Third Schedule of Sales Tax Strengthens Consumer–Government Trust and Reduces Tax Leakage

The Tax Policy Unit of Ministry of Finance is expected to continue with the policy of expanding the list of items of fast-moving consumer goods (FMCG) sector, on which tax will be charged on the basis of printed retail price, in coming budget to increase sales tax collection in 2026-27.

Official sources told Business Recorder that it is a fact backed by data to raise tax collection by including items in the list of Third Schedule (printed retail price items) of the Sales Tax Act. Secondly, the tax collection system under the Third Schedule (retail price fixed by manufacturers) is very simple and practical. The tax charged from consumer price collected at the stage of manufacturing ultimately results in increase in tax collection. However, extra effort is needed to bring retailers, wholesalers and dealers etc within the supply chain of items operating under the Third Schedule of the Sales Tax Act.

Sources quoted an example of coffee which was successfully brought into the Third Schedule and now showing huge revenue increase from the commodity. Clear difference is now visible in sales tax collection from coffee after bringing this item into the Third Schedule in last federal budget.

Similarly, major increase in sales tax collection can be witnessed in next fiscal year by including cooking oil, ketchup, milk, Tea whiteners and dairy products, infant formula, frozen foods, flour, and noodles into the Third Schedule items list.

Interestingly, the cost of the 4 percent ‘further sales tax”, to be charged from unregistered retailers, has to be borne by manufacturers. The FBR get rid of this extra levy by increasing revenue manifold from Third Schedule items.

“Each dealer, wholesaler and retailer must pay his due share of sales tax within the supply chain. There is only one big challenge for the FBR to ensure efforts for bringing entire supply chain into the documented regime where tax is easily coming from printed retail price basis”, officials categorically said.

Sources clarified that the retail price is a consumer price on which end-purchaser is actually getting any product in the market. Therefore, revenue increases following increase in the number of items subjected to consumer price.

According to an estimate, the annual turnover of fast moving consumer goods (FMCG) paying sales tax on the basis of consumer price or retail price stood at over Rs 2000 billion (Rs2 trillion). The remaining items having annual turnover of nearly Rs 200 billion to be brought into the Third Schedule would have a significant revenue impact with a simplified sales tax collection system.

Officials admitted that the retail price-based taxation (MRP-based) in Pakistan always result in higher and more predictable revenue, control of under-invoicing/tax evasion, improve compliance and reduced tax leakage, lower administrative burden for FBR, better documentation and better price monitoring and level playing field to all sectors.

Currently, products such as water, biscuits, coffee, ice cream, chocolates, juices, syrups & squashes, beverages, packaged tea and spices, soaps, and shampoos fall under the Third Schedule. Expanding this list to include items like cooking oil, ketchup, milk and dairy products, infant formula, frozen foods, flour, and noodles could improve revenue visibility for the government and provide greater price clarity and stability for consumers, they maintained.

Sources confirmed that the existing sales tax is collected at multiple stages across the supply chain starting from manufacturers to distributors, retailers, and finally consumers. These multiple layers increase complexity and go against the principle of ease of doing business.

Shifting to the Third Schedule would simplify this process, as the full amount of sales tax would be collected upfront at the initial stage, making it easier for the government to manage.

Moreover, the current system allows significant room for tax leakage. Under the Third Schedule, the retail price must be printed on the product packaging, making the tax base visible and harder to manipulate through practices like discounts, transfer pricing, or undervaluation.

For the FBR, enforcement becomes quicker and requires fewer audits since the printed price serves as a clear reference point. Additionally, since manufacturers pay the full sales tax at the time of supply, the risk of tax evasion by other players in the supply chain is minimized.

Under the current system, unregistered retailers are charged an additional 4% tax. Non-filer retailers must also pay an advance income tax of 2.5% (increased from 1 percent in Finance Bill 2024–25). This results in a total extra tax burden of 6.5 percent on such retailers.

Although these measures were intended to encourage registration and compliance, they have largely failed. Market estimates suggest that over 80 percent of retailers across the country still remain unregistered.  Instead, these taxes, especially the 4 percent further tax, have forced companies to absorb some or all of the cost to protect retailer margins. Otherwise, they risk retailers refusing to stock their products. What was meant to improve compliance has instead become a recurring business cost with limited effectiveness. Moving to the Third Schedule would remove this burden and create benefits for businesses, the government, and consumers alike.

Although companies are legally required to provide retailers with price lists and retailers are supposed to display them, this is rarely followed in practice. Without printed retail prices on products, retailers can charge higher prices, which disadvantages consumers.

Provincial authorities such as the Balochistan Food Authority and the Bureau of Supply & Prices (Sindh) have issued notices to companies asking why some products carry printed prices while others do not. Consumers also frequently complain about overpricing and sudden price changes.

The Implementation of Third Schedule would ensure that retail prices are printed on packaging, improving transparency at the point of sale and protecting consumers from unfair pricing.

By placing products under the Third Schedule and removing this additional tax burden, manufacturers can set more stable prices without sacrificing profitability. Greater price stability and affordability can increase demand, allowing businesses to boost production, improve capacity utilization, and achieve higher sales overall, they added.