The government is considering giving nearly 1.2 million shopkeepers another three months to join its fixed tax scheme, potentially delaying enforcement action that could expose noncompliant traders to penalties of up to Rs175,000.
Tax authorities have presented Finance Minister Muhammad Aurangzeb with two options: extend the deadline until January 31, 2027, with a maximum surcharge of Rs85,000, or proceed against traders under the regular income tax law, which carries higher penalties and additional compliance requirements.
The second option would expose shopkeepers to a minimum penalty of Rs175,000, possible tax audits and mandatory disclosure of their assets. The government has yet to make a final decision on the proposed extension.
Only 222 Traders Joined the Scheme
The government introduced a fixed tax scheme offering retailers a tax rate of 1 percent on total sales in exchange for exemptions from tax audits and permission to conduct cash transactions. Authorities had expected at least 1 million retailers to join the scheme this year, generating a minimum of Rs50 billion in income tax revenue.
However, only 222 additional traders filed returns and paid taxes by the October 31 deadline, generating a negligible amount. The scheme was initially aimed at bringing retailers into the tax system from an estimated pool of 3.8 million nonfilers.
According to tax authorities, nearly 1.5 million retailers fall within the scheme’s scope. Around 290,000 were already part of the tax system, while nearly 1.2 million digitally identified shopkeepers did not join the new scheme or file returns under the existing tax law.
Government Weighs Lower Penalties
Of the nearly 1.2 million shopkeepers identified, approximately 390,000 are registered retailers who failed to file returns, while another 772,000 are unregistered businesses. Authorities have also physically verified around 6,000 shopkeepers, making them potential targets for the first round of enforcement notices.
Under one proposal, the government would allow eligible retailers to file returns until January 31, 2027, under a revised surcharge structure. Shopkeepers filing by the end of November would pay Rs10,000, rising to Rs35,000 by the end of December and Rs85,000 by the end of January.
The proposal draws on Rule 10, which provides for penalties of Rs10,000 for the first default, Rs25,000 for the second and Rs50,000 for the third, with at least one month between successive enforcement proceedings. However, the proposed arrangement raises questions about whether retailers would receive preferential treatment compared with other taxpayers, who face a Rs25,000 penalty for late filing.
Legal Questions Delay Enforcement
Tax authorities believe the government could grant a general extension to small retailers under Section 214A of the Income Tax Ordinance. The provision allows the Federal Board of Revenue to extend deadlines for applications and other compliance requirements, including after the original deadline has expired. The aggregate extension granted by the Board or commissioner cannot exceed two years.
Earlier this week, Minister of State for Finance and Revenue Bilal Azhar Kayani told the National Assembly Standing Committee on Finance that the government would seek the attorney general’s opinion before initiating enforcement proceedings. He maintained that no further extension had been approved after the October 31 deadline.
The scheme has struggled to attract retailers despite exemptions from tax audits, restrictions on proceedings based on third-party information and the absence of mandatory sales tax point-of-sale systems or digital invoicing requirements. The parliamentary committee expressed disappointment over the poor participation, while its chairman, Syed Naveed Qamar, pressed officials on whether Prime Minister Shehbaz Sharif and the federal cabinet supported punitive action despite threats of a traders’ strike.
