There is a peculiar cruelty baked into Pakistan's current tax architecture. The more honestly you participate in the formal economy, the more you pay. The more you evade, the more you save. This is not a fringe observation it is the lived reality of thousands of registered businesses across Pakistan, and I speak from direct experience as the co-founder of a registered gemstone jewelry business in Lahore.

Let me show you, in precise numbers, exactly what "being documented" costs us and how much it costs our unregistered competitors doing the exact same thing.

The standard sales tax rate on goods in Pakistan is 18%. For jewelry, the government established a concessionary special procedure under SRO 391(I)/2001: local supplies of articles of jewelry of precious metal are subject to a 3% sales tax rate. This lower rate was designed as an acknowledgement that jewelry operates on complex artisan margins with significant raw material costs.

But the concession comes with a trap that negates its entire purpose. Under the same rules, a registered jeweler is not entitled to take adjustment of any input tax or claim any refund of sales tax.

Under a normal VAT system, a business collects tax from its customers and deducts the tax it already paid on its own inputs raw materials, packaging, utilities, workshop costs. The net difference goes to the government. That is the foundational logic of value-added taxation.

For registered jewelers in Pakistan, that logic simply does not apply. The 3% is not a tax on value addition. It is a flat tax on gross revenue, with no adjustment mechanism whatsoever. We pay tax embedded in the stone we sourced, the silver we worked, the workshop electricity we consumed, and we cannot recover a single rupee of it.

This alone would be an unfair burden. But then we sell online and that is where the situation becomes genuinely irrational. How the customer chooses to pay determines who intercepts the money first and how much they take. Under the Finance Act 2025, both payment routes are taxed by different institutions, deducting different amounts, with no visibility into what the seller has already paid.

Under Section 6A of the Income Tax Ordinance, every payment for digitally ordered goods is subject to income tax withholding. And separately, under the Eleventh Schedule of the Sales Tax Act, a 2% sales tax is levied on the gross value of every digital supply. These two charges stack on each other and are collected as follows:

Cash on Delivery

The courier delivers the parcel, collects cash from the customer, and before remitting anything to the seller deducts 2% income tax plus 2% sales tax from the gross amount. Four percent gone before we see the money. The courier deposits this with FBR as a designated withholding agent.

Credit or Debit Card Payment

The courier still delivers. But now it is the bank or payment gateway that steps in as withholding agent at the settlement stage. Before crediting the seller's account, the bank deducts 1% income tax plus 2% sales tax from the gross transaction value. Three percent gone before we see the money.

Two separate institutions, couriers and banks, acting as tax collectors in the same supply chain, each blind to what the other has charged, and neither with any knowledge of the seller's existing tax obligations. They do not know whether the goods are jewelry taxed at 3% under a special procedure, electronics taxed at 18%, or pharmaceuticals that are exempt entirely. They simply deduct and remit.

And critically: none of what they deduct is creditable against our 3% special jewelry sales tax. None of the income tax withheld produces a refund if we are over-deducted at year end. As legal scholars Dr Ikramul Haq and Huzaima Bukhari noted in their recent analysis of Pakistan's withholding regime: when the final tax liability is lower than what has been withheld, no refund is allowed; where it is higher, additional tax must still be paid. The asymmetry guarantees revenue for the state while denying any symmetry to the taxpayer.

Now compare our position with an unregistered jewelry seller doing the exact same business online. The unregistered seller pays 0% special jewellery sales tax, files no IRIS returns, and carries no compliance costs. Whatever the courier or bank deducts is their complete and final obligation, done automatically, nothing further owed.

We pay more in taxes. We pay more in compliance costs. We receive no benefit in return. We cannot claim back over-deductions. We are, by every measure, at a structural disadvantage compared to a competitor who chose not to register.

And here is the irony that completes the picture. The government deliberately set a lower income tax rate on card payments (1%) versus COD (2%) under the Finance Act 2025, explicitly to incentivize digital payments and push Pakistan toward a cashless economy. For a registered jeweler, it has achieved the opposite. Card payments simply bring the bank into the chain as an additional withholding agent, stacking on top of everything else we already pay. The rational response, for seller and buyer alike  is to prefer cash. Pakistan's tax policy is quietly strangling the digital economy it claims to be building.

This is not an accident. It is what legal scholars Dr Ikramul Haq and Huzaima Bukhari, writing in The News on Sunday, describe as the "withholding-isation" of Pakistan's tax system — a regime in which advance deductions at source have ceased to be facilitative instruments of revenue collection and have instead become substitutes for proper income-based taxation.

This is what drives informality. Not laziness, not dishonesty, a rational calculation that compliance costs more than it is worth. Each tax layer was designed in isolation. Nobody modelled the interaction between the special jewelry tax procedure, the Eleventh Schedule digital withholding, the Section 6A income tax regime, and the no input credit clause all hitting the same revenue stream simultaneously. Banks and couriers act as blind tax collectors, deducting from every settlement with no knowledge of the seller's existing obligations or their product's tax category.

FBR's own data tells the story: withholding tax collection in FY 2024 - 25 reached Rs 3,381.5 billion, up 23.5% from the previous year. The state is collecting more. The documented economy is shrinking. These two facts are not unrelated.

The joint industry proposal being assembled ahead of the Federal Budget is right to challenge the architecture of Section 6A, Section 153(2A), and the Eleventh Schedule. For the jewelry sector specifically, the ask is straightforward and fair.

First, the income tax withheld by banks and couriers on digital transactions must be fully creditable against a registered jeweler's actual income tax liability and any excess must be refundable. A final tax treatment that produces no refund on over-deduction is not a tax. It is a levy on honesty.

Second, the 2% Eleventh Schedule sales tax withheld on digital transactions, whether by the courier on COD or the bank on card payments, must be creditable against the 3% special jewelry sales tax already being paid on the same transaction. Two separate sales taxes on the same revenue, neither adjustable against the other, is not policy. It is double extraction.

As Dr Haq and Ms Bukhari conclude: Pakistan's excessive reliance on withholding is not a sign of administrative strength but of institutional weakness, a preference for certainty of collection over equity of taxation. A rational reform path exists. The question is whether parliamentarians will make it their priority before the Federal Budget.