REVENUE
DIVISION
CENTRAL BOARD OF REVENUE
*****
No.F.4(1)ITP/2002-EC/SAL
(Income Tax)
Subject: COMPUTATION OF INCOME TAX PAYABLE BY THE
SALARIED PERSONS FOR TAX YEAR 2003 AND DEDUCTION OF TAX FROM SALARY FOR THE TAX
YEAR COMMENCING ON
The tax liability of salaried taxpayers for
assessment year 2002-03 shall be computed in accordance with instructions
contained in CBR’s Circular No. 6 of 2001dated
2. The tax payable by salaried persons i.e. where
salary constitutes more than 50% of the total income from all sources for the
tax year 2003 shall be computed in accordance with the provisions of sections
12, 13 and 14 of Income Tax 0rdinance, 2001 read with rules 3 to 9 of Income
Tax Rules, 2002.
3. The taxpayers would be entitled to the following
relief:
a.
reduction
in tax liability as provided in clause (1) (1) of Part-III of the Second
Schedule to the Income Tax Ordinance, 2001;
b.
further
reduction of 50% of tax to the senior citizens aged 65 years or more and
earning income upto Rs.200, 000/- under clause
(1)(1A) of the said schedule ; and
c.
reduction
in tax liability in case of a full time teacher or researcher employed in a non
profit education or research institution, including Govt. training or research
institution, duly recognized by a Board of Education or a university or
University Grants Commission under clause (1)(2) of the said schedule.
4. The method of valuation of perquisites
and benefits under Income Tax Rules, 2002 with respect to salary income is the
same as in the repealed rules except the following changes:-
(i) The monetary limit of Rs.300,000 in rule 3(1A) of Income Tax Rules, 1982 (Repealed
Rules) has now been raised to Rs.600,000 in the Income Tax Rules, 2002.
(ii) The
method of valuation of housing or accommodation and conveyance previously
contained in the repealed rules has remained the same where income is below
Rs.600,000.
(iii) The
basis of valuation of accommodation or housing and motor vehicle provided by
the employer where salary income is Rs.600,000 or more has been changed as
under:-
(a) in the case of accommodation or housing the rates provided
in rule 18B of the repealed rules have been modified and given in rule 9 of the
Income Tax Rules, 2002.
(b) the
method of valuation of conveyance provided in the repealed rules has been
changed from “engine capacity basis” of motor vehicle to percentage of “cost to the
employer basis” whereby for private use of motor vehicle 10% of the cost of
motor vehicle to the employer and 5% of such cost if it is partly used for
private purpose, shall be added to the income of the employee. If the motor vehicle is acquired by the
employee on lease, the cost would be fair market value of the vehicle at the
commencement of lease.
5. Following examples illustrate the
determination of threshold of Rs.600,000:-
Example – 1. (Figures
in Rupees)
Time Scale (17440 – 1250 – 34940)
Total Exempt Taxable
Income Income Income
Basic Pay @ 34940 = 419280 Nil 419280
per month
Unfurnished accommodation
provided by the employer = 62892 Nil 62892
(as per
rule 5A)
Conveyance provided by = 3600 Nil 3600
employer partly for private (as per
use. Rule 6C)
Spl. Addl. Allowance =
18600 18600 Nil
Sr.Post Allowance = 12000 Nil 12000
Entertainment Allowance =
9600 Nil 9600
______ _____ ______
Total = 525972 18600 507372
The
Salary chargeable to tax determined after allowing admissible exemptions in the
above example does not exceed Rs.600,000. Hence the taxpayer would be entitled to
valuation of perquisites as per rule 3 – 8 for aforesaid treatment.
Example – 2. (Figures
in Rupees)
Time Scale (17440 – 1250 – 34940)
Total Exempt Taxable
Income Income Income
Basic Pay @ 34940 = 419280 Nil 419280
per month.
Furnished accommodation
provided by the employer = 104820 Nil 104820
(15%
+ 10%
of basic
salary, as per
rule 5A & 5B)
Conveyance provided by = 3600 Nil 3600
employer
partly for private
use.
