GOVERNMENT OF PAKISTAN REVENUE DIVISION CENTRAL BOARD OF REVENUE ***** No.F.4(1)ITP/2004-SAL Islamabad, July 3, 2004 Circular No. 15 of 2004 ( Tax) Subject: DEDUCTION OF TAX FROM SALARY FOR THE TAX YEAR COMMENCING ON 1 ST JULY 2004. The tax liability of salaried taxpayers where salary constitutes more than 50% of the total income from all sources for the tax year 2005 shall be computed in accordance with the provisions of sections 12, 13 and 14 of Tax 0rdinance, 2001 read with rules 3 to 9 of Tax Rules, 2002. 2. The taxpayers would be entitled to the following relief: a. exemption of basic threshold of Rs.100,000; b. reduction in tax liability as provided in clause (1) (1) of Part- III of the Second Schedule to the Tax Ordinance, 2001, as per following schedule: S No. Slab Reduction in Tax liability 1. Where income exceeds Rs.60,000 but 70% does not exceed Rs.80,000 2. Where income exceeds Rs. 80,000 but 60% does not exceed Rs.100,000 3. Where income exceeds Rs.100,000 50% but does not exceed Rs.150,000 4. Where income exceeds Rs. 150,000 40% but does not exceed Rs.200,000 5. Where income exceeds Rs.200,000 30% but does not exceed rs,300,000 6. Where income exceeds Rs.300,000 20% but does not exceed Rs.500,000 7. Where income exceeds Rs.500,000 10% but does not exceed Rs.1,000,000 8. Where income exceeds Rs.1,000,000 5% 1
c. further reduction of 50% of tax available to the senior citizens aged 65 years or more and earning income upto Rs.300, 000/- under clause (1A) of the said schedule shall also be applicable to salaried persons; and d. additional reduction of 50% 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. 3. TAXATION OF PERQUISITES AND ALLOWANCES WHERE SALARY INCOME EXCEEDS RS.600,000. The method of valuation of perquisites and benefits under Tax Rules, 2002 with respect to salary income is the same as explained in circular No.12 of 2002 dated August 9, 2002. However, in case of salaried taxpayer whose income is Rs.600,000 or more, the house rent allowance received in cash upto 45% of the minimum of the time scale or where there is no time scale upto 45% of basic salary subject to maximum of Rs.270,000 shall not be included in his taxable income. Principles of taxation of other perquisites in case of such taxpayers remain the same. 4. INCREASE IN BASIC THRESHOLD. The basic threshold has been raised to Rs.100,000 w.e.f. tax year 2005. The tax slabs have also been revised accordingly. These slabs shall, however, be applicable for tax withholding purposes in respect of salary paid on or after first day of July 2004. The revised slabs are as under:- S.No. Taxable income Rate of tax (1) (2) (3) 1. Where taxable income does not exceed Rs.100,000 2. Where taxable income exceeds Rs.100,000 but does not exceed Rs.150,000 3. Where taxable income exceeds Rs.150,000 but does not exceed Rs.300,000 4. Where taxable income exceeds Rs.300,000 but does not exceed Rs.400,000 0% 7.5% of the amount exceeding Rs.100,000. Rs.3,750 plus 12.5% of the amount exceeding Rs.150,000. Rs.22,500 plus 20% of the amount exceeding Rs.300,000. 2
5. Where taxable income exceeds Rs.400,000 but does not exceed Rs.700,000 6. Where taxable income exceeds Rs.700,000. Rs.42,500 plus 25% of the amount exceeding Rs.400,000. Rs.117,500 plus 35% of the amount exceeding Rs.700,000. 5. The following examples illustrate the computation of tax of salaried persons for the tax year 2005 and tax shall accordingly be deducted under section 149(1) of the Tax Ordinance, 2001 by the employers w.e.f. July 1, 2004. Example 1. Time Scale (12400 615 24700) Total Exempt Taxable Basic Pay @ 18550 per month 222600 Nil 222600 House rent allowance 30996 30996 Nil Conveyance allowance 4080 4080 Nil Spl. Addl. Allowance 18600 18600 Nil Over time 4500 Nil 4500 Spl. Relief allowance @ 15% through 33390 Nil 33390 Finance Division s OM No.1(4)Imp/ 2003 dated June 30, 2003. Ad-hoc Relief allowance @ 15% through Finance Division s OM No.1(8)Imp/ 2004 dated July 1, 2004. 33390 Nil 33390 TOTAL 347556 53676 293880 Tax on Rs.150,000(on the amount exceeding Rs.100,000) @ 7.5%. Tax on remaining amount of Rs.143880 @ 12.5% 3,750 17,985 Total Tax 21,735 Less: 30% reduction as per clause (1) of 6,520 Part-III of 2 nd Schedule. Tax payable 15,215 Tax deductible per month. 1,268 3
Example 2. Time Scale (16305 1070 31285) Total Exempt Taxable 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 Nil 22800 Spl. Relief allowance = 48609 Nil 48609 @ 15% through Finance Division s OM No.1(4)Imp/ 2003 dated June 30, 2003. Ad-hoc Relief allowance = 48609 Nil 48609 @ 15% through Finance Division s OM No.1(8)Imp/ 2004 dated July 1, 2004. Total = 541143 24456 493887 Tax on Rs.150,000 (on the amount exceeding Rs.100,000) @ 7.5%. = 3,750 Tax on next Rs.150,000 @ 12.5% = 18,750 4
