Formalizing the grey economy

Whats one of the common hindrances facing the governments pro-poor programmes, its ability to widen the tax net and its drafting and coordination of various policies. Ok, here is another hint; its also a major impediment to businesses looking to expand and enter new markets.
If you haven figured it out still; its the countrys documentation crisis, or actually the lack of it. The absence of credible statistics creates information asymmetry, which hurts the smooth functioning of the economy.
The good part is that the government understands this.
"The share of informal labour in the economy has increased, from 72.8 percent in 2007-08, to 73.3 percent in 2008-09, as a percent of total. Conversely, formal sector employment has declined over the same period," notes the Economic Survey for the year 2009-10.
This worrying picture is, to quite an extent, attributed to a faulty incentives framework. "Weaknesses in the taxation system, including in terms of policy design, have set perverse incentives for formality and hence, scale," the survey pointed out while criticizing the recent winding up of PACCs system for customs administration.
But despite this admission, the budget FY11 has, by and large, failed to turn this situation around.
Proposals to give a 5 percent one-year corporate tax credit on the first year of listing, and a ten-percent credit in the year a firm has incurred BMR expenses, are found wanting.
"These changes are insufficient and lack consistency," said Adnan Mufti, a senior tax expert, , who calls for broader reforms in the taxation structure.
"There are many anomalies in the system, for example, the PTR regime, which discourages documentation, still exists", Mufti said, adding that turnover taxes also have a similar effect.
Under the PTR-regime, a taxpayer is not required to assess their tax payables on the basis of what he has earned during the year, but that the tax deducted at source is considered as a full and final tax liability.
Similarly, the current taxation structure discourages corporatization, as the tax rate for corporations in Pakistan is much higher (35 percent) than what it is for small companies, AOP or proprietorship that are taxed at 25 percent.
Then of course, there are other cost advantages of being a relatively smaller, informal player in the economy.
These include accrued savings by escaping the regulatory "burden" (audits, inspections, filings, registration costs etc), and the use of informal channels for gaining utility connections, as well as making lower payments for consumption.
Now that the budget is out and the government can do much to restructure its taxation system to encourage formalization, perhaps promoting documentation should be an instrumental policy of post-budget economic management.