KARACHI: Section 11 of Income Tax Ordinance, 2001 deals with identifying categories of income. These incomes are chargeable to tax. The Federal Board of Revenue (FBR) issued the updated Income Tax Ordinance, 2001. The Ordinance incorporated amendments brought through Finance Act, 2021.
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Tax rates on salary income Tax Year 2022
KARACHI: Following are tax slabs for the taxable income and rate of tax applicable on salaried persons for the tax year 2022 (July 01, 2021 to June 30, 2022).
1. Where taxable income does not exceed Rs. 600,000: the tax shall be zero per cent
2. Where taxable income exceeds Rs. 600,000 but does not exceed Rs. 1,200,000: the tax shall be 5 per cent of the amount exceeding Rs. 600,000
3. Where taxable income exceeds Rs. 1,200,000 but does not exceed Rs. 1,800,000: the tax shall be Rs. 30,000 plus 10 per cent of the amount exceeding Rs. 1,200,000
4. Where taxable income exceeds Rs. 1,800,000 but does not exceed Rs. 2,500,000: the tax shall be Rs. 90,000 plus 15 per cent of the amount exceeding Rs. 1,800,000
5. Where taxable income exceeds Rs.2,500,000 but does not exceed Rs. 3,500,000: the tax shall be Rs. 195,000 plus 17.5 per cent of the amount exceeding Rs. 2,500,000
6. Where taxable income exceeds Rs. 3,500,000 but does not exceed Rs. 5,000,000: the tax shall be Rs. 370,000 plus 20 per cent of the amount exceeding Rs. 3,500,000
7. Where taxable income exceeds Rs. 5,000,000 but does not exceeds Rs. 8,000,000: the tax shall be Rs. 670,000 plus 22.5 per cent of the amount exceeding Rs. 5,000,000
8. Where taxable income exceeds Rs. 8,000,000 but does not exceeds Rs. 12,000,000: the tax shall be Rs. 1,345,000 plus 25 per cent of the amount exceeding Rs. 8,000,000
9. Where taxable income exceeds Rs. 12,000,000 but does not exceeds Rs. 30,000,000: the tax shall be Rs. 2,345,000 plus 27.5 per cent of the amount exceeding Rs. 12,000,000
10. Where taxable income exceeds Rs. 30,000,000 but does not exceeds Rs. 50,000,000: the tax shall be Rs. 7,295,000 plus 30 per cent of the amount exceeding Rs. 30,000,000
11. Where taxable income exceeds Rs. 50,000,000 but does not exceeds Rs. 75,000,000: the tax shall be Rs. 13,295,000 plus 32.5 per cent of the amount exceeding Rs. 50,000,000
12. Where taxable income exceeds Rs. 75,000,000: the tax shall be Rs. 21,420,000 plus 35 per cent of the amount exceeding Rs. 75,000,000
The above tax rate shall be applicable where the income of an individual chargeable under the head ‘salary’ exceeds seventy-five per cent of taxable income of a person.
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Finance Act, 2021: fixed allowance to be treated as salary for income tax deduction
ISLAMABAD: Any fixed amount paid to the employees on monthly basis shall be treated as salary for the purpose of income tax collection.
Through Finance Act, 2021 an amendment has been made to Section 12 of the Income Tax Ordinance, 2001.
The Section 12 of the Income Tax Ordinance, 2001 is read as:
Salary.— (1) Any salary received by an employee in a tax year, other than salary that is exempt from tax under this Ordinance, shall be chargeable to tax in that year under the head “Salary”.
