1. 03 TAXATION

2. PROVIDENT FUND The contribution paid by employee from his salary is not a deductible expense. Employer contribution is exempt upto 10% of the salary or Rs. 100,000, whichever is lower. Interest credited to the account is exempt upto 16% or 1/3 rd of the salary whichever is higher.

3. Jamal works in Flack Limited, a listed company at a monthly salary of Rs. 40,000. He participates in an employee provident fund which Flack Limited operates for all employees. Jamal is required to pay 11% of his salary in the fund, and Flack Limited also contributes the same amount in the fund on his behalf. Salary (40,000 x12) =480,000 Employer contribution in provident fund Contribution = 11% of 480,000 = 52,800 Exempt: lower of 10% of salary=(48,000) 4,800 or Rs. 100,00484,800

4. Kazim works has been working as Maintenance Manager in Flack Limited at an annual salary of Rs. 45,000 for the last many years. He also participates in an employee provident fund which Flack Limited operates for all employees. Kazim is required to pay 11% of his salary in the fund, with Flack Limited also contributing the same amount in the fund on his behalf. His accumulated fund on 30 th June 2015 was Rs. 2,360,000 and the trustees of the fund credited interest at the rate of 16% for the year on the same day.

5. Salary (Rs. 45,000 x 12 months) = 540,000 Employer contribution to provident fund 11% of 540,000 = 59,400 Exempt contribution – lower of: (10% of salary = Rs. 54,000 or Rs. 100,000) (54,000) 5,400 Interest on acc. Balance 16% of 2,360,000 = 377,600 Exempt(377,600) 0 545,400

6. PENSION Any pension received by a citizen of Pakistan is exempt from a former employer (or associate). Where a person receives more than one pensions, the higher will be exempt. If the person continues working with the employer after retirement, the pension will be taxable as ‘salary’ income. For a person over 60 years of age, all such pensions are exempt irrespective of the above mentioned conditions (Circular 28 of 1991) Commutation of pension is exempt from tax Clause 8 – 2 nd schedule

7. GRATUITY Amount received by government employees from the Government Gratuity Fund is exempt from tax. Amount received by private employees (non-government) from an approved gratuity fund is also exempt from tax (approved by CIT under Part III of sixth schedule) An amount received from an approved gratuity scheme (approved by board) will be exempt upto Rs. 200,000. In cases where an employee receives an amount from an unapproved gratuity fund or scheme, it will be exempt upto lower of (a) Rs. 75,000 or (b) 50% of the amount received Clause 13 – 2 nd schedule

8. GRATUITY Following are exceptions (no exemptions) Payment not received in Pakistan Payment received by a Director who is not employee Payment received by a person who is not a resident of Pakistan (spend 183 days or more in Pakistan). Clause 13 – 2 nd schedule

9. Mahmood worked at monthly basic salary of Rs. 50,000 till 31 st March 2015, when he retired. During his employment, he was provided with rent free accommodation by the company, and a car costing Rs. 600,000 for both official and personal use. Mahmood participated in the company’s approved provident fund where all employees are required to contribute 12% of their salary. On his retirement, Mahmood became entitled to a monthly pension of Rs. 22,000 from the company's approved pension fund. He also received Rs. 140,000 from the company's gratuity scheme, which is unapproved. The accumulated balance of provident fund on 1.7.14 was Rs. 1,430,000 and Mahmood received interest @ 18%.

10. Salary (Rs. 50,000 x 9 months) = 450,000 Accommodation (45% of 450,000) = 202,500 Car (Rs. 600,000 x 5% x 9/12) = 22,500 Employer contribution to provident fund 12% of 450,000 = 54,000 (lower 10% or 100,000) =(45,000) 9,000 Interest on acc. Balance 18% of 1,430,000 = 257,400 Higher of 1/3 salary or 16% (228,800) 28,600 Unapproved Gratuity fund: lower of 50% of 140,000 or 75,000 70,000

11. SHARE SCHEME When shares are issued under a scheme, the FMV of the shares less purchase price (consideration) less any amount paid to acquire right or option is taxable. If the shares carry a restriction on sale, benefit will be taxable (a) when restriction is lifted or (b) shares are disposed. FMV will be of the day restriction is lifted… When an employee receives a right / option to buy company shares, it will not be a taxable event. When employee sells the right / option, consideration received less amount paid to acquire right / option will be taxable Section 14

12. Naveed’s employer decided to increase share capital. The company took necessary permission and decided to offer ten percent of the issue to employees of the company. Naveed received 10,000 shares after paying Rs. 23 / share on 31.10.2013. The shares carried a restriction whereby they could not be sold for at least 18 months from date of issue. MV was Rs. 28 on 31.10.13. On 30.04.15, when the market value of the shares was Rs. 35 per share, the restriction on selling was removed. Naveed gets a monthly salary of Rs. 180,000. He is provided with an office maintained car costing Rs. 1,500,000 for both official and personal use.

13. The shares were issued in Tax year 2014 (1.7.13 to 30.6.14), but as they carry a restriction on sale, they will be taxable on the day the restriction is removed. The benefit will be based on market value of shares on the day the restriction is removed, and not on the market value of shares on the day they were issued. Disposal of asset includes a sale, exchange or transfer (Section 75). Therefore, if the employee does not sell the shares (with restriction on sale) in the market, but transfers them as a gift to someone, the benefit will be taxable for the employee on the day shares are transferred.

14. Pasha is CEO of a listed company. On 1.7.13, he was given options to buy 10,000 shares of the company at a fixed price of Rs. 12 per share. The options were tradable in open market, and had cost Rs. 1.5 per option. They had a market value of Rs. 2.25 per option on 1.7.13. The shares of the company were trading at Rs. 23 per share on 1.7.13. According to the terms, Pasha could exercise the option anytime within the next 24 months, and the shares bought through the option would be freely tradable in the open market, without any restriction. On 31.10.14, Pasha sold 2,000 options in the open market at Rs. 14.5 per option. The value of Company’s share was Rs. 31 on 31.10.14. On 15.12.14, he gave 3,000 options to his wife, when the MV of the option was Rs. 15 per option. On 5.3.15, he exercised his remaining options. The MV of the option was Rs. 16 per option on 5.3.15, while the shares of the company were trading at Rs. 34 per share on that day.