Computation of Income Tax on Salaries in Pakistan

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Computation of Income Tax on Salaries in Pakistan Powered By Docstoc



       FOR THE TAX YEAR 2012

       111-CCA, Defense Housing Authority, Lahore, Pakistan
       Phone:+92-42-35735158, fax: +92-42-35891025

Income Tax on Salaries                                        -1

       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

       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

       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 employee’s salary as per the basis above shall be added to his

       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

       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
       employee’s 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.      Any obligation to pay or repay amount owing waived by the employer.
       ii.     Any obligation to repay to any other person is paid by employer.
       iii.    Transfer of any property or services provided by employer to employee.
       iv.     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.
       v.      Fair market value of other benefits or perquisites as reduced by the amount
               recovered by the employer

       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

       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
       -- Free or subsidized medical treatment provided by a hospital or clinic to its
       -- 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 employee’s 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

       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

       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

       Tax credits

       A salaries taxpayer is allowed the following tax credits:

       i.      Tax credit for Charitable Donations to approved Non-Profit Organizations.
       ii.     Tax credit for Investment in Shares

Income Tax on Salaries                                                                         -6
       iii.    Tax credit for life insurance premium
       iv.     Tax credit for Contributions or Premium paid to an Approved Pension Funds
       v.      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                          Up to             Tax Rate %
                             0                          350,000                 0
                          350,001                       400,000                1.5
                          400,001                       450,000                2.5
                          450,001                       550,000                3.5
                          550,001                       650,000                4.5
                          650,001                       750,000                 6
                          750,001                       900,000                7.5
                          900,001                      1,050,000                9
                         1,050,001                     1,200,000               10
                         1,200,001                     1,450,000               11
                         1,450,001                     1,700,000              12.5
                         1,700,001                     1,950,000               14
                         1,950,001                     2,250,000               15
                         2,250,001                     2,850,000               16
                         2,850,001                     3,550,000              17.5
                         3,550,001                     4,550,000              18.5
                         4,550,001                                             20

       Marginal relief

                                           Marginal Relief

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

Income Tax on Salaries                                                                          -7

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