Reform the reformers—VI   VAT without  value addition?

“There are regular cases of frauds and unlawful input claims…The quantum of unreported cases may be in geometrical multiples of reported cases”—Study on Single-Stage Sales Tax (SSST) by Ashfaq Yousaf Tola

“Pakistan has deferred a proposal to introduce a new single-stage sales tax regime, which would have lowered the standard sales tax rate to 7%, after reservations expressed by the International Monetary Fund over its implications on revenue and businesses—Pakistan shelves plan to introduce single-stage sales tax, The Express Tribune, December 12, 2015

“….FBR Chairman Tariq Bajwa is expected to meet the IMF at Dubai next week to discuss Value Added Tax (VAT) mode of taxation and Single Stage Sales Tax. Beside FBR senior officials, the delegation also comprises Masud Naqvi, Chairman, Tax Reforms Commission (TRC) and Ashfaq Tola Member TRC, who is author of TRC proposals on sales tax including SSST”—Single Stage Sales Tax: tax managers to give presentation to IMF, Business Recorder, December 6, 2015

One of the least discussed episodes in Pakistan’s fiscal history occurred over a decade ago when a comprehensive study on introducing a Single-Stage Sales Tax (SSST) was prepared under the leadership of Ashfaq Yousuf Tola and presented before the International Monetary Fund (IMF) in Dubai.

The proposal challenged neither the objective of raising revenue nor the principle of taxing consumption. It questioned something far more fundamental: whether Pakistan’s existing General Sales Tax (GST), ostensibly operating in value-added tax (VAT) mode (sic), had already ceased to function as a genuine VAT.

IMF did not accept the proposal, as accepted. Pakistan continued to retain the pseudo VAT model, which has never been objected by the IMF!  The events that followed have produced an irony difficult to ignore. Successive Finance Acts have progressively dismantled the essential characteristics of a classical VAT while continuing to defend the system as though nothing has changed.

The SSST study by Mr. Ashfaq Tola, approved by Tax Reforms Commission (TRC) headed by Syed Masoud Ali Naqvi, was not a theoretical manifesto. It was an empirical examination of Pakistan’s sales tax framework, exposing its deficiencies brilliantly with data.

The SSST study demonstrated that the country’s GST was highly fragmented through exemptions, special procedures, concessionary regimes, Third Schedule goods, undocumented retail markets and widespread non-registration. The result was a system that retained almost all the complexity of VAT without delivering its principal advantages.

The numbers were startling. At that time, only around 55,000 registered persons actually paid sales tax, while merely 329 entities contributed almost 90 percent of domestic sales tax. Forty-nine taxpayers alone accounted for over seventy percent of collections. Such concentration exposed the illusion that Pakistan possessed a broad-based VAT. The burden already rested upon a handful of organised and tax-compliant manufacturers and importers.

A decade later in 2026, the position is scarcely different, rather deteriorated. The standard GST rate has risen to 18 percent. However, the effective incidence remains dramatically lower because exemptions, reduced rates, concessionary treatments, special procedures and fragmented supply chains continue to erode the base [FBR’s Performance FY 2024-25 (Part III): Sales Tax, Narrow Base, High Taxes, Minute Mirror, April 15, 2026].

The effective rate realised across the economy is only a fraction of the statutory rate. High nominal taxation combined with a narrow effective base has produced neither equity nor efficiency.

The principal justification for VAT has always been the documentation of the supply chain. Every taxable transaction generates an invoice. Every purchaser claims input tax. Every supplier reports output tax. The chain of invoices creates an audit trail capable of exposing concealed transactions. That is the theoretical strength of VAT. Pakistan has progressively abandoned that very principle.

Retailers with turnover up to Rs. 200 million are now effectively subjected to a presumptive levy of one percent of turnover. They remain outside meaningful VAT integration. They are not comprehensively connected through point-of-sale systems. They are exempt from the burdens of e-invoicing imposed upon organised businesses. They are largely insulated from the elaborate compliance framework originally justified on the ground that every participant in the value chain had to remain visible.

At the same time, Third Schedule [Sales Tax Act, 1990] goods have expanded far beyond their original rationale. For a substantial range of fast-moving consumer goods, tax intended to fall at the retail stage is effectively collected at the manufacturing stage through a mechanism closely resembling the Federal Excise Duty mode. Manufacturers collect tax on the maximum retail price long before goods reach wholesalers and retailers.

This raises an elementary but uncomfortable question. If tax on a substantial proportion of consumer goods is already collected at the manufacturing stage, and millions of retailers remain outside an integrated VAT chain, what remains of the classical VAT that policymakers continue to defend?

The contradiction becomes even sharper when viewed against the rejection of the SSST proposal. The indigenous proposal sought a transparent single-stage levy, abolition of input tax adjustments, elimination of fake invoices, withdrawal of numerous concessionary regimes, simplified compliance and a substantially lower uniform rate supported by a much broader base.

The SST study acknowledged administrative realities instead of pretending that Pakistan possessed the institutional capacity to administer a sophisticated European-style VAT.

The authors of SSST recognised what many policymakers still hesitate to admit. Pakistan’s problem was never merely the rate of tax. It was the structure of the tax itself. The study catalogued the weaknesses with remarkable accuracy: delayed refunds, fake and flying invoices, unlawful input tax adjustments, corruption in refund processing, limited audit capacity, excessive compliance costs and widespread procedural complexity. The World Bank’s Paying Taxes indicators then showed Pakistani businesses spending hundreds of hours merely complying with sales tax requirements.  Subsequent experience has vindicated much of that diagnosis.

Fake invoice networks continue to emerge periodically. Refund frauds remain a recurring feature of tax administration. Input tax verification has become increasingly complex. Manufacturers continue financing the working capital requirements of the State through delayed refunds. Organised businesses carry the compliance burden while large segments of wholesale and retail trade remain outside effective documentation. The irony is that policymakers now tolerate arrangements that depart far more radically from orthodox VAT principles than the proposal once presented by Pakistani experts.

The present system is neither a genuine value-added tax nor a coherent single-stage consumption tax. It has become an uneasy hybrid comprising conventional VAT for organised industry, Third Schedule taxation collected at manufacturing stage, presumptive turnover taxation for retailers, numerous sector-specific special procedures, minimum taxes, withholding regimes and repeated statutory exceptions. Complexity has increased while consistency has steadily disappeared.

Perhaps the greatest casualty has been the supply-chain audit trail that originally justified VAT. Once retail taxation is substantially shifted upstream and millions of retailers remain outside effective integration, the chain of invoice verification inevitably weakens. The theoretical advantages of VAT begin to disappear while its compliance costs remain intact.

This is precisely why Pakistan’s standard rate of 18 percent coexists with an effective incidence far below that figure. Instead of broadening the tax base, policymakers have repeatedly increased nominal rates on the shrinking documented segment. The predictable consequence has been greater incentives for evasion, expanding informality and rising prices for compliant businesses.

The experience of the last decade invites a broader question extending well beyond sales taxation. Why are carefully researched indigenous reform proposals repeatedly sidelined while the systems retained in their place are gradually modified until they themselves depart from the very principles originally invoked to justify their retention? That question deserves an honest answer.

The issue is no longer, whether Pakistan should adopt the exact model proposed in the SSST study. Many people may differ on that. The real lesson is much larger. Pakistan’s own experts correctly diagnosed the structural weaknesses of the existing GST long before they became impossible to ignore. Instead of seriously debating those proposals, policymakers preferred incremental modifications that have gradually transformed Pakistan’s VAT into a system that is increasingly difficult to describe as a value-added tax at all.

[To be continued]

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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.