‘Peacemaking’ with shopkeepers

Pakistan’s fiscal crisis has persisted for decades; however, every successive government has attempted to resolve it through the same narrow approach of imposing higher taxes on the documented segment of the economy but leaving structural flaws largely untouched. The repeated failure to achieve sustainable revenue mobilization has often resulted in criticism of the Federal Board of Revenue (FBR), particularly whenever annual tax collection targets are missed. Such criticism, however, oversimplifies a much deeper policy failure. The inability to collect sufficient revenue is not solely an administrative problem within the FBR; rather, it is a consequence of fiscal policies that continue to narrow the effective tax base, expand preferential treatments for politically influential sectors, and place an increasingly disproportionate burden on salaried individuals and compliant businesses. The recently notified Draft Special Procedure for Small Shopkeepers once again reflects this policy dilemma and raises serious questions about the government’s commitment to broadening the tax base. Pakistan’s leadership has tried to address fiscal challenges for decades but continues to tread the wrong path in its attempt to overcome them. Despite being home to the world’s fifth-largest population, Pakistan has yet to recognize the enormous economic potential that lies within its domestic market and entrepreneurial base, instead relying on orthodox and short-term revenue measures. The government claims in the latest Economic Survey of Pakistan that it achieved a primary surplus of 3. 2 percent of GDP, narrowed the fiscal deficit to 0. 7 percent, increased revenues by 10. 7 percent, raised development expenditure by 18. 7 percent and expanded Public Sector Development Programme spending by 26. 8 percent. These macroeconomic indicators undoubtedly suggest improved fiscal management. However, the same survey reveals that poverty increased significantly to 28. 9 percent in 2024-25 from 21. 9 percent in 2018-19, with rural poverty reaching 36. 2 percent and urban poverty standing at 17. 4 percent. The contradiction is conspicuous. Though fiscal indicators have improved on paper, the economic wellbeing of ordinary citizens has deteriorated, demonstrating that macroeconomic stability without equitable revenue mobilization and inclusive growth cannot deliver sustainable prosperity. The current budget has added further pressure to an already fragile fiscal position. The Federal Budget for 2026-27 estimates government net revenue receipts after provincial shares (NFC) at Rs. 11, 751 billion against expenditures of Rs. 18, 771 billion. Debt servicing alone is projected to consume Rs. 8, 054 billion, almost half of the total estimated revenue. Defence expenditure, pensions, subsidies, grants, civil administration and development spending continue to absorb significant fiscal resources, forcing the government to rely heavily on additional domestic and external borrowing. The projected financing plan envisages billions of rupees through multilateral lending, commercial borrowing, government securities and national savings instruments. These figures demonstrate that Pakistan is financing today’s expenditure through tomorrow’s liabilities. However, despite this mounting fiscal pressure, policy attention remains disproportionately focused on extracting additional revenue from the already documented economy rather than fundamentally expanding the country’s tax base. The government’s repeated criticism of the FBR for missing ambitious revenue targets ignores an important institutional reality. No tax administration, regardless of its efficiency, can consistently achieve unrealistic collection targets when fiscal policy simultaneously grants broad concessions, weakens enforcement mechanisms and leaves substantial sectors of the economy outside meaningful documentation. Revenue authorities administer tax laws; they do not design the economic structure within which those laws operate. When governments introduce exemptions, presumptive regimes and preferential procedures without adequate measures, they inevitably reduce the tax capacity that FBR is expected to exploit. Blaming the institution responsible for collection while continuously narrowing the effective tax base represents a policy contradiction rather than sound fiscal governance. The Draft Special Procedure for Small Shopkeepers demonstrates this contradiction. The proposal applies to individual retailers with annual turnover of up to Rs. 200 million and allows eligible shopkeepers to opt for a simplified regime based on one percent tax on gross turnover, subject to a minimum payment of Rs. 25, 000. The scheme remains voluntary, exempts participants from several withholding obligations, generally shields them from audits except in limited circumstances, exempts them from mandatory POS or digital invoicing systems, and even provides a “Green Plate”, indicating compliant status that significantly limits FBR’s interaction with the business. The objective of reducing compliance costs for genuinely small businesses is understandable and consistent with international practice. However, the proposed framework extends these concessions to businesses with annual turnover of up to Rs. 200 million, a threshold that can hardly be characterized as representing only micro-enterprises. A retail business generating such turnover may produce substantial profits, own significant commercial assets and enjoy considerable market presence. Therefore, allowing businesses of this scale to operate under an optional simplified regime but exempting them from