Special tax procedure - back to square one—I

Through SRO S.R.O. 1109(I)/2026 dated July 14, 2026 the Federal Board of Revenue (FBR) has proposed a Special Procedures of income tax for ‘Retailers’ having turnover less than Rs 200 million. This proposal may be one of several schemes introduced in the last 75 years of the country’s economic history to bring in an equitable and simple tax regime for retailers and wholesalers. All the past efforts have failed on account of lack of state writ in enforcing tax on this group of taxpayers.

A very high number of retailers do not pay tax on their real income. Unlike the general perception, it is not a case of non-declaration. This matter is solely a subject of huge under-declaration. It is a wrong notion that all of such retailers are non-registered for income tax purposes. A substantial number of them are registered, in one way or another, in the system; however, it is an undeniable fact that in a high number of cases there is huge incidence of under-declaration.

The state machinery has totally failed to curb that under-declaration and has accepted that failure in practice, in many ways, in the past 75 years. However, through this SRO, the failure has been formalized in a statutory manner.

The rollback

There may be arguments for and against the reasons for that failure; however, this formal retreat has effectively rolled back the following positive actions, undertaken in the past especially after the 1990s. These were the necessary actions for developing an income/transaction based taxation:

a. It has been accepted and prescribed in the law that sales tax under the sales tax act 1990 cannot be recovered from the retailers and there cannot be across the board VAT in the country. The relevant provision of law through which this was done is asunder:

3(9) Notwithstanding anything contained in sub-section (1), tax shall be charged from retailers, other than those falling in Tier-1, through their monthly electricity bills, at the rate of five percent where the monthly bill amount does not exceed rupees twenty thousand and at the rate of seven and half percent where the monthly bill amount exceeds the aforesaid amount and the electricity supplier shall deposit the amount so collected directly without adjusting against his input tax:

b. VAT, called sales tax in Pakistan, would therefore be collected like ‘Excise Duty’ from the manufacturer or importer at the retail price of the product. This is done by way of the extension of the Third Schedule to the Sales Tax Act, 1990. Until 2009, only 15 items were subjected to such taxation. Now as a rollback to the non-VAT system there are more than 100 items in that Schedule;

c. Income tax processes were automated and digitized to interrelate the commercial transactions with the banking system by various means such as Section 73 of the Sales Tax Act, 1990 and other provisions of the Income Tax Ordinance, 2001. Under the proposed system cash transactions are promoted by implication. There can be a sale to one party up to Rs 200 million without any requirement for crossed cheque, etc.;

d. The concept of ‘presumptive (deemed) tax’, which was effectively abolished in 2019 and earlier, has been reintroduced along with a weird concept of credit for imputable income. This is now proposed asunder:

5. Tax Rate. - Tax shall be charged at the rate of 1 percent of gross turnover. Shopkeepers may deduct withheld income tax from their payable amount. However, if withholding tax collected exceeds the minimum tax payable under this procedure, no refund shall be issued.

6. Minimum Tax under this Special Procedure. - To avail this special procedure, the shopkeepers must pay a minimum of PKR 25,000 in cash along with return of income regardless of any tax deduction or collection at source under the Ordinance. Tax payable (less withholding) or PKR 25,000, whichever is higher, shall be the tax payable.

7. Imputable Income. - Shopkeepers opting for this special procedure shall be entitled to take credit of imputable income based on payment of tax in order to support their personal expenses and accretion of assets.

It is the author’s view that this rollback is not desirable and the proposed scheme is required to be substantially revised for overall sustainable fiscal growth of the country.

Pakistan’s tax system should not be designed to cater for any particular desire of the lending agencies whilst it is known that such measures would not help the well-being of the economy in the long run. This tantamount to an intellectual weakness.

Detailed analysis of scheme denotes that the policy makers seem to be interested in collection of at least Rs 25,000 per annum from all retailers without looking at the fact that by providing a big threshold of Rs 200 million per annum a major portion of retail (and also wholesale trade) would fall under the presumptive tax rate of 1 percent of turnover. This is totally unjustified when the approximate comparative rate is 35 percent on income. This will ultimately lead to nothing but a huge arbitrage (shifting of profit, etc.) for the reasons and basis given in the following paragraphs reducing the overall tax collection with an additional feature of spoiling the taxation system.

Economic Significance

Through this proposal the government has effectively rolled back all the efforts undertaken in the past 25 years towards bringing retailers within transaction based income taxation. Instead a presumptive and imputed tax concept having no relation with actual income has been prescribed. This will be disastrous for the country in the long run. Retail and wholesale trade’s significance in the economy of the country is stated below:

In the 2025–2026 fiscal year, the Wholesale and Retail Trade sector remains the largest sub-sector in Pakistan’s services economy, contributing approximately 17 percent to the total GDP and making up 30.5 percent of the entire services sector. The Gross Value Added (GVA) by this sector reached a historic high of Rs 22.47 trillion, with the sector experiencing a real growth rate of 3.71 percent during the year.

This Rs 22.47 trillion economy has effectively been placed outside the documented income based tax regime. A presumptive system is proposed where keeping dual books becomes inevitable for keeping asset trail.

The Scheme

Thus it is now clearly indicated in the law that henceforth direct and indirect taxation on income shall only cover chain of transactions prior to retail trade. There is no denial to the fact that at the moment almost all of such incomes are outside the tax system as being under-declared; therefore, it could be argued by the policymakers that this step is to bring such persons into a semi-documented process, whereby, at least, the person undertaking the business activity is identified and known.

