Pakistan’s official tax discourse is mostly structured around a single question: how to collect more revenue. This narrow obsession with short-term revenue targets has produced a deeply distorted tax system that undermines growth, penalises documentation and increasingly shifts the burden onto those who are already visible, compliant and easy to tax.
Instead of broadening the tax base through structural reform, successive governments have relied on incremental, often distortionary measures, such as higher rates, additional levies, withholding taxes, and temporary surcharges, to squeeze immediate revenue from the formal economy.
Inevitably, the result is a regressive tax structure where compliant firms, salaried individuals and documented businesses shoulder a disproportionate burden while politically protected and informal sectors, including agriculture, retail, real estate and large parts of the services sector, remain lightly taxed despite their substantial contribution to GDP.
This imbalance is not accidental. It reflects deeper political economy distortions in which the state taxes what it can easily monitor rather than what it should tax. Weak enforcement capacity, fragmented administration and elite capture have allowed large sectors of the economy to remain under-taxed while the burden on documented taxpayers continues to intensify.
Lower, simpler taxes, with broader documentation, could generate stronger long-term revenues
The result is a vicious cycle. Higher tax rates encourage informality, while informality narrows the effective tax base further, forcing authorities to extract even more from existing taxpayers. Consequently, revenue extraction has replaced actual tax reform.
Pakistan’s sales tax regime has evolved into another example of how poorly designed taxation creates distortions not only for businesses but also for consumers. The ongoing debate around expanding the Third Schedule of the Sales Tax Act 1990 offers an important illustration of this problem.
The government is reportedly considering bringing more fast-moving consumer goods under the Third Schedule, where sales tax is charged based on the printed maximum retail price rather than through the conventional value-added system. Products such as cooking oil, dairy items, flour, frozen foods, tea whiteners and infant formula are expected to be added to the list after authorities observe stronger revenue performance from items like coffee already included under the regime.
Under the Third Schedule, tax is collected upfront at the manufacturing or import stage based on the printed retail price, reducing opportunities for under-invoicing and leakage further down the supply chain. For tax authorities struggling with an overwhelmingly undocumented retail sector, this offers predictability and administrative simplicity. But the significance of the issue extends beyond revenue collection.
The current sales tax system exposes a deeper structural flaw in Pakistan’s approach to taxation: consumers themselves remain largely invisible in policy design. Under the standard value-added sales tax framework, many everyday products do not carry clearly printed retail prices.
In an economy where a large majority of retailers operate informally and outside effective regulatory oversight, this creates significant room for arbitrary pricing and overcharging. Consumers frequently purchase essential items without knowing the actual intended retail price or whether excessive markups have been added at the retail stage.
In practice, this means consumers bear the burden of a dysfunctional tax and distribution system without even receiving basic price transparency in return. The Third Schedule addresses this issue by requiring retail prices to be printed directly on packaging. While designed primarily as a tax administration tool, it inadvertently introduces an important consumer protection mechanism.
A visible printed price reduces informational asymmetry between retailer and buyer, limits arbitrary markups and creates greater transparency at the point of sale. This matters particularly in the case of food and milk-related products, where frequent price changes directly affect household budgets already under severe pressure from inflation and stagnant incomes.
The irony is that Pakistan’s tax system often imposes substantial burdens on documented manufacturers while failing to protect either compliant businesses or consumers. Similarly, weak enforcement allows large wholesale and retail markets to remain outside the tax net, while compliant firms face increasing compliance costs, delayed refunds and multiple layers of taxation. As such, formal businesses absorb the cost of compliance, consumers face opaque pricing, and informal sectors continue operating with minimal accountability.
A sustainable tax system should not merely maximise extraction from documented sectors. It should promote fairness, simplicity, transparency and economic expansion. Excessive complexity discourages documentation, weakens compliance incentives and undermines public trust in the fiscal system.
The proposals put forward by the Overseas Investors Chamber of Commerce and Industry recently to simplify taxes, lower rates, and rationalise the sales tax regime reflect recognition that Pakistan’s current framework is economically unsustainable. Lower, simpler taxes, combined with broader documentation, can potentially generate stronger long-term revenues than increasingly punitive rates imposed on a shrinking compliant base.
Equally important, tax policy must begin recognising consumers as stakeholders rather than passive revenue sources.
Published in Dawn, The Business and Finance Weekly, May 11th, 2026