Spl. Addl. Allowance =
18600 18600
Nil
Sr.Post Allowance = 12000 Nil 12000
Entertainment Allowance =
9600 Nil 9600
Concessional loan of =
60000 Nil 60000
Rs.2.0 million obtained
@
2% per annum
(Bench mark rate 5%
Diff:
i.e. 5-2 = 3%)
_______ ______ ______
Total = 772900 372108 609300
The Salary chargeable to tax
determined after allowing admissible exemptions exceeds Rs.600,000. Hence valuation
of perquisites and benefits shall be made as per rule 9 of the Income Tax
Rules, 2002, which is as under:
(Figures
in Rupees)
Time Scale (17440 – 1250 – 34940)
Total Exempt Taxable
Income Income Income
Basic Pay @ 34940 = 419280 Nil 419280
per month
Furnished accommodation
provided by the employer = 370000 NIL 370000
with land area of 1000 Sq
yards, Rule 9(1)(a).
Add.
15% under rule 9(1)(b)
=
55500
55500
conveyance provided by = 50000 50000
employer partly for private
use. Cost of vehicle 1 million
(assumed) Rule 9(5)(b).
Spl. Addl. Allowance =
18600 18600 Nil
Sr. Post Allowance =
12000 Nil 12000
Entertainment Allowance =
9600 Nil 9600
Concessional loan of = 60000 Nil 60000
Rs.2.0 million obtained
@
2% per annum
(Bench mark rate 5%
Diff:
i.e. 5 -2 = 3%)
______ _____ ______
Total = 994980 18600 976380
6. Various provisions relating to above
examples are explained as under:-
(A) SALARY
BELOW Rs.600,000/-.
The salaried taxpayers whose salary as defined in
sub-section (2) of section 12 and rule 4 of the Income Tax Rules, 2002
excluding the exempt value of allowances, perquisites or benefits determined
under rules 3 to 9 of the said rules does not exceed Rs.600,000/-, the addition
would be made as under:-
(a) House rent allowance, Housing or
Accommodation.
(i) house rent allowance
received in cash upto 45% of the minimum of the time
scale shall be exempt from tax. Any amount in excess of 45% of the minimum of
the time scale of basic salary or the basic salary where there is no time scale
shall be added to the income.
(ii) where rent free unfurnished accommodation is provided, if the
annual value of the accommodation exceeds 45% of the minimum of time scale of
basic salary or the basic salary where there is no time scale, the amount
exceeding 45% as per (i) above subject to maximum of
15% of salary.
(iii) where rent free furnished accommodation is
provided by the employer, the addition towards salary would be an amount as
determined in sub-para (ii) above and additional
amount equal to 10% of the basic salary shall also be added
(iv) there is no change in the valuation of
conveyance or conveyance allowance paid in cash where salary income is below
Rs.600,000. Provisions of the Income Tax
Rules, 2002 are exactly the same as were in the repealed rules.
(B) SALARY
OF Rs.600,000/- OR MORE.
(a)
where
any perquisite is receivable in cash the whole amount shall be included in
employee’s salary.
(b)
where
any perquisite is receivable otherwise than in cash, the amount chargeable to
the employee under the head “salary” for that year shall include the fair
market value of the perquisite, determined at time it is provided, except
provision of housing or accommodation and provision of motor vehicle, as
reduced by any amount paid by the employee for the perquisite.
(c)
Where
unfurnished accommodation or housing is provided, the value for addition would
be determined on the basis of land area
of the accommodation as provided in rule 9(4)(a) of the Income Tax Rules, 2002. If furnished accommodation is provided, an
additional amount equal to 15% of the basic salary shall also be added under
rule 9(4)(b) in addition to the amount referred in
aforesaid rule.
