Pakistan’s sales tax system was designed in a value-added mode to collect revenues at every link of the supply chain and document the economy. However, despite being in place for over a quarter of a century, the consumption tax regime continues to suffer from gaps at multiple stages of the value chain.
Wholesalers and retailers that were originally meant to be brought into the tax net remain either partially documented or entirely outside it, underscoring the limits of the system’s effectiveness and the government’s ability to realise its full revenue potential.
In recent years, the government has introduced additional taxes on unregistered/non-filing retailers in hopes of encouraging them to register with the government and start filing income tax returns.
However, that has not happened. It has instead resulted in increased complexity and other negative consequences. A four per cent further tax and a 2.5pc advance income tax on unregistered retailers, on top of 18pc sales tax, may sound punitive. But in reality, manufacturers routinely absorb both charges rather than risk losing shelf space. This turns a compliance lever into a recurring cost for manufacturers, with a negligible deterrent effect, as more than 80pc of retailers nationwide operate outside the tax net, shielded by informality and the very penalty taxes meant to flush them out.
Bringing more products under the Third Schedule could strengthen consumer protection by ensuring greater transparency on the shelf
Tax economist Ikramul Haq argues that maintaining sales tax at elevated rates is counterproductive for the overall system, suggesting that it should not exceed 5-6pc. “In a value-added tax structure, it is unrealistic to expect full recovery of the tax across the supply chain. Given the multiple stages of collection and varying levels of documentation, revenue leakage is almost inevitable at different points in the chain, particularly where compliance and enforcement remain weak.”
Tax experts insist that the answer is not another layer of penalty but a structural fix — expanding the Third Schedule — so that sales tax on key grocery items and everyday consumer goods ranging from cooking oil, dairy, flour, frozen foods and more is paid in full at the factory gate, printed visibly on every pack, and impossible to manipulate across a supply chain that the taxman can barely see.
“Done right, this single reform would unclog the revenue pipeline, protect consumers from arbitrary retail markups, relieve manufacturers of a burden they were never meant to carry and give the Federal Board of Revenue [FBR] an enforcement tool as simple and legible as the price on the label,” tax lawyer Intezar Mahdi argues.
At present, a wide range of consumer goods, including bottled water, biscuits, coffee, ice cream, chocolates, juices, syrups and squashes, beverages, packaged tea and spices, as well as personal care items like soaps and shampoos, are already covered under this regime. Bringing additional categories such as cooking oil, ketchup, milk and dairy products, infant formula, frozen foods, flour and noodles into the Third Schedule could strengthen revenue visibility for the government while offering consumers greater price transparency and stability, he adds.
The case for such an expansion, say the experts, rests on several practical considerations. To begin with, it promises to simplify an otherwise complex taxation process. Under the current standard general sales tax system, tax is collected at multiple stages across the supply chain, from manufacturers and importers to distributors and retailers, creating layers of compliance and administrative burden. This multi-stage structure not only complicates documentation but also runs counter to the broader objective of improving ease of doing business.
By contrast, the Third Schedule consolidates tax collection at the initial point of supply, significantly reducing procedural complexity for both businesses and tax authorities.
Furthermore, it enhances transparency and curbs leakages in the system. “The existing value-based regime leaves room for under-invoicing, transfer pricing manipulation and other forms of tax evasion at different stages of the supply chain,” says Mr Haq.
Under the Third Schedule, however, the requirement to print the retail price along with the applicable tax directly on the packaging makes the tax base visible and far more difficult to distort. For the FBR, this could translate into quicker enforcement and reduced reliance on extensive audits as the packaged product itself becomes a verifiable point of reference.
Moreover, since the full amount of sales tax is deposited upfront by the manufacturer or importer, the government is better insulated from compliance risks further down the chain. This reduces dependence on downstream actors for tax collection and helps plug gaps that currently contribute to revenue leakage.
Another key argument in favour of expanding the Third Schedule is the improvement it could bring in price transparency for consumers. Although existing laws require companies to provide retailers with recommended price lists, which they are obligated to display, compliance remains weak. In many cases, the absence of a printed retail price allows retailers to charge above the intended price, leaving consumers vulnerable to overcharging and arbitrary price variations.
Regulatory concerns around this issue are not new. Authorities such as provincial food departments and price control bodies have, at various points, issued show-cause notices to manufacturers over inconsistent pricing practices, especially in cases where retail prices are printed on some products but omitted on others. Consumer complaints about excessive pricing and frequent, unannounced changes in retail rates further underscore the gaps in enforcement.
“Bringing more products under the Third Schedule could help address these concerns by mandating the printing of retail prices directly on packaging. In turn, this would strengthen consumer protection by ensuring greater transparency on the shelf and limiting the ability of retailers to deviate from declared prices,” says the marketing executive of a multinational company.
At a time when businesses are already grappling with elevated input costs and weak consumer demand, the additional burden of partially or fully absorbing the higher tax incidence associated with unregistered retailers has further squeezed margins. “This not only erodes profitability but also limits firms’ ability to adjust prices in response to market conditions, leaving them with little flexibility in an already challenging environment,” he maintains.
Published in Dawn, The Business and Finance Weekly, April 20th, 2026
