Presentation on Salary Taxation PTBA SUMMER CAMP 2009 BY ANWAR KASHIF MUMTAZ SAIDUDDIN & CO., ADVOCATES

SALARY Remuneration or compensation for services rendered, paid or to be paid at regular intervals and includes overseas, dearness or cost of living allowance by whatever name it may be described, and bonus or commission which is payable to an employee in accordance with the terms of his employment as remuneration or compensation for services including any amount received by an employee from any employment, whether of a revenue or capital nature, but does not include the employer’s contribution to a recognized provident or superannuation fund or gratuity fund or any other sum which does not enter into the computation for pension or retirement benefits; 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

TAXABLE SALARY For determination of taxable salary after the Finance Act, 2006, all the exemptions and reductions provided under the Rules have been withdrawn and now from 1st July, 2006 all allowances paid by the employer to its employee wether cash or in kind shall be treated as taxable income for the computation of tax. However, only the medical allowance/ reimbursement of medical expenses provided under clause 139 of the second schedule of the Income Tax Ordinance, 2001.

MEDICAL ALLOWANCE & REIMBURSEMENT OF MEDICAL EXPENSES (139) (a) The benefit represented by free provision to the employee of medical treatment or hospitalization or both by an employer or the reimbursement received by the employee of the medical charges or hospital charges or both paid by him, where such provision or reimbursement is in accordance with the terms of employment: Provided that National Tax Number of the hospital or clinic, as the case may be, is given and the employer also certifies and attests the medical or hospital bills to which this clause applies;

(b) any medical allowance received by an employee not exceeding ten per cent of the basic salary of the employee if free medical treatment or hospitalization or reimbursement of medical or hospitalization charges is not provided for in the terms of employment; or

EMPLOYEE SHARE SCHEME The value of a right or option to acquire shares under an employee share scheme granted to an employee shall not be chargeable to tax “employee share scheme” means any agreement or arrangement under which a company may issue shares in the company to – (a) an employee of the company or an employee of an associated company; or (b) the trustee of a trust and under the trust deed the trustee may transfer the shares to an employee of the company or an employee of an associated company.

PERQUISITES & ALLOWANCES Valuation of perquisites, allowances and benefits.- For the purposes of computing the income chargeable to tax under the head “salary”, the value of all perquisites, allowances and benefits provided by the employer to the employee shall be included in the said income in accordance with the rules 4 to 7 of Income Tax Rules 2002. Valuation of Accommodation. - The value of accommodation provided by an employer to the employee shall be taken equal to the amount that would have been paid by the employer in case such accommodation was not provided. Provided that the value taken for this purpose shall, in any case, not be less than forty five percent of the minimum of the time scale of the basic salary or the basic salary where there is no time scale.

Valuation of conveyance Valuation of conveyance.- The value of conveyance provided by the employer to the employee shall be taken equal to an amount as below: - 1) Partly for personal and partly for official use 5% of: (a) the cost to the employer for acquiring the motor vehicle; or, (b) the fair market value of the motor vehicle at the commencement of the lease, if the motor vehicle is taken on lease by the employer; 2) For personal use only 10% of: For the purpose of this part, “employee” includes a director of a company.

INTEREST FREE LOAN (13) (7) Where a loan is made, on or after the 1st day of July, 2002, by an employer to an employee and either no profit on loan is payable by the employee or the rate of profit on loan is less than the benchmark rate, the amount chargeable to tax to the employee under the head “Salary” for a tax year shall include an amount equal to- the profit on loan computed at the benchmark rate, where no profit on loan is payable by the employee, or (b) the difference between the amount of profit on loan paid by the employee in that tax year and the amount of profit on loan computed at the benchmark rate, as the case may be.]

(13) (14) (a) “benchmark rate” means – (i) for the tax year commencing on the first day of July, 2002, a rate of five percent per annum; and (ii) for the tax years next following the tax year referred to in sub-clause (I), the rate for each successive year taken at one percent above the rate applicable for the immediately preceding tax year, but not exceeding such rate, if any, as the Federal Government may, by notification, specify in respect of any tax year;

DEDUCTIBLE ALLOWANCE Zakat is allowed as deduction from the taxable income U/s. 60 of the Income Tax Ordinance, 2001.

TAX CREDITS Charitable Donations Investment in shares Contribution to an Approved Pension Fund Profit on debt

TAX DEDUCTIONS ALLOWED Tax deductions on telephone/mobile phones allowed for tax liability U/s. 236 of the Income Tax Ordinance, 2001. Tax deduction on cash withdrawal U/s. 231-A of the Income Tax Ordinance, 2001 from bank amounting to Rs.25,000/- per day is allowed as tax deduction from the tax liability of the year. Advance tax is paid at the time of registration of motor vehicle U/s. 234 of the Income Tax Ordinance, 2001.

TAX RATE FOR SALARIED CLASS Where salary income exceeds 50% of total income (a) Taxable income does not exceed Rs 200,000 NIL (b) Taxable income exceeds from Rs 200,000 to Rs 8,650,000 0.5% to 20% IDPT on the tax payable on the taxable income of one million rupees or more shall be levied at the rate of 5% of such tax. Bonus paid to corporate employees having Salary Income of Rs. 1 Million in tax year 2010 shall be chargeable to tax at the rate of 30%

Example-1, where salary excluding bonus is above 1 million Salary income of a corporate employee in tax year 2010 Rs. 1,300,000 (including bonus of Rs. 300,000) WORKING OF TAX Salary income other than bonus Rs. 1,000,000 A) Tax thereon @ 9% Rs. 90,000 Bonus income for the year Rs. 300,000 B) Tax thereon @ 30% Total Tax (A+B) Rs. 180,000 Example-2 Where salary excluding bonus is below 1 million Salary income of a corporate employee in tax year 2010 Rs. 1,000,000 (including bonus of Rs. 100,000) WORKING OF TAX Salary income other than bonus Rs. 900,000 Bonus Rs. 100,000 Salary income including bonus Rs. 1,000,000 Tax thereon @9% Rs. 90,000

STATEMENT /RETURN Where the entire income of a taxpayer in a tax year consists of income chargeable under the head “Salary” following is treated as a return of income (a) Employer’s Certificate in lieu of return (b) Statements Provided that where salary income for the tax year is Rs. 500,000/-or more a person requires to furnish a return of income electronically alongwith the wealth statement