On the eve of the federal budget 2026-27, the government has announced ‘Fixed Tax Assan Scheme’ [no details yet available on any official website] for small traders and retailers with an annual turnover of up to Rs. 200 million. As usual, it is launched as “a major initiative to bring businesses into the tax net”. The official narrative is “millions of traders remain outside the tax system”!
The wizards in Ministry of Finance and Federal Board of Revenue (FBR) are of the view that a simplified 1% turnover tax or Rs. 25,000, whichever is higher, will finally induce millions to contribute around Rs. 50 billion in fiscal year (FY) 2026-27 towards national exchequer. It presupposes that they are paying less than this amount.
This narrative rests on a fundamentally flawed assumption. All the traders, shopkeepers, wholesalers and small manufacturers are already paying advance income tax. By using commercial/industrial electricity and/or gas connections, they are paying income tax and sales tax with bills! In reality, in FY 2024-25 with electricity alone they paid advance income tax of not less that Rs. 100 billion [total was Rs. 144.371 billion including industrial and domestic users]. It will now be adjustable as per scheme. Section 235(4)(a) of the Income Tax Ordinance, 2001 disallows adjust/refund up to Rs. 42,750.
In terms of section 235 of the Income Tax Ordinance, 2001, every month millions of retailers across Pakistan pay advance income tax with electricity charges. In the case of a commercial connection, advance income tax is imposed at the rate of 10% if monthly bill exceeds Rs. 500 and up to Rs. 20,000. Beyond Rs. 20,000, the rate is 12% for commercial users.
If majority of traders is not filing returns and paying higher withholding tax, it merely reflects on the incompetence and inefficiency of the tax machinery. The real question is why the FBR, despite possessing extensive information about them and despite collecting advance taxes from them through multiple channels, has failed to convert them into return filers and assessed taxpayers. The announcement is thus less a tax broadening initiative and more an admission of administrative failure.
For decades, FBR has relied on withholding taxes and advance tax collections as substitutes for proper implementation of tax laws. The Income Tax Ordinance, 2001 contains dozens of withholding provisions that collectively generate the bulk of direct tax revenues (sic). Taxes are collected through banks, mobile operators, utility companies, government departments, customs authorities, vehicle registration agencies and numerous other intermediaries.
The utility companies collect these amounts and deposit them into the national exchequer. If these taxpayers are already paying income tax through electricity bills, how can they simultaneously be described as being outside the tax net?
The contradiction becomes even more glaring when one considers the advance taxes collected through mobile phone usage. Every trader using a mobile connection pays withholding tax under section 236 of the Income Tax Ordinance, 2001.
Every bank account holder faces withholding taxes on various transactions. Importers, manufacturers and distributors encounter numerous advance tax provisions throughout the supply chain. The reality is that Pakistan has not created an income tax return filing net. It has created a withholding tax net.
The distinction is crucial. A genuine tax system identifies taxpayers, determines their real incomes, allows deductions where appropriate, assesses taxable income and imposes tax according to law. Pakistan’s system increasingly bypasses this process and instead collects taxes before income is determined, often treating advance taxes as minimum/final liabilities. Consequently, the state collects taxes but fails to build a credible taxpayer registry.
Official statements frequently claim that Pakistan has over six million commercial and industrial electricity users who are not filing returns. If that figure is accurate, it represents not a failure of traders but a failure of tax administration. The irony is that FBR already knows who these persons are. Their names, addresses, electricity connections, monthly consumption patterns and tax payments are available in official databases. Many are also linked with bank accounts, mobile phone numbers, property records and sales tax registrations. No sophisticated technology is required to identify them. The information already exists.
The obvious question is why the Inland Revenue Service (IRS), employing thousands of officers and supported by increasingly sophisticated information technology systems, has failed to convert these identified taxpayers into return filers. Instead of answering this question, policymakers periodically announce new amnesty schemes, simplified propositions, presumptive/minimum taxes and turnover-based arrangements.
Each such initiative effectively lowers compliance expectations from taxpayers while avoiding scrutiny of administrative inefficiencies within the tax machinery itself. The proposed turnover tax scheme reflects this pattern.
Turnover taxes are often defended on grounds of simplicity. Simplicity undoubtedly has value, particularly for very small businesses. However, simplicity should not become a substitute for equity.