(d)
where
a motor vehicle is provided by the employer, the value for addition shall be
determined as under:-
(i)
where the motor vehicle is provided by an employer wholly for private use
of the employee, 10% of the cost to the employer for acquiring the motor
vehicle or the fair market value of the vehicle at the commencement of lease,
if the motor vehicle is taken on lease by the employer;
(ii)
where the motor vehicle is provided by an employer partly for private use
of the employee, 5% of the cost to the employer for acquiring the motor vehicle
or the fair market value of the vehicle at the commencement of lease, if the
motor vehicle is taken on lease by the employer;
(iii)
where the motor vehicle is used by more than one employee, the amount as
determined in clause (i) or (ii), as the case may be,
divided by number of employees using the motor vehicle; and
(iv) where an employee makes any payment to the employer in
respect of the use of motor vehicle, the value of perquisite as determined
under clause (i), (ii) or (iii) as reduced by the
amount paid by him.
7. The following allowances are to be
taxed in identical manner irrespective of the fact whether salary is below or
above Rs.600,000:-
a. MEDICAL ALLOWANCE:
(i)
Where
any benefit, reimbursement of medical charges or hospital charges, or both,
incurred by an employee is provided for under the terms of employee’s
employment agreement and the employee provides NTN of the hospital or clinic
and the medical or hospital bills are also certified and attested by the
employer, such expenses and reimbursement is exempt from tax.
(ii)
Where
such benefits for reimbursement of medical charges or hospital charges, or
both, are not provided for under the terms of employment agreement and instead,
medical allowance is received in cash the amount exceeding 10% of basic pay is
to be included in the income of the employee for tax purposes.
b. UTILITIES:
(i)
Any
sum paid for purposes of meeting the charges of gas, electricity and water or
value thereof in excess of 10% of the minimum of the time scale of the employee
is to be added towards total income.
(ii)
The
exemption of the utility charges available to Federal and Provincial Ministers
has been withdrawn. Any sum paid for
meeting the charges of gas, electricity and water or value thereof shall be
taxable for the sum paid on or after first day of July 2002.
c. CONCESSIONAL LOANS:
(i) Any loan provided by an employer on or
after first day of July 2002 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 difference between the amount of profit on loan paid by the
employee and the amount of profit on loan computed at benchmark rate shall be
added to the income of the employee.
(ii) Benchmark rate as defined in section 13(14) of the Income Tax
Ordinance, 2001, for the tax year commencing on the first day of July 2002
would be a rate equal to 5% per annum and for tax years next following, the
rate for each successive year shall be taken at 1% higher than the rate
applicable for immediately preceding year but the said rate shall not exceed,
in any case, from the rate notified by the Federal Government in respect of any
tax year.
d. OTHER BENEFITS:
The following benefits received by an employee from
the employer shall be added to the income of the employee:-
(i)
An
obligation of an employee or repayment of an amount owning by the employee is
waived off by the employer.
(ii)
An
obligation of an employee to repay an amount owning by the employee to another
person is paid by the employer.
(iii)
Transfer
of a property by an employer to an employee or services provided by an employer
to an employee in a tax year. The amount to be added as income of the employee
shall be the fair market value of the property or services determined at the
time of transfer of property or provision of services as reduced by any payment
made by the employee to acquire such property or services.
(iv)
The
services of a house keeper, driver, gardener or other domestic assistance
provided by an employer to an employee in a tax year shall be liable to
tax. The value of such services shall
include the total salary paid to such house keeper, driver, gardener or other
domestic assistance in that tax year as reduced by an amount paid by the
employee to acquire such services.
(v) In
respect of any other benefit or perquisite the fair market value of the benefit
or perquisite, as the case may be, reduced by the cost borne by the employee to
acquire such benefit or perquisite shall be added to the income.
e. TAXATION OF CERTAIN ALLOWANCES
The following allowances paid on or after first day of
July 2002, irrespective of the level of salary, have been made taxable:-
(a) Senior
Post Allowance
(b) Entertainment Allowance
f. TAX ON TAX:
The tax paid by an employer on behalf of its employee
on salary paid on or after first day of July 2002, is to be grossed up to
compute the tax liability of the employee.
g. EMPLOYEES SHARE SCHEME:
The grant to an employee of the mere right or option
to acquire shares is not chargeable to tax.
