Regulating to the brink

The strike being planned by Pakistan’s business community and industrialists says a lot about the current state of the economy. It is not just about taxes—it is about the growing sense that those who follow the rules are the ones being punished. At a time when the formal sector needs to lead the charge toward economic recovery, it finds itself raising alarm over policies that further penalize those already within the tax net.

Despite years of talk about improving the ease of doing business, the reality on the ground tells a different story. Businesses that are registered, documented, and paying taxes are weighed down by layer upon layer of regulation. There is nothing wrong with having rules—markets need structure to function—but the way rules are made and applied in Pakistan often feels arbitrary, duplicative, and counterproductive.

PIDE’s study “Regulatory Bodies: Hurting Growth and Investment” puts a number on what many businesses have been saying for years: the regulatory burden is massive—over 67 percent of GDP. With more than 100 regulatory bodies operating at the federal level alone, it is no surprise that companies face constant hurdles. In some sectors, just meeting compliance requirements costs nearly 40 percent of GDP.

What makes it worse is that many regulations do not actually solve real problems. Instead, they are used to serve narrow interests or to maintain control, rather than to create a level playing field. The institutions meant to oversee these markets often lack the necessary expertise. Many are led by retired officials who may have long experience in bureaucracy, but little understanding of how businesses or markets actually work today.

The grievances raised by business chambers ahead of the strike centre on similar issues—particularly the tax measures and provisions introduced in the latest Finance Act. These include a sharp increase in withholding taxes on turnover, a heavier minimum tax burden, and controversial provisions granting FBR officials arrest powers in cases of alleged tax fraud. Businesses also point to a clear policy bias that appears to favour retailers and traders over the documented industrial sector.

In contrast, comparable economies like Malaysia and Vietnam offer lessons in how regulatory frameworks can enable, rather than hinder, growth. Malaysia’s single-window digital portal for business registration and its digitized tax system have slashed red tape and built taxpayer confidence. Vietnam has introduced a National Single Window integrating trade compliance across ministries, and its stable tax regime has earned investor trust. Both countries have also empowered investment agencies to actively assist businesses.

For Pakistan, the way forward lies not in more regulation, but in smarter regulation. This requires a dual approach: first, consolidating and modernizing the regulatory landscape by eliminating outdated, rigid, and redundant rules; and second, institutionalizing reforms with strong political will and competent leadership. A structured system for introducing new regulations—based on evidence, impact assessments, and stakeholder input—must replace ad-hoc policymaking. Equally important is the need to strengthen institutional capacity through skilled personnel, process reform, and strategic planning.

If meaningful reform does not happen soon, the country could push its formal sector further to the sidelines—just when the country needs it the most to steer the economy back on track.