SMEs detest high tax compliance costs: study.

KARACHI -- Small and medium-sized enterprises (SMEs) believe the burden of tax compliance is a bigger hurdle than the actual tax paid or the high tax rates associated with it, according to a yet-to-be-released study conducted by Karandaaz Pakistan, a non-profit that focuses on improving access to finance for the underserved population.

Speaking at a webinar on the state of business taxation in Pakistan, Karandaaz CEO Waqas ul Hasan said a key challenge facing the taxation system is its inherent complexity, which leads to high compliance costs and burdens taxpayers.

According to the 2020 Doing Business Report, Pakistan ranks 161st in 190 economies for the paying-tax indicator, which underscores the difficulty and complexity of complying with tax regulations.

SMEs contribute more than 70 per cent to total employment and have a share of 25pc in exports. However, they tend to stay outside the formal economy. Estimates for the undocumented or shadow economy in Pakistan range from 35pc to 56pc of GDP.

Even though no census of business establishments has been conducted recently, proxy data suggests there can be close to 5.2 million SMEs in Pakistan. Still, only 64,000 or so associations of persons (AOPs) filed returns in 2018, according to the filing data of the Federal Board of Revenue (FBR). The dismal number indicates that only a handful of SMEs are registered with the national tax collection agency.

Evidence collected as part of the Karandaaz study suggests that the tax authorities 'must move beyond revenue-centricity' and towards the goal of building a cohesive and simplified tax regime that eliminates all the noise from the system. The study makes recommendations like harmonising the policy across jurisdictions along with...

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