EDITORIAL: The private sector’s contribution to the formal economy has remained relatively lower than that of its peers, and this decline is evident from the falling ratio of private credit to GDP over the last two decades. Within the private sector, SMEs (small and medium enterprises) are performing even worse. Both domestic and international literature suggests that compliance costs for small corporates are very high. According to a World Bank study, for example, compliance costs crush small companies in low- and middle-income countries. Pakistan alone cannot do much to lower these costs without international lobbying. However, the authorities can effectively work on reducing domestic costs. Recently, the Cabinet Committee on Regulatory Reforms’ sub-committee has proposed more than 280 amendments aimed at reducing compliance costs for private sector firms. This is positive, but there is a fear that these steps may not be sufficient to resolve the core issue. The main problem in recent years has been the growing cost of taxation—both direct and indirect. The FBR (Federal Board of Revenue) has failed to broaden the tax net on its own and has exhibited an extremely limited ability to generate voluntary tax payments. However, pressure from the IMF (International Monetary Fund) continues to build to expand the tax base. Since 2009, there have been concentrated efforts to tax value chains, especially in manufacturing. This began with the implementation of General Sales Tax (GST) in the value-added tax (VAT) form. However, success in this regard has been limited. As an alternative strategy, successive governments have made firms withholding tax agents to collect taxes on behalf of others in the value chain. This effectively represents a submission to the tax authorities’ inability to collect taxes on their own. In the process, the burden has been disproportionately shifted onto firms. Informality in Pakistan is very high, and the majority of industries are undocumented at the bottom of the pyramid. These suppliers (even if they are not small) refuse to enter the tax net and ask buying firms to incorporate the tax amount into their costs. On the other hand, the government has increased WHT (withholding tax) rates on non-filers, which have become part of the cost of goods sold in most cases. Eventually, the consumer pays for this, making the overall sector uncompetitive. Another issue is tax compliance and filing, which is cumbersome and requires significant effort and resources from small firms. These firms do not operate with a battery of taxation and legal experts, and this burden consumes the time of CEOs or owners. As a result, there is less time to focus on core business activities, which hinders innovation and discourages expansion. In many instances, WHT—both direct and indirect—is deducted from revenue stream rather than profits. If the actual tax liability is lower, the FBR is supposed to reimburse the excess, which it rarely does, and mostly only for large firms that have the lobbying power to influence decision-makers. Small and medium firms hardly receive refunds, and their working capital costs increase. As a result of which, many businesses attempt to move away from the corporate structure. The share of informality increases, which is evident from the rising currency in circulation as a percentage of broad money. There has been a significant upward shift since 2015–16, with no signs of reversal. If the government wants small firms to spur the growth of formal businesses, it must take the bull by the horns and get its act together at the FBR. Tax collection is the responsibility of tax authorities, not other businesses in the value chain. Without addressing this, efforts to reduce compliance costs will have a little impact. Copyright Business Recorder, 2025