Taxing fairness away

The government’s newly announced small trader scheme is being presented as a step towards expanding Pakistan’s tax base and bringing retailers into the formal economy. In reality, it appears less a reform initiative and more a negotiated settlement with one of the country’s most politically influential and persistently under-taxed constituencies.

Under the scheme, traders with annual sales of up to Rs200 million may opt into a simplified one per cent turnover tax regime. In return, they will be spared many of the compliance requirements imposed on other taxpayers, including audits, point-of-sale integration, digital invoicing and extensive documentation obligations. The government insists the arrangement is not an amnesty, yet it is difficult to view it as anything other than a concession that preserves the very informality tax reform is meant to eliminate.

Pakistan’s tax system has long suffered from a narrow and uneven base. Whenever serious attempts are made to document the retail sector, resistance from trader groups is followed by compromise. The result is another preferential arrangement that generates limited revenue while postponing genuine reform. The failure of previous initiatives should have demonstrated that voluntary compliance schemes rarely succeed in addressing structural weaknesses.

The scale of the imbalance is striking. Pakistan’s retail sector generates trillions of rupees in annual turnover, yet contributes only a negligible share of direct tax revenues. Meanwhile, the burden continues to fall disproportionately on salaried employees and the formal corporate sector. Salaried workers face automatic deductions at source and progressive tax rates. Corporations contend with extensive reporting requirements and some of the highest effective tax burdens in the region.

This disparity is neither sustainable nor equitable. A retailer handling hundreds of millions of rupees in turnover can now access a simplified regime while avoiding the documentation and scrutiny faced by compliant taxpayers. Such arrangements deepen distortions rather than correcting them.

The implications extend beyond questions of fairness. Pakistan has repeatedly committed to broadening its tax base and reducing dependence on a small pool of documented taxpayers. International lenders, including the IMF, have consistently identified the retail and wholesale sectors as critically under-taxed. Any measure that weakens documentation efforts risks undermining these commitments and inviting further scrutiny during future programme reviews.

Equally concerning is the message being sent to investors. Business groups have repeatedly warned that the concentration of tax obligations on the formal sector discourages investment and erodes competitiveness. As compliant companies shoulder an ever-greater share of the burden, preferential treatment for undocumented sectors creates an environment that rewards informality rather than transparency.

The political logic behind the scheme is obvious. Traders remain a powerful electoral constituency capable of exerting significant pressure on governments. Yet tax policy cannot be dictated solely by political convenience. Effective reform requires broadening the tax base, improving documentation and ensuring that all sectors contribute fairly.

Measured against those objectives, the small trader scheme falls short. It may generate some additional revenue, but it does little to address the deeper weaknesses that continue to undermine Pakistan’s fiscal system. A country facing chronic revenue shortages cannot afford reforms that prioritise accommodation over accountability.