Informality, taxes, and workers’ rights

Mansoor Ahmad
Tuesday, Sep 27, 2022

LAHORE: Informal sector in Pakistan provides 71.7 percent of the employment in main jobs outside agriculture, but the informal job providers exploit workers and in many cases mint money without paying any taxes.

Informality not only deprives the country of revenue, but also nurtures a workforce that lives in eternal poverty. The key sectors of employment in the informal economy according to the International Labor Organization are wholesale and retail trade manufacturing, community/social and personal services, construction, and transport.

Wealth generated in these sectors is visible to all. Contractors in the construction sector are rich, but they pay no taxes. In fact, they justify this by pointing out that they pay heavy taxes on the construction materials they use like cement, steel, cables, paints, and other items. If their logic is accepted, then every Pakistani using soap, toothpaste, or consuming sugar also qualifies as a taxpayer.

Jobs provided in the construction sector are temporary. Residential houses are built in Pakistan by the most affluent. This is the reason that there is a dearth of housing in Pakistan. Around 500,000 houses are constructed in Pakistan apart from double construction activities in infrastructure, commercial and industrial buildings.

A reasonable tax, depending upon size and quality of construction (even if it averages Rs100,000) on the contractor would add Rs150 billion in the government’s kitty. In the same way, the transporters are rich whether they own a van (Rs4 million), coaster (Rs5 million), bus (Rs7-10 million) or truck Rs7-9 million), but they pay no income tax. There must be a minimum income tax on ownership of each vehicle. This could yield another Rs150 billion income tax.

The potential of tax from wholesalers and retailers is also Rs150 billion. They must be properly documented to ensure that they treat their workers in line with labour laws of the country. To make tax compliance simple, all these sectors may be allowed to register in the tax net by filling a simple form of their assets, while continuing to collect fixed tax from them. However, they must provide the details of their workers to ensure they get wages and benefits according to the law.

An ILO document reveals that the informal economy in Pakistan is characterised by several decent work deficits and challenges, including rights at work, child and bonded labour, social protection, lack of sustainable employment, working poverty, and gender-based discriminations.

The promotion of decent work for all workers, women, and men, irrespective of where they work, requires a broad strategy: realising fundamental principles and rights at work; creating greater and better employment and income opportunities; extending social protection; and promoting social dialogue.

These dimensions of decent work reinforce each other and comprise an integrated poverty reduction strategy. The challenge of reducing decent work deficits is greatest where work is performed outside the scope or application of the legal and institutional frameworks.

In the world today, a majority of people work in the informal economy – because most of them are unable to find other jobs or start businesses in the formal economy.

Workers in the informal economy include both wage workers and own-account workers. Most own-account workers are as insecure and vulnerable as wage workers and move from one situation to the other. Because they lack protection, rights and representation, these workers often remain trapped in poverty.

However, the majority of workers and enterprises in the informal economy produce legalgoods and services, albeit sometimes not in conformity with procedural legal requirements, for example where there is non-compliance with registration requirements or immigration formalities which must be eased.

These activities should be distinguished from criminal and illegal activities, such as production and smuggling of illegal drugs, as they are the subject of criminal law, and are not appropriate for regulation or protection under labour or commercial law.