FBR says 'no new tax' on salaried class, disagreement follows

The Federal Board of Revenue (FBR) said on Tuesday that ‘no new taxes have been imposed on pensions or major components of salary’ in the recent budget proposals announced for fiscal year 2021-22, a clarification that rather adds fuel to the controversy around taxes on the salaried class.

Its statement came in response to a report carried on Monday by The Express Tribune that stated the government has "quietly proposed Rs10-billion worth of taxes on the salaried class by slapping income tax on their expenses on medical treatment, various allowances, and their savings in provident and pension funds."

The report cited Clause (139), Part I of Second Schedule to the Income Tax Ordinance, 2001, that deals with “giving exemptions in respect of benefit represented by free provision to the employee of medical treatment or hospitalization or both by an employer or the reimbursement received by the employee of the medical charges or hospital charges or both paid by him…”.

However, the FBR, in its response, cited Clause (39) of Part I of Second Schedule to the Income Tax Ordinance, 2001, saying its omission is only of technical nature. “Withdrawal of exemptions and reduced rates should not be confused with imposition of new taxes,” said the FBR on Tuesday.

Clause (39), Part I of the Second Schedule says, "Any special allowance or benefit (not being entertainment or conveyance allowance) or other perquisite within the meaning of section 12".

Confusion galore

The response causes further confusion and adds to the controversy that Pakistan’s salaried class would now have to bear extra burden on their income.

Dr Ikramul Haq, a tax expert, said the FBR has confused Clause (139) with Clause (39), effectively taxing the salaried class. “Taxing the allowance is akin to taxing take-home income,” Dr Ikram told Business Recorder on Tuesday. “The allowance, which was previously exempt from any tax, will now be taxable.

“This allowance varies from person to person. In some cases, its inclusion in the salary can take you to the higher salary bracket where the tax incidence is higher.”

Pakistan uses a progressive taxation system to tax its salaried class. The threshold of the yearly income that falls under the tax net is Rs600,000.

Dr Ikram said in some cases the medical allowance expense can take you beyond the minimum threshold and sometimes in the higher bracket, resulting in higher tax rates.

The Express Tribune report came barely three days after Finance Minister Shaukat Tarin unveiled the budget for the upcoming fiscal year, categorically stating that "no new taxes have been imposed on the salaried class" during his speech at the National Assembly on Friday. Before the budget announcement, reports were rife that the salaried class was likely to get a "relief".

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Amid this backdrop, the report stirred fresh controversy, much to the annoyance of the tax authority that issued a clarification on Tuesday.

"(The Express Tribune) story contains some incorrect or misleading content; therefore, the FBR would like to issue a clarification in this regard," it said. "Withdrawal of exemption and reduced rates should not be confused with imposition of new taxes. It is very clearly and candidly informed that the present budget proposals do not contain any new item for taxation of pensions or major components of salary as initially discussed.

"Omission of Clause (39) of Part I of Second Schedule to the Income Tax Ordinance, 2001 is only of technical nature. This clause provided exemption to re-imbursement of expenditure incurred by employee on behalf of the employer organization. This type of transaction cannot form part of the salary in any circumstances. The omission has been made only because there were some interpretations of the courts that were not in accordance with the actual purpose of this clause.

"The clause has accordingly been omitted to avoid multiple interpretations or confusions."

The clause, which is intended to be removed, reads, "benefit represented by free provision to the employee of medical treatment or hospitalization or both by an employer or the reimbursement received by the employee of the medical charges or hospital charges or both paid by him, where such provision or reimbursement is in accordance with the terms of employment: any medical allowance received by an employee not exceeding 10% of the basic salary of the employee if free medical treatment or hospitalization or reimbursement of medical or hospitalization charges is not provided for in the terms of employment."

The FBR also said that no tax has been imposed on pensions, gratuity funds payments, leave prior to retirement (LPR), commutation of pension and other allied benefits. However, profit on debt or markup component on provident fund has been proposed to be taxed at 10% as a separate block of income only if such markup exceeds Rs500,000 in a tax year.

This component of provident fund is now being taxed, which again becomes a new imposition.

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However, the FBR, in its clarification, said it believes that this change will not result in any significant burden on taxpayers. “Similarly, exemption to reimbursement of medical expenditure has been proposed to be omitted as a streamlining measure because there were complaints of fake claims of exemption on this account," added the FBR in its statement on Tuesday.

It added that slight changes on account of traveling allowance of newspapers employees, free supply of food or other perquisites etc. and salary of seafarers that was wholly exempt have been proposed for rationalisation of salary tax regime rather than as revenue generation measure.