04 Reduction & Credits TAXATION

TAX REDUCTION Where the taxable income in a tax year, other than income on which the deduction of tax is final, does not exceed one million rupees of a person- holding a National Database Registration Authority’s Computerized National Identity Card for disabled persons; or a taxpayer of the age of not less than sixty years on the first day of that tax year; the tax liability on such income shall be reduced by 50%. Part 1 - Tax Rates

Ali, born on 30 th May 1955, worked at monthly basic salary of Rs. 75,000 till 31 st December 2015, when he retired. Ali participated in the company’s approved PF where all employees are required to contribute 12% of their salary. He also received Rs. 200,000 from the company's gratuity scheme, which is unapproved. The accumulated balance of provident fund on was Rs. 1,930,000 and Ali received 15% for the year. On the day of retirement, Ali received 20,000 shares of the company under employees share scheme, free of cost without any restriction. The shares had a MV of Rs. 20 per share on Calculate tax for TY 2016

Salary (Rs. 75,000 x 6 months) = 450,000 Employer contribution to provident fund 12% of 450,000 = 54,000 (lower 10% or 100,000) =(45,000) 9,000 Unapproved Gratuity Scheme: (exempt lower of 50% of 200,000 or 75,000) 125,000 Interest on acc. Balance 15% of 1,930,000 = 289,500 higher of 1/3 salary or 16% (EXEMPT) 0 Employee Shares (20,000 x 20) 400,000

Salary Income 984,000 Tax on 750,00014,500 (984,000 – 750,000) x 10%23,400 37,900 Age more than 60 yrs. 50% (18,950) Tax Liability18,950

TAX REDUCTION The tax payable by a full time teacher or a researcher, employed in a non profit education or research institution duly recognized by Higher Education Commission (HEC), a Board of Education or a University recognized by the HEC, including government training and research institution, shall be reduced by an amount equal to 40% of tax payable on his income from salary. Part 3 – 2 nd Sch

Sana, born on 21st November 1956, is working as research associate for a research laboratory recognized by HEC. Her basic monthly salary is Rs. 77,000. She is provided a company maintained car costing Rs. 660,000 since 2014, for official and personal use. During the year ending June 2016, she received bonus equal to two month’s basic salary. She is also provided a domestic servant by the laboratory, who is paid a monthly salary of Rs. 8,000. During the year, the driver was also paid bonus equivalent to two months basis salary During the year, the laboratory paid Rs. 240,000 to Sana for her family’s trip to UAE. The trip was personal in nature. All employees are paid leave fare assistance once every 5 years.

Salary (Rs. 77,000 x 12 months) = 924,000 Car (660,000 x 5%) = 33,000 Bonus (77,000 x 2) = 154,000 Driver’s salary (8,000 x 12 months) = 96,000 Driver’s Bonus (8,000 x 2) = 16,000 Leave fare assistance = 240,000 1,463,000 Tax on 1,400,000 = 79,500 On 63,000 x 12.5% = 7,875 87,375

Tax on 1,400,000 = 79,500 On 63,000 x 12.5% = 7,875 87,375 Reduction 40% of 87,375 = (34,950) Tax Payable 52,425 Sana is not 60 years of age at start of tax year.

TAX CREDIT A person shall be entitled to a tax credit in respect of any sum paid (or property) as a DONATION: a)any board of education or any university in Pakistan established by, or under, a Federal or a Provincial law; b)any educational institution, hospital or relief fund established or run in Pakistan by Federal Government or a Provincial Government or a Local Government; or c)any non-profit organization. Tax credit will be: A (tax) / B (taxable income) x C (donation) C will be a maximum of 30% of taxable income for individual and 20% for companies. Section = 61

Tariq, born on 15th August 1953, is working as consultant at a multinational company. His basic monthly salary is Rs. 43,200. He is provided a rent free apartment by his employer, and gets 10% medical allowance and a 25% traveling allowance. These allowances are all received in cash and are based upon his basic salary. Tariq's job requires him to travel extensively, and his traveling allowance is fully utilized on his official travels. During the tax year 2016, Tariq gave Rs. 10,000 as donation to a non-profit organization, which is approved.