But when an employee is actually issued shares, the difference between
the market value of shares at the date of issue and consideration given by the
employee shall be included in the income of the employee. However, if the shares issued are subject to
a restriction on transfer the said difference shall not be included until the
restriction ends. In such cases fair
market value shall be determined not at the time of issuance of shares but at
the time when the restriction to transfer the share ends. However, if an employee disposes of the
shares despite the restriction the employee is taxable during the year the
shares are disposed off and the fair market value of the shares shall be
determined at the time of disposal.
In case an employee who has been granted a right or
option to acquire the shares under an Employee Share Scheme, instead of
exercising the right to acquire shares disposes of the right or option during
the tax year, the gain derived by the employee on such disposal shall be
included in his salary.
8. PAYMENT
ON TERMINATION OF EMPLOYMENT:
Any amount received on termination
of an employment, whether paid voluntarily or under an agreement, including any
compensation for redundancy or loss of employment and golden handshake payments
are to be included in salary by virtue of section 12(2)(e)(iii) of the Income
Tax Ordinance, 2001. However, an employee
receiving such payment in a tax year may, by notice in writing to the
Commissioner, opt to be taxed at an average rate of tax for the preceding three
years. Such option shall be exercised 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.
9. SALARY
PAID IN ARREAR:
Where any amount chargeable under
the head “salary” is paid to an employee in arrears and this results in
taxation at higher rate of tax, the employee may, by notice in writing to the
Commissioner, opt for the amount received as arrears to be taxed at the rates
of tax that would have been applicable if the salary has been paid to the
employee in the tax year in which the services were rendered. This option is to be provided 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.
10. INCREASE
IN BASIC THRESHOLD:
The basic threshold has been raised
to Rs.80,000 and the tax slabs have also been revised
accordingly. The following tax slabs
shall be applicable from tax year 2003 and salary paid on or after first day of
July 2002:
|
S.No. |
Taxable income |
Rate of tax |
|
(1) |
(2) |
(3) |
|
1. |
Where
taxable income does not exceed Rs.80,000 |
0% |
|
2. |
Where
taxable income exceeds Rs.80,000 but does not exceed Rs.150,000 |
7.5% of the
amount exceeding Rs.80,000. |
|
3. |
Where
taxable income exceeds Rs.150,000 but does not exceed Rs.300,000 |
Rs.5,250 plus 12.5% of the amount exceeding Rs.150,000. |
|
4. |
Where
taxable income exceeds Rs.300,000 but does not exceed Rs.400,000 |
Rs.24,000 plus 20% of the amount exceeding Rs.300,000. |
|
5. |
Where
taxable income exceeds Rs.400,000 but does not exceed Rs.700,000 |
Rs.44,000 plus 25% of the amount exceeding Rs.400,000. |
|
6. |
Where
taxable income exceeds Rs.700,000. |
Rs.119,000 plus 35% of the amount exceeding Rs.700,000. |
11. The following examples illustrate the computation of tax of
salaried persons for the tax year 2003 and tax shall be deducted under section
149(1) of the Income Tax Ordinance, 2001 accordingly, by the employers
w.e.f.
