ISLAMABAD: The federal government’s decision to introduce a simplified fixed tax regime for small traders has reignited debate over the tax burden on Pakistan’s salaried class, which continues to face some of the highest documented tax obligations in the country.
Under the proposed scheme announced ahead of Budget 2026-27, retailers and small businesses with annual turnover of up to Rs200 million will be able to opt for a simplified taxation system based on a fixed 1 percent turnover tax, along with easier filing and compliance requirements.
The move has been welcomed by trader organizations, which argue that the simplified regime will encourage documentation, increase tax compliance, and expand the tax base. However, many observers and salaried taxpayers have questioned the absence of comparable relief measures for wage earners.
Unlike traders operating under the new turnover-based system, salaried individuals remain subject to a progressive income tax structure administered by the Federal Board of Revenue (FBR). Tax rates increase with income levels and can reach up to 35 percent for higher-income earners, in addition to other applicable levies and withholding taxes.
The salaried class has emerged as one of the largest contributors to direct tax collection in recent years. During the first nine months of the current fiscal year, salaried employees reportedly contributed around Rs420 billion in income taxes, reflecting the effectiveness of the withholding tax system under which taxes are deducted directly from salaries before payment.
Tax experts note that salaried workers operate within a fully documented system, leaving little room for underreporting income or avoiding tax obligations. In contrast, a significant portion of the retail and small business sector remains outside the documented economy, prompting the government to introduce incentive-based measures aimed at increasing registration and compliance.
The new fixed tax regime calculates tax liability based on annual turnover rather than net income, offering eligible businesses a simpler and more predictable tax framework. Supporters argue that the initiative could encourage thousands of small traders to enter the formal tax net.
Salaried Class vs Fixed Tax Scheme for Small Traders
| Feature | Salaried Class | Small Traders / Retailers (Fixed Scheme) |
|---|---|---|
| Tax Basis | Net income (salary after deductions) | Gross annual turnover (sales) |
| Tax Structure | Progressive tax slabs up to 35% plus applicable surcharge | Fixed 1% turnover tax (optional scheme) |
| Collection Method | Automatic withholding by employers | Self-declared filing under simplified regime |
| Compliance Style | Fully documented payroll system | Simplified reporting structure |
| Turnover / Income Scope | Applies to all salary levels | Generally limited to businesses with turnover up to Rs200 million |
| Enforcement Visibility | High due to employer-based deduction system | Depends on registration and declaration |
| Additional Taxes | Subject to various withholding and indirect taxes | Also subject to indirect taxes but under a different compliance framework |
At the same time, concerns continue to grow among salaried taxpayers regarding the overall balance of the tax system. In addition to income tax, salaried individuals also bear various indirect taxes and withholding taxes on utilities, fuel, telecommunications, and everyday consumption, increasing the overall tax burden on middle-income households.
With the federal budget expected to be unveiled soon, stakeholders are calling on the government to announce meaningful tax relief for salaried individuals alongside incentives being offered to traders and businesses.
Analysts believe that addressing concerns of the salaried class could improve taxpayer confidence and strengthen voluntary compliance, while helping create a more balanced and equitable taxation framework across different sectors of the economy.
