Taxation of salaries and wages in Pakistan is governed by the Income Tax Ordinance, 2001, which is administered by the Federal Board of Revenue (FBR). This ordinance regulates the collection of income tax from individuals, including employees who earn salaries and wages. In this article, we will discuss the basic concepts, definitions, and examples of taxation of salaries and wages in Pakistan.
Basic Concepts:
Before we dive into the taxation of salaries and wages, let’s understand some basic concepts that are relevant to this topic:
Taxable Income:
Taxable income is the income that is subject to tax. In the case of salaries and wages, taxable income is the amount of money earned by an employee after deducting any tax-exempt allowances or deductions.
Taxable Year:
The taxable year is the period for which an employee’s income is assessed for tax purposes. In Pakistan, the taxable year is from July 1st to June 30th of the following year.
Taxpayer:
A taxpayer is a person who is liable to pay income tax. In the case of salaries and wages, the taxpayer is the employee who earns the income.
Withholding Tax:
Withholding tax is the tax deducted from an employee’s salary or wages by the employer at the time of payment. This tax is deducted as a percentage of the employee’s income and is paid to the FBR on behalf of the employee.
Definitions:
Now let’s understand some key definitions that are relevant to the taxation of salaries and wages in Pakistan:
Gross Salary: Gross salary is the total amount of money earned by an employee before any deductions. This includes basic salary, allowances, bonuses, and any other payments made to the employee.
Tax-exempt Allowances: Tax-exempt allowances are the allowances that are exempt from income tax. These include house rent allowance, conveyance allowance, and medical allowance, among others.
Tax-deductible Expenses: Tax-deductible expenses are the expenses that can be deducted from an employee’s taxable income. These include contributions to a provident fund, investment in National Savings Schemes, and payment of life insurance premiums, among others.
Taxable Income: Taxable income is the income that is subject to income tax. This includes gross salary minus tax-exempt allowances and tax-deductible expenses.
Examples:
Let’s now look at some examples to understand how the taxation of salaries and wages works in Pakistan:
Example 1:
Mr. Ali earns a gross salary of PKR 100,000 per month. His employer deducts PKR 10,000 as income tax at the time of payment. Mr. Ali also pays PKR 5,000 per month as a contribution to his provident fund. What is his taxable income for the year?
Solution: Mr. Ali’s gross salary for the year would be PKR 1,200,000 (PKR 100,000 x 12). His contribution to the provident fund for the year would be PKR 60,000 (PKR 5,000 x 12). Therefore, his taxable income for the year would be PKR 1,140,000 (PKR 1,200,000 – PKR 60,000).
Example 2:
Ms. Fatima earns a gross salary of PKR 50,000 per month. Her employer provides her with a house rent allowance of PKR 20,000 per month, a conveyance allowance of PKR 5,000 per month, and a medical allowance of PKR 10,000 per month. Her employer deducts PKR 5,000 as income tax at the time of payment. What is her taxable income for the year?
Solution: Ms. Fatima’s gross salary for the year would be PKR 600,000 (PKR 50,000 x 12). Her tax-exempt allowances for the year would be PKR 420,000 (PKR 20,000 + PKR 5,000 + PKR 10,000 x 12). Therefore, her taxable income for the year would be PKR 180,000 (PKR 600,000 – PKR 420,000). Her income tax liability for the year would be calculated based on this taxable income.
Example 3:
Mr. Hassan earns a gross salary of PKR 80,000 per month. His employer provides him with a car as a perquisite. The estimated value of the car is PKR 1,000,000. His employer deducts PKR 8,000 as income tax at the time of payment. What is his taxable income for the year?
Solution: Mr. Hassan’s gross salary for the year would be PKR 960,000 (PKR 80,000 x 12). However, the estimated value of the car provided by his employer is considered as a taxable perquisite. Therefore, his taxable income for the year would be PKR 1,960,000 (PKR 960,000 + PKR 1,000,000). His income tax liability for the year would be calculated based on this taxable income.
Conclusion:
In conclusion, the taxation of salaries and wages in Pakistan is a complex process that involves various concepts and definitions. Employers are responsible for deducting income tax at the time of payment and submitting it to the FBR on behalf of their employees. It is essential for employees to understand their tax liabilities and take advantage of tax-exempt allowances and tax-deductible expenses to reduce their taxable income.