ByThe government has approached the International Monetary Fund (IMF) to seek approval for the restoration of a 25% income tax rebate for teachers and researchers, a benefit that was abruptly withdrawn after tax authorities rediscovered its existence. Meanwhile, the Federal Board of Revenue (FBR) has fallen short of its seven-month tax collection target by a significant Rs470 billion, marking the sixth consecutive month of missing revenue goals. The shortfall in January alone amounted to Rs86 billion despite a 29% increase in tax collection amid economic challenges.
Tax Collection Shortfall and Contributing Factors
One of the main reasons behind the persistent tax collection deficit is the unrealistic target-setting combined with a slowing economy and inadequate enforcement mechanisms. The FBR has also been struggling with capacity issues, highlighted by its recent decision to impose full income tax charges on educators. After a period of inaction spanning over two and a half years, the FBR began issuing notices to educational institutions in December, not only demanding full income tax charges but also seeking arrears dating back to July 2022.
FBR’s Enforcement and Backdated Tax Notices
Previously, teachers and researchers were granted a 25% income tax rebate. However, the FBR’s notices claimed that this rebate had been repealed through the Finance Act 2022, effective from July of that year. According to authorities, the FBR only became aware of this change in 2024 and subsequently moved to enforce it. On January 14, the FBR issued a notice to the National University of Science and Technology (NUST), warning that it must collect and deposit the full tax liability from teachers and researchers while recovering past arrears. Non-compliance, the notice stated, would lead to recovery proceedings and additional penalties under the Income Tax Ordinance.
Government’s Engagement with the IMF
Finance Minister Muhammad Aurangzeb has since directed the FBR to engage with the IMF regarding the possibility of reinstating the rebate. Sources indicate that the IMF has responded positively to this request. If approved, the finance minister may announce the rebate’s restoration once the Tax Laws Amendment Bill is passed by the National Assembly later this month. The Federation of All Pakistan Universities Academic Staff Association (FAPUASA) has strongly condemned the FBR’s decision to discontinue the tax rebate, emphasizing its negative impact on educators and researchers.
Wider Tax Collection Performance and Challenges
In the broader tax collection landscape, the government aimed to collect Rs6.97 trillion in taxes during the first seven months of the current fiscal year but fell short by Rs470 billion. Despite economic struggles, the FBR still managed a 26% year-on-year increase in tax collection. However, the original annual target of nearly Rs13 trillion, imposed under IMF pressure, remains difficult to achieve. The IMF’s stipulations have led to new taxes, primarily burdening the salaried class and increasing levies on various essential goods, including medical tests, stationery, vegetables, and children’s milk.
Breakdown of Revenue Collection Performance
An analysis of the FBR’s tax collection performance shows that while the income tax target was exceeded, other key revenue streams fell short. The income tax collection for the first seven months of the fiscal year reached Rs3.16 trillion, surpassing the Rs2.88 trillion target by Rs283 billion. However, sales tax collection stood at Rs2.22 trillion, missing the target by Rs472 billion despite a 26% year-on-year increase. The federal excise duty collection reached Rs404 billion, Rs97 billion higher than the previous year, but still fell short of the Rs524 billion target by Rs120 billion. Similarly, customs duty collection rose to Rs713 billion but missed the Rs880 billion target by Rs167 billion.
Challenges and Future Prospects
The ongoing revenue shortfall underscores structural weaknesses in tax administration and economic constraints. The government now faces the dual challenge of meeting ambitious tax collection goals while ensuring that policy measures do not unduly burden key sectors such as education. The potential restoration of the teachers’ tax rebate could offer some relief to educators, provided the IMF formally approves the request.
