Karachi, August 27, 2024 – The Federal Board of Revenue (FBR) has announced that the value of perquisites will be chargeable to tax under the head of salary income for the tax year 2024-25. According to the updated Income Tax Ordinance, 2001, released up to June 30, 2024, several provisions have been clarified concerning the chargeability of various perquisites provided to employees by their employers.
Understanding Perquisites Under the Income Tax Ordinance, 2001
Perquisites are benefits or allowances provided by an employer to an employee, and the Income Tax Ordinance, 2001, outlines the framework for taxing these benefits under the head “Salary.” As per Section 13 of the Ordinance, the value of any perquisite provided by an employer to an employee is included in the employee’s salary and is subject to tax accordingly.
Key Provisions of Section 13: Taxability of Perquisites
1. Motor Vehicle: If an employer provides a motor vehicle for the private use of an employee, the value of this benefit is chargeable to tax. The amount to be taxed is computed based on prescribed guidelines.
2. Domestic Assistance: The total salary paid to domestic assistants, such as housekeepers, drivers, or gardeners, provided by the employer, is taxable. The taxable amount is reduced by any payment made by the employee to the employer for these services.
3. Utilities: Utilities such as electricity, gas, water, and telephone provided by the employer are taxable based on their fair market value. This amount is reduced by any payment the employee makes towards these utilities.
4. Loans: If an employer grants a loan to an employee at a rate lower than the benchmark rate or without any interest, the difference between the benchmark rate and the actual rate is taxable. Loans not exceeding one million rupees or loans used to acquire assets producing taxable income are exempt from this provision.
5. Obligation Waivers: If an employer waives an obligation of an employee to repay a loan or any amount owed, the waived amount becomes taxable under the head “Salary.”
6. Property and Services: Any property transferred or services provided by an employer to an employee are taxable at their fair market value. The value is reduced by any amount paid by the employee for these properties or services.
7. Accommodation: The value of accommodation or housing provided by an employer is taxable. The computation of this amount is based on prescribed formulas and takes into account the fair market value of such accommodations.
8. Unlisted Perquisites: Any other perquisites not specifically covered by the above subsections are also taxable based on their fair market value, reduced by any payment made by the employee for such perquisites.
Benchmark Rate and Its Application
The benchmark rate, a critical aspect in calculating the taxable amount for loans provided by employers, is defined in the Ordinance. For the tax year starting July 1, 2002, the benchmark rate was set at five percent per annum. For subsequent years, the rate increases by one percent per annum, capped at a maximum of ten percent. This rate is pivotal in determining the tax liability on interest-free or concessional loans provided by employers to employees.
Practical Implications for Employees and Employers
The regulations outlined in Section 13 of the Income Tax Ordinance, 2001, have several implications for both employees and employers. Employees receiving perquisites must consider these benefits as part of their taxable income and should be prepared for potential tax liabilities. Employers, on the other hand, must meticulously calculate the value of perquisites provided to ensure compliance with tax regulations.
Advisory for Taxpayers
The FBR advises all employees to maintain accurate records of all perquisites received during the tax year and to report them accurately in their tax returns. Any misreporting or underreporting of such benefits can lead to penalties and legal consequences. Employers are also encouraged to provide clear documentation to employees regarding the value of perquisites to avoid any discrepancies during tax assessments.
Conclusion
The updated provisions in the Income Tax Ordinance, 2001, reflect the FBR’s commitment to ensuring a comprehensive and fair taxation system. By including perquisites under the head of salary income, the FBR aims to capture the full scope of benefits received by employees, thus enhancing the transparency and effectiveness of the tax collection process.
Taxpayers are encouraged to consult with tax professionals to fully understand their obligations under these regulations and to ensure full compliance with the law. As the FBR continues to update and refine tax laws, staying informed and proactive in tax planning remains essential for both employees and employers in Pakistan.
