FBR Clarifies Tax Rebate Eligibility for Teachers and Medical Professionals

Historical Context: Tax Rebate for Teachers and Researchers

Previously, full-time teachers and researchers working in non-profit organizations or research institutions enjoyed a tax rebate of up to 25%. For example, if a teacher’s annual tax liability was PKR 1,00,000, they could claim a rebate of PKR 25,000, reducing their payable tax to PKR 75,000. However, this rebate was contingent upon two critical conditions:

1. The individual must be a full-time teacher or researcher.
2. The institution where they work must be a non-profit organization, meaning it operates with a welfare-oriented objective rather than for profit.

Reduction in Tax Liability:

Eligible Individuals:

The policy applies to full-time teachers and researchers.

These individuals must be employed in non-profit educational or research institutions.

The institutions must be recognized by one of the following bodies:

Higher Education Commission (HEC)

A Board of Education

A University recognized by HEC

Government research institutions.

Extent of Reduction:

• The tax liability of eligible individuals is reduced by 25% of the tax payable on their income derived from salary.

Conditions and Limitations:

1. Non-Profit Institutions:

The policy specifically applies to institutions classified as non-profit. These are organizations registered and operating with a welfare or public service objective rather than for commercial profit.

1. Exclusion for Medical Professionals:
   • The reduction does not apply to teachers in the medical profession who:
     • Earn additional income from private medical practice.
     • Receive a share of income from payments made by patients.

   Example:

   • A medical professor employed full-time in a medical college and conducting private medical practice is excluded from this tax reduction.
   • Similarly, a doctor who receives a share of fees paid by patients for medical services is not eligible.

Amendments in the Finance Act 2022

Through the Finance Act of 2022, applicable from the tax year 2023, changes were introduced to this rebate mechanism. A clause was inserted and later revised to clarify its applicability. The revised clause explicitly stated that the rebate would not apply to individuals in the medical profession who derive additional income from private medical practice. For instance, a doctor employed as a professor in a medical college who also earns income from private practice would no longer qualify for the 25% tax rebate.

Identifying Misapplication of the Rule

The FBR’s analysis, particularly data from the District Accounts Office, Rawalpindi, revealed that the changes had not been properly implemented. Many medical professionals who were both teaching and practicing privately continued to benefit from the rebate, leading to significant revenue losses for the government.

The document called for corrective action. It directed the Accountant General to ensure compliance by reviewing previous tax returns and requiring an undertaking from relevant employees. Doctors claiming the rebate must now declare that they are full-time educators with no secondary income from private practice. Their past tax filings will be scrutinized to confirm the accuracy of their claims.

The Accountability Mechanism

To streamline compliance, the document outlined the following measures:

1. Submission of Undertakings: Government-employed doctors must submit a declaration confirming that they are solely teaching and earning salary-based income.
2. Verification of Tax Returns: Past tax filings will be reviewed to identify sources of income. If the returns show secondary income from private practice, the rebate will be revoked.
3. Liability for False Claims: Employees providing false declarations will bear responsibility for any discrepancies, including repayment of the rebate amount and potential penalties.

Implications for Government Employees

The implications of these changes are significant, especially for teachers and doctors. While the rebate of up to 25% represents a substantial financial relief, its misapplication has led to stringent verification processes. For employees earning PKR 1,00,000 annually, a PKR 25,000 rebate translates to a major saving, particularly in professions with a large number of employees. Therefore, ensuring accurate compliance is critical for both the government and individuals.

Broader Context

The FBR’s notice focuses on employees of non-profit organizations, which predominantly include government institutions. Non-profit private organizations eligible for the rebate are relatively rare. This clarification benefits not only the government by addressing revenue leakage but also provides clear guidelines for eligible individuals.

This update serves as a reminder of the importance of compliance in financial matters. While the tax rebate offers significant benefits to eligible employees, it must be availed of responsibly and within the bounds of the law. Teachers and doctors working in government and non-profit sectors should review their tax filings and ensure alignment with the latest guidelines. For those seeking further clarification, engaging with tax professionals or relevant government offices is advisable.