The Federal Board of Revenue (FBR) is seriously considering a proposal of the Securities and Exchange Commission of Pakistan (SECP) to provide tax credit for contribution in the Voluntary Pension System (VPS) through amendment in the Income Tax Ordinance, 2001. According to sources, the FBR is examining the budget proposal of the SECP for amendment in section 63(2) of Income Tax Ordinance, 2001- Tax credit for contribution in VPS.
The SECP has informed the FBR that to provide level playing field to retirement schemes; VPS vis-a-vis employer sponsored schemes by removing rupee restriction of Rs 500,000. The existing cap on contribution to VPS (lesser of 20 percent of income or Rs 500,000) render VPS a non-competitive alternative for the following tax free contribution permissible to employer in the retirement schemes:- Superannuation Fund: Up to 20 percent of employee's salary -rule 110(1) of IT Rules. Gratuity fund: 8.33 percent of employee's salary -rule 117(1) of IT Rules. Provident Fund: up to 10 percent of salary or Rs 100,000, whichever is lower- clause 3(a) of Part I of Sixth Schedule of ITO, 2001. The Tax-free Contribution to these schemes could be even higher than 30 percent in a particular year if the actuarial valuations so require.
Under the existing provision of the Income Tax Ordinance 2001, the amount of a person's tax credit allowed under sub-section (1) for a tax year shall be computed according to the following formula, namely:
(A/B) X C Where.- A is the amount of tax assessed to the person for the tax year, before allowance of any tax credit under this Part;
B is the person's taxable income for the tax year; and;
C IS THE LESSER OF
(i) the total contribution or premium referred to in sub-section (1) paid by the person in the year; or
(ii) twenty percent of the eligible person's taxable income for the relevant tax year; Provided that an eligible person joining the pension fund at the age of forty-one years or above, during the first ten years starting from July 1, 2006 shall be allowed additional contribution of 2 percent per annum for each year of age exceeding forty years. Provided further that the total contribution allowed to such person shall not exceed 50 percent of the total taxable income of the preceding year; or (iii) five hundred thousand rupees.]
As per proposed amendment in the Income Tax Ordinance 2001:
PROPOSED AMENDMENT: The amount of a person's tax credit allowed under sub-section (1) for a tax year shall be computed according to the following formula, namely:
(A/B) x C
Where.
A is the amount of tax assessed to the person for the tax year, before allowance of any tax credit under this Part;
B is the person's taxable income for the tax year; and;
C is the lesser of;
(i) the total contribution or premium referred to in sub-section (1) paid by the person in the year; or;
(ii) twenty per cent of the eligible person's taxable income for the relevant tax year; Provided that an eligible person joining the pension fund at the age of forty-one years or above, during the first ten years starting from July 1, 2006 shall be allowed additional contribution of 2 percent per annum for each year of age exceeding forty years. Provided further that the total contribution allowed to such person shall not exceed 50percent of the total taxable income of the preceding year; or (iii) five hundred thousand rupees.] it added.