A GUIDE TO COMPUTATION OF INCOME TAX ON SALARIES UNDER THE INCOME TAX ORDINANCE 2001

FOR THE TAX YEAR 2012

TMIRCO CHARTERED ACCOUNTANTS

111-CCA, Defense Housing Authority, Lahore, Pakistan Phone:+92-42-35735158, fax: +92-42-35891025 info@tmirco.com www.tmirco.com

Income Tax on Salaries

-1

Introduction
If you are a businessman, entrepreneur or a director of a company and pay salaries to one or more employees, you are required to deduct tax from the amount paid (salary) at the time of payment.

This guide will provide you a comprehensive understanding of the provisions and requirements of the Income Tax Ordinance 2001 governing calculation of tax liability and ensuring maximum tax savings to your employees, while ensuring you remain safe from prosecution and penalties.

Before we proceed it is important to understand that employees include all the people employed by you including temporary and permanent staff and in the case of the company it also includes its directors. It is also important to understand that a "Salaried Tax Payer" is a person having salary income in excess of 50% of his/her Taxable Income.

You are allowed to make adjustments to the tax withheld and allow tax credits and admissible deductions after obtaining documentary evidence as may be necessary.

You are also required to provide a Certificate of Collection or Deduction of Income tax from employer to your employees as an evidence of payment of tax to the Federal Board of Revenue.

Income Tax on Salaries

-2

What is salary income?

Income tax is calculated on Gross Salary and all Allowances and Perquisites except those specifically exempted are to be added to salary. Valuation of these perquisites, allowances & benefits to the employee is done with rule 4 to 7 of the income tax rules.

House Rent Allowance in cash: the amount by which the house rent allowance exceeds forty-five per cent of the basic salary / time scale shall be included in his income Valuation of accommodation: The amount exceeding forty-five per cent of the basic salary /time scale, subject to a maximum of fifteen percent of salary will be included in salary. Where rent free furnished accommodation is provided to the employee, an amount equal to ten percent of his salary over and above the amount determined above. Where the accommodation is hired by the employee but the rent is payable by the employer, the amount includable in the salary shall be determined under the basis above. Where the accommodation is provided to the employee at a concessional rate, the difference between the rent actually paid by him and the amount determined to be includible in an employees salary as per the basis above shall be added to his income. Where any house rent allowance is receivable by the employee in addition to the benefits referred to above, the whole amount of the allowance shall be added in his income.

Conveyance allowance: Where neither any conveyance is provided by the employer nor any conveyance owned or maintained by the employee is used by him in the performance of the duties and conveyance allowance is receivable by him in cash, the amount of such allowance exceeding PKR 3600 or the actual expenditure incurred by the employee, which ever is less, shall be included in his income. Where a motor vehicle is provided by the employer for the use of the employee exclusively for personal or private purposes, there shall be included in the employees income an amount equal to (a) the sum actually expended by the employer on running and maintenance of the motor vehicle (including normal depreciation, where the motor vehicle is owned or the amount of rental where the motor vehicle is hired by the employer) if the motor vehicle is used by one employee; and

Income Tax on Salaries

-3

(b) the sum arrived at by dividing the amount as computed under (a) by the number of persons entitled to use the motor vehicle if the motor vehicle is used by more than one employee. Where any conveyance allowance is receivable by an employee in addition to the perquisite mentioned above, the whole amount of such allowance plus the amount determined in (a) shall be included in his income.

Other employment benefits The following are also to be included to salary. i. ii. iii. iv. Any obligation to pay or repay amount owing waived by the employer. Any obligation to repay to any other person is paid by employer. Transfer of any property or services provided by employer to employee. The services of house keeper, driver, gardener or other domestic assistance provided by the employer shall be included in the total salary paid as reduced by any amount recovered by the employer. Fair market value of other benefits or perquisites as reduced by the amount recovered by the employer

v.

Concessional Loans provided on or after 01.07.2002. to an employee. Difference between rate charged and benchmark rate shall be added. Benchmark [1% above the rate applicable in immediately preceding tax year] Provided such perquisite are exempted in the hands of employee, in the case of earning of interest is waived by the employee on his account with the employer for example Provident Fund or any other Fund etc.. Tax on Tax Tax paid by the employer on behalf of the employee on or after 1st July, 2002 is to be grossed up to compute the tax liability of the employee. Employee share scheme Mere right or option to acquire share is not chargeable to tax. When shares actually issued the difference between the market value of shares and amount paid by employee is to be added. If shares are subject to restriction on transfer, the difference will be added when the restriction ends. If employee disposes of the shares despite restriction the addition will be made at the time of disposal If employee disposes of the right or option to acquire the shares, gain shall be included in the salary. Payment on termination of employment. The employee by notice in writing to Commissioner may opt to be taxed at an average rate of tax for the preceding three years. Salary paid in arrears If arrear results in taxation at higher rate, the employee by notice in writing to the Commissioner may opt for the amount to be taxed at the rates applicable to the year to which the salary relates.

