FMCG industry pushes for GST reform

Pakistan's fast-moving consumer goods (FMCG) industry has urged the government to expand the scope of the Third Schedule under the General Sales Tax (GST) regime, arguing that the move will improve price transparency for consumers, reduce tax evasion, and simplify the overall taxation system without increasing the tax burden.

The proposal centers on shifting more essential consumer goods - such as cooking oil, milk, dairy products, infant formula, flour, noodles, frozen foods, and condiments - from the standard 18% GST to the Third Schedule, where the same 18% tax rate applies but is collected upfront at the manufacturing stage. Industry stakeholders stress that this is not a new tax, but a change in the method of tax collection aimed at improving efficiency and compliance.

Currently, over Rs2.5 trillion worth of FMCG sector products - including beverages, tea, soaps, and personal care products - are already covered under the Third Schedule. One of its key features is the mandatory printing of retail prices on packaging, a requirement that is not enforced under the standard GST regime.

Industry representatives said that the existing GST system was overly complex, involving multiple stages of tax collection across the supply chain - from manufacturers to distributors and retailers - creating administrative challenges and increasing the risk of leakages. In contrast, the Third Schedule ensures that the full tax is paid at the first point of supply, simplifying compliance for businesses and enforcement for the Federal Board of Revenue. They also highlight that the current structure allows room for underreporting and manipulation through practices such as transfer pricing and undocumented discounts. By mandating printed retail prices, the Third Schedule makes the tax base visible and reduces opportunities for evasion, as the price on the pack becomes a reference point for both regulators and consumers.

The call for reform also comes against the backdrop of the government's recent attempts to increase retailer documentation through additional taxes. Unregistered retailers currently face a 4% further tax, while non-filers are subject to a 2.5% advance income tax, bringing the cumulative additional burden to 6.5%. However, according to industry estimates, more than 80% of retailers across the country remain undocumented, indicating limited success of these measures.

FMCG companies claim that instead of improving compliance, these additional taxes have created unintended consequences. In many cases, manufacturers are forced to absorb part or all of the extra tax burden to maintain retailer margins and ensure product availability in the market. This has turned a policy tool aimed at documentation into a recurring cost for businesses, squeezing margins and limiting pricing flexibility.

Stakeholders believe that expanding the Third Schedule will eliminate the need for such additional taxes by shifting the tax burden entirely to the manufacturing stage. This, they argue, will create a more predictable and transparent system that benefits the government, businesses, and consumers alike.

Consumer protection is another key argument being put forward. Although companies are required to provide retailers with price lists under the current system, these are often not displayed or followed. As a result, consumers frequently face overcharging and arbitrary price variations. Authorities in various regions have issued notices to companies over inconsistent pricing practices.

By making it mandatory to print prices directly on product packaging, the Third Schedule could address these concerns by ensuring uniform pricing and preventing overcharging at the retail level. Industry players say this will enhance consumer trust and bring greater stability to the market.