(2) Salary means any amount received by an employee from any employment, whether of a revenue or capital nature, including —
(a) any pay, wages or other remuneration provided to an employee, including leave pay, payment in lieu of leave, overtime payment, bonus, commission, fees, gratuity or work condition supplements (such as for unpleasant or dangerous working conditions);
(b) any perquisite, whether convertible to money or not;
(c) the amount of any allowance provided by an employer to an employee including a cost of living, subsistence, rent, utilities, education, entertainment or travel allowance, but shall not include any allowance solely expended in the performance of the employee’s duties of employment;
(The following text in bold has been inserted through Finance Act, 2021)
Explanation: For removal of doubt, it is clarified that the allowance solely expended in the performance of employee’s duty does not include –
(i) allowance which is paid in monthly salary on fixed basis or percentage of salary; or
(ii) allowance which is not wholly, exclusively, necessarily or actually spent on behalf of the employer;‖;
(d) the amount of any expenditure incurred by an employee that is paid or reimbursed by the employer, other than expenditure incurred on behalf of the employer in the performance of the employee’s duties of employment;
(e) the amount of any profits in lieu of, or in addition to, salary or wages, including any amount received —
(i) as consideration for a person’s agreement to enter into an employment relationship;
(ii) as consideration for an employee’s agreement to any conditions of employment or any changes to the employee’s conditions of employment;
(iii) on termination of employment, whether paid voluntarily or under an agreement, including any compensation for redundancy or loss of employment and golden handshake payments;
(iv) from a provident or other fund, to the extent to which the amount is not a repayment of contributions made by the employee to the fund in respect of which the employee was not entitled to a deduction; and
(v) as consideration for an employee’s agreement to a restrictive covenant in respect of any past, present or prospective employment;
(f) any pension or annuity, or any supplement to a pension or annuity; and
(g) any amount chargeable to tax as “Salary” under section 14.
(3) Where an employer agrees to pay the tax chargeable on an employee’s salary, the amount of the employee’s income chargeable under the head “Salary” shall be grossed up by the amount of tax payable by the employer.
(4) No deduction shall be allowed for any expenditure incurred by an employee in deriving amounts chargeable to tax under the head “Salary”.
(5) For the purposes of this Ordinance, an amount or perquisite shall be treated as received by an employee from any employment regardless of whether the amount or perquisite is paid or provided —
(a) by the employee’s employer, an associate of the employer, or by a third party under an arrangement with the employer or an associate of the employer;
(b) by a past employer or a prospective employer; or
(c) to the employee or to an associate of the employee or to a third party under an agreement with the employee or an associate of the employee.
(6) An employee who has received an amount referred to in sub-clause (iii) of clause (e) of sub-section (2) in a tax year may, by notice in writing to the Commissioner, elect for the amount to be taxed at the rate computed in accordance with the following formula, namely: —
A/B%
where —
A is the total tax paid or payable by the employee on the employee’s total taxable income for the three preceding tax years; and
B is the employee’s total taxable income for the three preceding tax years.
(7) Where —
(a) any amount chargeable under the head “Salary” is paid to an employee in arrears; and
(b) as a result the employee is chargeable at higher rates of tax than would have been applicable if the amount had been paid to the employee in the tax year in which the services were rendered, the employee may, by notice in writing to the Commissioner, elect for the amount to be taxed at the rates of tax that would have been applicable if the salary had been paid to the employee in the tax year in which the services were rendered.
(8) An election under sub-section (6) or (7) shall be made by the due date for furnishing the employee’s return of income or employer certificate, as the case may be, for the tax year in which the amount was received or by such later date as the Commissioner may allow.
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Salary Tax Rates for year 2021-2022
ISLAMABAD: The Finance Bill 2021 has not proposed changes to tax rates and slabs for salaried persons for tax year 2022, sources in the Federal Board of Revenue (FBR) said.
Therefore tax rate and slabs will remain unchanged for tax year starting from July 01, 2021.
