The Pakistan Business Council (PBC) has written a letter to the prime minister, drawing attention to the severe constraints facing the country’s industrial sector. The letter states that the heavy burden of taxes and back-breaking energy costs have pushed Pakistani industries out of both the local and international markets.
Financing costs have risen so sharply that it is no longer possible to produce commercially viable goods that remain within the reach of the average consumer. As a result, Pakistan’s export products have lost competitiveness abroad. Input costs have become unaffordable, forcing many industries either to shut down operations or to relocate overseas.
The most formidable challenge confronting local industry is the steadily rising cost of taxation—both direct and indirect. The Federal Board of Revenue (FBR) has failed to broaden the tax net through its own efforts and has been unable to build sufficient public confidence to encourage voluntary tax compliance. Compounding this problem is the fact that, over the years, the authorities have attempted to mask their own shortcomings by relying excessively on tax value chains, particularly in manufacturing, through the imposition of General Sales Tax (GST) under the value-added tax (VAT) regime. Successive governments have turned business firms into withholding tax agents, forcing them to collect taxes on behalf of others in the value chain. This practice effectively highlights the tax authorities’ inability to collect taxes independently.
The issues highlighted by the PBC reflect an economy that is clearly under severe stress. Industry is the backbone of the national economy and when it weakens, a host of problems inevitably follow, including job losses, declining exports and shrinking tax revenues. As domestic production contracts, the country is compelled to import more goods, thereby increasing pressure on the balance of payments. This, in turn, leads to greater dependence on foreign borrowing, creating a vicious cycle from which there appears to be no easy escape under current conditions.
International experience shows that industrial progress depends on three key factors: low-cost and reliable energy, reasonable tax rates, and affordable financing. Unfortunately, none of these fundamentals is available in Pakistan today. The absence of an enabling environment for investment and industrial expansion is evident from the fact that during July-October of the current fiscal year, foreign direct investment declined by 26 percent, portfolio investment recorded an outflow of around $540 million, and overall foreign investment fell by a staggering 82.5 percent over the same period.
In this context, it is also relevant to note that Pakistan’s private sector contribution to the formal economy is significantly lower than that of comparable countries. This is reflected in the declining ratio of private credit to GDP over the past two decades. Within the private sector, small and medium enterprises (SMEs) are particularly disadvantaged because compliance costs are disproportionately high for them. It is therefore imperative that the concerned authorities act swiftly to reduce domestic costs and remove unnecessary hurdles.
Pakistan’s informal economy is sizeable, with the majority of working units remaining undocumented. Vendors and suppliers are reluctant to enter the tax net and often ask purchase managers to factor tax amounts into their costs. At the same time, the government has increased withholding tax rates on non-filers, which in most cases become part of the cost of goods sold. Ultimately, these costs are passed on to consumers, further eroding competitiveness across the sector.
For small-scale industries, tax compliance and filing requirements are a major burden. Filing tax returns is a cumbersome and time-consuming process. These firms cannot afford to hire professional tax or legal advisers, forcing owners to spend a significant portion of their time dealing with tax-related issues rather than focusing on core business development. This diversion of effort hampers productivity and growth.
Under the current system, withholding tax is deducted from revenue rather than from profits. When the actual tax liability is lower, the FBR is supposed to refund the excess amount, but in practice this rarely happens. Since small and medium firms often do not receive refunds, their cash flows are constrained and working capital costs rise. Consequently, many businesses attempt to move away from the corporate structure altogether. Tax collection is the responsibility of the tax authorities, not of businesses operating along the value chain. If the government genuinely wants informal businesses to transition into the formal sector, the FBR must fulfil its mandate effectively.
It is evident that unless the government takes decisive steps to reduce the tax burden and bring down rising input costs, industrial growth will remain elusive, and employment and exports will continue to stagnate. The hype surrounding stock market performance has little connection with real industrial growth. Stock market investment is inherently volatile, whereas industrial investment requires long-term commitment and policy stability. The country’s economic managers would do well to take the PBC’s submissions seriously and implement meaningful remedial measures without further delay.