1. SALARY: Taxation, Exemptions & Rebates Presented By: Asif Zafar 22 August 2016

2. Page 2 Objective ► Thank you all for this invitation. ► Today’s session has been planned with the objective to discuss and understand the income tax laws in relation to taxability of salary, rebates available against salary income and the tax credits available against the tax payable. SALARY: Taxation, Exemptions & Rebates

3. Page 3 SALARY: Taxation, Exemptions & Rebates Page # Salary – meaning of04 Pakistan Source Salary06 Basis of taxation07 Deduction of not allowed – General rule08 Allowances and Perquisites09 Valuation of accommodation and conveyance10 Treatment of medical benefits11 Payment on termination of services12 Concessional loans13 Tax on Tax14 Provident Fund – Deemed salary15 Perquisites not taxable16 Rebates / Deductible allowances17 Income Tax Rates19 Withholding tax by employer21 Adjustments from withholding22 Other adjustments23 Contents

4. Page 4 Salary – Meaning of ► Salary means: ► Any amount received by an employee from any employment (whether of revenue or capital nature). SALARY: Taxation, Exemptions & Rebates

5. Page 5 Salary – Meaning of ► Salary includes any amount received: ► By the employee’s employer, an associate of the employer, or by a third party under an arrangement with the employer or an associate of the employer; ► By a past employer or a prospective employer; or ► To the employee or to an associate of the employee or to a third party under an agreement with the employee or an associate of the employee. SALARY: Taxation, Exemptions & Rebates

6. Page 6 Pakistan Source Salary ► Salary shall be Pakistan source if it is received from exercise of employment in Pakistan. ► It is immaterial where salary is paid or the employer is Pakistan resident or not. SALARY: Taxation, Exemptions & Rebates

7. Page 7 Basis of taxation ► Salary is taxable on receipt basis ► A person is considered to receive salary, if the amount is: ► Actually received by the person ► Applied on behalf of the person on his instruction ► Made available to the person. SALARY: Taxation, Exemptions & Rebates

8. Page 8 Deductions not allowed – General Rule ► No deduction is allowed for any expenditure incurred by an employee in deriving salary income. SALARY: Taxation, Exemptions & Rebates

9. Page 9 Allowances and Perquisites ► All allowances received by an employee in relation to his employment are fully taxable. ► All perquisites (benefits in kind) provided to an employee in relation to his employment are taxable at fair market value (FMV). SALARY: Taxation, Exemptions & Rebates

10. Page 10 Value of accommodation and Conveyance ► The value of accommodation provided by an employer shall not be less than 45% of his basic salary. ► The value of conveyance provided by an employer shall be: ► 10% of cost of vehicle to the employer (if only for personal use) ► 5% of cost of vehicle to the employer (if partly for official and partly for personal use). SALARY: Taxation, Exemptions & Rebates

11. Page 11 Treatment of medical benefits ► If the terms of employment provides for medical treatment / reimbursement of medical expense, the entire benefit is exempt if: ► NTN of the hospital is mentioned on the bill ► Bills are duly verified by the employer ► If terms of employment do not provide for any medical benefit but the employer provides such benefit / reimbursement, the exemption is upto 10% of basic salary. SALARY: Taxation, Exemptions & Rebates

12. Page 12 Payment on termination of services ► Payment on termination of services may be taxed: ► At the applicable tax rate for the tax year in which payment is received; or ► At an average rate of tax of the employee for 3 preceding tax years, at the option of the employee. SALARY: Taxation, Exemptions & Rebates

13. Page 13 Concessional loan ► If the employer provides interest free loan or loan at a concessional rate, the amount to be included in salary will be - ► Profit on loan at the benchmark rate; or ► The difference between the profit paid by the employee and the profit computed at the benchmark rate (currently 10%) ► No addition will be made in respect of the above, if the loan amount does not exceed Rs.500,000 SALARY: Taxation, Exemptions & Rebates

14. Page 14 Tax on Tax ► Tax borne by the employer is a perquisite in the hands of the employee and is therefore taxable. ► Salary is therefore required to be “grossed up” to determine correct taxable income. SALARY: Taxation, Exemptions & Rebates

15. Page 15 Provident Fund – Deemed salary ► Following are taxable as salary income in the hands of the employee on account of provident fund – ► Any contribution to a recognized provident fund by an employer if it exceeds the lower of the following – ► 1/10 th of the salary; or ► Rs.150,000 ► Any interest on account of provident fund credited to an employee’s account in excess of – ► 1/3 rd of the employee’s salary ► at a rate exceeding the rate prescribed by the Federal Government (currently 16%) SALARY: Taxation, Exemptions & Rebates

