Wholesale and retail trade contributes 18.1% to Pakistan’s GDP but only 2% to direct taxes.
In comparison, the industrial sector, which also makes up 18.4% of GDP, contributes 40% to total taxes. Most people in Pakistan pay indirect taxes on consumption, which disproportionately affects poorer households. To reduce inequality and increase revenue, Pakistan needs to increase direct taxes and expand the tax base.
Small and medium enterprises (SMEs) using commercial electricity connections are a potential source of increased tax revenue. There are 4.1 million such connections, and these businesses pay significant electricity bills. By estimating their profit margins, a fixed monthly tax could generate substantial revenue. Encouraging electronic payments over cash transactions can also help capture the true value of commerce and improve tax assessments.
Expanding the tax net and using available data can increase Pakistan’s tax-to-GDP ratio, promoting fairer taxation and formalizing the economy. This approach will help grow the economy and benefit everyone. Better enforcement and political will are essential to achieving these goals.