The Federal Board of Revenue (FBR) has acknowledged a staggering Rs3.6 trillion sales tax gap, admitting that it cannot fully bridge the deficit due to the fragmented and largely informal structure of Pakistan’s retail sector. The revelation, shared recently with the Prime Minister’s Office, underscores the deep-rooted challenges in collecting taxes effectively across various industries.
According to the FBR’s own assessment, the retail sector alone accounts for nearly Rs310 billion in missing sales tax revenue, almost one-tenth of the entire gap. Officials noted that enforcement at the retail level is not only difficult but nearly unmanageable due to the lack of formal record-keeping and fragmented trade practices.
Despite these hurdles, the tax authority reported collecting Rs874 billion in the last fiscal year through enforcement measures. However, details of this collection have not been disclosed, despite repeated requests from journalists and inquiries directed at the FBR as early as mid-September. This lack of transparency raises questions about the claimed enforcement gains.
Data reveals that while the FBR managed to gather Rs3.9 trillion in sales tax revenue in the last fiscal year, the overall gap stood at Rs3.6 trillion. This mismatch between potential and actual collection remains a major obstacle for the government, which is under constant pressure from the International Monetary Fund (IMF) to expand its revenue base.
The latest development has coincided with growing tensions between tax officials and traders. A recent incident in Lahore, where tax officers allegedly harassed a local businessman, triggered backlash from the Lahore Chamber of Commerce and Industry. Its president demanded the removal of a senior tax official and threatened to resign if the matter was not resolved by October 1.
Over the years, multiple governments have tried to bring the retail sector into the tax net, using incentives and restrictions to improve compliance. Measures included limiting large purchases, enhancing salaries and perks of tax officials, and offering vehicles to motivate enforcement. Still, most of the sector remains undocumented, making direct monitoring difficult.
In its assessment, the FBR has suggested that meaningful gains could be made at the manufacturing stage, where compliance is easier to enforce. Manufacturers already account for a significant portion of withholding tax collection. Additionally, the FBR is investing in digital invoicing solutions to increase visibility across business-to-business transactions and logistics. However, recent decisions to accept cash deposits as digital payments have raised concerns about the consistency of these digital interventions.
Breaking down the tax gap across industries, textiles remain the largest contributor at Rs814 billion, followed by petroleum and food products at Rs384 billion each. Other major gaps were noted in chemicals and fertilizer (Rs326 billion), iron and steel (Rs200 billion), electronics (Rs193 billion), and beverages (Rs101 billion). Surprisingly, the sugar sector had a comparatively low gap of Rs46 billion, although it continues to attract significant regulatory scrutiny.
Despite missing its overall tax collection target of Rs11.74 trillion by Rs1.2 trillion last year, the FBR claims its enforcement efforts boosted the tax-to-GDP ratio from 8.8 percent to 10.24 percent. Officials believe Pakistan remains on track to meet its IMF commitment of raising this ratio to 13.7 percent by June 2027, with FBR’s contribution rising to 11.5 percent.
To strengthen integration, over 12,800 taxpayers have registered and selected licensed integrators, covering Rs33.3 trillion in turnover—two-thirds of the country’s total reported sales of Rs51 trillion. Enforcement has also seen visible action, with authorities targeting jewelers, furniture shops, and other retailers nationwide through nearly 100 operations backed by local magistrates and police.
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