Pakistan’s economic landscape is currently defined by severe inflationary pressures, with the average citizen bearing the brunt of escalating costs for daily necessities. While global market trends and macroeconomic indicators often dominate the conversation surrounding inflation, a significant and correctable driver of grocery inflation lies hidden within the structural mechanics of the country’s taxation system. Specifically, Pakistan’s indirect tax framework relies heavily on General Sales Tax (GST), which is applicable under the Value Added Tax (VAT) mode and serves as a fundamental element of the nation’s revenue generation. This system is overseen by the Federal Board of Revenue (FBR) alongside provincial regulatory agencies and is governed by the Sales Tax Act 1990. While GST is theoretically designed as an efficient, multistage tax, its practical effectiveness is severely constrained by structural weaknesses in downstream compliance, particularly at the retail level.
Over the past few years, successive finance bills have attempted to bring the deeply undocumented retail sector into the formal economy.
Over the past few years, successive finance bills have attempted to bring the deeply undocumented retail sector into the formal economy. To encourage documentation and push retailers to register and file income tax returns, the government introduced additional and advance taxes targeting unregistered and non-filer retailers. Under the current regime, an unregistered sales tax retailer attracts a punitive 4% further tax. On top of that, non-filer retailers are liable to pay an advance income tax of 2.5%, a penalty that was increased from 1% in the Finance Bill 2024-25.
This creates a substantial additional 6.5% tax burden specifically targeting unregistered and non-filer retailers. However, available market evidence conclusively indicates that this compliance strategy has not materialized. A conservative estimate based on market information reveals that over 80% of retailers nationwide still operate in the non-registered category. Instead of broadening the tax net, this approach has resulted in increased complexity, enforcement challenges, and unintended commercial distortions. Because unregistered retailers refuse to absorb these penalties, manufacturing companies frequently have to shoulder the partial or full liability of these additional taxes to protect retailer margins. If they do not, they face the severe commercial risk of retailers refusing to stock their products. Ultimately, an attempt at a compliance lever has turned into a recurring commercial cost with a remarkably weak impact on documentation.
The ultimate victim of this structural failure is the end consumer. Under the standard GST system, there are multiple stages at which sales tax is collected across the supply chain-from the manufacturer to the distributor, the retailer, and finally the consumer. These layers add immense complexity, conflicting directly with the principle of ease of doing business. Furthermore, while companies are legally supposed to provide retailers with a recommended retail price list that must be displayed, this practice is rarely followed. In the absence of a legally mandated, printed retail price on the actual product pack, retailers possess the unchecked ability to sell items at a higher rate. Consumers continuously complain of products being sold at excessive rates and face frequent, at-will price changes that disproportionately devastate low- and middle-income households. Without printed prices, consumers remain entirely vulnerable to inconsistent pricing practices, undermining confidence in the formal market.
The Third Schedule of the Sales Tax Act presents a highly viable, legally established alternative model to resolve this crisis. Under this specific framework, the entirety of the sales tax is collected upfront at the manufacturing stage, meaning the tax is paid at the first instance. Most importantly, a defining feature of the Third Schedule is the mandatory printing of the retail price directly on the product pack.
Currently, a number of consumer categories are already part of the Third Schedule, including water, biscuits, coffee, ice cream, chocolates, juices, syrups and squashes, beverages, packaged tea and spices, as well as soaps and shampoos. Expanding this schedule to include essential grocery categories like cooking oil, ketchups, milk and dairy products, infant formula, frozen foods, flour, and noodles would yield immediate, transformative benefits for the public and the state.
Mandatory on-pack pricing delivers tangible consumer protection by eliminating discretionary markups at the retail level, particularly in informal or low-competition markets where exploitation is highest. Consumers can clearly see the intended retail price, enabling fair comparisons, informed choices, and the establishment of trust. Furthermore, standardizing printed prices enforces equity across geographies, effectively reducing regional price disparities for the identical product.
From a regulatory and governance standpoint, a shift to the Third Schedule eliminates the room for downstream tax leakage. Because the tax base becomes tied to the printed pack, it becomes observable and much harder to manipulate through supply-chain discounts, transfer pricing, or undervaluation. The manufacturer deposits the full amount of sales tax at the time of supply, wholly mitigating the risk of tax evasion by other parties in the supply chain. Enforcement for the FBR becomes significantly faster and less audit-heavy because the product package itself serves as the reference point.
This shift also empowers provincial authorities. Currently, many companies receive show-cause notices from government agencies-such as the Balochistan Food Authority or the Bureau of Supply & Prices in Sindh-demanding explanations for inconsistent price printing across different products. For these food authorities and price control magistrates, a universally mandated printed price serves as a clear, highly visible compliance benchmark, streamlining their enforcement duties.
Finally, placing these essential items under the Third Schedule protects legitimate businesses currently struggling with high cost pressures. By removing the burden of the 4% further tax associated with unregistered retailers, manufacturers are allowed to rationalize prices without sacrificing their margins. Improved price stability and affordability will support stronger downstream demand, enabling industries to increase volumes and drive higher overall sales.
It is crucial to recognize that advocating for the expansion of the Third Schedule is not a request for tax exemption or a reduction in tax rates. Rather, it is a critical dialogue on how sales tax is collected, emphasizing the simplification of tax mechanisms and the eradication of evasion opportunities. Integrating essential groceries into this framework creates a definitive win-win scenario: organized industry escapes margin erosion, the government secures a transparent revenue stream, and, most importantly, the citizens of Pakistan are finally shielded from unjustified retail exploitation.
The writer is an Islamabad-based policy analyst