The Federal Board of Revenue (FBR) has clarified that the average tax rate for the purpose of deduction under section 149 (salary) of the Income Tax Ordinance is required to be recalculated for the entire tax year on the basis of the new tax rates for salaried individuals introduced through Finance Supplementary (Amendment) Act, 2018.
The FBR has issued circular 6 of 2018 here on Wednesday > from page 1 to explain the important amendments made to the in the Income Tax Ordinance, 2001 through Finance Supplementary (Amendment) Act, 2018.
According to the FBR, for the remaining months of the ongoing Tax Year, tax under section 149 of the Ordinance is to be deducted at an average rate of tax which would ensure that by the end of the tax year, tax on estimated income under the head "salary" is deducted at an average rate of tax based upon the rates introduced through the Finance Supplementary (Amendment) Act, 2018 which are applicable w.e.f. 01.7.2018.
Through the Finance Act, 2018 rates for both salaried and non-salaried individuals were unified and threshold of taxable income was increased from
Rs 400,000 to Rs 1,200,000. However, a nominal tax rate of Rs 1,000 was imposed on income(s) between Rs 400,000 to Rs 800,000 whereas a nominal tax rate of Rs 2000 was imposed on income(s) between Rs.800,000 to Rs 1,200,000. Moreover, a tax rate of 5% was introduced for income(s) between Rs 1,200,000 to Rs 2,400,000, 10% for income(s) between Rs 2,400,000 to Rs 4,800,000 and 15% for income(s) exceeding Rs 4,800,000.
Through the Finance Supplementary (Amendment) Act, 2018 separate tax rates have once again been introduced for salaried and non-salaried individuals respectively which shall be effective from 1st July, 2018 onwards. The tax rates applicable to salaried individuals (i.e. individuals whose income chargeable under the head salary exceeds 50% of taxable income) w.e.f. 1st July, 2018 shall be as follows:-
A proviso has also been added wherein it has been specified that where the taxable income of salaried individual exceeds eight hundred thousand rupees the minimum tax payable shall be two thousand rupees.
It would be pertinent to mention that the tax rates for salaried individuals introduced through the Finance Supplementary (Amendment) Act, 2018 will not result in an increased tax incidence upon salaried individuals who earn income up to Rs 2.5 million per annum or up to Rs 208,333 per month vis-à-vis the tax rates introduced through the Finance Act, 2018. Moreover, tax incidence upon salaried persons earning more than Rs 2.5 million per annum or more than Rs 208,333 per month shall still be lower as compared to the tax incidence prior to the introduction of the Finance Act, 2018.
Every person responsible for paying salary to an employee is obliged to deduct tax under section 149 at the employee's average rate of tax at the time of payment of salary. The average rate of tax pursuant to the introduction of the Finance Supplementary (Amendment) Act, 2018 is to be computed according to the following formula in terms of sub-section (2) of section 149 of the Income Tax Ordinance, 2001:
A/B
Where
A: is the tax that would be computed according to the new tax rates as given in the above table, effective from 1st July, 2018, in respect of the employee's taxable income for a tax year and;
B: is the employee's estimated income under the head "salary" for the tax year.
Prior to the introduction of the Finance Supplementary (Amendment) Act, 2018 the average rate of tax for purposes of deduction of tax under section 149 of the Income Tax Ordinance, 2001 was being computed on the basis of the tax rates introduced through the Finance Act, 2018 i.e. the average rate of tax for the months of July, August and September, 2018 was based upon the tax rates introduced through the Finance Act, 2018. However, pursuant to the Finance Supplementary (Amendment) Act, 2018, the average tax rate for purposes of deduction under section 149 of the Ordinance is required to be recalculated for the entire tax year on the basis of the new tax rates for salaried individuals introduced through the Finance Supplementary (Amendment) Act, 2018 as delineated in the foregoing paragraph. For the remaining months of the ongoing Tax Year, tax under section 149 of the Ordinance is to be deducted at an average rate of tax which would ensure that by the end of the tax year, tax on estimated income under the head "salary" is deducted at an average rate of tax based upon the rates introduced through the Finance Supplementary (Amendment) Act, 2018 which are applicable w.e.f. 01.7.2018.
In order to further elucidate the matter the following example is being presented:-
Table 1:
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S.No. Taxable income Rate of tax
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(1) (2) (3)
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1. Where the taxable income
does not exceed Rs.400,000 0%
2. Where the taxable income exceeds Rs1,000
Rs.400,000 but does not exceed Rs.800,000
3. Where the taxable income exceeds Rs.800,000 Rs.2,000
but does not exceed Rs.1,200,000
4. Where the taxable income exceeds Rs.1,200,000 5% of the amount
but does not exceed Rs.2,500,000 exceeding Rs.1,200,000
5. Where the taxable income exceeds 65,000 + 15% of the amount
Rs.2,500,000 but does not exceed Rs.4000000 exceeding Rs.2,500,000
6. Where the taxable income exceeds 290,000 + 20% of the amount
Rs.4,000,000 but does not exceed Rs.8,000,000 exceeding Rs.4,000,000
7. Where the taxable income exceeds Rs.8,000,000 1,090,000 + 25% of the
amount exceeding Rs.8,000,000
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TABLE 2:
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Taxable salary income Rs.4,800,000
Monthly salary paid or payable Rs.400,000
Average rate of tax under the Finance Act, 2018
(Rs.300,000/4,800,000 x 100=6.23%). 6.25%
Average rate of tax under the Finance
Supplementary (Amendment) Act, 2018
Rs.450,000/4,800,000 x 100 =9.375%) 9.375%
Tax deducted at average tax rate of 6.25%
during July, 2018 upon payment of salary of Rs.400,000 Rs.25,000
Total tax deducted during the months of July, August
& September, 2018 at average tax rate of 6.25%
upon payment of salary of
Rs.1,200,000 for these three months Rs.75,000
Monthly tax required to be deducted at average
tax rate of Rs.9.375% computed on the basis of the
Finance Supplementary (Amendment) Act, 2018 Rs.37,500
Total tax payable for the entire tax year at the
average rate of tax of 9.375% computed on the
basis of the Finance Supplementary (Amendment) Act, 2018 Rs.450,000
Tax already deducted during the months of July, August
and September at average rate of tax of 6.25% Rs.75,000
Balance tax to be deducted in the
remaining months of the ongoing tax year
(Rs. 450000 - Rs. 75000 = Rs. 375000) Rs.375,000
Tax to be deducted/withheld under section 149
of the Ordinance upon payment of monthly salary
of Rs.400000/-during the remaining months of the tax year Rs.41,667
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