important reporting and compliance requirements raises legitimate concerns regarding equity, transparency and revenue generation. A comparison with international practice is equally revealing, such as countries like India, Brazil, South Africa, France, Italy and Mexico all operate simplified tax regimes for small businesses, but these systems are fundamentally designed to reduce administrative complication rather than permanently reduce effective tax liability. India’s presumptive taxation regime under section 44AD of the Income Tax Act, 1961 requires taxpayers to declare a minimum percentage of turnover as taxable income but maintaining clear turnover thresholds and preserving the tax authority’s ability to verify compliance. Brazil’s Simples Nacional simplifies multiple taxes into a unified system but remains heavily integrated with electronic reporting and digital administration. South Africa’s turnover tax reduces compliance costs but maintains extensive third-party information systems and risk-based oversight. France and Italy provide simplified accounting for small enterprises without abandoning audit powers or digital reporting obligations. These jurisdictions simplify compliance but continue to strengthen documentation, digitalization and enforcement. The Pakistani proposal moves in the opposite direction by relaxing several of the very mechanisms that modern tax administrations rely upon to improve compliance. Exemption from POS systems and digital invoicing reduces transaction visibility precisely when governments around the world are expanding electronic reporting to combat underreporting and tax evasion. The practical limitation on audit activity, combined with consultation requirements involving trade associations, further weakens independent tax enforcement. Though third-party information and exceptional circumstances remain available as grounds for intervention, the overall policy message is that one of the country’s largest commercial sectors deserves reduced regulatory scrutiny at a time when Pakistan faces one of the lowest tax-to-GDP ratios among comparable emerging economies. The proposal also raises important questions of horizontal equity. Salaried individuals have their taxes deducted directly from source without negotiation, discretion or optional compliance. Corporate taxpayers maintain detailed accounting records, undergo audits, comply with withholding obligations and increasingly adopt digital reporting systems. Manufacturers, exporters and formal businesses bear extensive reporting requirements throughout the production and supply chain. Retail businesses benefiting from this proposed procedure would receive preferential treatment despite participating in one of the largest cash-based sectors of the economy. Such differential treatment cannot easily be reconciled with the constitutional principle that taxpayers possessing similar economic capacity should contribute fairly to public finances. The policy may also create unintended behavioural incentives. Businesses approaching the Rs 200 million thresholds may deliberately limit expansion, divide operations among family members or restructure ownership to remain within the preferential regime. Similar experiences have been observed internationally where overly generous simplified taxation discourages businesses from advancing into the regular tax system. Rather than encouraging formalization, excessively broad concessions can entrench informality by making continued under-documentation economically attractive. Sustainable tax policy should encourage businesses to grow into a formal economy rather than rewarding them for remaining below regulatory thresholds. The broader consequence is that Pakistan continues to finance government expenditure through increased borrowing, however, leaving substantial domestic tax capacity underutilized. Every rupee that remains uncollected from profitable but lightly taxed sectors must eventually be replaced with higher taxation on documented taxpayers, increased indirect taxation, reduced public services or additional public debt. None of these options strengthens long-term fiscal sustainability. The burden ultimately falls upon compliant citizens who have little opportunity to negotiate their tax obligations but those benefiting from preferential arrangements continue to contribute below their potential economic capacity. The real challenge facing Pakistan is not simply one of tax administration but of fiscal courage. The country does not require another temporary special procedure that further fragments the tax system. It requires a comprehensive strategy that broadens the tax base, strengthens digital footprints, integrates banking and transaction data, expands electronic invoicing, enhances risk-based audits and applies equitable tax principles across all sectors of the economy. The genuine microenterprises deserve simplified compliance mechanisms, but simplification should never become a substitute for fairness or accountability. Until Pakistan replaces sector-specific concessions with a transparent and equitable tax framework, people will continue to criticize the FBR for revenue shortfalls that are rooted in the fiscal policies which successive governments themselves continue to pursue. (The writers Huzaima Bukhari & Dr. Ikramul Haq, lawyers, are Visiting Faculty at Lahore University of Management Sciences (LUMS), members Advisory Board and Visiting Senior Fellows of Pakistan Institute of Development Economics (PIDE). Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance’) Copyright Business Recorder, 2026

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