The government’s much-publicised fixed tax scheme for traders appears to be struggling to attract the very taxpayers it was designed to bring into the formal tax system. Only two previously unregistered shopkeepers have opted into the scheme so far. Although 317 traders have been registered under the programme, it has generated just Rs26 million against a budgeted target of Rs50 billion. The figures raise serious questions about the government’s approach to broadening the tax base and, more importantly, about the willingness of traditionally under-taxed sectors to enter the formal economy.

The latest initiative is not the government’s first attempt to bring traders into the tax net. The earlier Tajir Dost scheme also failed to produce the expected results. The repeated inability to persuade shopkeepers to register suggests that the problem goes beyond the design of an individual tax programme. It points towards a much deeper resistance to documentation, taxation and regular interaction with tax authorities.

Under the new scheme, the government attempted to make compliance considerably easier. Traders were offered a tax rate of just 1 per cent of turnover, exemption from routine audits and withholding obligations, and relief from installing digital payment systems. These concessions were intended to remove some of the concerns traditionally raised by traders about joining the formal tax system. Yet the response has remained limited. The fact that only two previously unregistered traders have opted into the scheme indicates that even substantial concessions may not be enough to persuade many shopkeepers to voluntarily become part of the documented tax regime.

This raises a fundamental question about tax policy. If incentives cannot persuade businesses to comply voluntarily, what should the government do next? Continuing to introduce increasingly generous concessions without establishing an effective enforcement mechanism risks creating a cycle in which taxpayers wait for further concessions while the state repeatedly lowers the cost of compliance.

Many traders appear to believe that their collective political influence provides greater protection than any incentives offered by tax authorities. Trader associations have demonstrated their ability to mobilise members, close markets and exert pressure whenever taxation or documentation measures are perceived as threatening their interests. Such collective action can make governments reluctant to pursue sustained enforcement, particularly when policymakers fear disruption in commercial centres. From the perspective of individual traders, resisting registration may therefore appear less costly than accepting even a relatively modest fixed tax. But this behaviour creates a wider problem for the economy. A tax system cannot function fairly if significant sections of the commercial sector remain outside the net while those already documented are repeatedly subjected to additional taxation.

The contrast with salaried taxpayers illustrates the imbalance. Income tax collected from salaried individuals increased by 7.5 per cent to Rs91 billion during July-August, an increase of Rs6.3 billion over the corresponding period of the previous year. Salaried workers generally have little ability to avoid documentation because taxes are deducted at source. Their income is recorded, their employers report their earnings and the tax liability is automatically enforced.

The situation is different for many businesses operating largely through cash transactions. Where turnover, profits and transactions are inadequately documented, tax authorities face greater difficulty in determining actual liabilities. This creates an uneven distribution of the tax burden, with documented taxpayers carrying a disproportionate share of revenue collection.

The performance of the real estate sector also illustrates the challenges facing revenue mobilisation. The sector contributed Rs28 billion during the period, representing a decline of 28 per cent despite expectations that stronger property activity would generate higher revenues. The figures demonstrate that the government cannot rely on a few sectors or conventional revenue sources to compensate for weaknesses elsewhere in the tax system.

Pakistan’s longstanding tax problem is therefore not simply one of insufficient tax rates. It is fundamentally a problem of a narrow tax base, weak documentation, inconsistent enforcement and unequal treatment among economic sectors. Repeatedly increasing taxes on those who already comply may produce short-term revenue, but it does little to create a sustainable system.

The government should also recognise that incentives and enforcement are not mutually exclusive. Incentives can play a useful role in making registration easier and reducing the initial resistance to formalisation. Simplified tax procedures, predictable liabilities and fewer unnecessary interactions with tax officials can encourage compliance. But such measures can work only when taxpayers also believe that non-compliance will eventually have consequences.

A credible tax system requires certainty rather than selective enforcement. Traders should know what they are required to pay, how their liability will be calculated and what procedures they must follow. At the same time, those who remain outside the system despite clear legal obligations should face enforcement under transparent and consistently applied rules.

The government must also ensure that enforcement does not become arbitrary or dependent on political connections. Selective action against some traders while influential businesses remain untouched would undermine public confidence and strengthen resistance to documentation. Equal treatment is essential if tax compliance is to become a normal part of commercial activity.

Digitalisation can assist this process. Greater use of electronic payments, point-of-sale records and integrated databases can gradually reduce dependence on self-reporting and cash-based transactions. But digitalisation should be accompanied by safeguards against excessive administrative burdens and misuse of taxpayer information. The objective should be a system that makes compliance simple while making deliberate evasion increasingly difficult.

There is also a broader economic argument for bringing traders into the formal system. Documentation can provide businesses with access to formal credit, banking services and other financial facilities. It can also help policymakers understand the size and structure of different commercial sectors and design better economic policies. Formalisation should therefore not be presented solely as a mechanism for collecting more taxes.

However, the immediate revenue gap remains difficult to ignore. Generating Rs26 million against a target of Rs50 billion demonstrates the scale of the challenge facing the government. If the existing approach continues to produce minimal participation, the authorities will need to reconsider the assumptions underlying the scheme rather than simply extend its deadline or offer additional concessions.

Pakistan cannot build a broad and equitable tax base by repeatedly relying on those who are already within the system. Nor can the state sustainably compensate for under-taxation in politically influential sectors by increasing the burden on salaried workers and other documented taxpayers.

The failure to attract a meaningful number of previously unregistered traders should therefore serve as a warning. The government needs a tax policy that combines simple rules, reasonable rates, reliable documentation and credible enforcement. Incentives can encourage taxpayers to enter the system, but they cannot replace the authority of the state to enforce the law.

Ultimately, the credibility of Pakistan’s tax system will depend on whether citizens and businesses believe that the rules apply equally to everyone. A system in which compliance is optional for some sectors but unavoidable for others will continue to produce resentment, evasion and an inadequate revenue base. The government must therefore move beyond repeated experiments with concessions and establish a taxation framework in which registration, documentation and payment of taxes become routine obligations across the economy.