In a significant policy shift, the federal government is expected to withdraw the “further sales tax” in the upcoming Budget 2025–26. This move is part of a broader strategic initiative aimed at encouraging documentation across the entire supply chain, ultimately seeking to bring more businesses, particularly dealers, wholesalers, and retailers, into the formal tax net.
The further sales tax, currently set at four percent, is applied to transactions involving unregistered entities. Its removal is likely to result in short-term revenue losses for the Federal Board of Revenue (FBR). However, officials are confident that the long-term benefits—including greater compliance and enhanced transparency throughout the economy—will ultimately outweigh these immediate setbacks. The documentation drive is intended to extend from manufacturers all the way to retail outlets, effectively bringing the full supply chain under official monitoring.
Importers currently face similar challenges, where goods are brought into the country but their subsequent distribution often bypasses registration with the sales tax department. By removing the disincentive of further sales tax, the government hopes to integrate such untracked supply chains into the formal economy, fostering a more transparent and compliant business environment.
Historical Context and Rationale for Change
The FBR had previously raised the further sales tax rate from three to four percent through the amended Finance Bill of 2023. This increase was specifically implemented to discourage supplies to unregistered buyers by making it more costly to conduct business outside the official tax net. Under the law, registered suppliers were mandated to collect this “further tax” on sales made to buyers who either lacked a sales tax registration number or were not listed as active taxpayers.
Section 3(1A) of the Sales Tax Act formalized this measure, effectively penalizing unregistered businesses. However, tax officials now argue that while the four percent further sales tax did increase compliance pressure, it also inadvertently created barriers to entry for new businesses and, in some cases, encouraged tax evasion through informal channels.
By abolishing the further sales tax, the government hopes to make sales tax registration more attractive and less punitive, thereby expanding the overall sales tax base. Currently, Pakistan has an estimated 40,000 to 60,000 active sales tax filers, many of whom contribute minimal amounts. Policymakers anticipate that this reform will lead to broader registration across various business tiers and, over time, significantly higher overall tax revenue through improved formalization and compliance.
