Transition from Informal to Formal Sector: Issues, Challenges, and Opportunities
Author: Muhammad Adnan

The informal sector in many developing countries that includes firms, workers, and production activities handled by firms which are not registered and also don’t pay taxes, accounts for a substantial and increasing share of total economic activity. Informal sector plays a key role in developing countries like Pakistan. Informal sector is also untaxed and unregulated in Pakistan. The current research seeks the intention of the informal sector regarding transitioning towards formal sector. The dependent variable used in this research is ‘willingness to switch’ and the independent variables include, i) tax avoidance, ii) high tax rates, iii) complicated registration process, iv) tangible incentive. This research is conducted at three main commercial areas Raja Bazar, Saddar, and Tench Bhatta of Rawalpindi city, Punjab, Pakistan. Simple random sampling technique is used in this study with the sample size of 230. Primary data was collected through a structured questionnaire with both close and open ended questions. Linear probability model is used in this research for analysis of data. The results of the study show that 56% of the respondents are willing to register their enterprises; however they require some tangible benefits for registering their business. Furthermore, the results show that 78 percent think that people do not register because they want to avoid taxes. Another reason which 56 percent respondents think that is high tax rates. Seventy four percent respondents considers complications in the registration process restricting people to register their business, and 90 percent firm owners think that getting registered is not beneficial for them. The results of survey indicate that SECP and FBR need to step up its communications efforts in reaching out to the informal sector about the potential benefits of registering with the tax authorities. Formalization of businesses should be branded and incentivized. Furthermore awareness programmes are needed at a local level informing about initiatives such as the tax payers’ facilitations unit and how to access these forums. Supervisor:- Dr. Muhammad Nasir

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Supervisor: Muhammad Nasir

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