employment. The expansion of the informal sector not only aids in diminishing income inequality but also makes substantial contributions to poverty alleviation by opening doors to diverse groups of workers.

Pakistan's informal sector has always demonstrated remarkable flexibility and adaptability. During economic crises and periods of uncertainty, it has the ability to swiftly adjust its operations to align with shifting demands. This resilience within the informal sector not only contributes to stabilizing Pakistan’s economy but also establishes a safety net for vulnerable individuals and communities, offering them much-needed support during challenging times.

It is the informal sector where small businesses and entrepreneurs operate. It is the informal sector that fosters an environment where innovative ideas and entrepreneurship thrives. These small businesses serve as the backbone of the economy, contributing to economic growth and innovation.

It is the informal sector that provides a safety net for workers who do not have access to formal employment opportunities. It is the informal sector that indirectly reduces the demand for social welfare programmes, potentially saving public funds.

Suppressing the informal sector will result in job losses, which will lead to increased unemployment and social unrest. It is the informal sector that keeps a significant portion of the population employed and engaged in economic activities.

Peru has the ‘Tax Regime for Micro and Small Enterprises’ program that offers reduced tax rates and simplified compliance procedures for small businesses. This approach encourages formalization while recognizing the constraints faced by the informal sector.

South Africa has a dual-track approach to taxation and informal sector support. The country has introduced measures such as the Small Enterprise Development Agency (SEDA) and the National Small Business Act to provide support and resources to small businesses. These initiatives aim to promote formalization while offering assistance to those in the informal sector.

India has several initiatives to support its vast informal sector. The introduction of the Goods and Services Tax (GST) in 2017 aimed to simplify the tax system and reduce the burden on small businesses. Additionally, there are programmes that provide access to credit for micro and small enterprises, helping them grow and gradually formalize their operations. Brazil's Simple National System allows small businesses and informal entrepreneurs to pay a simplified and reduced tax rate.

In Pakistan, addressing tax evasion within the informal sector is of paramount importance. Although the informal sector may not directly bolster tax revenue in the conventional manner, it plays an indirect but pivotal role in bolstering the formal economy by supplying goods and services that subsequently generate tax revenue upon consumption or sale.

The government should adopt a more equitable strategy that nurtures, regulates, and systematically formalizes the informal sector. Such an approach promises a multitude of economic and social advantages for Pakistan. Acknowledging that our informal sector is the true bedrock of the economy is crucial. The objective should revolve around achieving equilibrium between tax collection and promoting economic growth.

The writer is a columnist based in Islamabad. He tweets/posts @saleemfarrukh and can be reached at: