The undocumented manufacturing sector

The primary issue of Pakistan economy is lack of documentation that leads to massive organised evasion of taxes. There are three major sources of economic ills.
These are: (1) unorganised and unrecorded manufacturing sector; (2) goods originating from Afghan Transit Trade and (3) those imported at under-invoiced prices. The piece seeks to concentrate on undocumented manufacturing sector.
Except for the large scale sector that cannot effectively keep the production out of records there is a general tendency amongst Pakistani industries to avoid documentation. The quantum of such a tendency can be easily gauged by the fact that in all our five major export sectors, one way or other, major value addition is made by the undocumented sector.
There is no empirical evidence of that quantum however, keeping in view the available produce in the market, it appears that around at least 40 percent of total manufacturing output remains out of the documentation net.
This adversely affects the economy in multiple ways. Firstly the input purchased remains out of tax net; secondly the manufacturer itself does not contribute to the national exchequer; thirdly, the subsequent stages of supply remain outside the net; and lastly it makes the documented sector totally non-competitive. All these are killers for sustainable economic growth.
The other way to calculate the size of the problem is an easy comparison between the industrial and commercial consumers of utilities like electricity and gas and tax registered manufacturers.
This can also be appreciated by the size of available products in the market and within that the composition of the recorded production. It is common knowledge in this country that in various cases, the genuine manufacturers of a brand or product maintain two production outlets. One being documented and second supplying the bulk, outside the books.
We all support the view that there should not be any control or regulation for the manufacturing activity and the License Raj cannot be revived. However, the question to be answered is whether or not no regulation is synonymous with non-documentation. This requires immediate consideration including survey of all manufacturing facilities in the country.
Other than the economic problems that emanates from such unorganised manufacturing sector usually remain unnoticed. These are serious social, environmental and population problems which result out of this tendency. We all know the pollution being created by leather factories in Kasur. If the system continues then almost all the people of that area would become patients of Hepatitis B.
We also know about the social problems being created in Faisalabad due to presence of dyeing and finishing factories in residential areas. We all should realise that slums are the outcome of unorganised industries and manufacturing facilities that exploit the economy, environment and the labour.
There is an urgent need to organise the manufacturing sector with appropriate incentives for organised and documented ones and penalise those creating all kinds of problems to various facets of socio-economic structure of the country.
The writer is a chartered accountant and tax expert, and a partner at A.F. Ferguson & Co. Chartered Accountants. He can be reached at [email protected]