Tax on next Rs.100,000 @ 20% = 20,000 Tax on remaining amount of Rs.93,887 @ 25% = 23,472 Total Tax = 65,972 Less: 20% reduction as per clause (1) of Part-III of 2 nd Schedule. = 13,194 Tax payable = 52,778 Tax deductible per month. = 4,398 Example 3. Time Scale (16305 1070 31285) Total Exempt Taxable Basic Pay @ 27,005 per month 324060 Nil 324060 Qualification pay 9000 Nil 9000 Entertainment allowance 5400 Nil 5400 Un-furnished accommodation provided 48609 48609 by the employer with plot area of 1000 Sq.Yd. at Islamabad (addition restricted to 15% of the basic salary). Conveyance provided by the employer. 3600 3600 Spl. Addl. Allowance 24456 24456 Nil Orderly allowance 22800-22800 Total 437925 24456 413469 Tax on Rs.150,000 (on the amount exceeding Rs.100,000) @ 7.5%. 3,750 Tax on next Rs.150,000 @ 12.5% 18,750 Tax on next Rs.100,000 @ 20% 20,000 5
Tax on remaining amount of 3,367 Rs.13,469 @ 25% Total Tax 45,867 Less: 20% reduction as per clause (1) of Part-III of 2 nd Schedule. 9,173 Tax payable 36,694 Tax deductible per month. 3,058 6. Following examples illustrate the determination of threshold of Rs.600,000:- Example 1. Time Scale (17440 1250 34940) Total Exempt Taxable Basic Pay @ 34940 = 419280 Nil 419280 per month 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 Orderly Allowance = 25584 Nil 25584 Spl. Relief allowance = 62892 Nil 62892 @ 15% through Finance Division s OM No.1(4)Imp/ 2003 dated June 30, 2003. Ad-hoc Relief allowance = 62892 Nil 62892 @ 15% through Finance Division s OM No.1(8)Imp/ 2004 dated July 1, 2004. Total = 614448 18600 595848 6
The Salary chargeable to tax determined after allowing admissible exemptions in the above example is less than Rs.600,000. Hence the taxpayer would be entitled to valuation of perquisites as per rule 3 8 for aforesaid treatment. Example 2. Time Scale (20000 2000 40000) Total Exempt Taxable Basic Pay @ 34000 = 408000 Nil 408000 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. Entertainment Allowance = 9600 Nil 9600 Concessional loan of = 100000 Nil 100000 Rs.2.0 million obtained @ 2% per annum (Bench mark rate 7% Diff: i.e. 7-2 = 5%) Total = 626020 Nil 626020 7
Since salary chargeable to tax determined after allowing admissible exemptions exceeds Rs.599,999, valuation of perquisites and benefits shall be made as per rule 9 of the Tax Rules, 2002, which is as under:- Time Scale (20000 2000 40000) Total Exempt Taxable Basic Pay @ 34000 = 408000 Nil 408000 per month Furnished accommodation provided by the employer = 370000 NIL 370000 with land area of 1000 Sq yards, Rule 9(1)(a). Add. 15% of Rs.270,000 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). Entertainment Allowance = 9600 Nil 9600 Concessional loan of = 100000 Nil 100000 Rs.2.0 million obtained @ 2% per annum (Bench mark rate 7% for tax year 2005 Diff: i.e. 7-2 = 5%) Total = 993100 Nil 993100 Tax on Rs.150,000 (on the amount exceeding Rs.100,000) @ 7.5%. = 3,750 Tax on next Rs.150,000 @ 12.5% = 18,750 8
Tax on next Rs.100,000 @ 20% = 20,000 Tax on next Rs.300,000 @ 25% = 75,000 Tax on remaining Rs.293,100 @ 35% = 102,585 Total Tax = 220,085 Less: 10% reduction as per clause (1) of Part-III of 2 nd Schedule. = 22,008 Tax payable = 198,077 Tax deductible per month. = 16,506 Example 3. Taxation of income of Rs.600,000 or more where house rent allowance is paid in cash. Time Scale (40000 5000 75,000) Total Exempt Taxable Basic Pay @ 55000 = 660000 Nil 660000 per month. House rent allowance = 240000 216,000 24000 received in cash [@ 45% as per rule 9(2)] conveyance provided by = 50000 50000 employer partly for private use. Cost of vehicle 1 million (assumed) Rule 9(5)(b). 9
Entertainment Allowance = 9600 Nil 9600 Concessional loan of = 100000 Nil 100000 Rs.2.0 million obtained @ 2% per annum (Bench mark rate 7% for tax year 2005 Diff: i.e. 7-2 = 5%) Total = 1059600 216000 843600 Tax on Rs.150,000 (on the amount exceeding Rs.100,000) @ 7.5%. = 3,750 Tax on next Rs.150,000 @ 12.5% = 18,750 Tax on next Rs.100,000 @ 20% = 20,000 Tax on next Rs.300,000 @ 25% = 75,000 Tax on remaining Rs.143,600 @ 35% = 50,260 Total Tax = 167,760 Less: 10% reduction as per clause (1) of Part-III of 2 nd Schedule. = 16,776 Tax payable = 150,984 Tax deductible per month. = 12,582 (Abdul Hamid) Secretary (IT Policy) Ph:9205561 10