Zafar Iqbal
Pakistan’s formal business sector operates under a silent but suffocating disadvantage. The rules that are supposed to create order in the marketplace have, in practice, become instruments of punishment for those who follow them. Nowhere is this more visible than in the fast-moving consumer goods sector, where the gap between documented and undocumented players has grown wide enough to threaten the very viability of compliant businesses.
The standard GST rate of 18 percent is already steep. For a developing economy with thin consumer margins and intense price sensitivity, this rate alone discourages registration and invites evasion. But the problem does not stop there. On top of this base rate, there is an additional 4 percent levy applied to sales made to unregistered retailers, along with a further 2 percent income tax on goods subject to standard sales tax. When these charges stack up together, the formal manufacturer faces an extra burden of roughly 6.5 percent that informal competitors simply do not carry. In a market where a few rupees determine which brand reaches the shelf and which does not, this is not a minor inconvenience. It is a structural injustice embedded into the tax code itself.
The scale of the problem becomes clearer when one considers that over 90 percent of Pakistan’s retailers operate outside the tax net. They are undocumented, unregistered, and largely untouched by the state. Every incentive scheme introduced over the past three decades to draw them in has produced negligible results. The most recent effort, the Tajir Dost scheme, was launched with considerable fanfare and collapsed with equal speed. The resistance of small traders to formalization is not irrational. Registration brings obligations, audits, and costs that their informal competitors never face. Until that asymmetry is resolved, no voluntary scheme will succeed.
Meanwhile, formal manufacturers are caught in an impossible position. They cannot abandon small, unregistered wholesalers and retailers without surrendering shelf space and market reach across most of the country. Walking away from this segment of the distribution chain means commercial suicide. At the same time, they cannot absorb the additional tax burden indefinitely, nor can they pass it on to consumers in a price-sensitive market where informal competitors are standing ready to undercut them. The consumer, in many cases, ends up bearing the cost. In others, the formal manufacturer simply absorbs the loss and watches its margins erode. Either way, the informal operator wins.
This dynamic exposes a fundamental truth about how penal taxation functions in Pakistan. It does not discipline the undocumented. It disciplines the documented. The filer and non-filer distinction that dominated tax policy for much of the past decade produced the same result. Additional charges on non-filers never succeeded in expanding the tax base. They merely added another layer of cost for those already inside the system while leaving the majority outside it untouched.
There is, however, a structural reform that could begin to correct this imbalance. The Third Schedule of the Sales Tax Act currently covers a range of consumable items, including water, biscuits, coffee, ice cream, chocolates, juices, beverages, packaged tea and spices, soaps, and shampoos. For these products, retail prices are printed on the packaging and sales tax is collected upfront from the manufacturer on behalf of the entire value chain. The result is a cleaner, more transparent system that reduces opportunities for evasion at every subsequent stage. The government already collects GST through this mechanism from a market estimated at over two and a half trillion rupees.
Many essential categories, however, remain outside this arrangement. Cooking oil, ketchup, milk and dairy products, infant formula, and several others are still governed by the standard sales tax regime, where liability passes through multiple hands across the supply chain: manufacturer, distributor, retailer, and finally the consumer. Each hand represents a potential point of leakage. Where retail prices are not required to be printed on packaging, consumers are left at the mercy of retailers who can charge what they choose. Undocumented discounts and under-declared taxable values move through the chain invisibly, particularly in small towns and rural areas where regulatory oversight is weakest.
The solution requires no new institutional architecture and no elaborate enforcement machinery. It requires extending the Third Schedule to include cooking oil, ketchup, milk and dairy products, infant formula, frozen foods, flour, and noodles. This single administrative step would fundamentally change the competitive landscape. Retail prices would become visible and standardised. Tax collection would occur at the point of manufacture, eliminating the layers of opacity that currently allow evasion to flourish. Formal manufacturers would no longer be penalised for their compliance. Consumers would be protected from arbitrary overcharging. And the government would collect the full tax due from a substantial portion of the consumer economy.
This is not a radical proposal. It follows the logic of a mechanism already operating successfully within the same tax code. The Third Schedule framework works precisely because it removes the burden of enforcement from weak links in the chain and concentrates collection at the point where the state already has visibility. Extending it to more categories would strengthen GST collection, reduce leakages, and restore some measure of competitive fairness to formal players who have long absorbed a penalty for choosing to operate within the law.
None of this eliminates the deeper challenge of retailer registration. That battle must still be fought through sustained political will, simplification of registration procedures, and genuine incentives rather than punitive levies that have consistently failed. But expanding the Third Schedule is a tangible, achievable reform that can deliver results without waiting for the informal sector to voluntarily embrace compliance.
Pakistan’s tax architecture should reward formality, not punish it. The current structure does the opposite. Correcting that inversion begins with the choices the government makes about how and where it collects what it is already owed.
