Tax gap

The tax machinery has once again fallen short of the target, with FBR officials admitting that the Rs3.6 trillion sales tax gap from the previous fiscal year cannot be fully closed due to the fragmented and informal nature of the retail sector. This admission is as much about lost revenue as it is about long-standing policy failures.

The government continues to rely heavily on those already in the formal economy. Salaried workers, registered businesses and documented industries are being squeezed, while large segments of the economy — particularly agriculture, wholesale and retail — largely operate outside the tax net. Instead of broadening the base, the strategy focuses on short-term gains from the same, already overburdened taxpayers.

The retail sector alone accounts for Rs310 billion in missed taxes, yet efforts to bring traders into the net have repeatedly collapsed. Instead of building trust and compliance, successive governments have opted for appeasement — handing out perks to tax officials and making concessions to shopkeepers. The real opportunity lies in rethinking the collection model. Chasing millions of fragmented retailers is administratively inefficient.

A shift towards collection at the manufacturing stage, where monitoring is easier, combined with digital invoicing and full supply-chain visibility, offers a more sustainable path. Sectoral focus is equally important. The Rs814 billion sales tax gap in textiles dwarfs those in sugar or beverages, yet enforcement often targets the latter for political optics.

With external debt servicing eating into revenues, it will be difficult to sustain expenditure and meet IMF requirements without broadening the tax base. Unless the sales tax system is rebuilt on stronger and more transparent foundations, the government will remain trapped between angry traders at home and impatient lenders abroad.