Sales Tax: Narrow Base, High Rates Dr. Ikramul Haq As shown in Part II, income tax in Pakistan has increasingly become withholding-based and expropriatory. Sales tax collection and its composition present an equally troubling picture of structural weakness, narrow coverage and widespread distortions. Fiscal year (FY) 2024-25 confirms once again that Pakistan's largest indirect tax is not functioning as a genuine value-added tax but as a fragmented and distortionary levy that undermines documentation, encourages evasion and weakens income tax enforcement. Official data for FY 2024-25 show that sales tax remains one of the largest components of federal revenue. However, deeper analysis reveals that this collection is heavily concentrated in a few sectors, dependent largely on import-stage taxation and sustained through high statutory rates that incentivise evasion and informalisation. In FY 2024-25, domestic sales tax accounted for 41.5% of total sales tax collection, while sales tax on imports contributed 58.5%. In FY 2024-25, the net collection of Sales Tax (Import) amounted to Rs. 2281.9 billion, up from Rs. 1863.9 billion from FY 2023-24, showing a growth of 22.4%. The most striking feature of sales tax performance in FY 2024-25 is the extreme concentration of revenue in a limited number of sectors. At the import stage, petroleum products remain the dominant source of revenue, followed by machinery and equipment, iron and steel, edible oil and chemicals and plastics. The concentration of sales tax is most visible at the import stage. The five largest heads-POL products, electrical machinery, iron and steel, edible oil and machinery-generated a disproportionately large share of revenue. Top 5 import-stage sales tax revenue spinners, FY 2024-25 Rank Commodity Collection (Rs billion) Share (%) 1 POL Products 315 13.8 2 Electrical Machinery 219 9.6 3 Iron and Steel 178 7.8 4 Edible Oil 178 7.8 5 Machinery 168 7.4 Source: FBR Year Book 2024-25 & Revenue Division Year Book 2025 These five heads alone account for 46.4 percent of total import-stage sales tax, confirming excessive reliance on a narrow base. Such concentration exposes the fragility of Pakistan's sales tax system. A slowdown in petroleum imports, industrial activity or machinery imports immediately affects revenue performance. Instead of a broad-based tax structure supported by documentation across sectors, the system relies on imports and a few organised segments of the economy. More importantly, heavy reliance on import-stage taxation fundamentally distorts the value-added tax principle. Import-stage sales tax behaves more like customs duty than VAT. It creates incentives for under-invoicing, as importers deliberately suppress declared values to reduce tax liability. Once goods enter domestic markets at undervalued prices, informal trading expands, and documentation at subsequent stages becomes almost impossible. This process systematically fuels the expansion of the informal economy. Undervalued imports flow through undocumented supply chains, retailers remain outside the tax net, and transactions escape fiscal scrutiny. The entire value-added chain collapses, undermining both sales tax and income tax enforcement. The pattern is similar, though equally troubling, in domestic supplies. Sales tax collection is again concentrated in a few sectors. Top 5 Domestic Sales Tax Revenue Spinners – FY 2024-25 Rank Commodity Collection (Rs billion) Share (%) 1 Electrical Energy 461 22.8 2 POL Products 139 6.9 3 Sugar 125 6.2 4 Cement 109 5.4 5 Cotton Yarn 75 3.7 Source: FBR Year Book 2024-25 & Revenue Division Year Book 2025 These five heads contribute 45 percent of domestic sales tax, once again demonstrating a narrow and highly concentrated base. Electricity alone accounts for nearly one-fourth of domestic sales tax collection. This indicates that a substantial portion of sales tax is effectively collected through utility consumption rather than through value addition in productive sectors. Such reliance distorts the nature of taxation and shifts the burden onto already documented consumers and businesses. The narrowness of the base becomes even more alarming when viewed in the context of Pakistan's economic structure. The country has millions of commercial and industrial electricity connections, extensive wholesale and retail markets and a rapidly expanding service sector. Yet the number of registered sales tax persons remains abysmally low, less than 200,000 active registered persons, of whom barely 40,000 pay any meaningful tax. This disconnect between economic activity and tax registration is a fundamental flaw in policy design and enforcement. A properly