FMCG industry urges expansion of Third Schedule under GST regime

ISLAMABAD: Pakistan’s fast-moving consumer goods (FMCG) industry has called on the government to widen the scope of the Third Schedule under the General Sales Tax (GST) framework, saying the change would improve price visibility for consumers, curb tax leakages and make the tax system easier to administer without raising the overall tax rate.

The proposal seeks to move more essential consumer items — including cooking oil, milk, dairy products, infant formula, flour, noodles, frozen foods and condiments — from the standard 18% GST system to the Third Schedule. Under that mechanism, the same 18% tax rate remains in place, but the tax is collected upfront at the manufacturing stage.

Industry stakeholders said the proposal does not involve a fresh levy, but rather a different mode of collection intended to improve efficiency and compliance. They noted that products worth more than Rs2.5 trillion in the FMCG sector, including beverages, tea, soaps and personal care items, are already covered by the Third Schedule.

Industry case for reform

According to industry representatives, the current GST structure is complicated because tax is collected at several points across the supply chain, from manufacturers to distributors and retailers. They said this creates administrative difficulties and increases the possibility of revenue leakages.

By contrast, they argued, the Third Schedule allows the full tax to be paid at the first point of supply, making compliance easier for businesses and enforcement simpler for the Federal Board of Revenue (FBR). They also said the existing system leaves room for underreporting and manipulation through practices such as transfer pricing and undocumented discounts.

Stakeholders maintained that requiring retail prices to be printed on packaging — a feature of the Third Schedule that is not enforced under the standard GST regime — would make the tax base more visible and reduce opportunities for evasion. They said the printed price on the pack would serve as a reference point for both regulators and consumers.

Concerns over retailer documentation measures

The demand for reform has also come as the government has recently tried to improve retailer documentation through additional taxes. Unregistered retailers currently face a 4% further tax, while non-filers are subject to a 2.5% advance income tax, taking the combined additional burden to 6.5%.

According to industry estimates, however, more than 80% of retailers across the country remain undocumented, which stakeholders say shows these measures have had limited impact. FMCG companies said that instead of increasing compliance, the extra taxes have produced unintended consequences.

They said manufacturers are often compelled to absorb part or all of the added tax burden in order to preserve retailer margins and keep products available in the market. In their view, a policy intended to encourage documentation has instead become a recurring cost for businesses, putting pressure on margins and reducing pricing flexibility.

Industry stakeholders said that expanding the Third Schedule would remove the need for such additional taxes by shifting the tax burden entirely to the manufacturing stage. They argued that this would create a more predictable and transparent arrangement for the government, businesses and consumers.

Consumer pricing and transparency

Consumer protection has also been cited as a major reason for the proposed change. Under the current system, companies are required to provide retailers with price lists, but industry players said these are often neither displayed nor followed. As a result, consumers can face overcharging and varying prices at the retail level.

They said authorities in different regions have issued notices to companies over inconsistent pricing practices. In this context, stakeholders argued that making printed prices mandatory on product packaging through the Third Schedule could help ensure uniform pricing and prevent overcharging. They added that such a step would strengthen consumer confidence and contribute to greater market stability.