Following is the table for tax rates on taxable income of salaried persons prevailed during tax year 2021:
Where the income of an individual chargeable under the head “salary” exceeds seventy-five per cent of his taxable income, the rates of tax to be applied shall be as set out in the following table, namely:—
01. Where taxable income does not exceed Rs. 600,000: the tax is zero per cent
02. Where taxable income exceeds Rs. 600,000 but does not exceed Rs. 1,200,000: the tax rate is 5% of the amount exceeding Rs. 600,000
03. Where taxable income exceeds Rs. 1,200,000 but does not exceed Rs. 1,800,000: the tax rate is Rs. 30,000 plus 10% of the amount exceeding Rs. 1,200,000
04. Where taxable income exceeds Rs. 1,800,000 but does not exceed Rs. 2,500,000: the tax rate is Rs. 90,000 plus 15% of the amount exceeding Rs. 1,800,000
05. Where taxable income exceeds Rs.2,500,000 but does not exceed Rs. 3,500,000: the tax rate is Rs. 195,000 plus 17.5% of the amount exceeding Rs. 2,500,000
06. Where taxable income exceeds Rs. 3,500,000 but does not exceed Rs. 5,000,000: the tax rate is Rs. 370,000 plus 20% of the amount exceeding Rs. 3,500,000
07. Where taxable income exceeds Rs. 5,000,000 but does not exceeds Rs. 8,000,000: the tax rate is Rs. 670,000 plus 22.5% of the amount exceeding Rs. 5,000,000
08. Where taxable income exceeds Rs. 8,000,000 but does not exceeds Rs. 12,000,000: the tax rate is Rs. 1,345,000 plus 25% of the amount exceeding Rs. 8,000,000
09. Where taxable income exceeds Rs. 12,000,000 but does not exceeds Rs. 30,000,000: the tax rate is Rs. 2,345,000 plus 27.5% of the amount exceeding Rs. 12,000,000
10. Where taxable income exceeds Rs. 30,000,000 but does not exceeds Rs. 50,000,000: the tax rate is Rs. 7,295,000 plus 30% of the amount exceeding Rs. 30,000,000
11. Where taxable income exceeds Rs. 50,000,000 but does not exceeds Rs. 75,000,000: the tax rate is Rs. 13,295,000 plus 32.5% of the amount exceeding Rs. 50,000,000
12. Where taxable income exceeds Rs. 75,000,000: the tax rate is Rs. 21,420,000 plus 35% of the amount exceeding Rs. 75,000,000
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Tax amendments made for income of salaried persons, individuals
KARACHI: The Finance Bill, 2021 has proposed certain amendments in Income Tax Ordinance, 2001 related to income of salaried persons and business individuals.
According to a presentation made at post budget 2021/2022 webinar of Karachi Tax Bar Association (KTBA) the major changes proposed through the Finance Bill 2021, are:
— Interest income above Rs5 million taxable at normal rates (previously Rs. 36 million); withholding @15 percent (previously 10 percent) for interest income below Rs. 500,000.
— Exemption for medical allowance / reimbursement withdrawn, which needs to be reconsidered.
— Interest income distributed by Provident Fund above Rs. 500,000 taxed @ 10 percent – conflict with 6th Schedule needs to be addressed.
— Rental income taxable at normal rate.
— No tax on transfer of assets via gift / inheritance etc. to non-resident relatives.
— Giftee allowed to claim FMV of gifted assets, after a holding period of 2 years.
— Individuals have been made a withholding agent for payment of commission (having turnover of Rs. 100 million).
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Budget 2021/2022: salary and pension increased by 10 percent
ISLAMABAD: The federal government on Friday presented budget 2021/2022 and announce an increase of 10 percent in basic salary and pension of the government employees.
While delivering the budget speech for the year 2021-22, Minister for Finance Shaukat Tarin announced that the increase in salaries and pensions of the federal government employees would be applicable from July 01, 2021.
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KTBA presents tax proposals for salary income
KARACHI: The Karachi Tax Bar Association (KTBA) has presented income tax proposals for salary income for incorporating in the Finance Bill 2021.
In its proposals for budget 2021/2022, the tax bar highlighted the issue related to taxation of notional income.
It said that the difference between the benchmark rate and the actual rate of interest is charged where actual rate of interest is charged at less than the benchmark rate by the employers on concessionary loans provided to the employees or otherwise it is treated as perquisite chargeable to tax
The tax bar said the taxation of this notional income is highly unjust since it taxes the notional income of the salaried person, which is against the basic principle of taxation since this notional income will never ever be received by the taxpayer.
The KTBA proposed that the taxation of marginal income on loans obtained from the employer below benchmark rate should be exempted for lower threshold amounts. The minimum threshold of the loan amount on which the provisions of Section 13(7) of Income Tax Ordinance, 2001 may not apply should be raised to at least Rs.2,500,000/- from the existing limit of Rs.1,000,000/-.
It is further suggested that benchmark rate currently fixed at ten percent be based on Kibor rate.
Giving rationale to the proposal, the KTBA said that the change would result in facilitation and easement of salaried taxpayers.
The tax bar highlighted the issue of withholding tax on salary income.
It said as per section 149 of the Income Tax Ordinance, 2001, every person paying salary to employee shall deduct tax from the amount paid at specified rate after making tax adjustment of tax credit U/s. 61, 62 ,63 and 64 of the Ordinance and other adjustments.
