Expanding the net

EDITORIAL: There is no fiscal case, and certainly no moral one, for letting large segments of the economy operate tax-free. Yet that’s precisely what happens when sectors like hospitality and event management – and so many others, of course – remain outside the formal system.

The Punjab government’s decision to register all restaurants and marriage halls finally begins to address this distortion – and must be seen as a welcome departure from the usual tax policy playbook that relies on rate hikes instead of structural reform.

The problem has never been that Pakistan lacks taxable activity. It’s that much of it continues to evade documentation, particularly in the services sector. Restaurants and marriage halls in major cities are not struggling cottage industries; they are often highly profitable, high-footfall operations that transact primarily in cash. Their failure to register not only deprives the exchequer of due revenue – it also creates a tilted playing field, one that rewards evasion and punishes compliance.

Chief Minister Maryam Nawaz’s insistence that no new tax rates are being imposed is crucial to the credibility of this effort. Expanding the tax base should not be confused with increasing the tax burden. This is about equity, not extraction. The salaried middle class, already taxed at the source, cannot be expected to carry the weight for those who conceal their earnings entirely. Formalising previously invisible businesses is the only path toward easing that imbalance.

The competitive implications are no less important. In any unregulated market, legitimate businesses that comply with tax and safety codes are undercut by operators who don’t. The state, by allowing this to continue, effectively penalises formality. Reversing that dynamic requires more than just registration – it demands enforcement, verification, and above all, a demonstration that tax evasion carries real cost.

That will be the real test. Enforcement in Pakistan tends to skew toward the visible and the vulnerable. Informal businesses that have never paid tax often stay invisible by design – and when detected, are more likely to pay a bribe than a fine. This is where the government must stay consistent: those who register should not face harassment; those who refuse must face consequences. Without that clarity, the policy will collapse into yet another incentive to remain underground.

It would also help if registration came with benefits. Documentation is a two-way street. Forcing businesses to register works best if they see some return. To that end, the Punjab government should consider pairing this drive with a voluntary compliance window. That’s how real expansion happens: through inclusion, not intimidation.

The larger point is that tax reform cannot be reduced to rates and rebates. It must confront the fundamental problem of coverage. A system in which high-income earners in retail, food, and real estate routinely pay less than salaried professionals is not just inefficient – it is unjust. This registration drive, modest as it may seem, is one step toward correcting that imbalance.

But it must not stop here. There are many more sectors that operate informally with impunity. The hospitality sector is a good starting point. But real reform lies in treating tax evasion as a structural flaw in governance, not just a revenue gap.

Punjab has chosen the right approach. The direction is correct. The only question now is execution.

Copyright Business Recorder, 2025