There is merit in this argument; however, it is the author’s view that in a real sense the scheme is ‘loss-loss’ for the government and at the same time creates problems for the retailers if there is a real income more than 2.8 percent of turnover (Rs 100 turnover-expenses Rs 97.2=Rs 2.8 profit. Applying the tax rate of 35 percent equals Re 1 being equal to 1 percent of turnover of Rs 100). Any income above that percentage would become unexplainable unless a separate amount over and above imputed income is paid. This has been explained in the following paragraphs.

Other features of the scheme are:

The Scheme in summary is:

a. There will be no charge for income tax on any person being a retailer (individual) if declared turnover is less than Rs 200 million per annum. There will be a 1 percent charge on turnover. However, if taxes are withheld from electricity bills then the same may be adjusted against the aforesaid liability. Nevertheless, any excess will not be refunded. Every person under the scheme will have to pay a minimum sum of Rs 25,000 per annum;

b. There will be no sales tax payable by such persons;

c. Such retailers will not be required to withhold tax on purchases made by them under Section 153 of the Income Tax Ordinance, 2001;

d. The Scheme will only be applicable to individuals. Firms or companies will not be eligible for these concessions;

e. The imputed income under Section 2(28A) of the Ordinance will be determined and reflected in the return of income to be filed under these rules. No further explanation on that subject;

f. Any undisclosed asset or income shall be taken into account only after consultation with the trade association; and

g. The person shall be required to file a notional balance sheet of his business in the return of income.

Analysis

This process simply means that 1 percent tax on turnover will be charged which will be the final liability of that person. Such an amount will have no relation with the actual income of that person. However, in the return of income prescribed as Annexure 1 there is a calculation of actual income of the person from this business and other income. Notwithstanding the same, it is important to note that that tax liability (referred to as total tax) in Annex I is the tax determined on 1 percent of the turnover on retail business.

Nevertheless, in Annexure 1 there is a reference and calculation of ‘imputable income’, which effectively relates to the concept laid down in Rule 12 of the scheme. This means that there are two kinds of income in the return. First being actual income based on actual expenses.

The second being imputed income as calculated on the basis of a tax charge of 1 percent on turnover using the definition as laid down in 2(28A) of the Ordinance. Liability is required to be paid as per first above and the said amount is the final tax on that business activity. This is a very simple explanation and analysis on this matter, however, the reality is not so.

Problem/Loss for the Tax payer

The law clearly provides that there will be a calculation of imputed income. If it is so then the real life working will be as under:

a. Turnover Rs 100 million

b. Tax Liability 1,000.000

c. Imputed Income 1,000,000x100/35=2.85 million

d. Actual profit 3,000,000. It can never be exactly equal to 2.85 million.

If the actual income of the taxpayer is, say Rs 3,000,000, or more than any amount in excess of Rs 2.85 million, then that amount will be represented by some form of assets in the hands of the taxpayer. If it is so then the following probabilities appear in the system:

a. The difference of Rs 150,000 being the difference between 3 million imputed income of Rs 2.85 million becomes unexplained income of the taxpayer. If the taxpayer intends to make it ‘white’ then tax equal to 35 percent will be required to be paid on the sum of Rs 150,000. If the taxpayer does not want to make it white then there can be no action by the tax department unless that asset is identified by a third-party information. This system is weird and non-workable.

or

b. The taxpayer is allowed to take credit equal to actual profit shown such as Rs 3 million. In this case no tax will be required to be paid on the difference. Rs 150,000 is also considered as an asset from a taxed source, if shown as income for that year in the return form.

The issue, as above, is not a new phenomenon and the same problem arose when this weird presumptive system was introduced by way of Section 80C of the repealed Ordinance 1979. Whatever is stated in (a) above was provided in Section 80C(5) as under:

(5) Where an assessee, while explaining the nature and source of any sum, investment, money, valuable article, excess amount or expenditure, referred to in section 13, takes into account any source of income, which is subject to tax in accordance with the provisions of this section, he shall not be entitled to take credit of any sum as is in excess of an amount, which, if taxed at a rate or rates, other than the rate applicable to income chargeable to tax under this section, would have resulted in tax liability equal to the tax payable in respect of income under this section.

In case if it is considered that imputable concept in the rule is not what is conceived similar to the repealed 80C(5) then it would provide a ‘carte-blanche’ to the taxpayers and a huge undocumented asset class will be created out of a legally defensible system. This will be bigger than any other amnesty in the past. However, on the other hand, if it is considered that tax would be payable on income over and above imputable income then it means that the reduced rate of 1 percent is applicable only if the margin of the retailer is up to 2.85 percent of turnover. Anything above that is subject to the normal rate of taxation. This also does not seem to be a workable solution.

There is no perfect answer to the question raised above. It is however the author’s view that the government intends to extend a ‘carte-blanche’ amnesty; however, that has not been said in so many words. What has been implied is to state that ‘books’ are to be maintained in the manner that profit does not exceed 2.85 percent of turnover. This is an absurd and unacceptable proposition.

The question that remains unresolved is the amount which the taxpayer will account for in the balance-sheet as prescribed in the return. For all practical reasons, it should be based on actual profit. If so the balance-sheet of the businessman will carry an unexplained asset if the actual profit is more than imputed income. In case it is considered that taxpayers would be required to pay tax at the rate of 29+8 percent on the difference in the year of transaction then that system has not been conceived in the rules. If this system is considered to be applicable then it means that income to the extent of 2.7 million is taxable at the rate of 1 percent of turnover and difference being 3 million-2.85 million at the rate of 35 percent being Rs 52,500. We consider that this complicated structure is also not conceived.

Economic and fiscal loss to the government

The scheme as proposed is apparently a presumptive taxation for retailers. However, as explained in the following paragraphs it can and will work as disguised amnesty and substantial reduction of income and sales tax for manufacturers and importers.

(To be continued tomorrow)

Copyright Business Recorder, 2026