Tax experts say the optional 1% turnover-based regime could create an uneven playing field by offering extensive compliance relief to eligible retailers.

KARACHI: The Federal Board of Revenue (FBR) has introduced a simplified tax procedure for small shopkeepers through S.R.O. 1166(I)/2026, offering eligible retailers the option to pay income tax at a flat rate of 1% of annual turnover. While the initiative is designed to encourage tax compliance and broaden the tax base, tax professionals have questioned whether the scheme effectively amounts to a hidden tax amnesty.

The notification, issued on July 27, 2026, establishes an optional taxation regime for individual retailers with annual turnover of up to Rs200 million for Tax Year 2026. Eligible taxpayers may either opt for the simplified scheme or continue to file income tax returns under the normal provisions of the Income Tax Ordinance, 2001.

Eligibility criteria

The scheme applies exclusively to individual retailers whose principal source of income is the operation of a retail shop and whose annual turnover does not exceed Rs200 million.

However, several categories of taxpayers have been excluded, including:

• Tier-1 retailers;

• Jewellery retailers;

• Professionals such as doctors, lawyers and consultants;

• Owners of multiple retail outlets; and

• Businesses whose annual turnover exceeded Rs200 million in any of the preceding three tax years.

According to the FBR, the initiative is intended to simplify tax compliance for small retailers while encouraging undocumented businesses to enter the formal tax system.

Experts question effective tax burden

Despite its stated objective, tax experts argue that the scheme could significantly reduce the effective tax burden for qualifying retailers compared with businesses operating under the normal tax regime.

Under the simplified procedure, participants will pay income tax at 1% of gross annual turnover, subject to a minimum payment of Rs25,000.

Critics note that companies operating under the corporate tax regime are subject to 29% income tax, in addition to super tax and other applicable levies. They contend that retailers with sizeable turnover could discharge their tax liability at a comparatively low effective rate, creating disparities within the tax system.

According to analysts, the difference in tax treatment may discourage business incorporation and encourage enterprises to remain outside the documented corporate framework.

Extensive compliance relief

Another feature attracting attention is the extensive compliance relief available to retailers opting into the scheme.

Participants will generally not be selected for audit. Departmental proceedings may only be initiated following consultation with representatives of trade associations and where credible third-party information indicates significant undeclared transactions, ownership of high-value assets or misuse of the scheme for tax evasion.

Retailers participating in the regime will also benefit from several exemptions, including:

• Exemption from withholding tax obligations on purchases under Section 153 of the Income Tax Ordinance;

• Exemption from minimum tax provisions;

• No requirement to install Point-of-Sale (POS) systems; and

• No obligation to implement digital invoicing infrastructure.

These concessions are intended to reduce compliance costs and simplify tax administration for small businesses.

Simplified return filing

The FBR has also introduced a simplified income tax return for participants in the scheme.

The return will require taxpayers to declare annual turnover, purchases, business expenses, net profit and legitimate assets. It will be made available through the IRIS portal as well as a dedicated mobile application in Urdu and regional languages to facilitate easier filing.

Debate over tax equity

Tax analysts acknowledge that the government is attempting to bring more retailers into the documented economy by reducing compliance complexities.

However, they caution that the combination of a low turnover-based tax, broad exemptions from audits and relief from various compliance obligations closely resembles the characteristics of a tax amnesty, despite not being formally described as one.

Experts argue that while simplifying taxation for small businesses is a positive objective, policymakers must ensure that the regime does not create an uneven competitive environment in which documented companies continue to shoulder substantially higher tax liabilities and compliance costs than retailers operating under the simplified framework.

They maintain that broadening the tax base should be accompanied by measures that preserve fairness and neutrality across different categories of taxpayers, ensuring that tax reforms promote both compliance and equitable treatment within Pakistan’s tax system.