CAP warns sales tax expansion will hike prices

The Chainstore Association of Pakistan (CAP) has expressed serious concern over the proposed inclusion of non-FMCG items, including everyday footwear, school backpacks, bags, wallets and other PCT 42.02 goods, in the Third Schedule of the Sales Tax Act, 1990, warning that the measure will raise prices by taxing consumers on notional retail prices instead of actual transaction values.

CAP, representing tax-compliant Tier-1 retailers, has consistently supported formalisation and broadening of the tax base. However, Third Schedule treatment for price-variable, retailer-led categories will overtax consumers and place pressure on documented retailers and manufacturers.

Public reports estimate that the proposed expansion through the Finance Bill 2026 will generate between Rs50 billion and Rs91 billion, indicating the scale of cost likely to be reflected in higher prices for end customers, while informal operators selling undocumented or smuggled goods will gain a price advantage.

CAP warned that charging tax on the original retail price can turn 18% sales tax into a much higher effective tax burden for consumers. Retail brands often apply end-of-season discounts on a significant share of products; for a product sold at a 30% discount from its original price, this results in an effective GST rate of approximately 26% instead of 18%.

"The issue is not whether tax should be collected. The issue is whether tax should be collected on the actual price paid by the consumer or on a notional price the consumer may never pay," said Tariq Mehboob, CAP Patron-in-Chief. "Taxing shoes, backpacks, bags and other price-variable goods on assumed prices will reduce affordability and add to inflation."

Mehboob emphasised that conventional Third Schedule goods are standardised products where the manufacturer fixes a stable retail price. Footwear, bags, wallets and luggage are different because value-addition is performed by the retailer or brand owner through design, branding and distribution.

"Formal retailers are already integrated with Federal Board of Revenue (FBR) POS systems and transaction-level data are available to the tax authorities," said Asfandyar Farrukh, Chairman CAP. "There is no documentation value in taxing integrated Tier-1 retailers on assumed prices instead of actual POS transaction values."

Farrukh warned that the impact will extend beyond retail prices. Formal footwear and leather goods retail supports local manufacturing, design, packaging and employment. If compliant retailers face higher tax costs and margin pressure, investment in local sourcing and manufacturing will be discouraged.

CAP has urged the government to limit Third Schedule treatment to branded, retail-packed and standardised goods only, and to retain actual POS transaction-value taxation for FBR POS-integrated Tier-1 retailers.