functioning VAT system requires documentation at every stage of the supply chain. When large segments remain outside the system, the chain breaks down. This results in revenue leakage, under-reporting and weak income tax enforcement. The failure to expand the sales tax base has therefore had cascading effects on the entire tax system. High sales tax rates have played a central role in this failure. The standard rate of 18 percent is among the highest in the region. Such rates create powerful incentives for evasion. Businesses avoid registration to remain outside the system, while registered entities under-report transactions to minimise liability. The result is a shrinking base and an expanding informal economy. High rates also encourage illegal enrichment. Businesses collect sales tax from consumers but do not deposit it in the treasury. Weak enforcement mechanisms and limited audit capacity allow such practices to persist. This creates a distorted dual economy in which compliant businesses are penalised while non-compliant ones gain competitive advantage by retaining tax collected from the public. This phenomenon is particularly damaging because sales tax is collected from consumers. When businesses collect 18 percent but fail to deposit it, the burden is effectively transferred from the state to private actors, resulting in unlawful enrichment and erosion of public trust. Multiple sales tax rates further aggravate the problem. Different sectors are subject to varying rates, exemptions and special regimes. Such complexity creates distortions and opens avenues for manipulation. Businesses reclassify goods and services to benefit from lower rates, leading to disputes and enforcement challenges. The fragmentation of the system through exemptions and special procedures further undermines the VAT structure. Each exemption creates opportunities for evasion. Businesses restructure transactions to exploit loopholes, weakening the integrity of the tax system. Perhaps, the most serious consequence is the destruction of supply-chain documentation. A properly functioning VAT system ensures that each stage of production and distribution is documented through input tax adjustments. Pakistan's fragmented system disrupts this mechanism. When supply chains include unregistered entities, input adjustments become ineffective, and documentation collapses. This has direct implications for income taxation. When supply chains are not documented, accurate income determination becomes impossible. Businesses operating outside the sales tax net also escape income tax enforcement. This reinforces the reliance on withholding taxes, further entrenching the distortions highlighted in Part II. The weaknesses of sales tax and income tax are therefore interconnected. A narrow sales tax base leads to weak documentation, which in turn leads to reliance on withholding-based income taxation. This creates a vicious cycle of distortion, evasion and inefficiency. Pakistan's experience clearly demonstrates that high rates combined with a narrow base lead to evasion and informalisation. In contrast, lower rates with broader coverage encourage compliance and documentation. Many countries have successfully adopted moderate VAT rates supported by comprehensive documentation across supply chains. Pakistan's continued reliance on high rates has produced the opposite outcome. Fiscal year 2024-25 confirms that sales tax reform is not merely desirable but imperative. Expanding the base, rationalising rates, simplifying the structure and strengthening enforcement must become central policy objectives. Without such reforms, sales tax will continue to distort economic activity, erode fiscal legitimacy and deepen the trust deficit in taxation. The structural weaknesses identified in this analysis naturally lead to the next area of inquiry. Customs duties and import taxation play a critical role in shaping both revenue performance and industrial competitiveness. The next part of this series will examine how tariff structures, import compression, under-invoicing and smuggling interact with Pakistan's broader fiscal challenges. ___________________________________________________________________ Dr. Ikramul Haq, Advocate Supreme Court, Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE), holds an LLD in tax laws. He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He also served Civil Services of Pakistan from 1984 to 1996.
The FBR's Performance FY 2024-25 series: FBR’s Performance FY 2024-25 (Part I) · FBR’s Performance FY 2024-25 (Part II) · FBR’s Performance FY 2024-25 (Part IV) · FBR’s Performance FY 2024-25 (Part V) · FBR’s Performance FY 2024-25 (Part VI)