Income Tax on Salaries

-4

Flying Allowance Any amount received as flying allowance by Pilots, Flight Engineers and Navigators of Pakistan Armed Forces, Pakistani Airlines or Civil Aviation Authority and Junior Commissioned Officers of other ranks of Pakistan Armed Forces. Medical Allowance Reimbursement of medical charges or hospitalization charges or both is exempted from tax if: it is provided for under the terms of employer's employment agreement. the employee provides NTN of the hospital or clinic and medical or hospital bills are also certified and attested by the employer. 2. Medical Allowance received in cash is exempt up to 10% of Basic Salary. Perquisites carrying zero marginal cost Following perquisites (or any other perquisites notified by CBR) provided by employers for which they do not have to bear any marginal costs have been exempted in the hands of employees: -- Free or concessional passage provided by transporters including airlines to employees (including members of household and dependents). -- Free or subsidized food provided by hotels and restaurants during duty hours. -- Free or subsidized education provided by educational institutions' to the children of employees. -- Free or subsidized medical treatment provided by a hospital or clinic to its employees. -- Any other perquisite or benefit for which the employer does not have to bear any marginal cost as notified by FBR.

Payment of salary through cheques

For the purpose of making payment through crossed cheque or direct transfer of the funds to the employees bank account the limit is PKR 15,000/- .

Senior citizens
If the taxable income of a taxpayer aged 60 or above on the first day of the tax year is up to PKR 1,000,000/- his tax liability on such income shall be reduced by 50% .This clause is equally applicable to a salaried or non-salaried taxpayer.

Admissible Deductions
Salaried persons are allowed to deduct the following payments from their Total Income; Zakat paid to Zakat Fund is allowable deduction Zakat deducted from Profit on Debts is allowable against such Profit on debts only. If Zakat is deductible in computing Income under any other head of Income, no deduction of Zakat from total Income is allowable. Note: Zakat deducted from dividend is allowable.

Income Tax on Salaries

-5

Professional fee paid by non-practicing Professionals to retain their Professional Qualification Donation paid to charitable institutions' approved under the Clause 61 of Part I of 2nd Schedule maximum 30% of Taxable Income is allowed to be deducted directly from the total income.

Miscellaneous provisions:
Pension (not working with the same employer in any capacity) Irrespective of age of retirement is exempt. A person who retires and rejoins on contract basis or otherwise is taxable. If a person received more than one pension the exemption will be applicable to the highest of pension received. Capital Gains Income from sale of Moradabad certificates, any listed instrument of redeemable capital, shares of a public company, and the PTC vouchers issued by Govt. of Pakistan shall be taxed as a separate block of income no capital gain tax shall be chargeable on disposal of securities held for a period of more than one year Provident Fund Accumulated balance due and becoming payable from Provident Fund to which P.F. Act, 1925 applies or an approved P.F. is exempted. Gratuity Fund Exempted if Received by employees of Govt. LA, Statutory body or Corp or Received from approved gratuity fund or Received under any approved scheme exempted upto PKR. 200,000/-. Gratuity received by other employees is exempted up to 50% or PKR. 75,000/- whichever is less.

Tax credit and withholding tax adjustments

Adjustment of the following with-holding tax is allowed: i. Tax paid on Telephone / Mobile phone ii. Tax paid on purchase of a Motor Vehicle iii. Tax deducted on Cash withdrawals from bank accounts. Reduction in tax liability is allowed of 75 % is allowed to Full time teachers and researchers Tax credits A salaries taxpayer is allowed the following tax credits: i. ii. Tax credit for Charitable Donations to approved Non-Profit Organizations. Tax credit for Investment in Shares
-6

Income Tax on Salaries

iii. iv. v.

Tax credit for life insurance premium Tax credit for Contributions or Premium paid to an Approved Pension Funds Tax credit for Interest paid on Housing Loan for construction / acquisition of new house

The Admissible adjustment and Tax Credit will be allowed by the employer subject to production of relevant evidences by the employee.

Tax rates for the tax year 2012

Income Tax Slab Rates From 0 350,001 400,001 450,001 550,001 650,001 750,001 900,001 1,050,001 1,200,001 1,450,001 1,700,001 1,950,001 2,250,001 2,850,001 3,550,001 4,550,001 Up to 350,000 400,000 450,000 550,000 650,000 750,000 900,000 1,050,000 1,200,000 1,450,000 1,700,000 1,950,000 2,250,000 2,850,000 3,550,000 4,550,000 Tax Rate % 0 1.5 2.5 3.5 4.5 6 7.5 9 10 11 12.5 14 15 16 17.5 18.5 20

Marginal relief

Marginal Relief Rate % 20 30 40 50 60 Amount PKR Up to 550,000 Up to 1,050,000 Up to 2,250,000 Up to 4,550,000 Up to 4,550,000

Income Tax on Salaries

-7