Salary (Rs. 43,200 x 12 months) = 518,400 Rent free apartment (45% of 518,400) = 233,280 Medical allowance (10% exempt) = 0 Traveling allowance (used in official work)= ,680 Tax on 750,000 = 14,500 On 1,680 x 10% = ,668 Senior Citizen (50%) = (7,334) 7,334

Tax Credit – Donation = (98) Tax liability 7,236 Tax Credit Calculation = 8,834 / 751,680 x 10,000 Why we are using 7,236 and not 14,668? Section 61 states that ‘A’ is the amount of tax assessed to the person for the tax year before allowance of any tax credit under this Part.

NON-CASH DONATION In case the donation is in a form other than cash (asset, or property) then the following rules apply [Rule 228(4)]. Imported items at their import price (inclusive of all custom duties and charges) paid by donor. Items manufactured in Pakistan at purchase price (inclusive of all duties and charges) paid by the donor. Depreciable asset at its written down value (cost less tax depreciation). Motor vehicles at value including all charges and duties till their registration.

INCOME REDUCTION Donations to certain organizations and institutions have been specifically allowed as expense from income of the donor Taking the donation as expense means to deduct it from the income, instead of taking the tax credit at average rate of Tax. What is the difference between the two different types of donations? Cl. 61, 2 nd Sch.

INCOME REDUCTION a)Any Sports Board or institution recognized by Federal Government for purposes of promoting, controlling or regulating any sports or game; b)Fund for promotion of Science and Technology in Pakistan; c)Fatimid Foundation; d)Al-Shifa Trust; e)Pakistan Red Crescent Society; f)Citizen Police Liaison Committee (CPLC); g)Shaukat Khanum Memorial Trust; h)Any relief or welfare fund established by the Federal Government Cl. 61, 2 nd Sch.

The same question again. Tariq, born on 15th August 1953, is working as consultant at a multinational company. His basic monthly salary is Rs. 43,200. He is provided a rent free apartment, and gets a 10% medical allowance and a 25% traveling allowance. These allowances are all received in cash and are based upon his basic salary. Tariq's job requires him to travel extensively, and his traveling allowance is fully utilized on his official travels. During the tax year 2016, Tariq gave Rs. 10,000 as donation to Fatmid Foundation (listed in clause 61 of 2 nd Schedule).

Salary (Rs. 43,200 x 12 months) = 518,400 Rent free apartment (45% of 518,400) = 233,280 Medical allowance (10% exempt) = 0 Traveling allowance (used in official work)= 0 …. 751,680 Less: Donation under 2 nd schedule (10,000) 741,680 Tax on 500,000 = 2,000 On 241,680 x 5% =12,084 14,084 Senior Citizen (50%) = (6,042) 6,042 (previous question 7,236)

TAX CREDIT A resident person other than a company shall be entitled to a tax credit for a tax year either: a)in respect of the cost of acquiring new shares offered by a public company listed on a stock exchange in Pakistan, provided the resident person is the original allottee of the shares or the shares are acquired from the Privatization Commission of Pakistan; or b)in respect of any life insurance premium paid on a policy to a life insurance company registered by the SECP, provided the resident person is deriving income chargeable to tax under the head “salary” or “income from business”. Section = 62

TAX CREDIT Tax credit will be: A (tax) / B (taxable income) x C. C will be lesser of: Cost of shares / insurance premium paid in the year 20% of taxable income for individual (this section is not for companies) or Rs. 1,500,000. If shares are disposed within 24 months of the date of acquisition, the amount of tax payable for the tax year of disposal, shall be increased by the amount of the credit earlier allowed. Section = 62

Usman is employed at monthly salary of Rs. 300,000. He receives medical allowance of 10% of salary. He is also provided a company maintained car and fuel. The Company has leased the car at a monthly rental of Rs. 45,000, and incurs an annual expense of Rs. 15,000 on maintenance and fuel. The fair market value of the car, at commencement of lease, was Rs. 1,500,000. During the month of January 2016, Usman got injured in a road accident and had to be hospitalized at a cost of Rs. 19,000. Company paid the medical bill, although it was not covered under Usman's employment contract. During the year Usman invested Rs. 450,000 to buy shares of a IPO in May 2016.

