CAP warns proposed sales tax expansion could push up consumer prices

ISLAMABAD: The Chainstore Association of Pakistan (CAP) has raised concerns over a proposal to expand the Third Schedule of the Sales Tax Act, 1990 to cover non-fast-moving consumer goods, saying the move could increase prices for consumers by applying tax on notional retail prices rather than actual sale values.

In a statement, CAP said the proposed changes would bring items such as everyday footwear, school backpacks, bags, wallets and other goods falling under PCT 42.02 into the Third Schedule. The association, which represents tax-compliant Tier-1 retailers, said it supports formalisation and efforts to widen the tax base, but argued that applying Third Schedule treatment to categories where prices vary and retailers play a central role in value addition would create an excessive burden for consumers while also putting pressure on documented retailers and manufacturers.

CAP said public estimates suggest the proposed expansion through Finance Bill 2026 could generate between Rs50 billion and Rs91 billion, which it said reflected the likely scale of additional costs that may ultimately be passed on to buyers. It added that undocumented and smuggled goods sold by informal operators could become relatively cheaper, giving them an advantage over formal businesses.

According to the association, taxing goods on the basis of original retail price could raise the effective burden above the standard 18% sales tax. It said retail brands commonly offer end-of-season discounts on a significant portion of inventory, and for a product sold at a 30% discount to its original price, the effective GST incidence would rise to about 26% instead of 18%.

CAP Patron-in-Chief Tariq Mehboob said the association was not objecting to tax collection itself, but to the basis on which it would be calculated.

"The issue is not whether tax should be collected. The issue is whether tax should be collected on the actual price paid by the consumer or on a notional price the consumer may never pay. Taxing shoes, backpacks, bags and other price-variable goods on assumed prices will reduce affordability and add to inflation," he said.

Mehboob said goods traditionally covered under the Third Schedule are usually standardised products for which manufacturers set a fixed and stable retail price. He said footwear, bags, wallets and luggage differ because the retailer or brand owner contributes value through design, branding and distribution.

CAP Chairman Asfandyar Farrukh said formal retailers are already linked to the Federal Board of Revenue's point-of-sale system and their transaction-level information is available to tax authorities.

"Formal retailers are already integrated with Federal Board of Revenue (FBR) POS systems and transaction-level data are available to the tax authorities. There is no documentation value in taxing integrated Tier-1 retailers on assumed prices instead of actual POS transaction values," he said.

Farrukh said the effects would not be limited to shop prices. He said the formal retail trade in footwear and leather products supports domestic manufacturing, design, packaging and jobs, and warned that if compliant retailers face higher tax costs and tighter margins, it could discourage investment in local sourcing and manufacturing.

CAP has urged the government to restrict Third Schedule treatment to branded, retail-packed and standardised goods, while continuing to tax FBR POS-integrated Tier-1 retailers on actual transaction values recorded at the point of sale.