ISLAMABAD: After 17 years of integration, the government has decided to reverse the functional integration of sales tax and income tax collection, acknowledging that the sales tax revenue gap has widened to Rs3.4 trillion amid weak enforcement and poor revenue collection.

The decision marks a major reform in tax administration, providing for the selection of officers within the Inland Revenue Service (IRS) and the separation of functional responsibilities, including tax collection and legal matters, to address persistent weaknesses that have contributed to the revenue gap, senior tax officials told Dawn on Saturday.

At the chief commissioner level, the administrative structure for sales tax and income tax will remain unchanged for now. However, functional separation will begin at the commissioner level and extend to subordinate officers, with dedicated officials assigned exclusively to sales tax matters.

A dedicated member for sales tax and federal excise duty will report directly to the FBR chairman. The new member, with three chiefs and their teams, will give sales tax and federal excise duty continuous attention through data analysis, operations, and follow-up on selected cases.

Government will separate sales and income tax functions within IRS

Within each chief commissioner’s jurisdiction, separate sales tax zones will be established, headed by commissioners and supported by additional deputy and assistant commissioners. The restructuring will begin at Large Taxpayer Offices on Dec 1, followed by Corporate Tax Offices and Regional Tax Offices. The transition is expected to be completed within two months.

The chief commissioners and Member IRS (Operations) will retain administrative and operational control, while the newly designated member will provide technical oversight and coordinate enforcement activities. Both taxes will continue to be administered within the IRS, rather than through separate services.

As part of the process, the FBR has begun conducting specialised tests to identify officers with the required expertise in sales tax and income tax administration. “We have already launched an exercise to identify competent officers,” an official said, adding that the assessment would help assign officers to functions matching their professional capabilities.

The need for functional separation also emerged from the widening sales tax revenue gap despite its relatively small taxpayer base. Sales tax accounts for nearly 55pc of the combined Rs6.2tr revenue gap, while approximately 90pc of its collections come from just 15,000 taxpayers, according to internal FBR estimates.

Official figures showed that around 313,000 persons were registered for sales tax in early 2024, of whom only 190,000 filed tax returns, including many declaring no taxable transactions. In comparison, the number of active income tax return filers stood at approximately 6 million.

It was pointed out that the integrated administrative structure had also weakened accountability, as IRS officers could meet their combined revenue targets by concentrating on income tax collections, while paying less attention to sales tax enforcement.

A recent proficiency test conducted in Karachi further exposed the imbalance, with officers performing better in practical income tax matters than in sales tax administration, reflecting their greater exposure to income tax work.

The FBR’s experience with production monitoring also demonstrated the 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, while it increased by nine percentage points in seven sectors without such systems.

Under the new arrangement, specialised officers will analyse this information and pursue cases involving underreported sales, questionable input tax claims, and other compliance failures, rather than dividing their attention between income tax and sales tax responsibilities.

In 2009, the then government, as part of the World Bank project, transferred the administration of sales tax and federal excise from Customs to the IRS. The major reasons for integration were that the two taxes are closely linked, because what an officer finds in a sales tax case often gives rise to an income tax demand, and that placing them under different officers would break this link.

However, after 17 years of integration, official data showed substantial revenue gaps in both taxes, raising questions about the arrangement’s effectiveness. The sales tax revenue gap was estimated at Rs3.4tr, compared with Rs2tr for income tax.

Officials said the original justification for integration had also weakened with the introduction of a common digital system operated by Pakistan Revenue Automation Ltd.

Published in Dawn, November 15th, 2026