Salary (Rs. 300,000 x 12 months) = 3,600,000 Medical allowance (10% exempt) = 0 Car (1,500,000 x 5%) = 75,000 Hospitalization (fully taxable)= 19,000. 3,694,000 Tax on 3,500,000 = 472,000 On 194,000 x 25% = 48, ,500 Less Tax Credit = (63,405) Income Tax Payable457,095 Calculation of Tax credit 520,500 / 3,694,000 = 14.09% x 450,000 = 63, ,000 or 1,500,000 or 20% of taxable income

APPROVED PENSION Tax credit will be: A (tax) / B (taxable income) x C. C will be lesser of: Contribution paid in the year in the approved fund 20% of taxable income for individual Approved Pension fund under the Voluntary Pension System Rules, Section = 63

Zia, born on 1 st June 1977 is employed at monthly salary of Rs. 300,000. He receives medical allowance of 10% of salary. He was provided a company maintained car since costing 1,800,000 for both personal and business use. The car was sold to Zia for Rs. 600,000 on when it’s market value was Rs. 1,200,000. Zia donated Rs. 50,000 to Shaukat Khanum Hospital (listed in 2 nd schedule) and Rs. 100,000 to a NPO. He paid 40,000 under the Zakat & Ushr Ordinance, Zia also paid Rs. 975,000 in an approved pension fund during the Tax Year Calculate tax for TY 2016.

Salary (Rs. 300,000 x 12 months) = 3,600,000 Medical allowance (10% exempt) = 0 Car (1,800,000 x 5%) = 90,000 Car purchase (1,200, ,000)= 600,000. 4,290,000 Less: Zakat (40,000) Less: Donation (2 nd Schedule) (50,000) 4,200,000

Tax on 4,000,000 = 597,000 On 200,000 x 27.5% = 55, ,000 Less: Tax Credit (donation) = (15,520) Tax Credit (pension) = (130,368) Income Tax Payable506,112 Tax credit (donation) 652,000 / 4,200,000 = 15.52% x 100,000 = 15,520 Tax credit (pension) 652,000 / 4,200,000 = 15.52% x 840,000 = 130,368

HOUSE LOAN Every individual shall be entitled to a deductible allowance for the amount of any profit or share in rent and share in appreciation for value of house paid by the individual in a tax year on a loan by a scheduled bank or non-banking finance institution regulated by the SECP or advanced by Government or the Local Government, Provincial Government or a statutory body or a public company listed on a registered stock exchange in Pakistan where the individual utilizes the loan for the construction of a new house or the acquisition of a house. The amount of an individual’s deductible allowance allowed under sub-section (1) for a tax year shall not exceed fifty percent of taxable income or one million rupees, whichever is lower Section = 64A

Ali, born on 1 st June 1977, is employed at monthly salary of Rs. 300,000 in Flick Limited (a public listed company). He receives medical allowance of 10% of salary. On 1 st January 2012, Ali took an interest free loan of Rs. 2,000,000 from his company to buy a car. The full amount is outstanding and payable on Ali also took a 3,000,000 loan at 14% interest rate on from a scheduled bank to construct his house. The loan is repayable in full on Ali ran a part-time business that was closed down on A car with a cost of Rs. 600,000 and WDV of Rs. 433,500, previously used by Ali in his business, was donated by Ali to an approved NPO on The business did not have taxable profit in tax year 2015.

Salary (Rs. 300,000 x 12 months) = 3,600,000 Medical allowance (10% exempt) = 0 Interest free loan (2,000,000 x 10%) = 200,000 3,800,000 Less profit on house loan 14% of 3m = (420,000) 3,380,000 Tax on 3,000,000 = 359,500 On 380,000 x 22.5% = 85, ,000 Less: Tax Credit (donation) = (57,092) Income Tax Payable387, ,000/ 3,380,000 = 13.17% x 433,500 = 57,092