A trader earning a profit margin of 20 percent and another earning a profit margin of 2 percent may have identical turnovers. Taxing solely on turnover ignores their vastly different capacities to pay. Such arrangements sacrifice fundamental principles of income taxation in favour of administrative convenience. The deeper problem lies in the message conveyed by these schemes.
Every time the government announces a simplified regime targeted at non-filers, it sends a signal that remaining outside the formal filing system may eventually be rewarded with special treatment. Those who have been complying with filing requirements receive no corresponding benefit. This creates a perverse incentive structure.
The government should instead ask a different question: why do millions of people already paying higher advance taxes not file returns? Part of the answer lies in the complexity of tax compliance. Return filing remains unnecessarily cumbersome for small businesses. Another part lies in the absence of trust between taxpayers and tax authorities. Many traders view registration as an invitation to harassment rather than a pathway to compliance.
These concerns deserve attention. However, none of them justifies abandoning the principle that persons whose incomes exceed taxable thresholds should file returns and be assessed according to law. We must lower rates, which are obnoxiously high. The irony is that Pakistan’s tax administration possesses more information about taxpayers than ever before but is so lazy to get returns from all who are earning taxable incomes.
FBR has access to electricity consumption data, gas connections, banking transactions, vehicle ownership records, property holdings, foreign travel information, withholding tax databases and increasingly sophisticated digital trails.
Successive governments have repeatedly celebrated these data integration initiatives. If despite possessing all this information the tax administration still requires another simplified scheme to identify taxpayers, one must question the effectiveness of the entire data-gathering exercise.
The issue becomes even more significant when viewed in the context of budgetary pressures. Pakistan faces mounting fiscal challenges. Public debt remains high. Development expenditure is constrained. Provinces are being pressured to generate larger fiscal surpluses. New revenue targets are expected to be imposed on FBR.
Under these circumstances, creating additional concessional regimes for groups already captured within the withholding tax system appears difficult to justify. What Pakistan requires is not another special scheme but a transition from withholdingisation to genuine net income-based taxation at reasonable rates.
The first step should be the automatic identification of all commercial and industrial electricity consumers paying advance income tax under section 235. Those whose economic profiles indicate taxable incomes should be issued notices requiring return filing.
The second step should involve a simplified return system tailored for small businesses without compromising the principle of income-based taxation.
The third step should be administrative accountability. If millions of identified taxpayers remain outside the filing system, responsibility cannot be shifted entirely onto traders. Questions must also be directed towards the institutions entrusted with enforcing tax laws.
Tax reform begins with intellectual honesty. Claiming that traders paying taxes through electricity bills, mobile phones, banking transactions and numerous withholding provisions are outside the tax net obscures the real challenge. The challenge is not discovering taxpayers. The challenge is administering the tax system effectively.
The proposed ‘Fixed Tax Assan Scheme’ may provide temporary political optics. It may create an impression of outreach and reform. It may even generate some additional revenues in the short run. However, it does not address the fundamental weakness of Pakistan’s fiscal architecture: a tax administration that increasingly relies on advance collections while failing to establish a comprehensive culture of filing, assessment and accountability.
The country does not suffer from a shortage of taxpayers but bona fide filers, those earning taxable incomes by opted to be ‘non-filers’ (not appearing on Active Taxpayers List). It also suffers from an incompetent and inefficient tax administration, and extremely bad tax policy of ‘filers’ and ‘non-filers’. Until this reality is recognised, new schemes of appeasement will continue to be announced, old problems will persist, and the promise of broadening the tax base will remain nothing but a dream.
Copyright Business Recorder, 2026
The writer is a lawyer and author, is an Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Senior Visiting Fellow of Pakistan Institute of Development Economics (PIDE)
The writer, an Advocate Supreme Court, Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE), holds LLD in tax laws
The writer is a corporate lawyer based in the US with extensive expertise in financial regulations, including Virtual Asset Service Providers (VASPs), corporate governance, and global economic policies. He holds an LLM from Washington University in St. Louis and has completed the Management Development Program at the Wharton School. He has developed regulatory frameworks for North American and South American Financial Institutions and has consulted and trained bureaucrats of different regions. He can be reached at abdulrauff@hotmail.com