Pakistan's latest tax scheme attracts just 222 new taxpayers

Pakistan's latest attempt to bring millions of undocumented retailers into the tax system has produced disappointing results, with just 222 new taxpayers registering under a government scheme that aimed to attract 3.5 million businesses.

The failure marks another setback for Prime Minister Shehbaz Sharif's government, which offered retailers substantial tax concessions, simplified filing requirements and exemptions from routine audits to encourage compliance. Yet, by mid-October, only 1,945 small traders had filed tax returns, including just 222 new taxpayers.

The scheme was expected to generate 50 billion rupees ($approximately $180 million) in revenue during the current fiscal year. However, government collections had reached only 90 million rupees by mid-October, representing just 0.17% of the annual target.

On his latest episode of "On My Radar," Kamran Khan highlighted the latest failure as evidence of the government's continuing inability to bring Pakistan's large undocumented retail sector into the formal economy despite repeated concessions and negotiations.

The government introduced the Tax Asaan fixed-tax scheme on June 5, with Finance Minister Muhammad Aurangzeb, Minister of State for Finance Bilal Azhar Kiani and the Federal Board of Revenue leading the initiative.

Under the scheme, retailers with annual turnover of up to 200 million rupees were required to pay tax equivalent to 1% of their sales, subject to a minimum annual payment of 25,000 rupees.

The government offered a simplified one-page tax return, exemption from routine audits and digital invoicing requirements, along with several other facilities. Despite these incentives, the response from retailers remained extremely limited.

Khan said the lack of confidence in the FBR was a major obstacle, with shopkeepers fearing that disclosing their sales and business records could expose them to future audits, additional tax demands and harassment.

Limited support from traders' associations, registration difficulties and the widespread reliance on cash transactions in the undocumented economy also contributed to the scheme's poor performance.

Repeated failures to tax retailers

The latest setback is not the government's first failure to expand the tax base through retailer-focused initiatives. Successive administrations have made at least four attempts over the past seven years, including three under Shehbaz Sharif's governments.

In 2024, the government introduced the Tajir Dost Scheme, setting ambitious targets to bring millions of shopkeepers into the tax system through registration and fixed-tax arrangements in different cities.

However, according to an International Monetary Fund report, the scheme collected only 3 million rupees against a target of 10 billion rupees by September 2024.

By December that year, collections had reached just 4 million rupees against a target of 23.4 billion rupees.

The government eventually had to replace the scheme's specific revenue collection targets with broader income tax collection targets for the entire retail sector.

Before that, in 2022, then-Finance Minister Miftah Ismail introduced a plan to collect fixed taxes from shopkeepers through their electricity bills.

The proposal set a monthly tax of 3,000 rupees for small traders and was expected to generate approximately 42 billion rupees in revenue.

However, widespread protests and resistance from traders' associations forced the government to withdraw the scheme in August 2022, with Prime Minister Shehbaz Sharif formally announcing its reversal.

A similar confrontation took place in 2019 under former Prime Minister Imran Khan's government.

Then-FBR Chairman Shabbar Zaidi introduced a requirement for buyers to provide their national identity card details for certain purchases exceeding 50,000 rupees.

Traders responded with nationwide strikes, forcing the government to negotiate an 11-point agreement in October 2019. Enforcement was postponed until Jan. 31, 2020, while the turnover tax rate for eligible traders was reduced from 1.5% to 0.5%.

The government was forced to offer significant concessions following resistance from the business community.

Tax burden falls disproportionately on documented sectors

Khan said the repeated failures had exposed a deeper structural problem in Pakistan's economy, where successive governments, finance ministers and FBR chairmen had been unable to bring millions of businesses into the formal tax system.

Pakistan's tax-to-GDP ratio remains among the lowest in the world. FBR collections accounted for approximately 8.4% to 9.2% of GDP between fiscal years 2020 and 2024, before rising to 10.3% in fiscal year 2025.

Despite the improvement, expanding the tax base and increasing contributions from different economic sectors remain major challenges.

Millions of businesses operate without complete records of their actual sales and purchases, while a parallel economy based largely on cash transactions continues to limit the government's ability to collect taxes.

The resulting imbalance places a heavier burden on salaried employees, corporations and businesses already operating within the documented economy, Khan said.

FBR figures for fiscal year 2025-26 show that salaried employees paid 633 billion rupees in income tax, compared with 174 billion rupees contributed by exporters.

The real estate sector generated 278 billion rupees in withholding tax, while retailers contributed only 70 billion rupees under the same category.

This means salaried employees paid 3.6 times more income tax than exporters, 2.3 times more than the withholding tax collected from the real estate sector and nine times more than the withholding tax collected from retailers.

The figures highlight the disparity in Pakistan's tax structure, where formally documented sectors and salaried workers contribute substantially while large segments of the retail economy remain outside the tax net.

Government faces questions over next steps

The latest failure raises questions about what options remain for the government after repeated attempts to tax retailers through fixed-tax arrangements, concessions and negotiations have failed to produce meaningful results.

Khan challenged Prime Minister Shehbaz Sharif, Finance Minister Muhammad Aurangzeb, Minister of State Bilal Azhar Kiani and FBR Chairman Rashid Mahmood Langrial to explain how the government plans to bring undocumented businesses into the formal economy.

He argued that the issue goes beyond the failure of an individual tax scheme, raising broader concerns about Pakistan's economic sovereignty, fairness in the tax system and the state's ability to enforce its laws.

"If millions of businesses remain outside the tax system despite repeated concessions, negotiations and new schemes, when and how will Pakistan finally become a documented economy?" the program questioned.

The episode also featured former Finance Minister Miftah Ismail, Lahore Chamber of Commerce and Industry President Ali Hussam Asghar and former Pakistan Tax Bar Association President Anwar Kashif Mumtaz.