Tax compliance is about more than just tax rates. In Pakistan, while tax rates are ostensibly comparable to those of peer nations, a multitude of additional factors significantly exacerbate the overall tax burden on firms. These include the sheer number of payments required, the time consumed in making these payments, the resources necessary to comprehend complex tax codes, and the effort required to file returns and fulfill documentary obligations.

Ironically, tax automation has made compliance harder, especially for small and medium enterprises (SMEs). According to Karandaaz's report on taxation, companies must file 18 annual returns for income tax, withholding tax, and sales tax on goods — monthly for sales tax and quarterly for withholding and income taxes. Service firms face even greater complexity, grappling with up to 61 returns annually across various jurisdictions for provincial sales tax.

A firm employing a single hourly tax accountant for audits incurs annual compliance costs of Rs1.06 million, or $3,823

For SMEs in Pakistan, tax compliance costs are a formidable financial strain directly correlated with the number of tax accountants employed, which can be worsened by the time-intensive compliance process and high hourly fees for tax accountants. Based on these parameters, a firm employing a single hourly tax accountant for audits incurs annual compliance costs of Rs1.06 million, or $3,823.

Pakistan’s compliance costs exceed regional peers due to excessive time requirements and high accountant fees. PwC’s “Paying Taxes 2020” report indicates that businesses in Pakistan devote 283 hours annually to tax compliance activities as compared to the global average of 108 hours.

Pakistan ranks poorly in the Paying Taxes score, a metric assessing the overall cost of tax compliance for businesses. With a rank of 161, Pakistan stands at the bottom among its peers, underscoring high compliance costs and complex tax processes. Even Bangladesh, despite its protracted compliance requirements, fares better in these rankings.

This poor ranking discourages foreign investment and weakens the business climate. Smaller firms, lacking the robust resources available to larger enterprises, face heightened challenges since they typically lack dedicated tax departments or the financial latitude to outsource these functions.

Over 50 laws and numerous regulations enforced by 40+ agencies create a burdensome landscape for the manufacturing sector

According to a Competition Commission of Pakistan (CCP) report on Enhancing the Economic Efficiency of SMEs in Pakistan (2023), the country’s regulatory environment is complex, with businesses facing at least 12 general regulatory layers and four additional processes for foreign firms. Over 50 laws and numerous regulations enforced by 40+ agencies create a burdensome landscape for the manufacturing sector. This complexity, combined with manual administration, encourages rent-seeking behavior and deters private investment.

Recent government efforts under the ‘Pakistan Regulatory Modernization Initiative (PRMI)’ aim to simplify, automate, and integrate regulatory processes across federal and provincial authorities. However, automation has inadvertently increased the burden on firms, particularly SMEs, thwarting their tax compliance instead of simplifying it.

To address these issues, a debate is ongoing regarding reducing the number of filings by implementing a unified system through the National Tax Portal. A single-return system offers numerous benefits, including curbing tax evasion. However, a persistent trust deficit between federal and provincial governments hampers this initiative, as provinces are unwilling to surrender control over their respective tax domains, particularly sales tax collection on services.

To ease the tax compliance burden for SMEs, Pakistan should prioritize digitalizing tax administration and automating filing, payments, and audits through expanded digital infrastructure. Electronic invoicing systems should be implemented to minimize manual intervention. Improving the online business registration process is essential by reducing procedural steps, offering pre-filled forms, and integrating with other governmental databases. Block-chain technology could further enhance security and transparency in business registration.

Tax incentives, such as lowering taxes and offering preferential corporate income tax (CIT) based on investment, can ease financial strain and encourage growth. A national marketing and advisory program, similar to Sri Lanka’s ‘Restart Sri Lanka,’ could support SMEs in adapting to economic shifts.

The author is a Research Associate at a Karachi-based think tank. She is specializing in international trade, public policy, and agriculture.