Govt to Restore Teachers’ Tax Rebate Amid Revenue Shortfall

February 1, 2025 Mahi Bukhari

Awaiting IMF Approval Despite Rs470 Billion Deficit in Tax Collection

Introduction

The government of Pakistan is in talks with the International Monetary Fund (IMF) to reinstate the 25% tax rebate for teachers and researchers. This move comes after the Federal Board of Revenue (FBR) recently started imposing the full tax liability on educators, sparking backlash from academic institutions.

Despite this, the FBR has been struggling to meet its revenue targets, missing its seven-month tax collection goal by Rs470 billion. The ongoing revenue shortfall, combined with the country’s sluggish economic growth, has left policymakers in a difficult position. However, efforts are being made to balance the budget while providing much-needed relief to the education sector.

The Controversy: Teachers’ Tax Rebate Removal

FBR’s Sudden Action Against Educators

For nearly two years, the FBR did not enforce the withdrawal of the 25% tax rebate. However, in December 2023, it suddenly started issuing notices to universities and colleges, instructing them to recover unpaid taxes from teachers and researchers dating back to July 2022.

This move caught educational institutions off guard, as no prior communication had been made regarding the rebate’s withdrawal. The issue escalated when the FBR issued formal notices to major institutions, including the National University of Science and Technology (NUST), demanding immediate compliance.

FBR’s Threats to Universities

One of the most controversial notices sent by the FBR to NUST stated:

“You are allowing a 25% rebate of total tax liability, which has already been discontinued through the Finance Act 2022, with effect from July 2022.”

The notice further warned that universities must immediately collect and deposit the full tax liability of teachers or face legal action under Section 161 of the Income Tax Ordinance. This created widespread panic among educators, who suddenly faced retrospective tax demands.

Government’s Response & IMF Consultation

The backlash prompted Finance Minister Muhammad Aurangzeb to intervene. According to sources, the government has approached the IMF to seek approval for reinstating the tax rebate. Reports indicate that the IMF has shown leniency and may approve the measure, pending final discussions.

Once approved, the rebate restoration will be formally announced through the Tax Laws Amendment Bill, which is currently awaiting approval in the National Assembly.

Pakistan’s Tax Collection Struggles

FBR Fails to Meet Revenue Targets

The FBR has consistently fallen short of its tax collection targets, missing the goal by Rs470 billion in the first seven months of the current fiscal year.

For January alone, the FBR failed to meet its Rs957 billion target, falling short by Rs86 billion. This marks the sixth consecutive month in which the FBR has missed its collection targets, despite an overall 29% increase in tax revenue.

Root Causes of Revenue Shortfall

1. Unrealistic Tax Targets

Experts argue that the primary reason for the shortfall is the unrealistic tax collection target set by the government. The annual target of Rs13 trillion was based on overly optimistic projections, without considering the economic slowdown and inflationary pressures.

2. Declining Economic Growth

Pakistan’s economy has been growing at less than 1%, making it difficult for businesses and individuals to generate taxable income. The economic slowdown has directly impacted corporate tax collection, customs duties, and sales tax revenue.

3. Weak Enforcement by FBR

Despite efforts to increase tax compliance, the FBR continues to suffer from operational inefficiencies. Widespread tax evasion, lack of digitalization, and a weak enforcement mechanism have further exacerbated the shortfall.

Breakdown of Tax Collection Figures

1. Income Tax Collection

Target: Rs2.88 trillion
Collected: Rs3.16 trillion
Surplus: Rs283 billion

Despite exceeding its income tax target, the FBR’s overall shortfall remains significant.

2. Sales Tax Collection

Target: Rs2.69 trillion
Collected: Rs2.22 trillion
Shortfall: Rs472 billion

3. Federal Excise Duty

Target: Rs524 billion
Collected: Rs404 billion
Shortfall: Rs120 billion

Despite doubling the duty on cement and imposing excise taxes on lubricant oil and real estate transactions, the government still failed to meet its excise duty targets.

4. Customs Duty Collection

Target: Rs880 billion
Collected: Rs713 billion
Shortfall: Rs167 billion

The decline in import activity has significantly impacted customs duty collection, further worsening the revenue shortfall.

The IMF’s Role in Tax Policy Decisions

The IMF has been closely monitoring Pakistan’s tax collection efforts, often demanding new taxes in exchange for financial assistance. This has led to the introduction of new taxes on everyday goods, such as:

Medical tests
Children’s milk
Stationery items
Vegetables

The imposition of such taxes has disproportionately affected the salaried class and low-income households, further straining economic conditions.

What Lies Ahead?

1. IMF’s Decision on Tax Rebate

The approval of the 25% tax rebate for teachers and researchers depends on ongoing discussions with the IMF. If approved, it will be a major relief for the education sector.

2. FBR’s Future Challenges

The FBR must address structural inefficiencies to improve tax collection. This includes:

Strengthening enforcement measures
Enhancing digital tax systems
Curbing tax evasion

3. Policy Reforms for Sustainable Growth

Long-term economic growth will require taxation policies that encourage investment and business expansion. Instead of overburdening the salaried class, the government must focus on broadening the tax base by targeting:

Wealthy non-taxpayers
Undocumented businesses
Tax-evading sectors

Conclusion

The government’s move to restore the 25% tax rebate for teachers and researchers is a step in the right direction, but it highlights Pakistan’s larger tax policy challenges. The FBR’s repeated failure to meet revenue targets, combined with IMF-imposed tax hikes, has placed a significant burden on ordinary citizens.

To achieve economic stability, Pakistan must implement sustainable tax reforms, improve enforcement, and create a fair tax structure that does not disproportionately impact the working class.

FAQs

1. Why did the FBR remove the 25% tax rebate for teachers?

The FBR claims that the rebate was removed in July 2022 under the Finance Act 2022, but it only started enforcing it in late 2023.

2. Will the tax rebate for teachers be restored?

The government has approached the IMF for approval, and there are strong indications that the rebate will be reinstated soon.

3. Why is the FBR facing a tax revenue shortfall?

The shortfall is due to unrealistic tax targets, weak economic growth, and enforcement inefficiencies within the FBR.

4. How is the IMF influencing Pakistan’s tax policies?

The IMF has imposed new taxes on essential goods as part of its financial assistance program, further burdening the salaried and middle-class population.

5. What measures can improve Pakistan’s tax collection?

Key measures include broadening the tax base, enforcing stricter compliance, digitalizing tax systems, and targeting high-income tax evaders.