Example – 1. (Figures
in Rupees)
Time Scale (12400 – 615 – 24700)
Total Exempt Taxable
Income Income I ncome
Basic Pay @ 18550 = 222600 Nil 222600
per month
House rent allowance = 30996 30996 Nil
Conveyance allowance = 4080
4080 Nil
Spl. Addl. Allowance =
18600 18600 Nil
Over time =
4500 Nil 4500
______ _____ ______
Total = 280776 53676 227100
Tax on Rs.150,000
(on the amount
exceeding
Rs.80,000)
@ 7.5%. =
5,250
Tax on remaining amount
of Rs.77100 @ 12.5% =
9,638
______
Total Tax = 14,888
Less: 30% reduction as
per clause (1) of
Part-III of 2nd Schedule. = 4,466
_______
Tax payable = 10,422
Tax deductible per
month. = 868.5
Example – 2. (Figures
in Rupees)
Time Scale (16305 – 1070 – 31285)
Total Exempt Taxable
Income Income Income
Basic Pay @ 27005 324060 Nil 324060
per month
Qualification pay 9000 Nil 9000
Senior Post allowance 9600 Nil 9600
Entertainment allowance 5400 Nil 5400
Un-furnished accommodation 48609 48609
provided by the employer
with area of 1000 Sq.Yd.
at
restricted to 15% of the
basic salary).
Conveyance
provided = 3600 3600
by the
employer.
Spl. Addl. allowance = 24456 24456 Nil
Orderly allowance = 22800 22800 Nil
______ ______ ______
Total = 447525 47256 400269
Tax on Rs.150,000
(on the amount
exceeding
Rs.80,000)
@ 7.5%. = 5,250
Tax on next Rs.150,000
@ 12.5% = 18,750
Tax on next
Rs.100,000
@ 20% = 20,000
Tax on
remaining amount
of Rs.269 @ 25% = 67
_______
Total Tax =
44,067
Less: 20% reduction as
per clause (1) of
Part-III of 2nd Schedule. = 8,813
_______
Tax payable = 35,254
Tax deductible per
month. = 2,938
Example – 3. (Figures
in Rupees)
Time Scale (16305 – 1070 – 31285)
Total Exempt Taxable
Income Income Income
Basic Pay @ 27005 324060 Nil 324060
per month
Qualification pay 9000 Nil 9000
Senior Post allowance 9600 Nil 9600
Entertainment allowance 5400 Nil 5400
Rent ceiling paid by 48609 48609
the
employer Rs.155664
(Restricted to 15% of salary).
Conveyance provided
= Nil Nil Nil
by the employer (for
business
use only).
Spl. Addl. allowance = 24456
24456 Nil
Orderly allowance = 22800
22800 Nil
______ ______ ______
Total = 443925 47256 396669
Tax on Rs.150,000
(on the amount
exceeding
Rs.80,000)
@ 7.5%. = 5,250
Tax on next Rs.150,000
@ 12.5% = 18,750
Tax on
remaining amount
of Rs.96669 @ 20% = 19,334
_______
Total Tax =
43,334
Less: 20% reduction as
per clause (1) of
Part-III of 2nd Schedule. = 8,667
_______
Tax payable = 34,667
Tax deductible per
month. = 2,889
Example – 4. (Figures
in Rupees)
Time Scale (50000 – 15000 – 200000)
Total Exempt Taxable
Income Income Income
Basic Pay @ 80,000 960000 Nil 960000
per month
Entertainment allowance
12000 Nil 12000
Unfurnished accommodation
provided
by the employer
462000 Nil 462000
in an area falling within the
limit
of Municipal Corporation
(area 2000 Sq.Yd).
Motor vehicle provided
by the
employer for private
use.
Cost of motor vehicle = 100000 Nil 100000
Rs.1million. 10% of the
cost to be included in
in salary
Utilities Charges =
100000 96000
4000
Insurance Premium
paid by the employer =
30000 Nil 30000
Loan of Rs.2 (M) provided
by the employer @ 4%
mark up = 20000 Nil 20000
Share acquired on
exercising stock option
at Rs.
0.5 million, fair
market value is 0.6 (M)
while employee paid
Rs. 0.4
million for
acquiring
the said shares
200000 Nil 200000
______ ______ _______
Total = 1884000 96000 1788000
Total Tax = 499800
Less: 5% reduction as
per clause (1) of
Part-III of 2nd Schedule. = 24990
_______
Tax payable = 474,810
Tax deductible per
month. =
39,568
(MUKHTAR AHMAD GONDAL)
CHIEF (DIRECT TAX POLICY)
Ph:9201742