New Policy Aims to Force Registration of Unregistered Business Supply Chain
Pakistan’s Federal Board of Revenue (FBR) is preparing to eliminate the controversial 4% additional sales tax levied on transactions with unregistered businesses as part of the federal budget for 2025-26, according to informed sources.
This landmark policy shift represents the most significant business documentation initiative planned for the upcoming budget cycle. The reform will compel mandatory sales tax registration across the entire business supply chain, effectively closing loopholes that have allowed dealers, wholesalers, and retailers to operate outside the formal tax system.
Background of the Tax Provision
The targeted provision, Section 3(1A) of the Sales Tax Act 1990, has experienced a turbulent legislative history. Originally enacted in 1998, the section was repealed in 2004 before being reinstated in 2013. The additional tax was designed as a penalty mechanism to discourage businesses from dealing with unregistered entities and promote formal registration.
However, FBR analysis reveals that the policy has produced unintended consequences, actually enabling tax avoidance rather than preventing it.
Why the Current System Failed
Internal FBR assessments, discussed during a high-level board meeting on May 29, 2025, identified critical flaws in the existing framework. Rather than encouraging registration, the 4% additional tax has become a substitute for proper documentation, allowing businesses to maintain informal operations by simply absorbing the extra cost.
The tax rate was previously increased from 3% to 4% in 2023 in an attempt to make unregistered transactions more expensive and less attractive. Despite this enhancement, the desired shift toward formal registration has not materialized, with many businesses treating the additional tax as a cost of doing business rather than an incentive to register.
Expected Impact and Strategic Goals
While FBR anticipates a temporary reduction in tax revenue from eliminating this additional levy, the organization projects substantial long-term gains through expanded tax base documentation. By removing the option to pay additional tax instead of registering, businesses will be compelled to enter the formal economy.
This comprehensive approach targets the entire supply chain ecosystem, from primary dealers through wholesalers to retail outlets, creating a more transparent and accountable business environment.
The reform aligns with broader government objectives to increase economic formalization and create a more robust, documented tax base that can support sustainable revenue growth in future fiscal periods.