FBR Tax Separation: Government to Split Sales and Income Tax Functions After 17 Years

ISLAMABAD: The government has decided to reverse the functional integration of sales tax and income tax collection after 17 years, acknowledging that weak enforcement and inadequate revenue collection have contributed to a widening sales tax revenue gap of Rs3.4 trillion.

The decision represents a major restructuring of tax administration, involving specialised officers and the separation of operational responsibilities to improve enforcement and revenue collection, senior tax officials told Dawn on Saturday.

Under the proposed arrangement, the administrative structure at the chief commissioner level will remain unchanged initially. However, functional separation will begin at the commissioner level and extend to subordinate officers, with dedicated officials assigned exclusively to sales tax matters.

A separate Member Sales Tax and Federal Excise Duty will report directly to the Federal Board of Revenue (FBR) chairman. The newly designated member, supported by three chiefs and their respective teams, will oversee sales tax and federal excise matters through data analysis, operational monitoring and follow-up on selected cases.

Separate sales tax zones will also be established within the jurisdictions of chief commissioners. These zones will be headed by commissioners and supported by additional, deputy and assistant commissioners.

The restructuring will begin at Large Taxpayer Offices (LTOs) on December 1, followed by Corporate Tax Offices (CTOs) and Regional Tax Offices (RTOs). The transition is expected to be completed within two months.

Chief commissioners and the Member IRS (Operations) will retain administrative and operational control, while the newly appointed member will provide technical oversight and coordinate enforcement activities. Both taxes will continue to operate under the IRS rather than being transferred to separate services.

As part of the restructuring, the FBR has initiated specialised assessments to identify officers with the necessary expertise in sales tax and income tax administration. An official said the exercise would help assign personnel according to their professional capabilities.

The move comes amid concerns over the widening sales tax revenue gap despite the relatively small number of active taxpayers. According to internal FBR estimates, sales tax accounts for nearly 55% of the combined Rs6.2 trillion revenue gap, while approximately 90% of its collections come from just 15,000 taxpayers.

Official figures showed that around 313,000 individuals and businesses were registered for sales tax in early 2024, but only 190,000 filed returns, including many reporting no taxable transactions. By comparison, approximately six million taxpayers were active income tax return filers.

Officials also argued that the integrated structure had weakened accountability, allowing IRS officers to meet combined revenue targets by concentrating on income tax collections while giving comparatively less attention to sales tax enforcement.

A recent proficiency assessment conducted in Karachi highlighted the imbalance, with officers demonstrating stronger practical knowledge of income tax matters than sales tax administration, reflecting their greater exposure to income tax work.

The FBR’s experience with production monitoring has also highlighted the potential benefits of targeted enforcement. In 12 manufacturing sectors where monitoring systems were introduced, the revenue gap declined by 12 percentage points of potential collections over two years. In comparison, the gap increased by nine percentage points in seven sectors without such systems.

Under the new arrangement, specialised officers will analyse production and transaction data and pursue cases involving underreported sales, questionable input tax claims and other compliance violations.

The integration of sales tax and federal excise administration into the IRS dates back to 2009, when the government transferred these responsibilities from Customs as part of a World Bank-supported reform project.

The original rationale was that sales tax and income tax were closely connected, as findings in sales tax investigations could also generate income tax liabilities. Keeping both functions under the same officers was intended to preserve this link.

However, after 17 years, official estimates indicate a sales tax revenue gap of Rs3.4 trillion and an income tax gap of Rs2 trillion, raising questions about the effectiveness of the integrated structure.

Officials also said the original justification for integration had weakened following the introduction of a common digital system operated by Pakistan Revenue Automation Ltd, which allows tax authorities to access shared information.