16. Page 16 Perquisites not taxable ► Following perquisites are not taxable as salary in the hands of the employee: ► Free or subsidized food provided by hotels and restaurants to its employees during duty hours; ► Free or Subsidized education provided by an educational institution to the children of its employees; ► Free or subsidized medical treatment provided by a hospital or a clinic to its employees; ► Any other perquisite for which the employer does not have to bear any marginal cost as notified by CBR. SALARY: Taxation, Exemptions & Rebates

17. Page 17 Rebates / Deductible allowances ► Profit on debt ► A deductible allowance against salary income is allowed to the lower of 50% of taxable income or Rs.1 million in respect of any profit or share in rent / share in appreciation for value of house paid on a loan obtained from a scheduled bank or an NBFC, or a Government, or a listed company where the loan is utilized for construction or acquisition of a house. ► Zakat ► Deductible allowance in respect of Zakat paid by a person is available to such person. However, the employer is not entitled to give any benefit of Zakat while working out taxable salary for the year and tax thereon under section 149. SALARY: Taxation, Exemptions & Rebates

18. Page 18 Rebates / Deductible allowances ► Education expenses ► Every individual having taxable income of less than one million rupees is entitled to a deductible allowance in respect of tuition fee paid by the individual in a tax year, to the lesser of – ► five per cent of the total tuition fee paid; ► twenty-five per cent of the person’s taxable income for the year; ► 60,000 rupees per child x No. of children ► The individual would be entitled to claim the above against his taxable income. However, the employer is not entitled to give any benefit of Zakat while working out taxable salary for the year and tax thereon under section 149. SALARY: Taxation, Exemptions & Rebates

19. Page 19 Income tax rates (Effective for the tax year 2017) SALARY: Taxation, Exemptions & Rebates Taxable income up to PKR 400,000 Taxable income from PKR 400,000 to PKR 500,000 Taxable income from PKR 500,000 to PKR 750,000 Taxable income from PKR 750,000 to PKR 1,400,000 Taxable income from PKR 1,400,000 to PKR 1,500,000 Taxable income from PKR 1,500,000 to PKR 1,800,000 Tax at 0% Tax at 2% of the amount exceeding PKR 400,000 Tax at PKR 2,000 plus 5% of the amount exceeding PKR 500,000 Tax at PKR 14,500 plus 10% of the amount exceeding PKR 750,000 Tax at PKR 79,500 plus 12.5% of the amount exceeding PKR 1,400,000 Tax at PKR 92,000 plus 15% of the amount exceeding PKR 1,500,000

20. Page 20 Income tax rates (Effective for the tax year 2017) SALARY: Taxation, Exemptions & Rebates Taxable income from PKR 1,800,000 to PKR 2,500,000 Taxable income from PKR 2,500,000 to PKR 3,000,000 Taxable income from PKR 3,000,000 to PKR 3,500,000 Taxable income from PKR 3,500,000 to PKR 4,000,000 Taxable income from PKR 4,000,000 to PKR 7,000,000 Taxable income exceeds PKR 7,000,000 Tax at PKR 137,000 plus 17.5% of the amount exceeding PKR 1,800,000 Tax at PKR 259,500 plus 20% of the amount exceeding PKR 2,500,000 Tax at PKR 359,500 plus 22.5% of the amount exceeding PKR 3,000,000 Tax at PKR 472,000 plus 25% of the amount exceeding PKR 3,500,000 Tax at PKR 597,000 plus 27.5% of the amount exceeding PKR 4,000,000 Tax at PKR 1,422,000 plus 30% of the amount exceeding PKR 7,000,000

21. Page 21 Withholding tax by employer ► Every employer is required to withhold tax from salary ► Tax is required to be deducted at the time of payment ► The amount of tax is calculated at an average rate of tax (as provided under Part I of the First Schedule) SALARY: Taxation, Exemptions & Rebates

22. Page 22 Adjustments from withholding ► Following adjustments can be made against the tax to be withheld by the employer : ► Tax credit on: (a) Donation; (b) Investments in new shares; (c) life / health insurance premium and (d) Investment in retirement annuity schemes ► Tax collected from the employee under various sections such as telephone and electricity bills, cash withdrawals etc. ► Excess or short deduction of tax by the employer from salary SALARY: Taxation, Exemptions & Rebates

23. Page 23 Other Adjustments ► 50% reduction in tax liability of the following persons where taxable income does not exceed Rs.1,000,000 – ► The individual is a disabled person and holds a CNIC to that effect; or ► The age of the individual is 60 years or more on the first day of the tax year. ► 40% reduction in tax liability of an individual subject to the following conditions - ► He/she should be a full time teacher or researcher; and ► He/she should be employed in: ► A non-profit education or research institution duly recognized by: ► Higher Education Commission; ► A Board of Education recognized by Higher Education Commission; or ► A University recognized by Higher Education Commission; or ► Government training and research institutions SALARY: Taxation, Exemptions & Rebates

24. Page 24 SALARY: Taxation, Exemptions & Rebates THANK YOU