Taxing smarter, not harder

As fiscal pressures mount, equally for the government and the public, the challenge is not just to increase taxes, but to design them better and play smarter.

Expanding the ‘Third Schedule’ to essential goods is one of the significant element in the system which needs to be worked upon in the best interest of the public and the tax collectors. This element could provide a credible pathway to higher compliance, reduced evasion, and improved consumer outcomes.

Pakistan’s tax system faces a persistent structural mismatch: it is designed for a fully documented economy but operates in a marketplace that remains largely informal. This disconnect is most visible in the collection of General Sales Tax (GST), a key revenue source that continues to fall short of its potential.

Administered by the Federal Board of Revenue, GST follows a Value Added Tax (VAT) model built on documentation at every stage of the supply chain—from manufacturer to distributor to retailer. While theoretically robust, this model falters in practice, particularly at the retail level, where a significant share of transactions remains undocumented.

To address this gap, policymakers have relied on punitive measures, including additional taxes on unregistered retailers and higher advance income tax for non-filers. The intent was to force documentation. The outcome, however, has been different: increased complexity, pricing distortions, and a heavier burden on compliant, organized businesses – without a meaningful expansion of the tax base.

A more pragmatic solution lies in expanding the Third Schedule.

The Third Schedule applies GST on the recommended (printed) retail price (RRP) of goods rather than on transaction values across multiple stages. It already covers categories such as beverages, confectionery, and personal care items. Extending this framework to essential grocery items such as cooking oil, dairy products, infant formula, processed foods and more of similar and widely used daily consumption items – offers a practical way to improve both revenue collection and market transparency.

The first and most immediate benefit is simplification. The current GST system requires tracking transactions across a fragmented supply chain, much of which operates outside formal documentation. This creates administrative burdens for both the government and businesses.

By shifting to a single-point tax collection at the manufacturing or import stage, the Third Schedule reduces complexity and aligns tax policy with on-ground realities.

Equally important is its impact on tax leakage. Under the existing system, evasion occurs through undervaluation, informal discounts, and unreported sales.

When tax is based on a printed retail price, the tax base becomes visible and standardized. The product itself signals the applicable tax, leaving less room for manipulation. Enforcement becomes simpler and less dependent on resource-intensive audits.

Beyond revenue considerations, the reform carries significant consumer benefits. Price opacity remains a persistent issue in Pakistan’s retail markets.

Although regulations require the display of price lists, compliance is uneven, allowing retailers to charge different prices for the same product. For households managing tight budgets, this lack of transparency can be particularly burdensome. Mandatory retail price labelling under the Third Schedule would address this gap.

The limitations of the current approach to retailer taxation further reinforce the case for change. Additional levies on unregistered retailers were meant to encourage formalization but have largely failed to do so. Instead, they have increased costs within the supply chain, often borne by manufacturers who are already compliant. This erodes margins, limits pricing flexibility, and ultimately suppresses demand.

By contrast, the Third Schedule sidesteps the bottleneck of retail compliance by securing tax revenue upstream, where enforcement is more feasible.

In a high-cost environment, minimizing tax distortions can support demand, improve capacity utilization, and encourage formal sector growth.

The broader principle is clear: tax policy must focus on points of control, not points of weakness. In Pakistan, the manufacturing and import stages offer far greater visibility than the fragmented retail sector. As fiscal pressures mount, the challenge is not just to increase taxes, but to design them better.

In the end, effective taxation is not about adding layers—it is about removing friction. And in Pakistan’s case, simplifying the system may well be the most powerful reform of all.

Copyright Business Recorder, 2026