ISLAMABAD: Leading multinational companies have strongly pleaded tax policy to encourage expansion of formal manufacturing sector and progressively bring a greater share of undocumented economic activity into the formal tax system.
Talking to Business Recorder, Dr. Faisal Hashmi, Founding Chairman of Beverages Advisory Foundation shared proposed tax policy for bringing under-taxed sectors into the formal documented regime.
The challenge lies in designing a tax system that generates sustainable revenue without placing a disproportionate burden on businesses that are already documented and compliant.
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This question has become particularly relevant as manufacturing begins to show signs of recovery. Large-scale manufacturing grew by 5.77 percent during July-May FY2025-26, according to the Pakistan Bureau of Statistics, while the Pakistan Economic Survey 2025-26 points to a broader rebound following contraction in the previous year. This recovery is encouraging. The more important policy question is how to sustain that momentum while addressing the cost pressures.
Dr Faisal stated that Pakistan’s revenue challenge is not simply one of insufficient collection, but also of concentration. Broadening documentation and rationalizing the burden on compliant sectors should be viewed as complementary rather than competing objectives. Widening the base without addressing the disproportionate load on formal manufacturers leaves the underlying concentration problem largely intact.
This highlights an important distinction between increasing tax rates and increasing tax revenue. Repeatedly raising rates on the same group of formal businesses may generate additional revenue in the short term, but beyond a certain point it can weaken demand, discourage investment, and increase the price differential between formal and informal products.
He highlighted that Pakistan’s edible oil and ghee industry illustrates the related challenge of uneven documentation. Established manufacturers operate within the formal tax and regulatory system, while parts of the broader market have historically remained less documented. The issue remains relevant today. In 2026, the Federal Board of Revenue moved to introduce electronic production monitoring across registered edible oil and ghee manufacturing facilities, with the stated objective of strengthening tax compliance, addressing under-reporting of production and preventing revenue leakage.
The implications extend beyond enforcement alone. In a price-sensitive consumer market, differences in the cost structures of formal and less-documented products can influence purchasing decisions. Pakistan has experienced this dynamic before.
While taxation is only one component of final prices, the experience of the sector illustrates the broader risk: where formal manufacturers bear taxation and compliance costs that are not equally captured across the market, widening price differentials can weaken their competitiveness and encourage demand to migrate towards less-documented alternatives.
A more sustainable approach is therefore to widen documentation and enforcement across the market while ensuring that the cumulative burden on compliant manufacturers does not constrain their ability to compete and grow.
He said that the case for supporting formal manufacturing also extends beyond the individual company. Production supports suppliers, distributors, transporters, retailers and employment across interconnected value chains. Tax policy should therefore consider not only the revenue collected directly from manufacturers, but also the wider economic and fiscal activity generated when formal production expands. The cement industry illustrates this relationship particularly well.
As a basic input into construction and infrastructure, cement has extensive linkages with housing, transport, labour, building materials and numerous downstream industries.
The formal beverage industry provides another useful example. Large beverage manufacturers operate through highly documented production and distribution systems. Their factories, suppliers, distributors and commercial transactions fall within the regulated economy, making the sector a visible and dependable contributor to government revenue. Multinational beverage companies, alongside other major manufacturers, also support extensive networks of suppliers, transporters, distributors, retailers and other businesses across their value chains. Aerated waters and beverages currently face a 20 percent Federal Excise Duty.
Dr. Faisal Hashmi further said that the impact of such taxation should be considered beyond the amount collected on an individual product. Excise duties contribute to the final consumer price, and price increases can weaken demand or encourage substitution towards cheaper alternatives. Where those alternatives are produced and sold outside the fully documented economy, the formal sector may lose volume without a corresponding increase in taxable activity elsewhere. Formal beverage companies operate within established standards for production, product quality, labelling and taxation, while informal food and beverage market remains undocumented. Continually increasing the cost of formal products without extending comparable regulatory and fiscal coverage across competing segments distorts market incentives and encourages greater informality.
The current policy discussion around large-scale and small-scale manufacturing can sometimes treat them as competing constituencies. In practice, however, the two are closely interconnected. Large manufacturers procure goods and services from smaller enterprises and depend on distributors, transporters, contractors, vendors and retailers. Small businesses, in turn, benefit from the demand, infrastructure, supply chains and market access generated by larger industrial activity. The objective of fiscal policy should therefore be greater formalization across a manufacturing ecosystem rather than concentrating an increasing share of the revenue burden on businesses that are already documented.
Pakistan’s standard GST rate of 18 percent is not low by regional standards, yet the donor agency estimates that only around one-quarter of the theoretical GST base is effectively taxed. This underlines the need for the tax policy to be assessed in terms of overall economic and revenue outcomes rather than individual rates. Where rationalization of the cumulative tax burden allows formal businesses to achieve greater volumes, the revenue impact of lower rates may be recovered through increased turnover and activity elsewhere within the value chain. The appropriate policy objective should be to identify tax rates that maximize sustainable revenue while preserving incentives for production and investment, supported by stronger documentation and enforcement, alongside a predictable and competitive environment for compliant businesses. Revenue and industrial growth need not be opposing objectives. A tax system that encourages greater formalization, productive volumes, and sustained investment provides a stronger and more durable revenue base than one that relies on increasing the burden on those already within it.
The policy objective should extend beyond raising additional revenue from sectors that are already visible to the tax authorities. It should seek to create conditions in which formal manufacturing can expand while progressively bringing a greater share of undocumented economic activity into the tax system.
Pakistan’s need for stronger domestic revenue mobilization is well established. Fiscal constraints, debt servicing requirements, and development needs make improving tax collection essential. The more consequential question is how additional revenue is generated and whether the structure of taxation supports broader economic objectives, Dr Faisal added.
Copyright Business Recorder, 2026