Tax system: Persuasion cannot replace enforcement

EDITORIAL: When the head of the country’s tax authority must ask business leaders to persuade retailers to comply with the law, it goes without saying that something is seriously wrong with the tax system.

Yet this is precisely what FBR (Federal Board of Revenue) Chairman Rashid Mahmood Langrial did this week, asking the Federation of Pakistan Chambers of Commerce and Industry (FPCCI) to actively promote the recently introduced retailers’ scheme so that the tax burden on already-compliant taxpayers could be reduced.

The message conveyed by this approach is highly troubling. Paying tax is not a discretionary act; nor is it a favour rendered to the state. It is a legal obligation.

The fact that Pakistan’s top tax official is effectively beseeching a trade body to encourage greater participation in a tax scheme speaks volumes about the FBR’s long-standing inability, or unwillingness, to enforce taxation in a politically sensitive sector primarily because of absence of political will to take on the tax evaders.

There is little mystery about why. Retailers and wholesalers constitute a politically influential constituency.

Whenever attempts are made to bring them fully into the tax net, they resort to protests, shuttered shops and strikes, with governments often retreating or diluting their demands rather than risk a confrontation with a powerful voting bloc.

Successive dispensations have thus approached the sector with extraordinary caution, opting for negotiation, concessions and simplified schemes over consistent enforcement. The result is a deeply inequitable tax system in which compliant citizens and businesses shoulder an increasing share of the burden while a large segment of the economy remains inadequately taxed.

The latest retailers’ scheme illustrates the problem all too clearly. It allows eligible individual retailers with annual turnover of up to Rs200 million to pay tax at just one percent of gross turnover, subject to a minimum Rs25,000 payment.

In return, they receive simplified compliance, relief from routine audits and certain withholding obligations, and exemption from POS and digital invoicing requirements. Simplification is defensible if it brings genuinely small businesses into the tax net. But there is a fundamental difference between simplifying compliance and abandoning meaningful taxation.

Income tax is ordinarily a tax on income, not sales. A retailer’s actual tax capacity depends on net income after legitimate business expenses. Yet the new arrangement effectively substitutes a flat charge on turnover for that assessment. Ironically, the simplified return that retailers have to file does ask them to report annual sales, purchases, business expenses, net profit and assets.

If such information is being collected, why isn’t it being used to establish the taxpayer’s actual liability? A turnover-based shortcut weakens the connection between taxable income and tax payable, creates distortions between businesses with vastly different margins and can provide opportunities for under-reporting or the legitimisation of unexplained wealth.

The consequences of years of such indulgence are visible in the revenue numbers. Retail and wholesale businesses have historically contributed disproportionately little to the tax pool despite their economic weight.

Only around 300,000 of an estimated 3.5 million retailers were actively filing returns in 2024. The latest withholding-tax figures further underline the disparity. Retailers and wholesalers contributed just Rs12 billion in the first two months of the current fiscal year, down 3.5 percent year-on-year, while the salaried class paid Rs79 billion more, an astounding 658 percent higher.

This is not a sustainable tax policy. The FBR should certainly make compliance easier for small businesses, but facilitation cannot mean preferential treatment. If the state continues to protect politically influential taxpayers from the full rigours of the tax system, it cannot reasonably expect already-compliant citizens to accept ever greater demands.

The answer is not another campaign to persuade retailers to pay. It is a tax administration willing to enforce the law uniformly, regardless of the political constituency involved.

Copyright Business Recorder, 2026