Formalizing the Informal Sector: Issues, Challenges, and Opportunities

Abstract

The current research seeks the intention of the informal sector regarding transitioning towards formal sector. The main purpose of this study is to investigate the impact of tax avoidance, high tax rates, complicated registration process, tangible incentive on the ‘willingness to switch’ to formalization of informal sector. This research is conducted at three main commercial areas Raja Bazar, Saddar, and Tench Bhatta of Rawalpindi city, Pakistan. Simple Random Sampling is used 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 for the analysis. The results show that fifty six percent of the respondents are willing to register their enterprises, however they require some tangible benefits for registering their business. Furthermore, seventy eight percent are of the view that people do not register because they want to avoid taxes. Fifty six percent opine that one of the potential reasons is high tax rates. Seventy four percent considers complications in the registration process restricting people to register their business, and ninety percent firm owners report that getting registered will not prove to be handsome bid for them. Therefore, it is proposed that taxation authorities need to step up its dissemination efforts in reaching out to the informal sector about the potential benefits of registering with the tax authorities. It is also recommended that formalization of businesses should be branded and incentivized.