Filing season ends
AS tax-filing season draws to a close, for those innocent enough to be part of the exercise, it is perhaps worth taking stock of what has worked and what has not in the recent past. One thing that has clearly not worked is schemes designed to give retailers incentives to become filers. Another thing that has not worked is mounting penalties on non-filers, and ramping up the FBR’s powers to enforce such schemes.
Let me qualify what I said. When I say these have ‘not worked’ I mean something specific: they have not worked to break the barrier that keeps our tax-to-GDP ratio so dismally low that the structural fiscal deficit becomes the biggest ball and chain that holds the rest of the economy back. There is only one way to end this vicious cycle, and that is to come up with a tax reform programme that unlocks the significant tax potential locked up in those areas of the economy that see large-scale turnovers but contribute little to nothing by way of taxes. Not surprisingly, most of these areas are found inside the services sector, which accounts for more than 50 per cent of our GDP (in constant 2015 prices).
And within services one constant headache has been wholesalers and retailers, second only in size to communications, whose size and weight are inflated due to the sheer scale of mobile communications in Pakistan. Mobile communications are reasonably easy for the tax machinery to reach.
In his first year of power, Gen Pervez Musharraf targeted the retailers in a documentation drive, and the combined efforts of the FBR and the interior ministry, then headed by retired Gen Moinuddin Haider, were brought to bear on the problem. They used a raw power approach, demanding traders register themselves or face forcible closure of their business. And this ‘documentation drive’ faced its first big test in the sprawling Bara market of Peshawar, which was a major hub for undocumented frontier trade in those days.
Yet again, the authorities are trying to incentivise retailers to self-register using yet another fixed tax scheme.
It was the most dramatic showdown between the state and the retailers that we have probably ever seen. But eventually, the drive failed, and it turned out to be the last time the state ever used head-on collision as its strategy for bringing retailers into the net and documenting the economy.
The priority lay dormant after that. Once the 9/11 bonanza got going, nobody was too pushed with the documentation drive or widening the tax net. The next time the matter was taken up was as part of the 2008 IMF programme, which had only one structural reform criterion: implement the value added tax. They called it Reformed GST, or RGST, at the time, to underline the fact that this was not a new tax but simply an upgraded version of something that had already been under implementation since 1991. The idea under this strategy was to incentivise traders, suppliers and vendors and distributors and wholesalers and all parties that were part of the supply chains connected with manufacturing in this country to help document each other. Every party would only pay tax on the portion of value that they added to a good. So they had to declare how much they bought an item for and from whom, and how much they sold it for and to whom, and pay tax only on the difference between these two prices.
This also failed because the traders mounted enough of a protest against the tax for it to be defeated in parliament, mainly because the government’s own coalition partners opposed it. And after this defeat came a series of ad hoc attempts, organic, home-grown attempts, to try and net the retailers. The first of these was a combination of a set of penalties for the remaining non-compliant, coupled with an incentive to comply by declaring one’s assets and incomes via an amnesty scheme. This was in 2015. This was the first carrot-and-stick approach to this problem of rising undocumented incomes in the services sector. It sounded good at the time, especially since it was also coupled with large withholding taxes on bank transactions of non-filers of income tax returns.
But these measures also failed. And then came yet more subtle measures. In 2017, they created a category called Tier 1 retailers, covering chain-store outlets, shops in air-conditioned malls, retailers with an annual electricity bill over Rs600,000, and wholesaler-cum-retailers. A little earlier, they had started using information from electricity bills to assess tax liability and make the collection.
Much of the tax effort then focused on these Tier 1 retailers, expanding and contracting their definition over the years, adding and removing penalties, bringing in technology like point of sale (POS) machine integration, and running lottery schemes against the receipts issued through these machines. In 2022, they brought in a fixed tax of Rs3,000, 5,000 or 10,000, depending on the bill size, for non-Tier 1 retailers, to be collected through electricity bills.
None of it worked. And now they tried, one more time, in the latest finance act, to incentivise retailers once again to self-register using yet another fixed tax scheme. According to a news report by Shahbaz Rana, “[o]nly two new traders have so far opted for the 1pc fixed tax scheme while another 315 shopkeepers who have filed returns are already part of the tax regime”. This strongly suggests that the latest version of the same scheme is now headed towards failure. It was easy to see this coming, given how all previous incentives and fixed tax schemes have fared in the past one decade.
As the curtain prepares to drop on tax-filing season, it has become another ritual to observe the long and rather discouraging track record of the state’s failure to keep its fiscal effort up to date with the changes its economy has undergone over the years. And the innocent ones, like you and me, who file our taxes dutifully every year, pay the price.
The writer is a business and economy journalist.
Published in Dawn, September 24th, 2026