Complete tax credits though legally available are not adjusted in payroll run.
The KTBA proposed that this section should include all tax credit under Part X Chapter III as are admissible against salary income.
Giving rationale to the proposal, the KTBA said that the current scheme has apparently missed tax credit under section 62A of the Income Tax Ordinance, 2001. The proposed amendment would cater all the current credits and those to be introduced from time to time.
The KTBA also highlighted the issue of employer contribution to Provident Fund.
It said Under Clause (3), Part I, Sixth Schedule of the Ordinance, the employer’s contribution in the recognized provident fund in excess of Rs.150,000 (increased from Rs.100,000 by Finance Act, 2016) is deemed to be income of the employee.
This provision is invalid as the accumulated balance (it includes employer’s contribution) due and becoming payable to an employee participating in a recognized provident fund is totally exempt from tax under Clause (23), Part I, Second Schedule.
Without prejudice to foregoing, since employer’s contribution does not constitute an actual receipt as the same is not at the disposal of an employee and therefore tax incidence should not be levied at the time of contribution.
The tax bar proposed that Clause (3) Part 1, Sixth Schedule be amended to exempt employer contribution to bring it at par with clause (23) Part 1, Second Schedule.
Alternatively, the threshold be based as Rs 150,000 or 1/10th of the salary whichever is higher.
Giving rationale to the proposal, the KTBA said that since employer’s contribution does not constitute an actual receipt as the same is not at the disposal of an employee and therefore tax incidence should not be levied at the time of contribution.
To another proposal, the KTBA said that as per clause (13)(iv) of part – I, there is existing limit of Rs.75,000/-.
Gratuity exemption not indexed for inflation, it added.
It should be increased to Rs.300,000/-, the KTBA proposed.
Considering the inflationary effect since the current limit as set at the promulgation of Ordinance has remained unchanged.
Similarly, the KTBA highlighted that as per clause (23A), withdrawal of 50 percent of balance is exempted subject to fulfillment of conditions.
It said that it was an inadequate exemption.
It is proposed to increase the exemption to the extent of withdrawal of actual amount invested in the pension fund and additional amount to be taxed at the rate of tax applicable on salaries.
To exempt the portion of investment made in pension funds.
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Tax collection from salary income grows by 69pc in TY2020
ISLAMABAD: The Federal Board of Revenue (FBR) witnessed a substantial increase in tax collection from salary income during tax year 2020, marking a sharp growth of 69 percent compared to the previous year. This significant rise is largely attributed to revisions in the income tax slabs for salaried individuals introduced under fiscal reforms.
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Salary income tax brackets to be reduced to five
KARACHI: The government is working on reducing the brackets of salary income tax to five from existing 11 besides reducing the income slabs, according to country report on Pakistan issued by International Monetary Fund (IMF) on Thursday.
Pakistan has assured the IMF to take major initiatives in the upcoming budget 2021/2022. According to the report the Pakistani authorities assured the IMF that in the next step of tax policy reform efforts and to further support fiscal objectives, the government will introduce both a general sales tax (GST) and a personal income tax (PIT) reform with the FY 2022 budget, yielding an estimated 1.1 percent of GDP.
The government may introduce change the existing tax rate structure by reducing the number of rates and income tax brackets from eleven to five and decreasing the size of the income slabs, with a view to simplifying the system and increasing progressivity.
The authorities further pledged to reduce tax credits and allowances by 50 percent (except for Zakat and those provided for disabled and senior citizens).
Besides, they also pledged to introduce a special tax procedure for very small taxpayers, aimed at preventing further tax base erosion and facilitating the formalization of the economy.
The authorities may adopt a long-term strategy to reduce labor informality and to bring additional taxpayers into the PIT net. This reform is expected to yield 0.4 percent of GDP on an annualized basis.
For the broadening and harmonizing the General Sales Tax (GST) base, the authorities assured the IMF through its Letter of Intent (LoI) signed by the finance minister and governor State Bank of Pakistan (SBP) that the government will advance the reforms to our GST system, underpinned by a unified tax base and within the confines of the current constitution.
The authorities pledged the following:
(i) to eliminate all zero-rated goods (Fifth Schedule), except on export and capital machinery goods and move them to the standard sales tax rate;
(ii) remove reduced rates under the Eight Schedule and bring all those goods to the standard sales tax rate;
(iii) eliminate exemptions (Sixth Schedule) excluding a small subset of goods (i.e., basic food, medicines, live animals for human consumption, education and health-related goods) and bring all others to the standard rate; and
(iv) remove the Ninth Schedule to replace a specific tax rate for cell phones with the standard rate. These reforms are expected to yield an estimated 0.7 percent of GDP on an annualized basis.
Moreover, the government is also in the process of harmonizing the service sales tax across provincial jurisdictions, with support from the World Bank, expected to be completed by end-June 2021.
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‘Salary’ explained for determination of income tax
Income Tax Ordinance, 2001 has defined the meaning of salary for the purpose of determining income of a paid employee.
The Income Tax Ordinance, 2001 updated up to June 30, 2020 issued by the Federal Board of Revenue (FBR) defined the salary as :
(1) Any salary received by an employee in a tax year, other than salary that is exempt from tax under this Ordinance, shall be chargeable to tax in that year under the head “Salary”.
(2) Salary means any amount received by an employee from any employment, whether of a revenue or capital nature, including —
(a) any pay, wages or other remuneration provided to an employee, including leave pay, payment in lieu of leave, overtime payment, bonus, commission, fees, gratuity or work condition supplements (such as for unpleasant or dangerous working conditions);
(b) any perquisite, whether convertible to money or not;
(c) the amount of any allowance provided by an employer to an employee including a cost of living, subsistence, rent, utilities, education, entertainment or travel allowance, but shall not include any allowance solely expended in the performance of the employee’s duties of employment;
(d) the amount of any expenditure incurred by an employee that is paid or reimbursed by the employer, other than expenditure incurred on behalf of the employer in the performance of the employee’s duties of employment;
(e) the amount of any profits in lieu of, or in addition to, salary or wages, including any amount received —
(i) as consideration for a person’s agreement to enter into an employment relationship;
(ii) as consideration for an employee’s agreement to any conditions of employment or any changes to the employee’s conditions of employment;
(iii) on termination of employment, whether paid voluntarily or under an agreement, including any compensation for redundancy or loss of employment and golden handshake payments;
(iv) from a provident or other fund, to the extent to which the amount is not a repayment of contributions made by the employee to the fund in respect of which the employee was not entitled to a deduction; and
(v) as consideration for an employee’s agreement to a restrictive covenant in respect of any past, present or prospective employment;
(f) any pension or annuity, or any supplement to a pension or annuity; and
(g) any amount chargeable to tax as “Salary” under section 14.
(3) Where an employer agrees to pay the tax chargeable on an employee’s salary, the amount of the employee’s income chargeable under the head “Salary” shall be grossed up by the amount of tax payable by the employer.
(4) No deduction shall be allowed for any expenditure incurred by an employee in deriving amounts chargeable to tax under the head “Salary”.
(5) For the purposes of this Ordinance, an amount or perquisite shall be treated as received by an employee from any employment regardless of whether the amount or perquisite is paid or provided —
(a) by the employee’s employer, an associate of the employer, or by a third party under an arrangement with the employer or an associate of the employer;
(b) by a past employer or a prospective employer; or
(c) to the employee or to an associate of the employee or to a third party under an agreement with the employee or an associate of the employee.
(6) An employee who has received an amount referred to in sub-clause (iii) of clause (e) of sub-section (2) in a tax year may, by notice in writing to the Commissioner, elect for the amount to be taxed at the rate computed in accordance with the following formula, namely: —
A/B%
where —
A is the total tax paid or payable by the employee on the employee’s total taxable income for the three preceding tax years; and
B is the employee’s total taxable income for the three preceding tax years.
(7) Where —
(a) any amount chargeable under the head “Salary” is paid to an employee in arrears; and
(b) as a result the employee is chargeable at higher rates of tax than would have been applicable if the amount had been paid to the employee in the tax year in which the services were rendered,
the employee may, by notice in writing to the Commissioner, elect for the amount to be taxed at the rates of tax that would have been applicable if the salary had been paid to the employee in the tax year in which the services were rendered.
(8) An election under sub-section (6) or (7) shall be made by the due date for furnishing the employee’s return of income or employer certificate, as the case may be, for the tax year in which the amount was received or by such later date as the Commissioner may allow.